Chapter XX / Luku XX

 SYSTEMS INTELLIGENCE

 

Systems Intelligence in Mergers and Acquisitions – a Myth or Reality?  

 

 
 
 
 

In: Raimo P. Hämäläinen and Esa Saarinen (eds.). 2004. Systems Intelligence – Discovering a Hidden Competence in Human Action and Organizational Life, Helsinki University of Technology: Systems Analysis Laboratory Research Reports, A88, October 2004.

Chapter 7

Systems Intelligence in Mergers and Acquisitions – a Myth or Reality? 

Satu Teerikangas

This article explores the concept of Systems Intelligence in the context of mergers and acquisitions. Throughout the article, we wonder what happened to the explosive potential for change that Systems Intelligence ultimately looks for, when looking at the example of mergers and acquisitions? In so doing, we argue that the successful management of mergers and acquisitions requires Systems Intelligence in terms of 1) taking a holistic view of the phenomenon, 2) accepting that minor changes and acts can have breakthrough consequences, 3) understanding the power of our underlying mental models in guiding our action, 4) the importance of our ability to reframe in novel situations and systems and 5) the need for Systems Intelligence at the levels of individuals and organizations. We conclude by arguing that a Systems Intelligent organization has the drive to utilize the potential for an explosive future that is provided by the combination of two previously separate organizations in the context of mergers or acquisitions.

Introduction

What makes mergers and acquisitions (M&A) succeed? And why do we keep on reading about either dismal failures or difficulties in the clashing of cultures, as in the case of Daimler-Chrysler? Despite the huge increase in the amount of mergers and acquisitions over the last two decades and the knowledge existing on the topic, many deals still seem to be going wrong.

Reading through the basic tenets of Systems Intelligence in Saarinen et al. (2004a, 2004b), something struck me. Indeed, whilst the themes introduced by Systems Intelligence seemed important to the success of mergers and acquisitions and today’s organizational life in general, the passion, excitement and opportunity for personal and organizational elevation and expansion advocated by the notion of Systems Intelligence seemed to be lacking in at least the mergers and acquisitions experienced and studied by the author. In other words, whilst mergers and acquisitions might be termed “successful”, none in my experience came even close to what was termed “breakthrough thinking” or “large-scale changes through the means of minor initiatives”. Indeed, how often does one hear of organizations being truly excited at having being merged or acquired?

However, many of the themes introduced by Systems Intelligence, such as holistic thinking, seeing and leveraging hidden systems, the notion of mental models and the ability to reframe seemed to be particularly salient in expressing the implicit dynamics that seem to explain why many mergers and acquisitions go wrong. With these questions and observations in mind, we propose in this article to expand further on the notion of Systems Intelligence in the context of mergers and acquisitions. We hope that by so doing, the hidden explosive potential in mergers and acquisitions be unearthed and new ways of seeing just why they go wrong and how they could succeed better be identified.

How often does one hear of organizations truly excited about having been merged or acquired?

Systems Intelligence in the form proposed here has been elaborated by Saarinen et al. (2004a, 2004b) as well as the contributions in Hämäläinen and Saarinen (2004a, 2004b). Whilst drawing from ideas dear to Systems Thinking (e.g. Ackoff 1999, Jackson 2000), such as “the whole is more important than the parts”, it moves further toward a more actor-based and action-oriented approach. In other words, it does not contend in understanding systems from a holistic perspective, it seeks to provide practical steps for any individual in gradually learning to live in our complex world, full of systems, some explicit, some implicit, and for individuals to become “system-free” instead of becoming prisoners of the systems they live in. Indeed, the basic tenet behind Systems Intelligence is that we are all part of many systems, though we are most often not aware of them. Thus, instead of understanding the implicit ways in which the systems (e.g. family, society, educational system, workplace, societal / national culture, religion) we live in mould our ways, choices and behaviors, actually narrowing down our opportunities for both personal growth and each system’s improvement, most of us end up being “System Prisoners”, engaged in “System Dictatorships” (Saarinen et al. 2004b).

In this sense, Systems Intelligence is a call for individuals to become more aware of the mental models guiding their behavior and their environment and thus become readier to make initiatives and moves that from the System Dictatorship perspective would have sounded counter-intuitive, but that actually enable both the actor and / or the system to reach new limits. Breakthrough thinking through small-scale change or action is thus another feature dear to Systems Intelligence. We begin to see how the ultimate aim guiding Systems Intelligence is a moral one – the improvement of the human condition and individual’s everyday lives. Habits and traditions as such would be harmless were it not for the fact that they have the tendency to provide a set route instead of letting individuals chose the route that suits them and the situation at stake best. Having become prisoners in System Dictatorships, it becomes difficult not only to find a way out, but also to be innovative enough to come up with new exciting ideas as to how to live one’s life or how to improve societal or organizational life.

The interest in using the example of mergers and acquisitions as a means of illustrating both the potential and the challenge of Systems Intelligence has two key drivers. Firstly, mergers and acquisitions have become a key contemporary corporate mania. They provide the platform for growth, expansion and learning that top managers are greedy of. Setting aside the often euphoric feelings accompanying the announcement of such deals, most press releases fail to reveal the less encouraging truth: hardly half of these ventures ever end up reporting success. So we are all left with the question – what’s the problem? The dismal failure rates of mergers and acquisitions speak words of the challenge in making them work. It seems that mergers and acquisitions represent today’s executives with a challenge that is too complex and multi-faceted to grasp with ease. Whilst financial calculations about the expected profitability of a merger might be computable and understandable, it is the actual implementation of post-merger change and integration measures where difficulties begin. The post-merger change phase brings together people from different organizations that gradually have to learn to work together. This means different people and personalities, different organizational affiliations and habits, but also different national and regional cultural backgrounds. Behind the logic and “ease” of financial

Behind the logic and “ease” of financial evaluation comes the reality of integrating people and organizations.

evaluation comes the reality of integrating people and organizations. It is often the difficulty of human and organizational integration that is a key challenge in mergers and acquisitions. Setting both of these in a cross-border setting, where organizational and national affiliations and behaviors differ from one’s own, an additional source of difficulty is created. Existing research results support these arguments. Research into the challenges involved in mergers and acquisitions has shown that as much as the early phases regarding the strategic decision to buy, partner selection and negotiations show signs of challenges, the post-deal implementation process seems to be even more difficult (Haspeslagh and Jemison 1991, Cartwright and Cooper 1993). The international context of today’s inter-organizational transactions provides an additional dimension of challenge stemming from the cultural diversity of the partners engaged in the venture (e.g. Sales and Mirvis 1984, Buono et al. 1985, Nahavandi and Malekzadeh 1988, Buono and Bowditch 1989, Olie 1990, 1994, Datta 1991, Chatterjee et al. 1992, Cartwright and Cooper 1993, 1996, David and Singh 1994, Morosini and Singh 1994, Morosini 1998).

In this article, we argue that a Systems Intelligent approach would enable organizations to explore the full potential inherent in merging two organizations.

This brings us to the second reason why mergers and acquisitions are an intriguing example for Systems Intelligence. The merging of two previously separate organizations provides a setting and a mirror, where not only the Systems Intelligent behavior of the parties involved can be assessed, but also reasons as to why they do not engage in Systems Intelligent behavior become apparent. It is a setting, where the two parties are faced with a novel situation, endowed with potential for both learning and explosive change. Moreover, it is a situation where the morale and behavior of especially the buying firm is at stake, as in order to be able not only to report successful figures years after the deal but also explosive and positive change, behavior respectful of the newly-acquired company is essential. We feel, thus, that it is an example that fits well with the moral aim of Systems Intelligence – the improvement of individuals’ and organizations’ lives.

Throughout the article, we will proceed to a presentation of those themes in Systems Intelligence that seemed most salient in highlighting the challenges and explosive opportunities inherent in mergers and acquisitions. In so doing, the article focuses on five main themes within Systems Intelligence. For each theme, subchapters are provided for illustrative purposes. We will begin by looking at the need to take a holistic perspective in order to succeed in the merging of two organizations. Thereon, we will pause to look at how minor changes do impact today’s mergers and acquisitions, and why opportunities for major breakthroughs are more often than not left unexploited. In a third part of this article, we will move on to looking at mental models and their powerful impact on guiding our implicit behavior. Fourth, we will show the importance of reframing. Finally, in a fifth part of this article, we will see how the successful implementation of mergers and acquisitions requires Systems Intelligence at both individual and organizational levels. In doing so, we realize that Systems Intelligent behavior is not only a key to making mergers and acquisitions work but also a key to making them an arena of explosive renewal and change, precisely what seemed to be lacking from our everyday experience. Section six concludes.

We note that the article does not intend to provide a thorough overview of the merger and acquisition phenomenon. Rather, it uses mergers and acquisitions as an example to both illustrate and illuminate the concept of Systems Intelligence as well as its applicability in today’s organizational life. Thus, throughout the article, examples are provided as a means of highlighting the most interesting examples instead of attempting to provide an all-exhaustive overview of the challenges involved in mergers and acquisitions.

By taking a one-sided or too focused a view when involved in mergers and acquisitions, one is unlikely to succeed.

The experiences related in this article draw from both the researcher’s PhD research and her personal experience of living through a global merger. In the context of the PhD research project made at Helsinki University of Technology, Institute of Strategy and International Business in 1998-1999 and 2001-2004, four Finnish multinationals and a total of eight of their mergers or acquisitions have been studied. Each studied merger or acquisition was treated as a case. The analysis of the results is ongoing. The current paper draws from earlier insights in Teerikangas (1999), Teerikangas and Hawk (2002), Teerikangas and Laamanen (2002), Teerikangas and Véry (2003), as well as case per case analyses that detail the progress of change separately in each of the cases studied. An overview of results will be published in the researcher’s PhD in 2005. The aim of the research project has been to understand how to successfully manage the inter-organizational change process following mergers and acquisitions in a cross-border context. Each merger or acquisition has been treated as a case and a grounded theory – based inductive research approach has been undertaken. In-depth open-ended interviews were carried out with staff, middle and top managers from each of the acquired and buying firms. For each case, a minimum of 10 and a maximum of 30 interviews were made, totaling 140 interviews. Of the studied mergers and acquisitions, one was a domestic acquisition in Finland, five were cross-border acquisitions in France, Germany, Denmark, the UK and the USA respectively, and two were cross-border mergers in France and Germany.

The author’s personal experience relates to the intra-firm merging of formerly domestic and regionally based operations into a globally integrated organization in the context of a European multinational. The experience of uncertainty, search for cues, rising levels of anxiety and frustration among colleagues resonate well with the experiences of the interviewees. We find that where mergers and acquisitions might be today’s corporate mania, in practice, for employees they more often than not are hard to live through. In such a context, thinking of opportunities for growth or radical change toward the positive remain illusions from an alternative reality. In this article, we argue that a Systems Intelligent approach would enable organizations to explore the full potential inherent in the merging of two organizations, and thus to truly succeed in making them work.

Before proceeding on, we note that the paper uses a “we” form, as ultimately, the results presented in the paper are a combination of all interviewees’ contributions and the researcher’s insights developed along the research project. In other words, the paper would not appear here as it does without the interesting and elevating dialogues held with the persons interviewed in the cadre of this research project. The researcher remains deeply indebted to each interviewee’s individual contributions, characterized by a great amount of wisdom, experience, personal insights and openness to talk about their experiences.

The Importance of Holism

We begin our exploration of Systems Intelligence and its illustration in the context of mergers and acquisitions with the argument that managers involved in them need to take a holistic view in order for the merger or acquisition to succeed, instead of relying on a one-sided or too focused view. Successful examples of mergers and acquisitions show that their managers have been able to understand and blend in the multiplicity of perspectives relevant to make their decisions. In other words, they have been able to understand the types of systems (and System Prisons) guiding the merging activity by taking a systemic and holistic view.

In this and the following chapters, we will make an exploration into the types of systems involved in the merging of organizations. However, as we will see later in this article, Systems Intelligence calls for more than a holistic view. Thus, engaging in a thorough understanding of the systems involved is a first step toward being able to take action within and toward these systems. This is why we begin this article by exploring the holistic view in mergers and acquisitions, whilst realizing that ultimately, success requires even more.

Successful M&A require holistic thinking, but it is not enough.

In short, the search for “holistic and expansive” thinking as compared to “reductionistic” thinking has been the claim behind Systems Thinking (see e.g. Ackoff 1999). Whilst in its current form, we refer to authors from the 20^th century, the ideas behind Systems Thinking can also be traced back as far as both Greek and early Eastern philosophers. Whilst they were somewhat forgotten in the years of Enlightenment and the birth of modern science, Systems Thinking was found again at the end of the 19^th century, as it offered a scientific worldview that stood in contrast to the prevailing Newtonian paradigm. It evolved in response to a concern in natural sciences, including physics and especially biology, that the Newtonian scientific paradigm did not provide sufficient means for understanding living phenomena. Problems in living systems tended to be holistic, and not open to a reductionistic view only. Systems that would combine into greater systems and not be reducible into parts gradually became an idea that emerged in the natural sciences and then leaked into other scientific arenas, e.g. the social sciences (see e.g. Burrell and Morgan 1979).

The key tenet of Systems Thinking is how best to view a system as a whole that is interacting with its environment, and consists of a set of complex, interrelated parts and subsystems. Coupled to this is the need to avoid seeing a system only as an additive relationship, where the whole is greater than the sum of its parts, but as a whole where the parts are richly connected. Systems research wants to remain interdisciplinary in nature in order to gain this perspective. In the following, we will proceed to a chapter-by-chapter overview of three areas in mergers and acquisitions, where we feel a holistic approach is particularly conducive to success.

Holism through a Process Perspective to M&A

In the realm of mergers and acquisitions, the search for a holistic view brings us in a first phase to consider the merger and acquisition phenomenon as a process (as introduced by Haspeslagh and Jemison 1991), comprising of two interrelated parts, the evaluation and integration (or post-deal/merger implementation) phases. Challenges incurred in the integration phase can often be traced back to the evaluation phase.

In the examples of mergers and acquisitions studied by the author, there seemed to be a constant overshadowing of organizational evaluation to the profit of financial evaluation. In other words, little else than financial figures mattered. Whilst their importance should not be under-estimated, the findings consistently showed that the most difficult and surprising aspects of the post-merger phase revolved around issues that had been overlooked in the evaluation period.

For example, difficulties arose e.g. as to the actual status of research projects, new project pipeline, and challenges related to project management in the research and development function. As they had not been foreseen in the evaluation phase, they became aspects to deal with, and difficult ones in the post-deal era. As such, the lacking new product pipeline meant in one case that the short-term earnings from the unit were to be significantly lower than expected. In another case, the difficult project organization meant years of wasted investments into a research project, whose parties did not get along for historical reasons.

“We knew one side of the company well, but not the side that they had acquired some years earlier. The consequence of this being that our understanding of that side of the business, as well as its integration has been much more difficult than for the side we knew better upfront. This also resulted in positive news: from the part we knew less at the beginning we ultimately gained our today’s most respected asset on which we are basing our current business activities. We didn’t recognize this at the time.” (Finnish interviewee – buying firm)

“The problem in the two-site two-country new product development project was seen during due diligence, but not in its full magnitude. It was seen that the problem resulted from the owner himself, but we realized later that it had deeper roots that had spread across the organizations in their years of working together.” (Finnish interviewee  – buying firm)

This calls into question the mental models guiding today’s organizations, where only aspects directly traceable to financial performance are accounted for.

Likewise, where the analysis of intangible sides of the organization was made well, the managers were able to take the right measures in the post-acquisition phase and focus on areas of potential difficulties. For example, by understanding the importance of the founder-owner to the small company’s culture and leadership style, the buying firm ensured that they sent an experienced leader of their own to head the operations until a local leader was found. They wanted to avoid the creation of a leadership vacuum and also to ensure that the new unit gradually moves away from its patriarchal leadership style to one of greater responsibility taking and transparency.

Aspects that were left without consideration in the evaluation phase often seemed to be ones that were difficult to trace back to business plans or company performance. Thus e.g. all the intangibles and human elements are easily left without notice. This does not mean that they do not have an impact on the forthcoming integration. Quite on the contrary, their influence cannot be maneuvered away. As long as they remain unseen, they will continue to impact the merging activity negatively and thus ultimately also the business performance of the organizations.

This calls into question the mental models guiding today’s organizations, where only aspects directly traceable to financial performance are accounted for. It seems that our very own mental managerial models and performance measures are keeping us away from a more holistic understanding of organizations, one including all aspects influencing organizational behavior and ultimately firm performance. Are we engaged in a System Dictatorship, where by only seeing some part of the pie we are taking away from ourselves the possibility of both increased overall performance and well-being that we would gain if we were able to see the full pie?

Holism through a Long-Term Historical and Future Perspective to M&A

A second arena illustrating the need for a holistic approach in looking at mergers and acquisitions is the historical and evolutionary view, i.e. ensuring that the successful management of mergers and acquisitions also draws on an understanding of the organizations’ histories, cultures and prior affiliations. Indeed, whilst the merger-related work might begin at the time of due diligence, the way both organizations will react to the deal and post-deal changes will depend on their mutual pre-deal relationship as well as both companies’ individual histories and cultures. We are not dealing with a once-off project, but rather with a project that has roots in both the recent and the more distant histories of both the buying and acquired companies and a project that will not end a year from the deal, but that has long-term consequences on both participating organizations.

...  we are not dealing with a once-off project, over in either 100 days or a year after the deal.

To take an example, organizations that merge or acquire one another have often competed against one another for years, thus they rarely engage in the merger as “neutral parties”. Instead, they begin their cooperation endowed with an existing relationship that can be of a competitive nature. In one of the cases studied, this resulted in the acquired firm’s managers starting up a competing company on their own that today has become a significant competitor to the merged firm. Their allegiance toward their past was stronger than their willingness to be part of the new “Viking-Finnish” organization. In another example, the buying firm’s top management team was so satisfied personally at their company having “won” the race and having been able to buy out their year-long competitor that the message from upper management remained for the initial years one of silent pride and satisfaction at having won the race. Thus, whilst middle management did their best to ensure that the acquired firm’s staff was well incorporated into the organization, little mutual learning took place as long as top management kept to their “we won them – how proud we can be of ourselves” attitude. As long as a “hunting-style” mentality is prevalent in the buying firm, you cannot expect the target firm to be treated as an equal or a wanted partner. And as long as this happens, what is the expected level of well-being in the acquired firm?

“Acquisitions are like opium to management. Managers are greedy for increased returns, they are blinded by sales volumes, as the size of the company says words about the importance of the manager himself. Why? Well, you compete against your competitor for years. When you get the opportunity to buy them out, it is indeed very appealing, and it is very difficult to say no. In a way it is the last step in extinguishing your dearest competitor. The greed to extinguish your competitor as well as the opium-greed of management together explain why many mergers fail. You go into a merger for the afore-mentioned reasons, not for the sincere interest of making the best of the deal and wanting to cooperate.” (Finnish interviewee– buying firm)

Also, we are not dealing with a once-off project, over in either 100 days or a year after the deal. Lasting change and integration in terms of behaviors, identity or cultural change will take years, or even decades to accomplish. Whilst textbooks might suggest taking a milestone approach e.g. at 30, 100, 300 day intervals, this should not lead us to conclude that the integration is over after this period. In contrast, the case studies seemed to point toward two integration phases, and thus two integration “time zones”. The first one refers to the immediate activities taking place after the deal, the so-called integration measures. These might relate to administrational changes such as changing letterheads and company flags, technical changes such as changing IT and email systems or to greater changes such as setting up a new commercial organization or streamlining production. Often in the first phase after the deal, only the most superficial and explicit changes can be made.

However, the pain of change does not end there. In a second, long-term phase covering several years after the deal, the acquired company gradually learns its ways in the new company, gradually affiliating itself with the new company identity. Also, more important changes, e.g. with regard to streamlining production or investments will take place once the initial excitement of post-deal aftermath is over. Respecting the long duration of integration change is required if companies want to ensure that units that they comprise of are to some extent in line with the organization’s way of working, culture and identity. Otherwise, the company might consist of different units with different backgrounds and work habits, thus providing a multi-faceted and distorted face toward the customer, instead of a unified one. The case studies showed how it takes several years before any unit or company forgets its former company identification and is ready to take on the new company’s identity. The same holds for change in organizational behavior and culture. This is exemplified by a Finnish manager’s comment from an acquisition of a company with approx. 130 staff.

“Whilst we initiated changes in the acquired company’s organizational culture immediately after the deal, still now, four years on, these changes remain underway and are by no means over.” (Finnish manager – buying firm)

Holism by Understanding Differing Change Requirements

A third example of holism in mergers and acquisitions is provided next. We seek to understand how the participating organizations differ with regard to the extent of change endured by both parties in the post-deal era. Only by understanding the differences and similarities between the merging parties will the potential areas of synergies and conflicts be foreseen. In doing this exercise, it seems important to focus also on the more intangible areas of similarities and differences between the firms, including their organizational histories, cultures and national affiliations instead of only looking at organizational structures and strategies. Moreover, it seemed appropriate to consider also unit-level differences instead of assuming the whole organization to look alike globally. This seems especially crucial in today’s organizations, consisting of units that have either been set up or acquired at different periods in time and thus might have fundamentally different modus operandi.

In Teerikangas and Laamanen (2002), we found that the extent of post-deal change will depend on the post-acquisition strategy, approach or regime chosen by the buying firm (i.e. the target state of post-acquisition change) as well as the extent of organizational differences between the two firms at the time of the deal. The most significant variable to dictate the degree of post-merger change is the post-acquisition strategy chosen (Olie 1994). In other words, will the acquired unit continue on an independent basis, or will it be fully merged into the existing operations of the buying firm? Based on three examples of acquisitions, we found that the extent of organizational differences and the post-merger strategy chosen will together dictate the “integrative challenge” in the merger or acquisition (Teerikangas and Laamanen, 2002). It seemed relevant to consider the need for post-deal change at both the level of the acquired firm as well as at the level of acquired units, as units might boast different backgrounds and organizations than the owning firm itself. Thus, differences between the buying and target firms were identified with regard to unit structures and cultures, organizational structures and cultures as well as national cultures. The aim in the integration in the studied cases was to have the new units functioning in line with the organizational structure and culture of the buying firm.

The analysis of the integration phase showed that areas where the acquired unit and the buying firm shared similarities were easy to integrate or even became factors speeding the integration work, whereas areas of difference provided the arena for post-acquisition change and thus areas of potential threat for the success of integration. Often, only the explicit differences, i.e. strategic and structural differences were identified by the buying firm early on. Differences in both organizational and national cultures took between months to years to recognize. In the meanwhile, the selected integration management approach might not have corresponded to the needs of each of the units. To take an example, this ultimately resulted in the acquired British unit’s longer integration time, as the means of integrating the unit followed a Finnish logic and did not match the managerial needs of the unit. It took years after the integration for the Finnish buying firm to recognize how different the management style required for the British unit was and to adapt its approach accordingly.

We thus argue for the need to take a holistic view to identifying differences and similarities between buying and acquired firms and / or units. This means going beyond the tangible areas such as strategy and structure to also include the more intangible areas of differences between the firms, including organizational and national cultures. By so doing, the buying firm is more able to adapt its approach to the particular needs of the acquired firm / unit and avoid getting into years of misunderstandings stemming from its cultural myopia.

To conclude, we note how the examples we have looked at within our first theme in Systems Intelligence, namely holism, have aimed at illuminating different types of systemic behavior embedded in mergers and acquisitions. The examples we presented concerned:

1. Seeing mergers and acquisitions as a process from evaluation to integration;
2. In doing so, realizing that also the organizations’ histories and pre-deal relationships are likely to influence the ease of cooperation and integration efforts, and how the implementation of change in mergers and acquisitions is ultimately a continuous process and not a once-off change that can then be forgotten,
3. Each deal will differ owing to the degree of change required and the extent of differences and similarities between the merging organizations, there is no “once-off” rulebook as to how to succeed in all cases.

Without taking a holistic and systemic perspective to the phenomenon, the buying firm is likely to fall into one of the above traps and miss out on the opportunity to create long-lasting positive change.

The Importance of Minor Changes and Acts

... at times success can be dependent on respectful behavior, e.g. shaking hands with shop floor staff ...

After looking at holism, achieving major breakthroughs through initially small-scale changes is the second key feature of Systems Intelligence that we focus on in this paper. In this and the next three chapters, we will elaborate on this particular feature in the context of mergers and acquisitions. In so doing, we will focus on two aspects of change. First, we will explore how small acts and the smallest behaviors can have large-scale impacts on the successful progress of mergers and acquisitions. We will show how at times success can be dependent on respectful behavior, e.g. shaking hands with shop floor staff. In a second stage, we will question the reasons why so-called “break-through” changes rarely occur in mergers and acquisitions, and seek to provide answers to the lack of “excitement”, “innovation” and “novel avenues” in the merging of organizations in today’s corporate environment.

The example of mergers and acquisitions is an exquisite one, as total success in merging organizations requires a variety of skills. Besides the traditional business and technical skills, also human touch is needed in understanding the feelings of the acquired company before and after the deal, in understanding the background and culture of the acquired company, and in understanding how the buying firm’s behavior impacts the way the merger is experienced in the acquired firm. Thus, we argue that in addition to requiring a holistic perspective for success, also the theme of small actions having a large-scale and long-term impact on organizations’ well-being, performance and integration seems a particularly pertinent one to illustrate the dynamics of mergers and acquisitions.

Minor Changes and Acts - Managing the Employees’ Mental State Prior to the Deal

The attractiveness of the buyer was found to greatly depend on the way representatives of the buying firm behaved during the evaluation phase.

A first example that we will look at in greater detail is the way small actions taken by the buying firm before the deal will impact the perceptions of staff in the acquired firm. A significant, and hidden dynamic inherent to the evaluation phase is the attitude that the acquired firm takes toward the deal and toward the buying firm. Earlier research has shown that this depends on the strength of the acquired firm’s own culture as well as the perceived attractiveness of the buyer (Nahavandi and Malekzadeh 1988). The findings of this research further deepened these constructs. There seemed to be both an element of fear toward the deal as well as an element of attractiveness toward the buyer.

In terms of fear, firms that had already been acquired, and thus had experience with mergers and acquisitions generally reacted with less fear than firms that were acquired for the first time. Also, firms that clearly understood the reason why they were being sold, e.g. their owner retiring, took the news more calmly than in the case of a suddenly announced hostile takeover.

The attractiveness of the buyer is the perception made by staff in the acquired firm of the buying firm. This attractiveness can depend e.g. on the buying firm’s national background. Thus for example European firms preferred European owners to e.g. American owners, who were not seen as the best possible buyer owing to their bad reputation as long-term owners. It can further depend on how well the buying firm is doing financially and how good a reputation it has in the industry. In this sense, Nokia would probably be the ideal owner choice for many firms in the industry as compared to smaller players that are not doing as well.

The attractiveness of the buyer was also found to depend on the way representatives of the buying firm behaved during the evaluation phase. Importantly, sound inter-personal relationships formed at the management level at this stage resulted in the integration phase in a good cooperation between the firms and an easier integration start. Whilst staff rarely gets the chance to meet the buying firm’s representatives at this stage, they will use whatever information available to them to form their “informed” opinion on the potential buying firms and then begin rumoring about and debating the alternative buyers. Thus, the behavior and moves of the buying firm’s due diligence and negotiations representatives will be under close scrutiny. The same will happen to any official statements made by the buying firm. This is understandable human behavior given the uncertainty that the prospect of being bought by another firm represents. In the pre-deal months, employees dwell in feelings of anxiety and fear of the unknown, as the following quotes illustrate:

“You don’t understand the dynamics in mergers well until you yourself have once lived through the agony of being acquired.” (Finnish senior interviewee with M&A experience)

“But this new thing from Finland, who are they, what do they want, what will they do to us? There was worry about the future. The bottom line was that an alien takes our learning from over 100 years away and will shut everything down and shift operations to Finland. In fact, in reality the reverse has happened.” (American interviewee describing feelings prior to the deal)

As a consequence, the buying firm can begin acting in a responsible way from its early relationships toward the target firm onward. Indeed, by realizing that every move it makes is a step forward in developing a lasting relationship based on trust and respect with its prospective future employees, the buying firm can begin winning over the hearts and minds of staff in the acquired unit. The first quote below exemplifies this type of behavior in a Finnish buying firm that took an approach based on warmth, empathy, caring and respect for the acquired firm’s past and experience. As the same touch continued after the deal, we need not emphasize that the merger was a success thereafter as well. A more negative example is provided by the second quote below.

“Their focus in evaluation interviews was on understanding the people – how we behave, what are the staff’s competencies, including their social competence - and on getting to know one another. We reached a good level of mutual understanding at this stage already.” (Acquired firm’s manager in Germany)

“Our previous American owners seemed distant when coming to visit us. They didn’t greet and shake hands with all employees they met when touring the site (as the tradition goes in France). We felt insulted. It seems that they didn’t respect us.” (French interviewee on feelings toward the previous American owner)

The reactions of the acquired firm’s staff toward the deal and the buyer can be summed up in terms of the mental state in which the acquired firm enters the deal. The greater their level of fear toward the deal and dislike toward the owner, the more cumbersome the early phases of integration will be from the perspective of staff satisfaction. Whilst mergers and acquisitions always induce an element of fear or uncertainty, the smaller this uncertainty is, the easier the start of the integration. In this sense, the buying firm begins its integration activities already in the evaluation stage through the impressions they make on the acquired firm’s management. These impressions often cascade throughout the organization through rumors or management confidence and trust toward the deal.

Minor Changes and Acts - Managing the Employees’ Mental State after the Deal

The same types of rules apply when we look at staff reactions to changes and integration activities in the post-deal implementation period. Figure 1 shows the uncertainty curve (as drawn by interviewees) for a factory that was acquired by a Finnish firm. After recovering from the uncertainties regarding the deal itself, the site plunged a few times toward great uncertainty as it was hit with negative news related to closing of machines and layoffs.

The studied cases showed nicely how the staff’s mental well-being and attitude toward the merger followed an uncertainty / motivation curve in times of change. Prior to the deal, there was a wealth of anxiety and worry. This decreased quite soon after the deal, as the new direction was set and post-merger change efforts were initiated. The greater the staff’s confidence in the new future, the sooner their uncertainties wore off. The same trend continued in the years following the deal. All positive news regarding investments and growth signaled an increase in commitment and motivation, whereas negative news regarding layoffs, machine closures etc. marked periods of rising uncertainty.

Figure 1. Example of the uncertainty / motivation curve at one of the studied factories. This is a summary of the curves as drawn by the local interviewees in 2003 when visiting the site.

The interest in looking at the level of uncertainty in the acquired or merged firms is that the level of uncertainty generally represents a good approximation of the mental well-being in the firm. The better the staff feels, the more likely they are to be motivated to work for the firm and focus on contributing to its development. However, high levels of anxiety and uncertainty are likely to drop down the atmosphere and take the staff’s focus away from work to worrying about their personal future and even to gossiping about the new owner. Taking this approach, we can argue that the primary task of integration management becomes not only the successful implementation of post-merger changes but in so doing ensuring the well-being of staff in the years following the deal.

...good integration management was characterized by Systems Intelligence.

In determining the outcome of a merger or acquisition, the triangle formed by the staff’s well-being, the way post-merger change is managed and the extent of post-merger change required (or the integrative challenge) will prove significant, in that one does not succeed without the other. Examples studied in the research project show that successful examples succeed owing to particular attention to the post-merger phase. Whilst this sounds like a cliché, deep down it is not. Integration management means that the integration phase is well taken care of. Successful acquirers were aware of the basic elements of successful integration management. Taking quick action after the deal instead of waiting for months, if not a year, prior to taking action is a means of ensuring that the acquired unit does not dwell in rising uncertainty. Moreover, acquired units and firms that were granted a clear vision for their future seemed more satisfied than ones that were left unaware of their future. Likewise, good integration management is seen in communicating the changes taking place toward staff of the acquired company, instead of leaving them to come up with rumors regarding their future by themselves.

Ultimately, good integration management was characterized by components of Systems Intelligence. The analysis of one successful case enabled to show that the implicit integration philosophy taken by the buying firm consisted of values such as openness, respect for the other, trusting and caring, changing together, keeping feet on the ground by reminding staff that integration is not hype but normal work. On the contrary, a haughty, disrespectful approach is not likely to get the sympathies of the acquired firm’s staff. This is where it gets interesting. Few firms deliberately want to be nasty to the acquired firm. However, as the acquired firm often is a firm against which one has competed for years, if not decades, it does happen that at least the ego of some top or senior managers cannot help “showing off” in the integration phase. This can be seen e.g. through a strong not-invented-here syndrome disabling the usage of the acquired firm’s technology to ensure improved solutions, given that “our solutions have always been better”. Also, the acquired firm might not be allowed to use its former brand, as the buying firm wants thus to show how it has “vanquished the competitor for good”. Whilst these might appear to be small things, to the acquired firm these are continuous signs of disrespect. In other words, all action by the buying firm is constantly monitored by the acquired firm’s representatives. Thus, in a merger or acquisition, disrespectful, “superior-like” behavior is not tolerated and it will not enable ensuring the motivation of staff. Moreover, these human acts can lead to a decrease in sales and thus a decrease in the potential for value creation through the merger or acquisition. This all becomes all the more difficult in cross-border situations, where the buying firm meets a firm from another country, where the same rules of management might not apply. The need for a respectful approach becomes all the more significant.

Minor Changes and Acts – Achieving Cultural Change

In our third example of small actions leading to larger-scale change, we will look at how change in organizational cultures is achieved. In the studied cases, changes induced to the acquired units concerned at least “superficial changes” such as its office layout, visual identity, reporting style, but also more “in-depth changes” concerning production efficiency, sales internationalization, the strengthening of sales support functions such as marketing and technical product service, new approaches used in research and development and changes in expected management style and behavior. Such changes are paralleled by a greater presence of the buying firm’s management as well as by contacts between the two firms at different levels of hierarchy. In addition, the acquired firm might want to communicate its organizational values through a set campaign.

We found that any change and any contact with the buying firm represented not only an operational or technical change or contact, but a cultural change, and as such helped to bring forward a gradual change in mentalities. The studied cases showed that all of the above-identified changes gradually molded and changed the acquired firm’s way of operating, and thus changed each unit’s organizational culture. In other words, cultural change does not take place through the sole medium of “organizational culture” programs, but through the integrality of all changes induced, each of which communicates its bit of the expected organizational behavior and culture.

Cultural change does not take place through the sole medium of “organizational culture” programs, but through the integrality of all changes induced, each of which communicates its bit of the expected organizational behavior and culture.

Whilst the operational integration measures provide changes to the way each function is used to working, the change of leadership as well as exchanges with the buying firm help to promote and understand a different management style and prevailing organizational behavior. Thus, departments or units that are most in touch with either the integration leader or the buying firm’s representatives in general are seen to change faster than those where the majority of staff is not in contact with the outside world. In any case, this does not mean a one-month or a one-year change, but rather a continuous process fuelled by change, interaction and a set direction. The studied cases showed how cultural change does not only take place through organizational culture or value programs per se but also through the practical changes that are made throughout the organization, from office layout changes to changes in manufacturing.

Cultural change that has been implemented in a way that is felt sensitive in the acquired firm seems to gradually result in a stronger identification and thus motivation toward working for the buying firm. Thus, whilst it seems optimistic and unrealistic to expect a total shift in organizational behavior given the imprints that time has left in each member’s mind, the gradual changes will over time move the acquired firm toward a new organizational culture and a new organizational identity. The integrative challenge becomes one of successfully changing the mental mindset of the acquired firm. Again, we do not mean a once-off brutal change, but a natural, long-term change of mindset that naturally accompanies post-acquisition efforts, where the integration strategy involves post-deal changes.

On the long-run, in the absence of a conscious building of organizational culture or identity (i.e. if there are no incentives for units to work toward a shared goal in a similar manner), the existence of different organizational cultures and different identities within a company can lead to conflicts between these units. In this sense, some degree of cultural change is positive as it avoids a longer-term problem of having a global organization with dispersed cultures and identities. We note that it is normal for each unit to have its own culture and an identification to the unit as well as to the parent. However, when the importance of this feeling grows and becomes a negative force within the whole company, difficulties are likely to ensue, as the organization does not work in one, but many directions.

Breakthroughs – Illusion or Reality in Mergers and Acquisitions?

In a fourth phase, before leaving the theme of change, we will pause to wonder where is excitement in mergers and acquisitions? Why is it lacking and why would most mergers and acquisitions not be characterized as platforms for breakthroughs. If we acknowledge that mergers and acquisitions represent complex systems that require to be treated as such, we get very close to understanding the keys to successful implementation of post-merger change. However, this is not enough to explain the logic of breakthroughs.

What is telling about the lacking of explosive change is the fact that even when judging the success of mergers and acquisitions, most executives and researchers are content with the phrase “well, they’re doing ok.” It seems that seeing the merger as an opportunity for renewal, exploration into new business areas and mutual learning is not there. It is enough, if the acquired firm begins reporting good results and even better if after some years its staff behaves more or less like one is supposed to in this firm. Thus, the exploration of exciting new avenues as offered by the prospect of a merger is not even considered. It is outside our frame of mind, outside the mental models of buying firms.

Another characteristic lacking from the merger rhetoric is the notion of mutual learning. Whilst it sounds like a nice word, it is rarely used by executives involved in mergers and acquisitions. The quote below illustrates well a typical rejection mode as to the possibility of mutual learning – the buying firm simply feels itself “superior” to the acquired firm. The following quote further elaborates this theme by providing the example of a firm that suffered from a superiority complex through a “not invented here” syndrome. Whilst these behaviors are human and understandable, the business consequences are less so. Interviewees mentioned failed business opportunities, dissatisfied customers, missed product launches, only to mention a few.

“The guiding logic behind owning their technology was a defensive one. We buy out a competitor to keep out new ones. We didn’t see a huge combination potential for our technologies. In fact, most of our engineers considered our products to be superior to theirs. So we have to admit that we haven’t use their solutions in our new product development, instead, we have tried to offer their former customers our solutions.” (Finnish interviewee – buying firm)

“There is such a strong not-invented-here culture in our company. Basically, anything that is not created by our main research department is not considered for development.” (Finnish interviewee – buying firm)

To conclude, we find that today’s mergers and acquisitions seem at best to reach as far as holistic thinking and thus ensuring the successful outcome of the merger. However, whilst the concept of learning from one another remains distant to most buying firms, we will still need quite a shift of mind until organizations would be ready to view mergers and acquisitions as something even more – as an opportunity for corporate renewal and radical business change. In the world of today’s mergers and acquisitions, this indeed seems like an utopist idea, a dream. However, the idea does seem plausible when reading through the tenet of Systems Intelligence. This would seem to suggest that our daily lives, ways of doing and ways of seeing still have a road to go toward being Systems Intelligent. The next chapter will attempt to provide further clarification and more pointers as to how to explain this phenomenon. We will explore how our mental models impact the way we act, e.g. when faced with mergers and acquisitions.

On Mental Models

An organization’s culture creates its own System Dictatorship, in that it becomes the implicit way of doing, the implicit mental model one is supposed to confine to in this organization.

The existence of mental models guiding our ways of thinking and doing, and the ability to be able to see and possibly to reframe them are the next features of Systems Intelligence that we will touch upon in this paper. Indeed, until we have become aware of the models guiding our behavior, we remain prisoners of the systems we live in. Typical of such behavior is the way people categorize their lives according to societal expectations, e.g. “I need to study, then I work, then I get married, then I work more, then I get retired, ….” Whilst there is nothing wrong with this kind of thinking in itself, what often frustrates people is the feeling that they lack opportunities to strike out of the model and be innovative, be it only with regard to small aspects. Systems Intelligence advocates for this type of change optimism, for the ability of stepping outside comfort zones typical to us, of seeing situations differently (reframing), and in so doing, creating opportunities for personal, organizational or societal change, renewal and improvement.

The ghosts of each unit’s old ways live on and a myriad of mental models dance their way in the organizational jungle.

In the following chapters, we will approach the notion of mental models in mergers and acquisitions as follows. We will begin by looking at what types of mental models exist in organizations and what causes them. Thereon, we move on to showing the implicit ways in which mental models affect organizational behavior. In a third phase, we start seeing how in some sense, these models are System Prisons the organizations are locked into, models that limit their view of the world, and stagnate rather than advance their development. We further show how an organization’s mental model guides it when it enters a merger. Instead of seeing the deal as an opportunity of moving out of its own prison, companies ensure that the acquired firm enters their own existing prison. This takes time, however, and in the meanwhile the organization exhibits a jungle of mental models that are rarely acknowledged or recognized officially. Given the wealth of implicit action taking place under the tip of the iceberg, we begin to get a glimpse at the powerful undercurrents in mergers and acquisitions. This is the focus of the fourth chapter on mental models, where we look at their stagnating impact on organizational change.

Unless organizations are able to see through their mental models and those of the companies they buy, they might lose out on many cues and thus end up taking the wrong approach toward the acquired firm. We claim that some degree of reframing is an essential feature of successful mergers and acquisitions. Reframing will be looked at once we have gone through the theme of mental models.

What Mental Models in Organizations?

In the domain of organizational life, mental models enter the picture to characterize our lives. Indeed, organizations typically become systems of thinking of their own, through the historical paths that they have undertaken, the types of traditions they have become used to, the types of owners and leaders they have grown under. Thus, organizations exhibit different cultures and mentalities. However, they are rarely totally aware of the models that they are carriers of. Whilst the trend today is to expose and advertise the values an organization aspires to publicly, the “real culture” of the organization is often something different. Thus, each firm has a culture, a spirit. However, this described culture or spirit differs from the explicit values the organization claims and aspires to. It seemed that understanding the “real” organizational culture of the firms participating in the studied mergers and acquisitions was more important than understanding their aspired values, or their “official organizational culture”. This real culture included phenomena like “not invented here” – syndromes, i.e. both positive and negative characteristics about the organizations. There was often a distance between the stated and the actual values of the studied organizations.

Moreover, we should not consider organizational cultures as unitary elements, i.e. there is not one organizational culture in a company, but each unit has an organizational culture of its own. This is especially manifest in the case of companies that have grown through acquisitions. Each unit’s and firm’s organizational culture seemed to depend on its history, the business it has been in, the size of the company, the type of leader it has had, the ownership of the company, but also the national cultural environment in which it has developed. Each unit’s or firm’s organizational culture is reflected in the management style in use, e.g. in terms of openness of communication and expectations of hierarchical behavior, but also in the way the organization has operated in its different functions, e.g. sales and marketing, production, research and development, the style of reporting it uses, the company’s visual identity and the office layout.

If the presence of mental models is not seen or accounted for, they are let free to roam around, causing opportunities unseen and damage uncorrected.

It is often to counter the negative influence of having conflicting cultures in the organization that an official culture through aspired values is introduced. Despite the advertisement of the new official culture and its values, more often than not, these “unofficial cultures” (mental models of the past) of the firm’s different units continue to live their own lives. Whilst the official message is to move toward the new age and the new way, old traditions do not die out instantly. Thus, looking behind the scenes, behaviors of a company’s units worldwide will characterize each unit’s prior organizational histories and experiences. Whilst one might tend to openness and flexibility, another one might have the tradition of building walls to be safe from attacks and external disturbance. The ghosts of each unit’s old ways live on and a myriad of mental models dance their way in the organizational jungle.

This brief introduction served to show us how mental models guide the lives of organizations through the cultures they have developed and that they either explicitly or implicitly adhere to. In a large merger, the cultural challenge is likely to differ per unit, as each unit boasts its own unique mental model based on its history and traditions and changing the model will require change at both explicit and implicit levels of the organization.

The Danger of Mental Models Lies in Their Implicitness

Now that we have looked at how organizations create their own mental models and consist of many mental models, we begin to understand the continuous implicit impact that mental models have on the behaviors of firms and their employees. The danger with mental models stems from the fact that if (and often so) their presence is not seen or accounted for, they are let free to roam around, causing opportunities unseen and damage uncorrected.

A powerful example is provided by the impact of national cultures on managerial behavior and organizational cultures in global organizations. Indeed, in addition to organizational mental models, another layer of mental modeling is brought by the fact that organizations are not only carriers of their organizational lenses, but also of their respective national cultures (see e.g. Hall 1976, Trompenaars 1993, Lewis 1996, Adler 1997 and Hofstede 2001). As organizations are embedded and grow in national environments, they share to some extent elements of their surrounding national culture. Thus, by impacting organizational culture, national culture indirectly influences managerial behavior and the integration philosophy adopted by the buying firm. These differences become a challenge if they are not recognized.

The organization’s mental model easily becomes a barrier to change, a force of stagnation, a force of hindrance.

The studied examples of mergers and acquisitions showed how strongly embedded in the Finnish tradition and culture the managerial styles and organizational cultures of the studied Finnish firms were. When acquiring abroad, the same slogans, management styles and expectations are often automatically put upon the new foreign counterpart, without realizing that many of these ways and expectations are based on the Finnish mental model, e.g. Finnish buyers would typically try to implement managerial systems based on the notion of responsibility and delegation without follow-up, which is not typical in many other cultures. As long as the buying firm is not aware of the impact of its own background on its mental models, it might not realize that it cannot expect new staff and newly acquired units to immediately transfer to its ways of working. If it does not explain what it expects and why, it is not likely to get the response it wants, and hence the vicious circle of “why don’t they work our way” or “they aren’t efficient” begins. In a successful acquisition, the integration leader was able to explain his requirements and expectations to the staff, and also explain why change was needed. Once they understood the reasons guiding the new choices, they were more ready to comply.

“We explained, for example, that during the times of the former owner, no attention to quality was made given that he was not interested in growth. As us, being the current owner, are interested in growth, this requires a mindset focused on improvements, e.g. in terms of quality.” (Finnish interviewee)

For another, firms that have grown through acquisitions often tend to base the development of their “official culture” on the management style and culture in use in its earliest fortress, e.g. its first home country plant or office. This is the culture that they develop and begin to advertise to the newly-acquired units, e.g. “transparency and openness”, “trusting one another”, … However, in parallel to this official saga, we have to realize that not only are the official values target ones, but also that in the meantime the buying firm and its units each through their behavior portray their actual organizational cultures and mental models. Thus, whilst the official slogan might say “trust and transparency”, the reality in action might look different.

Whilst the targeted values take years if not decades of mutual interaction to be implemented in the least, in the meantime we assist to the dance of the different units’ mental models like unseen ghosts of the past that are actually not supposed to be there, but that are in practice quite difficult to remove or change. And the newly-acquired unit with its mental model only adds another piece to the jigsaw. We now begin to get a grasp at the implicit human and mental challenge in organizational life.

These examples served to show the danger within the implicitness of mental models. Regardless of whether they are seen or not, they have a continuous impact on organizational lives. Organizations can choose whether they opt to see them or not.

Mental Models as System Dictatorships

Having acknowledged the presence and implicit nature of mental models guiding organizational life, we can move on to seeing how in some way, each organization’s culture also creates its own System Prison or System Dictatorship, in that it becomes the implicit way of doing, the implicit mental model one is supposed to confine to in this organization. Seen from this perspective, mergers and acquisitions would become opportunities for breaking free of both firms’ existing System Prisons or mental models and taking a step toward the new, opportunities for reframing for both organizations. We are not surprised to see that this rarely takes place.

Instead, mergers and acquisitions are often marked with an approach strongly related to the buying firm’s typical way of doing, as most of its managers are embedded in that culture or mental model. Whilst individual managers might act with their own flair and style, breaking away from the routine, it seems that the overall luggage that is transferred to the target firm, including the new flags, the new reporting system, relations to higher bosses, are all marked with the buying firm’s culture. In this sense, instead of opening themselves to mutual learning and the opportunity of breakthrough change, firms seem to lull back into the comfort zone of “making them look and act like we do.”

Whilst it often is the official aim to ensure the integration of the new unit into the existing structures and ways of operating of the buying firm, it seems that the behavior of both parties is ultimately undermined and determined by their mental models and traditional ways of doing. Not only do both firms and individuals have difficulty breaking out of their own mental models, but also, it is difficult to see the surrounding mental models and their impact on the progress of their cooperation. Let us take a few examples to illustrate this point.

Making one’s way in a merger or acquisition becomes like swimming on waters without seeing what lies under the water and understanding the currents that are influencing your way.

For one, it seems that the buying firm’s behavior at both the evaluation and integration stages is strongly undermined by the organization’s and the individual managers’ mental models. In other words, the buying firm’s approach and behavior in the evaluation stage says a lot about the prevailing management style in the buying firm. A company focused on financial management will focus on financial issues in the evaluation, whilst a company with a more humane culture will take organizational issues into account already at the evaluation stage. The approach taken will also be felt in the acquired firm. The resentful and haughty evaluation manager will be received differently from the humane and respectful one. Likewise, the acquired firm’s cognition will, together with the approach taken by the buying firm, help to explain their reaction to the deal and toward the buyer.

Looking at the integration management measures taken by each buying firm, these seemed to represent each firm’s “integration philosophy” behind the integration phase, consisting of themes or slogans used in the integration period, such as “both sides need to change”, but more often than that, they consisted of the implicit values guiding their actions and behaviors in the integration phase. These could be personified to the integration leader as well as to the actual practiced organizational culture in the buying firms. For example, one buying firm’s members explained that their firm’s organizational culture was an informal and relaxed one with a non-hierarchical management style. Not surprisingly, the integration phase was characterized by these same themes, which were as such visible in the integration approach taken as well as the integration leader’s management style.

We see that as firms are so embedded in their mental models, these become automatically and unconsciously transferred into their behaviors, as seen throughout the evaluation and integration processes in mergers and acquisitions. Thus, mergers and acquisitions become mirrors reflecting the mental models and behaviors of the participating organizations. If this is so, is there any place for mutual learning and breakthrough thinking or are we more concerned with the ongoing nurturing of the present model?

Mental Models Resist Change

Mental models in organizations also tend to have a slow-down impact in situations of novelty and change, e.g. during mergers and acquisitions. The impact of old ways of doing, old habits and the old organizational culture is seen in the natural resistance against change that takes place throughout the acquired organization. Thus, the existing mental model easily becomes a barrier to change toward the new one. It becomes a force of stagnation, a force of hindrance. In operations, this is seen in the resistance of the acquired organization’s old ways of doing, e.g. in production or research and development. In changes related to expected behavior, resistance seems to stem from a mix of the target’s organizational culture as well as its national culture. Thus, the ease of converting a German unit toward a more open and responsibilizing management style is a change both to the unit’s culture but also to the traditional Germanic management style.

Instead of opening themselves to mutual learning and the opportunity of breakthrough change, firms seem to lull back into the comfort zone of “making them look and act like we do.”

Until the change has been achieved, the mental model of the acquired firm continues to haunt and live on. The degree to which the resistance and impact of the old habits will be seen throughout post-acquisition times seems to depend on the approach and philosophy for integration adopted by the buying firm as well as the amount of contact with the buying firm. The greater the amount of contact, the faster the unit changes, and the faster also cultural resistance is countered. Also, the more respectful the integration philosophy, the less room will be provided for resistance. A disrespectful approach is likely to encounter greater and longer-term cultural resistance than a more respectful one.

To take an example, in one of the studied cases, the buying firm adopted a management style quite typical to Finnish companies, characterized by responsibilizing management, but also typical to its own organizational culture, characterized by a sensitive, relaxed and humane approach to work. Despite the changes that needed to be made in the acquired firm, cultural resistance did not take the lead given the sensitive integration philosophy and approach undertaken by the buying firm.

The significance of old mental models resisting and haunting is seen in companies that have made acquisitions over the years. Prior to the 1990s, the integration strategy followed by companies was one granting the acquired units independence of operations. In terms of organizational culture and company identification this means that a multinational that today boasts an official culture with values and slogans can in practice consist of a multitude of local identifications. For example, units that have for long been used to independence will not easily let go of it. In the meanwhile, the company might have launched a new organizational culture program. These new behaviors and values will not be accepted in a large organization overnight. The actual behavior in the company will be dictated by the habits that the formerly independent units are used to in their inter-unit cooperation. If a unit’s culture means bullying others, so they will do, even to a recently acquired new unit. This happened in one of the cases, where the acquired company consisted of two previously merged local companies. This earlier merger had left both sides with a wealth of anger toward one another, so the new acquisition brought the opportunity for both sides to revenge against one another. It took the acquiring company some years until it saw the interpersonal dynamics taking place behind the scenes and until difficult persons were taken aside. This resulted in five difficult years for especially those factories that had been at the forefront of the fighting.

“There are many different cultures in our company. One way to look at them is to divide them along a timeline, as our company consists of companies acquired during different periods. Thus today, each of these companies is at a different stage in their integration work.” (Finnish manager  – buying firm)

To conclude on mental models, it seems that instead of seeing mergers and acquisitions as opportunities for reframing and renewal, organizations end up shifting their own mental models onto the newly-acquired organization, and basically enlarging their System Prison to also the acquired firm’s operations and employees. The System Prison is enlarged both in terms of the new organizational culture, but also in terms of the implicit national orientation guiding the organizational culture. In encountering the new model, the acquired firm’s existing model puts up silent resistant for years, unless they are well taken care of. The danger in mental models stems from their implicit nature and the way they are embedded in our ways of doing and being, without us even realizing it. The challenge thus becomes one of being able to identify one’s mental models and then being able to reframe them to the situation at hand. This is the topic of the next chapter.

The Ability to Reframe

Having recognized the power of mental models in undermining our actions, we can begin seeing the importance of the ability to reframe and to be able to see things from the other party’s perspective. We will next proceed to providing examples to illustrate our point.

A first example relates to the fact that organizations often seemed at loss at how they will ultimately ensure the cultural integration of the acquired firms into their operations and organizational culture. Thus, whilst they were good at the explicit managerial actions, such as ensuring a production plant runs at the right speed, they were quite at loss at understanding how to manage the hidden organizational undercurrents. In other words, they had difficulties in seeing the mental models involved and understanding how to ensure that these would be able to live in harmony in the same organization. For this, they would have needed the ability to see both their own and the other party’s mental models, and this in turn would have required the reframing of their own mental model and adapting their managerial approach to the situation at hand.

A second example concerns the need to take different national cultural orientations into account when buying a company abroad. Often the acquired firm’s national environment and national culture force some degree of reframing and adapting to the new situation.

Third, reframing is particularly useful in the research and development function, where intercultural encounters are numerous if engineers are involved in cross-border project work. Where differences in mental models are not accounted for, misunderstandings and project delays might ensue. In one example, the integration phase of a research unit in the UK proved difficult until the

Buying firms tend to engage acquired firms into their own “Systemic Prisons”.

buying firm realized it could not operate in the UK with the same management style as in Finland. The British engineers expected follow-up from the bosses, and were not receiving it. They were puzzled. In another example, two units tried for years to work on a joint project, laden historically with treason and jealousy. In difficult project meetings both parties tried to put the blame on cultural differences, whilst it was really in the already history-laden relationship between the two units. Cultural differences were an additional source of problems. These examples from the research function show that whilst cultural differences are present, they can be either a core source of problem or made to look like the core problem whilst the real issue is elsewhere.

Fourth, reframing is also needed when going into foreign markets. Whilst this seems straightforward, in reality it is not often so. A good example is provided by cases of small firms being acquired for the purposes of internationalizing their sales presence. Such firms have to change from being a domestic to an international player. This requires a shift of mindset, as the rules played on the home market do not apply abroad. The company has to evolve to understand other markets instead of treating them as “deviations from the norm” or treating their own sales force as “unable to sell in the local way abroad, not being good enough”.

Finally, these difficulties, to a different degree, exist also at the level of larger sized firms, who at times had difficulties understanding the true dynamics and nature of foreign markets and what it requires to sell successfully there. For example, American industrial customers want to be visited, and thus a large sales force is needed. Also, the American sales force is motivated by a flexible salary as compared to a set salary in Europe. Both of these are deviations from the Finnish perspective and provided examples of where using an approach typical in your country on a global scale might not lead to optimal results. As a result, the firm will not enjoy its potential sales volumes if it is not able to adapt its approach to the markets served. This is an example of a “hidden cost” caused by a lack of understanding a foreign environment and the mental model guiding it.

To conclude, we note how the ability to reframe is essential to success in mergers and acquisitions and organizational life in general. We saw how reframing related to both identifying one’s own mental models and then understanding the target firm’s and the host environment’s mental models before being able to adapt one’s approach to the situation at hand. Going in with one’s existing mental model without changing it can prove either fatal or cause lost profits and sales revenues.

This debate, whilst strongly drawing from Senge’s (1990) notion of mental models, is also mirrored in literature on intercultural management (see e.g. Adler 1997, Schneider and Barsoux 1997, Marx 1999 and Kim 2001), whose main thrust lies in individuals’ and organizations’ ability to identify one’s own cultural background, the host environment’s background and then being able to adapt one’s approach to the situation at hand. This is illustrated in Figure 2, which compares the behavior of a monocultural and an intercultural manager, when faced with a puzzling situation. Instead of seeing the possibility of cultural differences and differing backgrounds and perspectives, the monocultural manager regresses back to one’s traditional way of doing and seeing. The challenge is to accept the anxiety and address the novel situation by taking an approach suitable to that situation. 

Figure 2. Reactions of a mono-cultural and inter-cultural manager when faced with a cultural difference they do not understand. The figure is adapted from the ideas presented in Marx (1999).

As compared to literature on intercultural management, Systems Intelligence takes a broader perspective by not confining mental models to the domain of national cultures only, as literature in intercultural management does. Instead, Systems Intelligence provides the freedom to see mental models in many ways, whether they stem from national or organizational traditions, societal traditions, professional traditions or individuals’ personalities. In this sense, Systems Intelligence helps to broaden our perspective and widen our view as to the significance of mental models in our everyday lives.

Systems Intelligence at the Level of Individual Managers

The example of mergers and acquisitions points to the dual challenge of Systems Intelligence in organizational life. At best, it would be hopeful if Systems Intelligence occurred at both individual and organizational levels. In practice, this means that whilst an individual manager in charge of the acquisition might prove to exhibit highly Systems Intelligent behavior, the success of the merger as well as the reactions of the acquired firm’s employees might suffer and drag on if the buying firm’s organizational environment into which they are welcomed is otherwise hostile and prison-like. Thus, it seems that organizations cannot get away by resting the responsibility of Systems Intelligent behavior on integration managers. They also need to think of how their organization’s blindness and the way that organization’s mental framework discourages newcomers from innovation and an exciting organizational ride. We have come back full circle to the System Prison mentioned in a previous chapter. Organizations lacking Systems Intelligent behavior are likely to kill off the initiatives and opportunities existing in the minds of the newly-acquired firm’s employees minds by forcing them gradually into the mental model they have, by engaging them in their existing organizational prison.

If we begin by looking at Systems Intelligence as exhibited at the individual level, we find that successful mergers and acquisitions are characterized by integration leaders exhibiting Systems Intelligent behavior. In other words, they see the merger as a holistic system, where a minor action or word will have consequences on the success of the deal. Moreover, they see the mental models involved, and are able to adapt their personal approach in the merger to fit the mental model of the acquired firm. Indeed, a large part of success can generally be personalized to the integration leader in charge of the change period. This is especially the case of small to medium-sized firms, where the role is a visible one. The role of the integration leader is crucial as he will be most in contact with the acquired firm’s staff and he will also come to represent the new owner to the new staff, as the following quotes exemplify.

”The presence of an integration manager showed that the buying firm really cared for us. Someone was in charge of us and was a living example of the change that we were going through.” (Acquired firm’s manager)

“His presence helped, it showed security. He was like a big teddy bear. He was a good communicator to people in the company. It was a good thing to send someone over instead of having remote control from Helsinki.” (Acquired firm’s manager)

Systems Intelligence in Organizations = Systems Intelligent Mergers and Acquisitions?

Besides the individual managers, ultimately Systems Intelligence is also needed at the level of organizations. Though individual managers involved in M&A might exhibit Systems Intelligent behavior, the organization that the acquired firm enters most often does not.

Instead, organizations are often trapped in the power of their traditions that have made them either bureaucratic or slow, blinding them to new ideas and opportunities. Once these traditions become engrained in the organization’s structures and ways of operating, they become forces of stagnation and imprisonment. This is how System Dictatorship is created. Looking at the examples provided in this paper, we see that a lot of organizations are in this very trap. They do not conceive of new opportunities as radical ones. Once they enter a new situation, they shift their existing mental models onto it instead of reframing for that situation. Thus, buying firms tend to engage acquired firms into their own “Systemic Prisons”, instead of utilizing the opportunity offered by the deal to enter a new and refreshing era cornered by mutual learning, respect and a sincere willingness to see the deal as an opportunity to create unique potential for both the well-

It seems that we begin to understand the lack of excitement in mergers and acquisitions. Are they all running “at the 0,64 rate” or even less?

being and market value of the enlarged firm. Albeit mergers and acquisitions have become today’s mania, listening to stories from staff and friends having undergone a series of them, respect, learning and excitement seem to be quite far from the daily experience.

We here come back full circle to the question raised in the introductory chapter in this paper: where is excitement and the potential for individual and organizational enhancement in mergers and acquisitions? Our review of typical examples of mergers and acquisitions has shown that whilst these examples have been more or less successful, they have not fulfilled the underlying potential inherent in combining two organizations, and we can rightfully ask, does this ever happen? Using the example of explosive possibilities of cooperation provided in Saarinen et al. (2004b, p. 16), we see that only too often, as firms enter mergers and acquisitions, instead of becoming stronger and more powerful together in all meanings of the word, they might at worst become less than they were as standalone organizations. In other words, the actual combinatory potential of the firms as two organizations becomes 0,8 * 0,8 = 0,64, instead of 1,2 * 1,2 = 1,44. As both organizations consist of tens, hundreds or thousands of employees (i.e. 1,2 * 1,2 * 1,2 * 1,2 …… or 0,8 * 0,8 * 0,8 * 0,8 * …..), we see how the

For an organization to become Systems Intelligent, it needs to create conditions for Systems Intelligent behavior to flourish.

difference between the minimum and maximum figures of 0,64 and 1,44 is likely to grow even wider, if we account for the individual contributions of all organizational members in a situation of either stagnancy or elevation. Taking the example of two organizations merging, both consisting of 11 members, the difference is already impressive, comparing 0,085 (=0,6¹¹) to 7,43 (=1,2¹¹). It seems that we begin to understand the lack of excitement in mergers and acquisitions. Are they all running “at the 0,64 rate” or even less?

We acknowledge that mergers and acquisitions are a challenge and many companies today are doing fine, but how much better could they do, and why do they engage in mergers and acquisitions if they aren’t ready to seriously affront the potential inherent in the deal? It seems that ultimately successful mergers and acquisitions should utilize a Systems Intelligent approach at the level of both individuals and organizations. What would this mean in practice?

For one, organizations seem trapped in the mental prison of quarterly results and stock market returns, and thus in a way understandably, need to focus on the bottom-line more than anything else. Being focused on the bottom-line, there seems to be a mental prison in place that sees financial results as stemming from logical steps and financial maneuvers only, e.g. focusing on plant efficiency, ensuring the same IT system globally to get the same figures. In parallel, the hidden potential for elevation or resistance provided by the organizations’ human minds is at worst not considered, or not given serious enough a consideration. Doing so, ghosts of old organizational traditions are let to roam around creating forces of resistance, whilst they could also become positive forces. The new organization is trapped in various collective as well as local mental prisons that inhibit its movement toward a better life for employees and in turn increased returns. As long as the only outcome measurement of mergers and acquisitions remains a financial one (hoping for soaring corporate profit in the post-deal years), the unique potential inherent in combining two previously distinct organizations remains underutilized.

Moreover, as long as the mentality in bringing together two organizations remains a non-Systems Intelligent one, the new firm will only be included in the Systemic Prison of the buying firm instead of being involved in building a future together with the buying firm. Ultimately, for an organization to become Systems Intelligent, it needs to create conditions for Systems Intelligent behavior to flourish. We refer here to conditions enabling a positive cycle of mutual learning, reframing and respect instead of forcing people down the spiral of resistance, bureaucracy and syndromes such as “not-invented-here”. A clear vision that is explained and made available to staff is one way of ensuring that all know the direction and are ready to go for it. Also, ensuring that the organization’s structures are conducive to cooperation instead of islet thinking, e.g. through incentives, or through organization structures that support cooperation and engagement instead of supporting turf-like thinking and sub-optimization. At the level of culture and behavior, behaving in a Systems Intelligent way, instead of forcing down values that staff have difficulty swallowing. Indeed, we may wonder whether Systems Intelligent behavior as such, without further guidelines, would lead to the development of right behaviors for our organizations? The quote below explains more.

”Though our organization doesn’t have values that it has written in stone, in the post-deal implementation period we argued for the use of common basic values, ones that are part of every child’s upbringing, e.g. being honest, communicating openly, mutual respect. We were not aiming at painting a beautiful and rosy future, rather we told the real situation with its positive and negative consequences. People need information; it is the lack of information that is hardest to bear. So we were direct, we said how things are in order to have our new employees trust us as people. If we are decent people, we believed that things would go smoother.” (Finnish interviewee)

We also note that whilst all persons can create change in their environment by behaving in a Systems Intelligent way, as one impacts the culture in one’s surrounding, we need to recognize that one’s position in the system influences the potential impact that one can have on the system. Thus, e.g. a CEO or a large project’s manager as in Fischer (2004), are positioned so that their Systems Intelligence or lack of it, has organization-wide consequences on the success of the project. However, if we remain waiting for those in positions to make changes, we remain trapped in a prison. Hence the call for us all to engage in thinking and acting Systems Intelligently at the level of individuals and organizations in order to make both our personal as well as our organizational and societal lives better. The articles in this book as well as in Hämäläinen and Saarinen (2004a, b) will provide insightful reading for this purpose.

Concluding Remarks

This article has explored Systems Intelligence in the context of mergers and acquisitions. We began the article by raising the question of where are breakthrough change efforts, radical change and explosive innovative potential in mergers and acquisitions? It seemed that these were lacking from most of our daily experiences when involved in mergers or acquisitions. In this sense, it seemed that today’s organizations have a lot to learn on the road to becoming more exciting, explorative and inspiring environments, i.e. in becoming more Systems Intelligent. Only by doing so could organizations consider novel situations they enter, such as mergers and acquisitions, as opportunities for renewal, change or growth.

We then realized that a lot of successful mergers and acquisitions do exhibit behaviors that are Systems Intelligent. We identified five aspects of Systems Intelligent behavior that seemed particularly pertinent in illustrating the typical challenges and success factors in mergers and acquisitions.

In a first stage, we argued for the need to take a systemic and holistic approach to understand the merger and acquisition challenge. Indeed any one approach, be it financial, human or managerial is likely to provide a disparate view of the change dynamics in mergers and acquisitions. A holistic view consisted e.g. in seeing the interrelations between the evaluation and implementation phases in mergers and acquisitions, in understanding the historical and long-term future perspectives to mergers and acquisitions and in realizing that deals differ as to the challenge of change inflicted on the participating firms.

In a second part, we moved on to understanding how small acts, changes and behaviors can have significant impacts on the success of mergers and acquisitions. Examples related to the importance of small acts and behavior before and after the deal in influencing the staff’s mental well-being. Another example related to the myriad of ways in which cultural change is achieved. We further initiated a debate as to where are major organizational breakthroughs in mergers and acquisitions? It seems that this view was so far from today’s organizational reality that it was not embedded in the rhetoric used nor the ways mergers and acquisitions are seen. In other words, they are regarded as “deals”, not as “opportunities for an exciting future”.

In a third part, we looked at how organizations’ mental models guided them in their action. We saw how organizations consisted of a myriad of mental models in contrast to the view of organizations having “an official value base”. Unless they are recognized, these mental models are let to roam around, disturbing the organization’s life, e.g. in times of mergers and acquisitions. Therein lies their very danger. They are implicit and difficult to identify without some effort.

.. a key cause for non-Systems Intelligent behavior stemmed from the mental model guiding today’s corporations, a mental model focused on financial performance and quarterly results only.

We argued that organizations’ mental models also become their System Dictatorships, forces of resistance and resilience toward the new, the different and toward change. We found how buying firms rarely enter deals with an approach conducive to mutual learning, instead they often aim to thrust their luggage onto the newcomer and thus invite them to join their mental models, engaging them in their System Dictatorships. In so doing, their System Dictatorship grows in size and importance. Through the implicit ways in which System Dictatorships we are engaged in influence our lives, we are guided by forces we are unaware of, instead of breaking free from them, identifying their existence and their influencing role upon our behavior.

We showed how mental models acting as ghosts of the past also had the impact of slowing down and resisting change efforts. Thus, if left unidentified, the acquired firm’s mental models often set up silent resistance in the years following a merger or acquisition. This is a further explanation as to why we should care about them. Can organizations afford having implicit forces of resistance roaming around and disturbing the present without even recognizing their existence?

In a fourth stage, we looked at the importance of reframing in new situations. The inability to adapt one’s approach to the situation at hand is often at the root of many later difficulties or missed opportunities in mergers and acquisitions. It is often the lack of reframing that is conducive to the lack of exploiting new opportunities.

Finally, we argued for the need for Systems Intelligence at the level of individuals and organizations for mergers and acquisitions to succeed. We noticed how successful mergers and acquisitions were characterized by the presence of an integration manager endowed with Systems Intelligence. However, whilst an individual might make miracles in a merger or acquisition, the excitement is likely to fall off as the new employees encounter and are forced to join the prevailing stagnant System Dictatorship that doesn’t encourage change or innovation.

Looking at Systems Intelligence at the level of organizations, we hit a key point. It seemed that as long as organizations are not acting in a Systems Intelligent way, we keep witnessing mergers and acquisitions that create unhappy employees and a systematic lack of potential for elevation as advocated by Systems Intelligence (whilst their financial results might look satisfactory). We argued that as they are not “quantifiable” nor “measurable”, they remain dismissed. Yet, such e.g. human, organizational and cultural forces continue to counter-influence corporations worldwide, regardless of whether they are measurable or not. The question then becomes, how long can we afford living in this denial mode?

We concluded by arguing that ultimately, successful mergers and acquisitions would be characterized by Systems Intelligent behavior and provided examples of how to achieve this. In doing so, we came back full circle to the individual’s capability in achieving change and to answering the initial question of this paper – where is excitement and elevation in today’s mergers and acquisitions? Whilst persons in positions of power might be better positioned to achieve change, ultimately, the opportunity and responsibility for change rests in each one of us. Thus, whilst Systems Intelligent Mergers and Acquisitions might be more of a myth than reality in today’s organizational settings, each one of us has the seeds to make a difference in the future.

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Internet Sites

Teerikangas Satu. May, 2002. Managing the Impact of Cultural Diversity on Inter-Organizational Encounters, a Literature Review, European Academy of Management, 2^nd Annual Conference, Stockholm. http://www.sses.com/public/events/euram/complete_tracks/east_west_best/east_west_best.htm

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Teerikangas Satu and Laamanen Tomi. December, 2002. Dealing with Cultural and Structural Diversity in Cross-Border R&D Centre Acquisitions, European International Business Academy, 28^th Annual Conference, Athens. http://www.aueb.gr/deos/EIBA2002.files/SESSIONS/WORKSHOP%203.htm

Acknowledgements

A special thanks goes to those gate-openers in each organization who allowed me to do research in their companies. Without their interest, the research could not have taken place in its current form. Also all persons interviewed in the cadre of the research have each contributed in their own ways to the findings presented in this paper, and deserve to be warmly thanked. The author would particularly like to thank Professor David Hawk, New Jersey Institute of Technology for inducing an interest in the world of Systems Thinking and Professor Tomi Laamanen, Helsinki University of Technology, for ongoing guidance in the research. This paper was considerably improved through the helpful comments of Professor Esa Saarinen, Professor Raimo P. Hämäläinen and Henri Penttinen from Helsinki University of Technology, Hanna-Maija Sinkkonen, University of Helsinki and especially Matti Knaapila, University of Durham.

Author

Satu Teerikangas MSc (Tech) is a post-graduate student at the Institute of Strategy and International Business at Helsinki University of Technology. Her doctoral research takes a cultural perspective to the post-merger integration process. Her interest in the area of intercultural management stems from her prior experience at Royal Dutch Shell in the Netherlands and from living in Finland, Kenya, France and the UK and spending time in China.