Today’s headlines are dominated by Mergers and Acquisitions But what’s actually happening on the inside when two corporate cultures try to live together as one? Unless the marriage is planned as carefully, the resulting shock can leave both sides estranged.
Late last winter, when Steve Cadigan, the worldwide HR chief for Burnaby tech company PMC-Sierra, arrived in balmy Herzliya, Israel, to court a young semiconductor company, Passave Inc., he immediately became hooked. The company was growing fast, it was entrepreneurial and well-advised, boasted cutting-edge technology. It also had a global outlook – just what his rapidly expanding electronics company was in the market for. Cadigan could easily imagine how the company’s DNA – its talent – could be -integrated into the fast-paced and entrepreneurial technology culture of PMC-Sierra, which has over 1,000 employees. But executives of the 150-employee Passave weren’t so sure. They felt Cadigan represented a giant North American manufacturer after their technology and revenue – in essence, to turn them into a quick roadside lunch on the highway to the future – and wouldn’t understand their way of thinking at all. They were an entrepreneurial, creative bunch looking for funding in order to expand aggressively, and the last thing they wanted was to be buried way down in a traditional organization chart as a tiny unit of some division in a huge conglomerate. Cadigan, in turn, was astonished and confused. Passave’s perceptions of PMC were the opposite of what his company actually was, he felt. It took a considerable amount of discussion to convince Passave’s executives that PMC-Sierra was, in fact, a mid-sized company from Canada, dedicated to rapid growth and in a sense very much like them, only bigger. This wouldn’t be a swallow; it would be a partnership, with common purposes. Once the perception problem was straightened out, the deal was done quickly. Last May, Passave became the latest piece of the ambitious $300-million-a-year plan by PMC-Sierra to more than triple its size through mergers and acquisitions by 2009. The troubling hitch that almost derailed the deal had been all rumour and misperception – two of the most common problems associated with mergers. As globalization increases, so does the pace of mergers.
According to the consulting firm Booz Allen Hamilton, two-thirds of mergers fell short of financial and other expectations. New York University’s Stern School of Business says as many as 70 per cent of M&As fail in that they don’t live up to their financial promise. These studies say one thing that can cause mergers to unravel is the lack of attention spent making sure the two cultures successfully merge. This reflects the reality that many M&As today involve buying talent as much as they do revenue streams, people as much as processes and ¬cultures as much as organizations. It also reflects a very powerful requirement in mergers today: there must be a clear, well-thought-out strategy in place for how the acquired company will help the acquirer. Certainly, there are some acquisitions where the people equation simply doesn’t seem that important – big company snaps up ¬smaller one for its production capability or to boost its ¬revenue growth and feed good news to the stock markets. If Alpha Footwear buys Beta Shoes, it’s mostly concerned with ¬production efficiencies or product lines, and not so much with the people who run the machines. But when an acquisition involves a business where knowledge, talent and people-based research or service are as important as the product being churned out, the situation can get much more complicated. These ¬acquisitions will be much more concerned with strategically merging cultures than they are with simply buying production. And, say observers, they’re often as driven by people concerns as they are by spreadsheets. Of course this means they are also messier and more difficult to handle than the slice-and-dice process common in mergers where it’s more about buying product rather than talent. That’s why HR – a management function that at one time would have been shut out of an M&A deal until much later in the process, when it was time to figure out compensation and pension plans – is now at the table right from the beginning. HR professionals are there to identify how the people that are being acquired will fit into the existing company culture. “They have to be part of the due diligence because they have to determine the cultures involved and look at the pitfalls that could be present in the merger,” explains Graham Dodd, Vancouver-based national practice director for Watson Wyatt Canada’s Human Capital Group. “A lot of pre-merger due diligence is mechanical and involves finances and technology. But when you’re dealing with people, behaviour change may be required, and that’s not as easy.” Santa Clara, Califorina-based Business Objects and Vancouver’s Crystal Decisions performed a very scripted $1.2-billion merger in late 2003. The two business-intelligence software competitors spent a lot of time at open kimono (pre-merger discussions) sessions considering the possible benefits and pitfalls of cultural integration. In fact, they engaged a very large U.S. consulting firm with experience in this kind of thing to map out the process for them. Simply put, it involved three phases: the pre-close requirements for day No. 1 of the merger; the tasks to be accomplished in the first 45 days; and the tasks required after that to achieve full integration, with an eye to bettering share price performance. Also, as part of the acquisition and integration process, Business Objects used new software called rganizational Culture Inventory to help plan and monitor organizational change and facilitate the merger. [pagebreak] This helped, especially considering that the new company’s workforce now spanned over 20 countries, says Janet Wood, Business Objects senior VP of global partnerships and sales enablement, who helped manage the merge. One of the challenges was integrating the two different cultures. Business Objects was more corporate, direct-sales oriented and aggressive, a combination of French and U.S. styles; Crystal, on the other hand, was more “Canadian” in that it was egalitarian, communicative, community oriented and entrepreneurial. The solution, says Woods, was to form a new culture, picking the best from each. “The combination of Eurocentric Business Objects, with its public-company experience and Fortune 500 customers, and Crystal Decisions, with its modern democratic management style and North American customer base, resulted in a strong market leader. We went from being similar mid-sized [annual revenue of $200 to $400 million each] companies to a billion-dollar global company.” But it wasn’t easy: “This was hardest at the beginning,” says Wood. “When we were integrating, we would refer to functions as being Crystal Classic or Business Objects Classic. But a lot of respect has grown as we became something new, and we don’t use those terms much anymore.” One cultural challenge involved merging the companies’ different styles of communication. This wasn’t just an IT issue, but involved the personal style of each company: Crystal’s democratic, whatever-works worldview versus Business Objects’ more corporate, measured response style. Crystal staff used BlackBerrys for instant communication around the globe; Business Objects still relied on email. The new company decided that speed was important and converted entirely to BlackBerrys. Another challenge was meshing three different national cultures – French, American and Canadian. Management tackled that problem by surveying all employees in an attempt to come up with a new, inclusive set of core values. The new company also transfers employees from one office to another – Vancouver to Paris to Singapore – a bonus for some of Vancouver’s Crystal employees now applying for stints around the world. McKesson Corp., a US$50-billion-a-year health-care and information-services company headquartered in Atlanta and ranked 16th on the Fortune 500 list, took a slightly different tack when it purchased Richmond’s ALI Technologies for $530 million in 2002. McKesson, which produces health-care diagnostic information, wanted ALI’s digital medical imaging and information software, but recognized that simply swallowing the company would all but ¬ destroy its coveted position in the industry. So, McKesson made it the base of an ¬entirely new division, the Richmond-based Medical Imaging Group, and injected financial and business support to help it grow. In fact, says Rod O’Reilly, ALI’s former VP of operations who is now VP and general manager for McKesson’s Medical Imaging Group, the MIG group is now the fastest-growing McKesson division. It has, for two years running, won the company’s President’s Cup, awarded to the business unit that achieves high scores in customer satisfaction, retention, employee satisfaction, operation income, sales growth and other performance metrics. Last August, the MIG group rented Nat Bailey Stadium to throw a party for staffers who contributed to the unit’s growth: a testament, says O’Reilly, to the way the much expanded ALI employee group has transferred its entrepreneurial zeal to the new parent company. “The key thing is that, while we now are owned, we’ve been allowed to keep our group together and in Vancouver,” he explains. “There has been some shifting of thinking, but it’s a good one: we went from thinking how we can build a company to how we can make an impact on health care.” This hands-off but supportive approach doesn’t always works out, however, especially in the case of mergers and acquisitions ¬ between smaller companies. The former owner of a Vancouver forestry company – which he doesn’t want to name because the process is still under way – that was acquired by a larger company in its sector more than a year ago, has watched his former company drift as the merger rolls out slowly. While the company has remained, for the most part, independent, some functions and decision-making were moved to head office, which confuses his employees and management. “I guess you could say it [the merger] is working because revenues are up quite a bit, but that might have as much to do with the economy as anything,” he says. “And, because we’re doing some things differently now, we lost a few long-time customers and the staff is wondering about where and what they’re going to be in future. There’s just nothing definite and there’s likely going to be a day of reckoning.” This kind of slow, tentative, and apparently non-strategic merger can spell serious trouble for an acquisition, say consultants. Cadigan, a mergers and acquisitions HR specialist who was previously with tech giants Cisco Systems and AMD in California, has been through dozens of them. He rarely sees a slow merger that works, especially in the fast-paced technology industry. “Integration begins the minute you have the first conversation with the CEO of the target company,” he says. RELATED ARTICLES: Mergers and Acquisitions Checklist