Mergers are famously disruptive for companies and employees. They also don’t always make business sense: About half of all combinations are considered financially unsuccessful, according to a 2003 study by the Federal Trade Commission.

So what makes for a successful merger? Experience shows that the primary reason for failure is the difficulty of organizational integration. A 2010 PricewaterhouseCoopers survey of post-merger companies finds that careful planning of integration ensures that a combination is more likely to achieve cost synergies or other goals. The report says that “speed is critical,” adding that the most important challenges “are motivation of employees, alignment of cultures, organization and processes as well as IT systems.”

Cisco Systems Inc.’s historical approach to takeovers is instructive. For years, the networking-equipment giant pursued a strategy of innovation through the acquisition of small technology companies, and has developed methods to make the process effective.

Cisco avoided “mergers of equals,” or the acquisition of companies of similar size. It also ensured that its due-diligence team included human-resources staff who screened targets for “shared vision” and “chemistry or cultural compatibility.” Deals were rejected if the fit wasn’t strong.

‘Cisco Buddy’

Once an acquisition was executed, integration teams immediately descended on the target company. Acquired employees were assigned a “Cisco Buddy” to help them assimilate and learn their new company’s culture.

Meanwhile, human-resources executives told new employees that the combination was an acquisition, not a merger of equals and that “the more flexible and positive you are, the better it will be for you.”

Cisco has recently experimented with a different approach for a small number of acquisitions of larger companies such as LinkSys. In those cases, instead of quick and close integration, Cisco allowed the target to operate as a stand-alone division, with its own brand name, management, product design and organization.

According to a 2008 article in the Wall Street Journal, “the slow pacing for some of the ‘platform’ integrations suggests they’re not as easy. Cisco decided to take a year and a half learning Scientific-Atlanta’s business before sitting down with its executives to discuss detailed sales synergies,” and that “some ‘us versus them’ dynamics have lingered.”

There are several reasons integration is likely to be difficult and costly. The full-scale merger of two organizations requires reconciling large numbers of policies, including those regarding structures, job titles, compensation and recruiting. In addition, employees are likely to lose some of the value of their intangible human capital, including their understanding of unique methods and culture of their company, as well as the social networks with colleagues that are so valuable to coordination, collaboration and problem-solving.

Finally, there is a serious risk of conflict as both companies’ workforces form into factions in an attempt to protect their positions in the critical post-merger phase.

Our research studied a sample of mergers among Danish companies to try to understand integration. The results suggest that costs are high, and provide clues as to how companies can successfully carry out mergers to mitigate those expenses.

We were surprised at first when we realized that many merging companies don’t fully integrate and, as a result, don’t realize maximum synergies. That decision is made because of the difficulty of achieving full integration.

Separate Offices

We found that, generally, there is very little mixing of two workforces in the same physical locations. Even several years after a merger, only 5 percent to 15 percent of employees have been reassigned to a workplace that existed in the other company before the merger. In other words, the two organizations don’t really become one.

Strikingly, there is high turnover, especially of target employees, but they are replaced by new hires and average workforce size doesn’t change. That is noteworthy, because incumbent employees possess valuable skills and experience that are lost when they leave. On the other hand, new hires may be easier to integrate because they are recruited for fit and aren’t part of an existing workforce and culture that might resist being absorbed.

Along similar lines, we found that mixing of workforces is most likely to occur at new workplaces set up after the merger, rather than when employees are sent “across enemy lines” to existing units in the other organization. It may be easier to combine employees in a new office, starting the unit from scratch.

We also found that target employees are more protected -- they have less turnover and are less likely to be reassigned to the other side -- if their company is closer in size to the acquirer. This is consistent with the idea, suggested by the economic literature on ethnic conflict, that clashes between the two workforces are more likely in a merger of equals.

By contrast, if the target firm is relatively small, its workforce has a stronger incentive to cooperate and assimilate quickly because it is in the minority.

Without extensive integration, how do merging companies achieve synergies? Our results suggest they do so by using key employees who serve as “brokers” between the two sides. In particular, managers and those employed in research and development are most likely to be reassigned to a unit from the other firm.

This makes sense: A primary role for managers is to coordinate across functions, so after a merger they translate and coordinate between organizations. R&D is likely to be one of the most important sources for synergies, so fuller integration is important to achieve knowledge sharing in product design.

Too Arduous

In short, organizational integration appears to be so difficult that the firms we studied do little of it in practice, even shedding experienced workers, hiring new people and setting up new workplaces in some cases.

Yet they seem to enjoy some benefits from a merger anyway, by strategic use of key talent to share ideas and coordinate.

Several lessons emerge. First, due diligence should include careful thought about integration: how it can be achieved, how likely success will be, and the extent to which synergies can be realized with limited integration.

Second, the acquiring company should have an integration plan ready before the deal is announced, and then implement quickly and forcefully.

Third, the merger should focus on the key talent in both organizations: identifying who they are and why they are valuable, and then finding ways to keep them and get them to collaborate with each other.

(Michael Gibbs, a clinical professor of economics at the University of Chicago Booth School of Business, is a contributor to Business Class. Kathryn Ierulli is a lecturer in economics at the University of Chicago. Valerie Smeets is an associate professor of economics at the University of Aarhus in Denmark. The opinions expressed are their own.)

Read more opinion online from Bloomberg View.

To contact the writers of this article: Michael Gibbs at Michael.Gibbs@chicagobooth.edu; Kathryn Ierulli at kierulli@uchicago.edu; Valerie Smeets at vas@asb.dk.

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net