Yet those same numbers can't predict the success of the merger, and studies suggest most deals fall short of expectations. Often, the problem is a culture clash.
When investment bankers crunch the numbers, they often don't take into consideration that people ultimately can make or break a merger. Without buy-in from middle managers and front-line workers, integrating two entities is likely to flop.
"Culture is one of those soft things people frequently underestimate when you're getting into an acquisition or merger," says Scott Whitaker, president of Whitaker & Co., an Atlanta management consulting firm. "It can delay things, cause headaches and employee morale issues...It can affect every success metric you've outlined."
McKinsey & Co. reports that executives know that culture plays a role, with 50 percent of respondents to a 2010 survey saying cultural fit was central to a value-enhancing merger. But 80 percent also said culture was hard to define.
"Culture is how we do things around here. It's the simplest way to say it."
"Culture is 'how we do things around here.' It's the simplest way to say it," says Logan Chandler, partner at Schaffer Consulting in Stamford, Conn. "It's critically important and not well understood."
Part of the confusion stems from the fact organizations typically have a formal culture defined by written policies and procedures and an informal culture that reflects "this is the way we get things done," says J. Neely, vice president at Booz & Company in Cleveland.
In the retail industry, banners build loyalty by getting to know their customers. When that knowledge is trounced during an acquisition, the merger often loses value. Experts point to Safeway's 1998 acquisition of the Dominick's chain in the Chicago area as an example of a merger that never achieved its potential. This past October, Safeway announced its decision to exit the Chicago market in conjunction with its third-quarter financial report, which showed its 72 Dominick's stores reported a loss of $35.2 million during the first 36 weeks of 2013. The company has sold four Dominick's locations to Jewel-Osco and continues to seek buyers for its remaining stores. It plans to shutter unsold locations by Dec. 28.
Dominick's had been the market leader with 130 locations when Safeway acquired it, but Chicago shoppers didn't appreciate the changes Safeway made after the buy-out, and the banner lost value almost immediately. Safeway also had trouble integrating acquisitions of Randall's and Genuardi's completed during the same period, and the company wrote down about 75 percent of the $4 billion it had spent on the three acquisitions, according to a report to shareholders of the Illinois State Board of Investment in 2004.
What went wrong? Chicago executive coach and communications expert Jackie Sloane said Safeway lost sight of Dominick's culture, or what it was all about. The Pleasanton, Calif.-based Safeway brought in its own private label foods and eliminated some of Dominick's own recipe prepared foods, while the quality of produce and customer service also declined. "You can't train people how to respond to every single situation. What you need to do is engage people in creating a great experience for your customers so they come again and tell their friends to go to your store for their party needs," Sloane says.
Safeway's stumbles provided an opening for competitors, such as Whole Foods Market, Trader Joe's, The Fresh Market and Mariano's, the latter of which is run by Roundy's CEO Bob Mariano, who also is former CEO of Dominick's Finer Foods. The rivals picked up Safeway's slack, particularly with high-end consumers. "What Dominick's could have done is take a more strategic approach," Sloane says.
But Safeway's biggest mistake was letting ego get in the way of integrating the new banner, says Jim Grew, president of executive leadership consulting firm The Grew Company in Portland, who previously worked for Jewel in Chicago when Dominick's was a leading banner. "Dominick's, they were really good. They were unbelievable," before Safeway acquired them, Grew says. "Dominick's won on perishables period....I think it's because the people who ran the place, the produce managers who say 'Throw that crap away,' they were really tough."
Instead of heeding that strength in the Dominick's culture, Safeway paid no apparent attention to it and instead brought in its own way of selecting products and merchandising them. "That's a culture thing. That's the Safeway ego: 'We know better. We know what will work in Chicago,'" says Grew. "That is a great story as a cultural failure. Clearly, they didn't have the right assortment, but somebody never looked."
Acquiring companies often assume they can bring their way of doing business to the companies they're buying without considering cultural differences.
"Too often people don't engage both sides of the equation. The less you involve both sides, the more the walls go up in terms of resistance to change."
"Too often people don't engage both sides of the equation. The less you involve both sides, the more the walls go up in terms of resistance to change," says Kathy Gersch, executive vice president at Kotter International in Seattle, who previously was an executive at Drugstore.com and Nordstrom.
Guarding Cultural Nuggets
To avoid eradicating the value in a company's culture, merging companies should identify the most important strategic elements to each culture and agree not to violate them. "Negotiate a way to protect what needs to be protected and give up what doesn't need to be protected," Grew says.
"Negotiate a way to protect what needs to be protected and give up what doesn't need to be protected."
The Grew Company
Kroger's acquisition of Harris Teeter also has the potential to be a cultural mismatch, considering that Harris Teeter is a niche banner with an upmarket customer base and its leadership has been outspoken in its opposition to organized labor.
Wages and benefits are part of the way a company does business and can spur a culture clash when two companies with opposing mindsets merge. "If you have some significant wage differences in terms of pay grades, you'll immediately have cultural rift potential. People find out immediately. They'll know how much their equivalents are paid, and if there's a gap, it creates problems," Whitaker says.
But Kroger isn't attempting to change Harris Teeter's culture, at least for now. Kroger intends to keep the current management team at Harris Teeter and allow it to operate at arm's length from corporate Kroger, Neely says.
Acquirers often are willing to allow a new unit to operate autonomously when it is performing well and can provide lessons the larger corporation can learn from. While Walgreen Co., which has grown through acquisition, typically converts acquired locations to the Walgreens banner, it chose not to do that when it purchased Duane Reade in New York City, Neely says. "Duane Reade was a very different animal for them. It was the preeminent badge in Manhattan," with strengths in fresh food, beauty and loyalty. "There was a very deliberate thought process in how to integrate that into Walgreens that included cultural elements." The company's flapship stores in urban locations are one result of the knowledge and culture Walgreen Co. gleaned from the Duane Reade merger.
Cultural differences can include dress code, office environments, how the companies interact with clients, how they hold meetings and what kind of contracts they have, says David Braun, CEO of McLean, Va.-based Capstone Strategic and author of Successful Acquisitions.
A Team Approach
The conversation between the two companies about the differences in culture should begin during the due diligence process, he says. As soon as a letter of intent is signed, Braun recommends forming integration teams comprising representatives from various functional areas of both companies, such as operations, human resources, IT, legal and accounting. "What we want to do is have those people having direct conversations in the due diligence process. That's the information gathering. That leads to decision-making," Braun says.
Draft a change management plan with specific objectives to address areas of culture conflict. Determine what's likely to be a pain point, and find a way to address it. Once the deal closes, the merging companies have about 100 days to make changes, because that's when most employees are expecting them and willing to react, Braun says.
It's critical to communicate to employees throughout the integration process. "People want to know information. When they are starving for information, their productivity and morale can tank," Whitaker says.
When Irene Rosenfeld, who is now CEO of Mondelez International, took the helm at Kraft Foods in 2006, she encountered a highly centralized organizational structure that had emerged from a string of mergers, starting with Philip Morris' buyout of Kraft in 1988 and the subsequent acquisitions of Oscar Mayer, Nabisco and Jacob Suchard. The acquired companies lost their autonomy as functional leaders were making decisions often without regard to the specific needs of each brand. The culture that emerged was conducive to micromanagement by home office and was thwarting the company's growth by preventing it from acting quickly. Changing that structure involved changing the culture, Neely says.
Under Rosenfeld's leadership, the company went back to accountable business units, with the exception of technology and human resources, which remained centralized. Rosenfeld's goal was to empower the managers of the various business units to act largely autonomously.
As part of the reorganization, Kraft updated its policies and procedures, posting the relevant ones on its intranet and letting others fade away. It also encouraged more transparency and improved its information systems to make it possible. Later, Kraft's desire for nimbleness would lead to the decision to split into two separate companies, with Rosenfeld continuing to head up the faster-growing Mondelez International.
What happens in the event of a culture clash that isn't addressed? "What happens is it really never gets undone. What happens is value is lost. Values and synergies are diminished over time so they end up destroying value," Whitaker says.
Unresolved differences can fester. In places where that has happened, Neely says, "You look back five years and frankly, most of the people are gone."
To encourage employees to adapt to changes during a merger, communicate early and often.
PricewaterhouseCoopers suggests effective change programs involve the following:
Source: PricewaterhouseCoopers "People Integration"