J. P. Chevriere
Reality: not many mergers work out
The hydrocarbon industry and many of the supplier industries that serve it are undergoing a protracted phase of consolidation. There are many drivers fostering this consolidation:
- A Wall Street-inspired need to lower costs
- Competitive pressures to improve returns on capital
- The burgeoning corporate governance movement.
acquisitions, and joint ventures promise more than they produce. Disappointment then reigns when expected synergies and cost savings do not materialize. I suggest that much of the benefit of consolidation is lost through poor post-merger integration. There are ways to gain more benefit from the process.
There is an old European saying that states "Der mensch irrt-solang er strebt," which means "He who tries hard makes mistakes." Without question, industry executives are trying very hard to make company combinations work but with less than optimal results. Too many avoidable mistakes are being made. I would like to make suggestions in three areas or categories that may help improve post-merger integration experiences.
Preventive medicineThe best way to assure post-merger integration success is to select the right company to marry. Everyone knows that a poor choice of partner in marriage leads to conflict, unhappiness, and often divorce. Likewise a careless selection of partner for merger, acquisition, or joint venture dooms the chances for a successful integration of companies. Why then the frequent lack of planning and careful thought in choosing the right partner?
It seems to me that there are a number of hardheaded questions and considerations to address in picking the right partner. And make no mistake that the right partner is the primary driver of a successful integration, with all the benefits that flow from making the right choice. The primary considerations in our view are as follows:
Does the acquiring company have a successful history, a track record of buying and integrating other companies? There is a knack, a talent, required of firms that successfully combine with other firms. Some companies possess this knack - others do not. Incidentally, no one fully understands why this is so.
Why, for example, do some people have a "green thumb?" Everything grows in their garden, while others couldn't grow weeds with all the fertilizer in the world. What is clear is that if you have no talent for acquiring and integrating firms then it should be a strategy of last resort.
Instead, try joint ventures and strategic alliances, which may prove more fruitful vehicles for your aims. Unfortunately, the investment banking community - concentrating on the numbers - too often promotes mergers and acquisitions by companies without the knack to make the deal a success. It is not in their interest to tell the truth.
The talents and capabilities needed for a successful acquisition are quite different from those required to develop an in-house business venture. The former requires a focus on what the acquirer brings to the marriage to add value. The smart acquirer must assume that most of the management of the target will soon leave and that he can make things run better than ever. If he cannot, things may crumble.
(1) The key question for an acquirer, then, is not what the target brings to him, but what he brings to it. The focus is opposite for in-house developments. Here, what counts is what the new development can do for the company. If the answer is unattractive, the development should be squashed.
It is both interesting and important to note that companies that are good at successfully completing acquisitions and mergers are generally not good at in-house ventures and joint ventures. Inversely, firms that are good at joint ventures and the like are generally poor acquisition artists.
For example, General Motors is a wonderful acquirer of companies. As a matter of fact, the corporation was created via acquisitions in the early twenties. On recent acquisitions like EDS and Hughes, General Motors earned back ten times its investment when these companies were sold. General Motors has the knack for properly nurturing acquisitions. On the other hand, most of General Motors' in-house developments and joint ventures failed.
(2) The next question to ask is: Does the acquiring company have a track record of successfully merging with or acquiring of similar-type companies? How about dissimilar-type companies? As a rule, petroleum companies are not good at merging with or acquiring dissimilar-type firms.
One can point to many clear examples: the past attempts by several oil companies to assimilate mining and metals firms (Arco's purchase of Anaconda Copper; Conoco's buyout of Peabody Coal). More recently, one can point to the wave of failures by major oil companies in the natural gas-to-electricity business. Oil company attempts to acquire power development companies are all failures to date. The jury, of course, is still out on Shell's inventive attempt to penetrate the business using its part ownership in Inter-Gen with Bechtel.
Why the failures? The reasons stem from an inability of the acquirers to understand and "get a feel" for the markets and technology of their targets. This leads to a lack of understanding and "chemistry" between the parties. Sometimes there is also a problem of lack of respect between acquirer and target. One senses this lack of respect between oil executives and their power counterparts.
Such disrespect is clearly evident between oil company executives and pharmaceutical or life science managers. Pharmaceutical executives see themselves as contributing to the general benefit of humankind. They see their profession, their business, as noble. For them oil company executives are just profit grubbers. Inversely, oil company executives often see pharmaceutical executives as divas and hypocrites.
(3) Our next point is that if you lack a successful track record in the field of acquisitions, avoid trying to marry at all costs. Find another way to meet your objectives. After all, some companies, like some individuals, are not the marrying kind.
(4) The next point is that one should never acquire or merge for purely financial reasons or as an "escape hatch". This strategy only leads to a lack of business focus. Examples of this kind of failed strategy abound in the petroleum and the engineering contractor industry: Fluor's purchase of mining and minerals giant St Joe's Mineral, Pebo Canada's takeover of Clyde Petroleum, and Raytheon's purchase of a slew of engineering firms, such as Litwin, Rust, and Ebasco. These are poignant examples of how financial thinking is no substitute for strategic thinking.
(5) Finally, only undertake backward or forward integration if it helps solve a size problem. Too often, hydrocarbon companies buy into industries to assure supply or to capture a market. This move just doesn't work. A classic example is DuPont's purchase of Conoco to assure a feedstock supply for its chemical businesses. The problem, of course, was never physical disruption of supply, but price. Consequently, Conoco turned out to be an awful long-term investment for DuPont. To a large degree, the recent moves by the oil industry into natural gas power plants is similarly misguided.
To sum up, if all these considerations are carefully thought out, the probability of making the wrong acquisition or even joint venture is considerably diminished. With the right acquisition, the probability of making the post-merger integration process work are high. Therefore, careful thought helps avoid catastrophes, and makes it more likely to get all the benefits of merging.
Tailoring integrationToo often, we try to over-standardize in the oil business. We have the habit of placing situations on a procrustean bed and stretching and cutting facts and events to fit one mold. We develop a one-world view.
This is why the expression "herd mentality" is so often used in referring to the oil business. A consequence of having this mentality are strategic actions sometimes inappropriate to the needs of specific firms. Specifically, it can lead to post-merger integration failure.
A sage once said that it is not wise to reveal truth, any more than light, too suddenly to eyes accustomed to the darkness. Let us lift up the veil and slowly reveal a few truths not frequently spoken by investment bankers handling the bulk of mergers and acquisitions today.
First, it is clear that there are common elements to examine in all oil and contractor acquisitions and mergers. For example, it is evident that the organizations, strategies, and operating systems of any combining companies must be made to fit. This is a truism. All integration teams work hard on these elements, which are graphically depicted in an accompanying pyramid diagram.
The importance of individual elements will depend on the specific merger candidate. What, however, is not frequently said is that one size doesn't fit all. One standard approach doesn't get the job done. You need to tailor your integration approach in a number of disparate key factors to succeed. The failure to do the tailoring, in large part, explains why there are so many firms are combined but not truly integrated.
There are three key things to look at in shaping your approach to integration. They are company size, company nationality, and company organizational structure.
Company sizeYou cannot approach merging a large with a small oil company or two drastically different size contracting companies the same way you merge two large firms. They are two different animals and require very different approaches. The main reason is complexity.
A large oil company's top management, for example, consists of 6-10 key executives. It must operate as a team. A small oil company's top management is usually one person; there is no team structure. The former, because of its size, must rely on the numbers and reports to direct. The latter is usually guided by a "management by walking around" style. Importantly, size means the former casts a big political shadow and must participate in the political process. The latter to a large extent can ignore politics.
Consequently, when BP merges with Amoco, the size of the combination strongly affects the specific integration approach. Conversely, when a Mobil acquires an Aran or a Total (a CSX oil and gas company), size imposes a lesser burden on the integration process. The latter process is simply less complex. Unfortunately, in too many post-merger integration cases today, the cookie cutter one-size-fits-all mentality still prevails.
Company nationalityThe nationalities of the merging parties can strongly affect the process of creating a successful union. Unfortunately, American companies often seem oblivious to the importance of taking into account the nationality factor in designing the integration process. This frequently becomes a root cause of post-merger integration failure.
To achieve success, one must be cognizant and take into account that differences in attitudes, history, social security policies, incentive systems, and culture exist. For example, when you merge a French oil or contracting firm with an American one, it is important to realize that the French do not reveal or speak openly about their remuneration levels. It is considered in poor taste. Even the salary of the most senior executives is not revealed in public documents.
This means, for example, that performance-based compensation, as understood in an American context, does not work in most European settings. The issue of compensation undoubtedly will be a tricky matter in the post-merger activities of BP and Amoco.
For those interested in this issue may I suggest examining the problems incurred in four distinct cases. They are the integration of:
- AMEC UK and Barnard & Burk
- The former Total North America with its French parent, Total SA.
- Ford Bacon & Davis with Deutsch-Babcock
- Sohio into BP.
Organizational structureThe acquiring company's specific organization structure always strongly influences the type of post-merger integration approach that is required. Generally, large hydrocarbon companies have very complex structures with elaborate reporting relationships. These organizational structures therefore require specific and complex behavior on the part of employees. It is crucially important to get the behavior patterns in harness immediately between the companies.
There are three general types of organizational structure that one finds in the oil industry (with examples):
- Federal decentralized structure (Royal Dutch Shell)
- Matrix type structure (Conoco)
- Network system structures (BP).
The same reasoning holds true for contracting. For example, until recently, Fluor was a matrix-type company. It was and still is a reimbursable-oriented contractor. How would it be able to merge with a lump-sum traditionally structured engineering contractor, such as, for the sake of argument, an EPC contractor like KTI? The post-merger integration process would be difficult and require considerable work to blend the two staffs together. What actions to take to do the right mix would need to be addressed in the post-merger integration plan.
Merger processLet us now say a few words about the mechanics of the process itself. First, it is well to remember that post-merger integration is the final step in a much larger acquisition process. Everything is linked. Thus, the post-merger phase is linked to the larger overall acquisition process and its specific objectives. It is not an independent activity. One can depict the post-merger process stage in terms of four simple steps. These are shown in an accompanying flow chart.
Ground rules, frameworkIn this step, the highest level of the integration team spells out the ground rules governing the effort of constructing a new company. This means spelling out in clear language the financial and operational assumptions the integration team will use. An important part of the work is to set out the objectives of the integration process, the schedule, and the organizational design criteria.
Before this important work commences, one needs to set up a top management team to provide strategic direction and develop these ground rules. This team usually includes the chief executives of the two firms and their most trusted deputies. An important task of the top management team is to nominate the right person for the post of "integration chief executive."
There is also a need to nominate key personnel for the business process and business support team that will perform the hard nuts-and-bolts work of combining the two firms. Here again, the right personnel choices can spell the difference between success and failure. Kv?rner in merging with Trafalgar House, for example, made the wrong choices and never recuperated. An accompanying structure shows the prototype of a typical petroleum integration team. All decisions good and bad flow from the wisdom or lack of judgment of the senior management transition team.
Synthesis analysisIn life and in business, it is important to separate the wheat from the chaff. Acquisitions and mergers are costly affairs in terms of time and money. It is, therefore, absolutely essential to extract all the potential benefits possible from any union. The way to do this is to take the very best systems, structures, and ideas from both companies. How do you best accomplish this aim or synthesis? The best means is to carry out a wide range of analyses that will set out the foundations for creating the new company.
The general aim, then, is to arrive at a synthesis of what is best. The typical analyses that need to be carried out by the integration team are as follows:
- Supplier and purchasing analyses
- Accounting policy analyses
- Capital budget analyses
- Human resource analyses
- Information system and computer system analyses
- Legal and liabilities analyses
- Commercial analyses.
"Finding a new look"During this phase, the senior management transition team must review the work performed by the various business process and support teams in order to decide what "shape" the new company will take. At this stage, the senior management should also "bless" an implementation plan to arrive at a new organization in a timely fashion. Here, one best understands the expressions "The buck stops here" and "We're paid to make the tough choices."
The designation of the new organization and plan will usually require very difficult decisions such as staff cuts, staff relocations, the closing or merging of field offices, and the closing of refineries.
Executing the designThere are two sets of activities that encompass this stage of the integration process. One set deals with the very hard work of implementing the organizational design plan. The second part is the tricky job of dissolving the old organization while putting into place the new structure. The process of replacement is very difficult and requires the intensive attention of top management. Let us now sum up and also set out some conclusions:
- First, selecting the right acquisition or merger partner is crucial to successful combinations. It is almost impossible to make a good marriage if the chosen bride is flawed. Unfortunately, we too often spend too little time properly selecting our bride and then perhaps too much time on negotiating the purchase price. Furthermore, in the rush of events too little time is given to post-merger integration planning. This often leads to failure or getting poor value from an acquisition.
- Second, it is clear from the empirical evidence that cross-national mergers and acquisitions have much higher failure rates than those carried out within national borders. Therefore, cross-border acquisitions and mergers require even greater attention and effort in the post-merger integration phase. Too often this is not the case and failures ensue.
- Third, much rests on the wisdom of the senior management transition team in setting the right ground rules and making the right personnel decisions. As the old saying goes, "Trees die from the top."
Common pitfallsIt is appropriate at this stage to set out a number of the more common pitfalls as regards acquisitions and mergers:
- Misalignment of objectives: Two prominent examples are the BP purchase of Sohio and Santa Fe's acquisition by Kuwait Petroleum Co. BP's original aim was a regional presence in the US. Instead, Sohio's top management had a different set of objectives. They wanted independence and embarked on a catastrophic program of diversification. BP had to eventually remove all Sohio's top management to regain control and unify corporate objectives. In the case of Santa Fe, conflicting objectives existed from the start. The Kuwaitis were never able to build the major drilling and petroleum company they desired on the foundations of Santa Fe.
- A fundamental lack of trust between the parties: This attitude makes it impossible to form a unified senior management team. An attitude of "us vs. them" is created. Often this occurs when the bigger of the parties has a conqueror's attitude regarding a takeover. A prominent example of this state of affairs is the British Gas takeover of Bow Valley, Bechtel's purchase of PMB, and AMEC's acquisition of Barnard & Burk.
- The lack of understanding of another company's business and clients: This situation exists for all the petroleum companies attempting to enter the power business via natural gas. Also, many oil companies trying to operate in the pharmaceutical industry face the same problem. Success requires a "feel" or a temperamental fit with the acquired company and its markets.
- Poorly selected integrated management teams: Sometimes integration executives are selected with an inbred conqueror's mentality and the acquired firm is treated as a subject. This circumstance makes the development of a strong union with one culture impossible. A few prominent cases are: the Brown & Root takeover of CF Braun, the Elf takeover of Occidental UK, and Kv?rner's takeover of Humphreys & Glasgow.
- Fundamental differences in internal communication policies: Some companies are secretive and some are not. This difference in handling information can cause serious problems in the transition integration team. Or, some firms communicate best via memos and others prefer simple informal conversations. The differences in communication, not surprisingly, are particularly deadly to successful cross-border mergers and acquisitions.
- Inappropriate groups of key employees: Sometimes, for internal political reasons, a department or entire organizational unit finds itself with an inappropriate reporting relationship. This problem can fester and lead to the failure of a union. Certainly, the placing of process-oriented CF Braun company directly under the supervision of a construction executive was a striking case of an inappropriate reporting relationship. It contributed to the failure of the Brown & Root-Braun marriage.
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