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Business Journal

Making Mergers Work

The eight elements of a successful corporate partnership

by Rodd Wagner and Gale Muller

Mergers. Acquisitions. Joint marketing agreements. Strategic alliances. Collaborative ventures. Organizational integration. There are dozens of terms for the strategy of bringing together -- or sometimes forcing together -- two entities on the assumption that when united, they can accomplish what neither enterprise could do alone.

More often than not, merged firms fail to integrate, fail to realize the promised synergy, and lose executives with years of experience.

The print and online components of USA Today were merged in 2005, with instructions to go "beyond arm's-length collaboration." The New York Times and NYTimes.com are under similar orders. Exxon merged with Mobil. Sirius Satellite Radio acquired XM Satellite Radio. Wells Fargo is merging with Wachovia. Delta Airlines is merging with Northwest.

Executives who are overseeing an integration routinely tell Wall Street that the new, bigger firm will give unrivaled service to its customers, new opportunities to its employees, and higher returns to its shareholders. About half the time, they're wrong; more than half of mergers and acquisitions fail.

A study of nearly 5,000 mergers and acquisitions found that the target companies suffer the perhaps "natural and acceptable" loss of many executives shortly after the combination. And, according to the study, "leadership continuity is permanently altered once the firm is acquired. Target companies can expect to lose 21% or more of their executives each year -- more than double that experienced in non-merged firms -- for at least ten years after the acquisition!"

More often than not, the two firms fail to integrate, fail to realize the promised synergy, lose momentum on key projects the companies were implementing before the merger, lose executives with years of experience and knowledge about the firms, or ignore the merger's negative effects on target employees -- effects that eventually erode productivity. Everyone talks about collaboration between organizations; few know how to do it.

"We may not perform as well financially as we expected following the merger," US Airways warned investors after its 2005 merger with America West. Once reality set in, the airline announced that the process of combining "will be costly, complex, and time-consuming," and management "will have to devote substantial efforts to such integration that could otherwise be spent on operational matters or other strategic opportunities."

In most cases, executives fail to anticipate the complexities they are getting themselves into. The combination of Company A + Company B = Company C looks clean on paper. But in practice, it is a messy business that involves thousands of employees from Company A each working with 1, 2, or 10 people from Company B, and vice versa. Strangers come in. Trusted associates leave or are laid off. Thousands have new working relationships imposed on them at a time of intense uncertainty and vulnerability.

Elements of a successful partnership

For the past five years, Gallup has studied partnerships between individuals to determine what elements make the difference between success and failure. Collaboration between organizations is largely the sum of those individual partnerships. The same elements that enable two people to achieve a shared goal are crucial to a larger corporate alliance.

Complementary strengths. There's no reason to unite if each firm does not offer something the other lacks. Perhaps one company excels at sales while the other excels at service. Or one group may be known for its creativity while the other can bring great ideas to market.

All too often, the reasons behind the partnership are forgotten when the work itself begins. Instead of integrating the best aspects of each approach, the two sides argue over whose way of doing things is better. The pre-merger discussions about what each company would add turn into grumbling about what each lacks. Executives must constantly emphasize the strengths of each organization if they expect their subordinates to do the same.

A common mission. As the Union Army made plans in late 1862 to take Vicksburg, Mississippi, President Lincoln gave General John McClernand orders to organize troops under his command. But General Ulysses S. Grant was already pursuing the same goal. "Vicksburg was 250 miles away, and as [Grant] saw it the town belonged to the man who got there first," wrote historian Shelby Foote. At one point when Grant would normally have waited for reinforcements, he hurried south. "I feared that delay might bring McClernand," the general wrote later, and the Union subsequently lost the Battle of Chickasaw Bayou. Grant was "fighting two wars simultaneously: one against the Confederacy . . . and the other against a man who, like himself, wore blue," wrote Foote.

A common hazard in corporate alliances is that the two sides lack a collaborative mission. In their eagerness for results, executives frequently encourage internal competition.

One of the most common hazards in corporate alliances is that the two sides lack a collaborative mission -- a goal premised on an agreement that both camps will succeed by working together. In their eagerness for results, executives frequently allow or even encourage internal competition. They say they want salespeople to work together, for example, but what they really want is the sale, and if elbows fly in the process, so be it. Companies give lip service to partnerships, then create financial incentives that reward employees for beating the other guy. When employees spend more time competing than collaborating -- or, like Grant and McClernand, more time outmaneuvering each other than pursuing the objective -- the organization loses.

Fairness. Issues of how to divide work, rewards, and power confuse companies as much as they do individuals. When Daimler-Benz AG merged with Chrysler in 1998, Daimler-Benz Chairman Jürgen Schrempp and Chrysler Chairman Robert Eaton appeared at a news conference in London heralding a "perfect fit of two leaders in their respective markets." They said they had "agreed to combine their businesses in a 'merger of equals'" and that the two of them would be cochairmen. But the combination became more of an acquisition of Chrysler than a merger, and -- despite some early victories -- it didn't live up to its collaborative or financial billing.

"So far, DaimlerChrysler is a trans-Atlantic partnership mostly in name," observed the International Herald Tribune one year later. "DaimlerChrysler is pretty much run by Daimler executives. From the ubiquitous chief executive officer Jürgen Schrempp on down, the big decisions are made in Stuttgart. Chrysler managers complain they are lame ducks." Eaton left less than two years after the "merger of equals" press conference.

Nine years after the firms came together, Daimler left Chrysler by the side of the road for one-fifth of its original purchase price. "Chrysler was bought and was subsequently treated like a stepchild, not a partner," wrote one industry publication.

While it is tempting to paper over real issues of parity with euphemisms, such rifts inevitably surface as two organizations start working together. If the joint effort is to succeed, it is far better to hammer out agreements about the division of responsibilities beforehand, then live up to those commitments.

Trust. Any time two groups are brought together, both must juggle competing loyalties, distinct cultures, and lack of rapport at the same time that the workload increases because of the integration. Under the right conditions, a new unified team can form in spite of the obstacles.

"When I think back on January 1999 . . . my most vivid memory is exhaustion," recalled editor Mark Kennedy of the period when the Chattanooga Times merged with its competitor, the Chattanooga Free Press. "Thankfully, though, the culture clash that people expected when the newsroom staffs were combined never really materialized."

"We weren't thrown into a newsroom with our competitors; we were thrown together with other survivors," agreed fellow editor Chris Vass. "I think the 'us vs. them' mentality vanished immediately."

Trust does not exist between two companies; it occurs between two people. That trust can be established only through experience, when both people take pains to ensure that they deliver what the other expects. Leaders who don't give their employees the time or provide the conditions where trust can flourish should not be surprised when much of their post-merger time is spent separating warring factions.

Acceptance. In a partnership between two people, both must accept the uniqueness of the other person and the differences from themselves. A similar concept applies to collaborating companies, which usually have different traditions, strategies, or perspectives. In much of the research on mergers, the issue of acceptance is categorized as "integration" or the imperative to "combine cultures."

In business, unselfishness means doing what's best for the shareholders regardless of the consequences for a particular department or unit within the company.

"It was obvious from the start that [our] sister company had a completely different culture than we did," reported one technology manager. "As software distributors, we shared many of the same product lines and dealt with many of the same technologies. We both did the same thing -- sold tech products to computer retailers across the country and around the world. The merger failed miserably. We simply could not get along. There were too many egos and too many superstars. Eventually our West Coast outfit was closed in favor of the East Coast company."

If either side of the alliance cannot comprehend that its way of doing business is not the only way and appreciate the approach of its counterparts, the resulting friction will doom the combination.

Forgiveness. In most successful combinations, both sides work intensely to fulfill their end of the deal. Both are careful to avoid a breach of trust that would require apologies and forgiveness. But just as between two people, rifts can open between organizations.

Neither entity fully understands what it's getting itself into. Rarely does the collaboration play out exactly as it was envisioned when the papers were drawn up. There will be mistakes. Whether those errors are greeted with recriminations or flexibility could determine whether the agreement dissolves or succeeds.

Communication. When former U.S. President Theodore Roosevelt joined an expedition down Brazil's River of Doubt in 1913, his group was visited one morning by three Nhambiquara Indians. "They left their weapons behind them before they appeared, and shouted loudly while they were still hid by the forest," wrote Roosevelt. "And it was only after repeated answering calls of welcome that they approached. Always in the wilderness friends proclaim their presence; a silent advance marks a foe."

This same concept applies to communication between two groups that are working together. Signaling cooperative intentions is crucial to understanding the other side's perceptions, avoiding hostile assumptions, and making the early agreements that become the foundation for trust. In nearly every study of failed mergers or alliances, miscommunication or lack of communication is one of the primary culprits.

Unselfishness. Leaders working to unify their organizations often have their public relations staff craft slogans aspiring to make their company "one." Coca-Cola touts, "One Company. One Team. One Passion." And LexisNexis proclaims, "One Company. One Team. One Goal." "One Team, One Mission," states the U.S. Department of Homeland Security's strategic plan.

The slogans are fine -- a fitting metaphor for the alignment of efforts that makes an enterprise effective. But real unity is elusive. In business, unselfishness means doing what's best for the shareholders regardless of the consequences for a particular department or unit within the company. Sometimes a pet project should be terminated or resources in one part of the firm should be transferred to a division that can use them more profitably. While these kinds of moves are best for the company overall, intramural contests or the company's incentives can spur employees to protect their turf against the interests of the larger organization.

In many mergers, one of the richest ironies emerges when the chief executive -- who just beat his own counterpart at a corporate version of king of the hill -- tells his people to form partnerships with their counterparts from the other company. When a leader from one entity jettisons the leader of the other to take control of the combined enterprise, it can spawn cascading Darwinian battles through operations, finance, sales, marketing, and every department where the stronger side can make a case that its weaker opposite is "redundant." Leaders who are poor partners themselves do nothing to inspire collaboration in their followers.

Without powerful examples at the top, collaborations that began as a "merger of equals" or a "building of strength upon strength" can degenerate into a series of cage matches that distract both camps from the business at hand. As with a partnership between two people, an organizational alliance that lacks the key elements is worse than no alliance at all.

Additional Reading

Jeffrey A. Krug and Walt Shill. "The big exit: executive churn in the wake of M&As" Journal of Business Strategy (2008) vol. 29 no. 4 pp. 15-21.

Rodd Wagner and Gale Muller recently completed five years of research identifying and analyzing the crucial dimensions of a successful partnership. Their book, Power of 2: How to Make the Most of Your Partnerships at Work and in Life, is the product of that research.

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