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The Conference Board
Post-Merger
Organization
Handbook
Interviews with senior executives and an examination
of leading research on post-merger integration reveal
that successful organizational integration requires:
Founded in 1916, The Conference Board’s twofold Robert J. Kramer, Ph.D., a principal researcher at The Conference
purpose is to improve the business enterprise system Board, is the author of a series of eight reports that address major
and to enhance the contribution of business to society. organization formats. Based on the core question of how multina-
tionals organize to conduct their worldwide operations, each
To accomplish this, The Conference Board strives report describes the strengths and challenges associated with each
to be the leading global business membership design, and what to expect in the future. Each report also includes
organization that enables senior executives from all numerous company examples.
industries to explore and exchange ideas of impact on
business policy and practices. To support this activity, Before joining the Board in 1990, Dr. Kramer’s research experi-
The Conference Board provides a variety of forums ence included 13 years at Business International Corporation,
and a professionally managed research program where he produced reports on a wide range of international man-
that identifies and reports objectively on key areas of agement subjects. His work has also appeared in publications
changing management concern, opportunity and action. such as Harvard Business Review, The Journal of Business
Strategy, and M&A Europe. His corporate background includes
human resource positions at RCA, International Paper Company,
and American Express Company. He has served for several years
as an adjunct professor of business management at Pace
University and Marymount Manhattan College.
Contents
6 Designing a New Organization
6 Foundations of Merger-Driven, Corporate-Wide Organization Design
7 Tasks That Drive Integration
16 Merger Profiles
16 Baxter International, Inc.
22 The Chase Manhattan Corporation
28 Kraft Foods, Inc.
31 SmithKline Beecham
T
he merger of two large business organizations is a complex endeavor
fraught with the possibility of failure. Data indicate that less than half
of all mergers are successful and that faulty integration management—
due to the lack of a systematic, strategic approach—is an important cause of
the problems that may arise.1 The procedures for planning organizational
integration during the due diligence phase often fail to create a proper design
or to emplace the management systems and processes required to operate the
new corporation.2 Moreover, companies pay insufficient attention to the
critical success factors associated with integration, such as pace of activity,
methods of oversight and control, human resources considerations, the linkage
of operating events with financial metrics, communications, and obtaining
user acceptance of the entire merger integration process. As the authors of a
seminal article on this subject have observed, “Improving the…integration
process…may be one of the most urgent and compelling challenges facing
business today.”3
This report also describes four company experiences in terms of five inter-
related integration elements, as well as draws upon post-merger integration
literature, in order to focus on how to create the structure, processes, and
systems of a new organization from a merger of “equals.”4 This handbook
does not cover human resources or corporate culture.5 These issues will be
addressed in subsequent Conference Board reports which, taken together, will
compose a body of information on this subject.
Sources: David Nadler, “Concepts for the Management of Organization Change,” in Michael L. Tushman, Charles O’Reilly, and David A. Nadler, The Management
of Organizations: Strategies, Tactics, Analyses (Cambridge, MA: Ballinger Publishing Co., 1989), pp. 493-–494. David Mitchell and Garrick Holmes, Making
Acquisitions Work: Learning From Companies’ Successes and Failures (London: The Economist Intelligence Unit, 1996), pp. VII, VIII.
Three factors—the firm’s distinctive attributes, its economics, and the CEO’s
preferences—are instrumental in creating a framework for the design of a new
enterprise organization.
Scale or expertise within the l Are they likely to develop future corporate leaders?
function
Long product development and It may also be helpful to examine each structural alternative in terms
life cycles of the factors and competencies that will achieve the firm’s strategic
Common standards objectives. Identify the management decisions that are crucial to the
success of the enterprise at different levels. Also, consider how the
Market/customer/industry major competitors of the newly merged company are organized.
Final structural alternatives should be compared in terms of cost
Important market segments
estimates.
Product or service unique to
segment
Select the best design. The final choice may be homogenous, such as
Buyer strength a straightforward arrangement of product or service business units
Customer knowledge advantage reporting to the CEO. Alternatively—and more likely—the design
Rapid customer service and
may constitute a mix of structures, such as several single-product
product cycles businesses, one or more geographical units, and a few global func-
tional activities. The overall design may also be a matrix compris-
Minimum efficient scale in
functions or outsourcing ing product, geographic, and/or functional dimensions.
Line operations
Human resources
How will each firm’s key senior executives fit into the new
organization? What organizational adjustments need to be made to
accommodate the skills and interests of these senior executives?
What are the most important training needs and how will they
be addressed?
Do not overemphasize the search for It may not be appropriate to A merger provides a unique
a single optimal solution. There is no organize every business or division opportunity to redefine the
one best way to organize. Most com- in the same way. Each respective scope and content of principal
panies have a “mixed” organizational organization should reflect its unique positions at many levels so
set-up that combines two or more circumstances and goals. employees can contribute more
formats. and find their work more rewarding
than their predecessors.
When working on an organization The CEO and the top executive
design, do not be tempted by committee should be actively
complex solutions. Try the simple ones involved in the design and
first. If, for example, certain organiza- implementation of the new Care must taken to set
tional aspects of the merger should be organization. Proactive and visible demanding—yet adequate—
implemented in stages, limit the number leadership is a critical component of project deadlines. Organization
of stages to keep the progression clear all merger-related activities. design is a labor intensive, time-
and to minimize work disruption through consuming task. Management
careful communications. must gather data, perform analysis,
The new organizational structure and review the alternatives.
Nothing is permanent. Build some should set clear targets and reward Nonetheless, it is in the interest
flexibility into the design to individual managers and teams of all stakeholders to get the job
accommodate change. accordingly. done as quickly as possible.
Organization culture
What are the attributes of the desired culture of the new company?
Is it consistent with the business strategy? Will it strengthen
employee motivation? Which norms, values, and informal
communication patterns are most desirable?
The CEO may take on additional roles if he or she feels it will bring about
a successful integration. For example, the chairman and CEO of Chase
Manhattan Bank sought to focus employees on a vision of the new company
and to promote a spirit of collaboration, so he delegated supervision of the
bank’s merger management structure to a senior vice chairman. On the
other hand, the CEO of SmithKline Beecham chose to oversee most of the
major integration activities, such as project-team work plans, internal and
external communications, and recommendations made by the merger
management structure.
Figure 2
Guiding
Principles
Continuing
Senior Corporate Merger
Post-Merger
Executive Management
Integration
Leadership Structure
Activities
Merger
Management
Process
Source: Price Pritchett, with Donald Robinson and Russell Clarkson, After the Merger: The Authoritative Guide for Integration Success (New York: McGraw-Hill,
1997), pp. 124–125.
Still, even after the initial goals have been met, important long-term
activities should be planned and carried out. For the integration is not
complete—and may yet founder—unless these matters receive attention.
They range in scope and importance from ongoing adjustments and struc-
tural alterations; through development of common practices and processes,
team building, and changes in performance management methods; to
cultural transformation.
B
axter International, Inc. (Baxter) operates in a single industry segment.
Focus: A merger integration that It is a global medical products and services leader of technologies
proved difficult from the outset
related to the blood and circulatory system. It has positions in four
and was further hampered by
business: biotechnology, which develops therapies and products in transfusion
inadequate organization design
medicine; cardiovascular medicine, which develops products and provides
work and conflicts of culture and
management style. services to treat late-stage cardiovascular disease; renal therapy, which
develops products and services to improve therapies to fight kidney disease;
and intravenous systems/international distribution, which develops
technologies and systems to improve intravenous medication delivery
and distributes medical products.
In 1997, the company’s revenues totaled $6.1 billion, more than half of which
was generated outside the United States, and it employed 37,000 individuals.
Baxter is headquarted in Deerfield, Illinois.
In 1985, Baxter acquired American Hospital Supply (AHS), which had been a
Baxter distributor from 1932 to 1962. The merger made Baxter the world’s
largest hospital supply company, offering more than 120,000 products and an
electronic order-entry system that connected customers with approximately
1,500 vendors. The post-merger integration was fraught with difficulty due to a
hostile takeover and a history of the two companies as rivals. This had ramifica-
tions for some individual employees. In the words of one executive, “Some
senior sales representatives asked me, ‘How in the world am I supposed to work
with somebody who may have slashed my tires in a parking lot twenty years
ago?’” The executive concluded that perhaps the hostility of the two companies
affected the way the merger was handled. The operating philosophies of the two
companies differed as well: Historically, Baxter was managed in a centralized
manner with strong vertical functional ties, and a technology-manufacturing-
innovation orientation, whereas AHS decentralized authority to its self-con-
tained divisions and was customer-driven and people-oriented.
Guiding Principles9
l The organization will be based on doing what is best for the business.
A key early objective, however, was to merge the two corporate staffs. A formal
design process to accomplish consolidation comprised the following actions:
prepare mission statements; identify the various functions and subfunctions;
designate the programs and systems required for support; evaluate a centralized
versus a decentralized approach to managing each function; determine the
resources needed to accomplish each function’s mission; create an organization
structure; select the best people to staff each position regardless of company
affiliation; and implement the new organization.
The staffing process used a “candidate slate” approach. The process, which
began two months before the merger officially closed, gave the Top
Planning and monitoring Strategic goals and plans for hospital Selected group organization plan
company and scientific products Alternate site
Operational budgets with synergies—
International
$ and headcount Hospital sales force(s)—role and
Canada
structure
Cash management
Management processes and procedures
Physical distribution consolidation
Five-year strategic planning
Management development and
Portfolio analysis Manufacturing process audit and
team building
Financial targets with consolidation plans
synergies Facilities planning for northern Illinois
RA/QA policies, procedures, and
Travenol hospital partnership program organization plan
Source: Thomas G. Cody, Strategy of a Megamerger: An Insider’s Account of the Baxter Travenol—American Hospital Supply Combination (Westport, CT:
Praeger, 1992), pp. 138–139.
For an overview of all important pre- and post-merger activities, see the box
“Baxter’s Merger Action Plans: First and Second Phases.”
On July 15, 1985, the boards of Baxter and AHS agreed to terms, and on
November 25 the merger became official. Within that four-month period,
management had designed a new organization, chosen the top 20 officers, and
In June 1988, the four operating groups were again reduced to two in order to
improve customer interface and global product profitability and technology.
Two years later, the firm eliminated its alternative site healthcare business.
The end came on September 30, 1996, when Baxter spun off its multibillion
dollar cost management and hospital supply business as an independent
company, Allegiance Corporation.
It may be a mistake, at least in this type of merger, to place too much emphasis
on staff, overhead, and “headcount” synergies as opposed to sales, distribution,
and product-line synergies ….
Getting from strategy to structure is clearly the most difficult step in the mega-
merger ….We need to learn a lot more about designing organizations to withstand
the stresses and strains of a major merger…one specific kind of stress during the
early, critical days of the merger combination and then a different kind as the new
organization goes forward from there.
T
he Chase Manhattan Corporation (Chase) was formed on March 31, 1996,
Focus: An exceptionally well-planned when the former Chase Manhattan Corporation merged with Chemical
and controlled operation. Executives
Banking Corporation (Chemical). Headquartered in New York City,
overseeing the merger drew on the
Chase has more than 70,000 employees and offices in 39 states and 49
company’s previous experience of
countries. With $366 billion in assets, it is one of the largest bank holding
organizational integration.
companies in the United States. The company’s operations are organized into
three major business franchises: the Global Bank, National Consumer Services,
and Chase Technology Solutions (which includes Global Services).
Guiding Principles
Figure 3
Executive Oversight
Transition Committee
(Office of the Chairman)
Business Area
Coordinators
Functional Area
Merger Office
Coordinators
Business Unit
Liaisons
Merger Planning,
Integration, and
Reporting
The charter of the Merger Office was made up of the following goals: to
develop and implement an overall management integration framework; create
its procedures; conduct activity reviews; establish planning coordination,
tracking, and reporting mechanisms; handle dispute resolution; and undertake
control and risk management activities. In addition, the Merger Office created a
common integration language, and was the corporate nerve center for communi-
cating the merger’s status to stakeholders. A core group of executives in the
Merger Office met for a month prior to the merger announcement to prepare
the merger process and protocols for presentation to the Transition Committee
at its first meeting.
Figure 4 The foundation for the entire Chase merger integration process rested on three
elements: a Merger Overview Model, a Technology Integration Model, and
Integration Management Financial Management Metrics and Tools (see Figure 4).
Management announced at the outset that the new company would take a $1.9
billion restructuring charge, and would save $1.75 billion as a result of the
merger. Hence, Financial Management Metrics and Tools were created to
forge explicit linkages between integration events and financial outcomes. The
Merger Office worked with each line of business to calibrate its restructuring
charges and savings targets. The businesses were asked to develop a detailed
master plan that showed the source of savings (e.g., systems and technology,
facilities closure) and restructuring charges (e.g., reductions in workforce) on an
event-by-event basis. The Merger Office approved the plans and ensured that
the savings and reserve commitments were tracked.
operating environment. The Merger Office built the TIM according to the
events captured in the MOM for risk management and successful execution.
Thus, when it was prepared, the TIM provided the road map for systems and
operations integration.
In merging the technology systems, a decision was made at the outset to incor-
porate the best application suite already in use by either merger partner. Thus, in
the case of the mortgage business, an application suite from Chemical Bank was
used to provide systems support for the entire flow of business processes from
mortgage origination at the front end to mortgage servicing at the back end.
This approach, which worked very well for the Merger Office in terms of
saving time, resources, and money, is further outlined in Exhibit 1.
It should be noted that a key enabler of the entire merger integration exercise
was the human resources plan and its execution. In fact, a senior executive
stated that human resources and leveraging technology systems were the two
most important pieces in the merger process. Human resources–related aspects
of mergers will be addressed in a forthcoming Conference Board report.
According to the plan, merger events were sequenced mainly over a three-year
period. A high concentration of events—72 percent—took place in the first
year, while 15 percent, 12 percent, and 1 percent were scheduled in the follow-
ing years. Some of these were quite important to the success of the new Chase.
For example, a number of complex systems and operations events took place
in the second and third years under the direction of a vice chairman.
Senior Chase management states that the key requirements for successfully
merging two large and complex organizations are:
K
raft Foods, Inc. (Kraft) is the largest processor and marketer of retail
Focus: A cautious, slow-moving packaged food in the United States. Its businesses include: frozen pizza,
merger in which streamlining
meals, beverages, ready-to-eat cereals, desserts and snacks, cheese,
business operations, eliminating
packaged meats, coffees, and enhancers (e.g., salad dressings and mayonnaise).
duplicate functions, and increasing
Its subsidiary, Kraft Foods International, Inc., markets coffee, confectionery,
overall effectiveness of the business
took more than six years. and grocery products in Europe and the Asia-Pacific region. Headquartered in
Northfield, Illinois, Kraft’s revenues for 1997 totaled $27.7 billion.
In November 1985, Philip Morris acquired General Foods Corporation (GF) for
$5.75 billion. GF sold products under such brand names as Bird’s Eye, Crystal
Light, Entenmanns, Jell-O, Kool-Aid, Maxwell House, and Oscar Mayer, and
had revenues of $9 billion in 1985.
Three years later, on December 7, 1988, Philip Morris acquired Kraft, Inc., the
United States’s largest independent food company, for $12.9 billion. At the
time, it was the second-largest takeover in history. Kraft’s product lines
included Velveeta cheese spread, Parkay margarine, Miracle Whip salad dress-
ing, Breyers’ ice cream, and Philadelphia Brand cream cheese. Kraft’s chairman
and CEO was promptly named Chairman and CEO of Kraft and General Foods,
as well as vice chairman of Philip Morris. Another Kraft executive was named
president and COO of the two companies. These executives were given the task
of overseeing the integration of Kraft and General Foods.
Guiding Principles
allow a single policy for dealing with retailers and other con-
stituencies on issues such as slotting allowances, trade terms,
and food regulations.”14
l The best person from either company will be placed in each job.
The new chairman and CEO of KGF formed a Merger Committee to recom-
mend how the integration should proceed. In addition to himself and the presi-
dent and COO, the committee members included the Kraft CFO, as well as the
vice presidents of strategy from both companies. Note there was no member
from Philip Morris.
The chairman and CEO and the president and COO—in consultation with the
head of Philip Morris—then appointed the heads of the operating divisions as
well as corporate staff functions. The seven divisional heads and staff officers
formed an Operating Committee that focused on interdivisional matters.
The Merger Committee identified four areas where synergies between the two
firms could be achieved: purchasing, international operations, manufacturing
and distribution, and research and technology. These were examined and imple-
mented by Functional Councils and monitored through an accounting system
that tracked synergies.
The committee also commissioned the following four task forces, which, with
the assistance of external consultants, were to explore certain integration
matters that had not yet been resolved.
Finally, in January 1995, Philip Morris announced it would merge KGF into
Kraft Foods, Inc. The organization, made up of 12 divisions, sought to further
streamline operations, eliminate duplicate functions, and increase the overall
effectiveness of the business. Headquarters were relocated to Northfield,
Illinois.
The president and COO felt that the integration should have proceeded more
rapidly, stating: “We picked the lower fruit first and left the higher fruit for last.
The only question is: Could we have picked the higher fruit earlier if we had
been more aggressive?”15
S
mithKline Beecham (SB) is one of the largest healthcare companies in
Focus: A well-managed integration the world. SB develops, manufactures, and markets pharmaceuticals,
characterized by strong CEO vaccines, over-the-counter medicines, and health-related consumer
involvement and change manage- products. It also provides healthcare services, including disease management,
ment initiatives that sought to
clinical laboratory testing, and pharmaceutical benefit management. With
transform two separate companies
headquarters in London, SB has manufacturing facilities in 31 countries and
into a new corporation with a
singular strategic vision.
sells its products worldwide. The firm’s 1997 revenues were $12.8 billion,
and it employed 55,400 individuals.
Guiding Principles
l Businesses that do not fit the strategic concept of the new company
will be sold.
The day after the merger was formalized, a seven-member Merger Management
Committee (MMC) was announced. Chaired by the CEO, representation on the
MMC was spilt between executives of the two former companies. Its role was
to provide guidance, philosophy, and strategy; obtain recommendations; and
make decisions—“but not to do it all.”17 The MMC was a subset of the
Executive Management Committee (EMC), whose membership comprised the
chairman, CEO, CFO, head of planning, head of human resources, corporate
secretary, head of pharmaceuticals, head of consumer brands, the regional head
of Europe, and the regional head of the United States. Again, representation on
the EMC was split evenly between the two merger partners.
McKinsey & Company, a management consulting firm, was engaged for six
months to provide best-practice advice, analytical and problem-solving skills,
and relevant industry data.
The MMC created eight Planning Teams to explore areas critical to realizing
business opportunities and cost savings. The teams fell into four categories:
self-contained, such as sector management; global resource, such as manufac-
turing; business support, such as information systems; and potential areas for
shared resources.
Task Forces, with memberships from the two prior companies, developed spe-
cific guidelines for how the two organizations would integrate. They prepared
criteria for retaining or closing locations, approaches to identifying leaders for
the new company, and policies covering separations.
When the MMC reviewed the formal plans prepared by the Project Teams and
Task Forces, four points were considered: implementation activities would not
simply combine two former units but would lead to the creation of a new and
better company; the guidelines had been observed; coordination between teams
had taken place; and the financial targets would be met or exceeded.
The MMC created a vision statement that explained the purpose of the merger,
the goal of the new company, and its long-term aspirations. SB’s chairman took
on the preparation of an initial draft of the document. Subsequently, the MMC
created guidelines listing how the new company would deliver against the
The MMC decided on the following three key aspects of the new company:
Structure. Each of four business sectors would be divided into major geographi-
cal regions. Each regional headquarters and country operation would have its
own dedicated line and staff units. As the structure required delegation of
authority to the lowest possible level, the country would be the primary profit
center. No more than six layers of management would separate the CEO from
each employee. Certain functions would have global responsibilities, such as
R&D, IT, and a few components of manufacturing. Organization complexity in
the form of matrix management and committees would be eliminated to the
greatest extent possible.
Staff resources. These would focus on adding value. They would not review
line management activities or have sign-off authorities. The concept was to
minimize the costs of a corporate bureaucracy, as well as to eliminate exces-
sive reviews, meetings, and paperwork.
The MMC decided to complete all integration plans in six months, and then
to achieve the integration within one year of shareowner approval. These
aggressive milestones would create a sense of urgency and also maintain the
momentum for change.
The CEO allocated most of his time to managing the merger integration.
He approved the work plans of every Area and Functional Project Team.
He reviewed every MMC recommendation. He also oversaw all internal and
external communications.
The next major process issue dealt with the new company culture. A consultant,
Dr. Warner Burke, was hired to address culture, individual needs, values, lead-
ership, etc. The EMC agreed on five core company values: performance, inno-
vation, customer-orientation, retaining excellent employees, and integrity.
Working with Dr. Burke, they developed a plan to operationalize these values
through the creation of a set of leadership practices. Rules for corporate and for
each business sector were devised to change the organizational culture.
Corporate was to provide support through human resources, performance man-
agement systems, communications, and recognition programs. The role of each
sector was to introduce the cultural initiative, devise ways to make it opera-
The lack of an integrated information system meant that as the businesses were
merged, there was no way to keep track of important operating data. Thus,
senior management did not know how the businesses were performing nor were
they able to learn at any specific point in time the status of the merger imple-
mentation. “Bringing the two information systems together should have been
given higher priority in the integration planning process.”18
Individuals involved in the Project Teams were selected on the basis of their
expertise in an area or function rather than their ability to manage—or even
work as part of—a team. Since these teams were important to the success of the
integration process, members should have been trained in team skills.
And finally, certain external stakeholders, particularly the financial and stock
analyst community, were not given adequate information regarding the goals
or ongoing status of the merger integration. Therefore, errors were made in
evaluating the new company’s progress in its early stages.
2 Kenneth W. Smith and Susan E. Hershman, “Making Mergers Work For Profitable
Growth: The Importance of Pre-Deal Planning About Post-Deal Management,”
Mercer Management Consulting, June 1997, p. 7.
4 There are many degrees of integration, ranging from little or none when an
acquisition is left to operate as a stand-alone unit, to a full integration when two
companies merge to create a new entity. The latter, the most demanding form of
merger, is the subject of this handbook. Nonetheless, principles discussed herein
may be applied in many instances of partial integration.
8 The initial work in these two phases focuses on defining an ideal structure. In its
early stages, the design does not account for influences such as personalities,
established relationships, tradition, etc.