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Mergers & Acquisitions: Increasing the Probability of Success

Published on Thursday, April 01, 2004

We’ve Merged. Are We Paying Attention to all the Right Components?

All merged and acquiring companies want the best outcome from the acquisition in order to deliver the expected return on investment. These companies focus on the most advantageous combination of systems, technologies, processes, financials and organizations. Is this enough?

No.

An area often overlooked is the new, combined culture. Who are we – now? How will we operate – now? What do we value – now? How will decisions be made – now?

A Common Example

Company A merges with Company B. Employees of A continue to operate as they always have: micro-managing, control-oriented and aggressively focused on achieving results. Moreover, A employees expect Company B employees to operate in the same way. Company B employees also continue to operate in the same was they always have: trusting each other in pursuit of goals with a high degree of autonomy and accountability, and with high level financial reporting only. They, too, expect A employees to do the same.

As a result of differing expectations, Company A employees look down on B employees as being out-of-touch, unprepared and not grounded in financial controls. Company B employees, for their part, feel overwhelmed by the requests for details they’ve never had to provide before, not appreciated and even trampled upon.

The business combination that looks good on paper has gotten off to a rough start. Both employee groups are moving down divergent paths, even while working on common goals. If this continues, business results will be impacted, and the forecasted financial benefits and expected outcomes may never materialize.

Generally, the acquirer, or the dominant or remaining entity, implicitly assumes that their current culture will continue, and that the other company’s employees will assimilate and accept the prevailing way of doing business. As an M&A executive in an acquiring company, I frequently witnessed lost opportunities to achieve the forecasted gains from the combination of companies. We often assume that the newly acquired company would take on our processes, systems, financial reporting and our expectations. When they did not, we felt they were wrong, naïve, and resistant to change. We began to “manage” them more tightly, and to give promotions and growth opportunities to “our own” people, who we trusted because they operated in the same way we did.

Now, as an executive coach, I assist companies to shape a new culture, one that all employees understand and can move toward. A shift is made from an assimilation model, of one organization fitting into another, to a model of all people, together, forming a new way of working, one that combines the best of both former companies.

They’re Experienced Business People. How Can this Happen?

Inattention to the cultural combination of companies, in my experience both inside acquiring companies and as a consultant to companies engaged in M&As, is the biggest obstacle to merger success. And this is topically measured in the return on investment—the ROI forecast that drove the business combination and that justified the price paid.

Cultures, generally assumed as “the way it is around here," tend to be transparent to many leaders, and therefore not unattended to. In the culture reside the relationships necessary to getting the work done (or not). The culture determines the amount of friction, or drag on results, that exists.

The Solution

To achieve a successful business combination, there are two strategies that must be in balance: the technical strategy and the cultural strategy. The technical strategy is the processes, systems, technologies, tasks, plans, deadlines necessary to accomplish the initiative. And the cultural strategy is the communication pathways, leadership, people, relationships, and environment necessary to achieve the initiative.

Leaders tend to spend more time on the technical strategies—estimates range from 80 to 99% of leaders’ time and attention is focused here. In fact, the cultural strategy can be transparent. In order to fully and powerfully achieve the goals of a business combination, both strategies must be in balance.

Some questions to ask yourself (and your leadership team) include the following:

• Do we have a vision for how our people will all relate most effectively to one another?
• Do we have a plan to address the differences in the way the two former organizations went about doing their work?
• Do we understand the potential pitfalls and have possible solutions?
• What has made each company successful?
• How can we retain these characteristics in the new combined company?
• Do we have clear expectations for how we will relate to each other, the business, and our clients, that are current with our new business situation?
• Do we have a clear decision process that everyone understands and buys into?

When barriers arise, they generally exist in the cultural realm. Communication has become blocked (resulting in misunderstandings and frustration), trust is reduced or differing expectations have become apparent. These barriers, if unaddressed, lead to increased friction and reduced performance, resulting in missed goals. Having a process to anticipate and deal with these situations is critical to the success of the combination.

European Expansion and the Euro: The Impact on Your Business

Published on Monday, March 01, 2004

On May 1, 2004, the 15-member European Union will admit 10 new members. This will increase its current number of consumers from 375 million to 448 million, and result in a significant boost in EU negotiating strength. This also will have ramifications for the euro. What will this mean for the United States and your business?

The New EU and Its Challenges

Current EU members include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. On May 1, the expanding trade bloc will admit the Czech Republic, Hungary, Poland, the Slovak Republic, Slovenia, the Baltic states of Estonia, Latvia and Lithuania, and the Mediterranean islands of Malta and Cyprus. In addition, two other applicant countries, Bulgaria and Romania, may join by 2007. A 13th hopeful, Turkey, has not been given a date to begin accession negotiations.

New members will contribute $680 billion in gross domestic product (GDP) to the EU and erase the last traces of the old “Iron Curtain” from the Cold War years. However, the ever-increasing bloc will not be without its challenges. For example, Western EU members will be required to pump billions of dollars in subsidies into the Eastern economies. And not unlike some of the problems that plagued former West Germany when it absorbed former East Germany, tensions are likely to arise when workers in the West lose jobs to many in the East.

Will U.S. Influence Diminish?

Since World War II and throughout the Cold War period, the United States has been unquestionably the world leader in terms of trade and economic policy. In fact, the Cold War provided much of the glue that held the American-Western European alliance together. However, since the end of the Cold War, and in light of the EU’s expansion plans, the U.S.’s position of dominance is being challenged.

To a greater extent, the EU is questioning the policy decisions of the United States. Consequently, forging new multilateral trade agreements and defending U.S. interests in trade disputes could become more difficult. And, as Eastern Europe grows more affluent and boosts imports, will goods and services from Western European companies displace those from the United States.

Who Is Adopting the Euro?

The euro has been used for non-cash transactions since January 1, 1999. On January 1, 2002, euro coins and notes became available. And by the end of February 2002, the national currencies of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain were withdrawn in favor of the euro.

But not all EU members favor the adoption of the single European currency. In a nationwide referendum in September 2000, Denmark voted 53 percent to 47 percent against membership in the euro area, also known as Euroland or the Eurozone. Three years later in September 2003, Sweden followed with a similar vote — 56 percent to 42 percent — rejecting the euro. And according to analysts, the United Kingdom is unlikely to adopt the single European currency any time soon. Why have Denmark, Sweden and the UK decided against the euro?

Arguments Against Participation

Those against Eurozone membership argue it would erode national sovereignty and hand over power to the European Central Bank whose “one size fits all” policies may not be welcomed. Furthermore, many are concerned that the single currency could lead to a political union that may promote legislation they do not support.

The UK, which has been especially critical of the euro, has established five economic tests it says must be met before it calls a referendum. The key test is whether the UK economy is converging with those in the Eurozone, and whether this can be sustained in the long term. The second test deals with the country’s ability to cope with the changes adopting the euro would bring. And the remaining three tests assess the impact of this on jobs, foreign investment and the financial services sector.

Prime Minister Tony Blair and Chancellor Gordon Brown support adopting the euro and wish to have a referendum on the issue before the next general election in mid-2006. But the Tories, the opposing conservative party, are against joining the euro in the immediate future. Britain’s attachment to its relatively stable pound sterling, which has an unbroken history of more than 900 years and has dominated global trade for decades, is proving difficult to break.

Benefits of Eurozone Membership

The Eurozone, which represents a population of 305 million people, has benefited from the single European currency in a number of ways. According to an EU study, the single currency eliminated transaction costs related to the existence of various EU currencies estimated at 0.5 percent of GDP. Other studies estimated this cost closer to 1 percent.

An International Monetary Fund study projects the euro will increase GDP growth in participating member economies each year, and by almost 3 percent in 2010. Plus, greater macroeconomic stability and reduced governmental deficits are anticipated in an economically stronger Euroland. These and other benefits generated by the euro are attractive to newcomers.

Will New EU Members Adopt the Euro?

Will the 10 new EU members join Euroland? If so, when? Unlike existing EU members, the accession countries are not being given an option on the euro. They will have to adopt the euro as soon as they fulfill the required criteria. But that still may take time—at least several years in the earliest cases.

Nevertheless, all new EU members will eventually phase out their national currencies in favor of the euro. What impact might this have on the dollar?

Will You Need a Euro Account?

According to the Conference Board, a research organization, 60 percent of world trade is currently denominated in dollars. In the event that the greenback falls from first place, a position it has held since usurping the British pound after World War I, more global business will be conducted in euros. Regardless of which currency is on top, more European companies will request that you transact business in euros. Complying with this request can give you a competitive advantage over companies that don’t.

Consequently, you might consider printing your price lists in euros, and adjusting your ledgers, receivables, and other financial systems to deal with the single currency. Expansion of the euro will, no doubt, simplify doing business in Europe. Plus, dealing with one stable euro instead of several less stable currencies will reduce volatility risk. It also will save on exchange fees. However, keep in mind that dealing with any currency involves a level of risk.

For More Information

To convert euros into dollars, click on CNN’s currency converter (http://money.cnn.com/markets/currencies/), the Universal Currency Converter (www.xe.net/ucc), or Oanda (www.oanda.com). For answers to business and legal questions, visit the European Central Bank (www.ecb.int), and the EU’s website on expansion (www.europa.eu.int/pol/enlarg/index_en.htm).

Feeding the Leader’s Healthy Mind

Published on Sunday, February 01, 2004

We’re inundated with nutritional information for healthy eating in order to maintain well-flowing arteries, high-functioning organs and a generally healthy body. Most is common sense, things our parents taught us. Eat fruits and vegetables. OK, we didn’t know it was the lycopene in the tomatoes that made them so healthy, but we did know tomatoes were good for us. We are also highly informed on maintaining healthy hearts, bones and muscles with exercise, supplements and alternative therapies like acupuncture and massage.

While donating blood at the American Red Cross recently, it was viscerally clear to me that I am what I eat. The contents of that blood was a reflection of all the choices I had made about what to put into my body—the healthy food and the junk food, and the low-fat veggies and the fatty cheeses. It was also clear to me that the contents of that blood determines, in part, my health and vitality. So I choose every day how healthy and functional I want to be.

It also struck me that the same is true for my mind. I am what I think. The contents of my mind is a reflection of all the choices I make about what I put into it. And the contents of my mind determines my overall health and vitality. In this way too, I choose every day how healthy and functional I want to be. And so do you.

If an assessment was done on your mind today, what would the results be? Is your mind a vibrant picture of health—supple and pulsing with life and energy? Or is it atrophying in places from too much focus on one area of your life. Is it thriving or suffering? Possibly suffering from an over-focus on work, or thriving from a balance of work and leisure, from judgment and frustration with small daily events, or thriving with a focus on gratitude for all the blessings present to each one of us every day, or from an abundance of mental and verbal chatter, or thriving with time and space for solitude and silence?

Mind Nutrition Guideposts

As leaders, how do we maintain healthy minds (not brains, but minds, the seat of our consciousness)? Again, this is not new information—we already know it. The opportunity is in how we actually use and practice it, and build healthy mental habits.

Here are some tips:

• Exercise your mind. Keep your mind facile and growing. Be curious. Let your interests guide your discovery and learning. Do not let your innate need to "know" or to "be right" get in the way of your learning. Challenge yourself to think beyond your current thinking. Tone your mind; no flabby thinking allowed.
• Feed your mind positive thoughts. Are you listening to talk radio, for example? if so, stop. It is junk food for the mind.
• Be intentional about what you feed your mind. Practice gratitude, being aware of and thankful for the many things you do have. When focused on what you don’t have, that is all you’ll see.
• Focus on what you do have and you’ll ride a wave of peaceful gratitude into your day. It is very easy for the human mind to run amok, mired in the negative aspects of life. Don’t let it happen to you.
• Keep it peaceful. Be a "non-anxious presence." In the face of others’ distress, do not absorb it. It has been said when your dog jumps down the well the least helpful thing you can do is jump down after him. You will be most healthy and most effective in any situation when you remain distinct from it, yet connected in a helpful way to it. So when the drama alarms go off in your office (you know the ones), don your oxygen mask first, breathe deeply of the clean pure air, and then step in to assist others. And find ways to remain peaceful in an anxious world.
• Take daily booster vitamins. Spend a few minutes every morning super-charging your mind with clarity, intent for the day and a clear plan for how you will move through the day. Clarity boosts everything. Nourish your mind and your body. You will find your ability to reach your potential as a leader, and as a human being, richly enhanced.

The Undiscussables: What You Don’t Know Will Hurt You

Published on Sunday, February 01, 2004

Are you getting all the information and feedback you need to lead your organization effectively? Unless you work in an extraordinary organization, the answer is an emphatic "No."

In most organizations, there are the "undiscussables: the items that everyone knows exist, yet do not feel free to talk about in a way that they could actually provide a resolution. For example, the boss is erratic in his emotions, so people tiptoe around him and check in with his close associates to determine whether "today is a good day to approach him." Or, two of the department heads are engaged in a long-running feud, so we know not to bring an issue up with one in the other’s presence.

While teaching a graduate business school course in Ethics in Business, I discovered that these twenty-something students, working during the day and attending classes at night, could not see the possibility of raising difficult issues for discussion and resolution. In case study review after case study review, their proposed solutions to sticky ethical issues omitted forthright, straight-shooting conversations with the people involved. “Why are direct conversations not an option?” I finally asked them. Their reply floored me (then – now, after researching it further, I find it quite common). It was not considered team play to raise sticky issues. They did not want to be perceived as anything other than team players, which to them meant holding their tongues on any issue that might cause distress or embarrassment to themselves or others. They did not want to be perceived as heretics for speaking against the party line. Even if ethical lines were crossed, people were being treated unfairly, or they, themselves, suffered.

Do leaders know that the "team" definition has been bastardized in this way? They may not. There is a condition that Daniel Goleman, author of Emotional Intelligence, calls "CEO Disease," the information vacuum around a leader when people withhold important (and usually unpleasant) information. It may be for fear of the leader’s anger, or it may be fed by the instinct to please the person we report to.

So consider that you may be receiving only the positive feedback, and that the negative is withheld when information flows upward. When the feedback is about the leader’s own behavior and performance, the problem worsens.

What do you do to counteract this tendency? Robert Eckert, CEO of Mattel, instructs us, “As you go to work, your top responsibility should be to build trust.” As the leader, you set the tone of the organization, and you determine the culture through your actions and your values. It is up to you to make it safe for people to share their opinions and feedback to improve the organization, no matter what it is (when delivered respectfully).

What does a high-trust organization look like? It has these characteristics:

• People talk straight and confront the real issues – there are no undiscussables
• Accountability is high – trust grows when people are reliable and deliver what they commit to
• People share credit abundantly
• Innovation and creativity prevail
• Mistakes are considered to be a means of learning
• There is real communication and real collaboration
• Energy levels are high and positive
• Information is shared openly and frequently

Consider that, as a leader, it is one of your key roles to create this environment of trust and openness. Business results depend on it.

Jim, a driven, dedicated leader, has encountered poor performance throughout the organization he leads. His first attempts to address this focused solely on the work. Instinct drove him to try harder, control more and increase the volume of his voice and actions. He commanded, threatened and cajoled people to shape up. That had little to no impact. Jim, at the end of his rope, decided to try an entirely new approach, one that focused on the changes he himself needed to make in order to increase team performance. He shifted to an approach of collaboration and inquiry, while maintaining an unwavering focus on goals. He learned that culture has significant influence on people’ ability and desire to perform. He learned to make it safe for people to discuss the "undiscussables." He found that people became more engaged and felt more valued, and that their performance automatically increased, their attitudes improved and they contributed ideas and creativity at higher levels. Performance reached an all-time high and goals were met and exceeded.

Begin to discuss the "undiscussables." Your business results depend on it.