The race to become the first 100,000-unit Housing Giant is fueling merger and acquisition activity throughout home building's Giants. Given that the top five home builders in the United States each own only 3 to 4 percent of national market share and more and more mid-tier players will merge or acquire to gain scope and expand market share, M&A activity will only increase.
This activity spike makes the importance of proper assessment — during all stages of the deal — more vital. Before undertaking either a merger or an acquisition, home builders must develop an accurate picture of the individual and collective strengths of the organization's top leaders. It's no longer just about focusing on the organizations' respective financial picture. While much easier to evaluate financial information, builders contemplating either a merger or an acquisition must also measure the "softer" issues — such as the company's strategy, organizational culture and people.
To get the most out of a merger or acquisition, builders need to know how to:
- Assess the available talent prior to and during the deal
- Manage the integration process
- Handle any post-merger challenges
Also, home builders should recognize that a merger or acquisition provides them with the unique opportunity to rethink their organizational structure and realign their talent.
What to Do Before Conducting a Merger
What is the common denominator for successful deals across industries? History shows it to be the culture of the organizations. A critical component prior to conducting a deal involves assessing whether the cultures of the two companies are compatible. Culture concerns more than just the acquiring company. The acquired company also places a great deal of importance on the culture of the purchaser. We've learned that the greater the respect exhibited by the acquiring companies, the more eager companies will be to consider an acquisition.
The pre-M&A assessment also should determine which company is further along from a business process perspective. As part of this due diligence, we often help companies decide which leadership strategies to pursue based on the new organization's strategic priorities and, at times, on which best practices to embrace.
Chemistry between the CEOs or the two owners is another critical factor prior to closing the deal. A deep and trusting relationship between both CEOs is instrumental in the acquisition process. This remains true even if the CEO or the owner of the acquired company intends to depart following the transaction — as it sends a positive signal about respect and trust to the newly formed organization.
Assessing the Talent
The next — and, in our opinion most — important step is to assess the people in the organization. The best practice for assessment should include the following:
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Determine the skills and competencies needed to deliver the "go forward" business strategy.
- Identify the type of talent profile required in the new organization based on future vision and strategy.
- Create an objective process for selecting the "best team" among a new or merged group of senior executives that meets the required skills and competencies.
- Identify potential high performers and focus on retention. "Prior to conducting an acquisition, we always conduct informal talent assessments," explains Standard Pacific Homes' CEO Steve Scarborough. "In addition to looking at individual competencies, we also want to see their entrepreneurial traits — something that is very important to our culture. Unless we spend significant amounts of time understanding the people prior to inviting them on board, we set ourselves up to fail."
- Provide clear career development paths. For example, determine the potential "career span" that an executive will have with the organization and work to identify his or her successor. Not only does this provide a career path for senior executives, but it also motivates younger executives to stay with the new organization if they can recognize their own career path.
- Make comparisons to best-in-market companies, including organizations outside of the industry. Benchmarking your company's talent against other similar companies outside home building brings perspective as to how to go forward in human capital planning.
With so much at stake, home builders need to make important leadership decisions based on objective, accurate information about key players' ability to drive strategies. Depending on the size of the merger or the acquisition and the time slated for the transition, home builders may need to seek an outside third party, something that most large executive search firms can provide, who can help them assess their current and future talent needs.
Integrating Merged Companies
Several factors improve the odds for a successful integration. "One of the biggest challenges to integrating 'outsiders' into a new organization is having them adapt to a new culture," says Richard Dugas, president and chief executive officer of Pulte Homes. "Yet at the same time, we don't want people to do things the way they have always been done. So when bringing in new people from an outside organization, we want them to be forward-thinking and always trying to improve the way the company operates."
When Pulte merged with Del Webb, the company adopted a unique approach to help new employees acclimate to the organization. Over a three-week period, all Del Webb managers were brought to Colorado for a series of informal discussions and fireside chats regarding Pulte's culture. According to Dugas, it was imperative that the company spend a lot of time sharing its vision with the new employees and talking about its culture.
Maintaining continuous communication between the entities is imperative. Cultivating a new culture that reflects the cultures of both companies also matters. Finally, consistent leadership and a fair division of people representing each organization — both in the top management tier and on the board if it's a public company — will likely speed up the integration process.
Another way to address cultural integration is to appoint a single person to chair an "integration committee" — a single point of contact regarding all aspects of the integration, including the all-important people issues.
In addition, retaining key managers of the acquired company plays a role in the success of the acquisition. Successful acquirers learn from those companies they acquire, rather than impose their own way of doing things. Inevitably, the company acquiring a new organization finds the change easier and less humbling than the acquired company. However, the more key leaders of the acquired company feel their skills are valued, the more likely they will remain. Direct communication, respect for the different cultures and a consensus-oriented management can help drive this process — be it for a large home builder acquiring many smaller companies or for two equal-in-size home builders merging operations.
With no slowdown in sight, home builders will continue to try to enter new markets and/or obtain more land through mergers and acquisitions. To make the most of a deal, due diligence needs to encompass more than just understanding the financial landscape. Evaluate the cultural fit, assess the talent issues and invest in an integration process that will increase your odds of creating a productive and profitable organization.
John Mumm and David Beuerlein are members of Spencer Stuart's Construction & Building Materials Practice. Contact John at [email protected] or David at [email protected].