Done Deal: Now Manage Post-Merger Integration

In mid-2010, U.S. companies outside of the financial services industry were sitting on a $2 trillion mountain of cash that their leaders had been hoarding as a cushion against continued economic turmoil. Holding onto that cash dampened spending and investing worldwide, but such miserly behavior may be changing as more leaders seize the chance to make favorably priced acquisitions and to expand and upgrade facilities.

In the first half of 2010, for example, global merger and acquisition activities totaled $1.2 trillion. By value, 66 percent were all-cash. That’s up from $1.1 trillion in deals a year earlier, when 54 percent were all-cash.

Yet many—perhaps as many as two-thirds—of those deals will fail to achieve the results that dealmakers envision. In 2004, business professor and author Marc J. Epstein noted: “In some mergers, problems with the strategic vision, fit or deal structure stand out in retrospect as fairly obvious causes for relative or absolute failure. Other mergers seem more fundamentally sound, and one cannot help but think they should have succeeded. These mergers are typically victims of a poorly designed and implemented post-merger integration.”

Once a deal is done, no task is more important than managing people effectively in the newly created company. This article describes a merger that lived up to expectations and has important lessons for HR professionals.

The Global Reach

Bupa Australia has now become that nation’s largest privately managed health insurance group. Bupa, originally the British United Provident Association Ltd., Australia, is part of the international Bupa Group, with headquarters in London. Today, this international health care company employs roughly 52,000 people serving more than 10 million members in more than 190 countries. In Australia, Bupa’s 2,375 employees and 30,992 contract health care providers, including 414 hospitals, offer full coverage to Bupa Australia’s 3.2 million members. The company holds roughly a 30 percent market share. Bupa Australia provides coverage for hospital, medical, dental, optical, physiotherapy and chiropractic expenses. It provides health plans for 4,500 Australian companies, covering more than 215,000 employees and their families. It meets the health care needs of Australians living and working overseas and more than 6,500 overseas visitors working in Australia.

One quality measure of Bupa Australia’s management: It is the only Australian health insurer to have kept premium increases below the industry average for nine years.

As a privately managed company, Bupa Australia reinvests any financial surpluses for the benefit of its customers. This may seem unusual, but Bupa Australia’s Director of Human Resources Penny Lovett explains that Bupa Australia’s parent group is a notfor- profit enterprise. Thus, any surpluses derived from the forprofit business in Australia are reinvested.

The Acquisition

In 2008, Bupa Australia, then the country’s third largest health insurer, with an 11 percent market share, paid $2.4 billion (Australian) to acquire the Medical Benefits Fund Group, Australia’s second largest health insurer, with 18 percent of market share. The business case was built on acquiring efficiencies of scale through increased market share, along with reduced administrative and overhead costs. Executives figured the deal should result in better service to customers and increase the market value of the merged company. The merged company had a new focus: to become a “health care partner” for its customers.

Senior leaders in both companies recognized that great people were key to delivering this promise. Thus, a major objective was to retain talented people. To do that, leaders treated the acquisition as a “merger of equals.” Bupa had won many awards for customer service, for its commitment to equal employment opportunity and for enlightened management—treating employees as assets to be developed, rather than as costs to be cut. The cultures of the two organizations were not radically different. Nevertheless, postmerger integration tested that philosophy.

The Integration Game Plan

To oversee the process, Bupa formed an integration board of executives representing each division, department and level. It met every month for three or four hours to focus on the “big picture.” It tracked the returns from the company’s investment; synergy savings and benefits expected of the merger, including operational efficiencies and direct and indirect cost savings; as well as measures of value and service for stakeholders. There were six major groups of stakeholders: employees, government regulators, suppliers, service providers, investors and customers.

Bupa’s Head of Integration Delivery Kate Christiansen neatly captures the fears and uncertainties of employees in two questions: “What’s going to happen to me?” and “What’s going to happen to my manager?” Explains Dr. Christine Bennett, chief medical officer: “Groups like the hospitals and doctors that we contract with want to know, ‘What is this going to mean for the contract with us?’ Or the government, for example, might be wondering, ‘What does this mean for customers, and will there be any changes that are likely to breach regulations?’ ”

According to Lovett, three broad, governing principles guided the integration:

• Create a vibrant, new organization, not simply merge existing companies.
• Engage staff in the journey of creating the new organization.
• Provide certainty quickly about positions and the direction and operation of the new organization.

To implement these principles, the board avoided imposing the Bupa Australia culture on the Medical Benefits Fund people. Rather, board members critically examined the talent pools, practices and cultural elements of each of the former companies to ensure that the best elements of each were represented in the new organization.

To encourage buy-in and to prevent confusion, rumors and costly employee turnover, board members recognized the need to involve people impacted by the change in decision-making. Finally, they used a variety of channels to provide frequent and honest answers to employees’ questions. In some cases, executives had to admit that they did not have all the answers, but they promised to respond as soon as answers became available.

The first time business leaders make an acquisition, they don’t typically identify principles like these and develop an overall approach to post-merger integration. In fact, the process can be painful and fraught with mistakes. Business leaders learn from mistakes, though, and use their experiences to make systematic improvements. This is what Bupa’s leaders did, based on the company’s 2002 acquisition of AXA Australia and its 2007 acquisition of Amity Group.

The Challenges to Integration

During the 2008 post-merger integration, board members faced five challenges:

• Tune out noise and avoid confusion.
• Keep messages simple, clear and on point.
• Acknowledge that not all questions have answers.
• Place people fairly in the new company.
• Provide transition services for those who do not fit into new roles in the new company.

As Lovett reflects, “When you go live on a merger, there’s so much noise and people are hungry for information.” The mission, therefore, required Bupa’s managers to provide the right information in the right way, at the right time, to all of its people. To do that, executives used a range of channels so that people could access information in ways that work best for them. Representatives at every level learned to acknowledge honestly when they did not have the answer to an employee’s question, and to follow up when that answer became available.

Managing Director Richard Bowden proudly notes that the new company filled 230 executive-level jobs within 100 days of consummation of the merger through an open, transparent process. No one was placed in a job; rather, each person, including senior leaders, had to apply. That put stress on HR professionals to write position descriptions for the new jobs and to develop pay schedules and structured interview processes, among other recruitment tools.

Inevitably, some people did not fit the newly created roles. Rather than let them go immediately, Bupa put them into a redeployment pool so managers could try to find jobs that might fit their talents better. The redeployment period typically lasted for the full period of advance notice of dismissal specified in each individual’s contract of employment, typically between one and six months. During this time, the people affected either continued to perform their normal duties, as agreed to with their managers, or worked on short-term projects. Because people didn’t leave immediately, managers had time to redeploy them across the organization.

Allowing people to work through their full notice periods was cost-neutral: If the affected employees left the business immediately, the company paid for the full notice period, regardless. The executive team debated this strategy because there was a risk in some cases that individuals wouldn’t have wanted to work through their notice periods and may have been disengaged and potentially disruptive to their colleagues. Bupa leaders decided to accept this risk, as they wanted to redeploy many people, signal trust, and treat everyone fairly and equitably.

The Communication Strategy

Director of Marketing Mark Engel was given the mandate for communication across all stakeholder groups. His team developed a comprehensive strategy with a focus on consistent and timely internal and external messages. Communication channels included town hall meetings; face-to-face briefings with senior leaders who toured the country and met with all employees twice during the first 100 days; print newsletters; and e-newsletters. Indeed, on the first day of the merger, Bupa launched a web site for up-to-date information about the integration, its developments and job vacancies.

To minimize the risk that people would not get all the information they needed, Bupa’s HR professionals named “merger champions” to brief employees in the field, collect information from them and help managers understand employees’ concerns. Programs were put in place to address those concerns. Customer Relationship Manager Monika Gunther, a merger champion, facilitated small-group meetings in South Australia and in Western Australia. Along with other facilitators, she received biweekly briefings from managers in the head office and then cascaded that information to employee representatives from every area of the business.

The Metrics to Assess Impact

As Bupa’s Chief Financial Officer Hisham El-Ansary says, “It’s the nature of acquisitions that you get the keys on Day 1 and on Day 2 people want to know how the new business is tracking.” Hence, the metrics on Bupa’s balanced-scorecard include:

• Financial measures, such as profitability and return on investment.
• Customer measures, such as satisfaction, service quality and complaints.
• Human capital scores for employee engagement and monthly pulse checks.
• Operational measures for costs and savings.

The Merger Outcomes

One year after the merger, Bupa’s leaders identified nine important outcomes:

• The senior executive team was selected in the week prior to going live on the merger and was comprised of equal numbers from the two former companies. The first level of senior managers was appointed in five weeks.
• Within 90 days of the merger, all positions in the new company were filled.
• In surveys conducted six months after the Bupa Australia merger, almost 80 percent of its employees reported being highly engaged at work.
• The new company retained all of its top performers.
• Only 7 percent of employees left the business.
• Customer satisfaction levels hit 82 percent and were well ahead of target.
• Profits exceeded target levels by 14 percent.
• The new company achieved 100 percent of its targets for operational efficiencies and synergies.
• Market share increased for three consecutive quarters after the merger.

At the same time, there were serious business and HR problems that executives had to face in the post-merger environment and beyond. They confronted the downturn in the Australian economy shortly after the merger went live, as well as changes the government made to the private health insurance framework. The team addressed these risks by focusing on core business principles, such as clear growth initiatives, and core customer service principles. The mantra of “don’t lose sight of the customer” became a commonly used phrase during the change process.

On the people front, the new executive team was confronted with the challenge of overcoming employees’ allegiances to past employers and the brands they previously supported. Senior managers faced the uncertainty of their own job tenure. To address these challenges, the executive team set a clear agenda for the first 100 days to create certainty of job tenure for senior managers, and the team delivered on this agenda.

And, they developed and executed a strong internal communications plan to support the change. As Lovett notes, “Creating genuine allegiance to a new employer in the hearts and minds of all of our people has taken considerably longer than 100 days. We got off to a strong start, but this journey has lasted for more than two years. Over time, our integration processes, including fully integrating our previously separate customer service systems and products, together with regular communications and new leadership programs, has helped to create strong identification with and allegiance to Bupa as the employer.”

Post-merger integration is all about people. Chief Information Officer Peter Powell captures this sentiment aptly when he says, “The technology is the technology; it’s a tool to support the business. But it requires people to transform it, to develop it and to support it.” Isn’t that true of every area of a business? After all, the people make the place.

The author holds the Robert H. Reynolds Chair in Global Leadership at the University of Colorado Denver. He has conceived of and created the eight-title DVD series on human resources sponsored by the SHRM Foundation.

Web Extras

• SHRM DVD: Once the Deal Is Done: Managing a Merger (SHRM Foundation)
• SHRM article: Be a Master of Mergers and Acquisitions (HR Magazine)
• SHRM toolkit: Mergers & Acquisitions
• SHRM article: A Fitting Role (HR Magazine)
• SHRM article: M&As Make a Move (HR Magazine)
• SHRM article: Mergers & Acquisitions: Making a Merger Work (HR Magazine)
• SHRM article: Culture Management and Mergers and Acquisitions (HR Magazine)
• Corporate brochure: Taking care of the lives in our hands" (Bupa Australia)
• Study: Dangerous Liaisons (Hay Group)
• Study: Making Acquisitions Work: Capturing value After the Deal (Booz Allen Hamilton)
• Article: CEOs get ready to tap cash piles (The Wall Street Journal)