People forgotten in the 'urge to merge'

By Selwyn Parker

If something is worth $3.48 billion, it's probably worth doing right.

That's roughly the total value of mergers in New Zealand. At least, it was in 1997, according to the latest available figures.

And given the pace of acquisitions worldwide such as Chrysler's with Mercedes-Benz and Deutsche Bank's with Bankers Trust and the way they trickle down into New Zealand, the total value of mergers here is likelier to go up rather than down.

Unfortunately, the M&A business has been hijacked by accountants and lawyers with unfortunate results. "New Zealand has been no exception whether the [mergers] have been internationally or locally driven," explain Watson Wyatt, international consultants who have done a study on the pleasures and pitfalls of merger mania.

That much is obvious from the generally average to poor performance of the merged companies. According to Watson Wyatt, "75 per cent of M&As are clearly disappointing or outright failures." Half of merged entities experience an overall fall in productivity over the following four to eight months.

Managers know all this. "On average," reports Watson Wyatt, "management grade the financial performances of their alliances as a C minus."

And so, it seems, do the shareholders who appear to be less dazzled by the prospects of a merger than do the deal-makers. At the announcement of a merger, a company's stock price typically rises in only 30 per cent of cases. In the other 70 per cent, it stays the same or falls.

Reading between the lines, the reasons for the far from spectacular performance of mergers, despite the ballyhoo that accompanies them, is people. The chief financial officers of 45 newly-merged Fortune 500 companies cited "people problems" as the single biggest reason for the failure of the combined organisations to integrate smoothly.

It's not being unfair to accountants and lawyers to point out that the people thing is not one for which they are suited.

Indeed it takes an accountant to recognise this. "You should be looking not only at hard data - the financials and client bases, for example," warns Warren Allen, principal of management consultants, Professional Services Consultancy.

"You should also be looking at intangibles such as culture, history, professional standing, attitudes and work ethics."

The trouble is that they don't. Lawyers and accountants, who indisputably lead the pack into the M&A ruck, are whizzbang at all the nuts and bolts of due diligence such as financials, plant, equipment, compliance and the other hard, measurable stuff.

But they tend to pass over the intangible issues like, well, people. The trouble with people, of course, is that they are human. But, boy, do they count! as Abraham Lincoln might say.

"Labour is the superior of capital and deserves much the higher consideration," he told Congress in 1861, about 100 years before the universities started teaching human resources.

The failure to start M&A due diligence with people instead of with the holy trinity of financials, plant and equipment is in fact almost immoral, as Pope Leo XIII more or less said. "It is a shameful and inhuman thing to treat men as mere chattels for profit, or to regard them as simply so much muscle power," quoth the Pope in 1891.

You'd think they would have learned. The human resource professionals, who are trained to deal with people, are generally still sitting on the bench long after the lawyers and accountants have collected their fees.

As Stephen Mockett, organisation development consultant for Watson Wyatt in Auckland, observes: "Our findings show that human resources professionals don't get involved in an M&A until after the integration or acquisition stage."

So to make sure all that M&A money is well-spent, here's what to do. Before the deal, there's a host of people-based research to tackle, including the perfectly understandable "me" issues. According to Watson Wyatt, just some of these are job security, pay, fears about having to move, and the big one: What will they be like to work for?

Communication is one of the bedrocks of a successful merger.

"Remember, people assume the worst," adds Mockett.

Therefore keep shoving out the information. Use lots of different channels to do so. Don't underestimate the importance of repetition. Move fast to keep key staff.
As you go, rate how well or badly the merger is going.
This can be done in six critical areas that include people, communications, training and skills, organisation strategy, customer service, operational alignment, the last obviously being very important when two companies combine.

The aim is to make the companies flow together like water instead of crashing together like cymbals.

And that's best achieved by not only running over the balance sheet, work-in-progress and other hard stuff but by taking a long look at the soft cultural issues such as work ethic and general attitude.

But ask, first of all, whether you've just got an itch called urge-to-merge. As Warren Allen, a former managing partner for Kensington Swan, adds: "Bigger is not necessarily bigger. There are many very successful niche firms. Inter-firm comparisons confirm that often the most profitable firms are the smaller ones." And probably more fun, too.