Peter A. Stanwick

Why do compa-nies merge?This age-old

question continues tobe asked, as a newwave of mergers andacquisitions take placewithin the United States. In1998, over 11,000 mergers andacquisitions occurred in theUnited States, with a total valueof $1.6 trillion. The traditionalresponse to this question is thatby combining two separate com-panies, the resulting corporationcan create additional value, bygenerating synergic opportuni-ties. But the results often tell adifferent story. A recent study,performed by MercerManagement Consulting, exam-ined 300 companies that wereinvolved in a merger or acquisi-tion over a ten-year period. Thestudy found that for 57 percentof the merged firms, the totalreturn to shareholders of thesefirms was below their industryaverage. A survey conducted byWilliam Wyatt Worldwide con-cluded that 70 percent of merg-ers do not meet their expectedfinancial performance. Althoughtop management for these newlyformed companies blame this

poor performance on high pur-chase prices or external factors(such as the economy), the realreason could be the failure tosuccessfully integrate differentcorporate cultures.

A 1992 Coopers & Lybrandstudy bears this out. It examined100 mergers that failed. Eighty-five percent of the executiveswho responded to the study stat-ed that conflicts in managementstyle and management practiceswere the dominant problems inthe failure of the mergers.

A NEW KIND OF DUEDILLIGENCE

So what can you do? Just asit is the responsibility of topmanagement to perform duediligence from a financial per-spective when considering amerger or acquisition, top man-agement should also perform acultural due diligence.

Remember, significantdifferences in thecompaniesÕ values orstyles of managementcan severely limit suc-cessful integration.

There are a num-ber of areas to consider whenyou evaluate the cultures of thetwo companies. For example:how will you integrate the strat-egy and vision of the two com-panies? How will the new com-pany be structured (which wouldinclude reporting levels, poli-cies, and procedures)? How willthe company encourage commit-ment from the employees (whichwould include incentives andbenefit issues, job descriptionand responsibilities, and selec-tion and training issues)? Howdo the communication patternsdiffer between the two compa-nies (which would include thetype of information dispersed toemployees and the mediumthrough which the informationis transferred)?

To successfully merge thecultures of two companies, topmanagement must understandthe significance of each compa-nyÕs culture, effectively commu-nicate changes as they occur,

Many mergers fail when corporate cultures clash.But how do you integrate two companies with verydifferent traditions? © 2000 John Wiley & Sons, Inc.

How to Successfully Merge TwoCorporate Cultures

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7© 2000 John Wiley & Sons, Inc.

and successfully implement atransition plan to merge the twocultures into a fully integrated,new culture.

UNDERSTANDING THE ROLE OFCULTURE

The culture of a companychanges over time, just as acountryÕs culture can, but theculture of the company evolvesbased on the beliefs and visionof the founders and current top-level managers within the com-pany. The establishment of thesevalues and beliefs are critical forthe success of the company. It isthrough these beliefs and valuesthat employees see their purposewithin the company. This family-like atmosphere becomes firmlyentrenched within a company,and the employees develop aresistance to changing the cul-ture, since they are committed tothe current belief and value sys-tem. As a result, when a mergeror acquisition takes place, thereis a threat to the belief andvalue structures establishedby the old companies.Employees are swept into achaotic situation, and it isunclear whether the newcompany will continue tosupport the same beliefs andvalues. As the chief execu-tive officer (CEO) of PentonMedia, Thomas Kemp, stat-ed after the acquisition ofMeckermedia for $274 mil-lion, ÒThe first word inÔmergerÕ is ÔmeÕ. . .EveryoneÕs wondering, ÔWhatdoes it mean to me? Am Igoing to have a job or not?ÕÓ

The merging of differ-ent cultures also createsuncertainty since the com-pany uses culture as aframework to reinforce

appropriate behavior throughrewards and incentives.Therefore, one big reason merg-ers and acquisitions (M&As) failis that top management fromboth companies donÕt identifythe differences in their culturesand fail to effectively integratethe beliefs of both cultures toform a fully integrated, new cul-ture. When a merger takes place,the productivity level of the firmbeing acquired can drop up to 50percent from the premergerlevel. Top management needs tobe responsible for auditing theculture of both companies toidentify areas of agreement andareas of conflictÑsuch as typeof management decision making,type of communication methodsused within the company, incen-tive and recognition methodsused by the company, reportinghierarchies, and the beliefs andvalues of the top management.Information for the audit can beobtained from personal visits tothe company, employee inter-views, employee surveys, exami-

nation of employee compensa-tion and benefits packages, thecompanyÕs mission statements/annual reports, and other inter-nal and publicly availableinformation.

USING COMMUNICATIONEFFECTIVELY

To merge cultures, top man-agement must develop and effec-tively present their future visionof the merged company (seeExhibit 1).

"You must have a commonvision and philosophy, and youhave to have trust,Ó warnsJeffery Harris, who is the CEOof Alliance UniChem. Thisallows all employees to focus onthe end result and help establishintermediate goals as the compa-ny moves toward full integra-tion. But Michele Paige, fromthe Conference Board, cautionsthat ÒCorporate communicationsis the one aspect of a merger oracquisition that is most likely to

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© 2000 John Wiley & Sons, Inc.

Questions Top Management Must Answer During a Merger

1. Why did the merger take place?

2. How will the strategies of the two companies be integrated?

3. How will the merger be implemented?

4. Who is accountable for each step in the merger process?

5. What is the new company’s commitment to employees?

6. How will the merger impact each employee?

7. What will be the new reporting hierarchy of the new company?

Exhibit 1

be shortchanged.Ó She continuesby stating that ÒCommunicationis the glue that holds the entireintegration process together. ThecompanyÕs M&A vision, mis-sion, and strategy depend uponsuccessful communication withthe stakeholders.Ó The vision isthe framework that helps identifyto the employees what is chang-ing and what will remain statusquo after the merger takes place.

In explaining the critical rolecommunication plays in a suc-cessful merger, Lainchen Friese,Hewitt AssociatesÕ team leaderfor communication for mergersand acquisitions, states thatÒEffective communication fromday one plays an important rolein reducing employee resistance,and communicating about thenew business structure and theroles people will play is one ofthe most effective ways to gainemployee acceptance.Ó

So for the merger to suc-ceed, top management mustensure that their information ispresented to employees in aclear and precise manner. To beeffective in communicatinginformation to employees, topmanagement needs to be awareof four different variables: theiraudience, the timing of the infor-mation, the medium used totransfer the information, and thecontent of the message (seeExhibit 2).

The audience is importantbecause top management needsto customize the information forthe audience that is receiving it.For example, information shouldbe adjusted to meet the needs ofboth external users (for example,stockholders, consumers, and themedia) and internal users (suchas management and nonmanage-ment employees).

Management must alsopresent information in a timely

manner. Although employeesand other stakeholders wantinformation as quickly as possi-ble, top management mustensure that the information isaccurate and consistent.

Choosing the proper mediumfor your messages is also impor-tant. Methods that can be used topresent the details of the mergerinclude group meetings and brief-ings, phone conversations, fax, ande-mail. An effective online methodto communicate the currentchanges happening in a merger isto establish an information intranetWebsite for employees. In addi-tion, brochures could be developedand given to employees to describethe philosophy and operations ofthe other company.

The focus of the informationis to address the short-term andlong-term concerns the employ-ees have with the newly formedmerged company. Top-levelmanagers need to address anumber of broad critical areas:Why did this merger or acquisi-tion take place? How do thestrategies of the two companiesfit together? What is the proce-dure that needs to be implement-ed to successfully integrate these

two companies? Who is incharge and is responsible for theimplementation of the merger?What is the new companyÕscommitment to their employees?In addition, top managementmust address other specific con-cerns of the employees includ-ing: ÒHow will this companychange effect me personally?Óand ÒHow will the companychart change based on the revi-sion on reporting levels?Ó

MANAGING THE TRANSITIONPROCESS

As soon as the deal has beenannounced, top managementneeds to develop a strategic planfor the successful implementa-tion of the merger (see Exhibit3). The transition process is criti-cal to enhance the value of amerger. As Tom Davenport, fromTowers Perrin, states, ÒPeoplethink that if you do the financialdeal, the soft and squishy stuffwill fall into place. . . Not true.ItÕs the soft and squishy stuffthat will make or break thedeal.Ó And, adds Davenport,ÒThere are two ways to screw up

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© 2000 John Wiley & Sons, Inc.

To Communicate Information Pertaining to the Merger, TopManagement Must Consider:

1. Their audience

2. The timing of the information

3. The medium used to transfer the information

4. Content of the message

Exhibit 2

a merger. . . One is to pay toomuch; the other is to integrate soslowly or badly that you destroyvalue, rather than creating it.Misapprehending culture is thenumber one culprit in screwingup integration.Ó

Choose a top-level managerto be the transition leader. Theduty of the transition leader is toensure the successful transitionof the merging process. So oneof the responsibilities of thetransition leader is to identifypotential personal and political

problems that can arise in thetransition process.

You also must create a tran-sition team that includesemployees of both companies.This will give the employees theopportunity to interact andbecome familiar with employeesof the other company. Make surethat different functional areas arerepresented on the transitionteam. This will aid in securingthe commitment of the differentfunctional areas within the com-pany, as well as specifying how

the transition process will impacteach of the functional areas. Itwill also allow top managementto review the skills and capabili-ties of employees from bothcompanies. Critical areas thatneed to be represented in thetransition team include employ-ees from marketing, sales,finance, accounting, manufactur-ing/operations, human resources,communications, and manage-ment information systems. Thisensures that the interests of thetwo previously separate com-

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Key Steps For Successfully Merging Different Corporate Cultures

Before the Deal Is Finalized

Implement a Cultural Due DiligenceAreas to Cover Include Reviewing the Differences Between the Two Companies Pertaining to:

Vision and Goals Measurement of the GoalsBasis of Their Competitive AdvantageStructuring of the CompaniesPolicies and ProceduresLeadership Styles Relationship between Supervisors and EmployeesTechnologiesAttitudes of the Employees Establishment of Culture and Cultural Beliefs

After the Deal Is Finalized

Establish a Transition Leader and Team to Implement the MergerEnsure the Composition of the Transition Team includes Representation from Both Companies

and from all Functional AreasEstablish a Clear Vision and Communicate It Clearly to All StakeholdersEstablish a Revised Business Strategy Establish Communication Channels to Disperse Relevant InformationEstablish Feedback Communication Channels to Allow Input from EmployeesIdentify Key Employees and Re-recruit ThemEstablish an Incentive System to Encourage Commitment of the EmployeesEstablish the Revised Structuring of the Merged CompanyEstablish the New Reporting Levels within the Company

Exhibit 3

panies are represented in thedecision-making process.

When Bass Hotels andResorts acquired Inter-Continental Hotels for $2.9 bil-lion, top managers were veryaware of the impact integratingcultures would have in the ulti-mate success of the merger. Thetransition team based theiractions on making decisions thatwould not do harm to either ofthe merging companies. The vicepresident of business inte-gration for Bass, Craig D.Smith, states, ÒWe spenttime assessing the implica-tions of the integration foreveryone concernedÑana-lyzing synergies, strengths,and weaknessesÑbecausewe were adamant that theintegration should in noway prove detrimental tothe culture and identity ofeither brand.Ó

The transition needs to bestructured, and it should beimplemented in different phases.But it should be accomplished asquickly as possible.

The first phase, which is thefirst 100 days, should be dedi-cated to reducing the level ofemployeesÕ uncertainty. The nat-ural tendency for some employ-ees will be to leave the company

since the newly developed cul-ture will no longer match theirbeliefs. So a critical role of topmanagement is to identify keyemployees that the companyshould attempt to retain.Through past and current per-formance evaluations, top-levelmanagers should establish a keycore of employees who they areconvinced should remain withthe company after the mergertakes place. This will result in

the effective re-recruiting of thecompanyÕs star employees. It isestimated that up to almost halfof senior managers of anacquired firm leave the companyone year after a merger, and thatfigure jumps to over 70 percentafter three years. As a result,financial and nonfinancial incen-tives need to be considered andimplemented to retain the key

core set of employees for thenew company.

In addition, decisions shouldbe made to address the personalconcerns each employee hasabout his or her role and respon-sibility in the newly mergedcompany. These issues includequestions about title and posi-tion, salary, benefits, and proce-dures for performing the job.

Finally, make sure that thegoals of the transition process

are clearly defined andstated to all the employ-ees. This gives both topmanagement and theemployees benchmarkmeasurements on theprogress of the implemen-tation process. Throughoutthe transition process, youmust carefully monitorpotential culture issues orproblems. WhatÕs more,top management shouldnÕt

be the only ones doing it.Employees from both compa-nies should view this procedureas a learning process. That way,top management has the bestopportunity to identify thestrengths and weaknesses ofeach cultureÑand to blendtogether each cultureÕs favor-able characteristics into a newlyformed integrated whole.

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© 2000 John Wiley & Sons, Inc.

Peter A. Stanwick is an associate professor of management at Auburn University. He teaches andresearches in the areas of strategic management, organizational theory, the natural environment, andethics.

Through past and current perform-ance evaluations, top-level managersshould establish a key core ofemployees who they are convincedshould remain with the companyafter the merger takes place.