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The Drivers of Success in Post-Merger Integration

MARC J. EPSTEIN

T he reports from both financial analystsand the media are that most mergers fail. Various surveys have confirmed these results. Further, there have been numerous reports of culture clashes, confusion, and internal disruptions when two companies are combined—with dramatic declines in employee and customer satisfaction, leading to significant declines in profitability. Loss in shareholder value is staggering, with one study showing that 61 percent of recent mer- gers destroyed shareholder wealth. The Daimler–Chrysler merger quickly decreased market value by $60 billion. Thus, not only did Daimler–Benz get no value from Chrys- ler, it further destroyed the value of Daimler. AOL Time Warner was forced to take a $54 billion charge against earnings as the value of the merged assets declined after the combi- nation. Why do so many mergers fail?

Though there are numerous explana- tions for failure, the seven determinants of merger success have been identified as stra- tegic vision, strategic fit, deal structure, due diligence, pre-merger planning, post-merger integration, and external environment. Though poor performance in any one of these can cause merger failure, there has been significant discussion related to the design features such as vision, fit, and deal struc- ture, and other items such as due diligence and external environment. It is the actual execution of the merger strategy through the pre-merger planning and post-merger integration process that appears to have the least understanding. There have been numerous case studies and analyses of the post-merger integration in acquisitions and

conglomerates, but the integration process in mergers is significantly different.

M E R G E R S , A C Q U I S I T I O N S , A N D C O N G L O M E R A T E S

One difficulty is the need for clearer dis- tinctions between three very different approaches to growth. Mergers, acquisitions, and conglomerates are often analyzed as if they were the same, and a clear distinction is necessary. Mergers of equals, such as JPMor- ganChase, involve two entities of relatively equal stature coming together and taking the best of each company to form a completely new organization. Growth through acquisi- tions, such as Cisco Systems Inc.’s model, involves the much simpler process of fitting one smaller company into the existing struc- ture of a larger organization. Conglomerates such as General Electric Co. constitute a third type of entity, bringing large companies together without a clear attempt to create synergies or meld strategies, but keeping them separate to provide the advantages of decentralization and autonomy. To lump the three together prohibits a thorough under- standing of either the determinants or eva- luation of success.

There are significant challenges in the integration of both the technical and human aspects of bringing another company into a large group in acquisitions and conglomer- ates. But, these pale compared to the more common challenges of two relatively similar- sized companies coming together to create a new organization with significant competitive

Organizational Dynamics, Vol. 33, No. 2, pp. 174–189, 2004 ISSN 0090-2616/$ – see frontmatter � 2004 Elsevier Inc. All rights reserved. doi:10.1016/j.orgdyn.2004.01.005 www.organizational-dynamics.com

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advantages. Whereas an acquisition conveys a clear sense of which company is in charge, a merger of equals often causes a power strug- gle, as members of both companies seek con- trol over the new organization.

Every aspect of the company’s business practices is open for discussion, and the selection of best practices is often of second- ary importance to each company’s desire to maintain their own status quo.

U N I V E R S A L C H A L L E N G E S I N P O S T - M E R G E R I N T E G R A T I O N

In addition to poor distinctions between mer- gers, acquisitions, and conglomerates, most previous studies do not distinguish between mergers that do not succeed due to design failures and those that fail due to poor execu- tion. 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 suc- ceeded. These mergers are typically victims of a poorly designed and implemented post- merger integration process.

Most executives at least profess to under- stand the folly of completing a merger with lack of synergies, an unrealistic vision, or an outrageous premium price. On the other hand, there is less clarity about best practices and dangerous errors of the post-merger integration (PMI) process. A strong PMI pro- cess can overcome some miscalculations or problems in the design of the merger. A strong PMI process can also overcome mer- ger activity that has been undertaken by chief executive officer’s (CEO’s) with political motives, to cement their legacy, or to achieve other personal rather than shareholder- related objectives. But most importantly, a weak PMI can destroy an otherwise well- conceived merger. Too often, companies have done an inadequate job of developing a post-merger integration strategy. Even more common is the inadequacy of the implementation of the post-merger integra-

tion strategy. In this article, I focus on both, offering a complete framework for success in post-merger integration.

It is important to recognize that post- merger integration is not the same as the integration process for serial acquirers such as Cisco and General Electric, either through complete absorption into existing units or establishing autonomous units. In those integration efforts, one company’s systems, structure, and culture is being fit into another. Post-merger integration, on the other hand, involves two large companies that need to fit together. This type of inte- gration requires a much more demanding and sophisticated process.

Many companies wait too long to begin the post-merger integration process. Post- merger integration must be considered simultaneously with, and in the context of, the other determinants of merger success. Companies that begin thinking about PMI after the merger announcement is made are undermining the prospects for success from the start.

In this article, I examine common pro- blems in companies that have recently merged and how even minor problems can derail an entire merger. I identify and describe the five keys to success in post- merger integration and examine the post- merger integration at JPMorganChase, a company whose prospects for merger suc- cess were quite good based on its strategy, design, and other key success factors. Its overall merger success was thus highly dependent on the execution of its post-mer- ger integration. I examine the important aspects of the process throughout the com- pany and provide an evaluation of the post-merger integration process that is informed by previous research in M&A and refined through extensive field research. That research was completed at JPMorganChase and included a review of merger documents, plus extensive interviews with over 20 senior company executives and integration team leaders. These five drivers represent a com- prehensive plan for firm-wide execution of a post-merger integration.

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F I V E D R I V E R S O F S U C C E S S F U L P O S T - M E R G E R I N T E G R A T I O N

There are five drivers of success in post- merger integration. Failure on any one of the five can impede the achievement of mer- ger goals. Some can be controlled easily through careful design and implementation. Others are more challenging because of numerous external forces. Though mergers can provide superb opportunities for profit- able growth, companies need to take great care of their performance on these five dri- vers of post-merger integration success if this foray into growth through merger is to suc- ceed. Otherwise, the merger will fail, and significant shareholder value will be squan- dered. These five drivers of success are:

C o h e r e n t I n t e g r a t i o n S t r a t e g y

The new organization should have a well- articulated integration strategy that rein- forces that this is a ‘‘merger of equals’’ rather than an acquisition. This integration strategy is in addition to the merger strategy and articulates how the merger will be integrated. Distinguishing mergers of equals from acqui- sitions is important, since it reflects a very different set of priorities in the integration process and has significant implications for all employees in terms of both process and content. An early opportunity to implement the integration strategy occurs when making decisions on the new organizational struc- ture. It is preferable that companies begin with an open mind when designing the struc- ture and not be constrained by the structure of either previous company.

This approach should continue through- out the PMI in the selection of systems, pro- cesses, and practices. Decisions should not be made on the basis of imitating the status quo from one organization or the other. All deci- sions should be made on the basis of a neu- tral, objective decision-making process that considers the solutions employed in the pre- vious organization, as well as any other alter- natives, along with the system conversion costs.

In personnel decisions, employees of both companies must be judged by the same standards and the candidate selection pro- cess based on merit rather than as a basis for a power struggle. If the name of one com- pany is being adopted, extra effort must be made to reach out to the customers of the other company, so that customers under- stand their importance to the new company. Technical decisions may require more care- ful consideration of interoperability and thus favor one organization’s applications, but that decision must be based on sound technical information rather than organiza- tional politics.

Companies that fail to consistently fol- low this implementation strategy typically face serious problems that threaten the value of the merger. For example, Bank One faced a dangerous level of customer attrition in 1998, after its merger with credit card company First USA. The new organization lost a large portion of its customer base because First USA customers were not well integrated and new customer service practices confused and frustrated them. According to then-chief financial officer (CFO) Robert Rosholt, profit margins and growth fell in this unit and led to a significant drop in stock price for the new organization. First USA’s reputation also suf- fered considerable damage.

Similarly, department store chain Dil- lard’s Inc.’s acquisition of Mercantile Stores Co. became problematic when it became apparent that the two retailers had dramati- cally different and unreconciled marketing strategies. Mercantile was known for its ‘‘Midnight Madness’’ sales, and Dillard’s was far more conservative and favored an everyday low pricing strategy.

Finally, the integration strategy must include a commitment to address two key constituencies in every aspect of the PMI: employees and customers. The central con- siderations of these constituencies extend into all five drivers of success, since a suc- cessful post-merger integration ascertains the impact on customers and employees for nearly every decision. Integration strat- egy and the following additional four drivers

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are critical to PMI success. Ultimately, how- ever, a well-conceived and well-articulated integration strategy will fail if employees aren’t prepared to implement it, and custo- mers aren’t inclined to give their business to the new company. Further, the retention of needed employees and customers during and after the merger transition is critical to ultimate merger success. The integration strategy must be carefully developed to implement the strategy for the merger itself and execute on the strategic vision and stra- tegic fit that led to the merger decision.

S t r o n g I n t e g r a t i o n T e a m

Commitment to a successful PMI must be demonstrated through the structure, leader- ship, and composition of the integration team. The team must be a discrete, full-time function with ample resources and strong leadership. It should follow a project-man- agement approach where integration project teams are separate from the core business. Most team members should be dedicated full-time to the PMI, and the team should be balanced with members of both compa- nies. The PMI leader should be ambitious, confident, and a fully dedicated senior executive who disavows all biases stemming from the leader’s former company. The strength of the PMI leadership proved to be problematic in the AOL Time Warner merger, when it has been reported that executives from the two companies failed to communicate effectively with one another throughout the integration process.

An important objective of the integration team is to ensure that the integration process is seamless from the customer’s perspective. It is the company’s merger not the custo- mer’s. Feedback from customers should be used to tailor the new company’s strategy where relevant, and the company should over-deliver during the transition period to compensate customers for any contusion, uncertainty, or possible dissatisfaction with the new offerings.

The integration team must work to elim- inate any culture clash in the new organiza-

tion. When the company cultures are not well integrated or the effort is either not supported or undermined by company leadership, the results are often disastrous. At DaimlerChrys- ler, differences in compensation systems and decision-making processes caused strife between members of senior management, while lower level employees fought over issues such as hours and smoking on the job. Instead of charging the integration team with addressing these problems,

Jurgen Schrempp, chairman, did not adequately focus on the importance of com- pany culture. The eventual results were financial losses and the firing of many key Chrysler employees. Finally, Schrempp admitted that—though he publicly stated that this would be a merger of equals—his intention was that Chrysler would be a divi- sion. This led to further organizational pro- blems and a stockholders’ lawsuit.

C o m m u n i c a t i o n

During the post-merger integration, and particularly at the beginning of the process, communication from senior management must be significant, constant, and consistent. It must build confidence in the merger and the integration process, reinforce the pur- pose of the merger with a tangible set of goals, and provide decisive responses to a variety of stakeholder concerns. Each con- stituency must receive information that explains its role in the merger with a pre- sentation that is tailored to them and con- sistent with the overall company message. Because of high levels of concern about the impact of the merger on their individual wellbeing, customers and employees need a very high level of communication through- out the process. Over-communication is one of the common elements of success in post- merger integrations.

For human resources, communication may be the most important driver of success. Information on candidate selection processes and severance policies must be quickly dis- seminated to prevent losing employees whose skills are vital to the new firm. Once

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employees know they are being retained, roles and responsibilities must be articulated clearly and advised of any training necessary to facilitate their contribution to the merged company. Employees whose positions are eliminated should be treated with dignity, informed of decisions rapidly, and assisted in finding new employment. Communication is also vitally important in dealing with customers who must be apprised of the direc- tion of the new company and how it affects their relationship. From the customer’s per- spective, a merger brings uncertainty, and the combination of strong performance and strong communication efforts are the best reassurance.

Poor communication can confuse employees and customers, scare investors, and undermine processes. Such a situation existed in the first two years following the merger of Pharmacia and Upjohn in 1995. Communication from senior management was poor, confusion was rampant in the organization, and internal politics replaced business as the primary concern. Cultural problems began to escalate and were not addressed by senior management. Sales and earnings plummeted, and merger costs were considerably higher than anticipated. The appointment of Fred Hassan as the new CEO, who was more proactive and acknowl- edged the previous lack of direction in the company, turned the company around—but not before much of the merger’s potential value was lost.

Poor communication was also a major problem for employee attrition during Hew- lett-Packard Co.’s merger with Compaq Computer Corp. The companies announced that they would achieve cost savings largely by cutting 15,000 employees, well over the original combined reductions of 11,000 employees already announced by the two companies. This was poorly received by the employees and created an environment of high employee attrition. The uncertainties surrounding the situation contributed to the 19 percent drop in Hewlett-Packard shares on announcement and a continued short- term decline.

S p e e d i n I m p l e m e n t a t i o n

Speed is essential to a successful PMI, and fear and indecisiveness can often be obstacles to rapid action. Early completion of integra- tion projects can both mitigate risk and per- mit an earlier realization of merger benefits. Immediate planning and design following the agreement is essential for a rapid PMI. The majority of planning should be complete before the merger is announced to the public. Following the announcement, the timeline should be highly compressed, with the goal of integrating front-office operations in the shortest possible time. Companies often set an integration program that includes a stretch goal for speed of implementation. Lucent Technologies Inc., for example, for- mulated an integration program that aimed for completion within 100 days.

Companies that move too slowly in the integration process face a number of threats, especially with regard to the two key con- stituencies. Employees may regard the slow pace as a sign of uncertainty and may pursue opportunities at rival firms where the situa- tion seems more stable. Customers may like- wise fear instability and seek competitors’ products if the visible aspects of the integra- tion are not achieved rapidly.

On the technical side of the PMI, a slow pace may hamper innovation, and prevent the companies from achieving the back-office synergies that are usually vital to the merger strategy. Solutions should therefore focus on speed and functionality over perfection, and ‘‘80-percent solutions’’ should typically be accepted. The importance of speed to the success of post-merger integration is often underestimated. There is a significant corre- lation between the speed of integration and merger success.

A l i g n e d M e a s u r e m e n t s

To achieve merger success, mergers need a clear definition and articulation of the drivers of success, how it will be achieved, and the appropriate measures of success. A success- ful PMI requires the creation of measures that are well-aligned with the merger strategy

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and vision. Targets and milestones must be created in all areas, especially for the mea- surement of synergies, and sophisticated tracking systems must be created so integra- tion leaders can easily monitor progress throughout the organization. The responsi- bility for creating these metrics should be shared by the integration team, business units, and functional areas. The integration team leader should present a consistent set of priorities to leaders in business units and functional areas and together they should tailor specific metrics that are consistent with organizational goals and relevant to employ- ees throughout the organization. In PepsiCo Inc.’s acquisition of The Quaker Oats Co., PepsiCo described in detail where it realisti- cally expected synergies. The description compared the growth rates for several finan- cial metrics it expected for the integrated company with PepsiCo and Quaker as stand-alone entities. It was clear what inves- tors and employees could expect in every major part of the business.

Both financial and non-financial mea- sures should be included in the information provided to integration and business leaders to adequately monitor performance. This includes both process and results measures that report on past performance and are predictors of future performance. The com- pany should quantify cost savings and rev- enue synergies so that both employees and investors have a tangible sense of the inte- gration’s progress. Customer satisfaction and retention, cultural integration, employee satisfaction and retention, operational relia- bility, and risk management are among the measures that may be included among the non-financial measures of performance.

T H E F I V E D R I V E R S O F S U C C E S S I N C O R P O R A T E I N T E G R A T I O N S

These five drivers of successful post-merger integrations are critical for all companies embarking on corporate mergers. Though there are some similarities between the inte-

gration in mergers, acquisitions, and con- glomerates, Fig. 1 also illustrates many of the differences. Thus, companies that have been applying principles of integration from acquisitions or conglomerates to mergers have often encountered significant difficul- ties. It is imperative that companies make this distinction and examine these five dri- vers before the consideration of a corporate merger and again during the earliest stages of the merger process.

T H E M E R G E R O F J . P . M O R G A N A N D C H A S E M A N H A T T A N B A N K

In the last few decades, the banking industry has undergone dramatic changes. The ability to package large numbers of loans as secur- itized financial instruments changed the busi- ness model for many banks. They no longer needed to borrow and lend locally, and com- mercial lending was no longer the primary engine for growth. Money management and investment banking became the most profit- able, growth-oriented businesses. Mergers of increasingly large scale occurred, and invest- ment-banking powerhouses and diversified financial conglomerates began to dominate the banking markets. The repeal of the Glass–Steagall Act of 1933 permitted commer- cial banks to merge with brokerages. The merger of Chase and J.P. Morgan, unthinkable not too long ago, became a necessity due to the rapid consolidation of the industry.

It was an imperative from both the bank’s and the consumer’s perspectives. Cli- ent demands for integrated solutions created opportunities to provide multiple products to develop stronger customer relationships and better service customer needs—without sacrificing either quality or convenience. Universal banking also provides an oppor- tunity for banks to bundle products that can result in some economies of scale and scope, and to capitalize on the advances in on-line technology.

Chase Manhattan traces its roots back to Aaron Burr’s Bank of Manhattan, though the

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direct lineage of the company traces back to 1877. John D. Rockefeller brought Chase National into prominence in the 1930s as the world’s largest bank, and Chase merged with the Bank of Manhattan in 1955. In 1995, it merged with Chemical Bank, which had earlier merged with Manufacturers Hanover in 1992, in a merger that kept the prestigious Chase name, but in which Chemical was the dominant power. J.P. Morgan was founded in New York in 1861, and gained a reputation

by rescuing Wall Street from a financial panic in 1907. Forced to split off its investment bank in 1935, J.P. Morgan became a world- class commercial bank known for its loans to governments and corporations, and in fact was the first bank permitted to underwrite corporate bonds.

The merger between Chase and J.P. Morgan was a deal of great significance, creating a new company that ranked second among banks in the U.S. in size of assets, by

FIGURE 1 THE FIVE DRIVERS OF SUCCESS IN CORPORATE INTEGRATION

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combining what were then the third- and fifth- largest entities. Each company had a long history, but faced an uncertain future that necessitated the merger. In terms of size and scope, the merger was one of the largest in the history of the banking industry. Chase had operations in 65 countries and nearly 80,000 employees. J.P. Morgan had about 30,000 employees.

P O S T - M E R G E R I N T E G R A T I O N A T J P M O R G A N C H A S E

The merger was planned in a series of meet- ings that were conducted outside of the firms’ offices, at the Waldoff Astoria Hotel and in legal offices, with a high level of secrecy. Only a select handful of top manage- ment was present, code names were used, the people involved did not use their own secre- taries and staff, and lawyers and their staff did all the typing.

Once preparations were completed, work began on the organizational structure and leadership for the new company. Sandy Warner of J.P. Morgan became chairman of the board. Chase chairman William Harrison became chief executive, with the two serving as co-heads of the executive committee. War- ner’s position, however, was well known to be temporary and essentially a merger accommodation, and he left the company by the end of 2001. Eight directors from Chase and five from J.P. Morgan were named to the board, and 11 members from Chase and four from J.P. Morgan were named to the management board. The first 25–50 positions were to be selected right away, and co-heads were avoided as much as possible, because JPMC managers saw this as a key mistake of the recent Citigroup merger. In some cases, however, co-heads were instituted, at least temporarily, to preserve revenue.

Top management teams were estab- lished immediately following the agreement. Further, the business model was completely defined and articulated before the announce- ment so that it was clear how the business would change and targets achieved. Com-

munications to employees, clients, share- holders, regulators, and the media were coordinated to guarantee rapid diffusion of information following the announcement. For example, on the day of the announce- ment, all employees from both companies simultaneously received letters containing the information, while the morning edition of the New York Times featured the merger as a front-page headline.

The post-merger integration process at JPMorganChase was driven by a merger philosophy that started with a commitment to creating a true ‘‘merger of equals.’’ Keep- ing the names of both companies in the new company’s name and using the JPM stock symbol reflected this philosophy, as did the maintenance of separate brand names in cer- tain lines of business. The post-merger inte- gration was based on a process that had been developed and refined over ten years, through previous mergers with Manufac- turers Hanover and Chemical, and was designed around a number of guidelines and priorities—with over-communication as a central unifying theme.

JPMC placed a premium on conducting the merger quickly, and set forth an ambi- tious timeline that would make critical enabling decisions early, as seen in Fig. 2. By doing so, they hoped to obtain a fast buy-in from various constituencies and build momentum for the later stages of the integra- tion process. Most of the key decisions, including branding strategy, facilities, and suite selections, were made within 8–12 weeks of the announcement, and many even sooner. Candidate selection guidelines were distrib- uted in the first four weeks following the announcement, along with information on benefits, compensation, and severance. Inte- gration teams were fully operational and sec- ond-level management decisions were completed within four weeks. Two weeks later, milestones, targets, and scorecards were prepared for use by the integration team. The merger of the holding companies was com- pleted less than four months after the announcement. Speed of the integration was clearly one of the keys to success.

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The PMI process included a number of systems to guide, focus, and discipline aspects of the integration. Management of the merger relied not only on the formation of the various merger teams and offices, but also through coordinating the specific roles of each team, and keeping information flow- ing through a well-coordinated communica- tions process. Fig. 3, JPMC’s ‘‘hexagon,’’ is a representation of the post-merger integration process. It portrays six keys to success, each of which comprise numerous other actions and considerations, and all of which rely on strong communication practices at the core of the process.

The entire integration process revolved around building partnerships and consen- sus, which was consistent with the styles of both organizations. The JPMC integration philosophy also included a principle of ‘‘driving the process to the areas of greatest risk’’ and was reflected in the use of a detailed approval process, the application

of Six Sigma principles, and a series of dress rehearsals throughout the process.

JPMC recognized the importance of choosing one company’s solution or the other’s rather than combining parts of each company’s approach in operational systems. This best practice philosophy had already been in place at Chase at the time of the Chemical-Chase merger, and the company learned more from that merger. For the JPMC merger, the company knew the importance of not only selecting best practices, but evaluat- ing the interdependencies of those practices.

The design of the JPMC integration team also reflected lessons learned from its two previous mergers. The project management approach was followed, and the Firm-Wide Merger Office was a discrete, full-time func- tion with ample resources. The process was decentralized, with a large degree of empow- erment for the teams. In terms of organiza- tion, focal points for integration team work were identified along three lines: lines of

FIGURE 2 JPMORGANCHASE INTEGRATION TIMELINE

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business (LOB’s), geographical areas, and functional areas. The strongest teams were placed in investment banking, London and Asia, and technology and operations, finance, and facilities.

The PMI process was not totally balanced in terms of contributions from the two companies, because J.P. Morgan deferred to Chase in many of the key struc- tural decisions, due to their experience in PMI. This, however, was not viewed by JPMC as a weakness of the process. The integration team generally did not include business unit leaders, who focused on client coverage issues. Although the integration team believed more input from business unit leaders would have been beneficial, the com- pany’s priority was clearly on the client side of the equation.

The Firm-Wide Merger Office also held weekly meetings to evaluate the overall sta- tus of the merger. In particular, there was a focus on progress reporting with regards to the milestones, giving consideration to both accomplished and missed milestones. A firm-wide integration scorecard was main- tained to give a summary of this information.

JPMC clearly recognized the importance of communication to a successful merger. Over-communication was both a stated tenet of its merger philosophy and key to post- merger integration success. Every member of senior management echoed the importance of over-communication in discussions of the merger and PMI. Communication through- out the merger was coordinated across multi- ple constituencies and multiple channels with the goal of achieving a consistent and constant message. The purpose and strategy of the merger, the status of merger events, and the impact of the merger on clients and employees were communicated through any available medium, including letters, phone calls, e-mail, the company Web site, presen- tations, and town hall meetings.

The period immediately following the merger announcement was used to open all of these channels of communications to employees. In its letter to employees, Chase stressed the worldwide ambitions of the merged company and pointed to advantages of the merger. Chase tried to build confi- dence and allay fears by attaching a copy of the letter of J.P. Morgan’s letter to its

FIGURE 3 THE JPMC HEXAGON

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employees, opening an e-mail box for ques- tions, and reminding employees of the suc- cess of past mergers. J.P. Morgan’s letter made similar points, and additionally focused on the heritage and proud history of the company. The firm also conducted employee polls to gauge satisfaction with the merger and specific aspects of it.

The general themes of the client commu- nications were enhanced capabilities on the one hand, and the lack of disruptions to relationships on the other. Client communi- cations were coordinated through a select committee that prioritized ensuring seam- lessness. Merger polls were also conducted to measure client satisfaction.

The primary tools for measurement at JPMC were Key Performance Indicators (KPI’s) that were determined early in the process for each LOB and functional area. These KPI’s were grouped into four cate- gories of indicators (financial, technical, cli- ent, and people), and the team for each LOB or functional area decided the specific metrics within each category and guided their priorities. Fig. 4 shows an example of a set of KPI’s from the investment manage- ment and private banking business.

F i n a n c i a l M e t r i c s

In the area of cost savings, metrics were established to precisely separate savings into those attributable to the economy and those attributable to merger synergies. To be certain which figures resulted from synergies, busi- ness units used expense metrics rather than headcount metrics and used ratios for savings rather than raw numbers. The merger synergy targets were significantly increased during the integration process and upgraded to $3.8 billion, as the merger integration pro- cess was proceeding above objectives. Even this new target was exceeded. This target included both increases in net incremental revenue and savings from reductions in short-term expenses due to the merger.

Headcount was another important mile- stone for JPMC. Since the process for head- count tracking varied by LOB and functional

area, the company prioritized by creating a system for tracking throughout the organiza- tion with consistency and efficiency. Although the original goal for headcount reduction was 5,000, the economic downturn caused additional downsizing that brought the total to 8,200.

R i s k M a n a g e m e n t P r o c e s s , a n d C o n t r o l

JPMC used a change-control process related to individual business consolidation events and ensured that all relevant authorities had approved actions to be taken. The number of approvals required depended on the nature of the event and the level of risk. Six Sigma practices were vital to determining success, evaluating results throughout the process, and were used in monthly meetings with the executive committee.

At each critical point in the timeline, pro- cesses were created for dress rehearsals to test preparation and mitigate risks associated with the merger conversions or initiation of

FIGURE 4 KPI’S FOR POST- MERGER INTEGRATION AT

JPMORGANCHASE

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new systems. In each case, it was vital that the conversions be completed over the course of one weekend, so that the company could seamlessly reopen for business the next busi- ness day. Legal and regulatory issues, creation and testing of contingency plans, and post- event operating models were also considered during these rehearsals.

A new unit, Enterprise Technology Ser- vices, was created to centralize the IT func- tion. There was a significant overlap between the two companies in technology, and there were 4,000 applications that needed to be pared down to 500–600. Tech- nology decisions were based on choosing suites of applications to ensure compatibility and cohesiveness. The goal was to stream- line the manner of running a particular busi- ness function without adding unnecessary layers of complexity to the decision-making process.

C l i e n t F o c u s

JPMC made client communications a high priority because of the importance of not only retaining clients, but convincing them to do more of their business through the new company because of the convenience of doing all banking business with one firm. The goal was to make the process invisible to clients so the client coverage model was developed within 8 weeks of the announce- ment.

H u m a n R e s o u r c e s ( H R )

On the surface, JPMC followed all the neces- sary guidelines for a successful PMI in per- sonnel decisions. The decisions were handled with speed and clarity and commu- nication kept employees well-informed. In all HR-related areas, meritocracy was con- sistently echoed throughout top manage- ment and all distributed information.

In the area of severance policies, the new organization chose to adopt Chase’s more generous policies. The company made it a priority to avoid all litigation related to layoffs. The company recognized that HR

processes were more challenging in Europe and a greater source of risk because of more onerous labor laws.

Different compensation systems also existed in the two companies; J.P. Morgan had higher cash payments and less stock compensation than Chase. The merger required a gradual change in the mix of cash and stock to achieve a compromise between the two systems, which was to be accom- plished within three years.

Despite the positive aspects of the pro- cess, some have cited retention of key talent as a weakness of the merger, as 25 top J.P. Mor- gan executives left within a year, including Sandy Warner, whose departure was expec- ted. Though many of these departures were inevitable, faster decisions and communica- tion about people issues may have retained some of that talent.

E V A L U A T I O N O F P O S T - M E R G E R I N T E G R A T I O N S U C C E S S A T J P M C

As outlined in the previous sections, the PMI at JPMorganChase aligns well with the five drivers of successful post-merger integration articulated here. JPMC not only made com- munication a top priority, they made it the centerpiece of the PMI strategy and imple- mentation. The extensive coordination efforts associated with the merger announce- ment were executed extremely well, and strong communications practices continued throughout the integration process, driven by JPMC’s discipline integration manage- ment systems.

Strong leadership was also evident at JPMC. The respective former CEO’s, Bill Harrison and Sandy Warner, led the new company in a well-defined power sharing arrangement that stands in sharp contrast to the infighting and struggles at Daimler- Chrysler, Citigroup, and other prominent recent mergers. Harrison also led the com- pany with a consistent voicing of the com- pany’s vision, even in the face of media scrutiny resulting from JPMC’s low stock

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price. The universal banking model had strong support throughout the company, both publicly and internally. JPMC also made wise decisions with regard to struc- ture, choosing to create a new organizational structure without the constraints of either predecessor organization, and puffing the PMI in the hands of a strong integration management team.

The measurement Systems implemented at JPMC were also consistent with the five drivers and prioritized the key functional areas in a balanced and well-aligned manner. Different groups within the organization were able to tailor the measurement tools to their specific goals, while maintaining a consistent structure throughout the organi- zation. In addition to financial measures, JPMC also recognized the importance of measures related to technical operations, human resources, and customer manage- ment. Finally, the company acted rapidly to move from announcement to merger in less than four months. Key decisions were made immediately, measurement tools and targets were created and disseminated early in the process, and the entire process unfolded with little or no delays.

The results of the PMI reflect JPMC’s strong practices. Financially, half of the total merger savings were captured in the first year, including merger expense synergies that exceeded expectations. In the area of personnel decisions, employee satisfaction with the merger was high and cultural bar- riers were quickly eliminated. From a tech- nical standpoint, all critical events in the merger were completed on time without major operational problems. Finally, success in the area of customer management is reflected in gained market share and high levels of client retention.

Leadership roles for Chase’s Bill Harri- son and J.P. Morgan’s Sandy Warner were clearly defined at the time of the merger, and neither a vacuum nor a power struggle emerged at any time. Despite a heritage of very different cultures, little culture clash emerged during the PMI, and teamwork and consensus were established as the com-

mon thread of the new organization. Custo- mer retention was excellent. Though employee retention was not as successful as JPMC anticipated, the company attributes this primarily to a lack of speed. Still, JPMC was satisfied that its depth of talent was unmatched in the banking industry.

Certainly the previous experience of the company and the integration team was a major factor in the success of the post-merger integration process. Though there has been some discussion about the success of the merger itself, this evaluation examines only the critical process of post-merger integra- tion. The other determinants of merger suc- cess are also critical, but it is in the execution of post-merger integration that mergers often fail. At JPMorganChase, the integration of the two companies was accomplished very successfully by diligently managing each of the elements of the post-merger integration process.

C O N C L U S I O N

This analysis of JPMorganChase demon- strates a company that excelled in most areas and achieved a highly successful PMI. But, since post-merger integration is such a highly detailed process, there are always areas for improvement and learning from both a com- pany’s own experiences as well as the experi- ences of other companies. Having been through three major mergers in the past ten years, JPMC can attest to both the value and importance of this organizational learn- ing and has already begun to document this merger and refine the process for potential future mergers.

Post-merger integration is a multi-faceted process that requires simultaneous efforts in numerous areas. It is a far more challenging process than the integration of either a con- glomerate or an acquisition, since the two companies must make decisions from a posi- tion of equals with competing ideas for achieving the merger vision they share.

While there are certain universal princi- ples that apply to all mergers, the process

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must be guided by the strategy and vision of the merger. My extensive research into post- merger integrations at many companies, and in depth here at the major combination of J.P. Morgan and Chase Manhattan Bank, has led to this identification of the five drivers of successful post-merger integration.

Analysts often evaluate the success of mergers based on changes in short-term stock price. Based on this criterion, JPMor- ganChase was not successful (though there has been substantial improvement in the intermediate term as the economy strength- ened.) Certainly though, many external fac- tors—including the recession and loan difficulties at Enron Corp., Argentina, and the telecommunications industry—were major factors in the decline in the stock price. But, an evaluation of merger success must be much broader than a simple short-term change in stock price, which often tells us little about the merger and more about exter- nal factors. We must instead ask what the company’s strategies were for the merger, and whether the goals were achieved. At the same time, we must ask whether the

strategy and vision were well-conceived and whether the merger’s conception was superior to possible alternatives. Finally, we must be prepared to disaggregate the economic context from the results of the merger in order to ask which changes are truly attributable to the merger.

In evaluating the success of the merger, all of the determinants of merger success must be considered. Though the other deter- minants of merger success, including strate- gic vision, strategic fit, deal structure, due diligence, and external environment are all important, careful attention to the pre-mer- ger planning and post-merger integration are essential to merger success.

JPMorganChase designed and executed the integration well. Though success in post- merger integration does not guarantee mer- ger success, mergers are unlikely to succeed without a high level of competency in execu- tion.

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SELECTED BIBLIOGRAPHY

There is a rich literature on mergers and acquisitions. For example, see M. Hitt, J. Har- rison, and R. Ireland, Mergers and Acquisitions: A Guide to Creating Value for Stakeholders (New York: Oxford University Press, 2001); K. Lucenko, ‘‘Implementing a Post-Merger Inte- gration,’’ The Conference Board Conference Report, 1999; R. Kramer, ‘‘Post-Merger Orga- nization Handbook,’’ The Confrence Board Research Report, 1999; J. Birkinshaw, H. Bres- man, and L. Hakansan, ‘‘Managing the Post- Acquisition Process; How the Human Integra- tion and Task Integration Processes Interact to Foster Value Creation,’’ Journal of Management Studies, 2000, 37, 395–425; L. Selden and G. Colvin, ‘‘M&A Needn’t Be a Loser’s Game,’’ Harvard Business Review, June 2003, 70–79; P. Ghemawat and F. Ghadar, ‘‘The Dubious Logic of Global Megamergers,’’ Harvard Busi- ness Review, July–August 2000, 65–72; S. Gates, ‘‘Performance Measurement during Merger and Acquisition Integration,’’ The Conference Board, 2000; J. Bower, ‘‘Not All M&As Are Mike—And That Matters,’’ Harvard Business Review, March 2001, 93–101; C. Markides and D. Oyon, ‘‘International Acquisitions: Do They Create Value for Shareholders?’’ Eur- opean Management Journal, 1998, 16(2), 125– 135; R. Alello and M. Watkins, ‘‘The Fine Art of Friendly Acquisition,’’ Harvard Business Review, November–December 2000, 101–107; K. Brouthers, P. von Hastenburg, and J. van den Ven, ‘‘If Most Mergers Fail Why Are They So Popular?’’ Long Range Planning, 1998, 31(31), 347–353; R. Mello and M. Watkins, ‘‘The Fine Art of Friendly Acquisition,’’ Har- vard Business Review, November–December 2000, 78, 101–107.

Though there is usually little distinction made on the differences between mergers, acquisitions, and conglomerates, substantial important work has been completed on post-

merger integration. For example, see P. Has- peslagh, ‘‘Acquisitions-Myths and Reality,’’ Sloan Management Review, Winter 1987; R. Ashkenas, L. DeMonaco, and S. Francis, ‘‘Making the Deal Real: How GE Capital Integrates Acquisitions,’’ Harvard Business Review, January–February 1998, 76, 165– 178; T. Galpin and D. Robinson, ‘‘Merger Integration: The Ultimate Change Manage- ment Challenge,’’ Mergers and Acquisitions, January/February 1997, 24–28; M. Marks and P Mirvis, ‘‘Making Mergers and Acqui- sitions Work: Strategic and Psychological Preparation,’’ Academy of Management Execu- tive, 2001, 15(2), 80–94; M. Fledman and M. Spraff, Five Frogs on a Log (New York: Harper Collins, 1999, 137–168); J. Krug and W. Hegarty, ‘‘Predicting Who Stays and Leaves After an Acquisition: A Study of Top Man- agers in Multinational Firms,’’ Sfrategic Man- agement Journal, 2001, 22, 185–196; R. Ashkenas and S. Francis, ‘‘Integration Man- agers: Special Leaders for Special Times,’’ Harvard Business Review, November–Decem- ber 2000, 108–116; M. Marks and P. Mirvis, ‘‘Managing Mergers, Acquisitions, and Alli- ances: Creating an Effective Transition Struc- ture,’’ Organizational Dynamics, Winter 2000, 35–46; M. Marks and P. Mirvis, Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances (San Francisco: Jos- sey-Bass, 1998, 166–186); S. Wall, The Morning After (New York: Perseus Publishing, 2000, 177–190); D. Light, ‘‘Who Goes, Who Stays?’’ Harvard Business Review, January 2001, 5–12; N. Ainspan and D. Dell, ‘‘Employee Com- munication During Mergers,’’ The Conference Board, 2000; S. Gates and P. Very, ‘‘Measuring Performance during M&A Integration,’’ Long Range Planning, 2000, 36(2).

Additional company anecdotes of mer- ger failures can be found in D. Henry and F.

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Jespersen, ‘‘Mergers: Why Most Big Deals Don’t Pay Off,’’ Business Week, October 2002, 14, 60–68; M. Arndt, E. Thornton, and D. Foust, ‘‘Let’s Talk Turkeys,’’ Business Week, 11 December 2000, 44–46; ‘‘AOL

Merger: Dissecting a Deal That Soured,’’ The New York Times, 22 June 2003; M. Sirower and S. Lipin, ‘‘Investor Communications: New Rules for M&A Success,’’ Smart Pros, 26 March 2003.

Marc J. Epstein, Ph.D., is Distinguished Research Professor of Manage- ment at Jones Graduate School of Management at Rice University. Prior to joining Rice, Epstein was a professor at Stanford Business School, Harvard Business School, and INSEAD. Epstein has completed extensive academic research and has extensive practical experience in the implementation of corporate strategies, corporate governance, accountability, and the development of relevant performance metrics ([email protected]).

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