change management post mergers and acquisitions dissertaion
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EXECUTIVE SUMMARY
One of the greatest challenges faced in the industry today is to oppose the forces of institutionalentropy that seemingly inevitable undermine organizational vitality. There is a pronounced
pressure on companies to continuously renew and change themselves in order to remain
competitive and innovative. Even under best circumstances, innovation at companies is
associated with uncertain endeavors.
I propose a conceptual framework that decomposes the overall acquisition integration process
into four sequential and co-evolving processes:
(i) Formulating the integration logic and performance goals,
(ii) Establishing the integration planning approach,
(iii) Executing operational integration, and
(iv) Executing strategic integration.
Managing the strategic dynamics of acquisition integration in fast changing competitive
environments requires attention to all four processes and the feedback loops between them.
Analysis of the HP-Compaq merger and Tata Tetley acquisition however, suggests that
creating a strong feedback loop between the operational integration process and the process of
formulating the integration logic and performance goals is difficult, yet is needed to timely revise
the initial assumptions in light of changing market realities and responses of key customers to the
new corporate strategy. It also suggests that establishing a strong feedback loop between thestrategic integration process and the process of formulating the integration logic and performance
goals is difficult, yet is needed to maintain sustained top management attention to the multi-year
strategic activities necessary to meet the dynamic competitive challenges.
Analysis, furthermore, suggests that top management should be cautious at the outset in stating
long-term goals for the new company, not declare victory too soon, and reduce the opportunity
costs of acquisition integration by augmenting its own bandwidth for managing large-scale
strategic change.
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OBJECTIVE
Successful integration leads to effective change management. I propose a conceptual
framework that decomposes the overall acquisition integration process, which leads to
successful change management into four sequential and co-evolving processes:
1. Formulating the integration logic and performance goals,
2. Establishing the integration planning approach,
3. Executing operational integration, and
4. Executing strategic integration.
Rationale behind the Objective
The first process formulating the integration logic and performance goals involves the
boards of directors, top managements, and consultants of the two companies, who convince
themselves that the merger makes strategic sense and make high-level decisions about the new
top leadership, major strategic goals and the overall organization. It is important to distinguish
two aspects of this process. First, top management of the acquiring company formulates the new
corporate strategy, which explains how combining the two companies will improve the product
market position of the new company, how it will strengthen its distinctive competencies, and
how it will use the strengthened competencies to defend and leverage its improved strategic
position.
Second, the top management of the acquiring company makes assumptions about the future state
of the competitive and economic environments and uses these to formulate short and long-term
strategic and financial goals for the merger and for creating shareholder value.
The second process- creating the integration plan - involves, in first instance, deciding on
the new executive team and the basic organization structure of the combined companies prior to
the mergers announcement. Specific goals are set for each of the major stakeholders:
shareholders, customers, employees, and partners. An integration planning team is formed and
the blueprint of the integration process is created. Pre-deal clearance planning activities such asidentifying short term goals for synergies, workforce reduction, procurement rationalization,
phasing out redundant products, and getting the new organization up and running are established
to prepare for the process of executing operational integration. Planning activities related to
multi-year strategic initiatives needed to develop a new culture, effectively cope with the
competitive dynamics, and meet long-term goals are also started to prepare for the process of
executing strategic integration. At this point, the distinction between strategy and execution is
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still meaningful: The vast majority of managers and employees of both companies only have to
think about delivering current business results and the integration team only has to think about
planning and creating the blueprint for executing the operational and strategic integration
processes.
The third process - executing operational integration - starts the day the deal closes and the
execution of the integration is launched. This process is very hard for everyone involved: There
are often a large number of layoffs, the remaining levels of management are selected, people find
out whether they have a job and what it is, new organization structures are activated, new sales
teams call on worried customers, and on it goes. This process, which generally lasts between 6
and 12 months, involves time-consuming, often unexciting and frustrating working through the
details of the integration at the frontline. The primary goals are short-term: To hold on to
customers and achieve market share goals, achieve quarterly financial results, eliminate targeted
product redundancies, get procurement synergies, select the right people and get the organizationto work. At this point, the distinction between strategy and execution becomes blurred, and the
effectiveness of strategic leadership is crucial and brutally obvious in the face of the challenges
and the short-term results obtained.
Executing operational integration tests the continued relevance of the new corporate strategy
with key customers as well as the initial assumptions about the economic and competitive
conditions. This learning, in principle, should trigger a feedback loop to allow the process of
formulating the integration logic and performance goals to co-evolve. There is little time to think
about strategy during the operational integration process, however, as management of the
combined companies must now manage very complex integration issues and deliver short-termperformance in line with the set goals. The cost of failing to execute well here is felt to be so
high (a feeling not necessarily made explicit) that the strategy is, somewhat appropriately,
viewed as secondary. At the same time, while the integration logic may remain valid, it may
nevertheless be necessary to adjust the initial assumptions on which the performance goals are
based in light of deteriorating economic and competitive conditions. This too is difficult because
these changes are often not immediately and unequivocally clear, but also because the revisions
they would require impose further difficult and potentially unsettling short term actions e.g.,
significantly increasing the number of layoffs on the part of an already stretched top and senior
management.
The fourth process - executing strategic integration - depends on some of the activities
performed in the operational integration process and runs somewhat in parallel with it. It is,
however, primarily driven by the multi-year strategic initiatives necessary to get ahead of the
competitive dynamics envisioned. While these strategic initiatives are prepared for during the
integration planning process, they may need to be subsequently adjusted in light of the feedback
loop triggered by the execution of strategic integration. This feedback loop helps test and revise
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the key assumptions of the integration logic that pertain to how well and how fast key
competitors were expected to be able to improve their strategic position and competencies. In
other words, the process of executing strategic integration must effectively cope with where key
competitors will be several years down the road from the start of the strategic integration
process, rather than where they are at the start. Strategic integration is the primary responsibility
of top management and assigned staff, who continue to scan the rapidly evolving competitive
environment. Effective strategic leadership of strategic integration requires being able to clearly
define what winning means and forcefully executing the multi-year strategic initiatives that
will make wining - achieving the longer-term performance goals set for the combined companies
- possible. This in turn involves generating extraordinary energy that continues to radiate
throughout the organization, and the ability to pick executives at the senior ranks with superior
skills in getting their organizations to follow through on the strategic initiatives in the face of
ambiguity and uncertainty. At the same time, everyone must continue to execute the remaining
operational integration issues and deliver business results.
The aim here would also be to study the human side of a merger. A merger brings a lot of change
in the culture and the employee morale. Thus the concept of change management comes into
play. Objective here is also to find the change management post mergers and acquisitions
referring to human side of change.
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TI
STRATEGIC DYNAMICS FOR ACQUISITION INTEGRATION- COEVOLVING
DYNAMICS OF CHANGE MANAGEMENT
5
PROCESS 1FORMULATING THE
INTEGRATION LOGIC &PERFORMANCE GOALS
PROCESS 2
CREATING INTEGRATION
PLAN
PROCESS 3
EXECUTING OPERATIONALINTEGRATION
PROCESS 4
EXECUTING STRATEGICINTEGRATION
SHORT TERMGOALS
SHORT TERMGOALS
LONG TERMGOALS
LONG TERMGOALS
TIME
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RESEARCH METHODOLGY
The research is primarily descriptive in nature. Descriptive research, also known as statistical
research, describes data and characteristics about the population or phenomenon being studied.
Descriptive research answers the questions who, what, where, when and how.
Primary Data is the original information gathered for a specific purpose. Sources for Primary
data collection were:
Secondary Data is the data already collected by others and is reused by the researcher. Sources
of secondary data were
1) Magazine
2) Journals
3) Research studies4) Online interviews of the company officials.
5) Newspapers
6) Company reports and Presentations
Sample
Sample consisted of officials within the company. Method adopted was Judgment Sampling.
Judgment sampling is a common non probability method. The researcher selected the sample
based on judgment that the sample will give accurate information on change management. This
is usually and extension of convenience sampling.
Limitations of the Study
Secondary Data cannot be verified.
Only top management officials of the company can give an accurate picture of the change
management process. However, the top management officials were unavailable to comment.
The HP-Compaq merger took place in US. Thus its implications in Indian context were not
known.
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LITERATURE REVIEW
MERGERS & ACQUISITIONS
1.1.1 OVERALL PICTURE OF M & AS
Mergers, acquisitions and joint ventures are common ways for companies to meet their growth,
globalization and development needs today. The words describing these different types of
contracts between companies have definitions. In particular the concepts of merger and
acquisition are used purposefully to give an impression about a situation in a certain perspective.
In many situations executives prefer to use concept merger instead of acquisition to offer a view
of co-operation instead of a hostile take-over.
Merger is defined as 'in general a situation in which two or more enterprises cease to be
distinct enterprises'.
Acquisition is defined as 'by one company of sufficient shares in another company to give the
purchaser control of that company'. (Both definitions are from Macmillan Dictionary of
Accounting).
Hubbard (1999) adds that acquisitions can be either friendly or hostile. Acquisitions are take-
overs in which the bidder negotiates directly with the target companys board of directors.
Proxy contest is in question when there is an attempt to gain control of the target company's
board of directors via a shareholder vote (Hubbard 2001).
Leveraged buyout is the purchase of shareholder equity by a group usually including incumbent
management and it is financed by debt, capital or both (Hubbard 2001).
Joint venture is defined as 'establishing a complete and separate formal organization with its
own structure, governance, workforce, procedures, policies and culture - while the
predecessor companies still exist' (Marks & Mirvis 1998).
I intend use the terms 'mergers and acquisitions'or'acquisition'as synonyms or simultaneously
not differing them from case to case. Sometimes the word merger is a nicer word for the situation
for the executives. Hostile take-over has not been included. I don't have a separate focus on
hostile situations. According to the cases I have studied, there are enough problems to be solved
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in friendly mergers and acquisitions to be more successful or less painful to the people involved.
I shorten merger and acquisition as MA.
According to company experts and economists there is no alternative to globalization.
Competition forces companies to go where labor and raw material are the cheapest, capital
favorable and the markets the biggest. The globalization started in the end of the 1980s when the
GNP (gross national product) and world trade grew faster than ever. Firms and countries have
been able to specialize and develop their core competencies (Helsingin Sanomat HS 18.9.2000).
The American thinking about the importance of shareholder value has become common also in
countries earlier with in-effective capital.
According to Helsingin Sanomat arguments for globalization are:
World GNP grows faster than ever Trade over borders is increasing
Firms and people are able to focus on what they best can
Firms are able to grow and become more profitable
Firms are able to get labour, raw material and financing cheaper than before
Competition and owners force the firms to be more profitable
Fighting is more expensive
Corruption decreases
Oppressed minorities get their voice heard better than inside a country
By international enactment it is possible to improve the position of labour, women and
environment
Availability of culture is improving, for example TV-series
Arguments against globalization are:
Income differences among countries will increase
The protected, weak, subnormal and slow areas will remain retarded in terms of
development
National states are tool less in world competition (market forces)
Democracy (democracy losing its power when the market power takes over)
Free capital, new technology and speculative investors bring instability in world economy
with them
Growing differences between poor and rich countries increase tension in world politics
Immigrant problems increase
Cultural clashes take place in multinational corporations
Supranational monopolies decrease competition
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Tax competition will wreck social security systems
Cultural convergence because of exposure to shared media experiences
Globalization has become the most common thing to describe the business activities in the worldtoday. Three reasons (Cartwright and Cooper 1992):
To be present for the customers all over the world (customers).
To use the favors of infrastructures of different countries remembering that countries, not
only companies want to be and must be competitive. Companies work hard to locate their
production and services in the best possible locations using all the competence and
financial benefits, which are available in different countries (country competitiveness).
Talent search (talent search and recruiting). Nations compete for companies; nations want
to be competitive to get the best companies and favors coming with that (Porter 1992).
Governments work hard to attract business by offering special benefits, part of which is offered
by the society: education systems, safe environment, well organized contacts between different
stakeholders, taxation benefits, and technology power. Many of the major corporations with
Indian origin have kept their headquarters in India, both because of taxation and human capital
availability reasons. Even if, it has meant a few expatriates to India, a lot of traveling in top
management.
1.1.2 TYPES OF MERGERS
Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
Horizontal Mergers
This type of merger involves two firms that operate and compete in a similar kind of business.
The merger is based on the assumption that it will provide economies of scale
from the larger combined unit. Example: Glaxo Wellcome Plc. and Smith Kline
Beecham Plc. mega merger
'The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline
Beecham PLC early this year announced plans to merge resulting in the largest drug
manufacturing company globally. The merger created a company valued at $182.4 billion and
with a 7.3 percent share of the global pharmaceutical market. The merged company expected
$1.6 billion in pretax cost savings alter three years. The two companies have complementary
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drug portfolios, and a merger would let them pool their research and development funds and
would give the merged company a bigger sales and marketing force.
Vertical Mergers
Vertical mergers lake place between firms in different stages of production/operation, either
as forward or backward integration.
The basic reason is to eliminate costs of searching for prices, contracting, payment
collection and advertising and may also reduce the cost of communicating and coordinating
production. Both production and inventory can be improved on account of efficient
information flow within the organization. Unlike horizontal mergers, which have no specific
timing, vertical mergers take place when both firms plan to integrate the production process
and capitalize on the demand for the product. Forward integration take place when a raw
material supplier finds a regular procurer of i t s products while backward integration takes
place when a manufacturer finds a cheap source of raw material supplier.
Example: Merger of Usha Martin and Usha Beltron.
Usha Martin and Usha Beltron merged their businesses to enhance shareholder value
through business synergies. The merger will also enable both the companies to pool
resources and streamline business and finance with operational efficiencies and cost
reduction and also help in development of new products that require synergies.
Conglomerate Mergers
It is an amalgamation of the companies in two different industries, (Eg: DCM and Modi
Industries.)
Conglomerate mergers are affected among firms that are in different or
unrelated business activity. Firms that plan to increase their product lines
carry out these types of mergers. Firms opting for conglomerate merger control
a range of activities in various industries that require different skills in the
specific managerial functions of research, applied engineering, production,
marketing and so on. This type of diversification can he achieved mainly by
external acquisition and mergers and is not generally possible through
internal development. These types of mergers are also called concentric
mergers. Firms operating in different geographic locations also proceed
wi t h these types of mergers. Conglomerate mergers have been sub-divided
into:
Financial Conglomerates
Managerial Conglomerates
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Concentric Companies
Financial Conglomerates
These conglomerates provide a flow of funds to every segment of their operations,
exercise control and are the ultimate financial risk takers. They not only assume financial
responsibility and control but also play a chief role in operating decisions. They also:
Improve risk-return ratio
Reduce risk
Improve the quality of general and functional managerial performance
Provide effective competitive process
Provide distinction between performance based on underlying potentials in the
product market area and results related to managerial performance.
Managerial Conglomerates
Managerial conglomerates provide managerial counsel and interaction on decisions thereby,
increasing potential for improving performance. When two firms of unequal managerial
competence combine, the performance of the combined firm will be greater than the sum of
equal parts that provide large economic benefits.
Concentric Companies
The primary difference between managerial conglomerate and concentric company is its
distinction between respective general and specific management functions. The merger is termed
as concentric when there is a carry-over of specific management functions or any
complementarities in relative strengths between management functions.
1.1.3 TYPES OF ACQUISITIONS
Share purchases - in a share purchase the buyer buys the shares of the target company
from the shareholders of the target company. The buyer will take on the company with all
its assets and liabilities.
Asset purchases - in an asset purchase the buyer buys the assets of the target company
from the target company. In simplest form this leaves the target company as an empty
shell, and the cash it receives from the acquisition is then paid back to its shareholders by
dividend or through liquidation. However, one of the advantages of an asset purchase for
the buyer is that it can "cherry-pick" the assets that it wants and leave the assets - and
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liabilities - that it does not. This leaves the target in a different position after the purchase,
but liquidation is nevertheless usually the end result.
An acquisition is only slightly different from a merger. In fact, it may be different in name only.
Like mergers, acquisitions are actions through which companies seek economies of scale,
efficiencies, and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm
purchasing another--there is no exchanging of stock or consolidating as a new company.
Acquisitions are often congenial, with all parties feeling satisfied with the deal. Other times,
acquisitions are more hostile.
In an acquisition, a company can buy another company with cash, with stock, or a combination
of the two. Another possibility, which is common in smaller deals, is for one company to acquire
all the assets of another company. Company X buys all of Company Y's assets for cash, which
means that Company Y will have only cash (and debt, if they had debt before). Of course,
Company Y becomes merely a shell and will eventually liquidate or enter another area ofbusiness.
Another type of acquisition is a reverse merger, a deal that enables a private company to get
publicly listed in a relatively short time period. A reverse merger occurs when a private company
that has strong prospects and is eager to raise financing buys a publicly-listed shell company,
usually one with no business and limited assets. The private company reverse merges into the
public company, and together they become an entirely new public corporation with tradable
shares.
Regardless of their category or structure, all mergers and acquisitions have one common goal:they are all meant to create synergy that makes the value of the combined companies greater than
the sum of the two parts. The success of a merger or acquisition depends on how well this
synergy is achieved.
So, the term acquisition means an attempt by one firm, called the acquiring firm, to gain a
majority interest in another firm, called target firm.
The effort in control may be a prelude:
To a subsequent merger or To establish a parent-subsidiary relationship or
To break-up the target firm, and dispose off its assets or
To take the target firm private by a small group of investors.
There are broadly two kinds of strategies that can be employed in corporate acquisitions.
These include:
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Friendly Takeover
The acquiring firm makes a financial proposal to the target firm's management and board.
This proposal might involve- the merger of the two firms, the consolidation of two firms- or the
creation of parent/subsidiary relationship.
Hostile Takeover
A hostile takeover may not follow a preliminary attempt at a friendly takeover. For
example, it is not uncommon for an acquiring firm to embrace the target firm's
management.
1.2 CHANGE MANAGEMENT THROUGH EFFECTIVE INTEGRATION
1.2.1 CHANGE MANAGEMENT
Change is a fact of life. On the positive side, change may be seen as akin to opportunity,
rejuvenation, progress, innovation, and growth. But just as legitimately, change can also be seen
as instability, upheaval, unpredictability, a threat, and disorientation.
The concept of change management describes a structured approach to transitions in
individuals, teams, organizations and societies that moves the target from a current state to a
desired state.
Stated simply, change management is a process for managing the people-side of change. The
most recent research points to a combination of organizational change management tools andindividual change management models for effective change to take place.
To integrate companies following a merger, arguably the most important challenges involve
the top of the organizationappointing the right top team, structuring it appropriately, defining
its agenda, and building the trust that enables its members to work well together. Executives who
fail to overcome these challenges are responsible for the ego clashes and politics that are often
the root cause of spectacular failed mergers.
Unfortunately, recent thinking about change management no longer emphasizes the pivotal role
of the top team. The consensus on how to manage change has shifted to a dispersed approach
because too many initiatives designed to cascade down the hierarchy have delivereddisappointing results. The usual interpretation is that top-down change fails because at every step
messages get diluted, so that each succeeding one seems less compelling and less authentic.
While this may be true in certain circumstances, a merger requires direction from the top because
that is the only way to initiate change throughout an organization. The change required to
integrate companies cannot be driven from an entrepreneurial business unit, an innovative
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functional unit, or the front line. Too much coordinated, programmatic change must be achieved
in too short a time for such approaches to succeed. The spirit of the project is determined at the
top, where the conditions are set for the whole integration effort.
But the top team must do more than just talk about the new company, adopt its language and
trappings, and act according to its norms. The team must become the new company in the fullsense. Its messages, processes, and targets must deeply incorporate the aspirations of the new
company in a way that is visible to managers, employees, and even outside observers. As the top
team goes on to integrate the company down the line, it in effect re-creates itself. The company
is not just rolling out messages, processes, and a set of targets; it is rolling out itself.
In the best cases, members of the top team signal the kind of company they are creating and their
commitment to that new company. In other cases, the team visibly lacks the requisite quality, and
its weaknesses inevitably spread throughout the merging companies. The power of the signals
emanating from the top team reflects the fact that they are not just signals: they create concrete
realities.
The important signals fall into three categories:
(1) Senior appointments
(2) The top team's alignment, and
(3) Clarity about roles.
Senior Appointments
One of the most memorable things during an integration effort is the way managers, employees,
and even other stakeholders closely watch to see who ends up on the top team. This attentiveness
represents much more than a voyeuristic interest in the human drama taking place. Theappointments provide strong clues about the new company's direction and, more subtly, about
the degree of its commitment to its proclaimed course. Managers and employees will, of course,
also interpret appointments to the top team as signals about their own future.
Timing is crucial: in general, the earlier the decision-making process begins and ends, the better.
In one study of 161 mergers, the early appointment of a top team was a strong predictor of the
long-term performance of the combined organization.
Understanding the impact of these signals on each side of the boundary between the merging
companies is critical because the signals may depart from expectations in very different ways.
Creating a new company at the top is particularly problematic in a merger of equals because
managers are sorely tempted to maintain the identities of the predecessor organizations. To be
sure, the proclaimed strategy usually calls for their full integration.
Yet compromises on people issues may fatally obstruct this effort and ultimately undermine the
merged company's pursuit of value. The resulting mess will often be attributed to "incompatible
cultures," as if the failure of integration was the inevitable result of trying to mix oil and water.
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Another source of failure at the top is an unwillingness to face the prospect of job losses among
close colleagues who have performed well for yearseven though many more job losses are
likely among people further down the line.
Alignment of the top team
Although appointment decisions can be difficult, at least in the end it is clear to all what has been
decided. Top-team alignment, by contrast, is a rather nebulous outcome of many diverse
activities. People know when a company really has it, but at various stages along the way they
ask, "Are we aligned yet?"
In a merger, the top team must fashion its own identity vis--vis the external world of business
partners, competitors, customers, and regulators to reach this level of agreement. Research shows
that when top teams turn their attention to the external environment, they often experience a
catalytic effect, which carries them past the usual internal frictions much more quickly.
Compared with the pressing need to thrive in the marketplace, these frictions simply do not
matter very much. This effect is particularly striking when an external crisis suddenly emerges.
Getting to that level of agreement without a crisis is mostly a matter of discipline. A carefully
limited dose of team-building exercises can also help, but with two important caveats. First,
managers on both sides may have very different perspectives on what constitutes a constructive,
business-like exercise. If one side perceives an activity to be a touchy-feely distraction, it is not
worth doing and could be counter-productive. Second, senior managers the world over have very
limited patience for time spent on anything other than "real work." This is all the more true under
the intense pressure of integration. It is best to focus on outputs whose value is clear even if they
are intangible (for example, a set of behavioral norms for the new company).
Role clarity
The members of the top team share responsibility for the merging companies' future as a whole,
but they also have distinct individual responsibilities. They must work together in a
complementary way not only to help the companies integrate successfully but also to lead the
combined one through its other concurrent and future challenges. To do so, the team must define
roles very clearly and quicklyparticularly roles directly involved in the integration effort.
From the perspective of a company's long-term corporate health, the future needs of the business
are an equally strong factor in defining roles. Creating the top echelon of the new company is as
important for its long-term performance as for the near-term success of the integration effort.
Establishing the top team poses a critical and immediate challenge for merging companies. The
new company's leaders must appoint the best possible top team for achieving its goals, and the
top team's members must be aligned around them. To collaborate effectively, its members must
be clear about their individual roles. All this is sensible enough and easy to say, but in practice
that degree of leadership can be hard to achieve during the hectic period leading up to a merger
or even in its immediate aftermat.
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1.2.2 LEWINS THEORY OF CHANGE
Kurt Lewin (1951) introduced the three-step change model. This social scientist views
behavior as a dynamic balance of forces working in opposing directions. Driving forces facilitate
change because they push employees in the desired direction. Restraining forces hinder change
because they push employees in the opposite direction. Therefore, these forces must be analyzed
and Lewins three-step model can help shift the balance in the direction of the planned change.
According to Lewin, the first step in the process of changing behavior is to unfreeze the
existing situation or status quo. The status quo is considered the equilibrium state.
Unfreezing is necessary to overcome the strains of individual resistance and group
conformity. Unfreezing can be achieved by the use of three methods. First, increase the
driving forces that direct behavior away from the existing situation or status quo. Second,decrease the restraining forces that negatively affect the movement from the existing
equilibrium. Third, find a combination of the two methods listed above. Some activities
that can assist in the unfreezing step include: motivate participants by preparing them for
change, build trust and recognition for the need to change, and actively participate in
recognizing problems and brainstorming solutions within a group.
Lewins second step in the process ofchanging behavior is movement. In this step, it is
necessary to move the target system to a new level of equilibrium. Three actions that can
assist in the movement step include: persuading employees to agree that the status quo is
not beneficial to them and encouraging them to view the problem from a fresh
perspective, work together on a quest for new, relevant information, and connect the
views of the group to well-respected, powerful leaders that also support the change.
The third step of Lewins three-step change model is refreezing. This step needs to take
place after the change has been implemented in order for it to be sustained or stick over
time. It is high likely that the change will be short lived and the employees will revert to
their old equilibrium (behaviors) if this step is not taken. It is the actual integration of the
new values into the community values and traditions. The purpose of refreezing is to
stabilize the new equilibrium resulting from the change by balancing both the driving and
restraining forces. One action that can be used to implement Lewins third step is to
reinforce new patterns and institutionalize them through formal and informal mechanismsincluding policies and procedures
Therefore, Lewins model illustrates the effects of forces that either promote or inhibit change.
Specifically, driving forces promote change while restraining forces oppose change. Hence,
change will occur when the combined strength of one force is greater than the combined strength
of the opposing set of forces.
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1.2.3 INTEGRATION AND CHANGE MANAGEMENT
The main goal of companies is to create value. If well managed, mergers help companies toachieve higher efficiency, productivity, and profit by creating opportunities for growth.
According to a research conducted with the participation of 115 companies around the world,
58% of mergers result in failures. Mergers involve two critical phases that affect the outcome.
Based on researches, 30% of the outcome is affected by activities during the pre combination
phase, while 70% depends on activities during the post merger period.
All merger interventions are complex change initiatives, and post merger integration
activities are key elements for the success of the change.
As in all change management interventions, the challenging dynamics of post merger period
requires a well structured planning. Management should have a clear understanding about thechange, and be prepared for the outcomes.
Companies often ignore the importance of developing a merger integration plan, assuming that
the employees will adapt to change with no preparation. However, employees are directly
affected by the change. Therefore, successful integration requires extensive planning.
The effectiveness of human resources strategies and practices are highly important for the
success of post merger integration phase. The main tasks of human resources strategies are to
communicate change openly, and in a timely manner with all levels of the organization, and to
motivate the members of the organization to support and adopt to change.
Cultural integration activities are also crucial for the success of merger interventions. These
activities mainly involve the assessment of companies cultures through questionnaires and
interviews and identify the key areas that will accelerate the integration process.
Creating a trusting environment for employees and customers is another critical factor.
Constructing an environment in which employees and customers feel safe and satisfied help
companies to sustain change and make it part of the corporate structure. During this process, it is
necessary to:
Manage expectations.
Communicate decisions with right channels in a timely manner.
Give consistent messages about strategies to all stakeholders.
Assign management as change agents.
Post merger integration projects involve three major phases:
1. Identifying organizational strategies,
2. Establishing integration plan, and
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3. Implementing plan.
MANAGING CHANGE- HP COMPAQ MERGER
The analysis of the HP Compaq is on the basis of four objectives explained above
(i) Formulating the integration logic and performance goals,
(ii) Establishing the integration planning approach,
(iii) Executing operational integration, and
(iv) Executing strategic integration
1.1 Introduction
Seldom is the inevitability of the strategic logic of large-scale corporate change immediately
clear to internal and external constituencies and observers. Even more rarely is such strategiclogic turned into effective execution, especially if the change involves the integration of two
large, high technology companies operating in rapidly changing competitive environments. Add
to this that a relatively new outsider is in charge of orchestrating the execution of the acquisition
integration and that she has to overcome active resistance of the major shareholding families of
the founders of the acquiring company. The a priori odds of success seem daunting. HPs CEO
Carleton S. Carly Fiorina faced this situation when she proposed to acquire rival computing
company Compaq in September 2001.
Following the consummation of the merger in May 2002, after a prolonged proxy fight, the
organizational integration of HP and Compaq was initially considered a success , even bymany skeptics, as the company was initially exceeding its goals. By the end of 2004, however,
it had become clear that HP was missing the mergers longer-term revenue and profit
goals. It was unclear whether this was due to the details of the organizational and cultural
integration taking much longer to be worked out than initially expected, or to the original
strategic assumptions being wrong, or to some combination of both.
In early 2005 the competitive effectiveness of HPs new corporate strategy was still subject of
debate among analysts and outside observers. The company continued to struggle with some key
strategic issues, especially the development of a world-class direct distribution system to
compete with Dell and the capacity to manage and provide business solutions to global enterprise
accounts to compete with IBM. In February of 2005, concerns on the part of HPs board of
directors about Fiorinas leadership style and her ability to get the organization to execute the
new corporate strategy led to her ouster as CEO.
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Why Did This Happen?
Analysis reveals that effectively managing the strategic integration process was extremely
difficult and suggests several reasons.
First, the highly urgent short-term goals naturally focused the executive team and the
integration planning teams attention on the operational integration at the expense of the
strategic integration. It was difficult to shift managers attention focused on cost cutting
and value capture to attention to strategic issues, because there was a fear that launching
the strategic integration work would lead people to lose focus on the short-term goals,
which were viewed as absolutely critical given the publicity of the $2.5 billion cost
cutting target.
Second, the battle fatigue that unavoidably accompanied working through the operational
integration process made simultaneous strategic learning exceedingly difficult. Top and
senior managers executing the operational integration had to manage both the verychallenging integration tasks and had to deliver the expected quarterly financial results
while keeping customers, employees, and other key stakeholders satisfied.
Third, in part due to a major focus on potential integration risks during the proxy fight,
there was a natural desire on the part of top management to get customers, business
partners, and financial analysts to stop focusing so exclusively on how the merger
integration was going. When the operational integration goals were met, top management
declared victory to the outside world. One unintended consequence of this was a reduced
sense of urgency and focus during the strategic integration process.
As a result, it was hard to get the top team to focus on scanning the changing economic and
competitive environment and to focus on the longer-term strategic initiatives necessary to
achieve the potential of the new company. The resulting less forceful execution of the multi-year
initiatives lead to a weaker feedback loop from strategic integration back to the integration logic
and its assumptions about competitive dynamics, which created a vicious circle. In some ways,
these strong forces may have led top management to equate the integration execution challenge
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primarily with operational integration. Successful operational integration, however, was
necessary but not sufficient for the company to achieve the new levels of success that were now
expected as a result of the process of formulating the integration logic and the performance
goals. Not fully following through on the difference between operational and strategic
integration led to declaring victory too soon. The vicious circle caused by not executing the
strategic integration process with the required focus and urgency, and thereby lacking an
effective feedback loop to measure progress against the assumptions underlying the integration
logic, caused top management to fail to achieve the full promise of the merger and to miss
projected growth and profit goals. This led to disappointment of external and disillusionment of
internal constituencies.
CHANGE MANAGEMENT AT HP-COMPAQ MERGER
2.1 Merger Overview from HR Perspective
Merger created a $70 billion global technology leader with the industry's most complete set of
IT products and services for both businesses and consumers.
New HP is the #1 global player in servers, imaging & printing, and access devices (PCs &
hand-held), as well as Top 3 player in IT services, storage and management software.
Combination furthers each company's commitment to open, market-unifying systems and
architectures and aggressive direct and channel distribution models.
Combined company is creating substantial shareowner value through significant cost structureimprovements and access to new growth opportunities.
New HP had operations in more than 160 countries and over 140,000 employees.
HPs Challenge
Largest merger in technology history
Skeptical market.
Heated proxy battle.
Weak IT market
HP Commitments to its People
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To help HP people share in the company's success, which they make possible.
To provide job security based on performance.
To recognize their individual achievements.
To help them gain a sense of satisfaction and accomplishment from their work.
Relationships within the company depend upon a spirit of cooperation among bothindividuals and groups, and an attitude of trust and understanding on the part of the
managers towards their people. These relationships will be good only if employees have
faith in the motives and integrity of their peers, supervisors and the company itself.
Job security is an important HP objective ... the company has achieved a steady growth
in employment by consistently developing good new products, and by avoiding the type
of contract business that requires hiring many people, then terminating them when the
contract expires.
To foster initiative and creativity by allowing the individual great freedom of action in
attaining well-defined objectives. Insofar as possible, each individual at each level in the organization should make his or
her own plans to achieve company objectives and goals. After receiving supervisory
approval, each individual should be given a wide degree of freedom to work within the
limitations imposed by these plans, and by our corporate policies.
2.2 CRITICAL FACTORS CONSIDERED IMPORTANT FOR CHANGE
MANAGEMENT AT HP
CRITICAL SUCCESS FACTORS SAMPLE ELEMENTS
Well Defined Acquisition Strategy Reasons for Merger Explained
Degree of Integration Defined
Criticisms Addressed
Clear Product Road Map Communication of Offerings to
Market Place
Re-alignment of Internal Efforts
Branding Strategy
Unyielding Focus on Customers Clear Points of Contacts
Uninterrupted/Attention Support
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Maintained Relationships with
Partners/Support.
Synergies and path to realization
specifically identified
Both cost and synergies included
Plans, Accountability and clear
metrics and/ targets assigned to
project level.
Strong Program Management
processes to track/drive results.
Clearly Defined New Corporate Governance Boards/Executives Agreed to
Organization Structure Defined
Line Management Roles Determined
Effective Communication to Stakeholders Communication early and often
Reaches all stake holders (employees,
shareholders, analysts, customers,
partners, et al
Clear consistent message.
2.3
Step 1: Building the Integration Team
Post-merger integration (PMI) leadership and group management named at time of
announcement on September 4, 2001.
Additional new HP senior leaders announced October 12, 2001.
Dedicated, full-time PMI leads from both HP and Compaq directing planning for businesses,
functions and horizontal processes since September.
Linked to new HP senior management team.
World-class advisors engaged.
22
Recognition of Cultural Differences Nature of Cultural Differences
Identified
Proactive Steps Taken to identify
Gaps
Rules of The Road Interaction
Defined
Speed/Decisiveness Minimize Periods of Uncertainty
Complete Planning prior to close Attack synergies from Day one
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HP and Compaq set up an Integration Office (IO) of 600 people from both companies to
oversee the merger process. Teams within the IO deal with IT systems, finance and human
resources as well as fuzzier issues, such as the integration of the two companies knowledge
23
STEERING COMMITTEECarly Fiorina (CEO), Michael Capellas (President), Bob
Wayman
(CFO), Susan Bowick (HR), Bob Napier (CIO), WebbMcKinney
and Jeff Clarke
STEERING COMMITTEECarly Fiorina (CEO), Michael Capellas (President), Bob
Wayman
(CFO), Susan Bowick (HR), Bob Napier (CIO), WebbMcKinney
and Jeff Clarke
PMI Team
Central PMONerve Center
Fast Track Center
PMO PMO PMO PMO PMO PMO PMO
Post
Integratio
n Team
Program
Teams
PT PT PT PT PT PT PTProjectTeams
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management systems. At each stage, the teams evaluated which companys systems worked best
and these were then adopted for the merged entity. The IO has also spent a lot of time dealing
with the cultural integration of the new company, with more than 150 executives and 35 focus
groups of employees being involved in trying to thrash out a joint culture from two cultures that
were quite distinct (Holland, 2002; The Economist, 2002).
There were certainly some major cultural integration issues to be overcome. In contrast to the
more paternalistic, family culture of HP, Compaqs culture was more difficult to pin down,
being described by employees in the early 1990s as fast moving, entrepreneurial, sales
oriented, aggressive, pragmatic, and quick, but, by the end of that decade as moribund
and extinct.
During this time, the company had also experienced several rounds of downsizing under Michael
Capellas, and staff morale was low (Sakar, 2002). The key to a successful merger would be to
integrate the faster-moving, aggressive sales focus of Compaqs culture, with HPs integrity,innovative capabilities and experience, as well as aligning internal systems, HR policies and
operational procedures. Consequently, this was one of the most exhaustively planned mergers in
corporate history. This desire to get this right was driven in large measure by Mike Capellas
bitter memories of the problems Compaq had when it took over DEC in the early 1990s, and
according to one commentator at the time, the employees in the two companies really dont like
each other that much (Gottliebsen, 2002).
An anonymous Compaq employee commented that, It will be two years of guerilla
warfare.
The merger led immediately to the loss of some 20,000 jobs worldwide and about 600 in
Australia (Hayes, 2002 b & c). A new Australian operation was formed out of HP and Compaq
employees into a new team selected by Fiorina and the new boss of HP-South Pacific, Paul
Bradling (Hayes, 2002a).
During 2002, it was reported that morale was at HP was at an all time low (Lashinsky, 2002:
17). Fiorinas personal standing also plummeted to the point where some HP employees in the
USA began referring to her as, The Armani Witch, who never mixed with or dined with her
employees in the staff canteen as her predecessors often did (Dalton, 2002). In fact, Fiorinas
leadership style, and her tetchy relationships with the families of HPs founders, was a major
issue throughout her tenure as CEO. On the positive side, she was seen as an excellent formal
communicator, determined, confident, decisive, strategic and charismatic. She also clearly
understood the need to somehow transform HPs stagnant culture; an incredibly difficult exercise
given the strong emotional and psychological commitment that so many employees and the
Hewlett/Packard families had to a culture that had served the company so well for such a long
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period of time. On the negative side, she was regarded by many people as remote, aloof and
autocratic (Mehta, 2003).
Negative sentiments about Fiorina and the company among both employees and financial
commentators were compounded when Capellas announced his resignation from HP in
November 2002 to take over at the helm of the disgraced telecommunications company,
Worldcom. At the time, this company was mired in the biggest bankruptcy in American
corporate history and had laid off 17000 employees. While HP tried to put a positive spin on his
departure, the companys share price immediately plunged 10% to $US14.99. Cynicism in the
company reached new heights when it was revealed that Capellas was to receive a $US14.4
million bonus payment. He would not have been ineligible for this had he quit HP more than a
year after the merger (Bergstein, 2003).
CULTURAL INTEGRATIONAL TOOL- LAUNCH AND LEARN
There were significant cultural differences between HP and Compaq and the integration requireda strong, multi year focus on establishing the new culture. Susan D. Bowick, HPs executive vice
president of Human Resources and Workforce Development, and a 25-year veteran of HP
pointed said that to complement the Adopt-and-Go approach the Clean Teams also developed a
Launch-and-Learn mentality. This was a way of taking action that was fast and good enough.
None of this was easy, and the so-called soft social issues that had to be handled in order to
create a new culture would take a long time to get right, or at least good enough, which is why
Bowick was fond of saying, The soft stuff is the hard stuff.
2.4
Step 2: New HP Vision and Merger Integration Team Purpose
Merger Integration Team Purpose
Provide effective overall leadership for the planning and execution of the integration of HP and
Compaq
Assure effective linkages with the business line managers, functions, regions, the integration
steering committee and HPs Executive Council.
Assure that the value captured is maximized and exceeds public expectations
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NEW HP VISION
We create a great new company that is a leader in our chosenfields and is positioned to be the leading overall IT solutions
provider
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Assure the new HP is set up to achieve long-term growth objectives
Guidelines for the Merger Integration Team
Start with the customer experience; retain the highest level of customer satisfaction.
Name executive leaders early and link tightly into planning.
Ensure that structure follows strategy
Make decisions quick and make them stick
Cultural Integrational Tool- Adopt and go
Clarify roles and ensure shared accountability
Create dedicated integration teams
Address cultural similarities and differences
Rigorously measure, manage and communicate integration progress, wins, issues and
opportunities
2.5 SHARPLY FOCUS ON VALUE CREATION PRE MERGER INTEGRATION TEAM
STRUCTURE
Central Program Management Office (cPMO)
Supply Chain
Customer To Cash Team
Information Technology
Finance
Human Resources (Including Organizational Design & Structure)
Brand Architecture
Communications-Organization
HP Labs
CTO
e-inclusion & Community Engagement
.com/e-commerce
Government Affairs
Culture
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Imaging &Printing
Systems Group
PersonalSystems Group
EnterpriseSystems Group
Services
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Closing/Anti-trust
Global Functions Infrastructure
Communications- Merger Communication & Messaging
Shared go to Market
Value Capture
TABLE 3- INTEGRATION PLANNING FRAMEWORK
27
Strategy
Strategy PrioritiesGo To Market StrategyPortfolio
Channel strategy
Structure &
Process
OrganizationStructureSystems &ProcessesInformationFlows &DecisionMakingProcessFinancial &InformationSystemsArchitecture
People & Culture
One Common CultureRetention of Top TalentNew Competencies For our
PeopleRoles & Responsibilities
Measures
CustomerSatisfactionFinancial
EmployeeSatisfactionOperationalExcellenceRecognitions &RewardSystems
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2.6 CULTURAL INTEGRATION GOALS
To build a strong, new culture that:
Is clearly defined and broadly understood
Reflects the business strategy and brand
Supports best-in-class performance with customers, partners, shareowners and employees
Produces alignment, commitment and excitement
Establishes a competitive advantage
Is reflected in the communications and actions of core leaders
Activities
Formal work-stream status
Culture due diligence (CDD) investigation planned and communicated
CDD process included interviews, focus groups and survey
Culture integration team met with combined Executive Council
Reviewed approach to culture integration
Identified culture cornerstones
Explored archival material
Engaged broader employee coalition Connected with brand and communication work
Fast Start workshops initiated
Anatomy of Cultural Due Diligence
Coverage: 22 countries
Timeframe: October December 2001
127 in-depth executive interviews
138 focus groups with managers and individual contributors, spanning 1,500 employees
Focus of inquiry
HP on HP
Compaq on Compaq
Views of other company
Computer-assisted content analysis of interview data
Report to executive team: Christmas week
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29
CORPORATE OBJECTIVES
VALUES
POLICIES &
PRACTICES
BEHAVIOR
STRATEGY
METRIC &
REWARDS
STRUCTURE
& PROCESSES
SAMPLE OUTPUT
Vision & Governance of the Company
Balance Scorecard & Pay Metrics
Leadership Selection
Formation & Start Up of New Teams
Customer(Quality Initiatives)Fast Track Program
SAMPLE INPUT:
New Co-Executive Culture Session
HP Historical
CPQ Historical
New HP Brand
Competitive Environment
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Day 1 Preparation
Focus solely on launch day
Gain agreement on day 1 requirements across functions/activities
Make adopt-and-go decisions
Develop conceptual/ physical models
Prepare
Test
Review readiness
Establish command centers
Measuring Success at Launch-We Were Ready
170 client business managers, 25 partner business managers and 30 retail account managers
trained and announced.
800 senior managers named, including region and country leads
Product roadmaps and transition plans available
Customer and partner outreach and training programs initiated
1100 customers contacted to date
23 top US/EMEA retail accounts contacted on day 1
All partners given access to on-line sales training
Sales readiness training website received 40,000 hits in the first hour of launch and 100,000
hits by end of day.
20,000 presales and sales call center agents and 8000 consumer support users trained and
ready day 1.
Channel strategy in place and communicated
Work force restructuring initiated.
Launch Report-Infrastructure Delivers
hp.com (online store) open for business
@hp employee portal accessible to all employees
Company networks connected at key strategic locations
Active directory and enterprise directory synchronized
E-mail systems interconnected
All external call centers with HP greeting on day 1
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Employee names with hp.com suffix for external email (both in-bound and out-bound)
Day 1 infrastructure management environment
Monitoring and reporting process
Escalation and incident management process
Command center for 30 days
Remain Sharply Focused on Value Creation-Post Close Merger Integration Structure
2.7 Integration Plan of Record
Managing integration progress through a rigorous process.
Tracking all projects and their milestones to ensure we meet synergy goals on schedule
Ensuring tie off with value capture, restructuring and financial planning targets
Determining accountability owner for each project
Driving results through merger integration office focus on cross-organizational dependencies,
pan-HP view.
Meeting with the Steering Committee
31
STEERING COMMITEE
CENTRAL MERGER
INTEGRATION OFFICE
GROUPS
(PMI)
REGIONS
/COUNTRIES
(PMI)
WORLDWIDE
OPERATIONS
(PMI)
CORPORATE
FUNCTIONS
(PMI)
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While the Clean Team operated in metaphorically clean rooms apart from the day-to-day
distractions of operating a company, they were closely linked to the Steering Committee. Fiorina
had limited the Steering Committee to a small group of senior executives who could rapidly
make decisions and have those decisions be completely unquestioned during execution. The
committee consisted of Carly Fiorina, Webb McKinney, Jeff Clarke, Susan Bowick, Bob
Wayman, and Bob Napier, the chief information officer.
Clarke described how each Monday the teams would go through a very rigorous process with the
merger integration program office, (reporting to McKinney and Clark). They would track the
status of each project by using the color codes red, green, yellow, just like a stoplight. Items on
track were marked with yellow, items that were finished or well ahead of plan were marked
green, and items that were falling behind or otherwise failing were marked red. Since they had to
track over 10,000 Adopt-and- Go decisions, the simplicity and rigor of that red, green, yellow
tracking process was critical. On Tuesdays, teams prepared for an all-day Wednesday integration
meeting (chaired by Clark and McKinney). During these meetings, teams made
recommendations about integration decisions. Clark and McKinney would consider therecommendations and often sent them back to the teams for more work. Members of the teams
would sometimes debate and come to a consensus recommendation, or a consensus position of
agreeing to disagree. McKinney and Clark then made the Adopt-and-Go decision. On Thursdays,
Carly held her half-day Steering Committee meeting. Clark and McKinney were on the agendas
for these meetings. They would present or bring others in to present and make recommendations
about important status items of the merger and different decisions, such as the merger product
roadmaps, management decisions, restructuring plans, consolidation plans, etc.
TABLE 6 - Value Capturing Planning Framework
Integration Planning Implementation-Post Closing
32
Value capture team
Drive overall top-down corporateplanning process to achieve fullvalue of the merger by 2004 Provides top-down baseline,forecasts, synergy targets Consolidates integration teamsubmissions
Integration teams
Verify and refine top-downbaseline, forecasts and synergytargets with bottom-up data.
Corporate planning
Monitors and tracks revenue, costand synergy capture over timeGroups Responsible for revenue, ownedcost and synergy targets Execute on synergy capture forday-to-day operations
Functions
Execute on synergy capture onowned costs for day-to-dayoperations
Management compensation tied toachieving value capture goals
INTEGRATION
STARTS
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\
HPs PEOPLE STRATEGY AFTER THE MERGER-MANAGING CULTURAL
CHANGE
1. Need for Change Management Strategy
Change is an opportunity that you can influence, and when managed correctly it will
energize an organization.
a) Why manage Change
Significant workplace change can defocus an organization
Consistently practiced change management techniques will:
anticipate the phases of emotions address the issues
maintain strong communication efforts
provide the catalyst to move people through change without losing focus and
productivity
b) Challenge for HR
Develop a strategy to maintain and surpass the pre-merger standards of both companies
while managing massive cultural change.
5 STAGES OF CHANGE MANAGEMENT
Stage 1-Awareness
The HP People Strategy is aligned to their corporate objectives and values and designed to keep
employee commitment, especially in this time of change.
HPs People Strategy enabled HR to:
Speed and smooth the process of change.
Move through the initial change period
Set a culture of high performance right from the start.
33
TIME
KICK OF GROUP & FUNCTIONAL
TEAMS
DEALCLOSE
REINFOR
& ARRI
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Stage 2-Encourage face-to-face interaction
Fast Start sessions
Fast Start and Fast Value
To help speed the cultural integration of the two companies, HP included a Cultural Integration
Team (CIT) within the overall Clean Team. The CIT launched Fast Start, a program of merger
integration workshops led by facilitators and held at the level of individual employee teams,
designed to help employees get to know each other, understand and align themselves with the
companys strategy and identify and deal with hot spotslikely sources of contention that
employees would face as HP got down to the job of integrating Compaq and HP together. Every
HP employee was required to attend a Fast Start workshop. One product of the Fast Start effortwas the Fast Value program, one-to two-day focused sessions designed to help employees
learn to work horizontally across the post-merger HP.
Stage 3-Be pragmatic
Adopt and go methodology
Adopt-and-Go
The Clean Team would do the research necessary to make recommendations about which
products to keep and which to eliminate. These were determined in a Product Roadmap, a
master plan of which overlapping product lines from HP or Compaq would be kept and whichwould be dropped. It was a huge task, but one they were expected to perform expeditiously.
According to Jeff Clark, instead of trying to develop best practices by combining the best
aspects offered by the respective assets of both companies, the Clean Team chose the better of
what was currently used by HP and Compaq, made that the winner as fast as possible, and
moved on to the next decision. The people whose jobs were eliminated when their products were
dropped knew that they could look for other jobs in the company. Adopt-and-Go improved the
focus of 99 percent of the combined HP-Compaq employees who worked outside of the Clean
Teams. They knew that there would be no debate over the clean room decisions. Their job was to
execute the clean room decisions. And that allowed the new company to get enormous speed in
the first six months, which obviously led to good financial performance. The Adopt-and-Go
process stopped the politicking, it allowed for speed of execution and that was the pivotal part of
the new companys ability to accelerate the savings.
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Stage 4- Mobilize: What Is High Performance
The high performance culture accelerates future growth by:
Maximizing organizational/individual productivity and capability
Aligning individual performance with company and business objectives
Using rewards as the motivator
Developing people through effective coaching, performance feedback and developmentplanning.
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36
BALANCE SCORECARD, HP VALUES ANDSUPPORTING
BEHAVIORS
1
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Stage 5: Reinforce and Arrive
Ensuring the Best Environment
1. Re-evaluated personal conduct policies and practices
2. Objectively examined behaviors and actions within HP
3. Created a new set of standards that define what we stand for today, owned by all HP
employees.
4. Not an HR programa broad-based, company-wide initiative
5. Long-term solution
6. Personal accountability and ownership
How we get things done is as important as what we get done.
- Carly Fiorina
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Reinforcing Desired Behavior
Clearly set expectations for personal conduct
Charge each employee with accountability and responsibility for creating the best work
environment
Provide resources, training and tools
Reward those who contribute to and ensure best work environment
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CASE ANALYSIS- TATA TETLEY ACQUISITION
1.1 INTRODUCTION
Tata Tea, after the acquisition of Tetley, has become the worlds second largest branded
tea company.
Tata Tea Globalization at a glance
World's second largest global branded tea operation with product and brand presence in 40
countries.
Significant presence in plantation activity in India and Sri Lanka.
Subsidiary in the US overseeing operations in the country, joint ventures in Pakistan and
Bangladesh to sell tea Acquisition of Tetley, a company that had a turnover three times the turnover of Tata Tea in
India
This was the biggest ever cross-border acquisition by an Indian company at that time and was
also the first leveraged buyout by an Indian firm.
BACKGROUND
Tata Group
Tata Tea, set up in 1964 as a joint venture named Tata Finlay, with UK-based James Finlay &Co to develop value-added tea, was among India's first multinational companies. In 1983 the
Tatas acquired the entire shareholding of James Finlay to rechristen the company as Tata Tea
Limited. In the mid 1980s, to offset the erratic fluctuations in commodity prices Tata Tea felt it
necessary to enter the branded market and launched its first brand Kanan Devan in polypack,
thus heralding the polypack revolution in the country.
Today Tata Tea and UK-based Tetley Group represent the world's second largest global
branded tea operation with product and brand presence in 40 countries and a significant,
albeit consciously declining presence, in plantation activity in India and Sri Lanka.
The worldwide branded tea business of the Tata Tea Group contributes around 88 per cent of its
consolidated turnover with the remaining 12 per cent coming from bulk tea, coffee, and
investment income. Tata Tea is headquartered in Kolkata (West Bengal) and owns 26 tea estates
in India as an entity. With an area of 15,000 hectares under tea cultivation, the company
produces around 40 million kilograms of black tea annually. Its tea estates are located in the
states of Assam and West Bengal in eastern India and Kerala and Tamil Nadu in the south. The
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company has a strong distribution network in India reaching out to over 1.7 million retail outlets
in India. Full-fledged research and development centers of the company focusing on the branded
tea business include a facility at Teok (Assam) and a product development center at Bangalore,
Karnataka focused on the entire range of tea operations.
The Tata Group companies are the largest shareholders of Tata Tea with a stake of 29 percent,
followed by the public with around 23 percent stake. Foreign institutional investors, foreign
companies and non-residents hold around 18 per cent stake, with the remaining stake held by
Indian financial institutions, mutual funds, banks and other companies.
Products and Brands
While Tata Tea is the second largest tea company in India after Hindustan Lever, it owns the
single largest tea brand in the country, Tata Tea Premium. The company has five major brands in
the Indian market catering to all major consumer segments for tea. Under the Tata Tea portolio,three brands cater to the premium, popular and economy segment Tata Tea Gold, Tata Tea
Premium and Tata Tea Agni respectively. In addition Tata Tea in India has three very strong
regional brands in the four Southern states, which are either number one or number two in their
respective geographies. These are Tetley, Kanan Devan, Chakra Gold and Gemini. Tetley in
India, though a niche brand, is presented as the new face of tea innovation brand. The Tata Tea
brand leads market share in terms of value and volume in India. Tetley acquired in 2000 is the
market leader in the UK and Canada with 26 per cent and 40 per cent market share respectively
by value. Tetley has also launched iced tea under Tea of Life brand in UK, which is making good
progress. Tetley is establishing a presence in the ready-to-drink segment, for which Tetley Ice
Tea has been launched in UK and Australia. Chayya, a recently launched Chai Latte brand inUK, is the first of its kind and is showing great promise. Besides Tetley also boasts of a wide
range of fruit and herbals and specialty tea. In order to build its business in these high value
segments, packaging innovations such as the stay fresh flip top carton are being introduced.
1.2 INTEGRATION PROBLEMS
A variety of problems existed in integrating the two companies:
1. How to Integrate: The Tatas decided that the best way to integrate was not to integrate
initially but to maintain a joint-venture type of arrangement. Furthermore, the integration
process was not rushed in order to protect Tata Tea from the risk of Tetleys debt. Tata Tea did
not want to change that structure until the debt level was manageable. The arms-length
relationship required that Tata Tea retain existing management at Tetley. Ken Pringle remained
as the Tetley Group CEO, and Tata management took new positions on the Tetley board of
directors.
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2. Size Difference: Tata Tea was half the size of Tetley in terms of revenues and number of
upper management. Tata Tea feared a domination of Tetleys corporate culture.
3. Financial Constraints: There were three financial constraints restricting integration. The first
constraint was that legal and capital controls in India made the listing of Tetley shares in India
unattractive. The second constraint was that Tata Tea did not want to carry the heavy debt
burden held by the SPV, particularly as Tata Tea was an A-rated Indian company. The third
constraint was the restrictive covenants at Tetley as a consequence of the LBO, which meant that
changes in Tetleys structure needed to be pre-approved by bankers.
4.Regional Players: Soon after the merger, the highly fractionated regional tea makers in India
grew faster, putting pressure on Tata Teas market share and profitability at home. Regional
players gained 6 percent market share in 2001.
5. Operational challenges: The merger posed a variety of operational questions, such as:
Growth issues: How could the combined corporate vision of Challenging for leadership
in tea around the world be achieved? The merger required vertical integration between a
tea production company and a global marketing company, and the question was what
growth targets needed to be defined for the individual companies?
Supply chain: How should they set up processes to harness the synergies on tea sourcing
and blending, purchasing, packing, logistics, and supply to allied functions to the mutual
advantage of both companies?
Support processes: How should they integrate various support processes covering
Finance & Legal, IT, R&D, HR, and Communications so that the objectives of both
companies were in sync? The back-office integration was complicated by the fact that
Tetley reported in UK GAAP, while Tata Tea adhered to Indian GAAP.
Commercial processes: How should they put in place benchmarked processes, which
would be adopted uniformly by the two organizations?
6. Cultural/Racial: There was a great deal of concern that British employees would resent
having Indian managers. These concerns were largely the result of the fact that India was a
former British colony. Anecdotally, Tetley employees were given substantial retention packages
to avoid exodus, which may have created negative feelings among Tata Tea employees. MrKumar also noted that, Culture was a huge issue and had to be handled carefully. . . . Tata
executives would complain about being kept waiting when visiting Tetleys UK head office
reception centre, despite being the senior partners. Meanwhile, Tetley people would complain
about being run by Tata, which knew only about India and nothing about Western markets.
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7. Corporate Philosophy: The two companies had different opinions on how the business should
be run. Tata Tea was a collection of estates that just happened to sell package tea and focused on
Asia (excluding China), Middle East, and Eastern Europe. Tetley was a marketing and packaging
company that had relationships with tea estates and focused on North America, Australia, and
Western Europe. Due to the significant differences in customer base, the two companies had
dissimilar products. In Tata Teas markets, tea was usually brewed in pots, so Tata Tea was an
expert in bulk and loose teas, while Tetley was an expert in tea bags and instant tea. This gave
rise to three types of differences:
Objectives of the company: Tata Tea was an integrated tea company, with its dual
emphasis on plantation as well as domestic marketing, whereas Tetley was primarily a
global marketing company. Whose approach was correct?
Geographical spread: Tata Teas international presence was limited to bulk tea sales,
whereas Tetley was into brand marketing with sizable international presence. Which
customers should the organization focus on? Differences in skill-sets: Tata Tea was a plantation company whose major strengths
were managing the estates, dealing with a huge work force, and making teas. There was a
drive since the mid-80s to create domestic brands and export bulk teas. In contrast,
Tetleys strength lay in its ability to buy quality teas worldwide; perfect its blending
skills, bring about innovation in packaging, and combine good logistics with management
skills. How were people to be cross-trained?
8. Kenya vs. India: It was initially believed that huge synergies would be achieved because
Tetley could source teas substantially from Tata Teas estates. Unfortunately, the majority of
Tetleys teas were of a different flavor, quality, and cost from teas found in Tatas estates.
Therefore, the integration process had to focus more on new products than on substitution.
9. Branding: Both companies had very strong brand names in their respective regions. There
was debate as to the surviving name of the new entity. The Tata name was not strong in Western
markets, while Tetley was relatively unknown in Tata Teas markets. There were also talks about
pensioning off the lovablebut old fashionedTeafolks in favor of promoting tea as a modern
lifestyle choice.
10. Conglomerate: Tata Tea was ultimately part of a huge conglomerate. The impact of theconglomerate on the operations of a related foreign entity and the strength of Tata Tea within the
conglomerate was unknown to Tetley employees. The Tata organization required group
companies to pay fees for the use of the Tata name and adhere to standards of financial and
social responsibility. The ramification of these standards on Tetley was still a mystery.
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11.Auctions/Commodity Price:The acquisition of Tetley by Tata Tea came at a time when the
prices of raw materials for making Tea were increasing. There were also rumors in the market
about Hindustan Lever Limited and Tata Tea controlling the price of Tea.
12.Demand for Tea:The general demand for tea in many of Tetleys core markets was slowing
or decreasing. This was partly because tea was viewed as a boring or sophisticated drink. Sodas,
coffee, and juices were gaining significant ground. There were a number of questions about how
to revitalize tea as a drink of choice.
13. Exchange Rate: The rupee was strengthening relative to the pound, which caused the
acquisition of teas from India to be more expensive for Tetley and made the transfer of money
back to the Tata organization less remunerative.
Changes Required
There were substantial challenges to realizing the synergies, which Khusrokhan effectively
summarized:
The first challenge is that the acquirer company in this case is smaller than the company
it acquired.
The second challenge is that since this was a cross-border acquisition, it is bound to have
its fair share of cultural problems. Getting people in two companies in the same country
to come together can be a problem; cross border integrations are even tougher.
The third difficulty is that, because this is a heavily ring-fenced, leveraged acquisition,
banks can have a say in what is being done. We will have to carry the banks with us for
anything that could be construed to be a structural change to Tetleys operations
[Attitudinal and mindset change among employees] is very much a part of any integration
process. I call it the learning-to-think-for-two phase, where each organization has to
begin to appreciate that there are two ways of looking at every issue and to appreciate
each others point of view. It is something like the adjustment phase in a marriage, which
starts immediately after the honeymoon.
1.3 FORMULATING INTEGRATION LOGIC AND PERFORMANCE GOALS