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Merge Ahead

Before you go full-speed into a merger, read this.

The business pages lately have been filled with announcements of heavily monied mergers--from MCI and British Telecom to aerospace giant Lockheed Martin-Northrop Grumman. Massive, multibillion-dollar corporations are becoming the norm, leaving an entrepreneur to wonder whether a merger ought to be in his or her plans, too.

But be warned: For every merger that works, there are others that fail, and the entrepreneur who rushes into a merger may just be stepping into despair. Software company Novell Inc., for instance, never successfully digested WordPerfect (it was spun out last year to Corel Corp., another software firm); The Quaker Oats Co. couldn't swallow Snapple (which was divested earlier this year); and Japanese electronics giant Matsushita Electronics Corp. threw up its hands after several years and disposed of Hollywood entertainment giant MCA Inc.

Why do mergers go wrong? A large but rarely discussed reason is that when business marriages are hurried into, sometimes the result is a loud clash of styles, say corporate culture experts Jacalyn Sherriton and Jim Stern. "[Business owners] focus on the financials and usually ignore the potential cultural incompatibilities when considering a merger," says Sherriton. "But when troubles arise, often the root is in culture clashes."

The good news is that when the importance of culture is recognized--and steps are taken to avoid clashes--"even companies with very different cultures can successfully merge," says Stern. President and vice president, respectively, of two management consulting firms--Corporate Management Developers in Reston, Virginia, and Health Management Consultants in Hollywood, Florida--Sherriton and Stern are also the authors of Corporate Culture/Team Culture (Amacom Books). Their consulting clients include IBM, Bristol-Myers Squibb Ltd. and Mobil Corp.

Entrepreneur: Why do companies consider embarking on mergers?

Jacalyn Sherriton: Many companies see merging as a way to compete. In today's global business environment, companies may have to grow to survive, and one of the best ways to grow is by merging with another company or acquiring other companies.

Jim Stern: But the problem is that as good an idea as merging may be, most business owners typically don't consider culture as a reason not to merge. In looking at potential merger partners, you've got to weigh potential culture clashes along with the financial aspects of any proposed deal. When cultures clash, you may not enjoy all--or even most--of the benefits you'd hoped for in a merger. Look at failed mergers, and you'll see the companies never reached a point where they could work well together--that is, the cultures clashed and nobody found a way to get them to mesh.

Entrepreneur: What are examples of mergers that failed because of culture clashes?

Stern: The Matsushita and MCA merger clearly shows the clash of cultures. On the one hand, [Matsushita] was a staid, nonrisk-taking Japanese company. MCA, by contrast, was entrepreneurial and Joe Hollywood in its mindset. And the merger didn't work. Matsushita divested itself of MCA, which was picked up by Seagram Co., and, so far, that seems to be a better fit.

Entrepreneur: Let's back up a step. Exactly what is corporate culture?

Sherriton: People think it's esoteric, but it's quite concrete.Corporate culture means the values, beliefs and patterns of behavior that are ingrained in an organization. It amounts to the norms about how things are done. The corporate culture is the personality, so to speak, of the company, and different companies have very different personalities and cultures.

Entrepreneur: Do business owners realize how deeply ingrained a business's culture is and how hard it is to change?

Stern: We've administered a survey to top executives for the past several years. It shows that they have heard about culture but are not doing anything to manage it. In fact, 75 percent admit they have no plan to manage cultural change associated with mergers and acquisitions. Seventy percent say their business has not assessed its culture. As much as the majority felt that mergers and acquisitions were viable strategies, they also admit they don't have a plan for addressing cultural issues that might arise in a merger. This is very troubling data.

Entrepreneur: How can a business owner get a feel for a potential merger partner's culture and where troubles might crop up?

Sherriton: You can sense the culture when you first walk in the door.Is there tight security, or are things loosey-goosey? Do people smile at you?

Another tactic is to ask employees questions:

  • What's encouraged here?
  • What's forbidden?
  • What's really valued?
  • What are employees held accountable for?
  • What are people rewarded for?

By asking questions, gradually you determine the organization's culture.For many [business owners], doing this is revelatory. They have never dissected their culture--the underlying beliefs and values--in the ways we're describing.

Entrepreneur: Culture can doom a merger, but can potential clashes be anticipated and addressed before they hurt the new business?

Stern: We're engaged now in a real success story. Our client is Universal Health Services (UHS) Inc., a hospital management company.They recently acquired George Washington University (GWU) hospital in Washington, DC. GWU had been a not-for-profit hospital in a university setting, while UHS is a for-profit management company. From the start, UHS recognized the potential for culture clashes and has taken steps to prevent it. As I speak, there are training classes for all GWU employees to acclimate them to the new corporate culture. All companies involved in mergers should be taking the same steps--conducting culture audits, anticipating where clashes may arise and training employees.

Sherriton: But they're not. We'd be hard pressed to give you the names of more than a handful of companies that are tackling these issues. Many companies seem to think that just by being next to each other, the cultures will get together. They won't--not without a vision and a plan to pull the two cultures together.

Entrepreneur: What are the steps for creating successful cultural change in relation to mergers?

Stern: Our program follows these steps:

1. Conduct a culture audit on both businesses. Ask questions.Discover the companies' personalities.

2. Assess the differences--in terms of systems and processes, management style, and values.

3. Identify where potential clashes will occur.

4. "Assess and agree"--as we call it in our program--where you get the two parties together and ask "Can this work?" If the answer is yes, the companies move toward integrating the cultures. That means addressing the changes--what parts of the old cultures need to be discarded?--that may be necessary to make the new, merged company viable.

Sherriton: You also want to get a feel for the cultures' flexibility. The Japanese management style, for instance, is so different from a Hollywood studio's. So ask "How much flexibility is there on each side? How much can they change to avoid major clashes?" If the answer is not much, maybe that's when you decide to walk away from the deal.

Stern: This process forces the powers that be to confront their cultures and to recognize the potential blocks to making the new business work. If companies can recognize and agree on the front end that there are issues that need addressing in regard to cultural differences, they can be successful.It's when they don't recognize they have culture issues or they see them but feel they can force through change anyway that these mergers are unsuccessful.

Entrepreneur: What are the components of a plan for changing a business's culture so that a merger will work?

Sherriton: There are six areas that need to be addressed here:

  • Clear direction from the senior-most leaders: Why are we doing this? What do we expect to achieve?
  • What is the new culture we're striving for? What do we want to be?
  • What systems, procedures and policies need to be changed?
  • How will we change them?
  • How will we roll out all of these changes? What's our plan?
  • How do we get everybody in the company involved and action-planning to achieve these changes?

Stern: At GWU, for example, every employee has put together a personal plan about the behaviors and styles they need to change to integrate into the new culture. And they will be held accountable for meeting those action plans.

Sherriton: The opposite example, if press reports are accurate, is Disney-ABC, where the senior-most executives are coming together to plan how to create synergy between the companies. But they haven't, according to the press, gotten lower-level employees actively involved in creating synergy.And the merger may not be producing all the hoped-for results.

Entrepreneur: Isn't resistance to a merger usually centered in mid- and lower-level employees who want to know what's in it for them but aren't getting answers?

Sherriton: Employees often have strong emotional reactions to mergers and proposed mergers. There are anxieties, and misinformation can spread.A case in point: When the proposed Office Depot and Staples merger fell through, Office Depot employees held a celebration. Why? They had heard about distinct differences--real or not--between their culture and Staples'. You want to manage these human impacts and emotions.Remember, too, that your best employees are the most marketable, and if they don't feel secure that their needs will be addressed in the merger, you are likely to lose them.

Entrepreneur: An issue in the minds of many entrepreneurs contemplating mergers is "How do we build in safeguards for our present employees? Can we?"

Sherriton: Yes and no. The first step is not to get blinded by the financial upside; look at the cultures, and see what's realistic and workable. Make an informed decision about whether to go forward. Beyond that, safeguard your employees by preparing them for the cultural changes that will occur after the merger. It's very important that you tell them there is no guarantee that things will stay the same and help them develop a new frame of mind about what will be expected of them.

Stern: You want to get them to participate in this cultural alignment. The way to do this is to involve your employees in meetings with employees of the other company. Help them feel they have input in the changes that will occur. Another step you need to consider for some employees is discipline and termination. And, frankly, there typically is a small percentage of employees who feel they cannot be compatible with the new culture, and they need to find positions in other companies where they will be happier.

Sherriton: You cannot safeguard your employees' future. But you can prepare them mentally for the changes that are coming.

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This article was originally published in the October 1997 print edition of Entrepreneur with the headline: Merge Ahead.

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