In our continuing series of case studies, we look at mergers and the problems of underestimating culture clash, while our panel of experts offer some solutions
HUMAN RESOURCES DIRECTOR Moira Tynan could see the dangers but none of her management colleagues at LGB wanted to listen. She knew, on paper, the deal made sense - LGB, a global financial services organisation with headquarters in London and Boston, was taking over the highly successful, Irish-owned financial services company Trilby.
LGB would extend its market by acquiring the investments firm, which is based in Dublin's newly developed dockland area of the International Financial Services Centre (IFSC). In turn, it would be the perfect alliance for Trilby's management team, which was concerned about future stability and costs at this time of increasing globalisation. Trilby had successfully evolved since its foundation 50 years ago, currently employing 800 staff, with revenues of €100 million and profits before tax last year of €9 million. Now, it was proposing to merge with the world's seventh-largest financial-services provider, listed on both the London and New York stock exchanges, employing 9,000 people, with revenues of $900 million (€661 million) and pre-tax profits of $72 million (€54 million).
Despite Moira's analytical exterior, she has an innate understanding of the softer side of business. She knows that while many companies are competent at managing the financial dimensions of mergers, in 70 per cent of cases they fail to achieve their goals.
HR - as in most deals of this nature - had been excluded from the pre-deal assessment of the potential acquisition, but she was eager to get on with the transition work, convinced that the due-diligence process would give them an insight into the best way to approach integration. However, when she outlined her initial concerns to LGB's finance director, Tom Morgan, in his fourth-floor office in the company's Canary Wharf building, he was dismissive of her worries.
In completing the HR due diligence, Moira had to work closely with her Irish counterpart at Trilby, Tim Hennessy. She suggested using a cultural audit to help minimise misunderstanding and reduce the risk of other personnel issues slowing down or blocking the integration. As part of this audit, focus groups were held with employees in both firms to find out how they felt about the merger.
At Trilby, staff feared there would be job cuts. They also thought their existing close relationship with senior management wouldn't stop executives, once they got their payout, abandoning ship. They were also worried that they would no longer be important as employees, with the concerns of shareholders dictating company strategy.
At LGB there were no such worries, as Trilby would simply form part of its global organisation. Senior executives thought that the Irish management was typically weak and old-fashioned, with its focus on inclusion in the decision-making process.
LGB is proud of its aggressive, results-orientated culture. New employees are told at their induction programme that there is a "work-hard, play-hard" ethos. Quick progression is promised in return for maximum contribution. The company's intricate bonus and commission systems reflect these values.
Trilby, on the other hand, likes to "mind" its customers and staff. The focus is on process rather than results, recognising team rather than individual effort. This means all the staff share modest bonuses, rather than just the "shining stars". After the audit, it was clear to Moira that there were key differences between the two cultures. LGB would face strong resistance if it tried simply to absorb Trilby into its structure and culture.
Moira presented her findings to the board. It was not going to be easy to win support from Trilby for the new culture and compensation systems, she explained. A priority would be to reinforce to the Irish staff the need for the merger. During the first six months, she intended to spend two days a week in Dublin to help her understand and address employee concerns, she told the directors.
Most started to nod in agreement, but Tom was quick to intervene. "If we spend time faffing about pretending to listen to what they want, it is creating a false impression that they have control over this acquisition. I think we should go in, tell them the way things are and just get on with it - short, sharp and painless," he said.
Kevin, the chief executive, had a lot of respect for Moira, as since she joined the firm productivity was up, employee-turnover figures were down, and the company had recently been listed as one of the top 100 UK firms to work for. However, he believed there was sense in what Tom was saying - although he would not have put it that crudely.
Finally, Kevin said: "It is not helpful to have such strongly opposing views on the same side of the fence. Let's set up a cross-functional project team to lead the integration process. We should involve some of the key people from Trilby. I would like Tom to head this, given his successful experience in this area. I am sure you will work it out. The key thing is to ensure we maintain and expand the client base and to do this we need to keep a strong local management team in place in some key areas."
Tom smirked at Moira; that would be the end of her notion of flitting off to Dublin every week. And he wasted no time in getting the project going, first starting to integrate the internal-support functions - HR, finance and marketing - streamlining processes, gathering reports, and implementing LGB systems.
They encountered numerous difficulties but nothing he couldn't handle, Tom thought, until three months later he was summoned to Kevin's office one morning.
"You better take a look at this," Kevin said, handing him a copy of an e-mail from the chief executive of the Trilby operation, Rick Morris, sent at 11.10pm the previous night.
"It did not take you long to go back on your word," Tom read. "There have been some disturbing disruptions to our 'deal'. You promised involvement of the staff in the integration process - instead we are bombarded with e-mails from all corners of your organisation telling us to do this, that and the other, with no explanation as to why. We were told that we would be left alone as we were doing just fine - yet, on the ground, I can see this is a completely different approach you are taking.
"A number of key staff have handed in their notice saying they don't want to work for 'a big anonymous machine that does not care about its people' . . . Early retirement looks like a nice option right now," the e-mail concluded.
"So, Tom," said Kevin, "what are you going to do about this?"
From here, how can LGB ensure a successful merger and keep a strong local management team in place?
THE EXPERTS' ADVICEUP UNTIL NOW, LGB HAS BEEN very successful at assimilation acquisitions, where one partner adopts the identity of the other.
This time, however, it is offering Trilby a separation-type acquisition, promising that the newly merged operation will include Trilby's culture in the combined organisation's dominant culture. However, from the start, this seems to have been an empty promise and LGB is falling back on old ways. This is the start of the communication crisis it is now facing.
People and culture:LGB has failed to recognise the amount of work associated with carrying out a successful integration in a strategic acquisition, especially as it needs to continue to run the business as well as manage the merger.
Its efforts to date have impeded rather than maintained the smooth running of the Trilby business, something that is a source of annoyance and frustration for the people there. Integration is key in a strategic acquisition and most of the real work begins after the deal has gone through.
For example, the goal in a strategic acquisition should be to maintain the strengths and culture that caused the acquired company to be successful in the first place. This concept could certainly be applied to the area of human-resource practice, particularly with compensation and benefits - while growth is key, different reward structures might work in different cultures to achieve that growth, recognising that culture is also a factor of nationality. LGB has enforced the sledgehammer approach and risks paralysing Trilby to an extent where it loses focus and faces problems in its own market place.
Integration process:There is still time to put in place an integration team to galvanise support for the change. This team will need to be on-site. Given that Trilby is receiving so many requests for information and undergoing changes of its processes and systems, it is important that some clarity is established around the whole process.
Kevin Flynn, the European chief executive of LGB, should have a very clear and open conversation with Rick Morris of Trilby on what must change and where there is room for negotiation.
Once this "non-negotiable" conversation is out of the way, then the work can begin on bringing the key executives together from both organisations to gain an appreciation of where everyone is coming from. However, the customer must always be at the heart of decisions about changes, in line with necessary regulation. It is worrying to hear that key members of staff are handing in their notice, but more worrying to hear the chief executive talking about an early retirement. It is crucial that Flynn gets Morris back on side. He needs to show him that he understands his concerns and admit areas where LGB has made mistakes.
Who will run the show? As part of integration it is important to put in place a management structure designed to support the strategic objectives of the combined entity.
The key here is to judge people by what they contribute, not where they came from. If Tom Malone gets his way, he will have LGB staff heading up Trilby in a very short time. If this happens, it will surely lead to unwanted turnover of key staff.
Systems and processes:The emergent business systems need to fit the ethos and practical challenges facing the new organisation. In the hurry to get the new business integrated, business systems are often taken from just one company - rarely are these policies designed from scratch to meet the future needs of a combined company.
Given that the aim is one of integration for this merger, and not assimilation, this approach is a mistake. A process of harmonising the levels of salary, benefits and allowances needs to be conducted as soon as possible after the merger, so as to ensure that the remuneration and benefits are fair and equitable between employees from the various organisations that constitute the new merged environment, and that the cost to the employer does not increase unreasonably in rectifying differences in remuneration and benefits.
Good performance depends on people
The first thing that strikes me is the way in which the actions of LGB orchestrated by Tom were dramatically opposed to the promises made by his CEO, Kevin. His approach not only breached the trust between the two companies, but he may also have undermined his boss.
People expect change after a merger or after being acquired. If the changes they see are at variance with the message they have received, it leads to suspicion, resistance, and diverts attention from the job in hand, ultimately damaging the business. It is particularly important for both parties to understand how the transaction is going to add value and how the business is to be run afterwards. There is no substitute for clear communication and the formulation of an integration team with members from both companies can facilitate this.
Cultural audit:Tom had successfully integrated poorly performing acquisitions in the past, by implementing LGB processes and replacing management. This deal was different. The target business was performing well and if simple comparisons of turnover, PBT and staff levels are examined, it was even performing better than LGB. His approach was one-dimensional and he was not open to the idea that LGB might learn something from the way its smaller partner worked. The cultural audit can be a useful tool and it highlighted a number of risk areas. The integration team should also determine what kind of future culture best matches the business model after the merger and how this new culture will be developed if a change is required.
Lead from the front:Tom is in a particularly difficult position. His boss is unhappy because the merger is at risk of failing to achieve its objectives. He has lost the trust of the Trilby management by imposing LGB systems and processes in Trilby, and he has alienated his HR colleague who had tried to alert him to the risks of his approach. He has not even followed his initial instinct to apply a short, sharp and "painless" message. Worst of all, his boss has now charged him with fixing the mess he has got them into.
There is nothing like a crisis to focus the mind. To successfully integrate this deal and achieve the business objectives of the "merger" requires winning the hearts and minds of the people affected by it. The performance of the business will depend more on the people than on technology assets, or cost reductions brought about by implementing LGB systems. If Tom is to retrieve the situation at this late stage, he will have to involve the key Trilby managers who need to be kept on board. He will have to listen to them and to Moira to achieve a shared understanding of the current state of the business. He will then have to develop a clear vision of the future state which they can buy-in to and outline the actions required to get there. In short, Tom will have to show leadership.
Marilyn Phillips is HR director at Grant Thornton. Jack Golden is head of human resources at CRH
