Health warning: Mergers can seriously damage your health

Cobbetts takes a quiet pride in its working environment, with a long-standing reputation for enticing and retaining its staff. In recent years, however, the firm has been creating more dramatic waves in the market with aggressive expansion strategies that have seen it complete three mergers in the space of eight months. With plenty of experience now under his belt, managing partner Michael Shaw provides some best-practice tips for managing a firm through change.

I think I was asked to write this article as I have taken my firm through half a dozen mergers over the past eight years and have also rejected a similar number of approaches for merger from other firms. In fact, we rejected three approaches before undertaking any merger activity ourselves and I have to say that we owe a great deal to those firms for what we learnt from our discussions. The first merger we undertook would be classified as being ‘horizontal’ in that it was between two entities supplying similar (but differently weighted) services in the same geographic market. We subsequently undertook two mergers to achieve market extension (that is, breaking into new geographic markets), and we have also undertaken three mergers driven by a wish to extend our service lines, although culture impact was a prime consideration in one case.

My firm doesn’t get everything right, but our mergers have delivered the anticipated results. We have assiduously endeavoured to turn hindsight into foresight after each and every merger activity by looking at what we have done well and where we have struggled. Statistical evidence suggests that a very high number of mergers fail to live up to expectations, that a significant number are not successful and, at the very least, if one were able to get behind the PR spin, most senior managers would admit to experiencing significant difficulties during the post-merger integration period. Hopefully, in this short piece, I can flag up some of the health warnings that, if heeded, will help minimise the chance of failure.

If there is no strategic purpose, don’t do it

We are all familiar with the old truism that merger is not a strategy in itself. However, I am sure, like me, you greet the news of some mergers with a degree of puzzlement and bewilderment as to what on earth the underlying strategic purpose could be. Of course, it is difficult to test strategic objectives if neither of the two parties to the merger actually have any in the first place. This seems pretty obvious stuff, but there are businesses that have failed to think through where they are going or why. Is it assumed that two ailing firms with a lack of purpose will be transformed into one large dynamic high-performance vehicle with a clear strategic vision? Given the difficulties associated with merger integration and management, which I will turn to, it seems either a particularly confident or, alternatively, foolhardy stance to take.

Understand the importance of brand

I was taught at an early stage that a critical test in a merger has to be people, business and money fit, in that relative importance to each other. This gem from an earlier age is what we would now see as a brand and culture test.

Every business has a brand of some sort, regardless of its inherent value. If we take a working definition of brand as being the client’s actual or anticipated experience of subscribing for a firm’s services, then we have to recognise that the prevalent behaviours within an organisation will reflect the values commonly held within that organisation, and that will shape the experience of the client. There has to be some brand analysis undertaken to establish whether the prevailing attitudes, values and behaviours within the two firms actually align, or are capable of aligning, and can be fashioned into a unique and consistent brand experience. If the answer is in the negative, then do not proceed to go. If those two sets of values and behaviours are capable of alignment, then go with the brand in which the greatest equity exists.

Find the correct management approach

There are various management styles in post-merger integration, ranging from a ‘one-night stand’, denoted by break-up, divestment and integration at one extreme, through to ‘love and marriage’ at the other, which focuses on full consolidation between the two firms with integration efforts being oriented towards blending and assimilating the two operations. Such analysis, however, fails to recognise the need for some fluidity in the required approach; while appropriate style will be dictated by a number of factors, the required approach may well need to change during different stages of the process.

In the case of my own firm, we have deliberately set parameters on the size of entity with which we would be prepared to merge. This was driven by a belief that we have made a very substantial investment over a period of time in brand management and operational systems. Therefore, I am afraid that in the initial stages of any merger we have tended to adopt a directive approach to management of the process. This has been a pragmatic approach to given situations, but at least it has removed a good deal of uncertainty in the initial stages. This isn’t to say that you should not look for improvements and learn from each other but, initially, you have to be prepared to stand firm with adopted systems and processes. Having said that, our general ethos is one of assimilation rather than annihilation and, once the systems have been put in place, we have tried to get contribution from all constituents that will benefit our business. The timing for that exercise, however, has to be right.

Avoid unpleasant surprises

Lawyers tend to think of due diligence in fairly narrow terms but getting a real understanding of another organisation, its people and the business it conducts, requires feel, not just data. Working alongside each other over a period of time reduces the risk of surprises crawling out of the woodwork at a later stage and can usefully extend due diligence from pure legal and financial issues through to culture audit, market testing, brand audit and client feedback.

The larger the merger activity that we have undertaken, the greater the length of time we have given ourselves to work alongside each other. Accordingly, we have benchmarked with our merger partners and adopted common accounting practices over two years prior to merger commitment. During that time we have also fostered the building of relationships at all levels. Additionally, we have found it useful to adopt formal agreements to merge, with fixed completion dates some months down the line to ensure that there is a period in which the new management structure (which had been fixed some time in advance) could operate in tandem, but at the same time become identified as the management structure for the merged entity. There doesn’t have to be a race to get the merger effected in record time.

Surprises can also be avoided if the legal documentation incorporates assumptions as to what each business brings to the party in terms of financial attributes. It is not difficult to accommodate all financial out-turns within the merger agreement, with clear target deliverables on the key financial criteria, while at the same time giving a degree of certainty as to the relative earnings of the constituent partners. I say it’s not difficult, but there are stories of law firms missing the point.

Assess the cost

You really need to get beyond the obvious here and start to consider the costs incurred in managing the exercise through the first year or two. The exercise will be a huge drain on management across both partnership groups for a considerable amount of time pre and post-merger, and consideration has to be given as to whether you possess the management skills within the two businesses to effect the process. You also need to be prepared to plug skills gaps that might exist. If the two businesses operate from separate locations, are you going to transfer some key personnel as part of the integration, which again will carry direct and even greater indirect costs?

No matter how well the exercise is handled, you should recognise from the start that it’s not going to be plain sailing. The human side of merger, on which I elaborate below, is more challenging than getting the sums and business fit right. The merger will generate a maelstrom in its wake. No matter how skilled management may be at dealing with this, the emotional cost to the players and to the business should be factored into a rigorous cost-benefit analysis before day one.

Plan for all eventualities

Lack of certainty will raise insecurity on the part of individuals; therefore, the greater degree of detailed planning, the less insecurity will arise. This will also provide an adequate road map so that the process can be managed in the best way possible – you may not feel in complete control, but you should be better prepared to cope. Don’t get caught on a back foot. Anticipate unexpected eventualities and, when they are encountered, take stock and adjust the plan. Remember that formal merger should only be the very first milestone and that the benefits contemplated by the strategic purpose of the merger will only be realised from the actions taken post-merger.

Protect the family silver

As part of the due diligence, there is sense in taking feedback from clients, while effectively communicating with them. In due course, clients want the reassurance of familiar relationships, while being convinced that there are real benefits to them from the merger. We have found that as long as they are kept informed through an active programme of communication, clients actually find pride in their advisers doing something dynamic with their own business.

Personnel and clients are the principal assets of any professional-services firm, yet you hear stories of both being ignored before and during the merger process. It’s not just a matter of communicating with both groups but, in our experience, actively consulting with them at the earliest possible stage and then working with them throughout. Clients should be included as part of brand evaluation and initial due diligence and be kept informed as matters progress. Competitors are not foolish and will use the inherent uncertainty in a merger situation to try and pick off a firm’s best clients. It is therefore essential that key client relationships are actively managed throughout the period of merger negotiation and implementation.

There is no point in making false promises to staff. It is important that senior management in both entities paint a realistic and consistent picture. In my experience, staff don’t betray confidences and should not just be kept informed, but actively engaged in the process. Indeed, your people have a lot to contribute to the success of the venture, especially in building the raft of quality relationships that are the hallmark of successful mergers.

External PR needs expert handling to get the brand propositions known in the market, but some businesses become totally fixated on that aspect of communication. By far the greatest effort should be in communicating the strategy for the merger internally to both personnel and clients; use the 80:20 rule of thumb. Above all, embed the strategy – winning hearts and minds is not enough. Values, behaviours and strategic purpose have to be embedded if a clear and effective brand proposition is to be established in the market.

Next time qualify as a psychologist

Merger will elicit a huge range of emotions from people within the two businesses as they come to terms with the situation. At the extreme, it has been likened to the loss of a parent and, like bereavement, there has to be a letting go of the old order. People will react in different ways to changes in cultures, ranging from obsession with the merger to the exclusion of everything else through to cultural terrorism. The impact of the process will also hit different groups at different times. Initially expect a requirement for high maintenance from senior groups as they try to rationalise what new expectations there might be of them, but also anticipate that because they will draw on senior-management time, those issues may be the first to be resolved. Less senior groups may feel that there is little impact on them in the early days, only to struggle much later in the process. What is likely to happen from a business point of view is that if you do not anticipate this post-merger trough, then the business may well lose impetus. You really have to have the energy and well-thought-out strategies and processes to deal with the human issues so that you can get people focused on driving the merged business forward and making it a success.

Michael Shaw is managing partner at Cobbetts. He can be contacted at michael.shaw@cobbetts.co.uk