CHAPTER 13

Postmerger Integration and Reorganization

Modern, large integrated enterprises consist of many functional units and departments that perform highly specialized tasks that are unique to the units or departments. Managing these separate units or departments requires integration, which consists of coordination, control, and conflict resolution (Shirivastava 1986).

Departments must be coordinated to achieve the overall goals of the enterprise. Control and monitoring ensure that departmental activities are complementary and that departments are performing their specified tasks promptly. Finally, conflict resolution is required to deal with conflicts arising between individuals, departments, or conflicts emerging from inconsistent goals assigned to the departments. Of course, the complexity of organizational integration becomes eminently more complex when independent companies are merged.

The term merger and acquisition (M&A) integration refers to combining two or more business entities after the conclusion of an M&A deal so that the new entity can function as a unified business enterprise.

Integrating actions “. . . may involve adapting the firms” value-generating activities to realize technical synergies, altering bureaucratic mechanisms of authority and control to ensure internal coherence, and transforming systems of values, beliefs, and practices to create congruent organizational frames of reference. Thus, integration can be defined as the making of changes in the functional activity arrangements, organizational structures and systems, and cultures of combining organizations to facilitate their consolidation into a functioning whole. (Pablo 1994, 806)

The level or degree of integration refers to the extent to which functions or departments of the acquired entity should be combined with the units and departments of the acquiring firm. There is no definitive guideline or consensus on what constitutes the optimal level of integration. However, organizational theorists agree that the level of integration depends on the characteristics of merger or acquisition. The characteristics of interest consist of the task, culture, and political attributes of the acquisition (Pablo 1994). We briefly discuss these characteristics in the context of an acquisition next.

The task characteristic, consisting of strategic and organizational, refers to the strategic intent of acquisition, which is based on the recognition that capturing the potential synergies could only become possible by combining two firms. Realization of strategic tasks requires sharing of relevant skills and resources between the acquiring and acquired firms as well as leaving the target company’s skills and resources that could lead to synergies intact. The policy of preserving the specialized skills and resources of the target firm is called organizational task.

Strategic and organizational tasks have important implications for the degree of integration. These tasks depend on the motivation for acquisitions. If the motivation of acquisition is to capture operational synergies, the need for combining the entities is high. On the other hand, if the motive for acquisition is financial, there is little need for extensive integration.

Culture has important influence on coordination and control functions of integration. Culture plays an important role by generating commitment to the newly created organization, increasing organizational stability in uncertain times of transition, and granting a sense of identity to the members of the organization.

The effect of culture on the degree of integration hinges upon the degree of cultural diversity of the acquiring firm. If the acquirer is a multicultural entity, implying that the organization tolerates or encourages cultural diversity, then having an acquired company with a different culture should pose no particular challenges, and the acquirer should leave the culture of the target unchanged. On the other hand, if cultural diversity of the acquiring firm is low, then the creation of a more uniform culture across the entities is desirable, and for control and coordination, more cultural conformity should be achieved through higher integration.

Political conflicts are omnipresent in all organizations; however, these conflicts tend to increase and become more problematic after M&As. Examples of political conflicts after an acquisition consist of the mandate of new units or departments, the acquirer’s misunderstanding of target firm’s activities, and the target’s failure to comprehend and implement the goals of the acquiring entity. Political characteristics of an acquisition determine the extent power is used by the acquiring firm to resolve the conflict and achieve its goals. The control function of postmerger integration becomes very prominent under such conditions.

Of course, using power by the acquirer in resolving the conflict depends on the perceived need to use power of the acquiring firm and its ability to apply force. Moreover, the perceived need to use power hinges upon the degree of compatibility of visions and actions of the target with those of the acquiring firm. Of course, the size differential between the parties to an acquisition also becomes a determining variable. The larger the acquiring firm compared with the target, the more power the acquiring firm can exercise over the target.

Hence, power differential and compatibility of visions between the acquiring and the acquired firms enter as a guidepost on the level of integration in the acquisition. The level of integration should be inversely related to compatibility of acquisition visions: The more comparable the visions, the lower the level of integration, and vice versa.

In general, postmerger integration involves three types of integration: procedural, physical, and managerial–cultural integration. We will give broad discussions of these integration types next; however, we refer the interested reader to Shirivastava (1986) for detailed discussions of this important topic.

Procedural integration refers to combining the operations, management control as well as strategic planning systems and procedures of the target and acquiring companies. The aim of such an integration is to facilitate communications between the target and acquiring firms.

Physical integration involves combination of product lines, production technologies, research and development (R&D), plant and equipment, and real estate assets of companies involved in M&A. The aim of this type of integration is to facilitate resource and know-how sharing between the merged firms.

Managerial and sociocultural integration involves selection and transfer of managers, changes in organizational structure, development of a corporate culture that facilitates achieving the goals of the organization, motivating employees, gaining their commitment, and establishing a new corporate leadership. Achievement of these objectives is a prerequisite to a successful merger or acquisition.

The success of an M&A transaction largely depends on effective postmerger integration and reorganization of former entities. Studies dating back to the late 1960s and early 1970s have shown that a large percentage of failures of acquisitions and mergers are due to ineffective postmerger integration and reorganization (Kitching 1967, 1973). Specifically, among other results, Kitching in his study of 1967 found that in a majority of failures, the organization of the firms was disrupted at least once after the completion of the merger transaction (Hunt 1990).

Statistics of failure of M&A are alarming. According to a Deloitte Consulting LLP (2011) study, 50 percent to 80 percent of all M&A deals fail to live up to expectations. The study shows that in 70 percent of deals, synergies are not achieved, and in a small fraction of the deals, about only 23 percent, the companies earn their cost of capital. Moreover, within the first 6 months, productivity drops by 50 percent, and by the end of the first year, 47 percent of the new company’s executives have left. All of these problems, which lead to failure to realize the expected synergies appear to be due to poor planning for M&As, supply chain (SC) disruptions, rising operating costs, and decreasing efficiency (Deloitte 2013b).

Furthermore, a survey of members of corporate development teams shows that only 41 percent of respondents were satisfied or highly satisfied by transaction integration of deals they had completed (Ernst & Young 2011). Moreover, a survey of roughly 200 chief executive officers and corporate board members from corporations with annual revenue of $500 million or more in the spring of 2013 showed that “cultural fit,” which is the same as postmerger integration, is the most pressing concern relating to M&A for a majority of the respondents. When the respondent was asked to identify the most important risk that is associated with the successful outcome of the postmerger integration process, the respondent identified the factors listed in Table 13.1, with the issue of “cultural fit” as the most pressing concern for many respondents.

Table 13.1 Greatest risk factor for successful postmerger integration

Risk factor	Directors	Chief financial officers
Achieving cultural fit	47%	51%
Synergy capture	25%	11%
Workforce transition	5%	4%
Customer retention	20%	32%
Other	3%	3%

Source: Wall Street Journal (2013).

Approaches to Integration¹

In general, three approaches to postmerger integration exist: status quo integration, complete integration, and hybrid integration.

First, the status quo integration refers to maintaining the existing conditions. The status quo approach requires that minimal integration of the target with the acquiring company take place. The only area of integration should be financial reporting. Second, complete integration refers to complete acquisition and integration of the target. Third, a hybrid approach requires that the process will only focus on integrating the best employees, processes, products, services, and technology of both the target and the acquiring company. These approaches may be classified as low, medium, and high levels of integration.

Integration is a complex process that involves simultaneous interactions among all units of an organization. Postmerger integration efforts may be classified into six sets of activities consisting of premerger planning, creating an effective communication mechanism, designing a new organization, developing staffing plans, integrating functions and departments, and setting up a new corporate culture. We briefly discuss these activities next and refer the interested reader to the vast literature on the subject, for example, DePamphilis (2012).

Premerger Integration Planning

A premerger integration plan should make it possible to have a refined estimate of the value of the target company and the transition issues in the context of the acquisition agreement. Furthermore, the plan should give the acquirer opportunities to a request for warranties, and include conditions for closing that would expedite the postmerger integration of the combined companies. Additionally, the plan should create a postmerger integration organization to facilitate integration after closing.

A premerger integration plan and involvement of an integration management team in the process should be started as soon as possible, perhaps as soon as the valuation of the target has begun. The early start would allow the postmerger integration management team to get familiar with due diligence processes and postmerger integration.

An essential component of premerger planning is the formation of the postmerger integration organization consisting of staff members from both the acquiring and the target company in friendly M&As. The main tasks of the postmerger integration team include development of a schedule specifying what is to be done, when to do them, and who to do the tasks, determining the economic functions of the combined unit, how to combine the functions and departments, develop performance indicators for both business performance and integration plan, implement the key decisions, and establish communication campaign.

Effective Communication Mechanism

Before public announcement of the acquisition, the management integration team and the public relation department of the acquiring company should prepare communication plans to inform the stakeholders of both target and inquiring entities. Of course, the stakeholders consist of the employees, the stockholders, the customers, the suppliers, and the members of the communities in which the companies involved in the deal are located.

Establishing a New Organization

Structuring an organization consists of devising a division of labor, setting up teams for or departments to do the tasks, for example, production, marketing, R&D, and assigning responsibility and authority to the employees. Implementation of these tasks is tantamount to the creation of bureaucracy, which provides the rules and regulations that give managers control over employees.

In setting up a new organization, the management must consider the following issues:

Organizational Model

Organizations can be designed using three different models: line organization, line-and-staff organization, and matrix organization.

According to the line organization model authority, communications are conducted from the top to the bottom of the organization, and all employees report to only one supervisor.

In a line-and-staff organization, the employees of a firm are classified into two categories: line personnel and staff personnel. The line personnel is responsible for achieving the goals of the enterprise directly, while the staff personnel advises and assists line personnel in achieving the goals of the enterprise.

Finally, in a matrix-style organization, specialists from different departments are organized into units that work on specific projects; however, these employees remain as part of the line-and-staff organizational structure. In a matrix-style organization, project managers are in charge of the members of the team.

The first important task in creating a new organization is appointment of members of the top management team. The leaders for departments, functions, and groups must be identified and their responsibilities should be clearly defined. Next, the structure of the new organization as previously discussed, must be specified.

Developing Staffing Plans

Staffing plan or human resource (HR) management consists of determining HR needs, recruiting, motivating, scheduling, evaluating, and compensating employees to achieve the goals of the organization.

Staffing plan should be undertaken in postmerger integration processes as soon as possible, and key employees from both acquiring and target companies should be included in staff planning for the new entity. The staffing strategy should focus on personnel requirements, employees’ availability, needs for external recruitment, compensation, and personnel information system.

Integrating Functions and Departments

Integration of functions and departments involves integration of planning and strategy; finance and administration; human resources; information technology (IT); supply change management; postacquisition business processes and internal controls; and intellectual property (IP) rights protection and management. We discuss each of these integration processes next (Deloitte 2013a).

Planning and Strategy

As stated earlier, a pivotal factor in a successful M&A transaction is planning and implementation of integration of the target firm with the acquiring firm. The challenge of planning is how to design a new strategy so that the new entity captures the potential benefits of the transaction without having negative impacts on financial performances of target and acquiring companies. A plan for successful transaction embodies three important components: clear statement of the purpose of the transaction, control of the M&A processes so that they do not negatively affect day-to-day operations of the entities, and managing employees.

Finance and Administration

Integrating the financial functions entails reorganizing the financial management and budgeting processes. A successful plan for financial integration must involve consolidating the financial and accounting functions of the entities involved, and capturing the synergies of the transaction, that is, cost reductions. Specifically, designing financial as well as accounting, including tax-related accounting, processes involves changing sales to accounts receivable cycle, purchases to accounts payable cycle, investment to fixed assets cycles, tax compliance process, and book-closing cycle for the new enterprise.

Of course, financial assets (cash, stocks, and bonds) as well as physical assets (equipment, plants, inventories, raw materials and intermediate inputs, real estate) and intangible assets (brand name, copyrights, exclusive agreements, product quality, technological patents, trade secrets, software) of acquiring and target firms should be combined and controlled.

Human Resources Integration

Human resources integration planning is as important as the other aspects of postmerger integration planning for the success of an M&A transaction. Integration of HR departments of the target and acquiring companies implies that approaches to recruitment, retention, compensation, training, and other aspects of personnel management of the companies must be unified. A 2005 survey of timing of HR integration indicates that 40 percent of respondents started integration of HR at the time of due diligence, 24 percent began the process at the start of M&A deliberation, and the remaining 36 percent began the process at the time of integration of the acquired company (Reed, Lajoux, and Nesvold 2007).

Typically, HR integration involves five categories: organization design, compensation, employee compliance, retention of key employees, and elimination of redundancy.

Organization design should take place soon after the signing of the sales–purchase agreement, and should be completed before the closing date. In designing the organization, consideration of cultural differences of the organization involved should play an important role.

In general, the target company’s HR policies converges to with the HR policies and practices of the acquiring company. The staff for the new organization should include key employees from both organizations, and the compensation of the employees of the new business should be commensurate with the compensation of the employees of the acquiring company. In cross-border acquisitions, local employment laws, rules, and regulations should be examined.

Employee compliance with applicable laws, rules and regulations, and company’s code of ethics requires wide distribution of the policy statement about these topics. The corporate policies concerning ethics and security should be well-defined for the employees of the new organization.

Key employees from the target company must be identified at an early stage of the M&A processes by having the target to secure an agreement to retain the key personnel for at least 6 months to 1 year.

In any M&A transaction, redundancy of employees inevitably occurs. The reorganization plan of the HR department should provide new opportunities for the redundant staff members to be retained for employment in a different capacity. For those employees whom the problem of redundancy cannot be dealt with, adequate severance payment should be provided based on the prevailing customs, rules, or laws.

Integration of Information and Communication Technology

Large public and private organizations rely on their information and communication systems for timely, reliable, and accurate information that is often crucial for optimal decision making. Accordingly, timely integration of information and communication technology (ICT) is pivotally important in capturing the benefits and synergies of a merger or acquisition. The negative impact of delaying integration of communication and information systems of the target and the acquiring company depends on the strategic level of intended interdependence or autonomy of firms involved in merger or acquisition.

It is useful to have a clear knowledge of the components of ICT for integration.

An ICT system consists of the following:

In general, three integration strategies are adopted in M&As. First, the acquirer might choose the strategy of complete absorption of the target firm by the unification of management systems of the target with the acquirer. Second, the acquiring firm might adopt the symbiosis strategy, which implies cross-transfer of selected capabilities and resources of the involved companies, while retaining the identity and autonomy of both firms. The third strategy is preservation strategy, which refers to the strategy of the acquiring company to nurture the capabilities of the target while maintaining the target’s autonomy (Haspeslagh and Jemison 1991).

The role of ICT in the first case (the absorption approach) of the target is the most important, and we will discuss factors contributing to the speed of ICT integration, which is an important determinant of the success of M&A.

Strategy for ICT Integration

A strategy for ICT integration aims to establish a desired level of integration of the ICT systems of the target and acquiring companies. An ICT strategy contains ICT objectives and methods of achieving them (Wijnhoven et al. 2006).

Corresponding to ICT integration strategies previously enumerated, ICT integration objectives depend on IT integration ambition levels, where the ambition level could be complete integration, partial integration, or marginal integration. Complete integration may be infeasible in cases where large enterprises are involved, while it is doable for smaller firms. Partial integration establishes priorities, and first integrates the most important processes, leaving the less important ones for later. The prioritization is based on synergies the processes could generate. Finally, marginal integration leaves most items intact and implements bridges for data exchange and consolidation when required (Wijnhoven et al. 2006).

The ICT integration methods³ consist of maintaining the status quo, eliminating the ICT of one company while maintaining and adapting the ICT of the second one, creating a hybrid using both ICT systems, discarding the old ICT systems and adopting a new one, and finally outsourcing (Harrell and Higgins 2002).

In using the absorption strategy of ICT integration, a number of questions must be answered including (Harrell and Higgins 2002):

In any event, the merging companies should plan for an ICT system at the due diligence stage and not after securing a deal. At this early stage, the acquiring and target firms should exchange information about their respective ICT infrastructures, hardware, and software.

The task should be performed by small internal transition teams, which are empowered and capable of implementing the task. Assessment of the size, scope, and functionality of the current ICT systems; and information gathering about business processes, the supply chain management (SCM), as well as the size and locations of the files should be carried out.

During the entire postmerger integration process, the goal should be the implementation of the infrastructure change with minimal impact on consumers, the employees, and the stock prices of the companies.

Supply Chain Management Integration

A corporate strategy that has a holistic view of operations, materials, and logistics management is called supply chain management.

A variety of definitions for the term supply chain management is used in the literature on the topic. Among the three definitions that appear in Tan (2001), we believe the following definition is the most appropriate one in the context of our discussions of M&As. SCM refers to “. . . the integration of the various functional areas within an organization to enhance the flow of goods from immediate strategic suppliers through manufacturing and distribution chain to the end user” (Tan 2001, 40).

From this definition, we could infer that the intensity of integration of SCM of target and acquiring entities depends on whether the merger is vertical or horizontal. In a vertical merger or acquisition, the SCM of the entities is already integrated, even though such integration may not be optimal. Any additional integration in such cases must be confined to the internal integration of the existing SCM of the organization. Acquisition of a customer or a supplier implies acquisition of an entity that already exists in the SC of the acquiring firm. Hence, discussions of integration of SCM in the context of M&A only pertain to integration of enterprises in a horizontal merger or acquisition. We will discuss the integration of SCM in horizontal mergers or acquisitions presently.

A Short History of SCM

The emergence of SC as an important corporate strategy goes back to the 1980s when the competitive global business environment forced many large integrated enterprises to offer low-cost, high-quality, and reliable products. One of the innovative approaches to achieving this goal was the utilization of just-in-time (JIT)⁴ and other management initiatives that reduced the cost of holding inventories. However, the JIT system of inventory required formation of business alliances, and buyer–supplier relationships. Moreover, many of the buyers relied and continue to rely on their supplier’s technology in the development process and product innovations. In fact, for companies that use the JIT inventory control system, the IT systems of the customer’s procurement department are integrated with the supplier’s IT systems to form a seamless procurement mechanism. Attempts to increase the pattern of interdependence between the suppliers and customers lead to the adoption of a corporate strategy of SCM, which aims to create seamless manufacturing and logistic functions as the integrated SC strategy. This strategy is a pre-emptive, competitive weapon to hinder duplication of the SC process by the competitors.

Optimal Supply Chain and Corporate Performance

A well-integrated SC consists of optimal flows of materials, products, and information between suppliers, manufacturers, and customers. Of course, optimal design of such a network relies on system-optimization methods such as linear and nonlinear programming, the discussions of which are beyond the scope of this book. We recommend the interested reader to consult Nagurney (2006) for further discussions of this topic.

Firms with strong integrated global SCM teams are found to cooperate with their suppliers and customers more effectively. These firms tend to innovate, manufacture, store, market, and supply better after-sale services more efficiently with greater speed.

A study conducted by Accenture, with collaborative research efforts of INSEAD⁵ and Stanford University, used data from more than 600 Global 3,000 companies and found a statistically significant relationship between SC performance to increase in stock prices of the companies and rise in shareholder value (Accenture 2003).

Why does a well-integrated SC result in better financial performances of companies? The answer is that an optimally integrated SC creates synergies.⁶

Synergy creation by optimal integration of the SC emerges from the optimal level of inventory (or minimization of working capital), better services, improved distribution network, faster shipment–shorter order-to-cash cycle, and leveraged purchasing processes (Langabeer and Seifert 2003). Of course, creation and capturing such synergies could be a powerful motive by combining enterprises through M&As.

Why does the optimal integration of SC matter? Studies have shown that difficulties in the successful postmerger integration of SC of the target and acquiring companies are major contributing factors to the failure of the merger. For example, in a 2007 survey by Accenture, which questioned 154 managers, about two-thirds of respondents revealed that they experienced an increased disruption in their business operations due to M&As. About 50 percent had problems with supplying orders, and more than 40 percent of the respondents reported experiencing problems in inventory management (Zhu, Boyaci, and Ray 2013).

One of the reasons for the failure of M&As is that SC professionals are not included as members of M&A teams, despite the fact that operational costs are the major portion of the total costs of any enterprise. It is common knowledge among executives responsible for M&As that executives who are responsible for planning in many corporate mergers (finance and accounting professionals) are different individuals than those employees who are to implement postmerger integration. The latter executives are SCM professionals. The exclusion of SC professionals in the early phase of M&A negotiation and planning takes place despite their greatest interactions with the customers of the acquired company.

The success of SC integration and capturing synergies of M&A deals hinge upon implementation of two policies: inclusion of SC professionals in the early phases of the M&A negotiations and development of integration strategy.

First, the inclusion of SC professionals in the earlier stages of M&A negotiation and planning enables them to identify the synergies that could result from the merger or acquisition. Second, M&As provide opportunities for corporate executives to reconstruct the company’s business model and develop new operations perspective and strategies by raising key strategic what-questions: what markets, what products, and what locations? Formulating interim-state and end-state SC visions and degree of integration of SC hinge upon answering these what-questions (Shirivastava 1986; Deloitte 2013c).

Second, the inclusion of SC professionals as members of the acquisition team enables the executives to concentrate on the formulation of a business strategy for the combined companies, while the SC professionals work on developing an operations plan for the new entity. Under such conditions, the likelihood of capturing synergies from the acquisition increases.

Formulation of integration strategies depends on the relative size of the target firm concerning the size of the acquiring firm as well as on the desired degree of integration. The operations integration of an acquiring firm with a target that has only, for example, 5 percent of its revenue would be dramatically different if the target’s revenue were higher than the revenues of the acquirer (Larsson and Finkelstein 1999).

Based on the scale of acquisition, four kinds of integration plans for SC exist. These integration strategies fall into four categories: transformation, bolt-on, consolidation, and tuck-in.

A transformative integration strategy requires a new organization structure that affects the existing processes and value chain of previously independent organizations. A bolt-on strategy means the target is acquired, but is operated as a portfolio enterprise and has independent processes and structure. Consolidation strategy involves large acquisitions and requires additional resources for SC integration. Finally, in the tuck-in strategy, key assets of the target are absorbed into the acquirer’s current operation with little or no integration (Deloitte 2013b).

It has been found that a large-sized differential between acquiring and acquired firms does not help in success (Hunt 1990). Of course, the effect of level of integration between the bidder and target firms on the performance outcome of the combined firm is indeterminate. Studies have shown both positive and negative impacts of the degree of integration on the performance of the combined firm (Zarb and Noth 2012). Therefore, no general statement and policy recommendation concerning the extent of integration can be suggested. One should consider the specifics of an M&A deal to determine the optimal level of integration.

Degree of Integration

The level or degree of integration is the extent of postacquisition change in the organizational, technical, administrative, and cultural setups. Defining the correct degree of integration is important because a high level of integration under all circumstances does not necessarily lead to efficient outcomes, and could be a source of negative synergies resulting from high coordination costs and increasing the likelihood of interorganizational conflict (Pablo 1994).

Motives for Acquisition and Supply Chain Integration

In planning for SC integration, the motive for the acquisition must be specified regarding synergies it might generate. What are the sources of synergies? Are synergies emerging from production, marketing, R&D, and administration, or do they come from an increase in market power as a seller or buyer? Do the synergies originate in the replacement of incompetent executives by competent ones, or are synergies created by financial and other risk diversifications? What competitive advantage does the acquisition provide? What types of SC disruptions would take place after closing? What is the appropriate level of SC integration? Studies show that these questions are seldom raised before closing (Tyndall 2010).

Actions for Rapid Supply Chain Integration

In any event, studies have found that the speed of SC integration is an important determinant of the success of the merger or acquisition. Companies that did not have much success in capturing the synergies they thought they would gain from acquisition required at least 2 years in integrating the SCM systems of the target and acquiring companies. The successful firms, in contrast, completed the integration of SCM within the year of completion of the deal (Langabeer and Seifert 2003).

Planning for SC integration should begin during the initial month of M&A due diligence and negotiation. A list of policies for an effective, rapid postmerger integration of SCM of the companies in mergers or acquisitions appears as follows (Langabeer and Seifert 2003).

Adopting these policies in integrating SC could assist, if not guarantee, capturing four types of synergies resulting from M&A (Herd, Saksena, and Steger 2005).

Revenue

A well-designed SC ensures customers’ satisfaction by filling the orders without interruption, hence avoiding loss of revenue during times of transition.

Operating Expense

The supply chain is an important determinant of the cost of production of goods and services, and degree of effectiveness of supply line has a direct impact on operating expenses as well as the net income of the enterprise.

Capital Expenditure

The outlays on physical assets involved in SC, assets such as manufacturing plants, warehouses, telecommunication, IT, and transportation equipment, are very large. Optimal SC sourcing and operations have a major positive impact on company’s cash flows by minimizing investment in these assets.

Working Capital

How quickly and efficiently a firm can convert raw materials into finished goods and have them available for consumers’ use can strongly affect the company’s cash flow.

Forming a New Corporate Culture

Commonly three sets of problems emerge during the integration phase of M&As: cultural (organizational and national) conflicts, selecting a new management team, and encouraging employees to welcome the employees of the target firm. We discussed corporate culture in Chapter 4 and used the following definition for it: “the part of the stock of knowledge that is shared by a substantial portion of the employees of the firm, but not by the general population from which they are drawn” (Cremer 1993, 354). Here, we discuss some policies in remedying the cultural integration problems of cross-country M&As, which are based on a survey of a sample of top management (chief executive officers, chief financial officers, vice presidents of business development) of active acquiring firms in France, Germany, Italy, and the United States (Very and Schweiger 2001). These measures include:

Postacquisition Processes and Internal Controls Integration

The main objective in the postacquisition integration of operations is a reduction of the average costs of production, inventory, marketing, and distribution by integrating similar departments and functions. However, in practice, incompatibility of variables such as management styles, systems of evaluation of compensation, and organizational cultures are major impediments to achieving the objective (Datta 1991).

We have discussed organizational culture and related issues in previous chapters, particularly in Chapter 4. However, we briefly review the remaining concepts of management style and evaluation–compensation system that determine organizational fit here.

Management style refers to the management’s attitude toward risk, the method of management decision making, and their preferred approach to control and communication (Datta 1991; Covin and Slevin 1988). Management styles across business organizations tend to vary considerably, and when two incongruous management styles from the combining firms come together in managing the new entity, a major conflict in the control of the new organization could arise.

Evaluation and compensation systems vary considerably across organizations and industries. Studies have shown significant differences among evaluation criteria companies use for evaluating managerial performance (Lorsch and Allen 1973; Bloom and Van Reenen 2006). Accordingly, when management teams come together from different reward and evaluation systems in the new company, the potential for conflict increases. The new management team should establish levels of authority, integrate business processes and internal controls, and establish and implement monitoring controls.

Postacquisition IP Rights Management and Control

Intellectual property (IP) is an important asset that is transferred in M&As. By the transfer of IPs, the merged entity could discover overlapping or complementary IP assets. In certain M&A situations, the acquiring and target companies may have combined IP rights that would form a formidable barrier to entry into the industry; hence, this may create a privileged monopoly situation for the new firm. Accordingly, the issues of patents, IP rights, and the adverse effects of M&As on consumer welfare by constraining innovations are sure to arise in M&As. These are important issues that must be addressed in premerger due diligence and postmerger integration. This is an important topic, but it is beyond the scope of this book. We refer the reader who is interested in the details of this topic to Durand (2005).

Nevertheless, the essential task at the postmerger integration stage is a determination of combined IPs of the merged companies. The IP assets should be categorized as fully protected and not protected. Of course, some of the IP holdings would fall in between these two extreme cases for being somewhat protected. Having prepared a list of IPs owned by the new entity, the next task is learning what each IP does, and what the new entity wishes to achieve. After implementing these two tasks, the postmerger implementation team should develop an IP strategy for the new company (Tayler Vinters Solicitors 2010).

Postmerger Acquisition Practices in Asia

A recent study by Cogman and Tan (2010) indicates that the required fast-paced postmerger integration model, which is based on practices of executives of Western companies, has not been followed by executives in many recent acquisitions in Asia. The authors wrote:

In a recent review, we estimated that roughly half of all Asian deals deviated significantly from the traditional post-merger integration management model, which aims for rapid integration and the maximum capture of synergies. Over a third of the Asian deals involved only limited functional integration and focused instead on the capture of synergies in areas such as procurement, with an overwhelming emphasis on business stability. An additional 10 percent attempted no functional integration whatsoever (Cogman and Tan 2010, 8).

The reason the authors give for such practices is the difference in attitudes of Asian and Western executives toward risk. The Asian executives are accustomed to organic internal growth rather than growth through M&A; many Asian executives aim to minimize the short-term risk of failure. Their aim is long term. They tend to trade capturing the immediate benefits of synergies for gaining the long-term benefits of expanding into new and unfamiliar markets, introducing new product lines, and gaining technological and marketing capabilities. Moreover, the management of the acquiring companies by not making fundamental changes in the management of the acquired entities give themselves opportunities to learn operational details of the target firms.

With this background discussion about postmerger integration, we present two case studies relating to possible issues that could arise in both domestic and cross-border M&As in Part III of the book. The first case study concerns the labor conflict arising in the postmerger integration of Microsoft Corporation acquisition of Nokia factory in China. The second case study pertains to a Chinese company’s acquisition of a company in Italy.

Summary

This chapter deals with postmerger integration. It was stated that the failure of most M&As to realize the synergies that were envisioned before the acquisition is a result of difficulties in integrating the acquired and acquiring companies. After a brief review of approaches to postmerger integration, it was stated that integration plans should be devised in the early stages of M&A activities. Furthermore, different aspects of integration including integration of functions and departments were reviewed. Finally, some policies for organizational as well as national cultural integration were suggested. A case study was presented by way of illustration of difficulties companies could face in postmerger integration processes.