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Mergers That Stick

DBR | 1호 (2008년 1월)
by Rosabeth Moss Kanter
Eager to snap up bargain acquisitions? Remember that merging talent is more important—and more difficult—than getting the numbers right.
To many executives, it might seem like a shrewd move in a recession to swoop in and acquire firms on the cheap—buy low, cut costs, and defy the usual prediction that most mergers will fail to produce economic value in their first two years. And there’s a grain of truth to that assumption. While M&A activity has been severely depressed since 2008 and fell dramatically in early 2009, acquiring companies during that period tended to outperform their industry peers in market valuation, according to a global study by Towers Perrin and Cass Business School examining 204 deals, each worth more than $100 million.
But outperforming peers during the worst days of the economic crisis simply means that acquirers’ stock prices fell by a lower percentage; the companies lost less value than others but did not necessarily create new value. The fact that they could afford to buy at all was a sign of financial health, a factor that alone could account for the better stock market performance. Studies by Boston Consulting Group analysts have shown that in a weak economy acquiring companies add only marginal value by cutting costs. As the economy strengthens, successful mergers will be those that have invested in profitable growth—which requires integrating and motivating employees who will work quickly and smoothly, minimize disruptions, increase market share, innovate, and adapt to emergent trends.
To extract lessons about how to manage the human side of integration, I looked deep inside a dozen successful acquisitions as part of a three-year study involving more than 350 interviews in 20 countries. My goal was to identify the practices of industry leaders. The mergers ranged from global deals, such as Procter & Gamble’s purchase of Gillette, to regional transactions, such as Shinhan Bank’s acquisition of Chohung Bank in South Korea. Several, like Mexico-based CEMEX’s purchase of RMC in Europe to double its size, reflect another M&A trend: an increase in emerging-market companies’ buying established Western ones. India’s Tata Motors, for instance, acquired the British icon Jaguar from the U.S. automaker Ford.
These acquirers overcame the usual barriers to successful mergers: employee shock, protests, and anxiety, all of which can fuel supplier unrest, government disapproval, and customer defections. For example, P&G faced the prospect of “blood on the floor” in its postmerger management ranks as headhunters went after Gillette talent, a former Gillette executive recalled. It also had to confront government inquiries in Gillette’s home state of Massachusetts, possible unrest in India in response to attempts to eliminate certain distributors, and other business disruptions. Yet P&G managed to retain a greater percentage of acquired talent than many buyers do (it held on to 90% of the top managers from Gillette who were offered jobs), and it enlisted employees (even those whose positions were being eliminated) in keeping suppliers, distributors, and customers happy. P&G met cost and revenue targets within the first year, incorporated Gillette processes considered superior to P&G’s, and continued to position itself for overall growth even as the current recession loomed.
Shinhan Bank’s acquisition of Chohung encountered much more resistance. About 3,500 Chohung employees and managers shaved their heads and piled the hair in front of Shinhan headquarters. To quiet the labor union and stem the flood of customer defections, Shinhan agreed to delay formal integration for three years. Yet well before the deadline, the combined banks’ holding company, Shinhan Financial Group (SFG), achieved de facto integration through merger task-force teams and heavy investments in “emotional integration” events (SFG’s term) designed to forge relationships and form social networks while also raising the wages of Chohung employees. Shinhan held informal happy hours and sponsored employee retreats, which included sing-alongs and mountain climbing. The internal investment in talent integration paid off; SFG’s stock well outperformed the South Korean market.
Using three cases that highlight different goals, I will describe the key strategies underlying effective integration and summarize the consistent lessons learned. In the first case, the cement company CEMEX wanted an acquisition’s employees to absorb its processes quickly and operate to global standards; the company needed to share its know-how with the people it had acquired. In the second case, P&G sought to catalyze internal change by adding Gillette’s successful methods to its own and retaining Gillette employees. In the third case, Publicis Groupe allowed the talent at acquired companies to take the lead in building new capabilities; mergers were treated like reverse takeovers, with the acquisitions transforming the buyer.
Investors did not initially like CEMEX’s decision to buy the British cement maker RMC, and some CEMEX leaders sensed negative perceptions among RMC employees that a “company from the third world” was reversing history by taking over a major business operating in developed markets. For the acquisition to be deemed a success, either by RMC employees or by capital markets in London, CEMEX had to show some early wins. The biggest was turning around RMC’s troubled cement plant in Rugby, England.
The factory loomed large on the western outskirts of Rugby, near residential areas; its construction interfered with local TV reception, and the plant emitted dust reputed to cause health problems. It was so unpopular that the television series Demolition named it one of the top 12 buildings people in the UK would like to see torn down. Many employees were ashamed to admit they worked there.
CEMEX invested many millions of pounds in the plant almost immediately, spending £6.5 million on a new air filtration system alone. It was not cheap and not strictly necessary, but CEMEX leaders felt it was the environmentally correct thing to do. The company sent experienced postmerger integration (PMI) teams as well as quality control and maintenance experts to help fix the problems and train their Rugby colleagues in CEMEX practices. To allay fears that PMI team members had arrived to supplant Rugby employees, CEMEX experts worked alongside their Rugby counterparts, emphasized their own transitional status, and recommended keeping all local managers willing to stay. Rugby employees were sent to CEMEX plants in Mexico, the United States, and Germany to experience the “CEMEX Way”—the company’s system of ethics, management practices, and technology platforms—and to become change champions upon their return. A new variable compensation bonus plan based on plant performance spread the fruits of success to workers. The factory created a sustainability department to focus on environmental issues.

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