Case Studies
Mergers

Improving Outcomes of Merger Negotiations and Integration
Through Successful Management of the “People Issues”

	William Coy is a Senior Associate with La Piana Associates, and is also on the faculty of the University of San Francisco. Tom Perez is a Managing Partner with Strategic M&A Partners. Liza Culick, a Senior Associate with La Piana Associates, facilitated the discussion. (More information on Bill, Tom, and Liza is found at the end of this article.)

A Discussion with Bill Coy and Tom Perez
Facilitated by Liza Culick

What distinguishes successful from unsuccessful mergers? Often, it's how the “people issues” are handled. In this interview, two human resources professionals Tom Perez and Bill Coy — from the business and nonprofit sectors, respectively — discuss the human resources (HR) challenges that arise during merger negotiation and integration, and offer tips for practices that will promote successful post-merger integration. The discussion also highlights the similarities and differences between mergers in these two sectors, both of which have experienced an increase in merger activity in the past several years. Through this interchange, the benefits of sharing “best practices” across sectors are revealed.

Despite the greater availability of financial and other incentives in the business sector, the key success factors in mergers are the same as in the nonprofit world. Typically, the difference between success and failure lies in how the human resources issues are addressed. Experience shows that clear, honest, and frequent two-way communication — as well as careful attention to the "people" issues — are key to achieving smooth integration and, ultimately, merger success. With the high financial and human cost of mergers, it is imperative that human resources professionals be integrally involved in both the negotiation process and also in post-merger integration. Additionally, leadership — in the form of an “integration champion” and an integration team — is critical to merger success, as this ensures that the people issues are addressed throughout the process.

LIZA: Tom, what are the reasons that corporations make decisions to merge?

TOM: The motivation to merge is driven by how organizations are performing in the marketplace and what they want to do. Often they want to acquire a new technology, enter a new market, or extend a product line. In sum, corporations are focused on bottom-line issues; they use mergers and acquisitions as a component of strategic growth. Rather than starting from scratch to build a product or to maximize intellectual property, a company can go out and acquire these capabilities.

“Corporations are focused on bottom-line issues; they use mergers and acquisitions as a component of strategic growth.” “The ultimate motivation (for nonprofits) is that clients will be served more effectively, the mission will be accomplished more effectively.”

LIZA: What about in the nonprofit sector, Bill — what are the motivations for merger?

BILL: The ultimate motivation is that clients will be served more effectively, the mission will be accomplished more effectively — but there is sub-text to that. One of the key motivations is complementarity of services. By coming together, organizations can create a more seamless service offering for clients or offer services to a broader base of clients—something they couldn’t do alone. Another motivation is economies of scale.

LIZA: Tom, how do you measure success in mergers in the private sector?

TOM: In the private sector, the success of a deal is usually measured in terms of return on shareholder value. Are the combined entities worth more to shareholders than the entities are separately? From a people perspective, you look at employee retention, and also at how well the goals and timetables that are set out during merger discussions were met.

Successful companies are those that have both short-term and long-term goals and timetables, and that have the ability to adjust these to accommodate changes, such as the changes in business climate that may occur between the time you announce, the time you close, and throughout the integration process.

LIZA: Bill, how do you gauge success in mergers in the nonprofit sector?

BILL: It is much more difficult to gauge success in the nonprofit world. On the for-profit side, you know you’re successful as a merged company if you create more financial value. Nonprofits are trying to transform society, and sometimes the indicators of success in this area aren’t readily available. In many ways, success in a nonprofit merger is the mission being accomplished more effectively, but that’s often difficult to gauge. So, we may measure success in terms of change in numbers of clients served, the size of the service area, and/or amount of services provided. Additionally, it may be in terms of the outcomes experienced by clients.

LIZA: Bill, as you negotiate a potential nonprofit merger, what are the process considerations that ensure success?

BILL: There are levels of resistance that we sometimes have to overcome when we negotiate a nonprofit merger that might not be as strong in a business. We don’t have acquisitions in the nonprofit world, so there is a different power play. Even though the merging organizations might be out of scale — such as, a really big one and a small one — the individual boards have the same amount of power entering into negotiations, and they both have to be convinced that the merger should happen.

People join a nonprofit board because they’re concerned about an issue — the welfare of children or animals, literacy, whatever it is. Getting them to agree to a merger means they really have to divest from that and re-invest in something new. It’s very hard for people to do that. To do so requires thinking more globally, believing that a mission will be more readily accomplished through the formation of a new entity

TOM: In some ways, I think it’s easier for corporations to do mergers and acquisitions, because we always have the carrot of stock options, bonuses, or other cash motivators — whereas in nonprofits, I would think that that would be harder to come by.

BILL: Yes, but in terms of the people issues, I think business and nonprofit mergers are very similar. People are the backbone of any organization, and they need to be taken care of. This means keeping them informed, communicating with them. An employee’s self-interest is something you can’t disregard. You have to be able to engage this self-interest, and help people develop trust in the new structure, the new entity, and the new management team. This starts even before the deal is signed. You need to be truthful to people as much as you can, and provide opportunities for them to deal productively with their anxiety about change.

TOM: Yes, there are clear similarities here. Something we constantly emphasize is trust-building and the communication plan. Companies that instill trust at the outset and that also communicate well are better prepared and are better able to integrate organizations.

“In terms of the people issues, I think business and nonprofit mergers are very similar. People are the backbone of any organization, and they need to be taken care of. This means keeping them informed, communicating with them. An employee’s self-interest is something you can’t disregard. You have to be able to engage this self-interest, and help people develop trust in the new structure, the new entity, and the new management team. This starts even before the deal is signed. You need to be truthful to people as much as you can, and provide opportunities for them to deal productively with their anxiety about change.”

LIZA: Bill, take us through the process of negotiating a nonprofit merger.

BILL: First, both boards make the decision to begin negotiating a merger. Throughout the process, the boards need a high degree of willingness to engage in considering the possibility of a merger. Each of the entities will appoint representatives to a negotiations committee, and then we—in the role of the consultant—work through that committee to articulate the key issues that have to be resolved in order for the organizations to merge. Once there’s a negotiated merger agreement, the individual boards must vote to approve it, and then put together a timetable for the legal execution and implementation.

In nonprofits, articulating the strategic intention and translating that to what it means for the individuals involved — whether that’s at the management team or employee level — is key in increasing the likelihood of success. Most communication systems are not highly evolved in nonprofits, and as a result, getting the word out is challenging — but you need to. That’s really the key to making sure it works. It’s important to keep people on track, and to ensure that people aren’t trying to sabotage the process. As consultants, we try to make sure that people stay engaged in the process. They explore as many solutions as possible to make the merger a possibility. In the end, though, success in merger negotiations may be the decision that a merger would not work right now, that it’s just not viable or would cost too much.

LIZA: Tom, how does that compare to the process in a business merger negotiation?

TOM: Bill describes what sounds like a very collaborative process. In contrast, the parties in for-profit merger and acquisition (M&A) can sometimes be at odds, because both entities are negotiating their own best interests. The process of M&A in private industry can be a bit jarring in that first you have these competing interests, then you gain agreement, and then you’re one big happy family going forward. It’s important for the parties to have the ability to put aside the animosities that were exhibited during the negotiation process, and move ahead to forge that new strategic goal.

There’s a term used in M&A — “the deal has wheels” — that characterizes the situation. It reflects the fact that at a certain point it’s extremely difficult to derail the merger; it’s not going to stop. There’s so much momentum, so much vested interest and egos, and legal and financial resources poured into this that you can't walk away from it.

BILL: This is an interesting contrast. In the nonprofit world the resistance is often greater than the momentum. You have to constantly drive the momentum; it rarely takes on a life of it own.

TOM: There are some other important differences between for-profit and nonprofit mergers. For example, you’ve said, Bill, that there is agreement, gained through negotiation, that the two separate entities could do more combined. And everybody agrees. The entities are on par with each other and aligned in their goals. Generally in for-profit M&A, there’s one winner. There is the one “acquirer,” and usually that organization’s executive has the mantle of leadership going forward.

LIZA: Bill, how do you do handle negotiation in a nonprofit merger when you have two executive directors who have the same degree of influence?

BILL: That is one of the biggest issues in these negotiations. You have two executive directors, and you are ultimately going to have only one. In the nonprofit world, the decision is usually a collaborative one. This might be one of the most significant differences between the two sectors: there’s a winner in for-profit M&A, but in the nonprofit sector, even if that is the reality, one would never say that. The winner is the community, the clients — the win is the new organization’s ability to better carry out the shared mission. In facilitating a successful merger process the mission becomes the one anchor that people can join around and that will keep them going, even when they’re feeling very adversarial.

LIZA: Now, let's talk about integration—what happens after the negotiation process and the signing of the agreement. Tom, in the for-profit M&A model, how do you move from being adversaries to being one company?

TOM: It pretty much requires a forced mindset change. All the way up to your merger agreement, you are negotiating your own best interests on behalf of yourself and your employees. The discussions get heated, and there are a lot of late nights. Then, once you gain agreement on price and what it’s going to take to do the deal, you need to go forward with one voice.

	“Getting the word out is challenging — but you need to. That’s really the key to making sure it works. It’s important to keep people on track, and to ensure that people aren’t trying to sabotage the process.”

LIZA: Bill, how does that compare to the situation for nonprofits as they move from negotiation mode to becoming one organization?

BILL: First, there is no price to agree to because no money changes hands in a nonprofit merger. Because people are focused (more or less) outside themselves—on the mission—it’s a bit easier to move to integration once people see that the mission will be better served through the merger. But, still, it’s not always an easy transition.

LIZA: We always hear that culture is at the core of merger success or failure. First, what is meant by “culture?”

BILL: Culture encompasses the way people communicate with each other; the way they resolve conflict; how they celebrate, reward, lead, manage, do their work, break down and assign work, and relate to each other. It is the core of the company’s belief system.

TOM: I agree with Bill. This is an area in which nonprofits and for-profits have a lot of similarities.

LIZA: How does culture impact merger success?

BILL: We often hear that mergers don’t work due to a clash of cultures, which has a lot to do with people—the inability of people to think of themselves and their organizations in different ways. They get tracked in one way of doing things, and get very resistant to any kind of change.

In the integration process, what you want to do is bring the best of both entities together to create something new. That takes an extraordinary amount skill and patience. It can be hard to find the energy and focus for this after an intense negotiation process.

TOM: It's very challenging to address culture as part of mergers and acquisitions. But organizations that engage in M&A without considering culture do so at their own peril. If you totally absorb an organization— without respecting the way they’ve done business—then you run the risk of alienating people and having them leave within a short time-frame.

LIZA: So, how can an organization address these cultural issues and prevent them from derailing the merger?

TOM: When you’re integrating cultures, you need to look at your business intent, the strategic reasons why you are getting together. Then determine the degree of integration needed to bring the two groups together. The acquired company could be very much a stand-alone if you don’t need a high level of integration of product, process, or people — you just leave them to continue to do what they do.

Or, the acquisition can be something that’s highly integrated and totally subsumed — you bring them in and, in many ways, you just impose your processes and procedures to make sure that the deal works.

What’s crucial to remember is that each deal is unique. You can’t use a cookie-cutter approach to mergers and acquisitions, even though a deal might be similar in size, technology and scope.

To surface cultural issues, you can either conduct formal cultural surveys that are very extensive and drawn-out, or you can conduct more informal culture assessments. These might include looking at the company’s website, having interviews with executives and managers, and reviewing their policy and procedures manuals. Drawing on this, you look at the similarities and the differences between the cultures of the existing organizations, and think about what it will take to work together to meet goals and timetables. And again, it’s important to underscore the business rationale for doing the deal. You show that you’re respecting and valuing them as an organization, but then you also need to move forward.

LIZA: Given the challenges of the significant transitions required by a merger and the need to get employees’ personal goals aligned with the institutional goals, how do you balance the needs of the individuals with the organizational needs? How do you help people fit in, and keep them happy and focused?

BILL: Organizational goals and the employees’ interests aren’t always the same, but they don’t necessarily have to be at odds. You walk a fine line between making sure that the work gets done and that the organization is succeeding, while also meeting the needs of your employees. Part of this is having an understanding of their self-interest, and where there's alignment with the new organization.

Most nonprofit organizations are extraordinarily flat. There are not a lot of levels and layers, so the job opportunities are not huge. One of the benefits of creating a larger organization is that you’re going to be able to make and provide some new opportunities for movement. Post-merger, that’s a big selling point. However, it’s a balancing act because there are fewer resources to make it work for people; there are not a lot of margins in terms of time or energy or finances to provide incentives.

Also, in for-profit M&A, there will often be an implementation team whose job is to work solely on the merger integration. In a nonprofit, the implementation team is usually the senior management team of this new organization, managers who are doing their job while also trying to implement the merger and deal with employees, all at the same time.

TOM: I agree that balancing employees’ personal goals with institutional goals is key to ensuring the success of a deal. One of the things that I do is look at how well the executive management team of the acquired entity is aligned with the executives of the acquiring organization. We discuss similarities and differences, then we talk about what the combined entity looks like in terms of vision and mission. This reinforces what people had in mind at the outset and what is expected going forward. From there, we draw out the strategy, tactics, and a timeline. Then the management teams are able to go back to their respective organizations to start driving home goals and objectives, making sure folks understand why they’re joining together.

“In for-profit M&A, there’s one winner. There is the ‘acquirer,’ and usually that organization’s executive has the mantle of leadership going forward.” “In the nonprofit world, the winner is the community, the clients — the new organization’s ability to better carry out the shared mission. The mission becomes the one anchor that people can join around and that will keep them going, even when they’re feeling very adversarial.”

Communication is key. You need to communicate how the strategic intent of the deal translates to people’s day-to-day goals and objectives. This is key to making sure that staff are on board and are aligned with the new organization.

One thing that works well is to have an executive sponsor, someone who’s been through deals in the past and can ensure successful integration. This person serves as a champion of the integration and can help the acquired company through — making sure they have a sense of voice and purpose, are being listened to, and are getting the resources they need to ensure the success of the deal. The champion should be a decision-maker who has authority and credibility with both organizations. They need to have great communication skills, as well as leadership skills.

BILL: In the nonprofit world, where staff is lean, it can be difficult to dedicate someone to this role. But, it’s essential that organizations recognize the need to have this focus and dedicated leadership, and find ways to free people up to perform this function. This is where human resources staff can perform an invaluable role.

Also, in terms of performance evaluation and performance management, there needs to be specific goals related to implementation and post merger integration issues — quick wins, as well as 3-, 6-, 9-month benchmarks. Integration champions should articulate these goals from the beginning, then use that as a basis for evaluating and rewarding performance.

LIZA: Tom, what are the unique challenges of integration in the for-profit world?

TOM: Again, we have the bottom line that we are always focused on. You have to convince all these stakeholders — boards of directors, shareholders, regulatory agencies, employees — that this is why we’re doing the deal, and this is how we plan on getting it done. A lot of companies think that once they get regulatory approval and close the deal, then that’s it. But that's when where their challenges actually start.

You continually need to be looking at all the people, process, and product issues that arise from combining two entities and gauge how well you’re doing, and when and what you need to do to re-direct. It is a process of constantly checking in, establishing metrics at the outset, giving people rewards and recognition when they do meet goals, but then also having the ability to determine when you’re off track and to get people re-focused. You have to keep tweaking it and maintaining the motivation until your goals are achieved.

Based on the research that’s been done in the private sector, about half to three-quarters of these deals fail — that’s a terrible statistic! When you’re talking about people’s careers, and millions or billions of dollars worth of value, it’s a travesty to just haphazardly go into an acquisition post-close with no game plan.

LIZA: Bill, what about the nonprofit sector? What challenges arise in integration?

BILL: In the nonprofit world, getting through merger negotiations can take a tremendous amount of time — four, six maybe even as long as 12 months — because you have a negotiating team that meets once every few weeks for a couple of hours. By the time people sign the deal, they feel like they’ve run a marathon. But, actually, that was the sprint. Now they have to start running the marathon. This is the challenge of the post-agreement integration. The people that were the champions of the merger are really tired, and they feel like they’ve already done their job, and want to step back. So the challenge of implementation is, first of all, getting in the mindset that this is going to take a lot of work and that we have to really identify what the issues are. And, you have to save some energy and resources in reserve to be able to do this.

LIZA: How are these challenges best addressed?

TOM: The better companies, those that are constantly doing deals, realize that the people will be the prime component of success. They place a lot of time and energy in ensuring that they have integration teams and that HR is very much at the forefront of ensuring that deals are done with people in mind.

“In terms of achieving success, both sectors emphasize leadership that’s committed to supporting employees through the integration process. That means having time set aside to address the “people issues” and to keep the focus on the reasons why the organizations merged. To make sure this happens, there needs to be a plan and a means of measuring progress on a continuous basis, and for making adjustments, as necessary.”

Building trust is key, as well. It works best if the top executive goes out and talks directly with employees. They should discuss why they’re doing the deal, the strategic intent, what the upside is going to be for employees, how successful they've been with deals in the past, and how everyone will be a part of that success going forward. This engages the staff, and everybody is impressed that there’s this very busy executive who goes out of his or her way to talk with them.

BILL: Parallel to that, there needs to be leadership in the nonprofit that can do this, that has credibility with stakeholders — both internal and external to the organization. They need to articulate the vision clearly and credibly.

LIZA: Thank you both for sharing your insights. One key learning from this discussion is that, despite vast differences in scale, intent, and even process in terms of merger integration in the two sectors, the bottom line for success is the same—it’s critical to focus on the people and on frequent, clear, and honest communication. When it comes to achieving success, the similarities outweigh the differences between the two sectors. And, in terms of tips for achieving success, both sectors emphasize leadership that’s committed to supporting employees through the integration process. That means having time set aside to address the “people issues” and to keep the focus on the reasons why the organizations merged. To make sure this happens, there needs to be a plan and a means of measuring progress on a continuous basis, and for making adjustments, as necessary.

William Coy, MA/MFC leads LA Inc.’s human resources management practice. He has been the Director of Human Resources at Yosemite National Institutes, and head of Training and Development at Industrial Light & Magic. Throughout his career, Bill has helped scores of organizations improve their performance through improving their management of their human resources. For more information on Bill, visit http://www.lapiana.org/consulting/team/coy.html.

Tom Perez, MA/HROD, a Managing Partner with Strategic M&A Partners, was the former Director of Mergers & Acquisitions - Human Resources with Excite@Home. Tom began his M&A career as Acquisitions Program Manager at Cisco Systems. He has managed over a dozen acquisitions worth $5.6 billion and has successfully integrated thousands of employees.

Liza Culick, MPH/JD specializes in organizational capacity-building and change management. For more information on Liza, visit http://www.lapiana.org/consulting/team/culick.html.