M&A Integration: An Insider's Look at Dow's Strategy

10 September 2001 00:00  [Source: ICB Americas]

What makes a merger or acquisition successful in our industry? What are the pitfalls to avoid? In the past few years, Dow's performance chemical business group has been involved in four unique acquisitions--Hampshire/Sentrachem, Angus, Union Carbide and Ascot PLC. While each is unique, common themes do run through Dow's approach to acquisition selection and integration. Target Selection CriteriaThe whole M&A process begins with confidential discussions. What is your company looking to buy? Who's willing to sell? How much will it cost? Is it worth it? These are simple questions on the surface, but they require complex analysis and strict criteria from which the company should not waver. Our business group has a team that do nothing but assess the M&A scene, hone the target selection criteria and constantly look for opportunities. Many companies are looked at, but few meet Dow's selection criteria and even fewer are pursued. Dow's overriding requirements are strategic fit and value creation. To determine this, the target company is assessed in several areas, such as strategy and financial measures. Key questions addressed are whether the target is complementary to Dow's business's strategies in technology, geography, business models, market positioning and products. Does it take us in a direction that has been endorsed by our operating board? Will it meet Dow's strict financial performance expectations? And secondly, is the total acquisition price right? Many acquirers in the specialty chemical sector over the past five years paid too much for their acquisitions. Only with the most robust metrics can a company see that before the acquisition. Critical Early DecisionsIn the hours before Dow and Union Carbide signed their merger agreement, the two companies' CEOs agreed on four critical decisions--the combined company's name, who would be the CEO, the headquarters location, and which company's work processes will be used. This set the tone for integration. In fact, every decision about the integration fell out of those four basic tenets. By having these critical issues decided before the deal was even announced, the organization was able to move forward on integration planning without feeling lost or wondering who would be in charge.Integration Techniques: A Three-Track ApproachBeginning with the Union Carbide merger, Dow's integration program was built on three tracks--communications, culture change and training; work process integration; and synergy capture. Throughout this, the cardinal rule was "speed, speed and speed."This three-track approach was developed by looking at what worked and did not in the integration of other acquisitions around the world, including some Dow acquisitions in the 1990s that did not go as smoothly as they could have. Most companies' errors fell into these three categories, so Dow decided to structure our program to bolster these areas and avoid making the same mistakes. Since then, we have successfully used this three-track model for other acquisitions, including Ascot, the poly-urethanes business from EniChem, the Rohm and Haas agricultural chemicals business, Isobord, and Celotex.Track One: Communications, Culture Change, TrainingDow has a rigorous change management methodology that we adapt to each M&A situation. Leadership visibility is one of the most important components of this track. We name our strongest people leaders to integrate our acquisitions. No one can do this kind of work in their spare time, so most of these roles are full time. These leaders become the "face of Dow." For employees being acquired, they become the symbolic personification of the company itself. Communication is critical throughout the process--from the day of announcement, through regulatory review and integration planning, to "day one" when the deal closes, and ongoing. Many companies do only two big splashes-- the announcement and the close--and often invest more energy with the media than with their own people. Dow's M&A communication is focused mainly on employees and customers; the rest is viewed as icing on the cake. Cultural integration also is a key priority. For most deals in our industry, complete integration is the goal as opposed to a financial, leave-it-alone acquisition. Where true integration is the goal, cultural integration is a must. If you try to integrate your processes, systems and product lines, but not your cultures, you set your employees, and maybe your customers, up for confusion and chaos.In Dow's acquisitions, we try to characterize the culture of the acquired company and compare it to our own. Culture can be hard to quantify, but it is critical to understand the acquired company's traditions, style, beliefs, priorities, values and unwritten rules. Whether using a rigorous metric or a more general approach, it is critical to understand how the other companies' leaders and employees will react to various situations. Then a change management program can be designed to help people move through the change curve more quickly. One component of culture of increasing importance is technology. In several of our recent acquisitions, employees were not using an intranet, videoconferencing or any other high-tech communications tools. Since these are a large part of how Dow works and interacts globally, we added these capabilities very quickly into the acquired companies' facilities. For example, standardized workstations with intranet and Microsoft applications, as well as videoconferencing equipment and satellite downlinks, were installed into Angus, Union Carbide and Ascot during their first four months as part of Dow. This enabled the newly acquired company's employees to immediately see the same information as existing employees, demonstrating that they were now as much a part of the company as any Dow site.Designing the Organization The new organization will have a mix of people from the two companies, and it is critical that the new organization be designed successfully with the right people fitting the right roles. An acquisition is a good time to restructure, since everything is up in the air. However, this approach is stressful for people at both companies. In keeping with Dow's value system, these decisions should be made fairly but also quickly so each individual will know his role in the new organization. The key is to have change-adaptable people at all levels and to have strong people leaders in line management roles, preferably who have successfully led major change initiatives. In our most recent acquisition of Ascot, the leader we named to lead the integration had just completed the successful integration of Angus. In our acquisition of Hampshire Chemical, Dow struggled with whom to name in key leadership roles. Initially, we left the leadership team of the acquired company intact, even though they were not in agreement with the integration plan, or even the acquisition itself. In retrospect, we should have immediately gone in and changed the leadership structure, selecting a mix of experienced Dow leaders and change-ready Hampshire leaders. As it was, the unsupportive Hampshire management undermined the early integration effort and created an atmosphere of distrust that took months to overcome.To support employees through this massive change, the company must provide training and support. Of course for departing employees, we provide a competitive severance package and employee assistance program support. For those remaining, we invest significantly in training. For example, during the integration of both Angus and Union Carbide, employees joining Dow spent 10 to 15 percent of their time in training during the first year. Topics included people systems, corporate values and ethics, business strategy, information technology, work processes, and environment, health and safety.Communicating the VisionLeadership must constantly reinforce the company's values and the business strategy. Employees at every level need to understand the business model, customer needs, goals and performance expectations. Depending on the legal constraints, this communication can begin during the waiting period prior to the close. And these messages need to be strongly communicated on "day one" and beyond. At the same time, customers also need to be reassured. This is a great time to reach out to all your customers, typically through a mailing, to let them know of your commitment to them and their industries. Customers want to be reassured that there will be no disruption of service to them during the transition. Also, some may be concerned about doing business with a much larger company. By keeping customers on board during the regulatory review phase, you may be able to avert negative comments they might make to government regulatory bodies. During the Union Carbide merger, each company sent mailings out to all of their customers, including those in businesses unaffected by the merger. We received excellent feedback from customers, who said they appreciated being "in the know."After the acquisition closes is an excellent time to reposition your business within its key markets. Be sure to describe the enhancements in terms of benefits to the customer, not just how it benefits you. Following Dow's acquisition of Ascot, we formed a new business unit that would take advantage of our greater presence in the custom and fine chemicals sector. We also initiated an extensive marketing communications campaign to sustain this positioning and introduce Dow to our new set of customers.Track Two: Work Process Integration It might seem obvious that you need to keep running your day-to-day activities during the integration of a merger or acquisition. But many companies take their eyes off the ball while managing the distractions of an integration. This second program track makes sure you have the systems in place to keep your critical processes going during transition.The first priority here must be maintaining environment, health and safety (EH&S) performance, especially personal safety. Even after the organization is defined, employees often must learn new work processes, so safety training and management of change are critical. Senior leadership must set the tone by making safety a top priority in their messages. During our integration of several recent acquisitions, Dow leaders started and ended every road show presentation and broadcast e-mail with an emphasis on working safely.The second priority of this track is to make sure that product is made, quality standards are met, product is shipped, invoices are sent and bills are paid. Typically this involves running dual systems and work arounds, so teams need to define these work processes and then eventually transition to the combined work process and system. During the Union Carbide merger, our teams identified nearly 100 projects just to handle the transition and integration of our work processes. Dow's approach for work process integration was to move to the Dow work process and IT system wherever possible. Exceptions were made only when the acquired company's work process was significantly better than the Dow process, and the value of the benefit outweighed the cost to train the much larger group of Dow employees. This was not always a popular decision with employees at the acquired company, although when we explained the rational of comparing the training cost versus the benefit, employees in general understood. We did, however, identify a number of best practices from UCC that were incorporated into Dow's work processes. These now become the new existing Dow process and will be the benchmark for future acquisitions such as Ascot.In the case of enterprise resource systems, Dow made a strategic decision several years ago to move all acquisitions to our current SAP R/2 system, even if the acquired company was on SAP R/3. This was based on a rigorous value analysis. Our single global R/2 system has remained a competitive advantage, not only from a productivity standpoint, but also because it enables our e-commerce systems to smoothly interact with one data warehouse.Track Three: Synergy Capture It is undeniable that Wall Street and shareholders want synergies. There are numerous examples where a company's failure to capture synergies resulted in an immediate and dramatic drop in share price. Every acquisition offers some type of cost-reduction and consolidation opportunity. A company that does not seek out and capture these synergies is undermining the future profitability of the acquired business. Cost synergies can come from not only employee reductions, but also facilities consolidation (combining research labs, sales offices, etc.) and supplier consolidation. Synergies also can be found through economies of scale on insurance premiums and information technology consolidation. The flip side of cost synergies is growth synergies. We hear less about these because they are hard to quantify, and they can take years to materialize. One example of a growth synergy is in Dow's biocides business. (sidebar, above). Often employees during a merger or acquisition will want leadership to slow the pace of change so they can adjust and digest. On its face, this seems like a good idea, but it is exactly the wrong thing to do in a merger or acquisition. It is impossible to go too fast in merger integration, when it comes to employees and change management.To maintain the fast pace, we set aggressive timelines for synergy capture, project completion, IT system conversion and notifying employees of their status. Each project has a clear owner who is visibly held accountable for meeting the results and timeline.However, there will be challenges. Some disappointments and problems to expect are outlined below.Ñ

Customer service will be chaotic while working on two systems simultaneously. Even with an aggressive integration plan, it takes a long time to reconcile terms and policies, as well as IT systems.Ñ

Joint ventures and divestitures always take more time and resources than planned. Ñ

Sometimes after the honeymoon is over, you will find that what you acquired is not what you expected it to be--the financials are disappointing, the customer base is not what you had hoped. In these cases, get creative in business strategy and be aggressive on synergy capture. Ñ

Everywhere, people will be stressed and stretched to their limit. If the changes feel uncomfortably fast, it is being done right. Employees will ask to slow down the integration to better handle it better. Do not do it. It just prolongs the pain. Ñ

Some leaders will not be able to adapt to the changes. The best thing is to recognize that they are not working out in that role and act quickly to replace them.Ñ

Leadership needs to invest a huge amount of time in people activities--listen, build teamwork and provide clear strategy and vision. Ñ

Leadership also must make tough decisions quickly; you will never have as much data to base your decision on as you would like. Ñ

Employees will be anxious. Some employees will be angry. Do not take it personally; it's a normal human response to change.In general, expect surprises--both positive and negative. We have completed the full integration of two of our four recent acquisitions, and both are performing profitably. The remaining two acquisitions are on track for full integration within the next year or so.In the end, the acquisition will only be successful if the people involved in the new business make it so. At Dow, we start with addressing employee concerns and build from there to reach out to other stakeholders-- customers, communities and shareholders. The leadership team must recruit, retain, integrate cultures, provide training and support, energize, set the vision, communicate the strategy, listen, inspire and be visible.Andrew Liveris is business group president for performance chemicals at Dow Chemical Company.

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