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Corporate Pioneers Navigate Global Mergers

September 1, 1998
There’s a tale about a Dutch East Indian company in the mid-1700s where an adventurer and trader—as he was exploring Southeast Asia for trade routes and new markets—came upon the island of Keva. Knowledgeable about affairs of the world and deliberate in his dealings with new peoples, this captain brought a small assemblage to meet the leader of the indigenous population. After days of negotiation, the two leaders agreed they had much to offer each other, and an alliance would benefit both communities. Our hero retreated to his ship to announce the merger.

Once the union was announced, the captain quickly dispatched a landing party to begin setting up operations. This base would serve as a starting point for the expansion that he and his countrymen so desired. Unsure, yet dedicated to their leader’s vision, the members of the landing group set forth to begin working with the Kevanese.

They came across a hunting party of indigenous people, who approached them with suspicion. Though the traders hadn’t been prepared for this encounter, they instinctively attempted to pacify the situation. Soon, everyone assembled began to exchange tentative smiles. There was a moment of calm after the tension.

Then, the leader of the expedition extended his hand in a greeting gesture. The Kevanese hunters assumed rage-filled stares. They surrounded the traders and incarcerated them. As the ship’s first mate recounted in his log after being held captive for two weeks, he realized the operations leader committed the ultimate insult by extending his right hand. The local populace took it as a sign of disrespect and responded in kind.

Today’s cross-border mergers are not unlike the alliance between the traders and the fictitious Kevanese. Initiated by CEOs and corporate boards (who see the financial and marketing advantages) and handed over to senior and middle managers to implement (who may be more aware of the pitfalls), mergers can be riddled with complications. Business reasons propel mergers and acquisitions, but HR determines whether they’ll succeed or fail. Global HR professionals are pivotal in the transition and integration by communicating a clear strategy, fending off attrition, integrating the two entities’ workforces—as well as their policies and functions—and helping create a unified corporate culture.

Respect the obstacles.
In a situation where corporate and societal cultures may be disparate and perplexing to each other, only companies that have respect for the difficulties of merging two groups of workers have any chance of beating the odds. Possibly, in no other instance is HR so critical in implementing the business plan.

"Mergers, in the empirical literature, are viewed as a loser’s game," says Fred Grauer, co-chairman of San Francisco-based Barclays Global Investors. "If you’re going to do it, you have to invest very heavily in mitigating all the forces that work against it. Essentially, mergers have a very tribal characteristic to them. You’re asking different tribes to come together as a nation, and you’d better find out why it’s in their mutual interest to do so. Otherwise, they’ll use the opportunity of the merger to express their differences."

The landscape is strewn with failures: 50 percent of all mergers and acquisitions fail, according to Kevin Rubens, senior vice president in the London office of Chicago-based Aon Consulting Worldwide. (The number is much higher if you believe other anecdotal evidence.) Rubens’ figures are reiterated by noted Harvard researcher Michael Porter (in his Harvard Business Review article: "From Competitive Advantage to Corporate Strategy," May/June 1987) and research done in 1996 by Coopers & Lybrand.

As daunting as this sounds, mergers continue at a frenzied pace. According to Securities Data Co., the first half of 1998 rings up more than $1.3 trillion in merger activity worldwide—$272 billion in cross-border activity (nearly 21 percent). Compare this to the figures for all 12 months of 1997: $1.6 trillion total with $274 billion across borders (more than 17 percent). "We are going through a historic, unprecedented consolidation and incorporation," says Richard Peterson, manager of media relations for Newark, New Jersey-based Securities Data Co. "It’s at record levels."

Reasons for mergers aren’t hard to discern. Corporate leaders join the fray, seeking to achieve competitive size, acquire new products or technology and gain market share, according to New York City-based The Conference Board. So with such motivation, why do more than 50 percent of mergers lose shareholder value, rather than create it?

Make sure you’re involved in the planning stage.
One key reason for the loss of value is that senior executives tend to underestimate the difficulties involved in integrating the organizations, so they don’t bring HR into the process until later. This decision further delays progress, dimming the likelihood of success.

Most organizations spend six months planning and negotiating mergers before announcing them. They then expect to spend the same length of time accomplishing the integration, according to a study by The Conference Board ("1997 HR Executive Review: HR Challenges in Mergers & Acquisitions"). But integration often takes much longer.

And the longer it takes, the greater the chance for problems. Companies intent on success know that accelerated transition is essential. "Once the deal is announced, companies should focus on three things in the first 100 days," says Mark Feldman, partner at PricewaterhouseCoopers. "Early stability, early momentum and early wins."

Once the deal is announced, companies should focus on three things: early stability, early momentum and early wins.

This timely response is critical because the first thing that often happens after a merger announcement is an initial loss in market share. This is because the business community understands that a merger can have a destabilizing effect on the companies involved. Mergers impact employees, clients, vendors, and even competitors. You can help counteract the effect by speeding up the transition—if you know in advance it’s approaching.

Rubens says, "The top managers who consummate the deal... are people who have a multinational viewpoint and enough commonality of interest that they understand what they want to achieve. They see things eye to eye and think things are workable." He continues: "Then they hand it to the next level of managers, and that’s where you hit the obstacles. These individuals didn’t have the six months to consider the acquisition, and now they have to execute it."

This often happens to HR. You’re asked to participate at the due-diligence phase to consider pensions, compensation and benefits, and union-related matters—items tied to the financial deal. Workforce issues are an afterthought. Prevent this mistake by making sure your executive team understands you need to be involved early in the process. There are many ways to help your organization avoid potential minefields, but they are only effective if you’ve had time to prepare. Once the announcement is made, it’s time to act.

What happens if you don’t jump in?
The transition is the critical juncture. If you aren’t ready to act, a series of events may begin to take place. In response to the merger announcement, employees may turn their attention to sorting things out internally, rather than staying focused on their jobs. There may be a drop in productivity as they speculate about the future. A company with 1,000 employees who spend an hour a day speculating loses 5,000 hours per week—20,000 lost hours per month. Productivity goes down while labor costs go up, reducing profit margins.

Because the pecking order has been disrupted, there may be chaos created by competition between workers of the merging companies. As when new chickens are introduced into a barnyard, individuals in two companies, with two executive teams and two distinct corporate cultures may fight for territory and power.

If there’s a dearth of information, people may theorize and dwell on the negative. Employees may make mistakes and exhibit hoarding behavior because they’re worried about having enough supplies. They may begin to feel alienated. Morale may drop, and rumors may begin to circulate.

Then, attrition may kick in. Key contributors may leave, accepting jobs with the competition. They’ll take vital experience with them, and leave behind a learning curve for those who replace them. Competitors, knowing the firm is vulnerable, may sell against the merged company, telling customers that the organization will be in turmoil for 18 months. And because it’s a global merger, there are additional complications of culture and language differences.

Identify and take charge of the people factors.
Based on this worst-case scenario, it’s clear that global mergers bring a stack of significant HR challenges to the table: productivity, quality, morale, attrition, and cultural and language barriers. If you have a plan—and enough time—you can solve these issues before they become stumbling blocks in the integration process. Key steps to prevent and overcome these difficulties include:

  1. Help your organization maintain control by implementing a workforce-management strategy. Prior to the announcement, work with senior executives in crafting a clearly articulated business strategy. Translate this strategy into a list of policies and programs designed to keep employees focused on their work. Consider strategic solutions, such as initiating recognition programs, installing employee self-service systems and other time-saving technologies, and organizing team-building exercises.
    Recognize the specific challenges you’ll face creating a multicultural company. Employees forming the new organization will come from different cultural frames of reference and have different management philosophies and approaches to the marketplace. Organizations specializing in cultural integration suggest that you do a thorough job of cultural due diligence. Gather information about the characteristics of the two cultures that are most dissimilar, and build cross-cultural training into your overall strategy.
  2. Develop a communications campaign. Work with corporate communications to design a plan that will convey a positive and consistent message about the merger, both internally and externally. The campaign should answer as many questions as possible, and at least anticipate the unanswered ones with some assurance that information is forthcoming. Consider that those involved in successful mergers believe it’s best to communicate with small groups, so individuals can respond and give feedback to managers about the proposed changes. Aon Corp. has experienced a great deal of growth within the last two years through global acquisitions of its own. Rubens attributes the success of its integration in part to its strong vision statement that managers communicate to everyone involved.
    "Communication is the key," adds Bruce A. Vakiener, executive vice president at Hartford, Connecticut-based Loctite Corp. Vakiener suggests, "Plan to spend a lot of time before completing the deal looking at the people issues and how to communicate effectively so everyone knows what’s going on at all times".
  3. Anticipate the time and effort required to complete the integration. You’ll need to spend a tremendous amount of time getting employees refocused on their work. Be careful not to underestimate how long this will take.
    Part of establishing a realistic time frame is understanding that intercultural mergers will take longer than same-culture mergers. One reason is that some cultures are slower to make decisions than others. Rubens explains: "Americans tend to understand the timetable and [stick to it more readily] than members of some other cultures who need to process the decisions more before they feel comfortable enough to act on them." Also, it simply takes longer to communicate between people of different languages. Feldman says, "Subtleties of language often contribute to an additional level of confusion. The extent of the drop in performance after the deal is made is generally greatly underestimated."
    Consider the challenges of today’s version of the Dutch trading company’s venture. Just look at the proposed $40 billion megamerger between Chrysler Corp. and Daimler-Benz—a powerful metaphor of the enormous odds to overcome. There can be no stronger symbol of middle-class Mom-and-apple-pie than U.S. auto makers, particularly Chrysler. And few would argue that the Mercedes-Benz insignia is synonymous with upper-class German luxury. The combination of these dominant forces underscores the incredible complexity of mergers in the global marketplace.
    Global HR managers are critical in the integration effort. You must keep morale high, integrate workforces and encourage communication so the business remains vibrant. Efforts such as these hold off natural tendencies toward tribalization. A unified corporate culture with a shared vision is a good start toward a strong nation.

Global Workforce, September 1998, Vol. 3, No. 5, pp. 12-17.