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Mergers and Acquisitions
Post Merger
Organization Design
By Walt Shill
Under the best of
circumstances, designing a new organization is a complex assignment,
difficult to get right. And mergers and acquisitions (M&A) transactions
rarely offer the best of circumstances. While they present certain
opportunities for one-stroke organizational transformation, the
offsetting pressure, stakes and potential strategic pitfalls are
extremely high.
 Nevertheless, designing a new organization under M&A conditions can be done,
and when it is, the returns can be substantial. Postmerger organization
design can tangibly help M&A transactions deliver on their original
strategic propositions.
Traditionally regarded as a "soft" discipline (if it was recognized at all),
post merger organization design has matured enough in concept and execution
technique to drive sustained high performance, as measured in "hard"
metrics. In an era when two out of every three mergers underperform, this is
no small matter.
A Matured Discipline
The basic conceptual assumptions of post-merger organization design are
straightforward. First, while every merger and post-merger integration is
different in its details, each also proceeds through predictable stages and
decisions, which can be addressed through shared best practices. Second, the
assumed overarching goal of applying these practices is to achieve the
largest and fastest value creation (as measured in increased shareholder
value over time), with minimal value destruction.
In terms of execution, post merger organization is comprised of five
complementary streams of activity, each of which in turn is made up of
methodologies and supported tools.
The five competences are:
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Operating model design
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Staffing process design and implementation
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Change management
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Communications
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Training
So
the discipline of post-merger organization design goes well beyond the
building of an initial "responsibilities and reporting lines" model to
include policies, procedures, and governance issues — "the rules." It
includes the means to diffuse and perpetuate these rules through the
organization — "the schools." And it includes technological support — the
"tools."
Why 'Design' the Post Merger Organization
 From reading the business press, one might think the impact of M&A
transactions on an organization is deep, but finite and of relatively short
duration. This picture is only partially correct: Yes, the impact is deep,
but the decisions made prior to the deal closing have organizational
implications that extend for years beyond formal post-merger integration
periods. Well executed post merger organization design must be flexible
enough to accommodate not only predictable factors, but unanticipated
side-effects.
Consider, for example, a merger's impact on workforce effectiveness. An
enterprise in the midst of integration is operating under crisis conditions,
and employees and executives can respond to extreme conditions for only so
long. If the organization design has not calculated for the tremendous
stress that integration imposes, one unanticipated result may be
"overstretch" and burnout of remaining employees. This often happens even
when organizations, with the best of intentions, choose to minimize stress
and uncertainty by immediately and broadly eliminating redundant staff.
On the other hand, if the organization is reluctant to let some people go,
there are rarely a sufficient number of senior positions in the merged
entity to satisfy the career expectations of two pre-merger sets of
executives. Those who "lose" (and choose to stay) are pushed down a level,
into positions their subordinates had hoped to gain, as opportunities for
advancement are limited for several years. Level by level, the "roll-down"
process continues, with a cascading organizational impact that is
debilitating to executive morale.
In the face of overstretch, burnout and rolldown, frustrated executives
leave — and they leave continuously. As Jeffrey Krug pointed out in his
February 2003 Harvard Business Review analysis of post-merger executive
departure, this "executive exodus" (as Krug called it) can proceed at
twice-normal rates for up to nine years after a merger.1 It is a very rare
post-merger organization design that plans beyond five years. As Krug notes,
the destabilizing effects of this kind of bleed-out of talent on the
remaining workforce is compounded by perception: departures are interpreted
(correctly) not as anomalies but systemic evidence of poor or inconsiderate
post-merger integration planning.
Culture: The Iceberg Below the Waterline
 More than any other root cause, cultural differences are blamed for
consuming anticipated efficiencies, undermining prospects for value creation
and, in some cases, compelling buyers to unwind deals that once held so much
promise. At the same time, these cultural differences are systematically
underweighted in pre-deal analysis.
Even five years ago, culture was commonly regarded as an art in the C-suite,
consisting of "soft stuff" that is inherently difficult to act upon. Now,
newly available measurement and reporting tools have made much more precise
the analysis of factors such as decision-making flows, information sharing
and collaboration protocols.
Increasingly, executives who ignore culture and preoccupy themselves solely
with financial and operational issues do so at their peril. In one
celebrated merger between IT manufacturers, meticulous integration planning
delivered substantial cost synergies above target and ahead of schedule.
Nevertheless, the increased shareholder value that drove the merger
rationale was never created, and the CEO was eventually forced out. The
widely assumed reason for the underperformance: pre-deal dismissal of a
highly-esteemed culture in the "junior" partner organization, and the
backfiring of post-merger attempts to intimidate this culture with imported
"shock and awe" tactics.
In fact, culture informs every part of every organization — and not only in
areas where it might intuitively seem important, such as functions with
significant customer interaction or containing significant intangible value
quotients, such as Research & Development. In the recent $41 billion merger
of Cingular and AT&T Wireless, for example, the pre-merger integration
analysis included organization design for both customer-facing and
back-office functions: sales and marketing, customer care, network
operations, billing, supply chain, IT, finance and human resources. One
value driver in the transaction was significant reduction in customer
"churn" (turnover); Cingular reaped the benefits of its attention to
backoffice culture when churn declined 19% in its first quarter as a merged
company.2
Facing Post-Merger Organizational Realities
In mergers, human behavior — with all the fallibility the term implies —
often trumps well-considered strategic behavior. During the first years of
interstate banking mergers in the late 80s and early 90s, one seasoned HR
executive at a large New York commercial bank put it this way: "As soon as a
merger is announced here, all real work stops." Factored for industry and
company, this quip still holds true. When mergers close and a combined
organization is born, the most "primitive" employee needs — survival and
then competition for title and resources — becomes paramount. Compounded by
rumor, anxiety and deep fatigue, the survival behavior that follows outdoes
any plot a reality television program could contrive. Though no one who is
experienced in corporate life is a complete stranger to this behavior, it
strains corporate cultures when what has been officially unacknowledged must
suddenly be formally addressed.
It's All About Value
At present, conversations suggest that postmerger organization design is
a challenge that only a few C-suite executives are well equipped to meet
from existing strengths. The skill set is too infrequently exercised and the
competing demands for attention are easier to address.
The idea that the systematic, strategic treatment of "soft-side" merger
integration issues can create tangible value is still new to many
participants in the world of M&A strategy. But it does — as measured against
the definition of a merger's success, the C-suite executive's promotion and
how companies become high performance enterprises — or not.
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