Coevolutionary integration:

Some key M&A statistics

Many of the above studies have identified lack of integration as the common theme, while other studies (Krishnan, et al., 2004; Hutchings, et al., 2003; Faulkner 2002; Demers, et al., 2003; Bijlsma-Franema, 2001) suggest that M&As fail primarily because they have underestimated the people factor and organizational fit (Faulkner 2002).

A Deloitte & Touche study (2002) found that only 1/3 of their total sample of 540 companies surveyed about mergers and acquisitions, could say that they thought that their merger was successful. Some of the reasons highlighted for failure of M&As:

Almost all the above issues are related to people and cultural issues. Slow integration does encompass technical integration, but it is the integration of the different cultures and ways of working that are often the critical factor. This cultural integration takes time and the effort involved is often seriously underestimated. Critchlow (2003) states three converging trends, which can help explain why cultural issues have become so important:

Mergers and acquisitions often fail to meet pre-merger objectives, despite an efficient due diligence process at the outset, because not enough time and energy is devoted to post-merger relationships and the development of an emergent culture to support the new organizational form. The erroneous assumption is that once the financial issues are dealt with everything else will fall into place. The two case studies will show that this is not the case.

‘Designing’ a new integrated organization

SSF company was good at mergers, had gone through several and the current one was considered “a good fit - a good mix of business and financial strength.” They were acknowledged by the market to be excellent at pre-merger planning, however they made two serious errors. They assumed that integration was merely a matter of good planning and that once they had appointed the integrated Board and the heads of the support functions, all else would automatically follow. They also assumed that the integration process to create the new organization could be designed in detail in advance.

Organizations often assume that it is possible to ‘design’ an organization in the same way that engineers can design a new product, but this is an erroneous assumption and the repeated failure of organizational restructuring and of M&As to create a successful new integrated organization, provide significant evidence that a different approach is required.

Human systems are complex and are fundamentally different from machine-type systems. Human behavior is not predictable and people are capable of changing their rules of interaction, through reflection and intentionality, thus changing expected outcomes. They are able to self-organize, to influence each other and be influenced in turn, and this reciprocal influence can change ideas, behavior, ways of thinking, working and relating - that is, humans are able to coevolve, to self-organize and to create something new that is emergent in the sense that it could not have been predicted at the outset. They create intricate networks of relationships sustained through communication and other forms of feedback, with varying degrees of inter-dependence. Although heavily influenced by their history and culture they can transcend both when necessary. When they meet a constraint they are able to explore the space of possibilities and find a different way of doing things, i.e., they are creative and innovative. (The principles of complex evolving systems shown in italics are discussed in Mitleton-Kelly, 2003b).

To create a new organization successfully the thinking needs to move away from the machine paradigm - organizations cannot be designed in detail in advance; they cannot be controlled in every detail, and their behavior cannot be predicted. What they do need, however, is a clear vision and direction. In addition they need an enabling infrastructure, that is, a framework of social, cultural, technical, physical, economic and political conditions that will help them achieve that vision. An enabling framework provides a new approach to ‘designing’ organizations, based on the theory of complexity. This approach does not assume that an organization’s direction or vision need necessarily remain unchanged. As the environment (or social ecosystem) changes, then the direction and the vision may change.

The logic is that organizations need to grow organically; they need to explore alternatives and find the most appropriate ways of working suitable to the task; this is not an argument for total lack of structure or accountability or leadership. All those are necessary, but structure has to start as an outline, which is then allowed to evolve into what is required and necessary. Organizations, both in the private and public sectors that have adopted this approach find that individual responsibility increases to a significant degree, and accountability becomes clearer and stronger. They also find that they develop true distributed leadership (Maguire & McKelvey, 1999), as everyone is a responsible agent working towards a shared vision, exploring possibilities and taking initiatives that nevertheless fit well into the overall strategic direction. They achieve this through a strong network of relationships and peer support (rather than pressure).

The official ‘leader’ then becomes a person who holds that space for them, negotiates with other stakeholders and is free to scan the horizon for new patterns and to influence the overall direction.

Two years after the merger, however, SSF had no clear vision to give direction and to create a sense of identity and coherence, just a sense of fragmentation, “Our culture is very fragmented, both within business units and across the group.” Part of the reason was that the original business had not integrated - they had not become one new business “What we’ve got is two bolted together businesses”.

This lack of integration into a coherent whole is not unusual after a merger or acquisition. The original firms try to maintain their old identity and there is a constant struggle to impose ways of working, procedures, etc., onto the other. Instead of conflict and imposition, complexity would argue for the notion of coevolutionary integration. That is, the coming together of two or more separate companies to create a new organization, not through imposition, but through reciprocal influence which leads to the emergence of a new organizational form. Interaction, aided by cooperation, collaboration and an environment of trust, leading to new behaviors, structures, ways of working, etc., is what is meant by coevolutionary integration. An apt simile is that the new organization is like a child. It inherits certain characteristics from each parent, but has its own distinct identity.

Despite the lack of integration in SSF, there was a sense of pride in the company’s position in the market place: “It is great to be part of the largest company in our industry.” There was also an awareness that they needed to create some kind of enabling infrastructure to support the change and to facilitate communication and the sharing of values. But these ideas were voiced by middle managers who did not have the power to influence board decisions, but who did nevertheless influence their local area of operations:

They were aware that they needed a coherent culture, but they were not clear what kind of culture they wanted. They again talked about creating a culture in the same naive and mechanistic way that they thought about the design of the organization.

In a more insightful way they were also aware that this did not mean “necessarily a uniform culture” and someone actually raised the profound question “What do we want to be? To do?”

Another mistaken assumption is that a coherent culture is the same as a uniform or homogeneous culture. But this is not necessarily the case. A resilient organization needs to be able to accommodate several heterogeneous cultures, provided that there is overall coherence that provides unity of purpose and/or values. As will be illustrated by EnF, diversity does not need to be a problem, but can be built upon to strengthen the new organization.

Communication

This was an area in SSF that attracted conflicting comments. Some were very critical, which if addressed, could become powerful enablers. While others illustrated how communication was already acting as an enabler.

Some of the critical comments referred to ‘the strategy cascade’ and SSF was said to be “not good” at communicating the strategy, of discussing it and clarifying it. “I think the communication ... is not particularly good. I don’t think the leaders play an active role.” The leaders did not play an active role, but this reflected an overall weakness in sharing knowledge: “As a group, my view is we are spectacularly bad at knowledge management.”

One of the themes that emerged was that there was a lot of unnecessary formality, with much emphasis on formal structures rather than on reflection about the business. In an uncertain organizational environment formality and the following of well-established procedures, is seen as the safe way to proceed. Another theme was that the new business was fire-fighting all the time and not enough time was spent on looking at context. Overall there was little time for reflection and this was an indicator of the manic activity that permeated the organization.

Communication upwards was constrained, possibly due to fear or lack of trust. The CEO did try a ‘suggestions channel’ and an open door policy, but this wasn’t entirely successful because the fear was too embedded: “that doesn’t work necessarily very well because staff here, still think that to speak your mind might be held against you and I don’t really know how you break down that barrier, because we’ve got a blaming organization.” The sense of blame, of fear, of lack of trust had permeated the organization and made it extremely difficult to communicate openly.

The CEO also led lunchtime communication sessions, which were viewed as positive and an enabler to greater clarity and team building. Furthermore an HR team was experimenting with facilitating conditions such as room format, music, etc., for the sessions to make them more appealing. There were two sessions, once a month of 1.5 hours each open to all, and attendance was voluntary. These were successful in so far as they attracted a good number of participants, but the effect on the culture was still very limited. Partly because the willingness to be open and to communicate was not shared by the rest of the management team: “Haven’t got any feedback loops breaking through the levels ... they’ve not got a shared agreement about what they are delivering. The CEO is very, very clear about what he wants delivering and then as soon as you get below him, I hear conflicting messages which worries me.”

Furthermore there was a strong perception that two years after the merger, the executive team was not working together effectively: “We’re from excellent to poor and I think that, again, that’s one of the consequences … there hasn’t been a pulling in together.” The initial idea therefore, that appointing an integrated executive team early, would solve the problem of integration, had not materialized. To overcome the problem they appointed a new CEO, and as indicated above he was trying very hard to open the channels of communication. But the attempt was only partially successful because it was too top-down and because his executive team did not share his aspirations and did not work well together - that is, they reflected the fragmented culture of the rest of the organization.

In addition there was not enough attention paid to the ‘people issues’, defined by one interviewee as “people and direction and leadership”, after the merger. Initially, during the merger and for those leaving, conditions were good, but it was felt that now efforts needed to be concentrated on those staying, with more emphasis on personal development, as training and development budgets were often cut - “Will we invest in the capability of our people?” The perception was that there were good development programmes for senior staff but not so good for junior staff.

Making change happen

Organizations that have gone through a merger have to spend a great deal of time and effort on the integration process. Both organizations have to change, to create the new integrated organization. The mistake is to assume that this degree of change can be determined by careful planning. Not that planning is unnecessary; simply that it is not sufficient. What is required, in addition to thoughtful planning, is an environment that encourages and facilitates exploration of the space of possibilities, i.e., exploring alternative ways of working that are appropriate to the needs of the new organization. To do this there has to be a significant degree of self-organization, to allow individuals to come together without external direction to experiment with new ideas, and new ways of working.

Facilitating self-organization, exploration of the space of possibilities and emergence, is the key to creativity and innovation. It is also a prerequisite for coevolution. A successful merger is in essence a successful attempt at coevolutionary integration - when the partners influence each other in a reciprocal way (not one-way imposition), experiment and find the best way of working together. In SSF there was little evidence of self-organization and exploration - there were two possible reasons for this: (a) fear of failure and its effect on one’s career and, (b) a control mentality that saw experimentation as dangerous. In part there was a risk if advice given to the public was inaccurate or a new product was not sound; but these risks could be contained. The error was in assuming that this risk applied equally to the development of different ways of working and to the building of relationships. The perception of risk was also associated with the lack of standards. It was true that there were duplicate systems and sets of procedures, but these were a result of tight control rather than experimentation.

Self-organization was not totally absent in SSF, but there was a noticeable division between those who felt able to self-organise and those who felt serious constraints. Senior managers were seen as being good at self-organization, because they had the space, the authority and the power to act independently, but this did not appear to be the case for the rest.

Junior staff tended to use a formal approach to present new ideas. They feared that they would be turned down and therefore needed to seek approval. The size of the merged organization did not help.

Although some enlightened senior managers wished to encourage self-organization, it did not happen.

The reluctance of staff to self-organize was possibly due to the following reasons:

Focus and leadership

One of the main themes was that too many projects were claiming equal high-level priority, and all were competing for limited resources, time, funding and energy. Many interviewees appeared exhausted with the constant battle to meet so many high priority deadlines: “We try to do too much all the time, constantly failing.” “We have so many projects clambering for resources at the moment. All the projects are classed as priority one and so it’s difficult to know what to work on first.” Overall there had been just too much change and they were suffering from change-fatigue: “they are punch drunk from all the change”; with the corollary that it was difficult to believe that the transformation would take place. A picture made by the research team’s resident artist shows this unceasing activity clearly (Figure 1). They are all concentrating on spinning plates and not noticing that the whole edifice is falling apart.

This was indicative of the lack of direction and focus. They needed clarity to help them concentrate their efforts on the important issues: “We potentially set out to try and do too much too soon in our merger, possibly not the right things first.” They also felt the lack of leadership: “They desperately need vision, but they need leadership to go with it to lead them out of where they are.” The workforce was in effect rendered unable to help itself, so they needed “to be shown the way out”. But leadership was not readily available as the executive team was not “knitted together” and did not have a “consensus view.”

Weak leadership coupled with a controlling attitude, lack of a clear vision and direction, all contributed to becoming a dysfunctional organization.

A complexity perspective on the other hand would take a more holistic view and look at all the conditions necessary for a successful merger or acquisition. Apart from the financial and legal dimensions there are also the social, the cultural, the technical, the physical and the political dimensions that need to be taken into account. Each plays an important role in the social ecosystem of the organization and influences all the others, while the ecosystem influences individual parts. The whole coevolves and creates new order in terms of a new organizational form.

Integration across national cultures

Company EnF acquired an organization made up of small firms that had already gone through a series of mergers and acquisitions, in a different but related market to its main operations. The parent company was primarily a UK organization while the acquired company (AcqC) was distributed throughout Scandinavia.

The parent company was in a market that demanded extremely high quality and safety, while the products of the dependent company were not in the same category. Applying the same procedures was inappropriate and in due course started affecting the innovative response of AcqC. Had this continued it could have had serious implications for the entire organization. AcqC at the time of the acquisition was a leader in its field and that position was due to its relationship with its customers and its quick response to their changing requirements. The new procedures made that response very much slower and were beginning to affect AcqC’s relationship with its customers. In addition, the parent company had imposed a matrix structure that was confusing and difficult to work.

EnF was very much aware that there was an integration problem, seen in terms of the different national cultures. At a Conference in 2002 they identified “awareness of cultural differences” as one of two main issues to focus upon. The other was “clarification of roles and responsibilities.” The HR Director in EnF was tasked with addressing the two issues, but did not know how to go about it. The research project had just started and some initial findings were presented to EnF. At that meeting the HR Director asked the research team to work on the integration issues. As this was a collaborative action research project, 14 members of the parent company and the AcqC, joined the LSE research team. Together they formed four teams and interviewed the top three management layers in the Nordic countries, the UK and the USA. The EnF teams were guided by the LSE research team in conducting semi-structured interviews and in analyzing the findings from the transcripts.

At a two-day facilitated workshop the four teams analyzed the findings from 44 semi-structured interviews, in depth, and identified a set of common themes, dilemmas, key questions and underlying assumptions. A set of recommendations, based on the findings, was presented to the executive board and adopted. The interview findings were supported by a tool called ‘Landscape of the Mind’ (LoM), which identifies preferences in decision-making, knowledge acquisition and sharing, etc. The majority of the top team had answered the LoM email questionnaire and the results were quite surprising. They showed that there was no significant difference in the preference profiles of the Nordic and the UK management teams, hence many of the problems associated with the national cultural differences were more perceived than real.

Apart from the interviews, LoM findings, workshop and board meeting, the LSE team also attended meetings, conferences and joint presentations. The findings showed that the national cultures issue had become a smoke screen that was used to hide all the other difficult issues that were impacting the relationship between the parent company and AcqC. Eight overarching themes were identified at the two-day analysis workshop, and cultures was only one of them:

The analysis findings, expressed as the 8 themes, were developed into 12 related action streams. Some of the themes and related action streams are discussed below.

Matrix structure and new product development

The complicated structure was associated with the matrix organization. This was something that the parent had imposed on the AcqC - the latter had been a set of small firms with simple business models and a shallow hierarchy. Everyone knew everyone else, as they were often part of the same small societal community with one or two main employers. The AcqC firms built relationships both within the firm and outside with their customers. They had a large global customer base while the parent had very few, but large customers. The matrix was relatively new for both parent and AcqC and no one knew precisely how to operate within it. The parent, however, was already used to a fairly complicated structure as part of a large organization, and they also introduced the matrix rather than having it imposed upon them, hence the psychology and the dynamics were quite different. For the AcqC on the other hand the changes were significant. They had gone through 2-3 mergers and acquisitions in a relatively short time, and they had as a parent a very well known organization, but one which operated in a totally different market sector and was not familiar with AcqC’s market. The parent brand in fact was seen as a constraint for the AcqC not an advantage.

The matrix was so complicated that it can only be described as a cube. It was not surprising therefore that the second issue identified by the 2002 Conference was ‘clarification of roles and responsibilities’. The fuzzy boundaries of responsibility and accountability, the multiple reporting lines, etc., were uncomfortable and confusing for an engineering culture that prefers clear, unambiguous structures. For the AcqC it was even more difficult as their previous business model and structure was relatively simple, clear and unambiguous. However, in due course some of the AcqC’s senior managers learnt that the best way to ‘work the matrix’ was through good informal networking. One interesting and uncharacteristic insight into the matrix was that it would “produce leaders who are comfortable with change and complexity.” Another point was that there were “no cross functional activities” and that they needed “real not virtual teams, with a physical focal point, e.g., war room.”

EnF acknowledged that working the matrix was a problem and that it affected its relationship with AcqC and one of the recommendations accepted by the board and implemented was the need to define the desirable characteristics and behaviors for a matrix, and to provide training and support for working in a matrix. Furthermore it developed programmes and events to facilitate informal networks, develop trust and foster loyalty to different groups.

Another issue associated with the complicated structure was new product development. Prior to the introduction of the matrix the location of product development was quite clear for both parent and AcqC. Those who interfaced with the customer brought back ideas and requests about the development of the product and these were directly implemented. But when the customer facing business units were separated from the operating business units, the responsibility and location of product development became confused “team responsibilities have been split to detriment of the ability to meet market demands.” In addition customers were confused, as they no longer knew who their main contact person was. This was a serious issue for the AcqC as they had built their reputation with their worldwide customers on their quick response rate and innovative approach. But post acquisition ideas for product development had to be submitted to head office in the UK, signed off, counter-signed, etc., and the process became cumbersome and slow, and innovation was in danger of being seriously compromised. When this point was brought to the attention of the board, they were surprised, but quickly realized the potential damage of this procedure and implemented the following actions, giving them a high priority:

Relationships, culture and communication

The ‘human behaviors’ and ‘relationships’ themes produced the most voluminous comments at the two-day Analysis Workshop. The main points relating to the relationship between parent and AcqC were the following. Both sides were seen as having hidden agendas. The parent suspected the AcqC of sticking to the old structures and trying to preserve their old relationship with their customers; that they gave too much emphasis to their own interests over those of the group; that knowledge was power and people did not want to share their knowledge. On the other hand, the AcqC suspected the parent of having a hidden agenda because of lack of transparency and open communication; they also feared that they planned to close them down, hence creating mass unemployment in their small communities, as they were seen not to share the same culture of community. Both sets of assumptions were inaccurate on the whole and once they were voiced, it was much easier to address them.

One of the main insights on the national cultures theme was that “awareness of national cultural differences may not be enough” and that this was “not a national culture problem but a business culture problem.” The national cultures issue was seen both as a “stumbling block” and as a “smoke screen” hiding other issues such as lack of empowerment and “lack of confidence to put the right person in the right job for fear of cultural faux pas.” It was recognized that there were business sub cultures even within the parent with “cultural differences in doing business” and “cultural differences in communications.” Regarding the parent and the AcqC “customer relationships were affected by different styles of doing business.” The imposition of ways of working was recognized, in particular that the parent culture of corporate governance plus self protection did lead to a detailed and lengthy decision making process.

Culture and communication were seen as going “hand in hand” and that national styles did affect customer relationships. The inadequate and multiple information systems of the group were not fully integrated and that was another constraint to communication.

Leadership, role of central team, management

One of the main findings from the workshop was that middle management lacked drive and created an impermeable layer between middle and senior management: “senior management understands the strategy, but the message is lost in the levels below”. People were evading the matrix not operating it and they exploited grey areas for personal benefit. They also used the “confusion of the matrix” to excuse non-delivery. The central team was criticized for not explaining why they requested information, while themselves not providing information in the best way. This created the perception that “people feel that they lack full information.” It was also acknowledged that the centralised reporting regime was overdone and was based on the parent requirements that were inappropriate for the AcqC.

EnF took these findings very seriously and implemented a whole series of action streams. They put in place a Leadership programme to develop business leaders and managers. They simplified and reduced management reporting requirements. The strategy process was clarified, and the intention was to communicate it better by making it relevant locally. Organizational changes in structure, roles and interfaces were disseminated in a variety of ways including several articles in the in-house journal. They also tried to develop more effective ways of sharing knowledge.

EnF Success

Fifteen months after the two-day analysis workshop, which identified the real underlying issues, most of the recommendations had been implemented. The board listened and took action and the parent company co-created with the AcqC, an enabling framework to facilitate integration. The framework consisted of 12 action streams and these were outlined above. But prior to that the HR Director had the vision to work collaboratively with an academic research team and to try out a different way of thinking based on complexity. In addition he appointed a project manager whose dedicated efforts and management style made the project a success and EnF is on the way of actually creating a culture of coevolutionary integration.

By opening up again the product development process they enabled self-organization by the local teams, and the exploration of the space of possibilities which facilitated creativity and innovation. They relaxed their rigid structure and enabled emergence without risk. They acknowledged the importance of connectivity and worked hard to improve the relationships between the parent and the AcqC. They improved their feedback and communication processes and opened up new channels. They acknowledged that local autonomy was essential and were on the way towards improving the central-local control balance. They understood the subtle balance of interdependence and learned to coevolve through reciprocal influence between the parent and the AcqC. They did this by honoring the differences between them and by seeing diversity as a strength to build upon, not as a weakness.