CEOs say potential culture clash can kill acquisition, merger
Cedar Rapids-based company CEOs look for balance in times of uncertainty
Everything can point to a successful acquisition, but a potential clash of corporate cultures can kill the deal.
"Culture is probably the No. 1 thing that we look at," said Duane Jasper, president of RuffaloCODY in Cedar Rapids.
The company on Nov. 1 acquired Scannell & Kurz, a privately owned Pittsford, N.Y., enrollment management consulting firm, and it has done other acquisitions in recent years.
"It can become a real distraction," added Al Ruffalo, founder and chief executive officer of RuffaloCODY. "In the end, you wind up with dissatisfied employees, unhappy clients, and it can really slow your growth as a company.
"It's just not worth it. If it just doesn't feel right, you're better off to walk away."
Jasper and Ruffalo were among the top executives whose Corridor companies have been involved in recent mergers.
Another example, Apache, a Cedar Rapids-based manufacturer and wholesale distributor of hoses, fabricated belting, cut and molded rubber, and industrial consumer products, has done four strategic acquisitions in less than the same number of years.
President and CEO Tom Pientok agreed corporate culture is important. In fact, it's one of five criteria that Apache senior management considers when it is deciding whether to buy a company.
"Culture is huge," Pientok said. "We have walked away from acquisitions because they don't fit. The personalities will not mesh."
Randy Ramlo, president and CEO of United Fire Group, said getting a good reading on the culture of a prospective acquisition can be difficult if the company is a large publicly-traded employer such as Mercer Insurance Group, which the Cedar Rapids insurer acquired early last year.
"You can't meet every employee," Ramlo said. "When you're going through one of these in secret, you might meet the top management. A lot of times, they're not necessarily the people who are going to be around long-term.
"You try to get a feel for, how do they celebrate holidays, what do they do for their employees, and how does management treat employees? At one of our acquisitions, senior management had their own floor, their own break room, and everyone at the management level had to be addressed as Mr., Mrs. or Miss.
"That's just not the corporate culture at United Fire. We feel we're fortunate that our corporate culture is portable and it was easier for them to adapt to our style of management."
While corporate culture is important, all three companies have other criteria that they consider when they're making a decision whether to buy or take a pass.
"We also look at geographic expansion, product line expansion or enhancement, market share and profitability," Pientok said.
"We want to buy healthy companies. We decided early on that we don't want to buy a fixer-upper.
"With our purchase of Seals Unlimited in September 2011, we've also opened our eyes to potential vertical integration."
Pientok said Apache tries to do ample due diligence before it puts an offer or letter of intent on the table, to ensure it has confidence that there's a good fit in terms of culture and financials.
"Most of the time when you see something in the detailed due diligence that you didn't expect, you work through it with the target company," he said. "We focus a lot of effort upfront on the financials, and as an employee stock ownership company, we have a fundamental understanding of the valuation process."
At United Fire, Ramlo said geographic expansion, new product lines, underwriting quality and expense ratio are factors the company considers when acquiring another insurer. He said the Cedar Rapids-based insurer has considered "tens of companies" as potential acquisitions over the years.
"The acquisition of Mercer Insurance Group added states on the East and West Coasts where we weren't doing business," Ramlo said. "We also try to find someone who does a lot of the same things that we do but maybe insures some special products that we don't insure.
"Mercer has a religious institutions program for churches. The company also insures waste haulers, offering an online surety product.
"We also look for people who know how to underwrite, meaning they don't have bad loss ratios. There's always a reason that an insurer is for sale, and we look (for) people who have expense problems."
Ramlo noted that, "We think we can cure expense problems because we have a very good automation here. Mercer had a high expense ratio of almost 40 percent, where ours is more like 30 percent.
"That's 10 points that we hope we can swing for them to get where we are."
At RuffaloCODY, Al Ruffalo said the 21-year-old privately-owned company that manages enrollment and fundraising services, has a "hit list" of potential acquisitions.
"We have steered away from very large companies. We tend to look at $1 million to $3 million companies. We acquired three of them in the last few years.
"We meet with the heads of the organization and if it doesn't feel right, we don't do it. Although the old merger adage of 'one plus one should equal three' sounds trite, it really isn't. If it doesn't equal three, then you haven't done your homework and you shouldn't do it.
"If one plus one is only going to equal two, you really haven't gained much."
Jasper said mergers require meshing employee benefits, such as vacation, sick leave, health and life insurance, 401(k) plans and transfer of employee seniority.
"Scannell & Kurz, the company we just acquired, never did any annual pay increases for their people, but they gave them great health care benefits," Jasper said. "We needed to merge that with our culture of annual pay increases where people pay a little bit more for their health care benefits."
Mergers bring change and Ramlo said United Fire made it clear early on that the company would operate in a unified manner after the Mercer acquisition was completed.
"Mercer, domiciled in New Jersey, had acquired Financial Pacific on the West Coast, which does business in California," Ramlo said. "Financial Pacific had never changed anything that they did after they were acquired by Mercer.
"When we acquired Mercer, it was almost like buying two separate companies. They had separate bonus plans, different agency agreements, different benefit packages and oodles of things.
"When we acquired Mercer, the East Coast operation was pretty open minded and understood there were going to be some changes. I think the West Coast operation felt deep down, 'Well, here's another acquisition and we can avoid this one like we did the last one.'
"We had some healthy push back, but I think they ultimately understood that we had thought through every change and there was a good reason for changing the way they did things. They trust us that we're not just making change for change sake, but it's the best way to do things for the whole organization."
Ramlo said United Fire employees also needed to understand that the Mercer acquisition was going to bring changes. United Fire made it clear that it would be looking at how Mercer did certain things and would adopt those practices if they were better ways to operate.
Pientok said Apache has taken a similar approach as it has acquired companies in recent years.
"Our philosophy is 'Don't go in and turn the world upside down' because we don't want to give the impression that it's our way or the highway," Pientok said. "We want our newly acquired companies to feel part of the team."
Pientok said company owners are passionate about their business and their employees. They also have done business a certain way and sometimes are resistant to change with new ownership.
"In some of our scenarios where the former owner has stayed on board, it has worked extremely well," Pientok said. "In some of our scenarios, it has been more challenging and we've had to work through that."
Mergers: Birds of feather - sometimes
Mergers and acquisitions come in many sizes and shapes. Here are three types of mergers:
This is a coming-together of competitors or of companies that are in the same industry operating at the same stages in production and sales. Chrysler of the United States and Daimler in Germany is an example.
These involve companies operating at different stages of the same industry — a supplier of data and a company that controls the means through which that information is supplied to consumers, for example, notes Finance Director Europe.
As these types of businesses might not know each other as well as competing companies in a horizontal merger, corporate culture clashes are sometimes hurdles after the ink dries.
These participants are in completely unrelated fields. A “mixed” conglomerate merger joins companies that are aiming to extend their markets. A “pure” conglomerate merger marries companies that have nothing whatsoever in connection with each other.