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Melding Cultures: No Easy Task When Companies Marry
In a merger, you need shared values, the right vibes, and financial incentives to make it work

The first of a two-part series

When the folks at Razorfish started talking with Plastic about buying the San Francisco company last year, everyone had a gut feeling it would work: "Their people's hair was dyed green. Ours' was dyed yellow," marvels Len Sellers, a 53-year-old journalism professor who started Plastic, which created Web sites and online activities for companies. They shared tastes in office colors, too: "We have orange desks. They have orange doorjambs," says Sellers. Razorfish's reaction was equally effusive: "These guys are exactly like us. We love them. We want to be with them," says Chief Executive Officer Jeffrey Dachis.

At a time when corporate behemoths are glomming together, small companies -- especially those in the high-tech and Internet fields -- are jumping on the merger-and-acquisition bandwagon, too. In fact, Razorfish, which helps companies develop Internet and other digital services, is something of a poster company for small-business linkups: Plastic was the third of six companies Razorfish acquired last year. A seventh deal closed in January, and another is in the pipeline.

Small-company linkups share some of the same rationale as the megamergers -- to expand into a new region or area of expertise or to achieve economies of scale. But there's an important difference: Unlike large companies, which often see mergers as the perfect time to slash staff, small businesses often use these deals as a way to get a productive team of experts faster -- and for less money than it would cost to hire them piecemeal. And that can be a matter of survival for aggressive little companies such as Razorfish once they take on big, international clients -- especially in the current tight job market. "I'm not getting big to get big," says Dachis. "When [discount brokerage Charles] Schwab comes to us, I need bodies. And they have to be amazing bodies."

BIG SAVINGS. Consider the Plastic purchase. It gave New York-based Razorfish a San Francisco presence. And the company estimates that the linkup saved it months and hundreds of thousands of dollars. For one thing, "recruiting takes a lot of time," says Craig Kanarick, Razorfish's chief scientist. And headhunters typically charge about 30% of a recruit's first-year salary. Not only that, starting a San Francisco office from scratch would have tied up key New York employees for months, he says, leaving that office shorthanded. Buying Plastic gave the company a productive team from the start. That's because the two companies shared expertise in certain programs, such as Microsoft's NetShow, which makes it possible to bring sound and video to static Web pages. They also had clients in similar businesses, such as media.

Still, melding two corporate cultures is no easy task. And when the goal is to acquire staff, the stakes become higher: If people jump ship en masse, the point of the merger may be moot. That's one reason Sellers and Dachis scrutinized each other down to such telling details as hair and office color.

Dachis claims he can evaluate whether a target company's culture is compatible with Razorfish's in a matter of minutes: "It's a vibe. If there are cubicles, it won't work. If people have awards plastered on the wall, or if people are only working nine to five, you know that won't work."

Of course, there's more than that to making a merger or acquisition work. Even when the vibes augur well, a deal structure that gives both parties -- executives and employees -- every incentive to make the transaction work is indispensable. Dachis says he pays only part of the purchase price up front. For the former owners to receive subsequent payments, the new unit has to meet performance targets. For all but one acquisition, Dachis paid in cash, either borrowed or from operations (not in stock to avoid diluting existing shareholders). The company does, however, give stock options to all employees.

FEEDING FRENZY. Razorfish started swallowing other digital communications companies in January, 1998, with the purchase of Avalanche, a New York competitor. It now has offices in London, Stockholm, Helsinki, and Oslo, in addition to New York, San Francisco, and Los Angeles. The acquired companies range in size from 12 to 150 employees. In the process, Razorfish swelled to a company of 350 employees and approximately $30 million in annual revenues, from a 45-person outfit with less than $4 million in annual revenues. Dachis won't reveal financial details, but he says Razorfish and each company it bought are making money.

What has Dachis learned from his numerous acquisitions? Beyond the cosmetics, a successful merger requires shared values. Says Dachis: "That's what keeps our company going, makes it different from a [typical] roll up.... Everyone who works here is happy to be here." People who work for Razorfish want a creative environment and a chance to learn, he says, an important recruiting and retention point for many young companies. As Dachis notes, "People are coming here -- some of them at submarket salaries."

Another lesson: It needs to be clear from the start who's in charge of the newly merged entity. At the same time, those whose company was acquired must not feel like chattel won by the conquering army -- or they'll leave. "It's hard for people who started the company and are used to doing everything to give up control," concedes Kanarick. That's why it's vital to make sure new company members still have important work to do. Razorfish says it sets the tone at the top. Although Dachis is chief executive, Peter Seidler, an Avalanche founder who's now chief creative officer at Razorfish, retained that title when the two companies hooked up and makes many creative and management decisions.

Last, a goodwill gesture may be in order. In January, Razorfish closed on its purchase of Spray, a Scandinavian digital communications company. "I'm giving up my title as chairman of the board so that a Swedish guy can fill that role," says Kanarick. He says he doesn't mind because he gets something substantial in return: "I'm having my company grow." That, of course, is the point of putting two companies together.

By Sherrie Nachman in New York

Part Two: Making All the Right Postmerger Moves
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