More than 9,000 corporations changed hands in mergers and acquisitions last year, according to Mergerstat of Los Angeles, which tracks and provides information about mergers. Yet despite the shareholder value riding on these actions, the process has yet to be standardized. In 83 percent of 700 large mergers, the stock price of the combined organization did not rise above those of the single entities, according to a study by KPMG Consulting.
Making a merger work is by no means easy. The companies involved must negotiate a series of difficult issues before they can hope to succeed. Two are of paramount importance: resolving cultural differences and integrating the information systems and knowledge bases of both parties.
It is not uncommon for the acquiring entity to try to impose its own systems, values and strategies on the culture of the acquired corporation. But this approach can produce a defection of talent and a decline in stock price. In the unification of Daimler-Benz and Chrysler, an acquisition once touted as a "merger of equals," Daimler-Benz, the dominant partner, has gradually been imposing its will upon Chrysler, which is bleeding red ink while facing dropping stock prices and a shareholder suit.
Observers say that the cultural conflicts between these companies have been particularly damaging when it comes to sharing knowledge. German engineers are reluctant to build their "superior" technology into American cars, and German marketers have a poor understanding of what the U.S. consumer wants in a car, says Kay Hammer, an entrepreneur and president of Evolutionary Technologies International Inc., a vendor of data management tools in Austin, Texas. "If they are too arrogant to listen to their American counterparts, there's going to be even more trouble ahead."
The New-school Merger
Old-school mergers feature a definite winner and loser for the sake of financial gain. But a well-thought-out plan would look beyond the balance sheet to intellectual capital and cultural issues, according to Verna Allee, president of Integral Performance Group, a consultancy in Walnut Creek, Calif.
Culture issues and other intangibles can make or break a merger. Many companies are insular and not suited to being merged, and determining such compatibility requires a knowledge audit, according to Dan Ruby, founding editor of Knowledge Management and currently vice president of content for SolutionCentral.com, an online market for IT products and services in San Francisco.
Executives also should look at the current business models for both companies about to merge. Often companies will find that "our knowledge, our intellectual capital and our ability to innovate, along with other intangibles, are what has built the business," Allee says.
In practice, however, such information is often ignored or overlooked, according to David Lewin, professor of management at UCLA's Anderson School of Management in Los Angeles. "Usually, the acquiring company is interested in cost savings or in acquiring the top management group," says Lewin. But information about the intellectual capital or culture often comes too late, he notes.
Ironically, during the so-called quiet period preceding the completion of a merger, companies have the time to strategize on how to bring the two companies together successfully or determine whether their two cultures are conducive to a successful merger at all, says Lewin.
"[But] it's usually the case that no work is being done [in the quiet period] because, at the operational level, the two sides aren't talking," says Ruby. "Meanwhile, fear and loathing is growing among the employees."
Winning Hearts and Minds
In an anxious pre-merger atmosphere, employees often shield themselves from the likely layoffs. But employee opinion is often neglected in the planning of the merger. "You have to get these issues out in the open, from the executive level down to the shop floor," says Allee. "Unfortunately, this often doesn't happen."
San Francisco-based bank Wells Fargo & Co. learned this lesson. Upon acquiring First Interstate Bank in the mid-1990s, the bank at once changed all the acquired systems and processes to those of Wells Fargo. That change generated bad press, customer complaints and lower shareholder value.
When Wells Fargo agreed to merge with Norwest Corp. of Minneapolis several years later, both sides moved quickly to cement the relationship. "As soon as the deal is announced... you are no longer separate entities," says Les Biller, COO of Wells Fargo. Employees anxious over job security may unwittingly communicate this uncertainty to customers, he says.
Wells Fargo and Norwest executives began an internal campaign to alleviate these concerns. The representatives met with the top 300 managers and then appeared before tens of thousands of bank employees at branches throughout the U.S. to explain the reasons behind the merger and answer questions about it.
This outreach not only helped alleviate concern over the merger but also paved the way for the integration of the companies' knowledge stores. Employee recommendations were reviewed by an M&A execution team that included specialists charged with providing an enterprise-wide view of the integrated bank. In some areas, this proved easy to accomplish. For instnance, the general ledger (GL) systems of both banks were smoothly integrated when programmers worked out a way to provide a double entry for listings of each bank that was eventually consolidated into one master GL application.
But other areas, like the demand deposit accounting systems, which include checkbook administration, were so dissimilar that the merger process required an immediate migration of one of them. When management opted to keep the Norwest system, all Wells Fargo products and services had do be remapped to that application, a considerable investment of IT efforts.
This time, the banks had opted to choose the best practices of each company, says Biller. "[This] made the merger more difficult in the short term but ultimately more effective."
Merging Knowledge Cultures
Any M&A will have to address corporate culture issues. They may be due to differing philosophies, market focuses or geography, but whatever the source, management must resolve them. Knowledge management techniques will help assure a smoother transition, says Michael Herzog, senior vice president of KPMG in McLean, Va.
KM was at the forefront when Sopheon, a London-based developer of KM tools, merged with the Minneapolis-based KM consultancy Teltech Resource Network. Management had to harmonize several core differences that could have undermined the deal. One side operated in consulting, the other in software development; one was established in the knowledge management market, the other was a recent entrant; one was based in the U.S., the other in England and Holland.
Both sides had to learn the finer points of transatlantic cultural differences. In the process of negotiating conflicting priorities and approaches, both parties discovered the key to a smooth cultural exchange. "Communication soothes the pain of an M&A," says Andy Michuda, CEO of Sopheon, who was previously president and CEO of Teltech.
Management also kept employees informed by answering questions and posting information regularly on the corporate intranet. A facilitator routed each question to the appropriate respondent, made sure it was answered and published the responses online.
Yet surveys revealed that only 20 percent of all employees understood the new corporate strategy. So one week after finalizing the deal, the company held a global session with all employees simultaneously at four locations on two continents, and in a follow-up survey conducted at the end of the event, 97 percent said they had achieved a clear understanding of the merger strategy.
Sopheon also involved its staff in launch events. Employees chose transition teams from both sides and organized the events, a process that revealed real, rather than hypothetical, issues. Staff on both sides demanded rapid training in the knowledge of their new colleagues rather than focusing on strategy. As a result, the agenda shifted to add sessions on specific products and services.
The first tangible success after the merger came when both sides worked together on a new KM software product, forcing technicians and analysts to break down pre-merger barriers, says Paul Corney, a business and strategic advisor to Sopheon in England who acted as a facilitator for the merger.
The product, Accolade, is a system of software and services to facilitate the product development process. Sopheon created it in 60 days using its own internal system for knowledge transfer. The company created a series of detailed knowledge maps that identified communities of interest, core objectives and specific information needs, as well as documenting who created, relayed and received related knowledge.
The cross-functional team worked out primary and subsidiary product launch objectives and mapped these to a series of information requirements (see the diagram "Knowledge Analysis: Product Development"). In tracking competitive knowledge throughout both organizations, the team found key data primarily hidden on the hard drives of a few individuals. They then determined which portions of this information should be posted on the intranet and worked out the processes and systems needed to make relevant data available.
"It's important to [determine] what knowledge is actually valuable and why, as well as how it should be tracked and used," says Chad Weinstein, Sopheon's director of knowledge management consulting. "A lot of data don't belong on the intranet, so you have to set things up to capture what is vital and filter out the clutter."
Rather than dumping everything in one central data repository on the intranet, Sopheon chose to isolate the most essential operational information for broad posting. With this time-intensive manual process behind it, the company now adds important new information through templates. This system places the onus on the individual to share knowledge and relies on a collaborative culture to police usage.
Not everything went smoothly for Sopheon, however. The company ended up two months behind in deploying a transatlantic IT network. Despite restricting the amount of data made available over the intranet, technicians initially underestimated the amount of bandwidth required. In retrospect, Michuda says he should have appointed a CIO earlier, with the responsibility for establishing a unified network and a common platform for knowledge transfer.
These examples suggest that a smooth M&A transition depends on speed of execution and effective communication to resolve cultural barriers. It takes more than rhetoric to bridge the gap between two merging companies. Following management efforts to assure employees of the wisdom and express the strategic advantages of the mergers, assessing and sharing knowledge management help to cement the deal.