Merging companies should look to their revenues, not just their costs.
Executives list revenue growth as one of their primary goals in 80 percent of all merger announcements. Yet most of the time, it remains elusive. Merging companies typically focus on integration and cost cutting after the deal and neglect day-to-day business, thereby prompting nervous customers to flee. In one recent merger in the pulp and paper industry, for example, the acquirer was so preoccupied with the details of integration that it reacted sluggishly to a supplier during a routine review—and lost its biggest customer.
Indeed, in the three years following a merger, a mere 12 percent of companies grow more quickly than they had before.1 Most sloths remain sloths, and many solid performers slow down. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. In our experience, coming up short on revenue targets after a merger has far more serious effects on the bottom line than failing to meet planned cost savings. In one merger, we found that offsetting a mere 1 percent decrease in revenue growth would require cost targets to be exceeded by 25 percent to justify the acquisition premium.2 Since nearly half of all mergers fail to achieve even their planned cost savings, it is imperative to maintain revenue growth.
How can executives avoid the revenue slowdown that sinks so many mergers? They should spend as much time winning the hearts and minds of their customers as they do wooing analysts and investors. Companies may use cost savings to justify their mergers, but once the deals are done the best of them focus on securing their customer base before merger turmoil takes its toll. After all, a company can always go back and cut costs, but revenue is fragile, and once customers have gone elsewhere they are very difficult to win back.
The sales force is golden
As the strongest link to customers, the sales force serves as the key messenger for communicating the merger's benefits for them
A company must start quickly to hold onto its customers and keep its revenues flowing. Typically, most top management teams devote the crucial days after the announcement of a merger to working out its legal and operational details. While these tasks obviously can't be ignored, CEOs must also find the time to generate excitement for the merger among frontline employees. As the strongest link to customers, the sales force serves as the key messenger for communicating the merger's benefits: win over the sales force, and the company is on its way to maintaining its customer base. But if you send salespeople a contradictory or unclear message about the positive side of the merger, or if they are distracted by internal considerations, customers are sure to defect.
Successful acquirers thus court salespeople lavishly, offer them significant financial rewards, and set up "war rooms" to help them win the battle for customers. Such companies have a comprehensive internal-communications plan ready to roll the day the deal is announced. Details of the merger are typically explained to the sales force first and to the rest of the company later. Once the front line is fully on board, it can sell the merger to customers effectively.
Make no mistake—the uncertainty generated by a merger creates the perfect environment for competitors to launch an attack. Your best people will get calls for job interviews within days, and your customers will be actively courted. Too many merging companies get caught off guard when competitors mount a powerful response; consider, for example, Commerce Bancorp's "Sink the Fleet" campaigns, which awarded that company's local branch employees a lump sum every time the local branch of a merging competitor closed.
Unless you have a plan to retain your sales force, on the day of the merger announcement you are likely to lose key salespeople and, probably, many of their customers. Such a plan must include a well-orchestrated communications effort, a clear road map for integration, and the right kinds of financial incentives.
Communicate, communicate, communicate
In the hectic days after a merger announcement, executives often pay lip service, and little else, to employee communications. That is a mistake if the goal is to retain customers and increase revenue. As soon as the deal is announced, your employees will want to know whether the merger makes sense and how the company will change. Bad news and gossip travel fast—especially among the sales force—and can paralyze an organization. Yet too frequently, a generic e-mail or a message on the company intranet is all that most employees hear from senior management.
For frontline employees and managers certain to be getting calls from worried customers—and solicitous competitors—the day after the news of a merger breaks, anything less than direct and immediate communication from the CEO is too little and too late. That was the lesson one CEO learned recently after acquiring a semiconductor company. He did visit its field offices, but not quickly enough: when he arrived at one office two weeks after the announcement of the deal, he found that 9 of the 12 salespeople there had already accepted offers from competitors.
To avoid such outcomes, the CEOs of both merging companies should hit the road as soon as the merger is announced to explain it to customer-facing employees. By meeting the sales reps and their managers—above all, those of the acquired company, where uncertainty is greatest—in two or three cities a day, most CEOs can cover all major locations within the first three to seven days after the merger announcement. The goal: to generate enthusiasm, to ensure that the sales force communicates a consistent message to customers, and to allay fears.
CEOs should also allow an hour or more to answer questions directly. Rumors, many of them false, flourish after a merger announcement. During the merger of two industrial enterprises, for instance, the CEO of the acquiring company was surprised to find that the salespeople of the acquired one had heard that its entire corporate headquarters—of which they were a part—was to be dismantled. During the Q&A period, the CEO squashed this rumor, no doubt preventing many key salespeople from dusting off their résumés.
By taking the time to communicate personally and to build frontline support, successful acquirers let the sales force know that it is a crucial part of the company. In addition, they ensure that everyone—from the CEO down to individual sales reps in both the acquired and the acquiring company—sends a consistent, positive message to customers and a strong signal to competitors that the company's customers and staff are not up for grabs.
A clear integration plan
Once the sales reps understand the strategic benefits of the merger, they will want to know how it is going to affect them personally. Will the sales forces of both companies be merged or remain separate? Will some people be let go and, if so, how many? How will accounts be assigned? Will compensation remain the same? Immediately following the merger announcement, the top team must be able to articulate, in a clear way, how and when these decisions will be made.
Whether or not the sales forces will be merged, the first step is to name the new sales manager quickly. In two-thirds of all mergers, the new CEO is chosen before the deal is announced, and the same urgency should be applied to appointing the new sales manager, who will be charged with looking after revenue.
How quickly the details of integration can be worked out depends on the immediate prospects of the merger. In some cases, the decision about whether to unite the sales force organizations can be made early (Exhibit 1), and shareholders and regulatory authorities can be expected to approve the merger quickly (within two months, say). If so, plans to integrate the sales forces can be developed immediately—ideally, even before the merger is announced.
Withholding information prolongs the uncertainty and turmoil that devastate revenue momentum
Managers in this situation should explain the coming changes immediately; withholding information only prolongs the uncertainty and turmoil that devastate revenue momentum. The moment that account information can be shared, the accounts of individual customers should be reassigned. Meanwhile, new compensation policies for the sales force, as well as the principles guiding its interaction with customers, should be devised quickly. The goal is to present a single face to the customer as soon as possible by communicating a simple, unified message about the changes to come.
If merging the sales forces appears to be the right strategic move, don't let the appeal of cost cutting make you overlook more valuable new opportunities to generate revenues from cross-selling, expanding product offerings and services, jointly developing new products, increasing access to the organizations of customers, and the like. Although pruning the staff seems to be easier and surer than working to capture these opportunities, such cuts can seriously damage prospects for growth, since the ability of the company to retain its customers will probably suffer along with the morale of the remaining employees. The elimination of seemingly redundant managers can be costly as well because the victims will probably include some of the most talented salespeople. When sales staff reductions are clearly justified, make them quickly; the remaining people will focus more successfully on retaining the customer base if they are assured of their place in the new organization.
In some cases, either it isn't clear immediately whether to merge the sales forces or a protracted regulatory review or a shareholder battle looms before the merger can be consummated. In this event, integration plans can't be made right away, and the sales staff is left with a great deal of uncertainty. Most companies in this situation do nothing and find that many of their best salespeople head for the doors. To avoid this outcome, prudent managers communicate the status of the merger frequently—even every day—and clearly articulate the guiding principles of the new organization. Salespeople must then reach out to reassure customers. Financial incentives will be particularly important in these circumstances, both to retain the top salespeople and to motivate them to keep their eyes on the company's revenue.
If approval of the merger itself is uncertain, an added difficulty will arise: the two companies may not be able to share information about their sales and customers, because of competitive risks if the deal falls through or explicit regulatory restrictions. In either case, the use of a "clean team" to analyze the shared data can break the information deadlock and allow integration planning to proceed. Although the team's members receive access to all information, they are separated from their organizations and sign legally enforceable contracts to ensure that they will not use or disclose the other company's information if the deal falls through. This process can often eliminate months of integration planning after the deal is finally approved and thus greatly reduces the staff's anxiety.
Particularly when integration plans can't be made quickly, financial incentives may be the CEO's most important tool for retaining and motivating the sales staff during the chaos of a merger. Tie such inducements closely to the most important objectives: retaining key salespeople and customers, encouraging cooperation and the sharing of knowledge with new colleagues, and promoting the cross-selling of each company's products.
Retention bonuses and monetary rewards for maintaining and increasing sales during the transition period should be offered on top of all existing compensation plans, not to replace them. Goals should be easy to understand and clearly attainable. In one high-tech merger, management increased the existing bonus plan by 10 percent for meeting sales targets during the three months after the announcement and threw in an additional 15 percent bonus for exceeding targets during the six months after the close of the deal. Not surprisingly, the company's revenue increased despite the distraction of the merger. This approach not only is good for the bottom line but also creates a lot of positive energy throughout the organization and effectively tells competitors that the company is staying on the ball throughout the integration period.
Interim bonus plans for salespeople can be costly, but they are nonetheless worthwhile when compared with the impact of falling sales. In a recent deal, the acquirer estimated that the interim bonus plan would cost $6 million. However, an estimated 2 to 5 percent of the combined company's revenue—that is, $20 million to $50 million a year—was at stake, so it obviously made sense to err on the side of overpaying sales representatives while the two companies were being merged.
Create a war room
Armed with incentives, an understanding of the merger's aims, and management support, the frontline sales force should naturally reach out positively to individual customers. It is a mistake, however, to expect sales reps on their own to handle all of the inevitable questions from customers and responses from competitors. Unfortunately, that is exactly what happens during most mergers, for many sales managers are too preoccupied with integration issues.
A temporary management structure can help resolve this problem and make it possible to retain more customers. Successful acquirers create a sales war room, or interim leadership group, typically staffed by two to four high-
performing senior salespeople from both companies, along with several junior members to do the legwork. These people are taken off their regular jobs and given a mandate to help the company retain customers and maintain sales levels during the transition period, which typically lasts three months to a year. The war room receives authority to cut through red tape and to make on-the-spot decisions, and it has priority access to senior executives.
Such a group plays a critical role in sustaining the company's revenue. It helps the new sales leadership craft detailed messages about how customers will benefit from the merger and sometimes creates customized sales toolkits for presentations. It acts as a clearinghouse for information about the concerns of customers and the strategies of competitors, and it develops and disseminates appropriate responses. When an important account has a concern, the war room can alert the appropriate executives so that they personally address the issue. It can also dispel confusion about the company's new product and service offerings and develop creative cross-selling tools by leveraging its cross-organizational expertise and market intelligence.
In addition, the war room works with the sales force to identify and monitor accounts at risk, something sales managers often let slide during the chaos of integration (Exhibit 2). It helps sales reps to rank their accounts by profitability (not revenues), to group together accounts that have similar retention problems and can be handled in a similar way, and to flag accounts coming up for renewal (Exhibit 3). For high-priority accounts, it ensures that explicit retention plans are developed. An important part of such a plan is an understanding of what—products, personal attention, service levels—drives the loyalty of particular customers and thus what marketing messages and retention tools to use for them. The members of the war room then meet each week with salespeople to review account status reports.
The key to a successful war room is the way it is staffed—particularly the quality of its leader. A war room filled with marginal people who lack the respect of sales managers is doomed to become just another layer of bureaucracy. Although it will be tempting to keep the best salespeople in the field during a merger, they can actually have a far greater impact on sales in the war room, whose sharp focus and flexibility make it one of the most effective tools for maintaining revenue growth.
Consider the role of the war room during the merger of two chemical companies in the northwest United States. A competitor had made a compelling pitch to the customers of the acquired company by arguing that its service levels would fall because the acquirer had a reputation for providing less service. Combined with an aggressive pricing proposition, that argument helped the competitor win over a group of these customers. The war room heard about this development immediately and soon worked out a counterstrategy. The acquired company declared in writing its commitment to retaining current service levels and had an executive call or meet with customers when necessary. It immediately began offering some of the acquirer's products, which the competitor couldn't match, and created sales materials to discredit the competitor's claims. These changes, rolled out to the whole sales force within two weeks, stopped the competitor in its tracks.
During a financial merger, a sales rep from the acquirer discovered how to bundle the two companies' products in a way that greatly boosted sales volumes. By leveraging the better client contacts of his own company and the back-office services of the one it acquired, he persuaded his customers to shift more of their managed assets to his employer. The war room quickly communicated this strategy to the entire sales force and modified the incentive plan to reward such cross-selling. Since the merger, the bundled product has become a much larger service line than the company first anticipated.
Lost revenue growth is one of the main reasons for the failure of mergers. Competitors attack merging companies and woo their employees while most of these companies are too focused on managing integration to respond effectively. But with a concerted effort to win over customer-facing employees, to ease their transition, and to give them appropriate financial rewards, companies will find that acquisitions can pay off after all.