Mergers That Stick

To many executives, it might seem like a shrewd move in a recession to swoop in and acquire firms on the cheap—buy low, cut costs, and defy the usual prediction that most mergers will fail to produce economic value in their first two years. And there’s a grain of truth to that assumption. While M&A activity has been severely depressed since 2008 and fell dramatically in early 2009, acquiring companies during that period tended to outperform their industry peers in market valuation, according to a global study by Towers Perrin and Cass Business School examining 204 deals, each worth more than $100 million.

But outperforming peers during the worst days of the economic crisis simply means that acquirers’ stock prices fell by a lower percentage; the companies lost less value than others but did not necessarily create new value. The fact that they could afford to buy at all was a sign of financial health, a factor that alone could account for the better stock market performance. Studies by Boston Consulting Group analysts have shown that in a weak economy acquiring companies add only marginal value by cutting costs. As the economy strengthens, successful mergers will be those that have invested in profitable growth—which requires integrating and motivating employees who will work quickly and smoothly, minimize disruptions, increase market share, innovate, and adapt to emergent trends.

To extract lessons about how to manage the human side of integration, I looked deep inside a dozen successful acquisitions as part of a three-year study involving more than 350 interviews in 20 countries. My goal was to identify the practices of industry leaders. The mergers ranged from global deals, such as Procter & Gamble’s purchase of Gillette, to regional transactions, such as Shinhan Bank’s acquisition of Chohung Bank in South Korea. Several, like Mexico-based CEMEX’s purchase of RMC in Europe to double its size, reflect another M&A trend: an increase in emerging-market companies’ buying established Western ones. India’s Tata Motors, for instance, acquired the British icon Jaguar from the U.S. automaker Ford.

These acquirers overcame the usual barriers to successful mergers: employee shock, protests, and anxiety, all of which can fuel supplier unrest, government disapproval, and customer defections. For example, P&G faced the prospect of “blood on the floor” in its postmerger management ranks as headhunters went after Gillette talent, a former Gillette executive recalled. It also had to confront government inquiries in Gillette’s home state of Massachusetts, possible unrest in India in response to attempts to eliminate certain distributors, and other business disruptions. Yet P&G managed to retain a greater percentage of acquired talent than many buyers do (it held on to 90% of the top managers from Gillette who were offered jobs), and it enlisted employees (even those whose positions were being eliminated) in keeping suppliers, distributors, and customers happy. P&G met cost and revenue targets within the first year, incorporated Gillette processes considered superior to P&G’s, and continued to position itself for overall growth even as the current recession loomed.

Shinhan Bank’s acquisition of Chohung encountered much more resistance. About 3,500 Chohung employees and managers shaved their heads and piled the hair in front of Shinhan headquarters. To quiet the labor union and stem the flood of customer defections, Shinhan agreed to delay formal integration for three years. Yet well before the deadline, the combined banks’ holding company, Shinhan Financial Group (SFG), achieved de facto integration through merger task-force teams and heavy investments in “emotional integration” events (SFG’s term) designed to forge relationships and form social networks while also raising the wages of Chohung employees. Shinhan held informal happy hours and sponsored employee retreats, which included sing-alongs and mountain climbing. The internal investment in talent integration paid off; SFG’s stock well outperformed the South Korean market.

Using three cases that highlight different goals, I will describe the key strategies underlying effective integration and summarize the consistent lessons learned. In the first case, the cement company CEMEX wanted an acquisition’s employees to absorb its processes quickly and operate to global standards; the company needed to share its know-how with the people it had acquired. In the second case, P&G sought to catalyze internal change by adding Gillette’s successful methods to its own and retaining Gillette employees. In the third case, Publicis Groupe allowed the talent at acquired companies to take the lead in building new capabilities; mergers were treated like reverse takeovers, with the acquisitions transforming the buyer.

Turnaround

Investors did not initially like CEMEX’s decision to buy the British cement maker RMC, and some CEMEX leaders sensed negative perceptions among RMC employees that a “company from the third world” was reversing history by taking over a major business operating in developed markets. For the acquisition to be deemed a success, either by RMC employees or by capital markets in London, CEMEX had to show some early wins. The biggest was turning around RMC’s troubled cement plant in Rugby, England.

The factory loomed large on the western outskirts of Rugby, near residential areas; its construction interfered with local TV reception, and the plant emitted dust reputed to cause health problems. It was so unpopular that the television series Demolition named it one of the top 12 buildings people in the UK would like to see torn down. Many employees were ashamed to admit they worked there.

CEMEX invested many millions of pounds in the plant almost immediately, spending £6.5 million on a new air filtration system alone. It was not cheap and not strictly necessary, but CEMEX leaders felt it was the environmentally correct thing to do. The company sent experienced postmerger integration (PMI) teams as well as quality control and maintenance experts to help fix the problems and train their Rugby colleagues in CEMEX practices. To allay fears that PMI team members had arrived to supplant Rugby employees, CEMEX experts worked alongside their Rugby counterparts, emphasized their own transitional status, and recommended keeping all local managers willing to stay. Rugby employees were sent to CEMEX plants in Mexico, the United States, and Germany to experience the “CEMEX Way”—the company’s system of ethics, management practices, and technology platforms—and to become change champions upon their return. A new variable compensation bonus plan based on plant performance spread the fruits of success to workers. The factory created a sustainability department to focus on environmental issues.

Productivity and safety increased and carbon emissions decreased by the end of the first quarter. Resistance to CEMEX’s presence and rigorous processes gave way to respect for standards, leading to improvements enjoyed by workers and managers. The team members on temporary assignments in Rugby listened to their new colleagues, which helped them bridge major cultural gaps, as a legacy RMC sales manager attested: “I have never, ever felt as much a part of the team as I do with this crowd. They actually listen and seek your advice, and it doesn’t matter if it is not necessarily what they want to hear. They are open to your ideas.” The CEMEX representatives included people from Mexico, Brazil, Uruguay, Spain, and Hungary. They took classes about British culture, studying up on things they should and should not say or do. To help the RMC people make a smooth transition, they kept the old systems running side by side with the new. Meetings started off in English, and when they sometimes devolved into Spanish, they quickly returned to English.

For other former RMC operations throughout Europe, integration went similarly. CEMEX sent nearly 800 experienced employees on PMI team assignments ranging in length from a few months to a few years. After a series of international acquisitions beginning in Spain in 1992, followed by others in Latin America, Asia, the Middle East, and the U.S., CEMEX had learned how to quickly identify cost savings and transfer best practices to and from the acquired company, formalizing its integration capability into a methodology. The company expected its best staff members everywhere to have a trained replacement on hand should they be needed for deployment during merger integration. This heavy investment in mentoring newly acquired employees, along with the human courtesies the mentors exhibited, played a key role in motivating the best people to become loyal to CEMEX, change behaviors quickly, and create new opportunities for innovation and market growth.

Catalyst for Change

When P&G bought Gillette, it focused on mapping the two companies’ processes to get the best of both. It formed nearly a hundred global integration teams, consisting where possible of matched pairs of executives from the same functions in each company. Initially many Gillette employees stayed with their legacy brands and previous staff-support structures. People from Gillette were allowed (and in China, encouraged) to use their own processes until they learned P&G’s methods. For the first year, P&G refrained from rating Gillette people on “building the business,” to give them learning time before their bonuses would be tied to that goal.

While Gillette and P&G were running in parallel as two companies, P&G leaders made a point of sending messages of welcome and inclusion. At town hall meetings, then-CEO A.G. Lafley talked about himself as a person, giving the company a human face, before describing P&G’s values. Bob McDonald (then the vice chairman of global operations and the COO, now the CEO) and others were careful to call the move a merger rather than an acquisition.

Leaders from the newly conjoined companies emphasized principles such as “best of both” and “field the best team” early and often; it was clear Gillette talent could compete for the top jobs. Of course, bending over backward to welcome Gillette raised concerns for some P&G managers, but overall P&G leaders were pleased with what they called the unheard-of action of replacing lower performers from P&G with higher performers from Gillette. This was an especially bold move for a company previously known for its promote-from-within commitment; it sent the powerful motivational message that a great company could become even better by learning from an acquisition’s best talent.

Throughout the world, human touches by managers smoothed the integration. In Brazil, for example, Tarek Farahat, P&G’s country general manager, put everyone on equal footing by shuffling office and work assignments. On the Monday of the Brazil-site merger, when Gillette people were to move into P&G’s facilities, nearly everyone from both companies arrived at work to find themselves in new offices on new floors. Brazil’s integration was seamless. “I was very lucky,” Farahat said. “Hermann Schwarz, my predecessor, and Eduardo Kello, the previous Gillette general manager, built wonderful pools of talent. All I had to do was mix them.”

Building networks for new employees was a major emphasis, not simply to make Gillette people feel welcome in an abstract sense but for business reasons. P&G relied heavily on many internal stakeholders to get involved in consensus-driven decision making. “If you didn’t know the network and didn’t grow up in it, you didn’t know how decisions were made or whom to talk to,” observed Ed Shirley, a legacy Gillette executive tapped to head North America for P&G. One solution to that problem: intranet postings with tips from employees who had joined P&G from previously acquired companies. P&G paired old and new employees and provided training programs (four full weeks in some regions) that taught “soft skills,” such as how to build networks and relationships, as well as P&G’s internally revered PVP (purpose, values, and principles statement). One Gillette executive in the UK said that coffee breaks in the large P&G lounge turned into social events where people made it a priority to meet and mingle. Between that and the cross-functional working teams he sat on, his 50-person network at Gillette was greatly expanded by the 150 P&G colleagues with whom he developed good relationships.

Each country’s staff worked out context-appropriate practices and procedures to lay the emotional and motivational foundation for Gillette to embrace P&G’s values; for P&G to incorporate many of Gillette’s superior go-to-market processes; and for new methods to be created by both companies (combining the best of both) and not “owned” by one or the other. For example, the marketing and distribution organization for Western Europe piloted a new streamlined decision-making process that added Gillette’s speed to P&G’s inquiry and consensus capabilities, a method that was eventually adopted globally.

Reverse Takeover

In 2000, when the France-based Publicis Groupe (now the world’s fourth-largest advertising and communications company) acquired cash-strapped Saatchi & Saatchi, Publicis president Maurice Lévy treated it like a reverse takeover. Publicis Groupe had already bought new agency networks to serve more clients in more places, but with Saatchi, Lévy was also seeking to position Publicis for future growth.

Talent retention was tough because top Saatchi people could cash out on favorable terms following a change of control. Motivation was even more challenging, thanks to Saatchi’s proud tradition of independence and creative excellence. Employees took a blow to their egos—the press had a lot to say about the French takeover of a British company. So it was important to make Saatchi people feel connected to Publicis and invested in creating a new kind of company together.

Publicis made meaningful welcoming gestures, both financially and emotionally. The company paid a premium for the acquisition and ensured Saatchi executives against any downside in stock price. At the Groupe retreat to welcome the new entity, Saatchi people made the major PowerPoint presentation. Lévy said that he would adopt the Saatchi operating system, gave everyone a copy of a management book the Saatchi CEO had written, and invited him to provide training sessions for Publicis managers. Publicis Worldwide, the original agency in Publicis Groupe, became just another part of the Groupe running in parallel with Saatchi and other agency networks. Saatchi’s CEO joined the Groupe operating committee, renamed P-12 to mirror a Saatchi designation.

Saatchi employees found themselves drawn to Publicis despite large dollops of pride and a continued desire for autonomy. One executive who had been skeptical about the merger and said he didn’t want a new boss was won over and began to act in the interest of Publicis Groupe: He took it upon himself, after a slight comment by Lévy, to fire two Saatchi managers who were undermining merger integration by dragging their feet and indulging in other forms of passive aggression.

Another important Publicis Groupe acquisition—its 2007 purchase of the digital-marketing agency Digitas—was designed not only to add managerial know-how but also to dramatically accelerate Publicis’s online capabilities and eventually transform the company. As A.G. Lafley did with Gillette, Maurice Lévy presented his human face and personal values to the Digitas staff—values that had won him the acquisition in the first place over other large holding companies that coveted Digitas. Lévy made the acquired employees feel they were in safe hands and excited about the central role they would play in Publicis’s future. The CFO was so convinced about the merger’s potential that he worked extraordinarily hard on the transition, even though his own job would be eliminated. David Kenny, the Digitas CEO at the time, joined the P-12 team and traveled to all major locations globally to form relationships with Publicis agencies’ leaders and employees while selling the digital message. From the start, he led or joined collaborations across the highly diverse parts of Publicis to serve particularly important global clients. Kenny and colleagues formed a new venture, VivaKi, to integrate Publicis’s media and digital units and take them to the next level.• • •

A slow economy tempts owners of distressed companies to hang “for sale” signs outside their headquarters. It also tempts firms that have resources to buy those businesses cheaply and then do little more than cut costs, figuring that acquired employees have no choice but to fall into line. But a bargain-basement mentality may destroy both current and potential value once the economy strengthens.

The companies in my study think in a different way. Whether integrating giant enterprises across many countries or putting two small offices together in one location, they do not act like conquerors sending out occupying armies. Instead, they act like welcoming hosts and eager learners. Their leaders are attuned to emotions and culture, knowing the importance of symbols and signals in communicating with employees about change. They establish transparent processes to reduce anxieties about changes that have not yet been made. They invest in the future, adding more than they take away and letting people share in the fruits of success. They try to be fixers rather than destroyers, which converts skeptics into fans. They value and facilitate relationships.

All companies that seek profitable growth can benefit by thinking of merger integration as three sets of activities—which Shinhan Financial Group dubbed “dual companies,” “one company,” and “new company.”

Dual companies: Run the old and the new side by side.

Having parallel operations during a transition period is more than a practical necessity in complex situations; it also helps people retain their identities, avoid too much change all at once, and learn new ways with open minds. It can make sense in the long run to permit redundancies, allow old methods to be used for a time, refrain from changing performance metrics, or deploy experienced people to be mentors in the new world.

One company: Find common human bonds, and encourage relationships beyond tasks.

Paying the bill for big events, lots of travel, and other ways for people to meet might seem excessive on top of the acquisition cost, but it can help forge an emotionally unified culture even while operations are still separate, thus motivating employees to connect and work across divides.

New company: Quickly start envisioning and building the future.

Creating a business model that’s not identified with any one legacy company turns attention away from territoriality and conflict, and toward collaboration that facilitates future success. And that frame of mind, above all, makes the merger a source of value.

No matter how compelling the short-term economics, a deal is never a bargain if you emphasize just the financial aspects of the transaction. You’ll create real value only if you attend with equal zeal to the integration of talent.