The Urges Behind the Merges

It’s important to understand that M&A is not an end in itself but a means, a strategy, to achieve corporate goals. Let’s take a brief look at some of the reasons corporate leaders get the urge to merge.

• Some M&As are defensive, initiated in part because the companies involved are under threat: contracting markets, falling commodity prices, excess capacity, rapid technological change or soaring R&D costs. McDonnell Douglas merged with Boeing in part because its biggest customer, the Pentagon, was cutting spending in half. 
  
  
• Some boards operate under the maxim that the best defense is a good offense, setting out with determination to buy first rather than be bought. Look at the dizzying dance among car makers in the wake of the successful and once-admired DaimlerChrysler merger: would VW buy BMW, would VW buy Rover, would GM buy a piece of BMW, would GM buy Daewoo, would DaimlerChrysler pair up with Peugeot Citroen and so on.
  
  
• CEOs face constant pressure to do deals that drive growth and improve their company’s competitive position. Waiting for organic growth, especially in a mature market, is a slow and non-energizing process. M&A activity, on the other hand, is more exhilarating and gains CEOs the attention of bankers, brokers and financial media. When the former Chemical Bank and Manufacturers Hanover merged with Chase Manhattan, the result was a remarkable mega-multinational institution with leading product lines in retail banking, wholesale lending, underwriting and loan syndications, trading, advisory, and venture capital services.

Growth through M&As has moved from trend to practice in America’s fast growth firms. A 1997 then Coopers & Lybrand study found that acquisitions have become a cornerstone of the expansion plans in the fastest-growing companies. Typical firms with a growth-through-acquisition strategy have already acquired an average of five smaller businesses over their first 10-12 years of corporate life. The acquiring firms grew significantly faster than their peers that relied exclusively on internally generated growth.

The Usual Suspects: Motive, Means and Opportunity

Given the last decade’s robust economic conditions in the U.S., corporations have had both the means, financial liquidity, and the opportunity, excess capacity, which creates new targets – to motivate CEOs and directors to continue making M&As a central business strategy. The market’s retrenchment in 2000 and complex regulatory hurdles in many merger-happy industries (e.g., oil, telecommunications) may signal fewer headline-grabbing mega-mergers on the $182 billion AOL/Time Warner scale; nevertheless, M&As are business-as-usual here and abroad.

There were enough smaller scale deals, in the $16 billion and less category, to set yet another record for 2000 M&A activity in the U.S. According to Thomson Financial Securities data cited in a March 2001 article, “A Slower Beat for the Mating Dance,” in Institutional Investor, U.S. corporations engaged in $1.8 trillion of M&As in 2000, significantly ahead of the $1.56 trillion of M&A deals in 1999 as well as the record $1.61 trillion in 1998.

Statistics vary depending on the source, but it does not take a statistician to conclude from available evidence that the majority of M&As fail to meet objectives on one or more levels.

• In a March 1999 article, “Best Practices in Acquisitions,” for The New Straits Times, Andersen Consulting cites a 1999 survey that nearly 50 percent of U.S. companies involved in M&As indicate that they did not gain access to new markets, grow market share or add products three years after the close of the transaction. In addition, more than half of these same companies under-perform relative to their peers.
  
  
• In a January 1998 article, “Why a Large Number of Mergers Fail,” in The New Straits Times, a PricewaterhouseCoopers executive director related that up to 77 percent of recent merger deals did not recover costs; 50 percent destroyed shareholder value while 50 percent recorded the same or lower productivity or profits.
  
  
• J.P. Morgan examined 116 major acquisitions (each involving >$1 billion U.S.) made over the last 15 years made and found no added value three years after the deals were made. Their research, highlighted in a January 1999 article, “Signs of Caution Lie Ahead for Merging Companies,” in The Kansas City Star, suggests that just 56 percent of mergers create value for the acquirers.

In their 1997 report, “Speed Makes a Difference: A Survey of Mergers & Acquisitions,” then Coopers & Lybrand researchers concluded that a rapid transition can lessen the adverse effects on key measures of business performance, including profits, employee morale and productivity. “The distinguishing characteristic of fast-transition companies is that they ruthlessly prioritize and focus on the 20 percent of post-deal actions that drive 80 percent of the value with the highest probability of success,” comments Mark Feldman, partner and managing director for Coopers’ M&A consulting. “Above all, that means doing what’s needed to boost revenue.”

Companies that operate in fast-transition mode, adds Feldman, facilitate the merger or acquisition at a pace faster than that at which the firm normally operates. The reverse holds true for slow-transition companies. Feldman remarks, “Unfortunately, companies that transition slowly have their priorities confused subsequent to the deal. They’re too focused on cost cutting. The result is these companies lose market share to competitors. Productivity and employee morale decline, while labor costs, the duplication of work, and employee turnover go up.” One memorable example: Compaq’s efforts to digest Digital Equipment Corp. While Compaq and DEC were involved in post-merger turmoil, Dell Computer geared up a slick, new ad campaign to take market advantage. After the merger, Compaq’s 1998 second quarter domestic growth rate was 11 percent, while Dell’s was 72 percent.

Measuring Success for M&As

Expressed as an equation, the general idea behind a merger is that 1 + 1 = 3 or more. As such, stakeholders inside and outside organizations involved in such transactions should be able to see clear readings on their M&A score, and grasp at a basic level why the deal makes sense. In a 1999 study of worldwide M&A activity, KPMG researchers found that generally M&As had been undertaken to improve the company’s visibility in its markets: 41 percent of respondents cited increasing or protecting market share as the purpose behind their M&A activity; 28 percent wanted to obtain new or increased presence in other geographic markets; and 11 percent were after economies of scale.

Yet when it came to scoring, results were not always so clear. While the companies surveyed tended to view their M&A transaction as successful, over half did not have a formal post-transaction review policy. Some companies may not have adequate measures to use in budgeting restructuring costs and assessing whether those budgets were met. Some companies may lack objective benchmarks where more precise success measures can be used, or do not know what measures to use.

Overall, respondents thought that their strategies for different facets of the transaction, such as HR, IT, culture, were not well planned at the outset or planned too late. They recognized they were weak during the post-merger stage, but were unclear how to go about improving their performance.

Why M&As Are a Red Zone Condition

What is clearly not business-as-usual is what happens between and inside each of the companies involved in these mergers. Leaders must continue running their current operations to the satisfaction of multiple stakeholders while designing, under prescribed parameters and tight scrutiny, different and better ways to operate at some point in the future to the satisfaction of even more stakeholders of a yet-to-be completed organization. Whew!

The value and consequences of M&As mean different things to different people. Each corporate constituency – directors, shareholders, regulators, analysts, lenders, management, employees, unions, alliance partners, suppliers, customers – defines such value in different and often conflicting ways. It’s the job of the CEO and executive team to identify and examine the opportunities that best fit the company’s goals and to reconcile these competing positions. This means lots of customized communication about the strategy to each group, under prescribed disclosure conditions, and then the crucial, step-by-step engineering of a vast variety of transactions to meet the needs, enact the strategy, accomplish the mission and achieve the desired results.

With billions of dollars at stake in a single deal and an unforgiving marketplace all too ready to pounce on the weak and punish the failed, there are few “do-overs.” Company leaders have one chance to get it right.

Why M&As Fail

While there are many reasons for mergers achieving less than the desired results, a February 1998 article, “Right Measures to Reap Benefits of Successful Mergers, Acquisitions,” in The New Straits Times cites three important reasons: “unclear case for union, inexperience, and integration issues.”

Unclear Case for the Union Reengineering guru and author James Champy wrote  in a November 1997 article, “What Ned Johnson Can Teach Sandy Weill,” for Forbes, “Synergy, an investment banker told me, is the excuse given for a merger than can’t otherwise be justified.” There is simply no substitute for strategic due diligence before and throughout the pre-union period. Beyond the surface, not every deal looks as good as it did at the outset. CEOs who walk away from flawed deals should be hailed as heroes. When a deal keeps going south, it’s better to just say no rather than push ahead only to end up facing years of factional scheming, damaged reputations, alienated customers, and declining share value.

Inexperience While there is a lot of current M&A activity, there is still a large number of rookie stakeholders involved in negotiations and post-merger integration who have never been involved in an M&A and may not go through another in their careers. It is common practice to hire accountants and attorneys with M&A expertise on the front end of the deal, and increasing practice to hire end-to-end merger management experts to support leaders during the transaction and throughout integration. Just like some leaders find it hard to say “no,” however, others find it hard to say “help!”

Integration Issues By their very nature, M&As represent no small degree of risk to at least two companies. Typically the stabilization and integration phases of the M&A life cycle take between 15-30 months before the targeted benefits are delivered. Proceed too fast and risk damage to employees and customers, business processes, and technology performance. Proceed too slowly and the next two or three big company initiatives could easily detract key management attention and derail the whole transition process. Leaders’ jobs don’t end when the ink dries, but rather when the company is well on the way to achieving the results it projected at the outset of the deal.

No primer on M&A would be finished without some real, live examples of companies who succeeded and failed in the Red Zone. These brief examples were selected to show some of the adventure and complexity of the real world of M&A.

Over a year after the acquisition was first announced, Boeing was still being plagued by a series of setbacks. The process of merging the cultures of intense rivals  with a workforce of some 235,000 employees would be difficult enough by itself. Added to that challenge, McDonnell’s commercial product line experienced larger losses and write-offs than projected. Its defense and space operations posted slimmer profit margins as Asia stumbled and cancelled or postponed contracts for fighter jets. Boeing took a larger-than-expected $1.4 billion pretax charge to phase out a pair of slow-selling McDonnell jetliner models, closing at a loss of $498 million for Q4 1997. This effectively meant that Boeing was really paying more than $15.5 billion for 85 percent of McDonnell’s revenues.

And the unthinkable, or surely the unmentionable, happened. According to an April 1998 article, “The Titanic Effect,” in Interavia Business & Technology, at a March 1998 address to the Seattle Rotary Club, Stonecipher told business leaders that Boeing’s financial results were dismal. He said that he was less threatened by Airbus Industrie (the company’s chief European rival) or Lockheed Martin than by Boeing’s own “failure to execute inside.” And he added that Boeing was “arrogant” and had yet to earn its self-proclaimed global status. A follow-up article, “Stonecipher’s Boeing Shakeup,” in the September 1998 issue of Interavia Business & Technology noted that “Stonecipher’s comments had less impact then, say, Kruschev’s denunciation of Stalin, but not by much.” The comments came a week after Boeing had frozen management salaries and bonuses for 1998 and a day before the report in the Seattle Times about a meeting with leaders of northern European airlines in which they expressed increasing frustration about delivery delays and Boeing’s unwillingness to share bad news. Boeing simply did not air its dirty linen in public, nor evidently with customers either.

Meanwhile, Boeing was struggling to recover from the effects of severe bottlenecks, parts shortages and problems of inexperienced workers. Company officials said it would take $2.6 billion in charges and unforeseen expenses to bring its factories in sync with the current order boom for its commercial aircraft. They continued to postpone significant reductions in personnel and gave no information about any plans to close or refurbish McDonnell’s outdated commercial jet facilities, either of which could ease the bleeding.

As the Dow Industrials soared, Boeing wrote off $4 billion and for FY1998 reported its first annual loss in 50 years. The stock tumbled. Boeing leaders were blamed for their failure to acknowledge the extent of its problems and for delays in designing and implementing a comprehensive plan to manage them. Critics said that the focus on correcting production snafus was diverting the attention of top executives from attending to pressing issues involving the McDonnell acquisition, as well as their 1996 acquisition of the aerospace assets of Rockwell International.

Here was a group of dedicated, talented people who had designed some of the most sophisticated products in the defense and aerospace industries, with a century’s worth of combined program and project management experience, and they still couldn’t get an effective plan going. What had looked like a showcase corporate marriage had some pretty dismal looking and feeling partners.

Outside pressures increased. The Pentagon was threatening to withhold billions of dollars earmarked for McDonnell’s latest Super Hornet models unless performance was improved. Inside the company, morale among former McDonnell employees continued to sag as they waited for information on plant closures and layoffs. Many McDonnell employees were still describing themselves as “McDonnell” defense workers or “Douglas” workers. Industry analysts observed that the Boeing-McDonnell Douglas merger actually involved three separate cultures: Boeing, McDonnell employees and Douglas employees who, they believe, were never fully integrated with McDonnell.

Decision making was lengthy and laborious, even over minor decisions. It took more than a year for the company to decide on a standardized in-house mail envelope. Getting to that decision involved convening a mail council from 20 geographic areas to evaluate the 13 different kinds of envelopes used between the companies.

The integration was in trouble at the top of the organization as well. High-ranking executives made little effort to get to know one another. At a meeting of the 200 top executives a year after the acquisition announcement Stonecipher asked: “How many of you know 50 percent of the people in attendance?” A small number of hands went up. At 60 percent, only a few hands were raised. At 70 percent, it was almost zero. Little wonder that actions and results at the line level of the company were so hard to come by.

Here’s an interesting piece of luck to bring a happier ending to this tale. Boeing’s Phantom Works, an in-house think tank that was a serendipitous creation during these tumultuous times, ended up being a key force in speeding the integration process by developing new products and refocusing the company on its diverse customers.

The Red Zone Moral to the Story:

Responsibility for the setbacks in this M&A started at the top of both organizations. The difficulty in senior executive integration was mirrored at the line level. When operating in a Red Zone, leadership must be united and switched over to a do or die level of commitment, or risk certain loss – in time, profit, market share, market value and credibility.

Time Warner itself had been created by a merger of Time Inc. and Warner Communications in one of the biggest deals of the 1980s. By the mid-‘90s, Levin’s situation was not enviable.  At the time, Time Warner was plagued by debt, years of under-performing stock prices, and involvement in poorly conceived deals that tied up its best assets as well as management energy. Meanwhile, rivals were doing the kind of deals that got them closer to the big seamless vision: Disney had bought Capital Cities/ABC and Viacom had bought Paramount and launched UPN. Levin asked shareholders and board to hang on while he got things straightened out.

The situation, for both Time Warner and Levin, didn’t get better anytime soon. One of the deals, a strategic partnership with U.S. West (among others) and TW’s Entertainment Division, landed Levin in court over potential competition between the partnership and Levin’s new deal to merge Turner Broadcasting into the parent company – a violation of the partnership agreement.

Dealing with the mercurial Ted Turner in the merger process wasn’t punishment enough. Added to his woes, to win the approval of a big Turner shareholder, TCI’s John Malone, Levin structured a side deal giving Malone a 20-year 15 percent discount on TBS services such as CNN, TNT and the Cartoon Channel. The arrangement prompted an investigation by the Federal Trade Commission. Analysts predicted the imminent breakup of Time Warner and a major management shakeout.

Long story short and from pillory to praise, Levin finally pulled off his dream deal. In July 1996, the FTC finally blessed a slightly altered version of Time Warner’s acquisition of Turner Broadcasting, restoring Time Warner’s position as the world’s largest media company.

Along the way, Levin had dumped executives and directors who did not share his vision. And he proved himself capable of giving up a sacred cow, cable operations. In a marked departure from the strategy that drove him to make nearly $5 billion in cable system acquisitions in 1995, Levin told analysts he was working on a deal to restructure the U.S. West partnership, conceding both majority ownership and management control of the company’s cable system to them. Levin was now, finally, delivering on a plan to restore the company’s financial health by eliminating $8 billion of debt by selling off significant stakes in its cable systems, aggressively cutting operating costs and generating new revenue through the TBS acquisition.

As the months passed, the question remained: would Levin’s dream end up becoming his nightmare? The rumor-mill cranked out stories about the behind-the-scenes management power struggles, many of which were based on the sheer size and consequent unmanageability of the vast enterprise. In addition, critics predicted that it was only a matter of time before Turner, made Vice Chairman in the deal and openly critical of the high costs and inefficiencies in Time Warner operations, took over completely.

Instead, Levin listened to Turner (though reputation suggests that it’s hard not to) and delivered the cost cuts and synergies in record speed. Ten executives were hired to act as bridges between the different divisions, to facilitate co-marketing arrangements, and operating protocols were established. The two leaders, Turner the showman and Levin the staid executive, complemented, and complimented, one another. “I love working with Ted,” Levin told Fortune in a March 1998 article, “Suddenly, Jerry Levin’s Stock Is Hot.” “He’s one of the most interesting people on the planet.” For his part, Turner says, “We just have a ball together, but I try not to waste his time.”

A year after the acquisition, the reinvigorated company’s stock rose 34 percent and market value nearly tripled, from $35 billion to $100 billion. Shareholders and Wall Street cheered both Turner and Levin. The man whom analysts had given only months in his job stuck to his vision and ended up a hero.

Just look at what happened a few years later. As a result of the successful Turner integration, Levin acquired a reputation for understanding how to make mergers work. One day he gets a call from Steve Case, chairman of AOL, asking him to become CEO of a combined AOL-Time Warner, and starting off the year 2000 with the biggest merger in U.S. history. This time around, a four-person committee of top AOL and Time Warner executives are focusing on how to merge AOL’s resources with Time Warner’s and divide responsibilities within the combined company.

Gerald Levin demonstrated a “do or die” commitment to this merger. By bringing in experienced players to oversee the TBS transition and integration, he was putting the strongest managers and employees into the thick of Red Zone management. Using the four-person committee of senior executives for the AOL-Time Warner integration also demonstrates that both Levin and Steve Case recognize that they are in a Red Zone that requires special behavior and commitment from everybody, especially key managers.

And now for the Red Zone principles that should apply to the merger and acquisition maneuver. The goal in this chapter is not to duplicate the principles of Chapter Four; instead we want to show variations and distinctions on those principles for the  Red Zone maneuver of mergers and acquisitions.

Red Zone Principle One: Declare the Company in a Red Zone

When merging or acquiring another company of equal size, an amazing amount of detail must be managed and managed well. And managing detail well takes time, lots of time and energy. Not to mention that M&A brings together two companies with different cultures, different ways of doing business, communicating, and viewing the business world. The large number of details and the differences in the companies will require a high level of enthusiasm, motivation and commitment to make a successful merger happen. That needed level of commitment really is Olympic-level motivation and creativity to achieve the gain coupled with do or die resolve to avoid the loss.

Capturing the attention of employees in either company is not a problem in the case of M&A. People are aware that M&A makes change happen and that jobs are immediately at stake. People have been through enough mergers or heard enough about them to know that the situation is going to be tense. The problem for management is to turn employee attention toward the hard work of the merger and away from the “woe is me” victim mentality that employees can easily fall into.

The two leaders involved in the M&A must quickly reconcile their positions, agree to the roles they will play in the new company, and take their strong leadership on the road to the employees. Both leaders must be credible in telling the employees about the stronger future they intend to create for the combined organization. They must also be articulate in the business reasons for the combination, giving employees time to make sense of the M&A maneuver. And last but not least, those leaders must make sure all workers understand that they are all in a Red Zone together until the final step of integration is complete.

Red Zone Principle Two: Put the Best Players in the Game

M&A is a two-executive team game. Both executive teams must play actively and aggressively: playing as visible winners, standing tall and straight, avoiding the frequently-seen winners and losers syndrome. Playing as winners starts with both teams respecting each other and honoring the business deal that puts the two companies together. Going beyond that, both teams must continue their moral leadership responsibilities to their troops as the details of the merger become clarified.

Rarely are the two teams equal in power in the M&A game. The more powerful team will be clearly known early on and will have a very special responsibility to set the tone for the entire merger. Putting egos aside is a leadership requirement as the more powerful team works with the other team to put the official slate of executives into place for the new company. Executive team members who do not wind up with a leading slot on the new team must continue to play and set a leadership example for both organizations. Leaders who get caught up in what they see as personal loss must either hide that loss and play well or take their leave early on.

The new executive team must get to know each other quickly and begin to play very well as a team because there is a lot to do in identifying and making the hundreds of changes needed to get the two companies playing together. Teamwork is the responsibility of the CEO of the new company. The quality of the teamwork that will emerge, however, is frequently determined by the example set by the other former CEO and her immediate reports. The new CEO should ask for and get complete cooperation from the former CEO or immediately arrange for that person’s departure. While almost half of the CEOs who are merged into a more powerful organization wind up leaving, the goal is to have them play as strong, effective business leaders, fully supportive of the new organization until their departure time.

Every top executive should have a Red Zone role in addition to his usual duties in the day-to-day running of the company.

• Red Zone Duties of the Chief Executive Officer (CEO)
  • Chief merger advocate to the organizations. The CEO’s primary responsibility is to ensure that proper strategic due diligence is done and that clear goals are set for the merger. The CEO, above all people, must understand each company’s distinctive market franchise and what specific advantages are to be gained by the merger.
  • Chief merger advocate to the board and to investors.  The CEO’s goal should be to keep the Board of Directors informed, involved, and supportive of the merger, particularly when the inevitable surprises begin to happen as the merger unfolds.
  • Chief customer advocate who ensures that the merger really does meet marketplace goals and bring additional value to customers. 
  • Chief Communications Officer to the firm on the business reasons for the merger, the specific merger goals, and the continuing status of the merger. The former CEO needs to be a co-communicator of the CEO’s message.
  • During the pre-merger phase, the CEO is the master architect, ensuring that the blueprint of the new organization will allow merger goals to be met.
  • The CEO must use a gracious, compassionate, but forceful leadership style that understands the sensitivities of the workers involved while ensuring that needed merger integration work is effectively handled. Once again, the former CEO, if still in play in the combined firm, must show her leadership right beside the CEO.
  • Major provider of resources and internal obstacle remover. In addition, the CEO must keep the ultimate time clock on the merger.
    
    
• Red Zone Duties of the Chief Operating Officer (COO)
  • Intimately involved in the design of the merger blueprint since many of the operating details belong to him.
  • Chief executor of the merger blueprint. The COO and his direct reports will be the folks on the spot for implementing the blueprint that combines the two organizations, including what will likely be the removal of redundant organization units and personnel.
  • Day-to-day owner of the customer scorecard since the COO owns those parts of the new organization that touch the customer. The COO is one the spot to handle one of the biggest potential problems in any merger, the loss of customers from the merged in organization.
  • Works with the CEO and his program manager to understand, identify, and schedule all the integration activities that will be needed to combine the new company in such a way that merger goals can be set.
  • Leader in day-to-day teamwork of the new executive team as it focuses on internal issues (while the CEO works external as well as internal issues).
    
    
• Red Zone Duties of the Chief Sales Officer
  • Key focus is on customer relationships during the combination of the two organizations.
  • Responsible for key customer interaction, impact of the merger on the now-larger market, and prevention of customer loss.
  • Responsible for rationalizing branding, product, and market strategies of the two organizations into one.
  • Chief communicator to customers to explain how the merger will serve the customer better. The merged company’s advertising and public relations strategies should be aligned to ensure that a positive and engaging message can be continually sent to the marketplace.
  • Chief pricing officer working directly with the CEO, COO and CFO to pick price points that that make sense for the merged operation.
    
    
• Red Zone Duties of the Chief Financial Officer (CFO)
  • Leader in financial due diligence. Merger success depends on knowing the full financial implications of the two companies and their assets.
  • Leader in getting metrics in place to measure the results of merger, including measurements that allow visibility of progress on the specific goals of the merger, worrying later about the sacred cow metrics of the two companies that must eventually be reconciled.
  • Leader in merging the financial systems of the two companies to ensure continuous financial and accounting operations.
  • Devil’s advocate for investment in the merger as well as for the overall use of capital for the now combined company.
  • Works with the CEO and Human Resources Officer to ensure that monetary incentives are in place to adequately motivate key organization members for merger success.
    
    
• Red Zone Duties of the Chief Information Officer (CIO)
  • Works directly with program management and the COO to ensure that information technology resources/systems are aligned to support merged operations to ensure continuous operations of the new company’s business and technical operations.
  • Chief information technology strategist who ensures that the merged company’s technology strategy starts with the merged condition and quickly points to operations in support of long-term merger goals.
  • Works directly with the CEO and CFO to ensure that the company metrics and scorecards for measuring merger results are in place.
    
    
• Red Zone Duties of the Chief Human Resources Officer (CHRO)
  • Works directly with the CEO and COO to ensure that managers/employees are named and made accountable in all key executive and operating roles as soon as possible.
  • Works directly with the COO to ensure that all people impacts of the merger are executed in a fair and legal way that protects the long-term franchise of the merged organization.
  • Leader in ensuring that the human resources systems for compensation and benefits are aligned as soon as possible to ensure workforce continuity, confidence, and security.
  • Leader in aligning employee performance management systems to focus the new organization on the short and long-term objectives of the merger.
  • Providing trained HR generalists to assist line management in carrying out the required operations of the merger blueprint.
  • Acts as the company’s Chief People advocate. Monitors stress and strain on the merged organization and recommends support to people as needed for Red Zone success.
  • Plays a key role in ensuring that the new exec team is jelling and pulling together well.

The new executive team must be absolutely together for merger success. If the new executive team is a typical blended one, they must play as one team without the two sub-team mindset with its destructive sneak circuits to other employees of the two companies. This executive team must provide the moral leadership and set the standard for getting on with the business of the merged company. They must look ahead and not back; they must get over hard feelings between the two companies and turn loose of the baggage that will keep the merged organization from moving forward to success. 

Red Zone Principle Three: Focus on the Customer

While the vast majority of mergers are publicly rationalized by increased marketplace impact, it seems that the party most likely to be lost in the shuffle is the customer. The difficulties encountered in a merger frequently seem so daunting and time consuming that the customer is the last to be served. Ironically, the truth of the matter is that the customer vote is likely to be the only one that counts in the final measurement of merger success.

Red Zone principle three recommends that a customer scorecard for the products and services of both organizations, like the example shown in Chapter Four, become an explicit driver for the planning and execution of any merger. The idea in a merger is not to immediately change the way the customer sees the offerings of the now-combined firm but to protect the way the customer sees the offerings. As managers and employees alike face customers from the organization with which they merged, it is critical to focus on keeping intact the attributes those customers valued.

Red Zone Principle Four: Set Clear Red Zone Goals

Crisp goals are important for any Red Zone maneuver, and M&A is no exception. Three kinds of goals are particularly important: rationale goals, synergy goals, and operational goals. The primary rationale for merging varies: acquiring new markets or distribution channels, acquiring complementary products to broaden lines, acquiring mass or size for economies of scale, diversifying, and so on.

Whatever the specific rationale, it should be turned into explicit, and where possible, quantified goals.

Specific goals should be set for any synergies that were a part of the reason for merging. These synergies are typically stated in terms of costs to be saved and/or additional sales (that could be made, for example, by making more product lines available through the sales outlets of the combined companies).

The final category of goals is that of the business operations of the combined organization for the time periods immediately following the merger. The best goals to use for this kind of Red Zone maneuver are as follows: market share, competitive rankings, profitability, and return on investment.

Clear merger goals are essential, allowing employees to understand where they need to go as well as to establish milestones to measure progress. Clear goals become the targets for incentive compensation that ensures adequate management motivation for merger success.

Red Zone Principle Five: Blueprint for Success

The goal of the blueprint step in Red Zone M&A is to build a clear, concrete picture of the organization as it will look one to two years past the transition period, when goals have been met and synergies realized.   Critical dimensions for the blueprint are as follows:

Vision, Strategy, and Values The blueprint should begin with a description of the organization as it should look in the future as it reaps the desired payoffs of the merger, including how the organization will be positioned in the marketplace: its desired competitive ranking and its goals.

The blueprint should also state the single, unifying competitive strategy that the merged organization will use to win with customers and compete effectively against rivals. For merging organizations whose operational units will be kept separate, the intention to keep independent competitive strategies in play must be stated explicitly. The blueprint should also include the values and operating principles that will provide the guidance and boundaries for operation of the merged firm.

Organizational Structure and Leadership Top management must state in the merger blueprint with as much precision and certainty as possible how they intend to structure and manage the organization. Failure to state clearly the desired structure and leadership positions with names will encourage continuing rounds of positioning and lobbying for opportunity as the merger unfolds.

Markets and Geographic Coverage Painting a picture of the extent of the merged company, including both the markets (customers) that will be served as well as the geographic regions that will be pursued, should be a key goal of the blueprint.

Product and Service Lines The merger blueprint should show how the company’s products and services will exist together, which will be primary products and which will be complements. The picture of products and services must match the customer scorecards completed earlier.

Operating Processes The blueprint should contain a description of how the merged organization’s business processes will work together to produce products and services across the geographic and customer markets to be served. While all the details of operating processes may not be known for some time, care should be taken to outline in as much detail as possible exactly how the organization will operate after the merger.

Don’t Move! Don’t stop the Red Zone design engine and go to execution principles until there is a clear picture of the merged organization as it will exist to meet merger goals:

• How customer value will be protected in the short run and strengthened in the long run
• How the organization will be structured and where it will be operating
• What the company will stand for in the marketplace

Red Zone Principles for Execution of a Merger

The Red Zone execution principles for M&A are especially critical since there are so many moving parts and details that must be reconciled in a short period of time for the merged organization to be able to reach its goals successfully. Strong leadership will be required to focus on those parts of the merger that are critical and to direct energy away from those parts that seem important to some but that in the long run are not.

Red Zone Principle Six: Focus on Mechanics

Successful execution of the Red Zone merger properly begins with the identification of the mechanical moves that must be made for merger success. The first challenge is to reconcile the differences between the two companies to get the organization operating as a single entity. Such differences range from the changing of signs to reflect the name of the merged company to the changing of customer numbers to allow them to fit into a single accounting system. Additional mechanical changes will include employee numbers, files, records; the list seems endless.

The second challenge is to identify the mechanical changes that will need to be made for the newly merged company to meet its purposes. If, for example, a primary purpose of the merger is to share distribution channels, mechanical changes will need to be identified to allow new product to flow and be promoted in existing channels. While some of the needed mechanical changes will be relatively simple, others may not. For example, if a primary reason for companies to merge is to blend the two companies’ technologies to develop and market products that are new to both companies, the needed mechanical changes will not be so simple or obvious.

To make the identification of mechanical changes even more onerous, there are second order mechanical changes needed behind each change.  In other words, any one change needed for the merger, like distributing one company’s product lines in another’s distribution system, will require changes in work processes, equipment, and in the roles and performance of workers. While these required changes are simple and logical, they become complex because of their sheer number. That complexity will be managed in the disciplined program and project management environment suggested in the next Red Zone principle.

Many of the needed mechanical changes can be worked out by managers and employees in near real-time as they understand and settle into their roles in the merged organization, provided that they know those roles and that they have access to the Red Zone blueprint. That is a big proviso for many organizations. I have found that the clarification of the merged organization’s structure and performance management system is critical to work through at the very early stages of the merger.

Top management must move rapidly to agree to an organization structure and to name the key managers to populate that structure. Once named those key players should be encouraged to name the players that will be on their teams, and so on. I have found great value in rapidly naming players by organizational level and then conducting teambuilding sessions of those new players as they take over their responsibility. The team building sessions should cascade down from the top management team until every organizational unit has been covered. Critical in those team building sessions are concentration on the merger blueprint, the development of that organization’s version of its own blueprint, the clarification of roles and responsibilities for each member of each team, and then the charge to work through the details that fall under each manager’s purview.

Red Zone Principle Seven: Use Program and Project Management to Build to Print

The CEO has her hands full during a merger. Her first concern is to keep the organization moving forward, serving the customers, and getting the revenues. Meanwhile she is also ultimately responsible for ensuring that all required merger actions are taken in a rapid and systematic way. I have found that a program manager reporting directly to her can be her alter ego and lead the mechanical transition steps for her.

The job of program management should be focused on getting the merger completed in the shortest possible time by systematically tackling the needed changes in the mechanical parts of the organization. The role of the program manager is to act for the CEO to ensure that the right merger actions are taken at the right time while keeping the CEO informed of and lined up for those critical merger actions that only she can handle up close and personal.

Program management must adopt a slam dunk attitude for Red Zone success. While the overall goal of the program manager is to make sure that the organization accomplishes all of the mechanical changes identified in any earlier step, some mechanical actions will just count more than others. Program management must use the 80/20 rule to find that 20 percent of merger actions that will result in 80 percent of the desired merger results. Once those 20 percent are named, program management must work directly with the CEO and the executive team to ensure that those actions are slam dunked, completed with 100 percent success.

Beyond slam dunking the critical 20 percent, program management must work with amazing detail. Program management for a Red Zone merger will likely need to be formal and disciplined to ensure that the thousands of changes required for the merger are brought under management. Program management  needs to identify and form multiple projects designed to achieve concrete results that will take the company to the blueprint.

The projects that make up the merger program are best organized around merger goals.  Experience indicates that each of these projects should be both cross-functional and bi-organizational in membership and orientation in order to have the broad view needed to reach those goals. Having project team members from both of the merging organizations will allow the team to use the best of both organization’s thinking and practice. For example, if a merger goal is to reap $50 million in cost savings, a project team might be appointed to help an assigned executive find those dollars. 

Red Zone Principle Eight: Focus on Speed

Speed may be more critical in M&A than in any of the other Red Zone maneuvers. Nowhere are the risks as high for moving too slowly. Customers and employees suffer when the merger does not move rapidly to remove uncertainty about how the organization will operate in the future. If the merger is really about increasing market presence and opportunity, moving fast gives advantage, and moving slowly allows competitors time to reap benefits during periods of  lingering uncertainty. The faster the organization can move, the less adverse the effects on key measures of business performance: profits, employee morale, and productivity.

The timeline for an effective merger varies directly with the type of merger. Mergers that form portfolio companies whose assets and operations are merged only on financial statements can move to complete the mechanical parts of the merger in less than six months. Mergers that call for the combining of operating units may take many more months. The CEO, as the time keeper during the Red Zone merger, must drive the merger as fast as he can to gain the desired merger goals while not going so fast that the organization can still effectively and efficiently make the needed combinations and deletions.

Red Zone Principle Nine: Meet Special Needs of Workers

  The most important  need of managers and employees alike in the merger Red Zone is certainty of a job, the nature of the position, its location, reporting relationships, and compensation. Workers going through a merger will work effectively only so long without certainty. Top managers must focus on bringing clarity to all employees about their status in the organization.

Be fair with those workers who might be leaving the company. While the merger maneuver does not automatically mean that there will need to be reductions in headcount between the two organizations, such reductions are common. All workers are impacted by the way the top management team handles those reductions. Obviously the employees whose positions have been eliminated will be directly impacted by the quality of outplacement packages and services arranged for them. The remaining workers in the merged company will be acutely aware of what is happening to their former co-workers. And what is happening will either be encouraging, that the new executive team is fair and humane, or unfair, that the new team might not be who they really want to work for in the long run.

Provide extra support to those workers who are on special teams to work out the details of the merger. Some of the two organization’s best and brightest will likely be called on to sort out the many differences that must be reconciled for merger success. These team members should not be forgotten as they return to regular work after serving on teams or task forces.

Provide strong leadership to settle merger conflicts. Merger teams can sometimes be bogged down by attempts to reach a consensus on every issue. Strong leadership is needed to keep workers focused on high priority matters and to step in and quickly resolve issues not critical for long term success.

Red Zone Principle Ten: Reward for Red Zone Performance

Provide real, substantial incentives for top management for bottom line merger results over the first three years of the merger. The idea of a merger is to create a new organization with more value then the two starting organizations. If the merger is successful, that increased value should show in two to three years, and should be the driver of the primary top management incentives. Putting the big bucks several years into the future focuses top management attention where it should be, on increased future value.

Additional incentives should be provided to match the different classes of merger goals. The key to proper incentives is to ensure that they are tied to the accomplishment of multiple goals, not just to one key goal. For example, tying primary incentive compensation for the chief executive solely to the accomplishment of a synergy goal, like a savings target, will likely cause intense interest on meeting that goal to the exclusion of other purposes of the merger, like building the long-term franchise value of the merged organization.

Explicit recognition must be given to the accomplishment of merger goals along with the accomplishment of normal year-to-year goals. Incentive compensation amounts should be commensurate with the success of the merger and should be over and above normal incentive compensation. And ending this section on a negative note, I have not been a part of a merger yet  that did not have a few managers and employees who, for whatever reason, could or would not support the merger. Those uncooperative workers should be subject to loss of all incentives, demotions, or even terminations.

Applying the Gameplan

Wait. Don’t begin applying the merger gameplan yet. Go straight to Chapter Ten and read the Red Zone Gameplan for culture change as well. One of the biggest obstacles to a successful merger maneuver is the cultural differences between the two organizations. To better understand how to tackle the culture issues with a merger, try Chapter Ten for size.

There is a lot to know about the Red Zone maneuver for M&A. Fortunately there are many M&A experts who have been there and done that who can help with the technical details. But the consistent application of the Red Zone principles will be up to the top management team. Only they can give this maneuver the importance and priority it deserves.

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