The revival of capital markets in the 1980s, combined with the re-emergence of the entrepreneur and the generally more positive attitude towards management, has bred a new kind of knowhow company manager - the professional chief executive. That he or she is often indistinguishable in style and methodology from the chief executives of traditional industrial companies is only natural - there are no other readily visible role models. It is only natural too that in adopting the style of industry leaders knowhow company chief executives should also assume their attitudes and appetites - particularly their appetite for maximum growth of market value.
These knowhow tycoons are invading knowhow company boardrooms and engineering a spate of mergers and acquisitions. We met the best known ex- ponent of the mergers and acquisitions strategy, Saatchi & Saatchi, the world's largest advertising agency, in Chapter Seven.
• Merger mania
The widely publicised merger mania in Western economies during the mid- 1980s was inspired largely by the financial advisers to the big industrial companies. Surprisingly few of the predator groups justified their activities in terms of industrial 'synergy'. Instead financial arguments, like 'it is in the inter- ests of shareholders', dominated the rhetoric.
Many deals are the products of the imperialist visions of entrepreneurs with financial skills, such as Lord Hanson or Robert Maxwell, who manage their mer- gers. 'Managed mergers', which are difficult to justify industrially, are usually carried out over the heads of the companies involved and often against the wishes of the employees.
But they are part of capitalism. Financial capital must be allowed to find its most profitable use in the free market. The stock exchanges of the world are the marketplaces where financial capital, deployed by financial advisers and in- vestors, tries to maximise its profitability.
• Mergers don't work
The problem with mergers is not that they are morally wrong but that they do not work. It has been estimated that almost two-thirds of all mergers fail (Business Week, June 1985) and that about one-third fail because of poor, post-merger integration (Journal of Business Strategy, summer 1986). Numerous problems emerge after deals are closed and the new management take charge of day-to- day operations. A third of acquisitions are subsequently sold.
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MANGING KNOWHOWThe post-merger problems of industrial companies pale into insignificance beside the difficulties associated with the knowhow company merger.
Following the trail blazed so successfully (until 1986, at least) by Saatchi &
Saatchi, other advertising agencies have acquired the acquisitive habit. The rationale is logical enough at first sight. In this era of 'global marketing' the big international companies need big, international agencies with representatives all over the world. If an agency wants to compete for the Unilever or ICI account it must, it is argued, have a presence in every territory in which the latter operate.
These new 'professional' agency executives are trying to substitute the knowhow conglomerate for the 'creative' shop which was the high flier of the 1970s. They offer a solution to every problem in every country from advertising to strategic management consultancy.
Growth is achieved by fusing together a number of small, previously independent agencies into a single, large organisation. The independents become subsidiaries run by professional executives and made subject to tight financial controls. The financial control systems developed and employed by Saatchi &
Saatchi are often billed as one of the secrets of the group's prodigious success.
It is likely that the urge to merge in the agency industry will turn out badly.
The mergers are handled by managers who are, for the most part, totally ignorant of the basics of knowhow management. There is no such thing as a neutral merger. One party always has ascendancy over the other. Since merging knowhow companies is tantamount to merging people the question such a growth strategy begs is to what extent is it possible to 'acquire' human beings?
• Merger problems of knowhow companies
The main problem with knowhow company mergers lies in the importance of culture to the knowhow company, the effect that a cultural disturbance has on morale and the negative impact a low morale can have on a knowhow company's results.
As the Saatchi & Saatchi case shows the aftermaths of knowhow company mergers can swiftly become battlegrounds on which opposing camps of pro- fessionals wrangle about conflicting business ideas and about what constitutes the enlarged company's core knowhow. Because the knowhow is so intimately connected with revenues, mergers inevitably lead to lower profits initially.
Let us look at mergers and acquisitions using some of the 10 success factors discussed in Chapter Eight.
DAY TO DAY LEADERSHIP Company management is removed from day-to- day operations and becomes 'corporate management'. All growing companies encounter this problem, of course, but it is particularly serious with knowhow companies because mergers tend to dilute and distort the various business ideas and almost always alienate the professionals from their new 'owners'.
QUALITY AND QUALITY CONTROL Quality and quality control is made more
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difficult if the merging companies operate in different knowhow areas. The cor- porate managers find it hard to understand, let alone reconcile the professional demands and ethics of other knowhow areas. Some of the professionals are always alienated and leave even when the merger appears to 'work'. At the very least this reduces quality immediately after a merger.
Clashes between cultures and concepts are unavoidable even when the mer- ging companies share professional ethics and the basic knowhow.
The quality of work tends to be eroded further by the inevitable shift in focus from professional knowhow to the managerial and entrepreneurial aspects of the business.
COMBINATION OF PROFESSIONAL AND MANAGERIAL KNOWHOW A key success factor in the knowhow company is what we call 'knowhow management' - the ability to combine and reconcile the entrepreneurial /managerial skills with the professional skills. Both types of skill must co-exist in a balanced way within a professional organisation. The traditional knowhow companies tend to lack the managerial skills. Merger mania is not a solution to the problem but rather a symptom of another problem - that the balance has tipped the other way and allowed managers to gain a strong foothold in many knowhow areas.
Too strong, perhaps, since very few professionals prefer to work in large organisations. On the contrary, most fear big bureaucracies because of the suf- focating effect they have on creativity. Professionals prefer to maintain a few, high quality contacts with colleagues in a wide variety of other organisations.
Their networks are not confined to particular organisational structures. The coming together of large numbers of professionals within one organisational framework is not, of itself, an encouragement to change established patterns which have proved rewarding in the past.
A STRONG, WELL-DEFINED CULTURE What happens to the culture?
Cultural conflicts are among the greatest obstacles to the successful implemen- tation of mergers. Cultures are the creatures of people and thus always different.
Conflicts invariably arise between people and between cultures even with 'successful' mergers.
It is hard to change a culture without changing the people. The characteristics and qualifies of the new subsidiary tend to be defended with the same zeal that threatened minorities exhibit all over the world.
FOCUS ON CORE KNOWHOW The all-important focus of the knowhow company is diffused by mergers, even if the acquired company is in the same knowhow area. If it is in a different knowhow area, the immediate result will be that the 'acquired' professionals perceive on the part of their new managers a more cursory attitude towards what was previously acknowledged as the core knowhow of the company. The professionals begin to question their role and status and this causes the quality of their work to deteriorate.
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MANGING KNOWHOWKNOWHOW PRESERVATION A 'walk-out' by a number of the professionals is the inevitable result of any merger. Their knowhow walks out with them, very often accompanied by a number of clients. The scale of the walk-outs varies, of course. At worst they can threaten the whole company, as happened with the UK public relations firm Good Relations in 1986 when the departure of key professional Maureen Smith caused enormous problems and led ultimately to the sale of the company.
DEVELOPING THE PEOPLE The ability to develop employees is not affected directly by mergers. It may even be enhanced. The professionals in the new company will have a wider variety of possible careers and professional syn- ergies may result which further improve career paths.
CHANGING KEY PEOPLE And the task of replacing key people may be made easier by a merger simply because there are more key people.
STABLE STRUCTURES The structures of the merging parties will be in dis- array after a merger. The acquired company may have to move from their premises. Old agreements may be questioned and the accounting systems will be changed. Established networks are inevitably disturbed by walk-outs and walk- ins.
A merger cleans up a lot of the dust that has settled in the organisations but also interferes with the professional peace of mind, causing the quality and quan- tity of output to decline. Thus the immediate effect of a merger is normally to reduce the overall effectiveness of the organisation.
It can be seen that the net effect of applying our 10 success factor tests is rather discouraging for the idea of the acquisitive knowhow company. Most factors speak against mergers between knowhow companies. That does not mean that successful mergers are impossible but it does mean that management skills of a very high order are required if an acquisitive strategy in the knowhow area is to stand any chance of long-term success.
• Accountancy in Sweden
During a brief period at the beginning of the 1980s merger mania swept through Swedish accountancy like a forest fire. Accountancy is a growth industry all over the world and Sweden is no exception. The number of chartered accountants has doubled in five years and the growth continues.
There are two reasons for the rapid expansion: a new law in Sweden now requires a chartered auditor for most limited companies and demand for special- ist knowhow in areas like taxation and data processing has increased dramati- cally. The smaller auditing firms could not cope with the increased demand in these areas so firms began to acquire each other at a considerable pace. By 1985 the 10 largest firms employed about 75% of chartered accountants in Sweden.
They now typically employ 800-1,000 people and operate 50-70 offices throughout Sweden.
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The chartered accountancy firm is a typical knowhow company. The pro- fessionals - the accountants - have a highly specialised professional knowhow which they use in tackling problems which are very difficult to industrialise.
The professionals were quite disturbed by the merger mania. Every quality- conscious accountancy firm develops its own systems, methods, forms, def- initions and rules about what is 'right' or 'wrong' both internally and as regards clients.
The culture - 'the way we do things around here' - is an essential part of the business idea. It is inevitable when two knowhow companies merge that the two business ideas and the two groups of professionals who subscribe to them will come into conflict. Each firm fights for its own systems. In one celebrated case the confrontation between business ideas ended in a fist fight. The losing accountant, nursing a bruised jaw, left the newly-merged company and started his own firm taking two colleagues with him.
Mergers cause enormous managerial problems too. Many of the top management teams of the merged firms found that though their competence had been quite adequate for the needs of the smaller organisations they came from, it was simply not sufficient to cope with the new problems associated with increased size and the conflicts between cultures and business ideas. In a sense the leaders of newly-merged firms have to start all over again. They have a new and often highly sceptical professional constituency to win over.
The merger of accountancy firms, and of every other knowhow company for that matter, represents a special case of the classic dual expertise dilemma dis- cussed in Chapter Four. The professional and the managerial problems must be taken care of simultaneously.
All the big accountancy firms in Sweden are now suffering from this 'morning after' syndrome. Several have had to call in management consultants to assist them. This must have been galling for them because large accountancy firms the world over now regard management consultancy as a natural area for their own expansion.