Send
in the steamrollers: That was the obvious solution to a parking
shortage that Milwaukee's Brady Corp. had to address at Thailand's
Technology Print Supplies Ltd. soon after acquiring the small but
fast-growing company in July. There was a vacant field on the property,
recalls Tom Walton, the corporate development director at Brady who led
the deal; a newly installed local manager proposed paving it to keep
traffic, and TPS, moving.
Brady, which had $816 million in sales in its fiscal 2005, makes
"identification solutions" like signs, software, high-performance
labels and precision die-cut parts for electronics components. The
company has pursued a global expansion strategy in recent years,
following its multinational customers as they move plants overseas and
demand local suppliers. The TPS deal was one of eight transactions it
closed in its last two fiscal years but its first in Thailand, Asia's
second-largest maker of hard drives.
The growth of TPS and other new subsidiaries is key to Brady's own
ambitious growth plans, so the rationale for quickly adding the parking
capacity at the facility in Laem Chabang, 90 miles south of Bangkok,
was a strong one. But as it turned out, there was an even stronger
argument for finding another solution. In the course of TPS' eight-year
history, the seemingly underutilized lot had become a makeshift soccer
field for many of TPS' 160 employees. So the games continue --
reflecting some important precepts that Brady has learned to apply in
its acquisition program. "People are the business," says Walton. "If
there are unique things they do to retain the culture of the business,
we respect that. We don't try to arbitrarily put them into a mold
that's exactly like us."
Thousands of miles from Laem Chabang, in Las Vegas, another merger
that closed last summer was also raising cultural issues -- albeit on a
larger scale. This was the acquisition of Caesars Entertainment Inc. by
Harrah's Entertainment Inc. in a deal valued at $9.4 billion. The deal,
which had come together quickly, was by far the largest that Harrah's
had ever done, and it represented a major demographic leap for the
company.
Long known as the workingman's slot parlor, Harrah's had absorbed
previous acquisitions into its distinctive, data-driven, mass-market
corporate culture -- "like the Borg on Star Trek," one writer noted.
Customers visiting its 28 casinos around the U.S. could count on
virtually identical experiences, like latte drinkers at Starbucks.
Caesars, by contrast, is the home of the high rollers, known for
glamorous but less-profitable table games and distinctive, luxurious
casinos in Las Vegas and elsewhere around the world. A lot of industry
observers wondered how the two would be combined. So, it turned out,
did John Boushy, the veteran Harrah's executive whom CEO Gary Loveman
charged with integrating Caesars into Harrah's. Boushy was struck by
the sheer size and speed of the deal. "You've heard the old adage about
the dog that chased a bus and caught it?" he asks. "Now what do we do
with it?"
Harrah's answer to that wry question is a multibrand strategy that
on one level seems far removed from the nuts-and-bolts decisions Brady
Corp. makes as it buys up small firms around the world. Still, Harrah's
and Brady have something fundamental in common: Each is finding ways to
deal with the significant yet hard-to-track role that corporate culture
plays in any attempt to combine two organizations. Walton, for one, has
no doubt about the impact of culture. "If you don't share Brady's
cultural values, you can't work here. It's just not productive," he
says. A great many dealmakers would apply the sentiment to their own
companies. But at least until recently, not many have known what to do
about it.
The problems start with the haziness of the concept. Just what is
corporate culture? According to the godfather of its academic study,
MIT Sloan School of Management emeritus professor Edgar Schein, it is
an underlying pattern of shared assumptions. To an organization, Schein
writes, culture is what personality or character is to an individual
(see box). In 1982, Terrence Deal, now a professor at the University of
Southern California, and Allan A. Kennedy, a Boston-based management
consultant, gave us a breezier definition: It's the way things get done
around here.
Even after you've settled on a definition, diagnosing an
organization's culture isn't easy -- especially early in the deal
process. As Brady's Walton says, the questions that uncover culture --
about risk tolerance, decision-making speed, teamwork, information
sharing, competition, rewards and power -- don't typically appear on
due diligence lists.
At Brady, however, questions about these attributes now do appear in
a guidebook for integration managers. And the advent of such diagnostic
tools, together with a growing awareness of the importance of culture
gaps to a deal's value drivers, are helping to firm up this soft
science. Walt Shill, a Reston, Va.-based organization strategy
executive at Accenture, says, "We're seeing a really renewed interest
in the question: How do we get organizations to work together?" The
discussion used to be dominated by questions about combining things
like IT systems and payrolls, says Shill, who worked with Harrah's
Boushy to integrate Caesars. "Five years ago, I never saw the terms
change management or cultural assessment or cultural integration. Now I
see them all the time."
It isn't that dealmakers have suddenly decided culture is everything
in an acquisition. As veteran acquirer Paul Clark, executive vice
president of $10.5 billion Ohio bank holding company National City
Corp., says, "I don't buy [the idea that deals fall apart due to poor
cultural fit]. I think that deals fall apart because a company paid too
much for a good company or they bought a bad company." In his book
"Deals from Hell," University of Virginia Darden Graduate School of
Business Administration dean Robert F. Bruner sums up the real
significance of culture in transactions as well as anyone has. "Large
cultural difference," he argues, "is an amplifier of several of the
drivers of failure. ... It creates a tin ear for danger; it heightens
the complexity of decision processes; and it may introduce cognitive
biases, management choices and operational practices that are
inappropriate for the situation of the merger." Similarly, there's a
strong case to be made that a good cultural fit amplifies success. "I
always think you can make a deal work financially," says Clark, who is
also president of National City Bank of Northern Ohio. "But if you get
the culture right, you can get to that future state, that vision of why
you came together to begin with, faster and a lot easier."
The evidence for both phenomena is familiar to most observers of the
M&A world. On the downside, for example, there's Sony Corp.'s
disastrous $6 billion acquisition in 1989 of Columbia Pictures, which
foundered partly because of the vast gap between Sony's
engineering-derived mindset and the freewheeling milieu of Hollywood --
exacerbated, of course, by the ethnographic differences between the
Japanese owners and their American managers. On the upside, there's
Unilever plc's $326 million acquisition in 2000 of Ben & Jerry's,
the socially conscious ice cream maker. Unilever integrated Ben &
Jerry's into its global distribution chain, but in many ways attempted
to preserve Ben & Jerry's independence, allowing the subsidiary to
maintain its left-wing political stance and its sharply delineated
brand. Ben & Jerry's has grown well since the deal, one of the
bright spots in Unilever's ice cream and frozen foods business, which
overall was down 3.4% from 2003 to 2004.
Tom Walton had good reasons, then, for taking that makeshift soccer
field at Laem Chabang seriously. In fact, Brady has learned a lot about
cultural details and how they fit into integration plans since 1998, as
his company has acquired some 30 companies in Europe, South America,
the U.S. and Asia. "It sounds trite," Walton says, "but it is the
attention to detail that keeps people motivated. You don't want to
change the social structure and the dynamics of the organization."
But how to identify companies whose cultures will mesh with Brady's?
Like any good corporate development executive, Walton searches for
organizations that meet Brady's strategic goals -- companies in
specific geographic markets that offer products complementary to
Brady's 50,000-item portfolio, as well as organizations that provide
manufacturing capabilities in key locations. But Walton and his
colleagues -- three directors in Asia, one in Europe and two others in
the U.S., along with Walton's boss, vice president of corporate and
business development Dan Johnson -- won't do deals with businesses that
don't share Brady's clearly defined values: teamwork, customer focus,
growth, value and, especially, honesty. To learn as much as possible
about how a company operates, Walton may cultivate a target for more
than a year before closing a deal, using all the traditional means --
dinner, meetings, coffee.
Cultural issues get a more formal place on the agenda once a letter
of intent is signed and due diligence begins. A Brady due diligence
team includes Walton or another corporate development officer, and
members from HR, finance, IT, operations, sales and marketing, R&D,
and environmental health and safety, as appropriate. Last year, Brady
started including a designated integration manager on each due
diligence team, matching the manager's expertise to the target's market
and geography. It's the integration manager who takes the lead on
cultural assessment, using tools and expertise Brady has developed on
its own as well as by working with consultants.
In TPS' case, Cheng Huang Lim, Brady's former head of finance for
Southeast Asia, received the plum integration assignment. His
preparation included training in organization design and in ways to
understand culture: How does the company recognize its employees'
efforts? How do employees feel about admitting to mistakes? Is their
communication open or guarded, polite or confrontational? Taking into
account ethnic differences, the manager completes a standardized
"Cultural Gap Assessment" that Brady includes with other checklists and
templates in its "Integration Manager Field Guide." Among other
exercises, the cultural assessment asks the manager to compare the
target with Brady in 23 different particulars, such as "service
standards" and "industrial discipline."
The initial culture gap analysis, produced during due diligence,
continues to be refined during early integration. "We could acquire a
company that has been accustomed to a command-and-control style of
management. That's not Brady's culture," says Caryn Addante, an HR
manager. "We learned from experience that you have to understand the
culture in order to make changes happen. If it's command and control,
you can't give employees a broad vision and say, 'Go make this happen,'
because they've always been told what to do and how to do it."
Brady managers feel they've honed their acquisition and integration
process down to a science: Acquisitions added 13% to Brady's revenue
growth last year alone, in contrast to organic sales growth of 6%.
Of course, as John Boushy can attest, it's not always possible to do
much cultural analysis before a deal. In mid-2004, casino organizations
were making deals as frantically as their customers were rolling dice.
Only a few days after Harrah's competitor MGM Mirage announced its
intention to acquire Mandalay Resort Group (see Corporate Dealmaker,
Winter 2004), Caesars CEO Stephen Bollenbach called Harrah's Loveman to
pursue a potential merger. Loveman believed that the industry would
wind up with two giants -- and he wanted Harrah's to be one of them. It
took Loveman and Bollenbach less than six weeks to reach an agreement.
As Boushy would say later, "Acquiring Caesars allowed us to extend
our relationship with millions of additional customers across the
U.S. ... It was a very sound strategic move."
But hardly a simple one. The two companies couldn't have been more
unlike each other. Bill Harrah had founded his company with a single
bingo parlor in Reno in 1937. Over the years, the business had grown to
be one of the most technologically sophisticated in the industry --
thanks in part to the efforts of Boushy himself, who was once Harrah's
CIO. It was Boushy who pioneered the company's wildly successful
customer relationship management program, the industry's first national
customer database. Total Rewards, as the program is now known, played
the starring role in Harrah's quantitative, performance-management
culture.
Former CEO Phil Satre, with Boushy's help, built a rigorous
method for continuous improvement, including weekly customer
satisfaction reports, monthly customer surveys of every property and
quarterly rewards for every line level and supervisory employee for
driving improved customer satisfaction. Former Harvard Business School
professor Loveman was the perfect person to reinforce this
metrics-driven culture. Satre tapped him as COO in 1998, and he became
CEO in 2003. Harrah's flourished: On fiscal year 2004 sales of $4.5
billion, its income from operations was $791 million.
Caesars wasn't so different in scale ($622 million in income from
operations on $4.2 billion in 2004 sales), but other similarities were
hard to find. Caesars had had three owners in 10 years, and it was
really a handful of companies that had been consolidated, but not
integrated, as they were acquired. Property managers operated
autonomously. "Even casinos that had run next to each other in Las
Vegas or Atlantic City didn't connect," says Accenture's Walt Shill.
Even so, Caesars had much of what Harrah's didn't: resorts like the
Conrad Brisbane on Australia's Gold Coast, international clientele and
a devotion to food, shopping and entertainment that made Caesars
properties lush tourist attractions. Says Shill: "I've seen very few
mergers that had this big a cultural difference." He pauses. "But I've
never been involved in one that put this much effort, structure and
measurements around merging the cultures."
John Boushy's record made him a strong choice to lead the
integration. But he was preparing for retirement when Loveman asked him
to take on the task about two weeks before announcing the merger.
Boushy took some time to consider the request. "Because the deal came
together so quickly, no one had even conceptualized a high-level
strategy around what the integration would look like or what we needed
to do," Boushy says. "I wanted to paint a picture for Gary of what that
would look like."
Harrah's had never put a single executive in charge of integrating
an acquisition before. Instead, functional managers had handled the
details, integrating the relevant piece of the target into their
operations while continuing to do their day jobs. For the most part, it
had worked. But not always: The integration of the Rio Hotel &
Casino, a smaller Las Vegas casino that Harrah's purchased for nearly
$1 billion in stock in January 1999, was marked by missteps. The Rio
was focused on very high-limit players, who would gamble $50,000 to
$100,000 on a single bet. Under Harrah's ownership, those high-limit
players were unprofitable; ultimately, the company scaled back the
limits.
Clearly, the huge Caesars acquisition would require a different
approach, starting with a dedicated team. Ultimately that team would
include 80 people drawn both from within Harrah's and from consulting
firms. "As I looked at this," Boushy says, "I thought the thing that
would be incredibly cool was that this would transform our company, and
if we did it well, it would be a platform for global growth." He
rescinded his retirement plans and took on the job.
He also hired Accenture to help him draw up the post-merger
integration plan and figure out how he should deal with the people side
of the equation. Each company had almost 50,000 employees. No massive
layoffs were planned after the deal closed. But the team would
undertake what Boushy calls a "talent discovery approach" that allowed
Harrah's to learn about Caesars execs and vice versa and that gave the
Caesars people a chance to opt in or out.
With Shill's help, Boushy also undertook a cultural assessment of
Harrah's and Caesars. In January 2005, the duo oversaw a Web-based
survey that pulled in responses from 10,000 employees of both companies
at supervisory level and above. The survey, created by a boutique firm
called Hagberg Consulting Group in San Mateo, Calif., is designed to
uncover conscious and unconscious assumptions that drive daily
behavior; it compares the survey scores against the mean results of its
database of 300 company responses. The results surprised Boushy. "We
were driven by the desire to understand the differences," he says. "As
the results came back, we became interested in the similarities."
They were significant. Harrah's focus on customer loyalty is the
lynchpin of its growth strategy. And even though the Caesars CRM
program was, by Boushy's estimate, three to five years behind Harrah's,
its employees also put an above-average premium on customer service --
a common philosophy upon which Boushy could imagine building a solid
company.
Caesars' employees also wanted to achieve Harrah's level of
continuous improvement. They had long desired to share best practices
between properties, but because they operated independently, they
hadn't had any structured methods for doing so. The assessment gave
Boushy something he could seize on: a way to drive Harrah's methodology
for improving customer satisfaction deep into the Caesars employee base.
To build on Caesars' strengths would require that Harrah's leaders
consider the merged company a collection of brands -- a fundamental
alteration of Harrah's formerly homogeneous culture. That new
perception spurred strategic changes. For instance, rather than
transforming Caesars' table game facilities into slot palaces, as
industry observers expected, Harrah's actually added tables. "It is
significant that we are managing brands based on their strengths," says
Boushy. At the same time, Boushy planned to add Total Rewards to the
Caesars properties, bringing all customer information under one
centralized system and giving customers incentives to visit multiple
properties -- including, for example, new Caesars resorts planned for
London and Singapore.
That strategic move might seem a straightforward IT and marketing
matter -- but in fact it holds fundamental cultural ramifications for
people who have for years guarded company secrets. "The two companies
were competitors," says Boushy. "On a day-to-day basis, we'd been
trying to steal their customers, and they'd been trying to steal ours."
Today, Harrah's is almost finished with the hard-wired portions of
the integration. Not surprisingly, it's taking longer to "inculcate the
various practices that we're learning from Caesars throughout Harrah's
and vice versa," says Boushy. Still, the financial results to date look
good: Revenue for the third quarter of 2005, the first that included a
full contribution from Caesars, was $2.3 billion, up 78.2% from
third-quarter 2004, despite the temporary closure of four casinos in
Louisiana and Mississippi caused by hurricanes Katrina and Rita. Net
income was up 42.3% from the 2004 third quarter, to $169 million, which
Harrah's calls a "record." But less than a year after the deal closed,
it's early days to predict long-term success. In April, Boushy will
conduct a follow-up cultural assessment -- in Harrah's fashion, to
track performance. As he and his team continue with the transformation
not simply of Caesars' culture but of Harrah's, Boushy is leaving
nothing to chance.
Back in Milwaukee, Brady Corp.'s acquisition program -- and
its effort to understand and work with cultural differences -- proceeds
apace. In October, the company went on to make its second Thai
acquisition: QDPT (Thailand) Co. Ltd., a $2.3 million maker of
high-precision components for the electronics, medical and automotive
industries. Dealmaker Tom Walton continues to travel extensively in
Asia while still saving some time for meetings of the Milwaukee chapter
of the Association for Corporate Growth, where he's on the board. He
also hopes soon to land a target in China, where he's been scouting for
a number of years without success. So far, he says, the differences in
business practices, values and culture between Milwaukee headquarters
and Chinese targets have just been too large.
Two companies: one a big, flashy service business, the other an
ambitious, medium-sized manufacturer. But they've both made a good
start on quantifying the previously unquantifiable -- and on firming up
the soft science of cultural integration.
A short history of corporate culture
The idea that corporate culture was a phenomenon worthy of study
first raised its head in the late '50s, as books such as "The
Organization Man" and "The Man in the Grey Flannel Suit" began showing
up on bookstore shelves. MIT social psychologist Edgar Schein, the dean
of corporate culture studies, was fascinated by these works. In an
autobiographical essay (see www.edschein.com), he wrote that these
books "criticized the ways in which American companies [were]
indoctrinating [their] new managers, and, thereby, undermining their
creative capacity."
Schein, who had conducted a long study of what happened to
Americans who were taken prisoner in the Korean War, had come up with a
theory of coercive persuasion, a method of transforming behavior
through social influences. He was struck by the similarities between
coercive persuasion and the ways corporations were indoctrinating their
workers. Always interested in the tension between organizations and
individuals, he took up the formal study of what he would come to term
corporate culture. Over decades of speaking and writing (he still is),
he laid out some basic principles: first, that culture is a pattern of
underlying assumptions, both conscious and unconscious. Those patterns
are hard to discern, but they motivate behavior. If managers don't
understand corporate culture, he explains in such books as
"Organizational Culture and Leadership," they will find organizational
change hard, if not impossible to bring about.
In the late '70s and '80s, as Americans watched highly socialized
and highly successful Japanese firms with envy, interest in cultural
change programs grew. While Schein was developing his theories, other
researchers were also exploring the arena. In his 1985 book,
"Understanding Organizations," Irish management guru Charles Handy
pioneered four organizational paradigms: an authoritarian organization,
which he called a "power culture"; a "role culture," which is
bureaucratic; a "task culture," whereby teams are formed to get
something done; and a "person culture," in which the individual is
paramount.
Over the years, hundreds of researchers have worked on practical
applications of ideas about culture. Academics in organizational
design, which studies workflow, the relations between departments and
individuals as well as the grouping of tasks, have dived in. Today,
virtually all of the top management and HR firms have added cultural
integration to their capabilities lists, sometimes under such rubrics
as "change management" or "relationship management." As a theoretical
foundation for their services, these organizations are turning to the
work of academics in social psychology, organizational development and
conflict negotiation -- and to the practical experience of their own
consultants who've come from industry after leading post-merger
integration efforts.
Many integration consultants also offer some form of cultural
assessment. Some charge as much as $15 or $20 per employee for these
employee surveys; others, like Accenture, often throw assessments into
PMI assignments for free. Almost no one conducts formal cultural
assessments during due diligence.
But Accenture organizational development lead Walt Shill expects
that to change, too: "I think five years from now, it'll be standard."
Of course, there are some real practical barriers to making cultural
analysis a more prominent part of the deal process. Many deals must be
done quickly, even opportunistically, and other considerations (price,
for one) can take precedence. When a company is acquiring a competitor,
the complications multiply.
Still, more companies are delving into cultural analysis -- at the
early stages, if possible, and certainly during integration. It's that
important to the ultimate success -- or failure -- of a deal. - Elaine Appleton Grant
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