WHITE PAPER: Change Management in Mergers and Acquisitions

In its November 2001 edition of the McKinsey Quarterly, McKinsey and Company provided what is probably still the best description of the change management challenge in mergers and acquisitions:

“Revenue deserves more attention in mergers; indeed, a failure to focus on this important factor may explain why so many mergers don’t pay off. Too many companies lose their revenue momentum as they concentrate on cost synergies or fail to focus on postmerger growth in a systematic manner. Yet, in the end, halted growth hurts the market performance of a company far more than does a failure to nail costs. Some balance may have to be restored.”
The belief that mergers drive revenue growth could be a myth. A Southern Methodist University (SMU) study of 193 mergers, worth $100 million or more, from 1990 to 1997 found that revenue growth was fairly elusive. Measured against industry peers, only 36 percent of the targets maintained their revenue growth in the first quarter after the merger announcement. By the third quarter, only 11 percent had avoided a slowdown; the median lag was 12 percent. When McKinsey joined the SMU researchers to take a closer look, it turned out that the targets’ continuing underperformance explained only half of the slowdown; unsettled customers and distracted staff explained the rest.
Moreover, these revenue shortfalls don’t represent the beginnings of a J-curve.”
In 2008, McKinsey reported that, globally, fewer than half of all mergers and acquisitions since 2001 had ever created any value. The underlying cause is failure to manage change.
In services organisations in particular, client retention is at significant risk following a merger or acquisition. The acquiring firm must actively manage the acquired firm’s clients’ perceptions and actions. When the acquired firm has few but high-value clients, this is critical to success. The clients will have many sources of information (and misinformation). The acquiring firm must step in immediately to communicate – repeatedly – that service levels will equal or exceed that to which the client is accustomed, and that the client is greatly appreciated by the firm. A panoply of micro-messages must be included in these communications to retain trust, not to mention the client.

The workforces at both the acquiring and acquired firms are the second area of risk. This risk manifests itself in three ways:

► Critical to revenue, a key staff member in the acquired firm may leave or be made redundant. This individual is rarely an executive; she or he is most likely a first or second level manager who is essential to a revenue-generating process, or to retaining an important client. The acquiring firm must quickly identify this individual – or these individuals – and move without delay to ensure their retention.

► Staff reductions are inevitable. They also negatively affect performance by those left behind. Repeated studies of past recessions have shown that companies making staff reductions suffered an average negative 24% productivity change for three years thereafter. When productivity means customer service, and customer service is the key to revenue, this has serious consequences. David Sirota, PhD, founder of Sirota Survey Intelligence, reports that a ten percent reduction in the workforce yields as little as 1.5% reduction in total costs. Managing change for the remaining workforce is essential to achieving any added value from a merger or acquisition.

► Merging HR systems creates the potential for widespread resentment. The “systems” here are not computer systems but management systems. For example, it is rare that both firms’ employee benefits are identical. Imposing one upon the other will create resentment. When the newly merged firm evolves its missions and business focus, existing measurement and compensation systems change. It is almost impossible to invest too many resources in ensuring that the new measurement and compensation systems actually appraise what contributes value to the overall enterprise, and that the workers perceive fairness and transparency in the new, or merged, systems.

Thomas Koch addressed post-merger integration in “Handbook of International Mergers and Acquisitions,” Palgrave MacMillan, 2002. More than half of the success factors he lists involve the human considerations. Failure to give proper attention to, and to invest sufficient resources in, change management is the leading cause of disappointing financial results in post-merger integration.