Change Management Post Mergers and Acquisitions Dissertaion

7/28/2019 Change Management Post Mergers and Acquisitions Dissertaion

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EXECUTIVE SUMMARY

One of the greatest challenges faced in the industry today is to oppose the forces of institutionalentropy that seemingly inevitable undermine organizational vitality. There is a pronounced

pressure on companies to continuously renew and change themselves in order to remain

competitive and innovative. Even under best circumstances, innovation at companies is

associated with uncertain endeavors.

I propose a conceptual framework that decomposes the overall acquisition integration process

into four sequential and co-evolving processes:

(i) Formulating the integration logic and performance goals,

(ii) Establishing the integration planning approach,

(iii) Executing operational integration, and

(iv) Executing strategic integration.

Managing the strategic dynamics of acquisition integration in fast changing competitive

environments requires attention to all four processes and the feedback loops between them.

Analysis of the HP-Compaq merger and Tata Tetley acquisition however, suggests that

creating a strong feedback loop between the operational integration process and the process of

formulating the integration logic and performance goals is difficult, yet is needed to timely revise

the initial assumptions in light of changing market realities and responses of key customers to the

new corporate strategy. It also suggests that establishing a strong feedback loop between thestrategic integration process and the process of formulating the integration logic and performance

goals is difficult, yet is needed to maintain sustained top management attention to the multi-year

strategic activities necessary to meet the dynamic competitive challenges.

Analysis, furthermore, suggests that top management should be cautious at the outset in stating

long-term goals for the new company, not declare victory too soon, and reduce the opportunity

costs of acquisition integration by augmenting its own bandwidth for managing large-scale

strategic change.


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OBJECTIVE

Successful integration leads to effective change management. I propose a conceptual

framework that decomposes the overall acquisition integration process, which leads to

successful change management into four sequential and co-evolving processes:

1. Formulating the integration logic and performance goals,

2. Establishing the integration planning approach,

3. Executing operational integration, and

4. Executing strategic integration.

Rationale behind the Objective

The first process formulating the integration logic and performance goals involves the

boards of directors, top managements, and consultants of the two companies, who convince

themselves that the merger makes strategic sense and make high-level decisions about the new

top leadership, major strategic goals and the overall organization. It is important to distinguish

two aspects of this process. First, top management of the acquiring company formulates the new

corporate strategy, which explains how combining the two companies will improve the product

market position of the new company, how it will strengthen its distinctive competencies, and

how it will use the strengthened competencies to defend and leverage its improved strategic

position.

Second, the top management of the acquiring company makes assumptions about the future state

of the competitive and economic environments and uses these to formulate short and long-term

strategic and financial goals for the merger and for creating shareholder value.

The second process- creating the integration plan - involves, in first instance, deciding on

the new executive team and the basic organization structure of the combined companies prior to

the mergers announcement. Specific goals are set for each of the major stakeholders:

shareholders, customers, employees, and partners. An integration planning team is formed and

the blueprint of the integration process is created. Pre-deal clearance planning activities such asidentifying short term goals for synergies, workforce reduction, procurement rationalization,

phasing out redundant products, and getting the new organization up and running are established

to prepare for the process of executing operational integration. Planning activities related to

multi-year strategic initiatives needed to develop a new culture, effectively cope with the

competitive dynamics, and meet long-term goals are also started to prepare for the process of

executing strategic integration. At this point, the distinction between strategy and execution is

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still meaningful: The vast majority of managers and employees of both companies only have to

think about delivering current business results and the integration team only has to think about

planning and creating the blueprint for executing the operational and strategic integration

processes.

The third process - executing operational integration - starts the day the deal closes and the

execution of the integration is launched. This process is very hard for everyone involved: There

are often a large number of layoffs, the remaining levels of management are selected, people find

out whether they have a job and what it is, new organization structures are activated, new sales

teams call on worried customers, and on it goes. This process, which generally lasts between 6

and 12 months, involves time-consuming, often unexciting and frustrating working through the

details of the integration at the frontline. The primary goals are short-term: To hold on to

customers and achieve market share goals, achieve quarterly financial results, eliminate targeted

product redundancies, get procurement synergies, select the right people and get the organizationto work. At this point, the distinction between strategy and execution becomes blurred, and the

effectiveness of strategic leadership is crucial and brutally obvious in the face of the challenges

and the short-term results obtained.

Executing operational integration tests the continued relevance of the new corporate strategy

with key customers as well as the initial assumptions about the economic and competitive

conditions. This learning, in principle, should trigger a feedback loop to allow the process of

formulating the integration logic and performance goals to co-evolve. There is little time to think

about strategy during the operational integration process, however, as management of the

combined companies must now manage very complex integration issues and deliver short-termperformance in line with the set goals. The cost of failing to execute well here is felt to be so

high (a feeling not necessarily made explicit) that the strategy is, somewhat appropriately,

viewed as secondary. At the same time, while the integration logic may remain valid, it may

nevertheless be necessary to adjust the initial assumptions on which the performance goals are

based in light of deteriorating economic and competitive conditions. This too is difficult because

these changes are often not immediately and unequivocally clear, but also because the revisions

they would require impose further difficult and potentially unsettling short term actions e.g.,

significantly increasing the number of layoffs on the part of an already stretched top and senior

management.

The fourth process - executing strategic integration - depends on some of the activities

performed in the operational integration process and runs somewhat in parallel with it. It is,

however, primarily driven by the multi-year strategic initiatives necessary to get ahead of the

competitive dynamics envisioned. While these strategic initiatives are prepared for during the

integration planning process, they may need to be subsequently adjusted in light of the feedback

loop triggered by the execution of strategic integration. This feedback loop helps test and revise

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the key assumptions of the integration logic that pertain to how well and how fast key

competitors were expected to be able to improve their strategic position and competencies. In

other words, the process of executing strategic integration must effectively cope with where key

competitors will be several years down the road from the start of the strategic integration

process, rather than where they are at the start. Strategic integration is the primary responsibility

of top management and assigned staff, who continue to scan the rapidly evolving competitive

environment. Effective strategic leadership of strategic integration requires being able to clearly

define what winning means and forcefully executing the multi-year strategic initiatives that

will make wining - achieving the longer-term performance goals set for the combined companies

- possible. This in turn involves generating extraordinary energy that continues to radiate

throughout the organization, and the ability to pick executives at the senior ranks with superior

skills in getting their organizations to follow through on the strategic initiatives in the face of

ambiguity and uncertainty. At the same time, everyone must continue to execute the remaining

operational integration issues and deliver business results.

The aim here would also be to study the human side of a merger. A merger brings a lot of change

in the culture and the employee morale. Thus the concept of change management comes into

play. Objective here is also to find the change management post mergers and acquisitions

referring to human side of change.

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TI

STRATEGIC DYNAMICS FOR ACQUISITION INTEGRATION- COEVOLVING

DYNAMICS OF CHANGE MANAGEMENT

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PROCESS 1FORMULATING THE

INTEGRATION LOGIC &PERFORMANCE GOALS

PROCESS 2

CREATING INTEGRATION

PLAN

PROCESS 3

EXECUTING OPERATIONALINTEGRATION

PROCESS 4

EXECUTING STRATEGICINTEGRATION

SHORT TERMGOALS

SHORT TERMGOALS

LONG TERMGOALS

LONG TERMGOALS

TIME


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RESEARCH METHODOLGY

The research is primarily descriptive in nature. Descriptive research, also known as statistical

research, describes data and characteristics about the population or phenomenon being studied.

Descriptive research answers the questions who, what, where, when and how.

Primary Data is the original information gathered for a specific purpose. Sources for Primary

data collection were:

Secondary Data is the data already collected by others and is reused by the researcher. Sources

of secondary data were

1) Magazine

2) Journals

3) Research studies4) Online interviews of the company officials.

5) Newspapers

6) Company reports and Presentations

Sample

Sample consisted of officials within the company. Method adopted was Judgment Sampling.

Judgment sampling is a common non probability method. The researcher selected the sample

based on judgment that the sample will give accurate information on change management. This

is usually and extension of convenience sampling.

Limitations of the Study

Secondary Data cannot be verified.

Only top management officials of the company can give an accurate picture of the change

management process. However, the top management officials were unavailable to comment.

The HP-Compaq merger took place in US. Thus its implications in Indian context were not

known.

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LITERATURE REVIEW

MERGERS & ACQUISITIONS

1.1.1 OVERALL PICTURE OF M & AS

Mergers, acquisitions and joint ventures are common ways for companies to meet their growth,

globalization and development needs today. The words describing these different types of

contracts between companies have definitions. In particular the concepts of merger and

acquisition are used purposefully to give an impression about a situation in a certain perspective.

In many situations executives prefer to use concept merger instead of acquisition to offer a view

of co-operation instead of a hostile take-over.

Merger is defined as 'in general a situation in which two or more enterprises cease to be

distinct enterprises'.

Acquisition is defined as 'by one company of sufficient shares in another company to give the

purchaser control of that company'. (Both definitions are from Macmillan Dictionary of

Accounting).

Hubbard (1999) adds that acquisitions can be either friendly or hostile. Acquisitions are take-

overs in which the bidder negotiates directly with the target companys board of directors.

Proxy contest is in question when there is an attempt to gain control of the target company's

board of directors via a shareholder vote (Hubbard 2001).

Leveraged buyout is the purchase of shareholder equity by a group usually including incumbent

management and it is financed by debt, capital or both (Hubbard 2001).

Joint venture is defined as 'establishing a complete and separate formal organization with its

own structure, governance, workforce, procedures, policies and culture - while the

predecessor companies still exist' (Marks & Mirvis 1998).

I intend use the terms 'mergers and acquisitions'or'acquisition'as synonyms or simultaneously

not differing them from case to case. Sometimes the word merger is a nicer word for the situation

for the executives. Hostile take-over has not been included. I don't have a separate focus on

hostile situations. According to the cases I have studied, there are enough problems to be solved

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in friendly mergers and acquisitions to be more successful or less painful to the people involved.

I shorten merger and acquisition as MA.

According to company experts and economists there is no alternative to globalization.

Competition forces companies to go where labor and raw material are the cheapest, capital

favorable and the markets the biggest. The globalization started in the end of the 1980s when the

GNP (gross national product) and world trade grew faster than ever. Firms and countries have

been able to specialize and develop their core competencies (Helsingin Sanomat HS 18.9.2000).

The American thinking about the importance of shareholder value has become common also in

countries earlier with in-effective capital.

According to Helsingin Sanomat arguments for globalization are:

World GNP grows faster than ever Trade over borders is increasing

Firms and people are able to focus on what they best can

Firms are able to grow and become more profitable

Firms are able to get labour, raw material and financing cheaper than before

Competition and owners force the firms to be more profitable

Fighting is more expensive

Corruption decreases

Oppressed minorities get their voice heard better than inside a country

By international enactment it is possible to improve the position of labour, women and

environment

Availability of culture is improving, for example TV-series

Arguments against globalization are:

Income differences among countries will increase

The protected, weak, subnormal and slow areas will remain retarded in terms of

development

National states are tool less in world competition (market forces)

Democracy (democracy losing its power when the market power takes over)

Free capital, new technology and speculative investors bring instability in world economy

with them

Growing differences between poor and rich countries increase tension in world politics

Immigrant problems increase

Cultural clashes take place in multinational corporations

Supranational monopolies decrease competition

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Tax competition will wreck social security systems

Cultural convergence because of exposure to shared media experiences

Globalization has become the most common thing to describe the business activities in the worldtoday. Three reasons (Cartwright and Cooper 1992):

To be present for the customers all over the world (customers).

To use the favors of infrastructures of different countries remembering that countries, not

only companies want to be and must be competitive. Companies work hard to locate their

production and services in the best possible locations using all the competence and

financial benefits, which are available in different countries (country competitiveness).

Talent search (talent search and recruiting). Nations compete for companies; nations want

to be competitive to get the best companies and favors coming with that (Porter 1992).

Governments work hard to attract business by offering special benefits, part of which is offered

by the society: education systems, safe environment, well organized contacts between different

stakeholders, taxation benefits, and technology power. Many of the major corporations with

Indian origin have kept their headquarters in India, both because of taxation and human capital

availability reasons. Even if, it has meant a few expatriates to India, a lot of traveling in top

management.

1.1.2 TYPES OF MERGERS

Horizontal Mergers

Vertical Mergers

Conglomerate Mergers

Horizontal Mergers

This type of merger involves two firms that operate and compete in a similar kind of business.

The merger is based on the assumption that it will provide economies of scale

from the larger combined unit. Example: Glaxo Wellcome Plc. and Smith Kline

Beecham Plc. mega merger

'The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline

Beecham PLC early this year announced plans to merge resulting in the largest drug

manufacturing company globally. The merger created a company valued at $182.4 billion and

with a 7.3 percent share of the global pharmaceutical market. The merged company expected

$1.6 billion in pretax cost savings alter three years. The two companies have complementary

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drug portfolios, and a merger would let them pool their research and development funds and

would give the merged company a bigger sales and marketing force.

Vertical Mergers

Vertical mergers lake place between firms in different stages of production/operation, either

as forward or backward integration.

The basic reason is to eliminate costs of searching for prices, contracting, payment

collection and advertising and may also reduce the cost of communicating and coordinating

production. Both production and inventory can be improved on account of efficient

information flow within the organization. Unlike horizontal mergers, which have no specific

timing, vertical mergers take place when both firms plan to integrate the production process

and capitalize on the demand for the product. Forward integration take place when a raw

material supplier finds a regular procurer of i t s products while backward integration takes

place when a manufacturer finds a cheap source of raw material supplier.

Example: Merger of Usha Martin and Usha Beltron.

Usha Martin and Usha Beltron merged their businesses to enhance shareholder value

through business synergies. The merger will also enable both the companies to pool

resources and streamline business and finance with operational efficiencies and cost

reduction and also help in development of new products that require synergies.

Conglomerate Mergers

It is an amalgamation of the companies in two different industries, (Eg: DCM and Modi

Industries.)

Conglomerate mergers are affected among firms that are in different or

unrelated business activity. Firms that plan to increase their product lines

carry out these types of mergers. Firms opting for conglomerate merger control

a range of activities in various industries that require different skills in the

specific managerial functions of research, applied engineering, production,

marketing and so on. This type of diversification can he achieved mainly by

external acquisition and mergers and is not generally possible through

internal development. These types of mergers are also called concentric

mergers. Firms operating in different geographic locations also proceed

wi t h these types of mergers. Conglomerate mergers have been sub-divided

into:

Financial Conglomerates

Managerial Conglomerates

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Concentric Companies

Financial Conglomerates

These conglomerates provide a flow of funds to every segment of their operations,

exercise control and are the ultimate financial risk takers. They not only assume financial

responsibility and control but also play a chief role in operating decisions. They also:

Improve risk-return ratio

Reduce risk

Improve the quality of general and functional managerial performance

Provide effective competitive process

Provide distinction between performance based on underlying potentials in the

product market area and results related to managerial performance.

Managerial Conglomerates

Managerial conglomerates provide managerial counsel and interaction on decisions thereby,

increasing potential for improving performance. When two firms of unequal managerial

competence combine, the performance of the combined firm will be greater than the sum of

equal parts that provide large economic benefits.

Concentric Companies

The primary difference between managerial conglomerate and concentric company is its

distinction between respective general and specific management functions. The merger is termed

as concentric when there is a carry-over of specific management functions or any

complementarities in relative strengths between management functions.

1.1.3 TYPES OF ACQUISITIONS

Share purchases - in a share purchase the buyer buys the shares of the target company

from the shareholders of the target company. The buyer will take on the company with all

its assets and liabilities.

Asset purchases - in an asset purchase the buyer buys the assets of the target company

from the target company. In simplest form this leaves the target company as an empty

shell, and the cash it receives from the acquisition is then paid back to its shareholders by

dividend or through liquidation. However, one of the advantages of an asset purchase for

the buyer is that it can "cherry-pick" the assets that it wants and leave the assets - and

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liabilities - that it does not. This leaves the target in a different position after the purchase,

but liquidation is nevertheless usually the end result.

An acquisition is only slightly different from a merger. In fact, it may be different in name only.

Like mergers, acquisitions are actions through which companies seek economies of scale,

efficiencies, and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm

purchasing another--there is no exchanging of stock or consolidating as a new company.

Acquisitions are often congenial, with all parties feeling satisfied with the deal. Other times,

acquisitions are more hostile.

In an acquisition, a company can buy another company with cash, with stock, or a combination

of the two. Another possibility, which is common in smaller deals, is for one company to acquire

all the assets of another company. Company X buys all of Company Y's assets for cash, which

means that Company Y will have only cash (and debt, if they had debt before). Of course,

Company Y becomes merely a shell and will eventually liquidate or enter another area ofbusiness.

Another type of acquisition is a reverse merger, a deal that enables a private company to get

publicly listed in a relatively short time period. A reverse merger occurs when a private company

that has strong prospects and is eager to raise financing buys a publicly-listed shell company,

usually one with no business and limited assets. The private company reverse merges into the

public company, and together they become an entirely new public corporation with tradable

shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal:they are all meant to create synergy that makes the value of the combined companies greater than

the sum of the two parts. The success of a merger or acquisition depends on how well this

synergy is achieved.

So, the term acquisition means an attempt by one firm, called the acquiring firm, to gain a

majority interest in another firm, called target firm.

The effort in control may be a prelude:

To a subsequent merger or To establish a parent-subsidiary relationship or

To break-up the target firm, and dispose off its assets or

To take the target firm private by a small group of investors.

There are broadly two kinds of strategies that can be employed in corporate acquisitions.

These include:

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Friendly Takeover

The acquiring firm makes a financial proposal to the target firm's management and board.

This proposal might involve- the merger of the two firms, the consolidation of two firms- or the

creation of parent/subsidiary relationship.

Hostile Takeover

A hostile takeover may not follow a preliminary attempt at a friendly takeover. For

example, it is not uncommon for an acquiring firm to embrace the target firm's

management.

1.2 CHANGE MANAGEMENT THROUGH EFFECTIVE INTEGRATION

1.2.1 CHANGE MANAGEMENT

Change is a fact of life. On the positive side, change may be seen as akin to opportunity,

rejuvenation, progress, innovation, and growth. But just as legitimately, change can also be seen

as instability, upheaval, unpredictability, a threat, and disorientation.

The concept of change management describes a structured approach to transitions in

individuals, teams, organizations and societies that moves the target from a current state to a

desired state.

Stated simply, change management is a process for managing the people-side of change. The

most recent research points to a combination of organizational change management tools andindividual change management models for effective change to take place.

To integrate companies following a merger, arguably the most important challenges involve

the top of the organizationappointing the right top team, structuring it appropriately, defining

its agenda, and building the trust that enables its members to work well together. Executives who

fail to overcome these challenges are responsible for the ego clashes and politics that are often

the root cause of spectacular failed mergers.

Unfortunately, recent thinking about change management no longer emphasizes the pivotal role

of the top team. The consensus on how to manage change has shifted to a dispersed approach

because too many initiatives designed to cascade down the hierarchy have delivereddisappointing results. The usual interpretation is that top-down change fails because at every step

messages get diluted, so that each succeeding one seems less compelling and less authentic.

While this may be true in certain circumstances, a merger requires direction from the top because

that is the only way to initiate change throughout an organization. The change required to

integrate companies cannot be driven from an entrepreneurial business unit, an innovative

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functional unit, or the front line. Too much coordinated, programmatic change must be achieved

in too short a time for such approaches to succeed. The spirit of the project is determined at the

top, where the conditions are set for the whole integration effort.

But the top team must do more than just talk about the new company, adopt its language and

trappings, and act according to its norms. The team must become the new company in the fullsense. Its messages, processes, and targets must deeply incorporate the aspirations of the new

company in a way that is visible to managers, employees, and even outside observers. As the top

team goes on to integrate the company down the line, it in effect re-creates itself. The company

is not just rolling out messages, processes, and a set of targets; it is rolling out itself.

In the best cases, members of the top team signal the kind of company they are creating and their

commitment to that new company. In other cases, the team visibly lacks the requisite quality, and

its weaknesses inevitably spread throughout the merging companies. The power of the signals

emanating from the top team reflects the fact that they are not just signals: they create concrete

realities.

The important signals fall into three categories:

(1) Senior appointments

(2) The top team's alignment, and

(3) Clarity about roles.

Senior Appointments

One of the most memorable things during an integration effort is the way managers, employees,

and even other stakeholders closely watch to see who ends up on the top team. This attentiveness

represents much more than a voyeuristic interest in the human drama taking place. Theappointments provide strong clues about the new company's direction and, more subtly, about

the degree of its commitment to its proclaimed course. Managers and employees will, of course,

also interpret appointments to the top team as signals about their own future.

Timing is crucial: in general, the earlier the decision-making process begins and ends, the better.

In one study of 161 mergers, the early appointment of a top team was a strong predictor of the

long-term performance of the combined organization.

Understanding the impact of these signals on each side of the boundary between the merging

companies is critical because the signals may depart from expectations in very different ways.

Creating a new company at the top is particularly problematic in a merger of equals because

managers are sorely tempted to maintain the identities of the predecessor organizations. To be

sure, the proclaimed strategy usually calls for their full integration.

Yet compromises on people issues may fatally obstruct this effort and ultimately undermine the

merged company's pursuit of value. The resulting mess will often be attributed to "incompatible

cultures," as if the failure of integration was the inevitable result of trying to mix oil and water.

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Another source of failure at the top is an unwillingness to face the prospect of job losses among

close colleagues who have performed well for yearseven though many more job losses are

likely among people further down the line.

Alignment of the top team

Although appointment decisions can be difficult, at least in the end it is clear to all what has been

decided. Top-team alignment, by contrast, is a rather nebulous outcome of many diverse

activities. People know when a company really has it, but at various stages along the way they

ask, "Are we aligned yet?"

In a merger, the top team must fashion its own identity vis--vis the external world of business

partners, competitors, customers, and regulators to reach this level of agreement. Research shows

that when top teams turn their attention to the external environment, they often experience a

catalytic effect, which carries them past the usual internal frictions much more quickly.

Compared with the pressing need to thrive in the marketplace, these frictions simply do not

matter very much. This effect is particularly striking when an external crisis suddenly emerges.

Getting to that level of agreement without a crisis is mostly a matter of discipline. A carefully

limited dose of team-building exercises can also help, but with two important caveats. First,

managers on both sides may have very different perspectives on what constitutes a constructive,

business-like exercise. If one side perceives an activity to be a touchy-feely distraction, it is not

worth doing and could be counter-productive. Second, senior managers the world over have very

limited patience for time spent on anything other than "real work." This is all the more true under

the intense pressure of integration. It is best to focus on outputs whose value is clear even if they

are intangible (for example, a set of behavioral norms for the new company).

Role clarity

The members of the top team share responsibility for the merging companies' future as a whole,

but they also have distinct individual responsibilities. They must work together in a

complementary way not only to help the companies integrate successfully but also to lead the

combined one through its other concurrent and future challenges. To do so, the team must define

roles very clearly and quicklyparticularly roles directly involved in the integration effort.

From the perspective of a company's long-term corporate health, the future needs of the business

are an equally strong factor in defining roles. Creating the top echelon of the new company is as

important for its long-term performance as for the near-term success of the integration effort.

Establishing the top team poses a critical and immediate challenge for merging companies. The

new company's leaders must appoint the best possible top team for achieving its goals, and the

top team's members must be aligned around them. To collaborate effectively, its members must

be clear about their individual roles. All this is sensible enough and easy to say, but in practice

that degree of leadership can be hard to achieve during the hectic period leading up to a merger

or even in its immediate aftermat.

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1.2.2 LEWINS THEORY OF CHANGE

Kurt Lewin (1951) introduced the three-step change model. This social scientist views

behavior as a dynamic balance of forces working in opposing directions. Driving forces facilitate

change because they push employees in the desired direction. Restraining forces hinder change

because they push employees in the opposite direction. Therefore, these forces must be analyzed

and Lewins three-step model can help shift the balance in the direction of the planned change.

According to Lewin, the first step in the process of changing behavior is to unfreeze the

existing situation or status quo. The status quo is considered the equilibrium state.

Unfreezing is necessary to overcome the strains of individual resistance and group

conformity. Unfreezing can be achieved by the use of three methods. First, increase the

driving forces that direct behavior away from the existing situation or status quo. Second,decrease the restraining forces that negatively affect the movement from the existing

equilibrium. Third, find a combination of the two methods listed above. Some activities

that can assist in the unfreezing step include: motivate participants by preparing them for

change, build trust and recognition for the need to change, and actively participate in

recognizing problems and brainstorming solutions within a group.

Lewins second step in the process ofchanging behavior is movement. In this step, it is

necessary to move the target system to a new level of equilibrium. Three actions that can

assist in the movement step include: persuading employees to agree that the status quo is

not beneficial to them and encouraging them to view the problem from a fresh

perspective, work together on a quest for new, relevant information, and connect the

views of the group to well-respected, powerful leaders that also support the change.

The third step of Lewins three-step change model is refreezing. This step needs to take

place after the change has been implemented in order for it to be sustained or stick over

time. It is high likely that the change will be short lived and the employees will revert to

their old equilibrium (behaviors) if this step is not taken. It is the actual integration of the

new values into the community values and traditions. The purpose of refreezing is to

stabilize the new equilibrium resulting from the change by balancing both the driving and

restraining forces. One action that can be used to implement Lewins third step is to

reinforce new patterns and institutionalize them through formal and informal mechanismsincluding policies and procedures

Therefore, Lewins model illustrates the effects of forces that either promote or inhibit change.

Specifically, driving forces promote change while restraining forces oppose change. Hence,

change will occur when the combined strength of one force is greater than the combined strength

of the opposing set of forces.

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1.2.3 INTEGRATION AND CHANGE MANAGEMENT

The main goal of companies is to create value. If well managed, mergers help companies toachieve higher efficiency, productivity, and profit by creating opportunities for growth.

According to a research conducted with the participation of 115 companies around the world,

58% of mergers result in failures. Mergers involve two critical phases that affect the outcome.

Based on researches, 30% of the outcome is affected by activities during the pre combination

phase, while 70% depends on activities during the post merger period.

All merger interventions are complex change initiatives, and post merger integration

activities are key elements for the success of the change.

As in all change management interventions, the challenging dynamics of post merger period

requires a well structured planning. Management should have a clear understanding about thechange, and be prepared for the outcomes.

Companies often ignore the importance of developing a merger integration plan, assuming that

the employees will adapt to change with no preparation. However, employees are directly

affected by the change. Therefore, successful integration requires extensive planning.

The effectiveness of human resources strategies and practices are highly important for the

success of post merger integration phase. The main tasks of human resources strategies are to

communicate change openly, and in a timely manner with all levels of the organization, and to

motivate the members of the organization to support and adopt to change.

Cultural integration activities are also crucial for the success of merger interventions. These

activities mainly involve the assessment of companies cultures through questionnaires and

interviews and identify the key areas that will accelerate the integration process.

Creating a trusting environment for employees and customers is another critical factor.

Constructing an environment in which employees and customers feel safe and satisfied help

companies to sustain change and make it part of the corporate structure. During this process, it is

necessary to:

Manage expectations.

Communicate decisions with right channels in a timely manner.

Give consistent messages about strategies to all stakeholders.

Assign management as change agents.

Post merger integration projects involve three major phases:

1. Identifying organizational strategies,

2. Establishing integration plan, and

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3. Implementing plan.

MANAGING CHANGE- HP COMPAQ MERGER

The analysis of the HP Compaq is on the basis of four objectives explained above

(i) Formulating the integration logic and performance goals,

(ii) Establishing the integration planning approach,

(iii) Executing operational integration, and

(iv) Executing strategic integration

1.1 Introduction

Seldom is the inevitability of the strategic logic of large-scale corporate change immediately

clear to internal and external constituencies and observers. Even more rarely is such strategiclogic turned into effective execution, especially if the change involves the integration of two

large, high technology companies operating in rapidly changing competitive environments. Add

to this that a relatively new outsider is in charge of orchestrating the execution of the acquisition

integration and that she has to overcome active resistance of the major shareholding families of

the founders of the acquiring company. The a priori odds of success seem daunting. HPs CEO

Carleton S. Carly Fiorina faced this situation when she proposed to acquire rival computing

company Compaq in September 2001.

Following the consummation of the merger in May 2002, after a prolonged proxy fight, the

organizational integration of HP and Compaq was initially considered a success , even bymany skeptics, as the company was initially exceeding its goals. By the end of 2004, however,

it had become clear that HP was missing the mergers longer-term revenue and profit

goals. It was unclear whether this was due to the details of the organizational and cultural

integration taking much longer to be worked out than initially expected, or to the original

strategic assumptions being wrong, or to some combination of both.

In early 2005 the competitive effectiveness of HPs new corporate strategy was still subject of

debate among analysts and outside observers. The company continued to struggle with some key

strategic issues, especially the development of a world-class direct distribution system to

compete with Dell and the capacity to manage and provide business solutions to global enterprise

accounts to compete with IBM. In February of 2005, concerns on the part of HPs board of

directors about Fiorinas leadership style and her ability to get the organization to execute the

new corporate strategy led to her ouster as CEO.

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Why Did This Happen?

Analysis reveals that effectively managing the strategic integration process was extremely

difficult and suggests several reasons.

First, the highly urgent short-term goals naturally focused the executive team and the

integration planning teams attention on the operational integration at the expense of the

strategic integration. It was difficult to shift managers attention focused on cost cutting

and value capture to attention to strategic issues, because there was a fear that launching

the strategic integration work would lead people to lose focus on the short-term goals,

which were viewed as absolutely critical given the publicity of the $2.5 billion cost

cutting target.

Second, the battle fatigue that unavoidably accompanied working through the operational

integration process made simultaneous strategic learning exceedingly difficult. Top and

senior managers executing the operational integration had to manage both the verychallenging integration tasks and had to deliver the expected quarterly financial results

while keeping customers, employees, and other key stakeholders satisfied.

Third, in part due to a major focus on potential integration risks during the proxy fight,

there was a natural desire on the part of top management to get customers, business

partners, and financial analysts to stop focusing so exclusively on how the merger

integration was going. When the operational integration goals were met, top management

declared victory to the outside world. One unintended consequence of this was a reduced

sense of urgency and focus during the strategic integration process.

As a result, it was hard to get the top team to focus on scanning the changing economic and

competitive environment and to focus on the longer-term strategic initiatives necessary to

achieve the potential of the new company. The resulting less forceful execution of the multi-year

initiatives lead to a weaker feedback loop from strategic integration back to the integration logic

and its assumptions about competitive dynamics, which created a vicious circle. In some ways,

these strong forces may have led top management to equate the integration execution challenge

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primarily with operational integration. Successful operational integration, however, was

necessary but not sufficient for the company to achieve the new levels of success that were now

expected as a result of the process of formulating the integration logic and the performance

goals. Not fully following through on the difference between operational and strategic

integration led to declaring victory too soon. The vicious circle caused by not executing the

strategic integration process with the required focus and urgency, and thereby lacking an

effective feedback loop to measure progress against the assumptions underlying the integration

logic, caused top management to fail to achieve the full promise of the merger and to miss

projected growth and profit goals. This led to disappointment of external and disillusionment of

internal constituencies.

CHANGE MANAGEMENT AT HP-COMPAQ MERGER

2.1 Merger Overview from HR Perspective

Merger created a $70 billion global technology leader with the industry's most complete set of

IT products and services for both businesses and consumers.

New HP is the #1 global player in servers, imaging & printing, and access devices (PCs &

hand-held), as well as Top 3 player in IT services, storage and management software.

Combination furthers each company's commitment to open, market-unifying systems and

architectures and aggressive direct and channel distribution models.

Combined company is creating substantial shareowner value through significant cost structureimprovements and access to new growth opportunities.

New HP had operations in more than 160 countries and over 140,000 employees.

HPs Challenge

Largest merger in technology history

Skeptical market.

Heated proxy battle.

Weak IT market

HP Commitments to its People

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To help HP people share in the company's success, which they make possible.

To provide job security based on performance.

To recognize their individual achievements.

To help them gain a sense of satisfaction and accomplishment from their work.

Relationships within the company depend upon a spirit of cooperation among bothindividuals and groups, and an attitude of trust and understanding on the part of the

managers towards their people. These relationships will be good only if employees have

faith in the motives and integrity of their peers, supervisors and the company itself.

Job security is an important HP objective ... the company has achieved a steady growth

in employment by consistently developing good new products, and by avoiding the type

of contract business that requires hiring many people, then terminating them when the

contract expires.

To foster initiative and creativity by allowing the individual great freedom of action in

attaining well-defined objectives. Insofar as possible, each individual at each level in the organization should make his or

her own plans to achieve company objectives and goals. After receiving supervisory

approval, each individual should be given a wide degree of freedom to work within the

limitations imposed by these plans, and by our corporate policies.

2.2 CRITICAL FACTORS CONSIDERED IMPORTANT FOR CHANGE

MANAGEMENT AT HP

CRITICAL SUCCESS FACTORS SAMPLE ELEMENTS

Well Defined Acquisition Strategy Reasons for Merger Explained

Degree of Integration Defined

Criticisms Addressed

Clear Product Road Map Communication of Offerings to

Market Place

Re-alignment of Internal Efforts

Branding Strategy

Unyielding Focus on Customers Clear Points of Contacts

Uninterrupted/Attention Support

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Maintained Relationships with

Partners/Support.

Synergies and path to realization

specifically identified

Both cost and synergies included

Plans, Accountability and clear

metrics and/ targets assigned to

project level.

Strong Program Management

processes to track/drive results.

Clearly Defined New Corporate Governance Boards/Executives Agreed to

Organization Structure Defined

Line Management Roles Determined

Effective Communication to Stakeholders Communication early and often

Reaches all stake holders (employees,

shareholders, analysts, customers,

partners, et al

Clear consistent message.

2.3

Step 1: Building the Integration Team

Post-merger integration (PMI) leadership and group management named at time of

announcement on September 4, 2001.

Additional new HP senior leaders announced October 12, 2001.

Dedicated, full-time PMI leads from both HP and Compaq directing planning for businesses,

functions and horizontal processes since September.

Linked to new HP senior management team.

World-class advisors engaged.

22

Recognition of Cultural Differences Nature of Cultural Differences

Identified

Proactive Steps Taken to identify

Gaps

Rules of The Road Interaction

Defined

Speed/Decisiveness Minimize Periods of Uncertainty

Complete Planning prior to close Attack synergies from Day one


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HP and Compaq set up an Integration Office (IO) of 600 people from both companies to

oversee the merger process. Teams within the IO deal with IT systems, finance and human

resources as well as fuzzier issues, such as the integration of the two companies knowledge

23

STEERING COMMITTEECarly Fiorina (CEO), Michael Capellas (President), Bob

Wayman

(CFO), Susan Bowick (HR), Bob Napier (CIO), WebbMcKinney

and Jeff Clarke

STEERING COMMITTEECarly Fiorina (CEO), Michael Capellas (President), Bob

Wayman

(CFO), Susan Bowick (HR), Bob Napier (CIO), WebbMcKinney

and Jeff Clarke

PMI Team

Central PMONerve Center

Fast Track Center

PMO PMO PMO PMO PMO PMO PMO

Post

Integratio

n Team

Program

Teams

PT PT PT PT PT PT PTProjectTeams


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management systems. At each stage, the teams evaluated which companys systems worked best

and these were then adopted for the merged entity. The IO has also spent a lot of time dealing

with the cultural integration of the new company, with more than 150 executives and 35 focus

groups of employees being involved in trying to thrash out a joint culture from two cultures that

were quite distinct (Holland, 2002; The Economist, 2002).

There were certainly some major cultural integration issues to be overcome. In contrast to the

more paternalistic, family culture of HP, Compaqs culture was more difficult to pin down,

being described by employees in the early 1990s as fast moving, entrepreneurial, sales

oriented, aggressive, pragmatic, and quick, but, by the end of that decade as moribund

and extinct.

During this time, the company had also experienced several rounds of downsizing under Michael

Capellas, and staff morale was low (Sakar, 2002). The key to a successful merger would be to

integrate the faster-moving, aggressive sales focus of Compaqs culture, with HPs integrity,innovative capabilities and experience, as well as aligning internal systems, HR policies and

operational procedures. Consequently, this was one of the most exhaustively planned mergers in

corporate history. This desire to get this right was driven in large measure by Mike Capellas

bitter memories of the problems Compaq had when it took over DEC in the early 1990s, and

according to one commentator at the time, the employees in the two companies really dont like

each other that much (Gottliebsen, 2002).

An anonymous Compaq employee commented that, It will be two years of guerilla

warfare.

The merger led immediately to the loss of some 20,000 jobs worldwide and about 600 in

Australia (Hayes, 2002 b & c). A new Australian operation was formed out of HP and Compaq

employees into a new team selected by Fiorina and the new boss of HP-South Pacific, Paul

Bradling (Hayes, 2002a).

During 2002, it was reported that morale was at HP was at an all time low (Lashinsky, 2002:

17). Fiorinas personal standing also plummeted to the point where some HP employees in the

USA began referring to her as, The Armani Witch, who never mixed with or dined with her

employees in the staff canteen as her predecessors often did (Dalton, 2002). In fact, Fiorinas

leadership style, and her tetchy relationships with the families of HPs founders, was a major

issue throughout her tenure as CEO. On the positive side, she was seen as an excellent formal

communicator, determined, confident, decisive, strategic and charismatic. She also clearly

understood the need to somehow transform HPs stagnant culture; an incredibly difficult exercise

given the strong emotional and psychological commitment that so many employees and the

Hewlett/Packard families had to a culture that had served the company so well for such a long

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period of time. On the negative side, she was regarded by many people as remote, aloof and

autocratic (Mehta, 2003).

Negative sentiments about Fiorina and the company among both employees and financial

commentators were compounded when Capellas announced his resignation from HP in

November 2002 to take over at the helm of the disgraced telecommunications company,

Worldcom. At the time, this company was mired in the biggest bankruptcy in American

corporate history and had laid off 17000 employees. While HP tried to put a positive spin on his

departure, the companys share price immediately plunged 10% to $US14.99. Cynicism in the

company reached new heights when it was revealed that Capellas was to receive a $US14.4

million bonus payment. He would not have been ineligible for this had he quit HP more than a

year after the merger (Bergstein, 2003).

CULTURAL INTEGRATIONAL TOOL- LAUNCH AND LEARN

There were significant cultural differences between HP and Compaq and the integration requireda strong, multi year focus on establishing the new culture. Susan D. Bowick, HPs executive vice

president of Human Resources and Workforce Development, and a 25-year veteran of HP

pointed said that to complement the Adopt-and-Go approach the Clean Teams also developed a

Launch-and-Learn mentality. This was a way of taking action that was fast and good enough.

None of this was easy, and the so-called soft social issues that had to be handled in order to

create a new culture would take a long time to get right, or at least good enough, which is why

Bowick was fond of saying, The soft stuff is the hard stuff.

2.4

Step 2: New HP Vision and Merger Integration Team Purpose

Merger Integration Team Purpose

Provide effective overall leadership for the planning and execution of the integration of HP and

Compaq

Assure effective linkages with the business line managers, functions, regions, the integration

steering committee and HPs Executive Council.

Assure that the value captured is maximized and exceeds public expectations

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NEW HP VISION

We create a great new company that is a leader in our chosenfields and is positioned to be the leading overall IT solutions

provider


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Assure the new HP is set up to achieve long-term growth objectives

Guidelines for the Merger Integration Team

Start with the customer experience; retain the highest level of customer satisfaction.

Name executive leaders early and link tightly into planning.

Ensure that structure follows strategy

Make decisions quick and make them stick

Cultural Integrational Tool- Adopt and go

Clarify roles and ensure shared accountability

Create dedicated integration teams

Address cultural similarities and differences

Rigorously measure, manage and communicate integration progress, wins, issues and

opportunities

2.5 SHARPLY FOCUS ON VALUE CREATION PRE MERGER INTEGRATION TEAM

STRUCTURE

Central Program Management Office (cPMO)

Supply Chain

Customer To Cash Team

Information Technology

Finance

Human Resources (Including Organizational Design & Structure)

Brand Architecture

Communications-Organization

HP Labs

CTO

e-inclusion & Community Engagement

.com/e-commerce

Government Affairs

Culture

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Imaging &Printing

Systems Group

PersonalSystems Group

EnterpriseSystems Group

Services


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Closing/Anti-trust

Global Functions Infrastructure

Communications- Merger Communication & Messaging

Shared go to Market

Value Capture

TABLE 3- INTEGRATION PLANNING FRAMEWORK

27

Strategy

Strategy PrioritiesGo To Market StrategyPortfolio

Channel strategy

Structure &

Process

OrganizationStructureSystems &ProcessesInformationFlows &DecisionMakingProcessFinancial &InformationSystemsArchitecture

People & Culture

One Common CultureRetention of Top TalentNew Competencies For our

PeopleRoles & Responsibilities

Measures

CustomerSatisfactionFinancial

EmployeeSatisfactionOperationalExcellenceRecognitions &RewardSystems


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2.6 CULTURAL INTEGRATION GOALS

To build a strong, new culture that:

Is clearly defined and broadly understood

Reflects the business strategy and brand

Supports best-in-class performance with customers, partners, shareowners and employees

Produces alignment, commitment and excitement

Establishes a competitive advantage

Is reflected in the communications and actions of core leaders

Activities

Formal work-stream status

Culture due diligence (CDD) investigation planned and communicated

CDD process included interviews, focus groups and survey

Culture integration team met with combined Executive Council

Reviewed approach to culture integration

Identified culture cornerstones

Explored archival material

Engaged broader employee coalition Connected with brand and communication work

Fast Start workshops initiated

Anatomy of Cultural Due Diligence

Coverage: 22 countries

Timeframe: October December 2001

127 in-depth executive interviews

138 focus groups with managers and individual contributors, spanning 1,500 employees

Focus of inquiry

HP on HP

Compaq on Compaq

Views of other company

Computer-assisted content analysis of interview data

Report to executive team: Christmas week

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29

CORPORATE OBJECTIVES

VALUES

POLICIES &

PRACTICES

BEHAVIOR

STRATEGY

METRIC &

REWARDS

STRUCTURE

& PROCESSES

SAMPLE OUTPUT

Vision & Governance of the Company

Balance Scorecard & Pay Metrics

Leadership Selection

Formation & Start Up of New Teams

Customer(Quality Initiatives)Fast Track Program

SAMPLE INPUT:

New Co-Executive Culture Session

HP Historical

CPQ Historical

New HP Brand

Competitive Environment


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Day 1 Preparation

Focus solely on launch day

Gain agreement on day 1 requirements across functions/activities

Make adopt-and-go decisions

Develop conceptual/ physical models

Prepare

Test

Review readiness

Establish command centers

Measuring Success at Launch-We Were Ready

170 client business managers, 25 partner business managers and 30 retail account managers

trained and announced.

800 senior managers named, including region and country leads

Product roadmaps and transition plans available

Customer and partner outreach and training programs initiated

1100 customers contacted to date

23 top US/EMEA retail accounts contacted on day 1

All partners given access to on-line sales training

Sales readiness training website received 40,000 hits in the first hour of launch and 100,000

hits by end of day.

20,000 presales and sales call center agents and 8000 consumer support users trained and

ready day 1.

Channel strategy in place and communicated

Work force restructuring initiated.

Launch Report-Infrastructure Delivers

hp.com (online store) open for business

@hp employee portal accessible to all employees

Company networks connected at key strategic locations

Active directory and enterprise directory synchronized

E-mail systems interconnected

All external call centers with HP greeting on day 1

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Employee names with hp.com suffix for external email (both in-bound and out-bound)

Day 1 infrastructure management environment

Monitoring and reporting process

Escalation and incident management process

Command center for 30 days

Remain Sharply Focused on Value Creation-Post Close Merger Integration Structure

2.7 Integration Plan of Record

Managing integration progress through a rigorous process.

Tracking all projects and their milestones to ensure we meet synergy goals on schedule

Ensuring tie off with value capture, restructuring and financial planning targets

Determining accountability owner for each project

Driving results through merger integration office focus on cross-organizational dependencies,

pan-HP view.

Meeting with the Steering Committee

31

STEERING COMMITEE

CENTRAL MERGER

INTEGRATION OFFICE

GROUPS

(PMI)

REGIONS

/COUNTRIES

(PMI)

WORLDWIDE

OPERATIONS

(PMI)

CORPORATE

FUNCTIONS

(PMI)


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While the Clean Team operated in metaphorically clean rooms apart from the day-to-day

distractions of operating a company, they were closely linked to the Steering Committee. Fiorina

had limited the Steering Committee to a small group of senior executives who could rapidly

make decisions and have those decisions be completely unquestioned during execution. The

committee consisted of Carly Fiorina, Webb McKinney, Jeff Clarke, Susan Bowick, Bob

Wayman, and Bob Napier, the chief information officer.

Clarke described how each Monday the teams would go through a very rigorous process with the

merger integration program office, (reporting to McKinney and Clark). They would track the

status of each project by using the color codes red, green, yellow, just like a stoplight. Items on

track were marked with yellow, items that were finished or well ahead of plan were marked

green, and items that were falling behind or otherwise failing were marked red. Since they had to

track over 10,000 Adopt-and- Go decisions, the simplicity and rigor of that red, green, yellow

tracking process was critical. On Tuesdays, teams prepared for an all-day Wednesday integration

meeting (chaired by Clark and McKinney). During these meetings, teams made

recommendations about integration decisions. Clark and McKinney would consider therecommendations and often sent them back to the teams for more work. Members of the teams

would sometimes debate and come to a consensus recommendation, or a consensus position of

agreeing to disagree. McKinney and Clark then made the Adopt-and-Go decision. On Thursdays,

Carly held her half-day Steering Committee meeting. Clark and McKinney were on the agendas

for these meetings. They would present or bring others in to present and make recommendations

about important status items of the merger and different decisions, such as the merger product

roadmaps, management decisions, restructuring plans, consolidation plans, etc.

TABLE 6 - Value Capturing Planning Framework

Integration Planning Implementation-Post Closing

32

Value capture team

Drive overall top-down corporateplanning process to achieve fullvalue of the merger by 2004 Provides top-down baseline,forecasts, synergy targets Consolidates integration teamsubmissions

Integration teams

Verify and refine top-downbaseline, forecasts and synergytargets with bottom-up data.

Corporate planning

Monitors and tracks revenue, costand synergy capture over timeGroups Responsible for revenue, ownedcost and synergy targets Execute on synergy capture forday-to-day operations

Functions

Execute on synergy capture onowned costs for day-to-dayoperations

Management compensation tied toachieving value capture goals

INTEGRATION

STARTS


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\

HPs PEOPLE STRATEGY AFTER THE MERGER-MANAGING CULTURAL

CHANGE

1. Need for Change Management Strategy

Change is an opportunity that you can influence, and when managed correctly it will

energize an organization.

a) Why manage Change

Significant workplace change can defocus an organization

Consistently practiced change management techniques will:

anticipate the phases of emotions address the issues

maintain strong communication efforts

provide the catalyst to move people through change without losing focus and

productivity

b) Challenge for HR

Develop a strategy to maintain and surpass the pre-merger standards of both companies

while managing massive cultural change.

5 STAGES OF CHANGE MANAGEMENT

Stage 1-Awareness

The HP People Strategy is aligned to their corporate objectives and values and designed to keep

employee commitment, especially in this time of change.

HPs People Strategy enabled HR to:

Speed and smooth the process of change.

Move through the initial change period

Set a culture of high performance right from the start.

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TIME

KICK OF GROUP & FUNCTIONAL

TEAMS

DEALCLOSE

REINFOR

& ARRI


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Stage 2-Encourage face-to-face interaction

Fast Start sessions

Fast Start and Fast Value

To help speed the cultural integration of the two companies, HP included a Cultural Integration

Team (CIT) within the overall Clean Team. The CIT launched Fast Start, a program of merger

integration workshops led by facilitators and held at the level of individual employee teams,

designed to help employees get to know each other, understand and align themselves with the

companys strategy and identify and deal with hot spotslikely sources of contention that

employees would face as HP got down to the job of integrating Compaq and HP together. Every

HP employee was required to attend a Fast Start workshop. One product of the Fast Start effortwas the Fast Value program, one-to two-day focused sessions designed to help employees

learn to work horizontally across the post-merger HP.

Stage 3-Be pragmatic

Adopt and go methodology

Adopt-and-Go

The Clean Team would do the research necessary to make recommendations about which

products to keep and which to eliminate. These were determined in a Product Roadmap, a

master plan of which overlapping product lines from HP or Compaq would be kept and whichwould be dropped. It was a huge task, but one they were expected to perform expeditiously.

According to Jeff Clark, instead of trying to develop best practices by combining the best

aspects offered by the respective assets of both companies, the Clean Team chose the better of

what was currently used by HP and Compaq, made that the winner as fast as possible, and

moved on to the next decision. The people whose jobs were eliminated when their products were

dropped knew that they could look for other jobs in the company. Adopt-and-Go improved the

focus of 99 percent of the combined HP-Compaq employees who worked outside of the Clean

Teams. They knew that there would be no debate over the clean room decisions. Their job was to

execute the clean room decisions. And that allowed the new company to get enormous speed in

the first six months, which obviously led to good financial performance. The Adopt-and-Go

process stopped the politicking, it allowed for speed of execution and that was the pivotal part of

the new companys ability to accelerate the savings.

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Stage 4- Mobilize: What Is High Performance

The high performance culture accelerates future growth by:

Maximizing organizational/individual productivity and capability

Aligning individual performance with company and business objectives

Using rewards as the motivator

Developing people through effective coaching, performance feedback and developmentplanning.

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36

BALANCE SCORECARD, HP VALUES ANDSUPPORTING

BEHAVIORS

1

23

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Stage 5: Reinforce and Arrive

Ensuring the Best Environment

1. Re-evaluated personal conduct policies and practices

2. Objectively examined behaviors and actions within HP

3. Created a new set of standards that define what we stand for today, owned by all HP

employees.

4. Not an HR programa broad-based, company-wide initiative

5. Long-term solution

6. Personal accountability and ownership

How we get things done is as important as what we get done.

- Carly Fiorina

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Reinforcing Desired Behavior

Clearly set expectations for personal conduct

Charge each employee with accountability and responsibility for creating the best work

environment

Provide resources, training and tools

Reward those who contribute to and ensure best work environment

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CASE ANALYSIS- TATA TETLEY ACQUISITION

1.1 INTRODUCTION

Tata Tea, after the acquisition of Tetley, has become the worlds second largest branded

tea company.

Tata Tea Globalization at a glance

World's second largest global branded tea operation with product and brand presence in 40

countries.

Significant presence in plantation activity in India and Sri Lanka.

Subsidiary in the US overseeing operations in the country, joint ventures in Pakistan and

Bangladesh to sell tea Acquisition of Tetley, a company that had a turnover three times the turnover of Tata Tea in

India

This was the biggest ever cross-border acquisition by an Indian company at that time and was

also the first leveraged buyout by an Indian firm.

BACKGROUND

Tata Group

Tata Tea, set up in 1964 as a joint venture named Tata Finlay, with UK-based James Finlay &Co to develop value-added tea, was among India's first multinational companies. In 1983 the

Tatas acquired the entire shareholding of James Finlay to rechristen the company as Tata Tea

Limited. In the mid 1980s, to offset the erratic fluctuations in commodity prices Tata Tea felt it

necessary to enter the branded market and launched its first brand Kanan Devan in polypack,

thus heralding the polypack revolution in the country.

Today Tata Tea and UK-based Tetley Group represent the world's second largest global

branded tea operation with product and brand presence in 40 countries and a significant,

albeit consciously declining presence, in plantation activity in India and Sri Lanka.

The worldwide branded tea business of the Tata Tea Group contributes around 88 per cent of its

consolidated turnover with the remaining 12 per cent coming from bulk tea, coffee, and

investment income. Tata Tea is headquartered in Kolkata (West Bengal) and owns 26 tea estates

in India as an entity. With an area of 15,000 hectares under tea cultivation, the company

produces around 40 million kilograms of black tea annually. Its tea estates are located in the

states of Assam and West Bengal in eastern India and Kerala and Tamil Nadu in the south. The

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company has a strong distribution network in India reaching out to over 1.7 million retail outlets

in India. Full-fledged research and development centers of the company focusing on the branded

tea business include a facility at Teok (Assam) and a product development center at Bangalore,

Karnataka focused on the entire range of tea operations.

The Tata Group companies are the largest shareholders of Tata Tea with a stake of 29 percent,

followed by the public with around 23 percent stake. Foreign institutional investors, foreign

companies and non-residents hold around 18 per cent stake, with the remaining stake held by

Indian financial institutions, mutual funds, banks and other companies.

Products and Brands

While Tata Tea is the second largest tea company in India after Hindustan Lever, it owns the

single largest tea brand in the country, Tata Tea Premium. The company has five major brands in

the Indian market catering to all major consumer segments for tea. Under the Tata Tea portolio,three brands cater to the premium, popular and economy segment Tata Tea Gold, Tata Tea

Premium and Tata Tea Agni respectively. In addition Tata Tea in India has three very strong

regional brands in the four Southern states, which are either number one or number two in their

respective geographies. These are Tetley, Kanan Devan, Chakra Gold and Gemini. Tetley in

India, though a niche brand, is presented as the new face of tea innovation brand. The Tata Tea

brand leads market share in terms of value and volume in India. Tetley acquired in 2000 is the

market leader in the UK and Canada with 26 per cent and 40 per cent market share respectively

by value. Tetley has also launched iced tea under Tea of Life brand in UK, which is making good

progress. Tetley is establishing a presence in the ready-to-drink segment, for which Tetley Ice

Tea has been launched in UK and Australia. Chayya, a recently launched Chai Latte brand inUK, is the first of its kind and is showing great promise. Besides Tetley also boasts of a wide

range of fruit and herbals and specialty tea. In order to build its business in these high value

segments, packaging innovations such as the stay fresh flip top carton are being introduced.

1.2 INTEGRATION PROBLEMS

A variety of problems existed in integrating the two companies:

1. How to Integrate: The Tatas decided that the best way to integrate was not to integrate

initially but to maintain a joint-venture type of arrangement. Furthermore, the integration

process was not rushed in order to protect Tata Tea from the risk of Tetleys debt. Tata Tea did

not want to change that structure until the debt level was manageable. The arms-length

relationship required that Tata Tea retain existing management at Tetley. Ken Pringle remained

as the Tetley Group CEO, and Tata management took new positions on the Tetley board of

directors.

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2. Size Difference: Tata Tea was half the size of Tetley in terms of revenues and number of

upper management. Tata Tea feared a domination of Tetleys corporate culture.

3. Financial Constraints: There were three financial constraints restricting integration. The first

constraint was that legal and capital controls in India made the listing of Tetley shares in India

unattractive. The second constraint was that Tata Tea did not want to carry the heavy debt

burden held by the SPV, particularly as Tata Tea was an A-rated Indian company. The third

constraint was the restrictive covenants at Tetley as a consequence of the LBO, which meant that

changes in Tetleys structure needed to be pre-approved by bankers.

4.Regional Players: Soon after the merger, the highly fractionated regional tea makers in India

grew faster, putting pressure on Tata Teas market share and profitability at home. Regional

players gained 6 percent market share in 2001.

5. Operational challenges: The merger posed a variety of operational questions, such as:

Growth issues: How could the combined corporate vision of Challenging for leadership

in tea around the world be achieved? The merger required vertical integration between a

tea production company and a global marketing company, and the question was what

growth targets needed to be defined for the individual companies?

Supply chain: How should they set up processes to harness the synergies on tea sourcing

and blending, purchasing, packing, logistics, and supply to allied functions to the mutual

advantage of both companies?

Support processes: How should they integrate various support processes covering

Finance & Legal, IT, R&D, HR, and Communications so that the objectives of both

companies were in sync? The back-office integration was complicated by the fact that

Tetley reported in UK GAAP, while Tata Tea adhered to Indian GAAP.

Commercial processes: How should they put in place benchmarked processes, which

would be adopted uniformly by the two organizations?

6. Cultural/Racial: There was a great deal of concern that British employees would resent

having Indian managers. These concerns were largely the result of the fact that India was a

former British colony. Anecdotally, Tetley employees were given substantial retention packages

to avoid exodus, which may have created negative feelings among Tata Tea employees. MrKumar also noted that, Culture was a huge issue and had to be handled carefully. . . . Tata

executives would complain about being kept waiting when visiting Tetleys UK head office

reception centre, despite being the senior partners. Meanwhile, Tetley people would complain

about being run by Tata, which knew only about India and nothing about Western markets.

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7. Corporate Philosophy: The two companies had different opinions on how the business should

be run. Tata Tea was a collection of estates that just happened to sell package tea and focused on

Asia (excluding China), Middle East, and Eastern Europe. Tetley was a marketing and packaging

company that had relationships with tea estates and focused on North America, Australia, and

Western Europe. Due to the significant differences in customer base, the two companies had

dissimilar products. In Tata Teas markets, tea was usually brewed in pots, so Tata Tea was an

expert in bulk and loose teas, while Tetley was an expert in tea bags and instant tea. This gave

rise to three types of differences:

Objectives of the company: Tata Tea was an integrated tea company, with its dual

emphasis on plantation as well as domestic marketing, whereas Tetley was primarily a

global marketing company. Whose approach was correct?

Geographical spread: Tata Teas international presence was limited to bulk tea sales,

whereas Tetley was into brand marketing with sizable international presence. Which

customers should the organization focus on? Differences in skill-sets: Tata Tea was a plantation company whose major strengths

were managing the estates, dealing with a huge work force, and making teas. There was a

drive since the mid-80s to create domestic brands and export bulk teas. In contrast,

Tetleys strength lay in its ability to buy quality teas worldwide; perfect its blending

skills, bring about innovation in packaging, and combine good logistics with management

skills. How were people to be cross-trained?

8. Kenya vs. India: It was initially believed that huge synergies would be achieved because

Tetley could source teas substantially from Tata Teas estates. Unfortunately, the majority of

Tetleys teas were of a different flavor, quality, and cost from teas found in Tatas estates.

Therefore, the integration process had to focus more on new products than on substitution.

9. Branding: Both companies had very strong brand names in their respective regions. There

was debate as to the surviving name of the new entity. The Tata name was not strong in Western

markets, while Tetley was relatively unknown in Tata Teas markets. There were also talks about

pensioning off the lovablebut old fashionedTeafolks in favor of promoting tea as a modern

lifestyle choice.

10. Conglomerate: Tata Tea was ultimately part of a huge conglomerate. The impact of theconglomerate on the operations of a related foreign entity and the strength of Tata Tea within the

conglomerate was unknown to Tetley employees. The Tata organization required group

companies to pay fees for the use of the Tata name and adhere to standards of financial and

social responsibility. The ramification of these standards on Tetley was still a mystery.

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11.Auctions/Commodity Price:The acquisition of Tetley by Tata Tea came at a time when the

prices of raw materials for making Tea were increasing. There were also rumors in the market

about Hindustan Lever Limited and Tata Tea controlling the price of Tea.

12.Demand for Tea:The general demand for tea in many of Tetleys core markets was slowing

or decreasing. This was partly because tea was viewed as a boring or sophisticated drink. Sodas,

coffee, and juices were gaining significant ground. There were a number of questions about how

to revitalize tea as a drink of choice.

13. Exchange Rate: The rupee was strengthening relative to the pound, which caused the

acquisition of teas from India to be more expensive for Tetley and made the transfer of money

back to the Tata organization less remunerative.

Changes Required

There were substantial challenges to realizing the synergies, which Khusrokhan effectively

summarized:

The first challenge is that the acquirer company in this case is smaller than the company

it acquired.

The second challenge is that since this was a cross-border acquisition, it is bound to have

its fair share of cultural problems. Getting people in two companies in the same country

to come together can be a problem; cross border integrations are even tougher.

The third difficulty is that, because this is a heavily ring-fenced, leveraged acquisition,

banks can have a say in what is being done. We will have to carry the banks with us for

anything that could be construed to be a structural change to Tetleys operations

[Attitudinal and mindset change among employees] is very much a part of any integration

process. I call it the learning-to-think-for-two phase, where each organization has to

begin to appreciate that there are two ways of looking at every issue and to appreciate

each others point of view. It is something like the adjustment phase in a marriage, which

starts immediately after the honeymoon.

1.3 FORMULATING INTEGRATION LOGIC AND PERFORMANCE GOALS

Documents

Change Management Post Mergers and Acquisitions Dissertaion