Successful mergers are the exception to the rule

The first time Jim Wilson was involved with a merger, he was fresh out of college and didn't give it much thought. That was in 1989 when his employer, First Federal of Madison, merged with First Federal of La Crosse.

When First Federal merged with Associated Bank in 2004, Wilson was a vice president and regional mortgage sales manager with a lot more at stake.

"The first merger I had a job with First Federal. The second merger I had a career with First Federal," he said.

Wilson had an active part in the merger, representing the sales force in the mortgage lending part of the business. Like many, he held some trepidations about how the process would work.

"What I was expecting was we were going to sit in a meeting and they were going to say 'This is what we do and this is what we're going to do,'" said Wilson, now a senior vice president and regional director of mortgage lending for Associated Bank.

But that's not how it happened. Instead, Wilson said, Associated Bank officials took the time to examine practices at both banks and use what was best from both.

"As far as mergers go, I would say it's been pretty successful," he said.

But as far as most mergers go, that's not the norm.

Despite the prevalence of mergers and acquisitions in the business world, experts say the practice is far from being a safe bet.

"There are thousands (of mergers and acquisitions) in the country every year," said James Bronson, chairman of the Management Department at UW-Whitewater.

And the ones who do it successfully?

"They're the exceptions," according to Bronson.

People make mistakes

Despite the seemingly impersonal business world and millions of dollars at stake, it's ultimately people making the decisions, and people are prone to mistakes. Even after knowing that other companies have had problems merging, Bronson said business leaders often remain optimistic because they figure they won't experience those problems.

"We all know that people often make bad decisions," he said. "We all like to think that business is rational. Unfortunately, because it involves people, it isn't."

For a merger to make sense, the companies have to be worth more under common ownership than they were separate, but it's hard to make that work, Bronson said.

Robert Sher, a former publishing firm CEO who recently wrote a book on mergers and acquisitions, said when different personalities and cultures are involved, things can get messy quickly.

"It can only take a few bonehead mistakes with people and it's a big hole to dig out," Sher said.

As an example, he noted a deal in which lawyers in California and Arkansas were trying to hammer out merger details. The California man said he hoped the closing venue would be in his state because he didn't want to have to go to Arkansas. That made the Arkansas lawyer mad -- probably flashing to all kinds of anti-Southern bias, Sher said. That comment -- which Sher believes didn't refer to anything more than one man's reluctance to flying partly across the country -- ended up making the venue a huge sticking point.

Communication essential

Sher contends that one of the most important things a company can do to ensure a successful union is to foster good communication even before the merger happens. He said a much higher share of mergers would work if people took the time to do their homework.

For example, if you date a person for three months and then marry, people think it's too soon; if you date for a year, everyone feels more comfortable. He said companies should look at unions like that.

That sometimes means backing away from a deal. Sher said he was familiar with a deal where a 25-person insurance company was looking at buying a 15-person insurance company. The larger company did enough research to realize the smaller company was not as vested in technology and that the two companies' employees and mindset weren't a good fit, so they walked away.

Sher said such research -- getting to know a company's "culture" -- is crucial.

Sher said there are no shortcuts to a successful merger. Meet in person when possible, not just via e-mail. Listen to your intuition, not just spreadsheets, he said.

Talk to everyone

Sher advocates talking to the owner, the owner's spouse, the board of directors, senior management -- and asking the same questions of everyone. Talk to employees, ex-employees, customers, companies with whom they do business, he said. All of this will help one company get a good feel for another, and hopefully see if the two will be a good fit.

"I wish I could say it's an exact process," he said.

Bronson said the difference in cultures is one of the main things businesses entering mergers don't think about enough.

"Good people tend to gravitate to places where they're comfortable," Bronson said. So if a new corporate culture is created and people aren't comfortable there, they're going to leave.

"The new management has to make a conscious decision about what culture they want," Sher said. "If it's not talked about, the CEOs aren't doing their job.

"After the merger, there is one company," he said. "It has to start at the top. What's important is top management has to come together."

"Communicate it over and over again," Sher said. "You have to communicate it until you are bored with it."

Losing good workers

And even in a good scenario, people leave.

After First Federal's merger with Associated Bank, Wilson said the company lost employees who ultimately could have worked well within the new structure.

"There are some very good people who left our organization because they couldn't accept the changes," he said.

Wilson said he was impressed with Associated Bank's willingness to look at each company's strengths and weaknesses and take what was best. The larger entity had to do quite a bit of adapting of its own in some cases. In particular, Wilson spoke of the mortgage lending aspect of the operations, which were quite different.

"What it meant was Associated Bank had to make a lot of changes," he said. "I think they did a really nice job of looking at strengths."

Sher said that's not common.

"There is definitely a bias toward the bigger culture," he said.

Bronson agreed, saying, "Invariably one company is dominant. Mergers are usually about winners and losers."

But mergers also are about having a clear game plan from the beginning and making sure everyone buys into it.

One of the most important tips to successful post merger integration, according to Dan Olszewski, director of the Weinert Center for Entrepreneurship and a faculty associate in Management and Human Resources at UW-Madison, is to have the actual people who are involved in doing the different jobs involved in the process.

"The most common mistake is that companies take too long to decide who is going to be responsible for the different activities and uncertainty continues for too long," he said.

Olszewski also said it's important to create a detailed implementation plan and not to delay.

"Steps not taken in the first year rarely ever happen," Olszewski said.

Savings overestimated

Companies also tend to overestimate their cost savings from a merger, he said.

"Assuming that the companies that are merging are in the same or similar businesses, they will expect to create value by capturing cost savings synergies," Olszewski said, citing improved purchasing power and overhead reduction. However, a recent McKinsey study showed that one-quarter of companies overestimated cost synergies by at least 25 percent.

"So this means capturing cost savings is not a certainty but requires very good implementation," he said.

Businesses tend to be too optimistic about their potential cost savings because there often are two distinctly different parties involved, Sher said.

"The people doing the deal are not the people doing the work," he said. For example, if both companies have accounting departments, someone looking at the merger on paper may say they could just get rid of half the workers. But if some of those workers are specialists and each person can only do so much work, the numbers don't crunch out in real life.

"People tend to jump to it, they want it to look good. They want it to work," Sher said. But that's too often not the case.

Sher said those in charge of a merger should do their best to guess at the cost savings and then add back 25 percent.

If it's barely good enough on paper, then it's probably not a good idea, Sher said. Giving some respect to the "fudge factor," Sher said a deal has to look pretty good to work in real life.

"If it's resoundingly good (on paper), then you should do it," he said, noting the worst case scenario is that the deal is only OK.

Lisa Maddux is a freelance reporter.