Mergers and Acquisitions

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CHAPTER 5
5
Mergers and Acquisitions
The rise in the number of mergers and acquisitions in the
global market continues at a relentless pace among
companies of all sizes. The problem is these deals,
particularly those done across borders, are increasingly
complex and hard to get right. As Vladimir Pucik explains,
there are a number of essential elements that have to be
in place for mergers and acquisitions to achieve their
promised objectives.

76 MERGERS AND ACQUISITIONS
Overview
Mergers and acquisitions are an increasingly popular alternative to greenfield invest-
ments and strategic alliances as a vehicle for accelerating international growth.Today,
mergers and acquisitions (M&As) are utilized not only by large multinationals,
but medium-sized and even small firms worldwide are exploring how to use them
effectively.
The starting condition for a successful acquisition is articulation of the shared vision
for the new organization. Some acquisitions are “mergers of equals”; in others one
firm is set to prevail. The strategic logic behind each alternative determines the nature
of the acquisition process, from due diligence, the role of the integration manager, to
the human resource implications. In any kind of acquisition, and especially within an
international context, it is important to pay attention to the cultural and people
aspects. Retention of talent should always be the top priority.
The success of a number of companies that grew globally through acquisitions has
shown that with a well-designed strategy, due diligence in preparation, attention to
soft factors and speedy implementation, acquisitions can work.
The merger wave
The rise in the number of mergers and acquisitions in the global marketplace is relent-
less, with more deals in the last two years of the century than ever before – 10000
plus per year and growing. Also, the deals are no longer a mainly American phenom-
enon, as companies in other parts of the world such as Europe, Japan, South-east Asia
and South America join in the game. In fact, the fastest growing type of deal is a cross-
border acquisition. The value of acquisitions outside of the home country reached
over 750 billion dollars in 1999, covering about half of all the deals announced. And,
even when merging companies are domiciled in the same country, often a significant
part of their operations involves affiliates in different parts of the world.
While the global mega-deals continue to grab the headlines, more and more M&A
activities take place among rapidly growing small and medium-sized firms – a phe-
nomenon most likely to dominate the discussions on M&As in the forthcoming
decade. There are a number of reasons why companies pursue cross-border mergers
and acquisitions:
•Advantage of market dominance, economies of scale and channel control
•Extending geographical reach through rapid market entry
•Inability to adapt organically to changes in competitive conditions
•Financial leverage through improved credit, debt and tax management
•Resource acquisition, both tangible and intangible
•Access to talent and knowledge.
The ultimate driver is, of course, the increase in global competition and the cor-
responding erosion of national boundaries. As both trends are likely to continue, so
will the increase in cross-border M&As. In this context, the obvious question to ask

WHY DO ACQUISITIONS FAIL? 77
is to what extent all these corporate marriages have worked. Research seems to point
to the fact that only a few of these deals in the 1990s achieved the promised finan-
cial results:
•A study by the American Management Association has found that only about
15% of M&As in the US during the early 1990s achieved the stated financial
objectives.
•According to the 1999 study of cross-border acquisitions sponsored by KPMG,
17% of deals increased shareholder value, 30% left it unchanged and 53%
decreased it.
•A similar study conducted by A.T. Kearney put the failure rate at 58% and
concluded “on balance, mergers hurt shareholders”.
•A joint 1997 Mercer Consulting/Economist study reported said that two out
of three deals have not worked as planned, and according to Fortune
Magazine, only 23% of US acquisitions earned their cost of capital.
THE ACQUISITION PARADOX
Research on acquisitions highlighted numerous paradoxes. Here are a few examples.
• A study of US banks showed that merged banks cut costs more slowly than banks
that did not merge.In other words, merged banks were too busy merging to cut costs,
while those that didn’t got the message about the need for more efficiencies and
looked for ways to improve their operations.
• In another survey, increasing revenues by 1% has five times greater impact than
decreasing operating expenses, yet managers in most acquisitions spend the bulk of
their time searching for ways to reduce expenses. In acquisitions and mergers,
companies talk a lot about creating synergies and the lower costs of the combined
operation. But, there may be a greater impact on shareholder value if merged com-
panies focus on increasing revenues rather than reducing cost.
• According to one management scholar, nearly half the time top management spends
on M&As goes into creating the deal, in contrast to 8% of time devoted to imple-
mentation. Far too much management time is spent on the deal itself rather than
making it work.
Why do acquisitions fail?
There is little doubt that acquisitions, particularly those that reach across borders,
are complex and difficult to get right. The business press is full of stories of
international acquisitions that failed to meet the original objectives; after all, many
of these deals are highly visible, thus they provide a good story. And with hind-
sight, many of the factors that cause these acquisitions to under-perform may seem
obvious.

78 MERGERS AND ACQUISITIONS
One of the major reasons why acquisitions fail, even when on the surface they
should enjoy great benefits of synergy, is the difference in the vision about where
the two sides want the combined entity to go. For the sake of the deal, this differ-
ence is often glossed over, but if firms do not start with a common and specific under-
standing of where they want to take the new organization and how they want to get
there, reaching a successful end point is very difficult.
The acquisition can fail because of attrition of talent and capabilities, most
likely when companies are not clear about their talent priorities or the right
methods to retain key staff. Yet another reason for failure is the loss of intangible
assets. Customers are not asked their opinion of a merger and might feel disgruntled
about being passed on to another entity. That can lead to a loss of potential value
almost overnight. Relationships with vendors, community and government can also
suffer when the new owner is perceived, rightly or wrongly, as insensitive to local
interests.
International mergers can also suffer from underestimation of the high transition
and coordination costs linking the new entities due to time and physical distance,
negating some of the advantages of the potential synergies. Related to that is the
danger of “synergy”gridlock, a situation when management so desperately searches
for ways to deliver the savings it promised to the stock market, while the costs are
going up, that it loses track of the business. The larger the merger, the more dif-
ficulties in operational integration can be expected.
Finally, the frequent failures of international M&A deals may be linked to the lack
of “cultural fit” between the two organizations. It is inevitable that merging
organizations with differing history, environment and national cultures that amplify
the variations in management style, will create challenges, and it is often said that
companies should not entertain deals where a significant cultural mismatch might be
a problem.
However, companies do not have the option of avoiding potential opportunities
because of cultural issues as they seek to accelerate their international growth – the
forces of market competition are unrelenting. This does not mean that cultural dif-
ferences, and other soft factors should now be ignored.To the contrary, because they
are so critical, they have to be well defined and managed.
What is the desired end-state?
In successful mergers and acquisitions, partners share the purpose and accept the
terms of their relationship. However, the reality is that corporate marriages are often
based on unattainable assumptions. Here, carefully defining and making explicit the
end-state is the first step in making the new relationship work. Managers and em-
ployees in the new entity are then able to focus on the business and let go of any
wishful thinking that may run counter to the reality of the deal.
There are a number of options (Figure 5.1), based on the direction and degree
of anticipated integration, each with its own logic and set of guiding principles for
implementation.

WHAT IS THE DESIRED END-STATE? 79
Stand-alone acquisitions
When a deal is announced, it often contains a reference that the acquired company
will preserve its independence and cultural autonomy. This often occurs when one
of the rationales of the merger is to get hold of talented management, or other soft
skills (such as speed of product development) and retain them, and when conform-
ance to the acquiring company rules and systems could be detrimental to the acquired
company’s competitive advantage.
The key to success here is to protect the boundary of the new subsidiary
from unwarranted and disruptive intrusions from the parent, but this is hard to
achieve. Even with the best intentions, there can be a form of creeping assimila-
tion as the acquiring company encourages the acquired one to begin to work in the
same way and develop systems and processes which match those of the parent
organization.
Because of operational pressures, most stand-alone acquisitions do not last. More
likely, while the acquired company may still appear independent to the outside world,
internally, the acquired company, or at least some parts of it, is merged with the rest
of the organization. Or,“stand-alone” is a temporary phenomenon, until other dimen-
sions of the deal come through, such as additional acquisitions.
Assimilation
Acquired company
conforms to acquirer:
Cultural assimilation
High
Best of both
Additive from both
sides:
Cultural integration
Transformation
Both companies find
new ways
of operating:
Cultural transformation
Reverse merger
Unusual case
Acquired company
dictates terms:
Cultural assimilation
Acquired company
retains
its independence:
Cultural autonomy
Preservation
Low
Low High
Degree of change in acquiring company
Degree of
change in
acquired
company
Figure 5.1: Strategies for post-merger outcomes
Reproduced with permission of Prentice-Hall (part of the Pearson Education Group) from P.H. Mirvis
and M.L. Marks (1994) Managing the Merger: Making it Work.

80 MERGERS AND ACQUISITIONS
Assimilation acquisitions
This kind of acquisition is fairly straightforward and probably most common
when there are differences in size between the two partners in the deal. The under-
lying philosophy of this approach is that the acquired company conforms to the
acquirer’s way of working, with a focus on full cultural assimilation. “If you do not
want to change, don’t put yourself up for sale,”is the blunt advice given by GE Capital,
the financial arm of General Electric, to the management of the companies they
acquired.
Most of the synergies may be related to cost cutting, most likely on the side of the
acquired company, although some may come from improvement in system and
processes brought in by the acquiring firm. Such deals are particularly common when
the acquired company is performing poorly, or when the market conditions force con-
solidation. The key to success is to choose the target well, move fast to eliminate
uncertainty and to capture the available synergies.
It is not all black and white, of course. Cisco, for example, assimilates the com-
panies it buys, for their technology and R&D talent, into the Cisco’s culture, but it is
still able to retain most of the employees, including top management, from the
acquired firms. Here, the emphasis is on finding targets that will match Cisco’s way
of managing the business, increasing the likelihood of cultural compatibility.
Reverse merger
This is a mirror image of assimilation, although it does not happen very often. Usually,
the organization that buys hopes to gain capabilities from the one bought. It typically
involves an acquired business unit absorbing the operations of a parallel unit in the
acquirer. When Nokia, for instance, bought a high-tech firm in California for its R&D
knowledge, it gave the new unit global responsibilities, which meant that part of the
business in Finland now reports to California.
Sometimes, the reverse merger is unintended. A few years ago, a French metal
product company acquired its smaller British competitor. Today, to the surprise of
many, the management style and systems of the new company resemble the culture
of the acquired firm. What has happened? When the two companie merged, it was
easier for everyone to adapt the explicit and transparent systems of the British firm,
more suitable for cross-border business, than to emulate more ambiguous and subtle
rules embedded in the old French organization.
Best of both
The intriguing option is the “best of both”, often described as a “merger of equals”.
This holds out the promise of “no pain” since in theory it takes the best practices
from both sides and integrates them. There are, however, very few examples of those
that have truly succeeded since it is very difficult to do so. The danger in the “best of
both”integration process is that it may become too political and time-consuming.Who
decides what is “best”?

WHAT KIND OF CULTURE DO YOU WANT? 81
The process of just making the decisions can be very complex, even to the extent
of defining the terms. Also, if two companies declare that the merger is one of equals,
does that mean top management is split 50/50 even if in terms of excellence the real
split is 80/20? The controversy surrounding the Daimler Chrysler merger is only the
most visible example. Without shared respect for the knowledge and skills of each
company this kind of strategy will not work.
The key to success is the fairness of the process. The test of the “best of
both” approach may be the ability to keep the people who do not get the top jobs.
Having similar cultures helps.The AstraZeneca or Exxon/Mobil merger has proceeded
relatively smoothly because the similarities were more pronounced than the
differences, and the new group has been relatively successful at identifying the best
practices from each side, as well as having a balance of top management from the
two firms.
Transformation acquisition
With transformation, both companies are hoping to use the merger to transform
themselves in a sharp break from the past. Merger or acquisition can be the catalyst
for trying to do things differently, because it forces companies to review their past as
a way of looking forward to new ways of operating as a combined entity. This can
involve the way the company is run, or what business it is in, or both.
An example of transformation is Nortel, a telecom equipment manufacturer. Several
years ago it bought Bay Networks in California to spearhead its shift away from voice
to digital and optical networks. It also moved its headquarters to California – though
retaining Canada as its legal base – with the aim of benefiting from Bay Networks’
culture of speed and entrepreneurship. This was a case of the parent company chan-
ging its culture by incorporating learning from the junior partner. It also led to a new
name, new management style and new business strategy.
This kind of merger is usually most complex and most difficult to implement. It
requires a full commitment, focus and strong leadership at the top (e.g., Percy
Barnevik at ABB) to avoid getting trapped in endless debates, while ongoing business
suffers. If change is what is desired, there may be easier ways to achieve it than
through an acquisition.
What kind of culture do you want?
The new organization will have a culture, whether it is by default or design. The
motives for the merger, the industry dynamics, coordination needs, management style,
implementation skills, all will influence what kind of organization and culture will
emerge from the deal.
In the case of a hostile takeover, or when a company is put up for sale due to its
poor performance, it may be argued that the vision for the end-state is very clear: one
company wants to take another over and assimilate it into its culture. In most inter-
national acquisitions, the reality is more complex. While hostile takeovers are

82 MERGERS AND ACQUISITIONS
increasing (Vodafone’s acquisition of Mannesmann being the landmark event), most
cross-border deals are still done through direct negotiations between the parties, not
by solicitation of shareholder votes.
In such a case, articulating and sharing the vision of the desired end-state in terms
of strategy, organization and management style are critical. It eliminates misconcep-
tions about how the new organization will operate, and avoid misinterpretation of
what people hear or may want to believe. It is also the first step in communication
of the plan to the employees, assuring them that the management knows where it is
going. When reality is different from the espoused strategy, the people on the front
line are usually the first ones to know.
Clarity in communication gets rid of ambiguities. When BP took over Amoco, it did
so for the oil reserves owned by Amoco. If you were a manager in Amoco with 25
years’ experience you might not be very happy about that, but you would probably
have a good idea where you stood: you either go along with being absorbed into the
BP way of working or leave. In contrast, when top executives speak about a “merger
of equals”, as in the case of DaimlerChrysler, but actually mean absorption, the lack
a shared purpose and the resulting conflicts lead to loss of valuable time, attrition of
talent and, ultimately, to poor business results.
Just as bad is a lack of consistency in what top management is saying. In the failed
Deutsche-Dresdner banking merger, mixed signals from the leadership about the
future of the combined organization’s investment banking operations created oppo-
sition in both camps, ultimately forcing a cancellation of a deal that on paper looked
very promising.
A complicating factor is that often there will be parts of each organization where
a particular approach to the merger makes sense and others where it does not. There
are very few M&As which achieve a perfect fit across the whole organization. For
some parts of the business, a full assimilation may be the best approach; in others, a
reverse merger could be a more appropriate strategy. It very much depends on the
condition of the business, and the skills and competencies of people in it. Time and
competitive environment are also important influences; the direction chosen may not
be ideal, but one cannot search for a perfect partner forever.
Due diligence process
Getting the strategy right depends very much on doing the homework. Good
planning is not possible without good data. Due diligence in an acquisition has two
aspects to it. One is, of course, clarifying the legal, financial and business picture. The
infrastructure to get this kind of information is well developed, as is the methodol-
ogy for the analysis. The other, equally important, but often neglected, is about the
culture and people in the organization to be acquired. It is important to understand
the “soft” side of the deal before proceeding, so cultural and human issues can be
addressed already in the early stages of the acquisition. In fact there is ample evidence
(see Table 5.1) that the “soft” issues are among the most critical factors determining
acquisition success.

DUE DILIGENCE PROCESS 83
Often companies believe that this kind of information is not available, especially
during the initial planning stage where secrecy and confidentiality are important.
However, in most cases there is a large amount of information accessible about com-
panies, their cultural strengths and weaknesses, their management and people. What
is usually lacking is not information, but the discipline and rigour in collecting and
analysing the data. Two methodologies can be especially useful here: cultural assess-
ment and human capital audit.
Cultural assessment
The purpose of cultural assessment is to evaluate factors that may influence the organ-
izational fit, to understand the future cultural dynamics, and prepare a plan of how
the cultural issues should be addressed if the deal goes forward. Depending on the
stage of the negotiations and the resources available, cultural assessment can be formal
or informal, using market intelligence, external data sources, surveys or interviews.
What is important is to have at least a rudimentary framework that helps in organiz-
ing the issues and arriving at the proper conclusions.
Some assessment questions should look at the leadership of the target company
and its view of the business environment, its attitude towards competition, customer
and change:
•What are their core beliefs about what it takes to win?
•What drives business strategy: innovation and change or tradition?
•Is the company long- or short-term oriented?
•How much risk is the company used to accepting?
•What is its approach to external partners: competition or collaboration?
•Who are the important stakeholders in the organization?
Other questions may examine leadership principles and how the company manages
internal systems:
Table 5.1: Critical issues for M&A success
Issue % of companies
who felt that this
issue was critical
Retention of key talent 76
Communication 71
Retention of key managers 67
Integration of corporate cultures 51
This exhibit is taken from Ira T. Kay & Mike Shelton,“The people problem
in mergers,” The McKinsey Quarterly, 2000 Number 4, and can be found
on the publication’s Web site, www.mckinse yquarterly.com. Used by per-
mission.The full article from which this chart is excerpted can be viewed
online at http://mckinseyquarterly.com/login.asp? ArtID=934.

84 MERGERS AND ACQUISITIONS
•Is the company result-oriented or process-oriented?
•Where is power: concentrated on the top/in certain functions or diffused?
•How are decisions made: by consensus, consultation or by authority?
•How does the company manage information: is the flow of information wide
or narrow?
•What counts as being a valuable employee: values, skills and competencies,
getting results?
•What is the value of teamwork versus individual performance?
Some companies use cultural assessment as an input to a stop/go decision con-
cerning the acquisition. For example, Cisco avoids buying companies with cultures
that are substantially different from its own, as it recognizes that it would be difficult
to tackle differences in expectations of how a business should be run and still retain
the key staff, which it wants to do. On the other hand, GE Capital, with less concern
about retention, is more aggressive in its approach to cultural differences. For GE, cul-
tural assessment is also a “must” but mainly as a tool to plan integration. One cannot
say that one approach is better than the other, but both companies are clear in where
they want to go and how they want to get there.
The challenge in conducting a cultural assessment is to approach the subject with
a proper perspective. After all, most difficulties in cross-border acquisitions can at a
certain level of generalization be traced to culture. Even a disagreement about the
price of the deal can be blamed on cultural differences. Where some see cultural obs-
tacles, other may simply observe poor management.“It was like two drunks trying to
hold each other up,” commented the Wall Street Journal on one case of spectacular
cross-border merger fiasco attributed to cultural misunderstandings. At the same time,
there may be a limit on how many cultural boundaries one can safely cross: every
time a large Japanese “old-economy” company tried to buy a Silicon Valley start-up,
the result was a failure.
Human capital audit
There are two dimensions to the human capital audit. One dimension is preventive,
focused on liabilities such as pension plan obligations, outstanding grievances or
employee litigation, or other employment-related constraints that may impact the
acquisition – for example cost of anticipated restructuring. It also includes compar-
ing the compensation policies, benefits and labour contracts of both firms.
The other dimension, and in the long run probably more critical to the success of
the acquisition, is focused on talent identification. It is essential to confirm that the
target company has the talent necessary to execute the acquisition strategy; to iden-
tify which individuals are key to sustaining the value of the deal; and to assess any
potential weaknesses in the management cadre. It is also important to understand the
motivation and incentive structure, and highlight any differences that may impact
retention. Finally, understanding the structure of the organization helps to clarify who
is who.
Some examples of questions to consider:

IMPLEMENTING ACQUISITIONS 85
•What unique skills do the employees have?
•How does the target’s talent compare to ours?
•What is the background of the management team?
•What will happen if some of them leave?
•What is the compensation philosophy?
•How much pay is at risk at various levels of the firm?
•What are the reporting relationships?
•How are decisions made?
Where does this information come from? Former employees, consultants, execu-
tive search firms and customers knowledgeable about the company are usually the
best source. Some data are already in the public domain, and web-based search
engines can speed up the process of finding the information.
Still, many companies ignore the talent question early in the M&A process.
They do not take the time to define the type of talent critical to the success of the
deal, relying instead on financial performance data as a proxy for talent. However,
without early talent assessments, companies may acquire targets with weaker than
expected talent or talent that has a high likelihood of departure. Early talent assess-
ment helps to pinpoint the potential risk factors so that the acquiring company can
begin developing strategies to address anticipated problems as early as possible. It
also helps in speeding up the eventual decision about who should stay and who
should leave.
Implementing acquisitions
A systematic and explicit integration process is at the heart of most successful
acquisitions – people often talk about the importance of the “first 100 days” when it
comes to post-M&A integration. All acquisitions require some degree of integration,
but it is important to tailor what is integrated and how it is to be done – based
on the purpose of the acquisition and the characteristics of the companies involved.
Maintaining the focus on the key areas that create value is the critical part of the
integration process.
To do this well, a number of elements must be put in place:
•Agree on the business model logic and strategic goals, creating a shared
vision. Present a clear vision of how the acquisition/merger will create value
and ensure that the employees understand the logic. Having a well-articulated
message can also help deal with any potential political and/or competitive
issues which can arise once the deal is announced.
•Identify key priorities that have the potential to impact significantly the
performance of the new acquisition. These should be done very early in the
integration planning process and integration projects launched immediately
after the deal is closed.

86 MERGERS AND ACQUISITIONS
•Develop understanding of each other’s capabilities, assist businesses to take
advantage of existing resources, and identify and implement opportunities for
business synergy, especially where results can be achieved quickly.
•Define value and norms for leadership behaviours. Clarify performance
standards and rewards and recognition principles. Establish common ground
for corporate governance, and spell out how decisions are made.
•Surface hidden issues and concerns that may create conflict in the new
organization. This is an area that is often neglected, but which should be
tackled as early as possible. Some companies today use the intranet to
monitor online how people in the acquired company really feel so something
can be done before unhappy staff walk away.
•Specify next steps for integration and post-integration planning, starting with
feedback to speed up the integration, and capturing the learning from the
process to enhance the capability of the organization to execute future
acquisitions.
•Deliver and celebrate quick wins: nothing can be more motivating to the
employees of the new company because it offers proof that the
merger/acquisition was the right way to go.
The critical role of the integration manager
Integration of the acquired company with the new parent is a delicate and compli-
cated process, but who should be responsible for making it happen? After closing,
the due-diligence team with a deep knowledge of the acquired company disbands or
goes on after another deal. At the same time, a new management team is not yet fully
in place. This is why companies are increasingly turning to an integration manager to
guide the process, to make sure the time-lines and targets are met, and that the people
on both sides quickly learn to work with each other.
What is expected of this role? First, integration managers should facilitate
and manage integration activities, making sure that time-lines are followed and
critical decisions are made according to the agreed-on schedule, removing the bot-
tlenecks and making sure that the speed of integration is maintained. They help engi-
neer short-term successes that produce business results essential for creating positive
energy around the merger. They should also act as the champions for behaviours and
norms consistent with new standards, communicating key messages across the new
organization.
An important aspect of the job is forging social connections and helping
the acquired company understand how the new owner operates and what it can
offer in terms of capabilities. The integration manager can help the new company
take advantage of existing resources, educate the new management team about
common processes, and help with essential but intangible aspects such as interpret-
ing the new language, culture and customers. New companies often have little know-
ledge about the way things work in the business they are now part of. Equally
important for the integration manager is the role of information “gatekeeper”
between the two sides to protect the new business from the embrace of an owner

IMPLEMENTING ACQUISITIONS 87
eager to help but who could end up destroying what makes the business work. The
integration manager can thus help the new owner understand the acquired business
and what it can bring.
What combination of skills is required of the integration manager? First of all, a
deep knowledge of the acquiring company is a must; where to get information, whom
to talk to about various subjects, how does the informal system work. The integration
manager must be tough about deadlines or about coming to a decision, but he also
should be a good listener, able to relate to different levels of authority; thus flexible
leadership style is another requirement. Comfort with chaos and ambiguity, emotional
and cultural intelligence and willingness to take risk and make independent decisions
are some of the traits expected in this role.
Retaining the talent
People problems are a major cause of failed mergers. Many acquired businesses lose
key employees soon after the acquisition. When there is not sufficient communica-
tion, and especially if staff cuts are expected – employees will leave, and the best will
exit first – they have other choices. And it can be taken for granted that after a deal
is announced, and well before the actual closing, the headhunters move in immedi-
ately to pick off any promising managers unsure about their career opportunities in
the new organization. For talented employees waiting to see what will happen to
them in the new company, a concrete job offer from another company looks very
attractive.
Retention of the key employees is therefore crucial to achieving acquisition goals.
That means knowing exactly who they are, particularly if they are lower down in the
acquired organization, building on the talent identification effort in the due diligence
stage. Companies may offer stock options, retention bonuses, or other incentives to
employees who stay through a merger or until a specific merger-related project is
completed. What will ultimately work, however, depends on employees’expectations
as well as the labour and tax legislation in countries involved.
The key to success in retaining talent is fast and open communication. In Cisco,
on day one of the acquisition, the integration team holds small group sessions with
all acquired employees to discuss expectations and answer questions. Often, the key
members of the integration team were themselves brought into Cisco by acquisition,
so they not only understand well what the newly joined employees are going through,
but their messages are received with additional credibility.
At the same time, even the most elaborate retention incentives cannot substitute
for a one-on-one relationship of trust with executives of the acquiring firm. In com-
munication with top talent, senior management involvement is critical to successful
retention. High-potential employees at most companies are used to senior-level atten-
tion. Without the same treatment from the acquiring company, these employees
may doubt their future and will be more likely to depart. Here, distance may be a
hindrance, but it cannot be an excuse. Meetings and informal workshops in the early
days of the acquisition, if not already before closing, can go a long way to build a
foundation for a long-term relationship.

88 MERGERS AND ACQUISITIONS
Yet, retention success cannot be taken for granted. In acquisitions involving
knowledge-intensive firms, it is also important to protect the value of the deal from
competitive implications of employee defection. When trade secrets and confidential
information are important assets of the acquired companies, then it is wise to tie the
closing to no-competion, no-disclosure agreements with key employees. It is also
essential to clarify who has rights to technology, the acquired company or individual
employees.
Moving with speed
When companies are asked what they have learned from their past M&A experiences,
they always say: “We should have moved faster, and we should have done in nine
months what it took us a year to do.” GE Capital, for example, has cut down the 100-
day process to 60–75 both because it has learned how to move faster and because it
has developed the tools to do so. And that is essential, because if a company is taking
two to three years to integrate, not enough attention is being spent where it really
counts – with the customers. According to GE:
Decisions about management structure, key roles, reporting relationships,
layoffs, restructuring and other career-affecting aspects of the integration
should be made, announced, and implemented as soon as possible after the
deal is signed, within days, if possible. Creeping changes, uncertainty and
anxiety that last for months are debilitating and immediately start to drain
value from an acquisition.
Analysis should not be confused with indecision. There are very few occasions
when the answer is unanimous – there is always another way to do things. If a
company waits until there is total consensus it will take too long to do anything.
There will be a number of systems and processes that must be integrated quickly
in order to attain synergies. Examples are IT, sales reporting systems, logistics and
procurement. Once these key areas are identified, it may help to make sure that each
one of these value drivers has a team of people associated with it, having a clear
mandate, performance targets and accountability. At the same time, while such teams
can smooth the path to integration, there is a limit to how many there should be,
since too many committees can slow things down. Prioritization is critical. As stated
by one experienced M&A manager: “We only attack things that would bring benefits
to the business. We did not integrate just for the sake of integrating.”
Often, restructuring is an essential step to get to the necessary synergies. Restruc-
turing should not be confused with integrating, but here the rule is similar: it should
be done early,fast and once, minimizing the uncertainty of “waiting for the other
shoe to drop”. A problem jeopardizing the success of many acquisitions has been a
tendency to restructure slowly, with the best intentions not to upset the old culture,
and give people the time to adjust. Meanwhile, of course, while time, effort and
resources are being spent on reaching the consensus and negotiating the details of
implementation, competitors come along and take away the business.

MOVING WITH SPEED 89
There is no doubt that the pressure of work caused by the need to manage inte-
gration as well as “doing the day job” can be formidable. Add to that the tendency for
people to resist change and the shortage of appropriately qualified management talent
and you have a recipe for an over-stressed, under-performing work environment. Man-
aging this involves preparing the employees for the change, involving them to ensure
understanding, preparing a schedule for the changes, implementing them, and then
putting in place all the structures, policies and practices to support the new organi-
zation. Acquisition is a change process. Not surprisingly, companies that do well in
managing change are also good in managing acquisitions.
Measuring M&A success
A well-thought integration plan should detail how progress is going to be measured.
What gets measured gets done; without measurements, there is no accountability.
Some of the ways to measure success include:
•retention of key contributors
•goals met in terms of schedule, revenue and cost
•integration of key systems and technologies
•best practices shared and adopted
•employee morale survey results
•creation of shareholder value.
However, in the long term, the only valid measure of success is the satisfied cus-
tomer. Does the acquisition create customer value? From a customer’s point of view,
has it made sense? If it has not, then there is not much chance for long-term growth.
When short-term synergies are exhausted, deals that do not create customer value
have not much chance of being sustained.
Strong focus on the customer can also help generate the energy to push through
the required changes. It cuts down on internal politics and conflicts that divert man-
agement attention away from the business. And bear in mind that creating customer
value occurs only after the deal is done, which makes post-merger integration a
critical success factor.
M&As as an organizational capability
There is little doubt that companies that master the art of international acquisitions
will gain significant market advantage. When there is a sound strategy behind the
merger and when the acquisition process is well managed, M&As can become a major
tool for international growth. For some companies, such as GE Capital or Cisco,
expanding through acquisitions is already a well-proven part of their business strat-
egies. They understand well that the capability to execute acquisitions is one of the
core competitive capabilities for the future, and that the intangible aspects of an acqui-
sition are just as important as its financial dimensions.
To capture its M&A capabilities, GE Capital has developed a tightly controlled
process for acquisitions, as shown in Figure 5.2. It is a “live document” – as the
company accumulates more experience, it is continuously fine-tuned. What this

90 MERGERS AND ACQUISITIONS
detailed process does is give guidance about what needs to be done, highlights the
key issues and decision points, provides the methodology and resources; however, it
also lets the GE staff involved in the process find the right answers for themselves.
Flexibility in reaching solutions is important, because all deals are different. In acqui-
sitions, learning never stops.
➔Formally introduce integration
manager
➔Orient new executives to GE
Capital
➔Jointly formulate integration
plan,including 100-day and
communication plans
➔Visibly involve
senior management
➔Provide sufficient
resources and assign
accountability
➔Begin cultural
assessment
➔Identify/cultural
barriers to integration success
➔Select integration manager
➔Assess strengths/weaknesses
of business and function leaders
➔Develop communication strategy
Continue developing
common tools, practices,
processes and language
➔
➔
Continue long-term
management exchanges
➔Utilize corporate education
center and Crotonville
➔Use audit staff for integration audit
➔Use process mapping, CAP, and
Workout to accelerate integration
➔Use audit staff for process audits
➔Use feedback and learning to
continually adapt integration plan
➔Initiate short-term management
exchange
Figure 5.2: The wheel of fortune at GE Capital
Reprinted by permission of Harvard Business Review. From Making the Deal Real by Ashkenas,
DeMonaco & Francis, p. 167, January–February 1998. Copyright © 1998 by the President and Fellows of
Harvard College, all rights reserved.
GE CAPITAL’S WHEEL OF FORTUNE
The work starts at the pre-acquisition stage, where the framework for integration is set:
• Begin cultural assessment
• Identify cultural barriers to integration success
• Select integration manager

SUMMARY 91
SUMMARY
The acquisition process starts with the creation of vision and strategy for the com-
bined organization. There are a number of options, based on the direction and degree
of anticipated integration, each with its own logic and set of guiding principles for
implementation. Clarity in communication about the strategy is an essential founda-
tion for success.
The “soft” part of the due diligence process is just as important as the financial analy-
sis. Most M&A failures are linked to post-merger integration, and cultural and people
issues consistently rank as one of the key causes of difficulties in executing acquisi-
tions. A well-structured cultural assessment and human capital audit can help focus
management attention on potential problems.
In any acquisition, retention of top talent should be on the list of key priorities.
The retention efforts start during the due diligence process that should spotlight top
talent. Retention incentives can help during transition, but in the long run, retention
• Assess strengths and weaknesses of business and function leaders
• Develop communication strategy
The next stage focuses on the integration process:
• Formally introduce integration manager
• Orient new executive to GE Capital
• Jointly formulate integration plan, including 100-day and communication plans
• Visibly involve senior management
• Provide sufficient resources and assign accountability
Integration is done rapidly:
• Use process tools to accelerate integration
• Use audit staff to audit key processes
• Use feedback and learning to adapt integration plan continually
• Initiate short-term management exchange
The final stage is assimilation:
• Continue developing common tools, practices, processes and language
• Continue long-term management exchanges
• Utilize corporate education resources
• Use audit staff for integration audit

92 MERGERS AND ACQUISITIONS
requires commitment from senior management to build personal relationships with
top talent from the newly acquired organization.
After the deal is closed, it is imperative to move with speed. Key decisions about
management structure, senior appointments and about anything related to
people’s careers should be made as soon as possible. Uncertainty and anxiety
after the acquisition drain energy from the business. Ability to manage post-
merger integration can become a major source of competitive advantage.
LEARNING POINTS
•Do your homework: mergers and acquisitions are always more complicated
than at first glance.
•Think about the end-state before you start.
•Be clear about your intentions.
•Do not underestimate cross-cultural differences, but do not confuse
culture with poor management.
•Make talent assessment an integral part of due diligence.
•Appoint an integration manager to speed up the process.
•Identify points of resistance and address them early.
•Secure and celebrate quick wins.
•Measure M&A outcomes and assign accountability.
•Capture the learning to improve future acquisitions.
•Keep in mind that the deal must make sense for the
customer.