Three Disciplines To Beat The Merger Performance Odds

In response to the recession’s toll on businesses, as well as the current low costs of capital and rising levels of cash, economists have been forecasting a surge in M&A activity. That such a surge was already gathering steam became apparent in the first 16 weeks of 2011, when Reuters carried a hefty 8,510 articles on M&A. In April, we stood on the brink of one of the most influential mergers in the financial markets: The potential combination of NYSE and the NASDAQ-Intercontinental Exchange (ICE) venture. According to an April 19, 2011 letter, the NASDAQ-ICE team was “deeply committed” to a merger with the NYSE. It had offered a 21 percent premium over Deutsche Boerse’s competing offer, acquired $3.8B in secured financing, $66M in voting NYSE securities, and made a $350MM reverse breakup promise.1 It all but provided the roses and chocolates. Well, almost.

NASDAQ also indicated that it would split the combined company in two, and hinted that it would aggressively cut operating costs by eliminating redundancies on the floor, in the back office, and in management. In the end, the less-aggressive Deutsche Boerse won the war of the suitors: By May 16 the NASDAQ-ICE venture had withdrawn its bid, but only after the U.S. Department of Justice threatened a lawsuit, a threat that sent the NYSE Euronext market cap down to its lowest level in 30 months.

If NASDAQ was unhappy that it didn’t get to the altar, it need not have been. Marriages between businesses fail far more often than they succeed. As research by the Wharton School and executive recruiter Heidrick and Struggles concluded, the failure rate for mergers in the 1990s and 2000s has been as high as 74 percent over one to five years after the deal has been done.2

In fact, merged organizations lose twice: once when valuable employees leave and once when know-how is lost. This can occur even when employees with know-how survive the cuts, as that know-how is often invisible to the many merger integration teams. Knowledge loss or fragmentation slows down work, hurts quality and compromises service levels, making the merged entity far less than the sum of its parts.

Articles and cottage-industry consultants abound with advice on merger due diligence, leadership, communications, measurement, and rationalizing work. However, little practical advice is offered for identifying and integrating the know-how that is now dispersed throughout the merged organization.

This article introduces the Knowledge Jam, a process and a set of disciplines – indeed, a culture – for surfacing and translating know-how into productive work in the merged organization. Knowledge Jams target pockets of knowledge, use facilitated conversation to surface insights, and rapidly apply that knowledge to the task of making and developing new products, processes and structures. Intentional knowledge integration replaces and compensates knowledge flight, and a “jam” culture improves employees’ sense of fairness, belonging and transparency.

It’s the knowledge, stupid
Businesses merge to improve efficiency, get into new markets, expand market power, accelerate innovation and increase new product launches. But all too often the merged organization fails to achieve these goals. Merger performance, as defined by stock performance, has grossly underperformed management expectations. Researchers agree that mergers fail between 40-70 percent of the time. They blame a lack of objectivity in the due diligence, poor executive leadership, communications failures, bad technology bets, data integration failures, and customer defections. These may all be true, and there is great evidence to support all of these reasons.

But new evidence indicates that these reasons are symptoms of a larger problem: knowledge fragmentation. Knowledge fragmentation is the dispersion of know-how around the firm in employees’ heads, habits, and hard-drives, with no coherent alignment with the new work and processes of the combined entity. A recent study at American University sheds some new light. Researchers Robert Feinberg and Ralph Sonenshine studied 63 publicly traded mergers from 1996 to 2006, with deal sizes ranging from $50 million (3D Systems-DTM) to $120 billion (AOL-Time Warner). Feinberg and Soneshine’s general results agree with the previous research by the Wharton School and Heidrick and Struggles. Across the newly merged companies, Feinberg and Sonenshine found cumulative abnormal returns (risk-adjusted cumulative share price gains), or CARs, of minus 4 percent, 17 percent and 29 percent over one, three and five-year periods, respectively.3

Their specific results are more compelling. The researchers observed that out-sized “intangible assets” (market-valued assets in excess of book value) have a long-term positive impact on firm performance, lifting CAR on average by 5 points. However, they found that the very mergers in which you’d expect to see these intangible assets appreciate – horizontal mergers joining big R&D groups—appear to lose their advantage and subsequently, the intangible asset premium.4 This is ironic, says Sonenshine, as he points to an earlier article showing that acquirers with high R&D-intensity pay larger premiums, so their investors will be even more disappointed with the eventual merger stock performance.5

Why we fail to capitalize on the knowledge in a merger
Short hand for intangible assets like large groups of R&D employees is “knowledge.” Why is it that the returns on merged knowledge are so elusive? Part of this is talent flight. Wharton management professor Martin Sikora, editor of Mergers & Acquisitions: The Dealmaker’s Journal, notes that talent flight is a pervasive problem. It’s part of what he calls the “merger syndrome,” resulting from victory-like messages and job-cutting actions by the new management.

But knowledge loss that is even more insidious than talent flight is talent invisibility. All too often function rationalizations, image management, and position jockeying distract leaders from focusing on knowledge retention. Such leaders under-invest in identifying, transferring and capitalizing on the know-how dispersed throughout the two firms. I describe this under-investment as “knowledge blind spots,” “knowledge mismatches,” and “knowledge jail.”

Knowledge blind spots
Both acquiring and acquired organizations have knowledge workers with different titles, job scopes, personal networks, and operating models. But managers have blind spots when it comes to identifying just which employees have specific knowledge. Usually, they try to tap their own networks or those of their counterparts to find out “Who knows…?” Often, differences in language or value systems complicate the answer to that question. As a former VP in a bank merger, I remember looking for someone who was knowledgeable about process improvement in my new organization. My helpful counterparts pointed me to what they called “six sigma projects.” I found projects adhering to elegant project templates, but no process analytics. Same term, but different meaning. It took me another six months to find the business-process experts.

When we have blind spots like these we can’t recognize and identify expertise. We waste time, compromise quality, and break the spirit of overlooked employees. As Sikora would agree, retention bonuses can’t buy spirit.

Knowledge mismatches
In another merger, blind spots were less of a problem. When we found the experts, we lobbed a request over to our counterparts, asking for process documentation. Where any existed, it tended to be too brief or too detailed — that is, a mismatch for our new objectives or new roles. Procedures would cover reams of paper and hardly answer key questions such as, “Why did we do it this way?” and, “What can we apply to the new merged function?” Even when we began meeting, we lacked the skills or courage to dig deep into that type of detail, lest we offend or tip our hands.

Knowledge jail
Finally, knowledge may simply be tied up in numerous repositories, procedure documentation, or intranets. It’s in jail because it’s hard to find, retrieve and absorb. Even social media, with pages and pages of discussion threads are difficult to mine. NYSE’s and Deutsche Boerse’s knowledge is likely to be spread across hundreds of repositories, dozens of applications, and as many different languages and taxonomies.
What can we do about knowledge fragmentation?

The fastest way for merged company executives to surface and translate knowledge between organizations – and counter those blind spots, mismatches and jail — is through timely, inclusive conversation. Unlike documentation, social media, and other forms of asynchronous knowledge-transfer, conversation enables experts to draw out the unspoken logic of their actions, and to “jam” with others in a productive way. Bring the right people into the room, give them a safe and dignified context, and they will be informed and inspired — moved by more than just the facts.

Knowledge Jam
“Knowledge Jam” is a facilitated conversation between “Knowledge Originators” (e.g., individuals or teams who run an operation, serve a customer, or architect an application), and “Brokers” (e.g., product managers, process planners, instructional designers, or project managers seeking to translate ideas into newly-formed functions or departments).6 The Originators may be well-recognized “experts.” More often than not, they are sales, project or operations veterans who have performed creatively or adapted to a complex environment. (In fact, they may consider themselves more “survivors” than “experts.”) The Brokers are important translators of practices across the organization. They come into the Jam to learn on behalf of their organization, and they carry new insights back there. The “Facilitator” orchestrates a collaborative planning process and facilitates the actual conversation where critical knowledge emerges. The “Sponsor” provides strategic alignment, political support, and incentives to conduct the Jam. Here are Knowledge Jam’s five steps:

    Select: Identify and prioritize Knowledge Jam subjects. Selection involves Sponsors and Facilitators working together to scout and prioritize knowledge that could be critical to the merged organization, such as manufacturing operations, product roadmaps, or customer care.

    Plan: Plan the primary Knowledge Jam “jam,” or discover/capture event. Planning involves Originators and Brokers developing a topical agenda to be used in the knowledge-capture.

    Discover/Capture: Engage Knowledge Originators and Brokers in a real-time knowledge-capture. A 90-minute facilitated conversation sees participants draw out and make sense of a (sometimes incoherent) set of ideas. The Facilitator projects the notes at the front of the room or with desktop-conferencing software.

    Broker: Translate the Jammed know-how into useful applications. Led by Brokers, but with Facilitator help, Brokering entails selecting appropriate vehicles, framing, and using change management strategies to ensure know-how gets to the people who can use it. In a merger integration, Brokering is like a field trip with a license to act immediately. Brokers are resourced and motivated to return to their merger teams with insights on how to optimize the merged organization and on where pockets of brilliance reside.

    Reuse: Apply the Jammed knowledge to distinct merger-integration projects. Reuse ensures knowledge has a measurable impact on the operations, products, or customer experience with the new organization.

Conversation is at the center of the five steps. It’s best to think of conversation as not just an event, but as one of three disciplines — facilitation, conversation and translation – that weave throughout the five Knowledge Jam steps.

Discipline 1: Facilitation
Effective facilitation is essentially boundary spanning. Facilitators make the connections between what may get interpreted completely differently across disparate departments or individuals, and cultures. They use the planning process to bring participants on board and orchestrate the Discover/Capture event so that practical know-how comes to the surface. In that event, Facilitators may help explore how different groups overlap or complement. For example, in a conversation about merging process improvement capabilities mentioned above, a Facilitator could have had us explore how Six Sigma could be used, and how Six Sigma project templates embodied process improvements concepts that were reusable outside of the project management process.

Discipline 2: Conversation
A probing conversation between the Knowledge Brokers and Originators can draw out the conditions around the facts or context. (How did you decide to use that application? Why would you decide to re-approach that sales target?) Making context explicit in turn enables the ideas in the room (or virtual room) to travel from context to context. It can also help surface new connections between events, outcomes, people, politics, etc., that even the Originators hadn’t considered. It’s just as organizational theorist, Karl Weick, observes, “How do I know what I think until I hear what I say?”

Conversations prior to and during merger integrations can be difficult. Facilitators must be prepared for this. People may fear that sharing what they know will make them redundant. People fear criticism. People fear that their hard work will be lost. People fear that someone will “poach” their top staff. Facilitators help Knowledge Jam participants stay aligned with the merger’s higher objectives. They foster a tone of curiosity and openness by showing respect and using non-judgmental listening. They treat all participants with dignity. They use different vocabularies to draw out people’s diverse cultures and worldviews. Ultimately, they help participants get beyond their own defensiveness or fears for their jobs.

Just before our bank merger, I had been helping my own department and another department develop conversation skills like the ones I describe above. My department had practiced respect and non-judgmental listening as I held “check ins” at the head of each staff meeting. I had taught another department similar practices, and worked with its manager to create a “container” for talking about changes in the organization. As a result, my team met its merger objective (a combined intranet) on time, on budget, and with a productive and warm collaboration with our new colleagues. Similarly, my colleague reported that the departmental consolidation went more smoothly and with less disruption than any of the several other mergers she had witnessed.

Discipline 3: Translation
Effective translation is a new concept for many organizations, distinct from the territory protection and fragmentation typically seen during mergers. Above all other participants in the Knowledge Jam, Brokers are the most responsible for change management, as they bring back from the Jam new processes and practices into their home organizations. They must know their organizations’ needs, show up in the Jam to ensure they capture useful insights, and then, when returning to their organization, sell what can sometimes be an unsettling message. For example, a German employee in the NYSE-Euronext merger might discover that Oracle, and not SAP, is the appropriate combined-firm ERP. That’s tough news to swallow for a German.

Translation involves rendering the “jammed” concepts into familiar terms – re-framing for the next use of the ideas. This is a new paradigm, because knowledge-capture is most often decoupled from knowledge-use. Traditional knowledge-transfer methods focus on repositories. By bringing Brokers together with originators, we narrow in on the knowledge that needs to be applied, and nothing more. Thus, with the Knowledge Jam, there is less content-accumulation and more action planning.

Merger executives allow time for the new Brokers’ role to develop. Brokers need time to explore how insights drawn from several individuals or teams can be repurposed. For example, a German instructional designer might be inspired in the Knowledge Jam to propose consolidating the ERP training functions – something that would be considered heresy where divisions control their own training functions. The Broker needs executive backing to explore such a change.
From technical to adaptive merger leadership

Ronald Heifetz and Don Laurie introduced managers to the ideas of Technical versus Adaptive leadership in 19947. They explained that adaptive leadership often deals with “systemic problems with no ready answers.” The Knowledge Jam process is adaptive, as it goes further than combining puzzle pieces in the merger. It calls on leaders to use conversation to solve the kinds of problems that can’t be addressed in simple documentation. Out in the open, new logic and new practice ideas emerge.

In fact, it’s the Knowledge Jam disciplines that are adaptive. Facilitation, conversation, and translation contribute to a culture of intention, openness, and stewardship – essential for discovering hidden know-how, retaining the dignity of the employees, and focusing on action. Having a Knowledge Jam culture will not only help achieve knowledge-integration during the merger-integration, but it will also improve the organization’s readiness for other types of restructuring, particularly as curve balls start rattling managers during the integration period and beyond.

Merger executives play an important role in making a Knowledge Jam program succeed. They must:

    Target critical knowledge: Work with the full executive team to draw up a portfolio of candidate subjects for Jamming (for example programs or department capabilities that might merge or functional best practices that might be adopted across the board)

    Build Jam capacity: Hire or train a bench of Knowledge Jam Facilitators who have the ability to convene diverse parties, set and manage the tone, and help ensure “jammed” knowledge moves productively into action

    Support risk-taking: Reward employees to be Originators and Brokers, and to engage in non-judgmental, innovative conversation; and finally

    Walk the talk: Model openness, seek out diverse insights, and show how you’re putting newfound “jammed” ideas into practice.

By capturing knowledge and putting it to work in a systematic way, leaders can use Knowledge Jam to reduce what we called talent invisibility above. At the same time, they can apply the Jam culture to improve employees’ sense of fairness, transparency and belonging. Thus, leaders can use Knowledge Jam to reduce talent flight.

Plan Ahead
It would seem that the high-paced, take-no-prisoners world of M&A would be a hostile environment for introducing conversation. But with executive backing and skilled facilitation, it can improve both efficiency and morale. Collaborating on accessing and integrating knowledge during the actual merger could mean the difference between safe and injury-ridden operations, between satisfied and frustrated customers, and between profit and red ink.

Knowledge Jam may very well help leaders enter the exclusive category of “performing” mergers — those that work. Where there is a deliberate process for making functions and divisions draw on combined insight, knowledge fragmentation drops, combined functions perform, and the bottom line improves. The result is an adaptive organization that nurtures employee behavior that is inquisitive and innovative, rather than protective and defensive. Managers should start early. Even during the antitrust reviews, the champagne toasts, and the press conferences, it’s already time to start planning for knowledge integration.

 References
    NASDAQ OMX Group and Intercontinental Exchange Deliver Proposed Merger Agreement to NYSE Euronext Board of Directors; Demonstrate Commitment to Proposal That is Superior by 21% or $2 Billion; April 19, 2011, GLOBE NEWSWIRE, NASDAQ OMX Group, Inc. http://www.globenewswire.com/newsroom/news.html?d=219122.

    Kell, Thomas, Why 74 Percent of Mergers Fail, Heidrick and Struggles Leadership Consulting Research, January 5, 2010. http://www.heidrick.com/Articles/Pages/Whymergersfail.aspx Please also see Wharton University’s 2005 study “Why Do So Many Mergers Fail?” Knowledge@Wharton, March, 2005

    Cumulative abnormal returns [CARs] are cumulative share price gains, adjusted for both the merged-company stock’s beta with the S&P500 and its market cap peers’ beta with the S&P500.

    Feinberg, Robert M. and Ralph Sonenshine, Why Mergers Fail, American University, March 2011 https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2011&paper_id=25

    Sonenshine, Ralph, “The Stock Market’s Valuation of R&D and Market Concentration in Horizontal Mergers.” Review of Industrial Organization, 2010, pp. 37:119–140. DOI 10.1007/s11151-010-9262-8.

    “Sharing Hidden Know-How: How Managers Solve Thorny Problems with the Knowledge Jam ,” (Jossey-Bass, 2011)

    Please also see “Don’t Just Capture Knowledge – Put It to Work ,” Katrina Pugh and Nancy M. Dixon, Harvard Business Review, May 2008.

    Ronald A. Heifetz, Donald L. Laurie, “The Work of Leadership” Harvard Business Review, Dec 01, 2001. Reprint Number R0111K-PDF-ENG. http://hbr.org/product/the-work-of-leadership/an/R0111K-PDF-ENG

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