M&A Integration Strategies

Mergers and Acquisition ‐ Integration Strategies

Deepak Sharma GDEC08IB006
Ajay Panandikar GDEC08BM040

Merger and Acquisition ‐ Integration Strategies

Acknowledgement

We would like to thank Dr. A Seetharaman, Professor for Strategy, GMBA, for encouraging us to
undertake this study. We are also grateful to our counselor Ms. Vinika Rao for her valuable
suggestions towards the completion of the report. We also express our gratitude to Mr Bithin
Talukdar, Programs Director – Hewlett‐Packard Asia Pacific Private Limited (Singapore) and Mr
Mukesh Shah, Manager – Pfizer Limited for their valuable inputs.

The project would have been incomplete without our mentor, Dr. A Seetharaman’s consistent
guidance and support. The project is truly what it is today because of his challenge that brought
out the best in us. Regular interactions and feedbacks from him helped us complete this project.

We are also grateful towards our peers at SPJCM for all the discussions we had with them while
working on this project.

Indeed, it has been an exciting and enriching journey at all fronts.

Regards,

Deepak Sharma Ajay Panandikar
GMBA08IB006   GMBA08BM040
Investment Banking   Banking Management
SPJCM, Singapore   SPJCM, Singapore

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DECLARATION

We hereby declare that the matter included in this ARP report entitled “Mergers and Acquisition
Integration Strategies” is the result of study and interviews carried out by us. We further declare
that this is our original work and has not been published anywhere before. This Project work has
been carried out for the sole purpose of submission in partial fulfillment of Global Masters in
Business Management (GMBA) at SP Jain Center of Management, Singapore.

The above is true to the best of our knowledge and information.

Deepak Sharma Ajay Panandikar
GMBA08IB006   GMBA08BM040
Investment Banking   Banking Management
SPJCM, Singapore   SPJCM, Singapore

Project Mentor
DR. A Seetharaman
S.P. Jain Center of Management, Singapore

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Table of Contents
Executive Summary .......................................................................................................................... 5

Introduction ...................................................................................................................................... 6

Research Methodology ..................................................................................................................... 9

Statement of Problem ................................................................................................................... 9

Objective ....................................................................................................................................... 9

Literature Review ...................................................................................................................... 11

Limitations ................................................................................................................................. 23

Analysis and interpretation ............................................................................................................ 24

Mergers Gone Awry ................................................................................................................... 24

Successful merger ...................................................................................................................... 28

Findings and Analysis ................................................................................................................ 34

Best practices for merger integration ...................................................................................... 41

Conclusion and learnings ............................................................................................................... 44

References ...................................................................................................................................... 45

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Executive Summary

Mergers and Acquisitions (M&A) is a change process that deal with the buying, selling or
combining of two organizations. This alliance can be due to various strategic factors like
increasing market share, reducing competition, diversification etc. The marriage between the
organizations has an impact on the strategic, financial and managerial aspects of business.
Despite the benefits that are associated with the deals, history has seen a lot of mergers go
awry. Unsuccessful mergers can be result of a number of reasons. Our research deals with
Mergers and Acquisitions and the strategies which can ensure successful integration.

We based our research on the literature available on the secondary research. We followed case
studies of mergers which went askew (Chrysler – Daimler) and those which were successful (HP
– Compaq) to learn about the various reasons why mergers turn out to be successful or
unsuccessful. We also conducted primary research where we surveyed respondents who were
employees of companies which had undergone mergers / acquisitions. This gave us valuable
insights into what the employees perceive as effective and successful mergers and also what
current age companies follow during and post mergers and during integration.

Based on the primary and secondary research we were able to define some of the best practices
which can be adapted for a deal to be a success. One of the major reasons for failure of mergers
was found to be cultural issues. Hence we deemed cultural integration to be the most essential
phase of any post‐merger integration strategy.

The research helped us to understand the dynamics of mergers and the various synergies
involved. Our research emphasizes the significance of post‐merger integration and the
implication that it has on the success of a merger.

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Introduction

Merger means a combination of two or more organizations especially corporations. Acquisition
is buying control or assets of one corporation by another through mutual or hostile manner.
Merger can be categorized into a number of categories:
• Horizontal merger – When two business competitors merge then its known as horizontal
merger. The merger of Pfizer and Wyeth is an apt example
• Vertical merger – When an organization mergers with its suppliers or its customers, it is
known as vertical merger. Here it necessarily means entry into a different business being
carried out by suppliers or customers which is known as forward or backward integration
respectively
• Reverse merger – When a profitable company mergers acquires a listed company with
limited assets and then merges it in itself that is known as reverse merger. Here the
company aims to raise finance from the market
• Conglomerate merger – When two organizations with varied business interests merge
together it’s known as conglomerate merger. The proposed merger between General
Electric and Honeywell was an example of conglomerate merger

The deal process starts with the preparation of information memorandum, finding of suitable
acquirers. This is followed by the signing of the letter of intent and carrying out of due diligence
review on the target company. The findings of the due diligence review are considered in the
valuation of the target company.

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Merger Plan

Source: www.ceoadvisory.com

Once the deal has been closed, the post integration process between the two organizations
begins.

Some of the most important aims of M&As are the optimum utilization of the available
resources, optimum value derivation out of resources such as human resources, elimination of
competition, achievement of synergies, achievement of economies of scale, installation of an
research platform which is integrated, achievement of savings in administrative costs, reduction
of tax burden and ultimately improvement of the profits. Thus companies are looking at
synergies (cost and revenue) in their merger.

As per Dealogic, a firm that tracks M&A deals, although the M&A deal volume has fallen from
US dollar 829.3 billion during the year 2008 (year to date – Mar 08), it stood at commendable US
dollar 482 billion year 2009 (year to date – Mar 09). M&A Deal volume also saw a drop from
10182 deals in 2008 (year to date – Mar 09) to about 6693 deals in 2009 (year to date – Mar 09).

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Thus there is a significant amount of M&A activity taking place around the globe. However, not
all the mergers are successful. KPMG in its Mergers and Acquisitions: Global Research Report
1999 suggests that about 83% of the merger deals fail to deliver on the realization of deal value.

Merger deal value realization

Source: Mergers and Acquisitions: Global Research Report 1999, KPMG

We have carried out a research on the integration issues which the organization faces during the
process of merger and acquisition. We have evaluated the integration issues from a broad
perspective without delving into the details of each of the issues which could be a matter of
further research in itself. Integration of the companies post merger and acquisition has been a
major factor in the success of the organization.

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Research Methodology

For the purpose of our research on M&A integration strategies we formed a research
methodology

Statement of Problem

Mergers and acquisitions have always been considered as a significant change issue. There is lot
of concern on the various fronts when an organization undergoes integration. Organizations
encounter a number of issues during integration post merger and acquisition. Several
organizations form and apply various strategies towards addressing these integration issues.
These strategies can take the form of broad strategies or precise strategies aimed at tackling
common or specific integration issues respectively. The result of these integration strategies
forms the basis of successful or unsuccessful integration of two organizations.

Objective

The purpose of our research was to identify issues that organizations face during the integration
stages, post merger and acquisition. We wanted to evaluate the line of attack organizations
employ to crack the integration issues nut which can take the form of generic technique or
specific approach.

We researched on the application or misapplication of these strategies which determine the
success or failure of the integration process and in turn spell the success or break down of the
organizations.

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Methodology

Research Plan: We aimed to research on the integration issues and strategies using various
techniques of research methodology. Our research was mainly based on literature review and
survey questionnaire.

We performed high level literature review (through secondary sources) related to issues
involving integration in a merger and acquisition. We focused primarily on the qualitative
aspects of the issues and lower emphasis had been placed on the quantitative aspects of the
merger and acquisition deals.  The literature review formed a basis of our further analysis.

We supported our literature review, with a survey questionnaire. A pilot test of the sample
questionnaire was conducted on sample respondents. The responses and suggestions were
subsequently included to improve upon the structure of questionnaire. We administered the
questionnaire on a sample of 16 respondents. We aimed to gain useful first hand information
about the issues and strategies engaged during merger and acquisitions. The questionnaire
contained an equal mix of open and closed ended questions.

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Literature Review

In the article Post Merger Integration – The Key Ingredient of M&A Success in www.ustyleit.com
(May 2002) speaks about five critical success factors that executives must attain to lead their
companies to M&A success. They are:
• Quickly establish the company's vision and values – Any large corporate combination
effectively creates a new organization. With any new company must come a new vision ‐
a picture of the desirable future that can or will be for the company's employees and
stakeholders. The employee's positivism spreads through the combined company,
helping to spawn the broad employee motivation critical to attaining integration
objectives.
• Lead the leaders – Cultivating and deploying multiple leaders is another urgent task of
the CEO and his or her senior managers. These leaders must be motivators (they will
serve as influential spokespeople in helping to champion the merged firm's new strategic
direction). It's the CEO's job to identify, train, empower and dispatch loyal, high‐potential
managers to help achieve integration objectives as swiftly as possible.
• Foster and ensure information‐sharing – The post‐merger integration process is
inherently based on data transfer and knowledge‐sharing. Breaking down barriers ‐ and
building bonds between the new co‐workers ‐ is one of the leadership’s most crucial
leadership challenges.
• Be the consummate communicator – Leaders must get out and actively serve as the
chief proponent of the integration initiative. Although written communications are
deemed to be essential, nothing can replace the power that is wielded by face‐to‐face
interaction.
• Actively forge the culture – When new organizations are formed, so too must their
cultures. Initially, integration requires that dissimilar cultures be aligned. It is only over
time that a new culture can be proactively developed.

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Each of the foregoing point underscores this critical success factor: everything the
leaders do in supporting the integration process must be undertaken with an eye toward
developing a new high‐performance culture.

M Beth Page in A Successful Organizational Marriage: Cultural Integration Is the Secret To A
Successful M&A (July 2008) emphasizes on specific, focused efforts to integrate different
cultures and workforce should remain the exception rather than the norm in M&A activity.
Firms which managed the organizational culture realized a nearly seven‐fold increase in
revenue, in comparison to 166% increase for firms not managing their culture.. Cultural signs of
the so‐called “merger syndrome” include a “we versus they relationship, with a natural
tendency for people to exaggerate the differences rather than the similarities between the two
companies.” (Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and
Alliances, Marks & Mirvis, 1998). The key to a successful Done Deal, is selecting a culturally
appropriate model of integration.

Also, identifying the “must haves” of cultural compatibility is like assessing marital compatibility;
some compatibility issues are negotiable, while others could be considered “knockouts.” An
organization’s culture consists of the underlying values, beliefs, and principles that define an
organization’s management system, as well as the firm’s management practices and behaviors
that reinforce those principles.

Some of the measures that need to be followed for an efficient integration are:
• Integrate cultural criteria early in the merger discussions
• Prepare due diligence teams with cultural criteria
• Have the due diligence teams collect data on culture
• Use tools to assess potential culture fit and issues

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How companies choose to deploy this model depends on their own structure and culture.
Acquirers are encouraged to operate under the assumption that cultural differences exist, and
they must actively work to manage these differences throughout the integration process.

Companies are also encouraged to create joint projects. One large telecom company that
actively engaged in M&A activity tasked one of its human resource professionals with
strengthening the company’s acquisition process by educating executives and due diligence
teams on culture.

The enormous challenges of M&A are broadly known. What are not as well documented are the
specific M&A leadership skills corporate leaders must demonstrate. Clearly, every corporate
combination is different. Thus, each one poses unique leadership challenges. The
aforementioned leadership roles are the ones most central to achieving M&A success.

PricewaterhouseCoopers in Global best practices for Oracle Corporation talks of Oracle
Corporation and its M&A strategies. Oracle is a global technology giant that specializes in
developing and marketing enterprise software products and database management systems.

It has grown and profited from a consistent mergers and acquisition (M&A) strategy that
enables it to compete effectively in a fiercely contested industry where innovation is the most
highly valued attribute. Oracle has historically been one of the most prolific acquirers in the
world. In fact, the company made 41 acquisitions within a 45‐month time period. At the heart of
this highly successful track record is a consistent, straightforward strategy ‐ buy innovation from
others. The company focuses on purchasing proven research and development that
supplements what it has already invested in, as well as acquiring intellectual capital ‐ industry
experts with decades of experience.

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Oracle's goal is to combine with companies that fit its corporate objectives, enabling it to
strengthen its product offerings, accelerate its innovation capabilities, and meet customer
demands more quickly. For instance, Oracle's purchases of PeopleSoft, Inc., Siebel Systems, Inc.
and BEA Systems, Inc. represent the company's objective of obtaining a customer base that can
increase its market share and revenue. Oracles's acquisitions of Business Objects S.A. and

Hyperion Software Corporation exemplify Oracle's ongoing strategy to buy into a new product
line that fills a market gap. And its purchase of SAP's Frictionless Commerce reflects Oracle's
goal of improving a core capability. In addition, Oracle never ventures too far away from its core
business when evaluating target companies.

Oracle considers it paramount that each acquisition integrates quickly and immediately adopts
Oracle's back office policies. To stay abreast of each acquired company's integration status,
Oracle created a software tool that tracks performance metrics surrounding the integration
effort. Performance tracking continues on a quarterly basis for two years after the close of the
deal.

A natural concern among customers of Oracle's acquired companies is how it will impact the
quality of service they have come to expect. Oracle responds to those concerns by stressing the
fact that its customer integration efforts improve with every deal.

It can manage integrations by listening and responding to customer concerns and reassuring
customers that current technology won't be discontinued without ample notice. Over the years,
the company has been successful in retaining its acquired companies' customers, thanks to
frequent communications about the potential and current synergies that the deal will bring.
Oracle also tells customers how those synergies will benefit them and provides a record of fast,
seamless integration.

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PricewaterhouseCoopers in Global best practice for Lenovo Group Limited emphasizes the
successful accelerated integration strategies. Lenovo Group Limited is the largest personal
computer manufacturer in China and also one of the largest in the world thanks in part to the
acquisition of IBM's personal computer division. The Beijing, China‐based Company makes
desktops, laptops, servers, handheld computers, imaging equipment, and mobile phone
handsets.

One of the challenges facing Lenovo after purchasing IBM's personal computer division was the
integration of the two companies' procurement functions. One of the integration's objectives
was for Lenovo to save more than $150 million in direct‐spending costs within 18 months after
the deal closed. Lenovo focused its integration efforts on production costs and identify savings
opportunities that the procurement integration team could work on immediately. They
identified suppliers that Lenovo shared with IBM, helping Lenovo to pare down the number of
suppliers they would use, offer higher volumes to those suppliers, and as a result, receive lower
prices in return for that higher level of volume.

The team also analyzed the cost structure and design for each part, looking for ways to reduce
manufacturing costs without compromising the quality of the part. That effort also brought the
design team and the procurement team closer together.

Lenovo was able to find a balance in the two divergent cultures to help maximize synergies
within 18 months after the deal closed. Part of Lenovo's success in achieving its procurement
cost savings goals was its ability to address cultural issues between the two organizations from
the outset. For example, realizing that Lenovo's procurement team had little or no experience
with IBM's processes or culture, the company created an open minded work environment that
encouraged candid discussions, the exchange of ideas, and addressed cultural differences so
each side knew what the other was thinking and doing.

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Lenovo was able to borrow some of the process discipline that was a hallmark of IBM's
operation in order to handle the greater production volumes that the two companies' meshing
had generated. At the same time, Lenovo was able to maintain a relatively quick turnaround on
processes such as the qualification cycle, which is a system of verifying the veracity of a
particular product or function such as a hard disk drive, before allowing that product to go to
market.

PricewaterhouseCoopers in Global best practice for General Electric accentuates talks of General
Electric and its M&A strategies. GE effectively used the Six Sigma methodology to its merger and
acquisition strategies as a way to sharpen due diligence efforts and accelerate integration.

Before the actual merger, GE conducted thorough due diligence to gain a competitive
advantage. It used the principles of Six Sigma ‐‐ define, measure, analyze, design and verify ‐‐ to
evaluate target companies. The company applies this methodology to instill discipline and
consistency into its merger and acquisition (M&A) due diligence process, gain a better
understanding of how a target company will fit into its overall strategic objectives, and ascertain
with greater certainty how the new company will deliver value to its customers.

GE Capital pays particular attention to cultural due diligence. It surveys its own employees as
well as the target company's employees in order to compare how well the two cultures will
mesh. And it has established a process for learning from its acquisition experiences, which it's
due diligence team uses to facilitate its evaluations. GE Capital also sponsors conferences that
promote idea sharing and the implementation of best practices.

Another insightful approach used by GE is to accelerate synergies by basing integration on
economic value drivers. It applies the principles of Six Sigma to its integration process just as it
does to its other core business processes.

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The company develops its integration plans and decisions based on lessons learned from past
acquisitions and applies those best practices to each acquisition it makes. At the heart of GE
Capital's M&A success is a focus on process rather than hierarchy. While most companies tend
to concentrate on functional hierarchies and merging technology systems, GE Capital has
learned that focusing on processes is what really drives economic value during the integration
phase.

Instead of becoming bogged down with deciding who will be responsible for what, GE Capital
focuses on how the new company will deliver value to customers, and ultimately to
shareholders. It also realizes that taking a process view of performance rather than a
departmental or functional view achieves synergies faster and easier. In addition, experience
has taught GE Capital's senior managers that integration goes more smoothly if it is planned
early in the deal‐making process. And those plans include clear, realistic objectives that can be
achieved soon after the deal has closed.

Karen S. Hinchliffe, Partner PricewaterhouseCoopers LLP, Boston, in an article Early Warning
Signals of a Merger (Cultural Integration) Going Awry ‐ A new role for HR managers in
supporting the due diligence deals with the cultural issues leading to mergers to go awry. There
is increasing recognition that cultural integration is an important component of merger success.

Most onlookers point to the senior team as the likely culprits of merger mismanagement. Even
the deal‐making banks are criticized for their role in value destruction. In the bid to acquire a
coveted target, it is easy to overestimate potential and to underestimate costs.

Organizations often have a view of what are “right” and “wrong” or “good” and “bad” and these
values are reflected in any number of written and unwritten rules of behavior:
• Integrity and ethical standards
• Quality customer service

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• Learning and development expectations and support systems
• Change, flexibility and stability
• Roles, responsibilities, reporting and decision‐making rules
• Teamwork and reward
• Personal performance and reward
• Communication

It is unclear whether management teams pay attention to these kinds of issues when they first
select an acquisition target. And despite the costs of this oversight, the risks do not seem to
compel organizations to audit any or all of the following:
• Leader behavior
• Cultural fit
• Employee attitudes and opinion
• Retention and appointment issues
• Manpower target and training issues
• HR department performance

Sometimes behaviors are encouraged, anticipated and promoted under the banner of a stated
corporate value or program, such as: “Customer First, Employer of Choice, or Total Quality
Management”.

These programs often work best when they are tailored to a target group of employees or
businesses. As a result, many of them do not translate well across even the closest internal
borders. When attempted, the implementation of these programs to cultures further afield may
be ineffective or even counterproductive.

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Different policies of the two organizations can create issues in many areas of operations like:
1. Gross underestimation of costs
2. Values are not equitable
3. Proposed compromises appease no one
4. Perceived generosities are actually cost savers
5. Acquired knowledge banks are bleeding
6. Management systems are recklessly rudderless

Cultural integration requires some mutual adaptation and therefore changes in behavior and
decision‐making habits. To examine leader behavior for a cross‐border deal, you may need a
special kind of expertise: cultural sensitivity. Due diligence carried out with an eye to HR and
culture can also result in the early identification of opportunity.

Several questions can reveal opportunity in the form of savings, synergy and the potential for
shareholder value, such as:
1. How diverse are the workforces? How are ideas leveraged and transferred?
2. What is the employee mix? How are teams organized and expected to work together?
3. What is done with the results of organizational assessments or employee surveys?
4. How do employees and leadership develop? What kind of feedback do they get?

An audit of these issues would look to a comparison of companies with respect to the use and
importance of the hierarchy and the location of power, focus of attention on the individual or
the group, means of achievement and relationships, attitude toward risk and uncertainty,
consideration of time (past, present, future).

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Culture coaches are employed to help facilitate critical meetings. A reengineered M&A would
need to include cultural expertise and coaching in each of the following: canvassing possible
selection targets, identifying a primary and secondary target, defining the integration idea,
assessing merger alignments and synergies, designing communication and implementation and
managing the various players and projects. This would be the way HR could reduce the M&A
failure rate statistics.

HR must take the following actions to prevent the cultural issues in integration:
1. Prepare the HR team to handle the unexpected crises that may arise: strikes, contract
disputes and outstanding liabilities. Plan a communications strategy for the first days of
the deal.
2. Articulate the areas of HR most vital to the M&A process. Focus on things that drive
value.
3. Break down possible involvement into typical phases of M&A activity: pre‐deal closure,
transition management and post‐transaction implementation.
4. Assess risks inherent in critical human resource areas, including infrastructure. Show
balance sheet implications.
5. Estimate potential value to be generated from proactive management of specific HR
issues.
6. Get the ear of a management team member. Arm yourselves with data concerning risk
and opportunities.
7. Ensure that the external advisors chosen for the due diligence evaluate HR and cultural
issues as integral parts of their process.
8. Formulate implications of the merger for a future HR strategy.
9. Get on the due diligence planning and/or review team.

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KPMG in Mergers and Acquisitions: Global Research Report 1999 segregates the merger success
factors in to two sections namely “Hard” and “Soft” keys. The hard keys focus on the pre deal
activities which will result in tangible effect on the organization:
• synergy evaluation
• integration project planning;
• due diligence

Many organizations saw unsuccessful mergers due to wrong prioritization of components
(mandatory actions like legal financing) during the pre‐deal phase. Successful companies were
able to accomplish success in long term deal by prioritizing the three hard keys during the pre
deal phase. Expeditious and sizeable value could be extracted on deal completion by
organization focusing on these hard keys.

The soft keys deal with people and cultural concerns in a deal:
• management team selection
• cultural issues resolution
• communications

Planning for nitty‐gritty’s to extract value in an M&A is hollow if the organization employees do
not have the will and ability to implement the plan. It is very evident that there is a strong inter‐
linkage between these soft parts and overall success of a deal. Human resource issues are
important, but they are also the most difficult issues to resolve. In the quest to drive the merger
objective, one cannot force the staff to cooperate or change staff’s business behavior in a whip.
Incentives and motivation is the answer to these issues and it requires critical planning. Many
companies do not give priority to this area as they don’t have either the know‐how or the
resources to address it.

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Merger Factors: Hard and Soft Keys

Source: Mergers and Acquisitions: Global Research Report 1999, KPMG

Careful assessment of benefits, risks and operational impact gives the management an upper
hand during negotiation and result in strengthened shareholder value strengthen their hand
during negotiations and place them in a good position to deliver shareholder value after
completion of deal. Further, addressing the human side of the deal in selecting the right team
and exchanging the right ideas in different cultures is important for deals success. Thus a holistic
approach to the deal will go a long way in achieving the stated objective of the deal.

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Limitations of the Research

1. Our research was limited to broad issues faced by organizations during integration
2. Mergers and Acquisitions being highly confidential deals, our primary research was
restricted to general inquiry questions
3. We wanted to dwell more into the financial aspects of mergers and acquisitions. But this
being highly sensitive, access to this data was not available
4. Our primary data was restricted to mostly IT and consulting companies. Due to strict
timelines, we could not venture into the other sectors.

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Analysis and interpretation

As a part of analysis, we have analyzed a successful merger and an unsuccessful merger and
evaluated the reasons contributing to the success or failure

Mergers Gone Awry

83% of the mergers fail (Mergers and Acquisitions: Global Research Report 1999, KPMG). There
are numerous examples of unsuccessful mergers Quaker Oats – Snapple, Walt Disney – Capital
City, AOL – Time Warner, North west Airlines – Delta being some of them. This can happen due
to various reasons various – misplaced strategies for either of the party, flawed integration
strategy, ineffective corporate governance, inexperience of the management team handling
M&A, miscalculation of synergies and cultural issues. Some of the results of the failed deals are:
stock price of the acquiring firms normally fall after the deal is announced, and also there is an
adverse effect on the profitability of the acquired firm. Also there is a lot of conflict which is
encountered among the participants which result in a high turnover. The participants express
their disappointment over the expectation on the merger and how the deals do not work
successfully most of the times.

An exemplary case of a merger gone awry is the Daimler‐Chrysler merger. Daimler‐Benz, a
German auto manufacturer and Chrysler Group from America merged in 1998 and the value of
the deal was US dollar 36 billion. Prior to the merger, both the automotive giants were doing
very well, with Chrysler being the most profitable automaker in America and this was expected
to be a successful merger of equals. The strength of the companies was expected to benefit
each of them. However, after the merger, the performance was drastically different from this
expectation, especially at the Chrysler division. A few months after the merger, the stock price
fell by almost half since the post merger high. Apart from the losses incurred, Chrysler also
indulged into severe layoffs.

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The major reason for the failure of the merger was the difference of the cultures between the
two organizations. As a result of the difference in the operation styles between the Americans
and the Germans the operations and management couldn’t be successfully integrated as equals.

Daimler‐Benz had a more structured and formal approach to management, while the Chrysler
had a typical American approach – relaxed and unrestrictive. Some of the vital policies for
organizations like pay scales and travel expenses were viewed differently by both the
organizations. Due to the German’s increasing dominance, the American employees were
extremely dissatisfied and they viewed this as an attempt by Daimler to take on and impose the
culture on the whole firm. Cultural conflicts are often neglected during the analysis of the
benefits of the merger in the initial phases – despite the large role that it plays in the success or
failure of the deal.

Initially, Chrysler was supposed to use the components and the parts that were manufactured
by Daimler to reduce the costs of the vehicles to be manufactured in the future. But as was
discovered later, problems were discovered in the Daimlers units and as a result were
disinclined to contribute to Chrysler. Eventually, Chrysler get some steering and suspension
components out of the deal.

One of the major reasons cited for the failure was that there was no due diligence performed in
the deal. Daimler never looked into the future to predict decisively weather it could afford to be
competitive with the others. Daimler‐Chrysler had to content with lot of difference which varied
from legal, social, cultural and in the larger picture, the basic difference between the United
States and Germany. As there were no visible solutions to these differences there were a lot of
issues in corporate governance.

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Some of the main lessons learnt from the mergers which were unsuccessful are with regards to
the revenues. It is believed that revenues deserve more attention in premerger analysis and
most mergers fail because it does not consider this.

Most of the times, many of the parties rely on assumptions on the pricing and market share
which are not consistent with the market rates. Acquirers need to attune the market shares and
market assumptions in order to come up with realistic figures. Also many times the synergies
are over‐estimated by at least 25% which can result into 5‐10% valuation error. If the available
benchmarks are not used as sanity checks, then a company can miscalculate the synergies.

Many a times, the deal teams are very optimistic, and in the process unrealistic, about the
timeframes of the whole deal. Capturing synergies and calculating their sustainability can be
time consuming at it is absolutely essential to get the timeframes in place. Savings should be
phased out as they are not perpetual. Bad timing can prevent synergies from taking effect. Key
line managers should be involved in the process of problem solving and due diligence. This helps
by leveraging the knowledge of the managers and their practical work experience. Companies
that have access to reliable data can prepare reliable benchmarks to estimate synergies and find
insights into the sources and patterns of estimating the errors in revenue growth.

Matthias M. Bekier, Anna J. Bogardus, and Tim Oldham in their article “Why mergers fail” which
was published in “The McKinsey Quarterly” in 2004 highlighted that revenues must be given
more attention during the whole process, further adding that a lot of companies lose the
revenue momentum as they are more focused on cost synergies, and fail to forecast the post
merger growth.

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Revenue Growth in Merger

Source: The Mckinsey Quarterly, 2004

It said that on 36% of the companies could manage to maintain its revenue growth for the first
quarter after the announcement of the merger. Also these trends do not signify the beginnings
of a J‐curve (J‐curve is a term which is used to define a curve which initially falls, and then in due
course of time, rises steadily and subsequently rises above the starting point). In a McKinsey
research that included 160 acquisitions that involved 157 companies across 11 industry sectors,
only 12 % of these companies actually were able to increase their growth over the three years’
post the acquisition. Most of the companies remained sloths and some of the strong performers
slowed down dramatically. On the whole, the growth rates of the acquirers were on an average
4% below that of the industry peers.

Page 27


Successful merger

Some of the successful merges are as follows: Gillette and Procter & Gamble, Boeing –
Mcdonnel, General Electric (with numerous companies), Glaxo – Smithkline Beecham, Royal
Dutch Petroleum – Shell, Oracle (with numerous companies), Bell labs – AT&T Exxon – Mobil
etc. Successful mergers have unique attributes which have been subject of numerous studies.

Merger between HP – Compaq during the year 2001 has been one of the classic cases about a
successful merger. The USD 25 billion merger between equals created one of the largest
computer hardware organizations in the world. The combined entity was expected to offer
businesses and consumers most complete set of products and services, with commitment to
open systems and architectures. It was touted to bolster it to number 1 position in servers, PCs
and hand‐helds, and imaging and printing and to leading positions in services, storage, and
management software. The HP – Compaq merger was expected to create opportunity to bolster
the enterprise position by creating end‐to‐end leadership in this segment and creating strategic
differentiation as compared to the competitors

The merger was expected to result in cost synergies of approximate USD 2.5 billion annually and
the transaction was expected to be substantially accretive to earnings (13%) in the first year.
Initially there were apprehensions about the merger of HP – Compaq that one mega – company
may not be able to absorb another equally large company.

The integration planning focused sharply on value creation with following attributes:
• Maximize value creation for all constituencies
• Integration team of more than 450 person supported by number of advisors
• Detailed planning

Page 28


HP follows a concept of “clean room” where high level discussions about integration strategies
are conducted. The discussions held at the “clean room between the high level employees forms
the basis of the guiding principles for the sub teams called work stream to implement the
integration strategies.

Some of the critical success factors that were considered during the acquisition integration
were:

• Well‐defined strategy for acquisition: Reasons for the merger were clearly explained
before the acquisition with clear definition of the degree of integration. Criticisms of the
proposed acquisition were addressed well in advance before the actual integration
• Product road map is clearly defined: Offerings to the marketplace were transparently
communicated as that would exist post the acquisition. Internal efforts were re‐aligned
as per the new branding strategy
• Customers at the focus: Point‐of‐contacts were clearly defined so that attention can be
provide uninterrupted. Relationships with the partners were maintained during the
integration phase
• Readiness on day one: All the function, geographies and businesses involved had plans
ready for the day one of the integration. The transition was effective as the plans were
put to action during the integration
• Synergies and manner to achieve identified: Clear targets were assigned at the project
levels for the realization of the synergies which included cost and revenue synergies.
Tracking of the results was continuously carried out using the robust program
management methods
• Governance of the new company defined: The roles of the board and other executives
were arrived at through consensus. The organization structure was defined with the
roles of line management clearly defined during the integration phase

Page 29


• Communication to stakeholders: Clear and consistent messages were communicated to
all the stakeholders which included shareholders, employees, customers, analysts
partners etc. Communication were made during the early stage of the integration and
continued during the whole phase
• Employee retention at focus: Identification and targeting of the key employees was
done at the outset. Issues related to morale were addressed and where appropriate,
incentives utilized for the cause
• Cultural differences recognized: Early stage integration plans included identification
(through due diligence) of nature of cultural differences. Gaps in the culture were
bridged by taking steps pro‐actively and defining the rules to be followed for enhancing
interaction
• Swiftness in decisions: Planning for the integration was completed even before the close
of the deal. This was necessary as times of uncertainty would be minimized and the
synergies could be attacked from the day zero

HP formed a complete framework for integration planning. The broad focus of the integration
planning framework was on:

• Strategy: Strategically important priorities were defined during the planning stages line
go‐ to‐market strategy, product portfolio strategy and strategy of distribution channel. A
integration core team is formed at the center and in each groups and regions / countries,
corporate functions post merger integration team at all locations

Page 30


Integration Team Structure

Steering committee

Central office
(merger integration)

Groups Regions / World wide Corporate
countries operations functions
PMI PMI PMI PMI
PMI – Post merger integration team

Source: www.ustyleit.com

• Organization structure: Structure and process were defined during the initial stages of
integration. Systems and processes of the new organization were planned and identified.
Flows of information and process of decision formulation was put together during the
preliminary phase of integration. The architecture of the financial systems and
information systems was crafted as part of the framework
• Human resource and culture: Emphasis was placed on having a single common culture in
the whole organization. Top of the crop people were identified as retention of these key
resources was imperative to the success of the new organization. Competencies of the
employees were evaluated to absorb them in the right positions and identification of
newer competencies to be developed done in the initial leg of framework for integration
planning. Roles, remuneration and responsibilities of the employees set apart as part of
this framework

Page 31


Culture integration planning framework

Structure
Strategies and process
Corporate
objectives

Metrics
Behaviors Values and
rewards

Policies and
practices

Source: www.hseland.ie

• Measurement: As an integral ingredient of framework for integration of the outcome of
the integration needed to be evaluated on an ongoing basis. Hence as a part of the
integration framework continuous measurement of customer and employee satisfaction,
financials, excellence in the operations and reward and recognition systems was planned

Post the merger, integration process was put on the fast track with the implementation of the
framework for integration. Thus rigorous process of integration was managed by tracking the
projects and milestones so that the projected synergies are realized within the stipulated time
frame. Financial and restructuring targets were assiduously monitored and efforts directed
towards achieving them.

Page 32


As an immediate result of these integration initiatives, some of the metrics which evident
measure of integration were visible. The integration lead to procurement synergies i.e. USD 550
million (direct), USD 250 million (indirect) and USD 125 million (due to closure of manufacturing
facilities). There was significant reduction in the headcount i.e. about 17900 by the year 2003
which lead to synergies worth USD 1.5 million. Administrative facilities closure lead to a
reduction of about 21% in the square footage and synergies worth USD 250 million.  At the IT
front, key systems were completely integrated and lead to reduction in the application portfolio.
These integration initiatives resulted in transformation of innovation in IT into a competitive
advantage for the organization.

Page 33


Findings and Analysis

To understand the general issues observed by employees of the companies who were involved
in mergers and acquisitions over the past few years, we carried out a primary research. The
research was carried out across companies from various sectors ranging from IT services to
Pharmaceutical giants and the Big Four Consulting firms. A snapshot of the companies covered
is as follows:

Acquirer Company Target Company
Capgemini Kanbay
HP Mercury
HP Compaq
Oracle Inc i‐Flex Solutions
Persistent Systems Controlnet
Pfizer   Parke Davis
Pfizer Pharmacia
PricewaterhouseCoopers RSM
Tata Consultancy Services Citigroup Global Services
Deloitte C C Choksi and Company

The basis for our research was to include as many companies from varied sectors as possible to
come upon issues employees observed across sectors and understand (post the deals) which are
the most important stages of the integration process.

Page 34


The questions posed and the responses were as follows:

Which is the processes which Which category of
had most significant change? organisational structure
underwent most significant
17% 14% change
17% 14% 22%
17%
14%
14%
18% 7%
17%
29%

Product Service Design Functional Geographic
Production Supply Market Segment Product
Financial Marketing Service Divisional

Source: Merger and Acquisition - Integration Strategies Analyses

The above questions were poised specifically because we believed that for successful
integration, the various processes like product, supply, financials, marketing etc held equal
significance. The respondents confirmed our belief as we got an evenly distributed response as
expected across the processes. As for the organizational structure, we found that in most cases
the market segment underwent the most significant change. As an example, the Tata
Consultancy Services acquisition of Citigroup Global Services Ltd led to an increase in Market
Segment for both the companies. Citigroup Global Services got an opportunity to serve
companies other than Citigroup while Tata Consultancy Services got the expertise of Citigroup
Global Services over the financial services domain which it leveraged to get more customers in
the market.

Page 35


Was the integration plan Was the integration
communicated to employees completed within the time
affected? anitipated?
0% 0%
7% 20% 13% 7%
13%

33% 47%

60%

Strongly Agree Agree Strongly Agree Agree
Neutral Disagree Neutral Disagree
Strongly Disagree

     Source: Merger and Acquisition - Integration Strategies Analyses Strongly Disagree

We found that 80% of the people thought that the integration plan was communicated
effectively to the employees of both the involved companies. It is said that informal face‐to‐face
communication plays a more important role in the success of a merger, and in such cases, the
relevance and credibility of the formal means of communications like circulars, newsletters etc
increases considerably. Also 54% of the employees think that the deal was completed within the
stipulated timeframe. We believe that the high percentage of people who think that the
integration was not completed within the timelines might actually not be very well aware of the
timelines as normally such deals are always under the covers in its initial phases.

Page 36


Was there a change in Whose corporate policies
Management post prevailed post integration?
integration?
7%
33%
33%
27%
54%

6%
13%
27%

Strongly Agree Agree
Neutral Disagree
Strongly Disagree Acquirer Target Combined


In 33% of the cases, there was a change in Management after the merger. This can be attributed
to the fact that some of the mergers were across sectors, so the management was retained to
retain the expertise. In a majority of cases, we observe that the corporate policies of the
acquirer were prevalent after the merger.

Whose HR policies prevailed Did the change in the IT
post integration? systems and processes affect
the work considerably

7% 20%
33%
33%
20%
60%
7% 20%

Strongly Agree Agree
Neutral Disagree
Acquirer Target Combined
Strongly Disagree


Page 37


60% of the respondents were convinced that the best human resource policies of both the
companies prevailed post the merger. This was expected as the acquiring company would
eventually want to streamline the whole system with the best practices of both the
organizations. 40% of the employees believed that there was no change in the IT systems and
processes after the integration. We believe that this was because the acquiring company
wanted to leverage on the already prevalent IT infrastructure of the target company.

Was a prior Due Diligence Were the findings of due
(financial, cultural, systems diligence addressed in the
etc) conducted Integration Plan?
0% 0%
7% 7% 7% 7%

33%
40%
46%
53%

Strongly Disagree Strongly Disagree


Due Diligence is of prime importance before any merger because these deals involve significant
investments. A successful due diligence can provide valuable insights by providing risks involved
into the business process integration. Around 60% of the respondents believed that the due
diligence was conducted prior to the deal and 50% believed that the finding was addressed prior
to the deal. This low number is alarming, but again we think that this number might be affected
by the large number of respondents who were neutral as they might not be sure of the due
diligence process being followed.

Page 38


Was there a dedicated team
What was the primary
purpose of the merger?
managing the integration
3%
process?
0%
10%
29%
7%
23% 40%

19% 53%
16%

Increasing marketshare Diversification Strongly Agree Agree
Increasing capacity Reduction in competition Neutral Disagree
Economies of scale divestment by the seller Strongly Disagree


Some of the major reasons for companies to indulge into such significant deals were to increase
market share, reduce competition and for purposes of diversification. 93% of the people
believed that there was a dedicated team which worked towards successful completion of the
integration process. This was significant in the success of the deals.

Was there a major change in Was there a change in the
the working culture post Vision, Mission and Goals of
integration? 0% the merged
0%
7% 20% 20%
20%

53%
27%
20% 33%

Strongly Disagree Strongly Disagree


Page 39


53% of the respondents believed that there was no major change in the working culture of the
company post integration. This was favorable as once employees are employed in a company, it
is very difficult for them to adjust to changing working culture. If there is a drastic change, it is
very important that proper efforts are taken in the change management process wherein an
awareness of the benefits of the change in the culture is conveyed to the employees involved in
the deal. 40% of the respondents believed that there were no change in the mission statement
and the goals of the organization post the integration. This is in line with our findings that most
of the deals (54%) saw the corporate policy of the acquirer being prevalent.

To summarize, we had the following observations after our research:

• Most of the respondents felt that the integration plans were communicated to the
employees efficiently, and the timelines were also maintained
• In most of the cases, there was no change in management after the deal, and also the
policies of the acquirer prevailed after the deal
• Combined human resource policies were implemented after the deal, as the
organizations involved were inclined to use the best practices prevalent in the HR. Also
40% believed that there was no significant change in the IT infrastructure post the deal
• Due Diligence was carried for all the organizations that when through the merger
process. Most of the findings during the due diligence were addressed in a satisfactory
manner
• All the processes were evenly concentrated on in the deal and increase in market share
was the most desirable outcome of the deal
• In most of the cases, there were dedicated teams that were involved in the merger
process. There was no major change in the working culture after the deal and also most
of the respondents believed that there was no change in the mission statement or the
goals of the company

Page 40


Best practices for merger integration

The most crucial factors in a successful integration are represented in the chart below

Integration gear

Proactively
tackling
integration
glitches

Involving
integration
teams early
Developing
teams
(integration) by
committing
resources


• Establish most favorable integration plan and integration team: In order to determine
the optimal integration, ground work for the target to deliver the targeted objectives of
merger is to be prepared. Forming of a clear vision and strategy for the future
organization is the next stage determination of an optimal integration which in turn
should inspire the new management and human resource to deliver on that vision and
strategy. The most decisive moments of integration are the transfer of management
practice, systems and technologies. The seamless of all these forms the basis of a
successful merged organization. The best attributes of the acquirer and target
organization needs to be adopted in the merged organization. These best attributes
create value for the organization. This plan can has to be executed by committing
resources and suitable developing teams

Page 41


• Timing of plan: Establishing the integration plan and involving the teams from the drop
of the hat is the best possible manner of facing the challenges of integration. If the
execution and integration plan is considered as an afterthought, then the organization is
taking the risk of cultural issues and teething challenges

Deal continuum

Source: www.ustyleit.com

The above chart gives the entire continuum starting with the origination of the deal to the
complete integration into a single entity and normal operations of the merged organization.
As can be seen from the chart deal team’s work starts right from the origination of the deal
and the resource requirement is at the peak during the due diligence stage. Deal team’s
work ends as the necessary approvals are put in place and deal signed and closed.

Integration team’s work encompasses the entire deal continuum and extends beyond the
closing of the deal. The Integration team should initiate its work right from the origination
with a lag. Due diligence (Commercial, cultural, financial and accounting, tax, environmental,
legal, operations, information technology) of the target organization is to be conducted in
consonance with the deal team. The real resource requirement for the integration starts
with the signing and closing of the deal. Maximum commitment of the resources is required
post the merger during integration of the two organization.

Page 42


• Implementation of the integration plan: Some of the factors that need to be evaluated
while implementing an integration plan are:
o Complete assessment of targets and acquirers corporate culture
o Comprehensive due diligence and other analyzing method to evaluate target and
acquirer
o Determination of compatibility of the existing culture
o Evaluation of factors that lead to incompatibility of the two cultures
o Ingraining the required cultural attributes and management practice
o Ejecting incompatible aspects of the corporate culture
o Capturing the best practice management practice of the acquired company
• Evaluation: The integration plan which is implemented needs to be continuously
monitored and evaluated to measure the realization of the stated objectives of the
merger. Thus evaluation of the cost or revenue synergies as expected to be delivered as
a result of the merger is required to be weighed up on a regular basis. These monitoring
measures will ultimately facilitate in proactively undertaking corrective actions and
tackling the issues plaguing the integration.



Page 43

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