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M&A
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by Prof. Dr. Rolf-Dieter Reineke
in IntegrationProcesses
Anyone who has observed the international Merger and
Acquisition (M&A) scene over the past ten years will have
noticed that the number and size of take-overs has
increased but not the success-rate. In most studies this rate
still averages under 50%, when the result is related to the
aims of the take-over. Although in newspaper reports many
M&A activities look similar, there are in fact considerable
differences as regards what motivates these new strategic
arrangements.These differences can simultaneously appea
in varying combinations.
BUSINESS01 Integration
Processes
.v\|nvestment bankers,
lawyers and strategy
consultants who are
significantly involved in
mergers do not generally
have appropriate cultural
diligence as one of their
priorities, and there is
usually no precise
information in advance
about possible intercultural
problems and their
.,.. .*..._ . y.....
M &A activity is often defined byreference to correspondinginternational growth strategies.Thus empirical studies have shown that
shareholder value is created mainly by
firms which can generate an above-average
growth rate. Analysis has also shown,
however, that in 70% of cases this so-called
profitable growth was stimulated internally
and only in 30% of cases by M&A. Buying
or merging with other firms is actually an
extremely risky growth strategy and only in
few cases is stronger growth in turnover or
even profit ascertainable later. A further
motive is basically the intensification of
synergies. By means of common overheads,
purchasing and production activities,
economies of scale can be exploited and
synergy potential increased. Consistently .
realizing the strategy of cost leadership is
highly relevant at this level. Of course, this
synergy potential should appear after a
certain time on the company's "bottom
line" and unpleasant surprises should if
possible be avoided in the costs of the
integratipn. An attractive purchase price
can also be a significant motive for M&A
activity. In particular, financial investors
such as Apax, KKR or Morgan Grenfell aim
at buying firms cheap and selling them at a
profit later to industrial investors or on the
stock market.. >
Differing CorporateCultures
In all these cases the new organization
and integration of the combined
companies presents an important
challenge. While the completion of the
M&A activity often leads to a new mission
statement on the part of top management,
its comprehensive establishment in the
organization as a whole is usually lacking.
It is only when mergers fail, or when they
get into trouble after an apparently good
start, that incompatible corporate cultures
are likely to be blamed. One gets the
impression that imprecisely defined
cultural incompatibility is often brought
in, when mergers fail to function, to cover
up unmanageable power struggles or
strategic errors. Investment bankers,
lawyers and strategy consultants who are
significantly involved in mergers do not
generally have appropriate cultural
diligence as one of'their priorities, and
there is usually no precise information in
advance about possible intercultural
problems and their relevance to
integration. For the most part, experienced
intercultural organization consultants are
only called in when massive conflicts arise
after the merger, which are then only
manageable with great difficulty.
Levels of Integration
For successful integration, it is
important to realize that the process always
takes place simultaneously on three levels,
as the following quotations from a
German/US American merger make clear:
- the rational level (economic and legal
factors):
"The new company will give us world-
wide competitive advantage."
- the political level (power and group
interests) \
"You must conform. This is the way it has
to be done, whether it makes sense or not."
- the emotional level (attitudes,
emotions, personal interests:
"The concern when we heard it's a German
company was that the culture was totally
different."
"Nationalism comes into play, it's just
human nature. Here you had your
company being sold by a US corporation
. to a foreign corporation and there was an
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to
I
vS
^1
o
Corporate culture types and strategicdependency in international M&A
Polycentriccorporate culture
Synergeticcorporate culture
New geocentriccorporate culture
Ethnocentriccorporate culture
Low Strategic interdependence
Source: modified from Haspeslagh, Jcmison (1992) and Iteincke (I9H9)
r- Prof.Dr.R.-D.Reineke
High
unknown factor." .
"Germans always say: Don't worry about
the salary - dedicate yourself to bur
company and it'll pay. In the United States
people, if you talk about promotion, they
wanna know what the salary is."
Organizing the IntegrationProcess
Change management should already
take place during the preparatory phase of
the merger so as to analyze opportunities
and risks on all levels of integration and to
structure the process of change. During
this phase, officially involved investment
bankers and lawyers lack the means to do
this in that their options are aligned
towards deal closure rather than the
organization of the integration process. It
is important, however, even at the stage of
establishing the aims of the integration, to
take into account the implications for the
international corporate culture. This
includes the questions of what degree of
integration is strategically necessary, and
what exactly is being integrated.
The First Hundred Days
Decisions affecting the success or failure
of the project are often made in the first
hundred days after the merger. There are
some important and very basic questions
which need to be asked in this phase:
- Is an integrated corporate culture
actually necessary for corporate strategy
and for the goals of the integration? Or
is it perhaps more meaningful to
preserve both corporate cultures in a
so called 'polycentric corporate culture'?
- If a unified corporate culture is
necessary, to what extent is this an
opportunity to learn from one another
by searching for a synergistic corporate
culture or even by aspiring together
towards an entirely new cultural
orientation?
- If a short-term integration of corporate
cultures is necessary, are all involved
aware that within, say, a year it will only
be possible to make a start with regard
to the values and identity of employees
and that progress can at most be
expected on the levels of outward
: behavior and formal cultural
appearances?
Connecting DifferingProcesses of StrategyDevelopment:'Soft Factors'and'Hard Factors'
A fundamental misunderstanding is
clearly visible in the way in which
post-merger integration projects are often
treated. Because corporate culture is
conceived as related to 'soft' factors, the
issues are frequently dealt with separately
from 'hard' factors such as the integration
of business processes. For example, quite
separate teams are formed for the
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BusINESS1/01 Integration
Processes
Critical success factors in integration managementcan be summarized in seven categories
1. Active change andspeed management .
6. Stringent measuring/control systems withappropriate incentives
5. Multi-levelcultural change
7. Firmproject
management
.4. Focus oncustomer
- Prof. Dr. R.-D. Reineke
2. Clear strategy basedintegration approach B
3. Early stabilizationof organization
integration of corporate culture.
In practice, it is neither meaningful or
possible to disconnect corporate culture
from other integrationSssues. The attempt
to limit corporate culture to styles of
behavior and communication overlooks
the fact that the fundamental values of the
corporate culture affect the design and
implementation of all management
functions. This circumstance is particularly
clear in international M&A. For example,
in German-American M&A, problems
arise because of differing processes of
strategy development. Whereas in the USA
a quick decision tends to be made from
relatively few strategic options, but with
great openness to early changes of plan, in
Germany - after lengthy consideration of
numerous well-developed alternatives - the
option eventually selected tends to be
pursued with long-term consistency.
The integration of hard and soft factors
are two sides of the same coin. Separating
them along thematic or project-
organizational lines is generally not
meaningful. On the contrary, working on
'hard1 integration issues allows one to
focus very concretely on cultural
integration. Work on corporate culture has
in this sense the function of a cross-section
which is relevanfto allintegration projects.
Critical Success Factors inInternational IntegrationProcesses
These can be summarized in seven
categories: ,
1. Active Change and Speed
Management
Important here are: the mobilization of
employees, an appropriate communication
strategy, a tailor-made training concept
and employee participation. The speed of
the integration process will need to be
controlled. Phases in which complexities
are allowed to develop and in which the
process can be thought about are just as
necessary as phases of consistent and rapid
implementation of the integration concept.
2. Clear Strategy Based on Integration
Approach
The word "integration" alone is enough in
the meantime to cause anxiety among the
many employees who have not always
experienced it positively. Important here is
a clearly communicable strategy which will
itself need to be precisely integrated (and
which may possibly stay in place).
Intercultural misunderstanding is often
related to different understandings of
strategy and differing ideas of the aims of
the integration.
3. Early Stabilization of Organization
An important contribution to this is the
immediate and definite filling of leading
positions. In international mergers it is not
infrequently the case that uneasy
compromises are made, in personnel -
politics as much as in the integration of
business processes, so as not to jeopardize
the new cooperation. The exaggerated need
for harmony at the start of the integration
process, which often results from
insecurity in dealing with foreign
(corporate) cultures, can then lead to
problems later, whose original cause was
the failure to take the opportunity which
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Integration project controllingbased on the Balance Scorecard
Financialperspective
Synergy and costreduction potential
Clientperspective
- Benefit of mergerfor client
- Developement ofclient base
Client satisfaction
Shareholder value
Integration costs
Value added throughprocess integration
Pace of processintegrati'on
Relative speed ofR&D processes
rpora&fulture B
Learning anddevelopmentperspective
- Perceived sincerityof communication
- Employeecommitment
- Fluctuation rate
- Knowledge increaseSource: Reineke (1989)- - Prof. Dr. R.-D. Reineke -
the beginning of such a process offers of .
making sweeping changes. A further
stabilizing factor is a Credible formulation
of the central principles and aims of the
merger. 'Buzzwords' such as "Merger of
Equals" are likely to do more harm than
good: employees will notice that one party
is always 'more equal' than the other.
4. Focus on Customers .
Amid hectic efforts to integrate, the needs
of customers often come last. This can
sometimes result in high integration costs
because of customers going elsewhere,
whereas paying attention to one's present
customers' needs can actually be a focal
point for the creation of a new, superior
corporate culture. The active involvement
of customers - for example, in stakeholder
boards - can be a first step.
5. Multi-level Cultural Change
In the case of complete integration,
behavioral and procedural integration will
not suffice. Rather, a new common identity
will have to be created. In international
mergers, because of the influence of
different national cultures, this process will
require particularly careful attention.
6. Stringent Measuring/Control Systems
with Appropriate Incentives
Measurement of the financial goals of the
integration is not sufficient. For continuing
success, all critical Actors should be the
object of an integration control system
such as an 'Integrations Balanced
Scorecard.'
7. Firm Project Management
A professionally managed integration will
need considerable (personnel) resources.
The necessary expenditure for integration
projects is frequently underestimated. This
is particularly true of the phase before the
integration actually starts.
to " ' :
Selected reading:
Hapeslagh Philippe C, Jemison, Davis B. Akquisitionsmanagement.Frankfurt: Campus, 1992.
Kaplan, Robert S., Norton, David P. Balanced Scorecard. Strategienerfolgreich umsetzen. Stuttgart: Schaeffer-Poeschel, 1997.
Reineke, Rolf-Dieter. Akkuluturation von Auslandsakquisitionen. EineUntersuchung zur unternehmenskulturellen Anpassung. Wiesbaden:Gabler, 1989.
Reineke, Rolf-Dieter. "Post Merger Integration mit BalancedScorecard." Unternehmensberater, Nr. 4/1999: S. 34-37.
Reineke, Rolf-Dieter."Business Driven Intel-cultural Development." R.-D. Reineke, C. Fussinger, eds. Interkulturelles Management -Konzeption, Beratung, Training. Wiesbaden: Gabler, 2001 (in print).
Prof. Dr. Rolf-Dieter Reineke is Head of the Post Graduate MBA-Program "International Management Consulting" at theLudwigshafen School of Business
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