Chief Investment Officer
BirdsEye Viewmaking mergers work
Bank M&As have been heating up in the past year, and 2015 promises to be a strong year for acquisitions. Regulatory pressures and costs are major forces behind this trend.
Price Pritchett is an author who puts together very brief but poignant books on numerous topics. His manuscript on making mergers work has many good points in it. You should read the book, but below are some of his most useful observations, along with a few of mine, that I trust will help you improve your acquisition integration process.
Pritchett offers three principles that underline successful mergers, which make great sense to me:
Mergers are an expensive proposition, and often involve optimistic projections that do not materialize. Given the high stakes, focusing on the issues and addressing them in a timely manner makes an enormous difference in the final outcome. Ironically, many acquiring bank executives are simply not aware of problems already present in the acquired bank, as well as the new issues that arise from the merger itself. One should expect problems to occur when two organizations with duplicative infrastructure merge, not to mention the disparate cultures and ways of doing things that get in the way of integration.
Mergers create tremendous angst among staff at all levels, and, most of all, those at the lowest levels who often have the most customer contact. It is unavoidable to encounter a new set of problems emanating from the transaction itself. Executive management's awareness of these issues and willingness to address them are essential to any merger success.
The first problem management at both organization has to address is opening the lines of communication with their staff. Shooting the messenger never works, but is especially dangerous during acquisition integration. Yet it occurs frequently in merger situations, where the messenger ends up either being accused of causing the problem, being a naysayer, or being tasked with fixing the problem they identified and brought to management's attention. In all these cases the messenger will learn never to open their mouth again, thereby leaving management in the dark as friction arises. A winning tactic is rewarding the messenger for disclosing problems and transparently facing up to them.
The second problem is disappointment. Both acquirer and acquired banks violate expectations throughout the process, thereby eroding fragile trust and damaging the common foundation they're working so hard to build. Again this is unavoidable, since a merger communication is like catching a falling knife. Managers do their best to keep their staff informed, but things keep changing. One needs to manage expectations of both teams regarding change. It WILL happen, and it will affect both acquiring and acquired banks. Communications are a chronic problem in organizations in general, and that is never more pronounced than during a merger. There is an easy remedy to this, which isn't always consistent with the corporate culture of either banks: frequent system-wide conference calls run by the CEOs of both entities. Such calls are priceless as they build the elusive and imperative trust that is needed across the newly formed organization. We all learn what's happening together, and directly from the horses' mouths. Executive management shares not only up-to-date news but newly created concerns and other variables which help form a strong bond between them and the team. In fact, some bank CEOs do this regularly as part of their management style, and the staff loves it. These calls should be straightforward, honest and blunt. Folks will appreciate them more that way. Further, explaining reasons for what's happening is critical. People not only want what is going to happen, but why it's going to happen.
Making change happen is never easy. Making it happen slowly isn't going to ease the pain. Well-intentioned acquirers often choose the slow way, believing that it will facilitate integration and acceptance. It doesn't. It merely prolongs the uncertainty and suffering. I believe people can handle change, but can't handle uncertainty. They will find ways to fill information void with fictional data, often expecting the worst in order to prevent future disappointment. Shortening the period of uncertainty is the way to go.
Remember that, even though you acquired the institution, the acquired bank has a lot of resident knowledge and wisdom in it. They don't necessarily need you, the acquiring bank, to come and fix them. After all, you paid a handsome price for BOTH their intellectual and corporate assets. Integration should be a joint effort of the best minds of both organizations. Otherwise, your executives could become the "corporate seagulls who "fly in on the company plane, squawk a lot, east your food, crap all over you and then fly home". The most successful mergers I have been involved in were guided by "best of both worlds" philosophy. It works.
The human element. There are twelve stages to recovery. There are three stages to merger acceptance: Shock and numbness; grieving; and resolution. The acquiring bank should accept these stages and handle the acquired bank staff accordingly. These are difficult times for people who invested many years in the success of their bank, only to see it being swallowed by another institution. It's a little bit like death to some. Engaging these employees is key to the merger success, so understanding what they're going through is helpful. Listening to them, giving them an opportunity to vent, and learning from them what worked and what didn't in their institution are all positive activities. Keep them involved whenever possible, and tolerate their mistakes a bit more than you would normally would - but do not tolerate "this is how we used to do it" resistance. Don't rush the grieving process, but set the tone to what is expected in the new company and create focus around the new culture, mission and vision of the combined organization to build ownership among all staff.
Where there is change, there is resistance to change. You should expect it , especially from the "ninjas" who nod their heads when you speak with them and then sabotage the new bank at the water cooler. Overt resistance is easier to handle. You know who the people are and you can address the issues 1:1. It is the stealth ninjas that are harder to detect, but, at the same time, the most lethal. Inviting resistance helps bring the ninjas to light, and confronting the substantive issues in a transparent fashion reduces their ability to continue their shadow campaign. Respect resistance, and use it to understand better the effectiveness (or lack thereof) of the merger integration process.
Building a combined team is another key aspect to integration success. Having a united front of leadership from both banks speaks volumes. This requires commonality of culture and leadership styles, which isn't always easy to achieve. In addition to building trust at the executive levels, reaffirming the corporate culture is critical as it provides the first step toward building a combined organization. Corporate culture, while intangible, can be quite palpable. It is, in a way, the personality of the organization, and you should be able to describe it in a sentence or two. It is also very difficult to change, but times of instability, such as merger times, provide the best opportunity for such change.
When Norwest and Wells Fargo merged, many things were subject to change and discussion. One element that was non-negotiable was the new company's corporate values, those basic tenets that guide the behaviors and decisions of the staff. Employees need to know what the company stands for, and those values set the tone for the new organization. Finding people who embody these values is an excellent way to communicate exactly what it is that you mean by "integrity" or "caring", for example. It is those corporate heroes that make these values come alive by acting on them day in and day out. Shining the light on these heroes, who are present at all levels of the organization, is an excellent way to reaffirm and communicate your values and culture. In addition, rebuilding your corporate rituals and adding corporate "lore" from both organizations through recognition events, incentive programs, and corporate hero selection adds context and "color" to the culture you embrace and wish to preserve.
I don't know Price Pritchett, but I like his clear and concise messages. His book "Making Mergers Work" is an excellent guide to the do's and don'ts of acquisition integration. It should be handy in 2015, when acquisition opportunities will continue to present themselves and heat up. Effective integration is what truly accrues value for the shareholders after the right price is struck. Otherwise, the real assets you bought - the people and the customers - will drift away.