By Cheryl Weber. When K. Hovnanian purchased Goodman Family of Builders three years ago in Texas, senior managers from both sides met and drafted a list of transition tasks, ranked the items, and worked methodically through them. One of their first changes was to make accounting and financial controls consistent. They also switched Goodman's suppliers to a national account, tweaked a few job titles, transferred personnel benefits, and, over time, implemented some best practices.

To hear most big builders tell it, integrating after a merger is a relatively predictable process, if they've done their homework. "All the major transitional issues were completed within two years," says Bobby Ray, president of Goodman, and K. Hovnanian's regional president in Texas. "Ara Hovnanian told us up front how he saw the transition, and he's been 100 percent correct."

When it comes to integrating two companies, builders, it seems, have an advantage. When the business consulting firm Booz Allen Hamilton studied 78 global mergers that closed in 1997 and 1998, they discovered that more than half the mergers failed within two years. When the acquisition involved vertical integration or developing new capabilities, the success rate was 32 percent. But on acquisitions made within the same industry or market to expand existing operations, the success rate increased to 55 percent.

That's good news for big builders, who typically buy out colleagues who own smaller but well-run companies, builders whose top managers they admire and intend to retain. "In-market deals go smoother -- the buyer already knows the company because they've been competing with them and there's very little in the way of head count reduction," says John Stanley, UBS Warburg home building analyst. "This industry has done a lot of deals in the past several years. While the risks are always there, they've manifested well."

Changes Ahead

Many variables affect how well a company performs after a merger. But all successful mergers have one thing in common -- a thorough due-diligence process. According to the Booz Allen Hamilton study, execution issues that result from poor early-stage decisions are the primary cause of integration failure. That's why John Landon, co-chairman and co-CEO of Meritage Corp., in Plano, Texas, looks for companies that are immediately accretive to his business, financially as well as culturally. "We look for acquisitions that have a land position and access to additional land, and also a platform of management in place," he says.

Centex Homes' president and CEO Andrew Hannigan agrees. "In the early stages it's more cultural than anything else, in terms of things that are important to running the business. If the acquired company has been focused on operating margins, return on net assets, and customer satisfaction, more than likely there will be a good fit."

No matter how seamless the fit, however, a merger brings changes to both sides. Gerald Adolph, a N.Y.-based senior partner at Booz Allen Hamilton, says all the nitty-gritty integration efforts must answer the question, Why did I buy it? "You're translating the strategic intent for the deal into meaningful integration guidelines," he says. "Don't leave it to the other company to figure out what you're trying to do."

Stephen Duffy, a partner with the consulting group Ernst & Young, thinks of transition planning as building a future state on paper in terms of organization, operations, and technology. "On the organizational side, you're looking at roles, responsibilities, and staffing levels. What will be centralized and decentralized? How many positions do you need in the new structure based on volumes of business and activities? There are people from both companies offering you a pool of talent. Which people should be drafted into what positions? You might have more people than you need in some positions and not enough in other positions. That will lead to recruiting and outplacement."

Builders have learned that drastic personnel changes wreak havoc on integration efforts. "We haven't made acquisitions in overlapping markets," says Andy Parnes, CFO of Standard Pacific, in Irvine, Calif. "That's helped us. If you have excess staff, cutting them is detrimental to the process. Once you start that, you lose more people than you intend to lose."

Photo: Jack Levant

Ara Hovnanian, president, K. Hovnanian When K. Hovnanian acquired Washington Homes two years ago, the merger was its first involving overlapping markets-in North Carolina, New Jersey, and Washington, D.C. Yet the two companies managed to fold 11 offices into five without losing a single senior manager. That satisfied Geaton DeCesaris Jr., president and CEO of Washington Homes, and now COO and president of nationwide home building operations for K. Hovnanian. "One of my objectives when we sold was to retain the management team I'd put together over the years," DeCesaris says. "We knew what our team was capable of, and because Washington Homes was the dominant player in D.C. and North Carolina, our management team headed up the merger." CEO Ara Hovnanian attributes a good part of his company's integration success to seeking out companies with a well-functioning human infrastructure. "I'm proud to say that, other than principals who told us they want to retire, we've kept 99 percent of all senior management in every acquisition we've done in the last six years," he says.

Priority Setting

Operational issues are also top priority after a merger, and some are more pressing than others. Except for financial reporting, operational shifts should happen gradually. "It's important that everyone speaks a common language and puts the same cost codes in the same places," Hovnanian says. "Some builders may include in-house commissions as part of their sales and marketing costs; what we call direct costs. We want to make sure our profit and loss statements have identical formats."

At Meritage and Standard Pacific, the initial priorities are also business related -- business planning, forecasting, internal controls, providing the new company with more creative ways to finance, and making sure future land deals are approved by the land committee. "Human resource issues kick in right away, too. They'll come off their old benefits plan," says Parnes. Within three months to a year, K. Hovnanian looks at national contracts, exploring opportunities to reduce costs and slowly transitioning the acquired company to take advantage of its better prices.

Why Mergers Fail

Strategic Issues:

? poor strategic fit

? overly ambitious strategy

Execution and Other Issues:

? loss of key staff

? culture clash

? weak management team

? poor due diligence

? slow execution/hesitation

? loss of key customers

? poor external communication

? poor/clumsy integration

Source: Booz Allen Hamilton

Poor Planning: Certain issues, such as drastic personnel changes, can wreak havoc on an integration.

"Sometimes there ought to be a lack of integration," Landon says. "This is a very localized business; to impress your will on people operating that business may be wrong." Technological systems, for instance, are often tweaked and then overhauled a year or two later. At Washington Homes, CFO Chris Bentley oversaw the data migration from Washington Homes' computers to K. Hovnanian's. In North Carolina, though, K. Hovnanian switched to the computer systems Washington Homes was using. "We made the decision ours were better, and it was simpler to do it that way," DeCesaris says. "Within the next three years, K. Hovnanian will change all of its operations to a new system," which will be adopted and used by all employees. Standard Pacific, too, is working on a standard integrated systems software model for all its divisions. Beyond the functional requirements of a well-managed company are other fundamental questions about quality: How will the new company behave? What new best practices of each company will be integrated? And how will the changes be woven together in an efficient and clear approach? After all, Stephen Duffy points out, "You're not in the business of integration; you're in the business of building homes." Centex Homes uses the due-diligence process to identify the strengths and weaknesses of the company it is acquiring. "If the target has a strong sales force, we'll leave that alone for the time being," Hannigan says. "If construction scheduling needs more work, we'd tackle that first."

Photo: Jack Levant

Bobby Ray, president, Goodman Family of Builders Goodman Family of Builders adopted K. Hovnanian's customer service survey and one of its key practices called the even-flow concept. "It's a streamlined operation that means you'll start a house today and close a house today," says Goodman's Bobby Ray. "It ensures that the subs and suppliers have steady work." Goodman sent one of its four "community builders" to New Jersey to get training and then teach the practice to about 30 employees. In Meritage's acquisitions, best practices have been passed both ways, whether it's adopting some of the acquired company's product ideas, or the way it builds model parks. "We've shared and learned subtleties, things that can have a large impact when taken in total," Landon says.

Common Threads, New Dynamic

If there's another common thread in a successful integration, it's communication. "When you talk to a lot of senior executives, in retrospect, they wish they'd spent more time on the people aspects of integration," says Adolph, of Booz Allen Hamilton. "That means communicating, bringing on board, dealing with concerns, stitching together a new team. There's frequently a presumption in a merger that once I've gone through the process, the people who still have jobs will be so thrilled that they'll now engage in the new company. But by definition, something has to be different. Otherwise there's no value created."

Indeed, Ray says the best decision his company made was to communicate early and often, both with K. Hovnanian and with his own people. A corporate-wide meeting as the deal was being made assured the Goodman people that their jobs were secure. The next day the staff met Ara Hovnanian, who explained what they could expect.

Centex also tries to err on the side of over-communicating. One of the challenges of an acquisition is the period between the time a company announces its intent and the time the deal closes -- three to nine months. "We make sure we don't create gridlock in the acquired company because of so many issues," says Neil Devroy, Centex's vice president of communications and public affairs. "We let them ask questions. We're almost always in a situation where they understand we're buying them for the resources, and that few, if any, jobs are at risk." Centex provides packets on how its benefits program relates to the acquired company's program and how the merger will affect the staff personally.

Clear communication also keeps geographically dispersed divisions focused on the tasks at hand. One of the biggest pitfalls during an integration is the rush among senior management to make an impact, Hannigan says. But there are critical tradeoffs in timing to be made. "We have a lot of high performers in our company," he says, "too many people trying to take advantage quickly. Rather than having everybody working on things at day one, we help them prioritize which resources can really add value." Parnes, of Standard Pacific, agrees. "There's a big risk of losing track of what you're doing," he says. "You have to keep people focused and morale up."

Like any successful product, the sum of two or more companies is only as good as the quality of its parts. Just as Standard Pacific won't consider buying a fixer-upper, Meritage takes cues from its acquired companies on the best ways to continue success in their market. "Meritage," says John Landon, "means the blending of fine ingredients to make a superior product. You don't want to ruin one of the ingredients."

Maximizing Mergers

Pitfall Opportunity

Focusing on combining operations instead of capturing best practices. Relying too heavily on naturally occurring synergies.Thinking of organization as purely structure.

Taking advantage of the merger to implement new strategies.Taking advantage of external windows of opportunity, e.g. customers, partners, financial.


Worrying about culture comparison between the two organizations.Assuming a single prevailing culture in each organization.

Building a culture that is appropriately different from that of either predecessor.

Failing to engage the whole organization.Stopping short of significant change.

Leveraging peoples' expectation of significant change to drive major improvements.

Reinforcing the status quo.Letting intercompany equity overshadow finding the best people.

Setting a new direction

Failing to achieve targeted savings and timing.Disrupting the business because of the integration in detail-poor integration.

Using due diligence and the pre-close period to plan the integration.Deploying sufficient high-quality resources.

Establishing an organization structure to monitor and drive progress.

Source: Booz Allen Hamilton

Combined Power: The success of a company merger is reliant on a number of things. Stephen Duffy, a partner with Ernst & Young, looks at the positive side, noting that with a merger comes a large pool of talented employees, among other things.

Published in BIG BUILDER Magazine, January 2003