THE LIFE CYCLE OF MERGERS/ACQUISITIONS:

coping strategies for those who lead and those who follow.

Dr. Laurence J. Stybel Maryanne Peabody
Stybel Peabody Lincolnshire
Sixty State Street, Suite 700
Boston, MA 02109

The Watermill
Waltham, MA 02154
` 781/736-0900
e mail: stybel@aol.com
SUMMARY:

Individuals have life cycles. Products have life cycles. Do corporate mergers/acquisitions (M/A) have life cycles? Understanding M/A management from a life cycle perspective can better help employees to predict "what happens next" amidst the chaos of the present. It can also help increase the odds of individual employee survival.

We are going to address three key issues:

1. What do we know about M/A management?
2. What is the M/A Life cycle?
3. What are the implications of the M/A cycle for those who manage it and those who are managed by it?

WHAT DO WE KNOW ABOUT M/A MANAGEMENT?

We certainly know there is plenty of it going around! The MÀ Data Base shows that in 1980, there were approximately 1500 M/As; by 1986 there were 4500 in a year. Dollar value of the M/As during this period went from less than $40B in 1980 to over $200B in 1986. Britain shows a similar trend, with 400 M/As taking place in 1980 and 1,200 in 1988. The dollar value of M/As is significant. And so is the impact on people. It is estimated by Fortune that 25-50% of the work force is directly affected when two companies merge. In 1983 alone, nearly a quarter of a million employees lives were changed as a result of just 10 large mergers.

Review of the M/A Literature
There tend to be two general types of M/As. The first type might best be called "create wealth through leveraged buying followed by asset sales." This type of activity will not be the subject of today's talk. A second type of M/A is based on generating value by creating synergy and efficiency. By blending two companies with complimentary or different products, there will be added value for the new,larger company. An example of this would be Sears' acquisition strategy. The efficiency argument states that there
are cost savings to be made by eliminating redundant services and paring down middle management bulge. The growth of banking M/As are largely based on this premise. Presumably, this synergy and efficiency will result in bringing more wealth to the owners.

That is the theory. Does it work in practice?
A 1983 article by Michael Jensen and Richard Ruback in the Journal of Financial Economics summarized 13 separate studies of the prices of shares involve in U.S. takeovers. They concluded that, if you look at share prices one month before and after a M/A event, then one could safely conclude that M/As do indeed increase shareholder value. Beyond a year after the event, share prices actually underperformed the market!
Julian Franks and Robert Harris looked at share price data for 1500 British acquisitions from 1955 to 1985. They found results similar to the Jensen Ruback U.S. study.
David Ravenscroft and Frederick Sherer conducted a fairly elegant study of 471 companies broken down by comparing the performance of purchased operating units with control groups of similar units that stayed independent. For example, a division of a larger company would be compared with a free standing company of similar size and market focus. As a group, the acquired units were yielding 9.8% per year between 1975-1977 compared to 13.7% for independent groups. And what do we know about the management of mergers once the financial and legal dust settles? The Management Contents data base contains summaries of articles appearing in 120 business journals from 1974 to the present. Of 253,000 articles in the database, only ten citations could be found covering the management of people during M/As.

THE M/A LIFE CYCLE

This discussion must be a broad overview. Mergers and a- cquisitions will clearly differ depending upon a number of factors: degree of hostility in the take-over, related versus unrelated industries, whether the new owner seeks to grow the business or simply harvest its profits, etc. Having said this, we find M/As go through some clear cycles.

STAGE 1: AMBIGUITY
There is a paradox here. This stage--called the Stage of Ambiguity--is actually the clearest phase of all. It begins at the first rumor of a M/A activity; it ends when the acquiring
company makes its first clear policy move. As with all ambiguous social situations, rumors abound and institutional paranoia is the norm. And in a paranoid state, there is a tendency to overinterpret motives and undervalue the likelihood that events are caused by chaos or randomness. What appears to the acquiring company as the acquiring
company's own lack of clarity / chaos or unwillingness to discuss its plans with subordinates will appear to the acquired company officials as a clear indication of deceit and bad faith. For example:

The General Manager of an Acquired Division met the acquiring company president at a company social gathering. The General Manager's question to the CEO was, "When do you plan to take over our operations?" Fumbling with his drink, the CEO mumbled, "Not anytime soon."

A week later, the acquiring company made its first move to dismantle financial operations at the Division and to move it to corporate headquarters. For the General Manager, this sign was proof positive that the President deceived him at the party. For the President, the same event meant that the General Manager had put him on the spot and the President was unwilling to go into a detailed business conversation at a social gathering.

Of course, not all acquired company officer claims of deceit are due to institutional paranoia. We suspect a significant percentage of M/As fail to meet high expectations because of deceit on the part of the acquiring company officials. It poisons the atmosphere so much that only the death/retirement/termination of those who lie may solve the problem. For example:

When an acquiring bank negotiated for the purchase a competitor, it publicly went on record to state that there were no intentions of replacing the senior management. And that is exactly what it did within four weeks!

Between these two extremes lies the more common day-to-day operational ambiguities that routinely poison the atmosphere:

The Director of Personnel of an acquired company visited the Vice President of Administration of the acquiring company. After assuring her that her operations would not be impacted by the merger, he politely vetoed her choice of a compensation consulting firm on the grounds that headquarters always used Firm X.

Suggestions for Dealing with the State of Ambiguity Managers:

1. Try to keep the period of ambiguity as short as possible. If changes are going to be made, make them rapidly. Making a series of "small adjustments" over a period of years is likely to be perceived as a Chinese "water torture." People will be able to adjust when they understand what is going to happen.

. Don't call it a merger unless it really is one. A merger implies two companies of equal value. An acquisition implies a power imbalance. People need to know where they
stand at the front end of a M/A operation. Slick face saving gestures calling an acquisition a merger probably does not fool customers or the financial community; but it can easily confuse employees at the acquired company who desperately don't want to believe they have been acquired.

. The value statement "honesty is the best policy" is not only an ethical issue, it is also a philosophy of M/A management that is profoundly practical. Employees may not like bad news, but they can deal with it. Employees may resent chaos in upper management, but they can understand it. Deliberate duplicity is unlikely to be forgiven or forgotten.

2. Announce the company severance benefits as quickly as possible. One of the benefits of a clear and generous severance program is to make it worth something to employees to take a "wait-and-see" attitude during this period of ambiguity. If the severance benefits are also ambiguous, then many good people are likely to prematurely jump ship as a way of achieving some measure of certainty and control over their professional lives.

3. Establish a Rumor Control Center in each division. This Center could actually be a senior level person who has the authority and credibility to confirm or deny rumors before they begin to spread.

Employees

1. Don't jump ship until you are pushed, if the severance plan is decent.

STAGE 2: CONSOLIDATION

With the acquiring company's first policy moves, its inten tions now become clear. An "us" versus "them" mentality becomes common. Also common is the resentment among acquired officials over demands for more and more operational data. It is often perceived that owners are going to use this information against the people providing it. At the same time, the officials at the acquired company will likely feel that people in the acquiring company are withholding important information. Institutional Paranoia is likely to give way to Institutional Mourning for the old company and its way of life. It is a profoundly sad time. But there is also the danger of the Rebecca Myth.

"Rebecca" is a short story by Daphne DuMaurier. A man brings his second wife to his home. The servants keep comparing the new wife to the dead first wife--"Rebecca Wouldn't Have Done It This Way." The second wife is convinced that the servants hate her and that she can never compare with the often mentioned Rebecca. But the end of the story has a twist: Rebecca was actually a hateful woman! In other words, the Rebecca Myth refers to a sincere sense of mourning and loss for a state of affairs that objectively wasn't as wonderful at the time as it now appears!

During this time period, the acquiring company is apt to be evaluating the depth of management talent in the mid management ranks of the acquired company. Evaluations based upon old perfor mance appraisal documents are likely to be suspect, as these evaluations are often confounded by compensation factors ("I want to give this employee a 6% raise when "average" performers are only able to get 4%. I'll fill in the appraisal sheet to justify the 6% raise, even though I privately believe this employee to be only an average performer"). Evaluations of subordinates by asking the boss directly about his/her opinion are now also likely to be suspect, as bosses have political motives to make themselves look good in the eyes of the new owners--even it means downgrading the performance of subordinates. In other words, one can count upon bosses to claim more personal credit for success than they may really deserve. Given these dynamics, old mentor relationships and political alliances are apt to be severely strained. And the more naive employees may not realize it until it is too late.

Suggestions for Dealing with the State of Consolidation

Management

1. This is a good time to initiate employee climate/ attitude surveys. Results are likely to be "rock bottom," thus giving a good base line against which to measure later improvements or lack of improvements.

2. Given the new politics of promotion decisions, it may be useful to involve outside consultants in helping to evaluate employees. At its best, such consultants help to convince employees that the company is going the extra "mile" to insure impartiality against its own favoritism or subordinate backbiting on the part of subordinate's bosses. At the worst, it allows the consultants to function as a scapegoat to explain why promotions weren't forthcoming.

Employees

1. Provide management at the acquiring firm with more information than they may actually be seeking. This action positions you as having a reputation of being cooperative and a player on the "new team."

2. Make every effort you can to establish good personal relations with the new power sources.

3. Be wary of your boss. An M/A action can turn a mentor into an ex-mentor!

4. Request that the acquiring company provide an impartial "second opinion" prior to making a decision about your suitability for promotion or new jobs. Many companies now routinely provide such assessments as part of the screening process of senior level people who are being recruited externally.

5. Organize employee-sponsored (not company sponsored) mourning rituals for dead products, services, or organizations. Such rituals can be as simple as a toast with wine to an actual memorial service. Like funerals, such mourning rituals help acknowledge communal loss and help start the healing process.

STAGE 3: POST CONSOLIDATION
It is said that in the aftermath of a nuclear war, the survivors will envy the dead. In a similar way, in the aftermath of a consolidation, remaining employees have been known to state that they envy those employees who were able to obtain early retirement or new jobs. It may take up to 18 months of no new policies or disruptions to finally convince employees that the period of post consolidation is at hand. During this period, employees may find themselves in chronically undermanned situations. Chronic and constant undermanning can be a major source of stress for employees. But an organization that is staffed at a somewhat less than optimal level actually performs more effectively than other staffing patterns. Slight undermanning prevents the freezing in of stereotype work roles and forces employees to be flexible in responding to customer needs. An example of this would be the typical emergency room of a large city hospital. Staffing patterns can often can go from overmanned to undermanned and back to overmanned in a matter of minutes. The TV series "M*A*S*H" also captured the essence of the desirability of a slightly undermanned situation. If this type of optimal undermanned situation is achieved and maintained on a consistent basis, the work unit is likely to develop a sense of mission and enthusiasm...even an "esprit de corps." Of course, if that optimal level is not achieved, then employees will simply feel overworked and unappreciated. But if an optimal undermanning situation can continue, this
sense of mission and enthusiasm will continue until.....the parent company announces the impending sale of the division to a new organization!

CONCLUSION

Like all life stages, the M/A life cycle sets up a series of challenges for individuals to meet. Meeting those challenges does not end the problem...it simply helps position one to go onto the next level of problem. In short, if you are looking for a way to achieve homeostasis following a merger, you will be doomed to disappointment! The good news, however, is that the challenges and hurdles are beginning to become predictable. And, as they become predictable, they become more controllable. Harvard University Medical School psychiatrist Leston Havens perhaps put the issue best when he wrote:

"The expected can be discounted, as they say in the commercial markets. Against the unexpected, there is confusion, denial, turmoil...the sense of being thrown. It is the slow translation of the unexpected into the expected that constitutes much of wisdom."

Dr. Laurence J. Stybel and Maryanne Peabody are co-founders of StybelPeabody Lincolnshire. There are twenty five Lincolnshire International offices in the United Kingdom, Canada, and the United States. The firm provides career effectiveness services for senior executives. Contact Larry at stybel@aol.com.

Stybel Peabody Lincolnshire clients include 36% of New England's largest 14 thrift institutions, 40% of Boston's largest 25 largest law firms, and most of Boston's major teaching hospitals. Their programs are the only ones approved by the Massachusetts Hospital Association. The readers of MASSACHUSETTS LAWYERS WEEKLY voted Stybel Peabody Lincolnshire "Best retained search Firm" in Boston.

REFERENCES
Alan Auerbach. Corporate Takeovers: causes and consequences. Chicago: University of Chicago Press, 1988 Leston Havens. Making Contact: uses of language in psychotherapy. Cambridge, Massachusetts: Harvard University Press, 1986. David Ravenscroft quoted in The Economist, December 17, 1989, p. 78.