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by Prof. Dr. Rolf-Dieter Reineke in Integration Processes 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.

G01 Reineke Change Integration

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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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    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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