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Feb. 19, 2009

NOTE ON POSTMERGER INTEGRATION

Introduction

Approximately 65% to 85% of mergers fail.1 That’s a startling statistic. While there are
myriad reasons why mergers are not successful, in many cases the reason is simple: a failure to
develop and execute an appropriate postmerger integration (PMI) strategy. Clues to successful
PMIs can be gleaned from the 15% to 35% of mergers that do succeed; this note contains some
tips and best practices distilled from those successes. Because every company and every merger
is different, this collection of practices is by no means exhaustive. Instead, its purpose is to serve
as a starting point for the creation of a well-tailored strategy for a firm planning to undertake the
assimilation of an acquisition into a new, combined entity.

Tip 1: Create a dedicated integration team

Regardless of the type of integration, there is value in creating an integration team made
up of individuals from both firms. The individuals selected should possess expertise in the
functional areas implicated in the merger. The integration team should be led by someone who is
a champion of the merger and prepared to work with outside consultants if any are hired.
Integration should be treated as a project to be managed and considered separately from the day-
to-day operations of the firm. All too often, firms fail to treat integration as a separate project and
let worries about integration overshadow firm operations or, perhaps worse, pay little attention to
integration concerns in favor of focusing on daily operations. By contrast, absence of a dedicated
PMI team may result in management’s distraction from operations, leaving the core business
vulnerable to competitor mischief. Finally, the integration team should be formed in advance of
the merger announcement, and much of its work should be completed prior to closing.

1
See Appendix 1 in The Synergy Trap by Mark Sirower (New York: Free Press, 1997), for a review of the
relevant research.

This technical note was prepared by Lipi Patel (MBA/JD ’09) and L. J. Bourgeois, Professor of Business
Administration. Copyright ã 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA.
All rights reserved. To order copies, send an e-mail to [email protected]. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by
any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden
School Foundation.
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For example, when Proctor & Gamble (P&G) acquired Gillette in 2005, Rick Hughes,
P&G’s chief procurement officer, created a cross-functional team to complete the integration of
the two firms’ procurement groups. Limited in resources, P&G was only able to hire two
additional employees to manage the integration process, but with the help of existing employees,
Hughes and his team were able to successfully identify necessary staff within both organizations,
to establish procedures for the completion of a complicated technology-platform integration, and
to select the best suppliers from within each firm’s network. Without a clear plan in place and
without a team to execute that plan, P&G’s acquisition may not have gone quite as smoothly.2

In cases where the acquiring firm or integration team do not have direct experience with
mergers, outside consultants can assist in the management of the process and offer best practices.
Although hiring consultants can be costly, PMI is an area where outside advice, guidance, and
objectivity may be helpful. Outside consultants also are likely to be well versed in the project-
management aspects of PMI and may free up time for key managers to focus on business.

Tip 2: Understand your firm’s strategic position and tailor your PMI strategy accordingly

Mergers can take a variety of forms and understanding what kind of merger a firm is
undertaking can help in the formulation of an appropriate strategy. One of the ways in which a
target can be classified strategically is according to the degree of its relatedness to the acquirer’s
core business.

Figure 1. Acquisitions by degree of relatedness to core business.

Source: Created by the author.

Figure 1 categorizes acquisitions in terms of closeness to the buyer’s business. These

classifications represent ideal or pure forms; different deals may include different elements of
each category, but the spectrum may help one get a sense of where a particular deal falls. In

2
David Hannon, “P&G-Gillette: Blueprint for a Merger,” Purchasing.com, January 17, 2008
http://www.purchasing.com/article/CA6518715.html, (accessed February 3, 2009).
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addition, if a buyer has completed other mergers or plans to complete additional deals, he or she
can assess what is being gained by locating those deals on this spectrum.

These classifications provide a broad-stroke understanding of what types of mergers there

are, and they may help identify some general challenges to expect when completing a deal. Here
are some examples of issues that may arise in the various categories of mergers:

· Buying a competitor (typically, a “roll-up” strategy): Are the cultures of the firms likely
to create rivalry? Will the target firm be upset about “losing out” to a competitor?
· Geography: What local laws and regulations need to be considered? Does the buyer’s
business work in that environment? How are local competitors different from the buyer’s
traditional competitors?
· Related-Constrained: How does the buyer choose the best practices of each firm and
apply them to the newly merged entity?
· Value Chain: What does each firm need to learn about the new business each is entering?
Is it most sensible to allow the target firm to operate as its own business entity? What
should and should not be integrated?
· Related-Linked: What kind of link (direct or indirect) does this acquisition represent? Is
the buyer moving too far away from its core business?
· Unrelated Conglomerate: Does culture matter? Should this acquisition be treated as a
bolt-on?

Consider the merger of AOL and Time Warner. Although both firms conceived of the
merger as related-constrained (complementary products), in reality, the merger fell somewhere
between value chain (one firm supplying another) and related-linked (establishing a platform in a
new industry). AOL’s main line of business was the delivery of Internet access, whereas Time
Warner provided various forms of visual media and entertainment. Although they identified a
number of opportunities for synergies and expansion, the two firms failed to recognize that
value-chain integrations are among the most difficult to complete due to differences in
technologies, differences in economic models, and by implication, differences in culture. These
differences were glossed over by AOL and Time Warner, and unfortunately, both firms failed to
gather sufficient information about the true business practices of the other firm.

Tip 3: Think about how much has to be integrated

Once the buyer has thought about where the deal falls on the larger map, it is helpful to
dig a bit deeper and to start thinking about how much of the other firm should be integrated. One
mistake many firms make is to assume that all parts of the target must be integrated into its new
parent, or, conversely, that the target should be kept at arm’s length. But not all acquisitions are
alike. Figure 2 illustrates common organizational arrangements and highlights changes in target
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identity as well as the type of relationship between firms that might emerge when differences in
the acquisition strategy are considered.

Figure 2. Common organizational arrangements.

Organizational Degree of Relationship to or with

Arrangement Integration Target Identity Parent
Separate business Target remains
Hold units autonomous Cash moves between firms
Merge back office Target’s external Realization of one-time
and keep separate identity remains, but the synergies followed by transfer
Retain/Preserve product lines internal identity changes of culture and best practices
Merge staff and
field employees;
Absorb impose your way Target identity is lost Takeover
Create a new New company identity
Meld company is created Partnership

A merger does not have to be all or nothing; the degree of integration may be tailored to
the needs of the firms involved. For example, one would expect conglomerates or private equity
firms to hold their various units separately, whereas in an industry-consolidating acquisition of
competitors, one would expect the absorption that accompanies taking excess capacity out of the
system.

Tip 4: Due diligence is not only about the other firm (go to school on yourself as well)

Integration teams should spend time conducting due diligence on the other firm. Research
about operations, culture, and ways of doing business needs to be conducted to ensure that
integration runs smoothly. In addition, the best practices that the other firm brings to the table
should be considered for incorporation into the buying firm’s strategy. That said, preparation for
an integration should also involve due diligence on one’s own firm. This is especially true in
situations where the value of both firms resides in intellectual or human capital, such as in the
case of professional-service firms (e.g., law or advertising).

One approach to consider is writing down both firms’ top-10 decision rules.3 Most firms
have some ingrained way of doing business that may not always be readily obvious or readily
articulated. Taking the time to clarify the firms’ implicit decision rules can help determine

3
L. J. Bourgeois, Strategic Management: From Concept to Implementation (Fort Worth, TX: Dryden Press,
1996), 700–02.
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whether the buying firm’s values are compatible with those of the target. Also, understanding
one’s own decision-making rules could help an integration team create a strategy that is
customized for its stakeholders.

Next, if the buying firm has gone after other acquisitions and mergers in the past or
shifted lines of business, it should consider mapping the strategies and moves employed in the
past and essentially connecting the dots. Very few intended strategies are actually realized, but in
the process, new strategies emerge. Connecting emergent strategies and identifying patterns can
help one determine what is missing from his or her organization as well as what skills, products,
and expertise are available to work with.

Tip 5: Communicate, communicate, communicate

We all know that change is difficult. All stakeholders will have questions and concerns
that need to be addressed as the merger unfolds. They will be phrasing their questions and
evaluating responses they hear through the WIFM or the “what’s in it for me?” filter. As such, it
is critical that the team identify all stakeholders whose concerns must be addressed and do its
best to craft responses with their various needs in mind.

Communicate timelines. Communicate next steps. Communicate goals. People tend to

react better when they have more information and when they feel that their participation and
input is valued. Think about how to best get information from stakeholders (phone lines, e-mails,
help desks). Integration teams should be deployed wisely and must ensure that they and other
senior executives who are championing the merger are listening and responding to stakeholder
concerns.

Tip 6: Pace and speed are important

When planning a PMI strategy, firms should emphasize urgency. For example, serial
acquirer Cisco always ensures that integrations happen quickly so that political troubles and
jockeying are avoided. Similarly, GE Capital warns against the dangers of slow change;
uncertainty may lead to decreased morale and also compromise the likelihood that synergies will
be realized. And finally, indecision can be very expensive. There is value in executing decisions
quickly with the information available rather than waiting to see if the choices made will be
absolutely correct. If the right work is done ahead of time, an integration can be completed
swiftly and successfully.

To ensure that the pace of an integration is considered and respected, the acquiring firm
should form timelines and try to stick to them. The steps of the integration should be mapped
out, and the associated timelines should be communicated to the relevant stakeholders. The
sequence of events may matter a great deal and formulating a timeline can help an integration
team and senior executives keep track of progress.
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Tip 7: Formulate Day 1 priorities

Although the acquirer will do much of the work ahead of time, the day the deal is
announced, a lot will change, and a lot will change quickly. There is tremendous value in
preparation: The integration team should think about what needs to be in place and ready to go
on Day 1 so the merger can happen and so all stakeholders can understand what is happening.
Will the merged firms need a completely new global directory so employees can contact each
other? Will they need new signs and stationery so customers will know about the new entity?
Will the infrastructure need to be merged so e-mails and telephone lines work smoothly? How
will titles and responsibilities be reshuffled? Who will be responsible for which functions of the
business? Considerations such as these could easily fall by the wayside if not considered in
advance. What is in place on Day 1 will help to set the tone for the rest of the integration process.

Tip 8: Establish metrics to evaluate progress

It is important that the integration be treated as a project, and part of project management
involves continuous reflection. As one plans the integration strategy, he or she should think
about the metrics that will be used to evaluate PMI performance. In addition, thought should be
put into how those metrics will change over time and how to best communicate those metrics to
the various stakeholders.

The established metrics may be defined in terms of dollars saved, in terms of headcount,
or in terms of planned steps to be completed by certain deadlines. Regardless of which
definitions are chosen, these metrics should be incorporated into the PMI timelines and should be
used throughout the integration process to track progress.

Tip 9: Promote champions and remove cancers

If the merger will require personnel reorganization or a shifting of responsibilities,

integrators should identify and promote champions of the change and remove detractors. For
example, if a firm is acquiring another firm and the (obstructionist) CEO of the target firm
wields a great deal of power and influence over his employees, the buyer CEO may need to
remove him from a position of authority to get buy-in from those employees. Similarly, if there
are executives within the buyer’s own organization who are antimerger or who are trying to
undermine the shifts in power and influence, they may need to be removed.

A merger can expose old problems, hide existing ones, and always introduce new ones.
The PMI leader should be aware of the current shortcomings of his or her organization and
ensure that his or her staff is well equipped to handle the new problems that will arise. The best
way to do that is to remove the cancers from the organization and to encourage the development
of the champions.
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Pharmaceutical giant GlaxoSmithKline learned the value of promoting pro-integration

leadership after its first failed merger attempt in 1998. During the first round of negotiations, the
two firms were unable to reach consensus on who should run the newly combined entity,
resulting in a breakdown of merger talk altogether. In 2000, realizing their past mistakes, the
CEOs of both firms agreed to a mutually beneficial leadership transition plan to ensure
successful completion of the merger. SmithKline CEO Jan Leschly agreed to step down,
allowing his second in command, Jean-Pierre Garnier, to become chief executive of the new
company. At the same time, Glaxo Wellcome CEO Richard Sykes agreed to become chairman of
the merged firm with the understanding that he would retire after two years. This plan allowed
both firms’ management teams to get what they wanted and complete the integration.4

Tip 10: Cultural sensitivity matters

As PMI efforts focus on the nuts and bolts of integration strategy such as the architecture
of reorganization and the plumbing and wiring, one must not lose sight of the fact that the softer
areas of integration matter a great deal as well. In fact, cultural mismatch can lead to very painful
and dramatic failures. A critical part of the due diligence process is to understand how the
organization with which a firm is merging operates and to understand the values that drive
management and employees at that firm.

Culture can be difficult to evaluate, but much of the evaluation will come from candid
conversations, interviews, and observation of the other firm. It is also important to consider how
differences and similarities in culture will affect decisions at every level of the firm. And finally,
training and development should focus on cultural understanding as well as functional
understanding. If the cultures of the firms involved mesh well, there is an increased likelihood
that expected synergies will be realized.

DaimlerChrysler provides a strong example of the problems that can arise from a culture
clash among employees. The postintegration team invested much time and money trying to help
employees understand the differences between American and German culture, but the firm’s real
problems seemed to stem from differences in management perceptions and business practices.
The firms championed different values, had different compensation structures, and ultimately,
had very different philosophies about how to brand their products.5 Although there is no question
that understanding the differences between cultures in the traditional sense is critical, it is also
important to realize that culture includes business practices and routines, firm values, and
management and employee attitudes.

4
“Merger’s Troubled History,” BBC News, January 17, 2000, http://news.bbc.co.uk/2/hi/business/606677.stm
(accessed February 3, 2009).
5
Sydner Finkelstein, “The DaimlerChrysler Merger,” Tuck School of Business (Dartmouth) no. 1-0071, 2002,
http://mba.tuck.dartmouth.edu/pdf/2002-1-0071.pdf (accessed February 3, 2009).
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Conclusion

The PMI strategy that a firm employs should be customized to the particular needs of its
organization and to the deal it is undertaking. That said, there are some general principles that
could help an acquirer determine the strategy that will be most beneficial. The tips and best
practices provided in this note are not a comprehensive collection but should serve as a useful
starting point for the creation of any integration plan.