Correcting common misconceptions about communicating during mergers & acquisitions. (Foundation Findings).

Pick up any "how to" book on implementing a merger or acquisition, and you will get lots of advice about the value of communicating to employees as much and as often as possible. Many authors go so far as to say that there is no such thing as "overcommunicating" in a merger or acquisition. Few, if any, of these books, however, differentiate between the types of mergers or acquisitions being implemented or base their recommendations on much more than anecdotal evidence or single case histories.

Over the past five years, I have conducted a number of research studies on mergers and acquisitions to investigate these claims, collecting first-hand data on hundreds of deals, reviewing more than a thousand media clips on these transactions and talking to dozens of communicators responsible for making the deals work. My most recent study, completed in May 2001 and underwritten by IABC, included direct feedback from more than 300 communication executives involved in recent mergers or acquisitions. From this research, a number of interesting contradictions and misconceptions emerged with regard to the role of communication in the success or failure of a merger or acquisition.

INITIAL COMMUNICATION

Two of the biggest "Day One" mistakes managers make in announcing a merger or acquisition are to provide no useful information to employees and to make promises that cannot be kept. Employees want and expect honest information early on about how the deal will affect them.

This does not mean that all the answers have to be available when the deal is announced, but it does mean that some organizational work needs to be done beforehand and questions should be anticipated. As one manager noted, "Employees are surprisingly tolerant of an 'I don't know' answer if it is accompanied by an explanation of what is being done to get the answer and when it might be available."

In many deals, however, management's fixation on speed and secrecy causes them to announce plans for the merger or acquisition prematurely, before they can accurately assess the impact on the employees. A surprising number of people reported that their firms either lied outright or, at least, misstated the potential impact of the deal. These firms, apparently in an attempt to keep employees from jumping ship after the M&A announcement, assured everyone that jobs would be safe, when, in fact, the shoe dropped a few months later and significant numbers of employees were let go.

LOOK ORGANIZED

Related to the issue of upfront communication is the need for employees to feel that the deal was well thought out and that management has things under control. Firms don't have the luxury of waiting until the deal is final to start planning organizational issues. For example, when Cisco Systems successfully undertook the US$7.2 billion acquisition of fiber optics equipment maker Cerent Corp., the company used the two months between the Day One announcement and the completion of the deal to be sure that every Cerent employee had a title, boss, bonus plan, health plan and direct link to Cisco's internal web site as soon as the new venture began. But after that initial communication Cisco took a hands-off approach with Cerent and kept formal communication to a minimum.

POST-MERGER COMMUNICATION

Although Cisco's post-merger approach violates the "overcommunication" rule touted in the literature, research indicates that the company's communication strategy was right on target. Ideally, the amount of post-merger communication should be dictated by the motive behind the deal, and there are two basic acquisition motives. Some firms are acquired for financial synergy and are held within a holding company-type structure. These firms gain no strategic advantage by integrating cultures and will perform better if communication and control mechanisms from the parent are kept to a minimum. The Cisco/Cerent deal fits this category. A top Cerent software engineer said of the deal, "They said we would continue business as usual, and we did.... There haven't been any surprises."

Conversely, firms that are acquired for operating synergy will likely require consolidation of facilities and people, and the acquiring company typically must establish strong centralized communication and management controls to succeed. Take the example shared by a human resources executive in a firm whose parent failed to deploy a strong communication strategy when it was needed. At the outset of the deal, the acquirer had widely touted to customers and employees the strategic advantages of integrating the acquired firm into the parent's operations. But after two years, there had been little or no interaction between the acquired employees and their counterparts in the parent company. Nor were formal communication tools developed to help them identify with the parent or understand its strategic direction. Seeing no real role within the new organization, most of the top talent in the acquired firm drifted away to competitors' firms.

It is equally damaging when the parent promises autonomy to the acquired firm but begins to implement a strong, centralized level of communication and control over its organizational structure. A manager in a recently acquired advertising agency described how, shortly after the deal was completed and despite assurances that the agency would be allowed to continue to operate independently, the parent began issuing corporate newsletters, employee manuals and work rules, and announced that the ad firm's bonus plan had to be scrapped in favor of the corporate bonus structure. The parent eventually merged the agency into one of its larger subsidiaries. "We used to be the parent agency, now we're just a small subsidiary of a giant firm," the manager said. He suggested that because of the broken promises, management lost its credibility and key employees ultimately left with their clients. In the end, the parent netted little or no financial benefit from the deal.

MERGER OF EQUALS

Another mistake made by firms in their M&A communication efforts is to position the deal publicly as a "merger of equals" when, in fact, it clearly is not. This is not to suggest that firms should avoid "mergers of equals." There can be a great advantage in having both firms jointly and equally decide the fate of their operations and the disposition of their employees. But too often the characterizations are made as a public relations ploy to make the two companies appear friendlier and more coordinated than they really are. The classic example of how a false "merger of equals" characterization can cause severe damage is the US$40 billion deal between Chrysler Corp. and Daimler-Benz in 1998.

Jurgen Schrempp, the chairman of the new venture, repeatedly used the term "merger of equals" when discussing the deal, achieving initial buy-in by employees and the media. Marjorie Sorge of Automotive Industries wrote in June 1998, "Twenty years from now only the historians should remember Daimler-Benz and Chrysler were ever separate companies.

But shortly after the deal's completion, it became clear that the characterization was intentionally misleading. A joke started to circulate: "How do you pronounce the name of the new company formed by the merger of Daimler and Chrysler corporations? 'Daimler'--the 'Chrysler' is silent."

Later on Schrempp openly admitted the mischaracterization to the Financial Times, suggesting that it was a ploy to get the deal approved and avoid backlash from Chrysler's employees and shareholders. This revelation caused a class-action lawsuit on behalf of Chrysler's shareholders and prompted dozens of negative news stories, including a Business Week article by Bill Vlasic and Bradley Stertz, "How the DaimlerChrysler 'Marriage of Equals' Crumbled--Taken for a Ride" (June 5, 2000), and a book by the same authors titled "Taken for a Ride: How Daimler-Benz Drove Off With Chrysler."

The lesson learned, according to Chrysler executive Gerald Greenwald, in an interview with the Chicago Tribune (March 18, 2001), is "Anytime you hear 'merger of equals,' run the other way."

Now contrast the DaimlerChrysler deal with Dow Chemical Co.'s US$12 billion acquisition of Union Carbide Corp. in early 2001. According to the Dow public affairs director responsible for coordinating communication activities, the deal was positioned as an acquisition from the outset. Union Carbide employees were fully aware that Dow management would be in the lead position and make final decisions regarding the deal. Dow management, however, went out of its way to solicit feedback and obtain input from the Union Carbide employees and to make them feel that they were a welcome addition to the Dow family.

When that deal was approved, only Dow leaders were quoted in internal and external communication and only the Dow logo was used, but Dow's planning manual clearly stated that for Union Carbide employees, "elimination of the UCC identity must be done with sensitivity." It remains to be seen how successful this more forthright approach has been, but if media reports are an indicator, it's certainly more beneficial than trying to mislead employees and the public about the nature of the deal.

FORMAL VS. INFORMAL COMMUNICATION

One of the more interesting findings from this research is the nature of communication tools that are most closely associated with the outcome of mergers and acquisitions. The most widely used tactics, distributing copies of the external press release to employees and holding large group meetings, had no direct correlation with the success of the deal. Neither did other popular formal communication tools such as new employee manuals, employee newsletter articles and intranets.

Conversely, several informal communication tools, such as management by walking around, small one-on-one meetings, cross-divisional training of managers, informal interaction among employees, and publishing company-wide telephone and e-mail directories, correlated significantly with high outcome levels. This finding suggests that informal communication plays a stronger role in merger success than formal communication. The formal tactics are still important, but these findings indicate that formal communication will be more useful and credible if employees have first experienced informal interactions with management and their fellow employees.

EXPERIENCE FACTOR

This research also suggests that firms with the most experience with mergers and acquisitions employ fewer communication tactics and have a higher degree of success than their less-experienced counterparts. One explanation for this outcome might be that the more experienced firms have learned which communication activities are the most effective for their organizations and do not waste time on less effective tactics.

NO MIRACLE COMMUNICATION CURE

There's a popular belief that the very high failure rate among mergers and acquisitions of the past 35 years is due to poor communication, which causes or exacerbates a clash of cultures and ultimately dooms the deal. This research indicates, however, that there are many mergers where the cultural incompatibilities are so strong that communication can do little to help the deal succeed.

The Mellon-Dreyfus merger in the early 1990s is one example. The initial cultural clashes that the two firms experienced can be traced to the fact that the acquirer, Mellon Bank, had little understanding of the mutual-fund industry in which Dreyfus operated. And the two firms had very different management styles. Mellon's management was conservative, with a controlling and technocratic style, whereas Dreyfus's management was entrepreneurial, with a loose, easygoing style. The deal was generally reported as a dismal failure in the early stages when the firms tried to operate as an integrated firm. Communication seems to have been less important to the deal's success than changing the organizational structure and creating more distance between the two sets if employees. Today, Dreyfus operates as a wholly owned subsidiary of Mellon Bank Corp.

SYMBOLS, STORIES, RITES

Assessing the cultural compatibility between two potential partners then becomes important--perhaps even more important than the financial due diligence that every merger or acquisition undertakes before the marriage. Cultural audits can provide important insights into the two firms, but confidentiality issues prohibit a coordinated effort preceding completion of the deal. One way around this constraint is to allow a neutral third party to assess the firms' cultural compatibility. In its early stages of discussions with Union Carbide, Dow Chemical used what it termed a "clean team" to conduct a cultural assessment without violating any restrictions against sharing confidential information. Early audits also help identify areas of weakness or places where communication efforts need to be emphasized once the deal goes forward.

Even without formal cultural audits, firms should pay special attention to each other's symbols, stories and rites, which are predictors of cultural compatibility. Within the realm of advertising and public relations agency mergers, there are many common cultural icons, such as stories about agency founders. Yet these stories provide a unique sense of heritage and establish cultural guidelines that highlight the underlying values of each agency.

Symbols are also frequently good indicators of an agency's culture. One important symbol is the level of formality or informality displayed by agency management. Some agencies are known for suit-wearing executives and company brochures reflecting formal offices and organizational structures. Other agencies seem to equate informality with creativity. One firm depicts its executives on its web site in T-shirts and blue jeans. It also refers to "fun and laughter in the halls" when it describes itself in a company profile. This same firm had a very negative experience when it was acquired a few years ago by a mega-agency that tried to impose strong centralized controls. The management of the acquired agency ultimately bought out of the deal, which they found intolerable. Had the parent company evaluated cultural symbols before making the acquisition, it might have been able to identify the potential for conflict.

ESSENTIAL COMMUNICATION

The bottom line is that communication represents a critical element in all mergers and acquisitions, but it cannot create synergy where none exists or where cultures are incompatible. Nor can communication make up for laziness in the due diligence process, poor initial planning or lack of understanding of how both firms add value to their customers. Frequent and thorough communication, although important, cannot overcome these fundamental problems.

The best advice is to begin the planning for a merger or acquisition early enough to address employee concerns and broaden the due diligence to look for possible cultural conflicts. Be honest in how the deal might affect employees and emphasize the less formal, interpersonal forms of communication to implement the deal.

Patricia T. Whalen, Ph.D., APR, is an assistant professor in Northwestern University's Medill Integrated Marketing Communications department in Evanston, III. She can be reached at 847-467-1820, [e-mail].