By Joan Indiana Rigdon
Red Herring magazine
July 1, 2000
Companies are engaging in one of the riskiest business practices around:
merging. When consulting
firm KPMG studied the 700 biggest mergers that occurred between 1996 and 1998, they found that
83 percent of the studied mergers didn't boost the acquirer's shareholder value within a year of
consummation. In other words, they failed.
Mergers fail for all sorts of reasons: poor choice of partners, poor timing,
high-level ego clashes, or
paying too much. But more often, they fail because the companies put minimal effort into the
process of integration.
Integration is the colossal job of combining two separate companies in
every way -- an effort that
goes far beyond the elimination of redundant operating costs. It covers everything from market
philosophies to payroll to the most pedestrian details, like whether meetings are conducted in
person or via conference call. As tricky and unpredictable as this can be, it has to happen fast.
Just a few years ago, investors gave companies up to two years to recoup the price paid for an
acquisition. But now that more companies are buying each other for a billion or more dollars a pop,
investors are decidedly getting more antsy. "In this day and age, we've barely got a year to
demonstrate to Wall Street that we got the value out of it," says Iain Somerville, an Andersen
You can't combine two companies that fast, and get all the details right,
any more than you could
choreograph the collision of two tidal waves. But that doesn't mean it's impossible to get enough of
it right to increase shareholder value. Companies that have succeeded, like Cisco (Nasdaq :
CSCO), say they beat the odds by laying careful plans, and then setting up integration teams (see
"Union Jobs") with the authority and the skill to make the plans happen.
The task before integration teams is changing along with the nature of
the mergers themselves. In
traditional mergers, companies buy each other because they want to boost profits by cutting down
on the costs of infrastructure. So when banks or manufacturers merge, they typically perform
"integration" by the sword: they shut branches, close plants, and lay off "redundant" workers.
But in today's technology-driven economy, companies have a different reason
for buying each
other: speed. As Microsoft (Nasdaq : MSFT) learned the hard way with Netscape, it only takes
three years for a couple of corn-fed college seniors you've never heard of to develop a technology
that dumps your industry on its head and threatens your multibillion-dollar monopoly. With stealth
competition like that, companies can no longer afford to take the time to build all their capabilities
in-house. They need fast access to new technologies, patents, markets and -- amid the lowest
unemployment rates in three decades -- talent.
That's one of the chief motivations for the recent record-setting buying
spree. In 1999, there were
a total of 9,278 mergers, with prices paid totaling $1.42 trillion, compared to 7,809 deals valued at
$1.2 trillion the year before, says Mergerstat, a Los Angeles merger-tracking firm.
When companies merge in search of technological innovation and talent,
the goal of integration is
to grow, not shrink. So, rather than laying off workers, acquirers have to work hard not to scare
off the ones they've just paid millions of dollars a head to buy. The more successful acquirers try
to preserve huge chunks of the culture of what they bought, even if that means paying -- and
coddling -- some employees like baseball stars.
After all, why not let acquired employees keep their beer busts, if it
makes them happy and doesn't
hurt the business? Cisco does. "The last thing we want to do is to make this acquisition and then
rip it all apart, and leave nobody there to meet our success metrics," says Mimi Gigoux, Cisco's
director of human resources for mergers and acquisitions.
Integration starts as soon as any merger overtures start, with top management
from each side
sitting down to make sure they are compatible on big issues like business goals and culture. A lot
of technology companies insist culture isn't a big deal, because -- the reasoning goes -- an
engineer is an engineer, and a lot of technology mergers boil down to one group of engineers
acquiring another. KPMG doesn't buy that approach. "Cultures are never identical. Our advice is to
understand the cultural differences and take action to mitigate the cultural barriers," says Jack
Prouty, KPMG's partner in charge of business integration.
Another nugget of advice the consultants offer: run screaming if the culture
gap looks too big from
the get-go. Redback Networks (Nasdaq : RBAK) says it walked away from one deal partly because
of the target company's regimented work hours. During due diligence, Carrie Perzow, Redback's
vice president of human resources, staked out the target's coffee pots. She noticed that workers
materialized at their desks at precisely 9 o'clock, suddenly quit working when a lunch bell rang at
noon, and repeated the performance at dinner. Redback employees like to eat too, but they're not
Pavlovian. "I knew in a hot second that there was no way those employees would survive at
Redback," Ms. Perzow says.
If both sides survive their first dates, they announce their talks and
the real work begins. But
there's only so much they can do before the deal is announced. The reason: they are still separate
legal entities, so they are not allowed to access each other's competitive data, like planned
products, pricing strategies, inventory databases, or even each other's intranets.
Lacking such access, top managers from both sides must try to negotiate
a price as best they
can, while an integration team decides on a new executive team. The key thing to remember here,
says Andersen Consulting's Mr. Somerville, is that someone has to run the company. He remembers
one telecom client that named coleaders, hoping to decide on one leader later. It didn't work.
"There's no such thing as a merger of equals," Mr. Somerville says.
It's much better to lock in commitments early. In some industries, like
regulations make it difficult to name a new management team before the deal is done. But in other
industries, it's not uncommon for companies to have a verbal understanding early on about who the
new leaders will be. Last year, when Xerox announced its intention to buy the color printing
business of Tektronix (NYSE : TEK), it also said that the acquired unit's chief, Gerry Perkel, would
become the head of Xerox (NYSE : XRX)'s newly combined printing business. The release also
named Mr. Perkel's boss, and his boss's boss. By making all this clear early on, Xerox was hoping to
remove uncertainty. According to KPMG's study, merging companies who clearly outline the new
management team right away are 26 percent more likely to increase shareholder value.
As soon as talks are announced, shareholders, customers and employees want
to know what's in it
for them -- or whether the merger will muck up business so much that they should take their
money or talent elsewhere. To cut down on confusion, KPMG tells its merging companies to prepare
FAQs (frequently asked questions, along with answers) for all of their constituencies so the
company communicates a consistent message. Even if a company doesn't know all the answers, it
can give timelines. It can say, for instance, that it plans to keep the same products and invoicing
system for the first three months, and then gradually change over to new products and invoices.
"We want everyone scripted," says KPMG's Mr. Prouty. "We don't want somebody, like a salesman,
With FAQs in hand, the merging companies have to visit their biggest customers
right away. They also have to face their employees. With 58 mergers under its belt, Cisco takes
pride in giving every acquired employee a packet on the day the merger closes, telling them about
their new pay, bosses, and benefits. The packet also includes new business cards and their Cisco
But the most important part of communication is meetings: successful acquirers
like to meet with
their employees in large groups, small groups, and one-on-ones. Lucent Technologies (NYSE : LU),
which has acquired 35 companies since 1996, says it encourages employees to ask anything that's
on their minds in such meetings. "We ask them about 100 times a day how they're doing, how's it
going, what do you think?" says Mary Jane Raymond, Lucent's vice president of merger integration.
The trouble is, companies don't always like to hear the answers to these
questions. While many
employees are concerned about big issues like product strategy, they're often more worried about
what seems trivial. This can be a hair-pulling time for managers. Ask Barry Schuler, America Online
(NYSE : AOL)'s president of interactive services. After AOL bought Netscape last year, Mr. Schuler
was trying to figure out how to combine the two Internet giants' products and markets. But his
phone kept ringing with minutiae. "I used to get my expense check signed by one person and now I
have to get it signed by three people," Mr. Schuler says, echoing one of the complaints he heard
from his new Netscape charges. Or: "I used to call Joe to install my computer. And whatever I
wanted, I got."
Myopia? Yes ... and No. Mr. Schuler says as maddening as those calls were,
he soon realized that
they were a key indicator of employee satisfaction with the merger. Companies should pay
attention to the details because each is "a signal of what it's going to be like in the new world," he
says. (And obviously, many Netscapers didn't like the new world. Although AOL says it kept all the
Netscapers it really wanted, the fact is, many quit).
The best way to deal with what looks like inverted priorities is to look
at their impact on the
business. That's Cisco's approach. If an employee is riveted on some detail or some perk that won't
hurt the business, Cisco doesn't want to stand in the way. Taking away something like a beer bust
would only scare off the talent it sometimes pays as much as $3 million a head to acquire.
Redback had a lot of incentive to preserve the holy cows that came out
of its merger with Siara
last November. After all, Redback paid $4.3 billion for Siara, a 225-person startup with no
revenues, products, or customers -- that works out to about $19 million a head. And some of
those heads are well fed. Before the merger, Siara had a tradition of serving dinner every
weeknight for an average of 80 workers who stayed late. Redback decided to maintain the
expensive tradition. "People are more productive if they talk over dinner," says William Kind, senior
vice president of marketing and product management. If each meal results in just ten extra minutes
of work a night "it's worth it," says Pankaj Patel, Redback's senior vice president of engineering. So
Redback now caters dinners for 100 (not everyone stays late).
With the unemployment rate the lowest it's been in 30 years, a lot of companies
are offering big
money for talented workers. So in order to keep the ones it buys, acquired companies have to
make sure their pay is competitive. For a lot of mergers, that's not so difficult. Redback, for one,
says most of the Siara employees fit right in with its pay practices.
But other companies have very different pay practices, like Xerox and Tektronix's
business. The best way to bridge that gap is to make sure the acquired employees don't lose
anything. That means giving them raises if they tend to be paid less, or letting them keep their pay
if they tend to be paid more.
Xerox estimates that 70 percent of the acquired employees fit in with its
pay scales. Most acquired
employees didn't have any change in pay at all, says Erin Isselmann, spokeswoman for Xerox's
newly combined office printing business.
But the other 30 percent were a headache. The Tektronix side of the office
printing business pays
its office administrators more, because they're hard to find in Wilsonville, Oregon. The Tektronix
side also has a few employees in far-flung offices who get paid significantly more than their
counterparts at Xerox. The solution? "You just live with that," says John Vester, Xerox's vice
president of strategy and business development, and one of the key people in charge of the
integration. Over time, Xerox hopes to even out the scales by giving higher paid people more
There are no easy rules for combining huge areas, like sales, information
systems, inventory, office
equipment, and real estate. The best approach here comes from medicine: do no harm. If two
companies were making products and shipping them before the merger, they shouldn't take any
steps that might jeopardize that. Instead, KPMG's Mr. Prouty suggests that companies look for
"quick wins," or relatively easy changes that can have a high impact on moving a merger forward.
For instance, during talks, the two companies might figure out that their
combined product line
allows them to go after customers that neither one of them could have won on its own. If merging
companies can announce such a deal soon after the merger closes, that's a quick win. Or maybe
they can switch to a single supply vendor within 30 days.
The key here is to prioritize, and not necessarily around cost. Xerox,
for instance, wanted to save
money by installing its own copiers at its newly acquired Tektronix unit, which was renting copiers
from a Xerox competitor. Xerox could have swapped all the copiers out right away, but that was a
low priority. "That was something you didn't need to change, so why mess with it. It disrupts the
normal business," says Xerox's Mr. Vester. The company decided to make the change gradually,
over a few months.
Instead, Xerox put its energies into solving more immediate problems, like
business cards. After the
merger, Mr. Vester learned that it would take six months to get new business cards for employees
at the newly combined office printing business (OPB). Rather than wait that long, Mr. Vester
decided to print the new cards on OPB's own printers. (But since Xerox wants OPB to have official
cards, he had to place an order for those, too.)
The most difficult part of any merger is combining cultures from both sides.
That goes well beyond
issues of pay and a few holy cows. Culture shows up everywhere -- dress, meetings, and how
many phone calls it takes to get the answers to a single question. Consultants say that in the best
mergers, no one side absorbs another. Instead, the companies try to pick the best practices from
To that end, when Xerox acquired the Tektronix unit, it announced that
the merger wasn't just
about expanding its copier business, but learning some new, nimbler business practices. And Xerox
could use some: in May, it ousted CEO G. Richard Thoman amid keen competition, deteriorating
earnings, and falling stock prices. The stock had tumbled from the $60 range last summer to the
mid-$20s at press time. In March, Xerox announced its second restructuring in two years. The
latest one came with 5,200 job cuts and a $625 million write-off.
In addition to keeping on Tektronix's Mr. Perkel as the head of Xerox's
new OPB, Xerox also decided
to headquarter OPB in the Tektronix unit's Wilsonville, Oregon offices. Just to make sure no one
missed the significance of these moves, top Xerox executives, including former CEO Mr. Thoman,
have flown to Wilsonville to tell the former Tektronix workers that they hope to not only preserve
the Tektronix culture, but copy the best parts of it -- even if that means breaking Xerox rules and
pissing off people in the Stamford, Connecticut headquarters.
"We were acquired for our DNA," says Duane Schulz, a former Tektronix executive
who is currently
vice president of new business ventures for OPB. "And part of the frustration is making sure not to
let our employees copy the Xerox DNA."
That cultural transfusion will be extremely difficult. While Xerox likes
to think of itself as a
cornerstone of the new economy -- its press releases say Xerox invented the first personal
computer and the graphical user interface -- its culture definitely hails from the old school. Suits
and ties are de rigueur in Stamford, and casual Friday means you get to wear a sports coat.
Tektronix, at age 53, is no startup. But its culture is decidedly left coast. In Wilsonville, Tektronix's
former color printer workers wear Dockers and even jeans with holes. They live and die by email,
while some of their Xerox counterparts go a week without checking.
As Xerox and Tektronix worked on combining their businesses, they learned
just how different their
cultures were. Sometimes it manifested in small ways, like on January 3, when Mr. Vester arrived in
Wilsonville to celebrate the merger's close. He had met three of the Tektronix division's executives
several times before, and they were wearing suits each time. So Mr. Vester wore his, only to
discover that everyone else was dressed casual. He wanted to change, but his casual clothes
were in his luggage, which had been delayed in Seattle.
That was easy to fix, but it's the clashing business habits that really
strain patience. Xerox favors
large meetings, both in person and over the phone. Tektronix prefers email. It's not unheard of for
someone from Xerox headquarters to ask a Tektronix alumni to take a 10-hour round-trip plane ride
in order to attend a two-hour meeting, says Mr. Schulz. It's not uncommon for the Tektronix alum
to say No.
Mr. Vester hears both sides of it. "Why can't I get three guys to get on
a plane and fly to
Rochester?" he says, echoing a headquarters complaint. "And then I had an email (from the
Tektronix side): 'This drives me bananas. I solved this problem three times. Why do I still have to
talk to this guy?'"
The solution: since one of the Tektronix division's biggest assets is its
business culture, Xerox,
working with KPMG, has taken great pains to build a "bubble" around OPB. To that end, Xerox
tapped some of its executives to serve as coaches (it won't call them that). These are people from
the Xerox side whose job is to run interference between Wilsonville and headquarters. They help
the people in Wilsonville figure out what Mr. Vester calls Xerox's "process-laden" culture. Among
other things, they tell OPB employees which meetings really are important and which can be
Mr. Vester has tried to get both Wilsonville and headquarters to funnel
all communications through
his integration team. But they don't always listen. In that case, Mr. Vester wants OPB workers to
defend themselves. When someone from Stamford calls to explain the "Xerox way," he tells OPB
workers to remember that they aren't necessarily supposed to snap to it. At first they did, and
bogged down OPB's business because they wanted to please their masters. Now they have orders
from the top to stand up for themselves and follow guidelines that Xerox's upper echelon has
established for OPB.
Among other things, the guidelines call for efficiency. Against that test,
question looked like this: "What's more efficient, sending 784 bytes over the Web or spending a
bunch of money on a plane ride for a meeting?" asks Mr. Schulz. Email won.
Mr. Vester had to loosen requirements for his own meetings, too. He used
to host large, three-hour
conference calls once a week. After many complaints, he has whittled them down to just one hour,
once or twice a month, with only half the people.
A lot of executives get into the merger for the thrill of the deal, and
then lose interest once the
integration is under way. Andersen Consulting's Mr. Somerville says this is the biggest pitfall for
mergers. "Executives lose sight of the fact that they got into this for the value," he says.
To keep things on track, merging companies have to keep checking to make
sure that they are
integrating various parts of the company on schedule. For relatively simple mergers between small
companies, like the one between Redback and Siara, this can be relatively easy. Redback's vice
president of human resources, Ms. Perzow, worked from a spreadsheet that listed deadlines for
things like creating an internal communications plan and forming common policies for expense
reports and purchase orders.
It's much harder to track how well two cultures are meshing. Most companies
rely on meetings and
internal Web sites with email links for this. But that assumes that employees will always speak up
about what's bothering them. Xerox and the Tektronix unit went one better: during talks, Tektronix
employees spontaneously started their own Yahoo chat board, a kind of anonymous online bitch
session. Mr. Vester and others on the integration team didn't formally monitor it, but they did look
in often enough to get a feel for how the merger was going.
The integration team posted some of the chat board's comments, with answers,
on Xerox's internal
Web sites -- unless the comments were "nasty or snotty," Mr. Vester says. He didn't actually mind
those. "Over time, if they were getting nastier and snottier we knew we weren't doing something
right," he says. These days, he says, the snottiness index is way down. "Not many people use it
anymore," Mr. Vester says. "People are past the integration. They're back to running their
business." He hopes.
Joan Indiana Rigdon is a freelance writer living in San Francisco. Write to email@example.com.
By Joan Indiana Rigdon
Red Herring magazine
July 1, 2000
Companies who have successful large mergers under their belts are using
a not-so-secret tool that
helps them get their arms around what could otherwise be unwieldy work: integration teams.
Sometimes the teams include a few outside consultants, but the best teams
are led by top
managers from each side, from the CEO down to line managers in charge of large areas of business,
like operations and human resources. Some executives plead they don't have time to spend on
integration, because they are running their business. What they don't realize is that without
integration, there is no business. What happens after the deal is "where you win or lose it," says
Iain Somerville, a partner at Andersen Consulting.
Integration teams will vary as much as the integrating companies, but some
parts of the process
are common to any company. As soon as they announce merger talks, both companies should form
a single steering committee comprising their CEOs and chiefs of finance and operations, advises
Jack Prouty, a partner in charge of business integration at consulting firm KPMG. Between the
announcement and the day the merger closes, the steering committee should work out large issues
that haven't yet been resolved, such as which business units to keep or drop.
If the merger is more of a combination of businesses -- as opposed to an
absorption, as when
Cisco Systems (Nasdaq : CSCO) buys a startup -- it's important to have people from both sides at
all levels on the integration team. If an acquired executive doesn't see many of his former
colleagues on the integration team, he can only form one conclusion: "You've just told me it's going
to be your way or the highway," says Mr. Prouty. "That's a signal we don't want our clients to
The steering committee also names an integration director. It doesn't matter
what the director's
expertise is. "We don't care if they don't know anything about integration," Mr. Prouty says.
Instead, what's important is that they are up-and-comers who know their company's culture well,
so they know who to call for what information. And a touch of diplomacy doesn't hurt either.
Under the integration director should come vice presidents from the main
areas of both companies,
Mr. Prouty advises. They aren't expected to work full time on integration. Instead, they're more like
"executive champions," Mr. Prouty says. They name middle managers to handle specific tasks, and
intervene only when the work hits a snag.
So, for instance, vice presidents of human resources from both sides might
each assign small
groups of their own managers to integrate benefits, payroll, and expense reporting policies. If the
benefits teams disagree over options vesting, the vice presidents of human resources would
intervene. If the vice presidents can't solve the problem, they take their question to the steering
Since it's against the law for separate companies to share competitive
information, the teams can
only do so much before the merger closes. The team can work out new benefits packages early on,
but it can't announce them until the deal is done. Other tasks, like merging databases, will take a
The important thing to remember is that while speed is key, too much of
it can be a bad thing.
"We've learned there's a right speed," says Andersen Consulting's Mr. Somerville. "If you try to go
too fast, you lose customers and employees. If you go too slow, you may be outpaced by
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