Knowing why most mergers fail is one thing; doing something about it is quite another. Just ask the CEO of Acrian.
Knowing why most mergers fail is one thing; doing something about it is quite another. Just ask the CEO of Acrian.
Big-firm megamergers may monopolize the headlines, but smaller companies remain the most active players in the mergers-and-acquisitions game. In 1984, for instance, 80% of all acquirees had revenues of $100 million or less. And while the deals are consummated for a variety of reasons, their ultimate success often turns on management's ability to integrate one company's sense of identity and purpose with another's.
"Most [mergers] don't work," declares Claudio Serafini, president of Serafini Associates, a Silicon Valley-based consulting firm specializing in organizational development and strategic planning. In his 30-year career, Serafini has served as an adviser on numerous mergers and acquisitions. The ones that work best, he says, are "predicated on hiring good people -- and that means Company A has got to be very sensitive that [members of] Company B get treated like they're part of the original team."
One Serafini client who shares that belief is Jack Harris, the 43-year-old chairman and chief executive officer of Acrian Inc., a maker of power amplifier components and subsystems, also based in Silicon Valley. Harris, moreover, has had the opportunity to test his faith in recent years, as Acrian has struggled with the acquisition of a company twice its size.
It all began in 1982, when Acrian was four years old. At the time, it had a solid $8 million in annual revenues, and about 125 employees. Harris was convinced, however, that the company had to grow quickly to the $20-million-a-year level in order to establish credibility in the telecommunications and defense-industry markets. After surveying his options, he decided that Acrian could best achieve this "critical mass" by making an acquisition. He soon settled on a specific target: Communications Transistor Corp. (CTC), a wholly owned, 240-employee subsidiary of Varian Associates Inc.
As it happened, Varian was eager to shed itself of CTC, which had lost $3 million on sales of $12 million in 1982. Harris, for his part, saw CTC as a good buy. Its problems notwithstanding, it had a high profile in overseas markets and a product line that neatly complemented Acrian's at the lower-frequency end of the spectrum. Moreover, it came with some $4 million in receivables, against which Acrian was able to borrow heavily. Thus, for almost no cash up front -- and with substantial tax benefits down the line -- Harris could lift his $8-million-a-year company to the magic mark of $20 million with one stroke of the pen.
By temperament, however, Jack Harris is not strictly a numbers man; more than issues of productivity and liquidity, he brooded about the merger of two very different styles of corporate culture.
"My main objective," he explains today, sitting in his San Jose, Calif., office, "was maintaining [CTC's] sales level while getting rid of [its weaker products]. But that raised the question: why was the company losing money? Is there anything we can do to change their losing attitude and help turn them around? See, at Acrian, we were on our way up; we were used to taking risks. CTC, on the other hand, had become a cautious organization accustomed to preserving the status quo. If you want to put it in sports terms, imagine the mind-set of a 17-0 team meeting one that's 2-17."
Harris faced a formidable task. Even under the best circumstances, he knew, holding on to good employees is a delicate proposition in Silicon Valley, where the "winner" mentality often turns engineers into expensive free agents overnight. Hoping to set a positive tone, he addressed the morale issue directly in several public appearances before the CTCers. Meanwhile, he began to map out a detailed blueprint of the newly merged venture, carefully calculating the number of positions the expanded company would need to fill, and the number of bodies available to fill them.
In planning the transition, Harris was guided in part by his own experience at Fairchild Semiconductor Inc. in the late 1960s. After a period of heavy growth, that company fell on hard times, and the board imported several senior managers from Motorola Inc. to take charge. The new bosses created, according to Harris, "as close to a hostile-takeover situation as I've ever lived through. They came in saying, in effect, 'How can you guys be any good?' It was an overnight change. One day you worked on trust and good feelings, the next day politics and posturing were your keys to success. What happened after that was absolutely predictable. First, communications broke down, then the whole esprit de corps collapsed. Pretty soon, all the movers and shakers had walked out the door -- about 80% of them, as it turned out, to go off and start their own companies."
Determined to avoid such an experience in the Acrian-CTC merger, Harris brought in his old friend and mentor Serafini to help smooth the transition, and announced that his first priority was making sure all the employees at CTC felt fairly treated, whether they stayed with Acrian or not. "We had to work quickly to minimize [their sense of] apprehension," he observes, "but we had to spend enough time on the interview process to make sure we reached the risk-takers and dealt with their feelings of defeat." While he wanted to go into that process with a clear sense of the personnel needs of the expanded company, the goal, he says, was to hold on to the best people CTC had to offer. "We were like a pro [sports] franchise, looking to draft the best available athletes, regardless of position."
Bill Bray, a CTC applications engineer, was one of the earliest draftees. Bray had been part of a core group at CTC struggling to stay motivated in the middle of what was, in his words, "an essentially leaderless situation." He admits now to having heard rumblings about a buyout deal from ex-CTCers who had moved over to Acrian well before the merger.
"Right before the announcement," Bray says, "the rumors were really flying. The worst-case scenario was that everyone would be fired on a Friday, with perhaps a few brought back the next Monday. Or that [Acrian] wanted none of our people or equipment, only our customer base. Morale was low, but it was like we'd already boiled ourselves down into this tight-knit group that was determined to stay on. We had a sense of camaraderie, and it held over through the transition -- which was both good and bad."
The point people in the transition plan were the Acrian managers and Serafini representatives who handled the interviews with CTC employees, including everyone from clerks to vice-presidents. In the process, 160 CTC and Acrian people were let go. That left about 90 of the CTCers who had to be integrated into Acrian. Adapting an idea from General Electric Co., Harris set up a "buddy system," pairing CTC employees with Acrian counterparts of similar background and job description, people who already played the role of teachers within the organization.
"We didn't use it everywhere," he says, "just in a few key areas like manufacturing, marketing, and engineering. Where we tried it, though, the system was pretty effective. It wasn't a case of 'report to us every week' or anything, but the buddies had a lot of direct input" into performance reviews of the new employees.
Mary Kuykendall, a former test supervisor at CTC, remembers the buddy system as being particularly helpful with the technical aspects of her new assignment. "Working with my 'lead' got me into the flow of the company much more quickly," says Kuykendall, who is now a senior planner in production control at Acrian. "But I guess what impressed me most was how open everyone was about the problems around here. Jack and Jim [Huiskens, senior vice-president] were easy to approach, and they passed along information that surprised me. The cooperation on all levels was excellent."
But, for all their efforts and good intentions, Acrian's managers soon began to encounter problems. One involved former CTC customers who, after a five-month honeymoon, started taking out on Acrian their frustrations with CTC products, a situation that put extraordinary pressure on the sales force. Another was a chronic shortage of work space for the new employees. (Harris says they used to joke about hiring the "short shift" -- employees who were "three foot six, so we could fit them on a new mezzanine level.") A third was what Bray calls the "not-invented-here" factor: Acrian workers who belittled anything with the CTC imprint on it, CTCers who reciprocated the sentiment. Through what Bray calls "a short period of friction that seemed to last a long, long time," the two sides worked toward a mutual accommodation.
In the end, however, what most undermined their efforts were events unrelated to the acquisition, and beyond anybody's control. The first was the failure of a $20-million public offering, intended to meet the company's long-term financing needs and reward the loyalty of employees, including the CTC veterans, to whom Harris had given equity participation. Just as he was putting the final touches on the deal, at the end of 1983, the IPO window "slammed shut right on our fingers," he recalls. "We eventually got some money through private financing, but we ended up with a major sense of disappointment in the organization. People started leaving in droves. It was like they were dropping votes in a ballot box on the way out the door, and each vote said 'No."
"The expectations were so high then, and the volume of work so heavy, that I guess there had to be a crash," says Bray. "I dunno, maybe the ones who left had planned on leaving anyway and were just waiting around for the stock offering so they could take something with them. When we didn't go public, [some of the CTCers] wanted to see the failure as Acrian's."
The wave of reaction washed out many of the bridges that had been built during the transition period, and complicated what turned out to be a rough year across the board for Acrian. Although hardly a "troubled" company -- it managed to stay profitable, for instance, which was no mean feat in the Valley circa 1984-85 -- Acrian was squeezing nickels, not roaring ahead as planned. Meanwhile, it had to contend with all the issues faced by any growing company -- questions about its marketing mix and customer base, about the adequacy of its management systems, about its ability to operate smoothly on a larger scale. Late in 1984, Harris brought in another consultant, Murray Silverman, to help cope with such problems. "I didn't come in to 'change the culture' at Acrian, because Jack had already worked on that," says Silverman. "To my mind, the later problems were more a function of the complex technology the company is working on. Engineers aren't always great at communicating with each other, much less the marketing people. But they've made some good progress."
On balance, Harris agrees that most of his original goals for the merger have been realized. Acrian grew swiftly to the $20-million mark and has stayed competitive during difficult times for the industry as a whole. Yes, there was new-employee attrition, but, given both the ethic of the Valley and the inopportune timing of the IPO debacle, much of it was beyond his control. If he could do it again, he says, he would concentrate even more on the people aspect. But didn't he go to heroic lengths on that score the last time?
"Maybe," he answers, "but keep in mind that I was also running a company. And when you do that, you get side-tracked."
Sidetracked on what?
"Oh," he sighs, "I probably focused too much on this order or that factory. Or I made too many things 'untouchables' -- certain manufacturing processes we used, certain sets of products we had. All this stuff cost me some time and some people, and people are what this whole damn thing is about."
Asked to distill the lessons of his experience, Harris smiles. "First," he answers, "go find someone who's been through this before. I don't care what you think you know, talk to somebody who's been there. Second, make the decision early on, should I keep this person or not? If you want him, make him a family member as quickly as possible. Third, maintain your sense of humor -- at all costs. Because sooner or later, I promise you, you're gonna need it."