Gjensidige's Acquisition of Forenede
7.2 PHASE ONE:
PHASE l PHASE2 PHASE3 PHASE4
Historical Pre- Initial combination The Path towards
background and combination Organisational
Strategic objective Integration
.
n
TASK Potential gains Regulatory authorities Regulatory authorities Economic climate and realisation of gains
Discretionary slack Realisation of gains
Regulatory authorities POWER Balance of power pre- Balance of power Organisation of Economic climate and
combination integration process power relationships
Organisation of new Change in key
entity management positions
and structure Allocation of senior
positions and functions
CULTURE Historical Friendliness and Reactions and Economic climate and
backgrounds reactions expectations downsizing
Merger or acquisition Positioning and Structural changes
regime downsizing
Participation Information and communication
I have included a review of the chronologies of the second and third phases in appendix 7.1.
7.2 PHASE ONE:
HISTORICAL BACKGROUND AND STRATEGIC OBJECTIVE Before Christmas 1991
7.2.1 Introduction
From the mid 1980s Gjensidige's strategy was to grow substantially in the market for life-assurance. After a few years the corporation realised this expansion strategy would be difficult to achieve by purely organic growth. Forenede which was about half the size of Gjensidige, seemed to suit the aims Gjensidige was seeking, and the unstable ownership situation in Forenede made this company a viable candidate for acquisition.
Gjensidige faced a number of challenges in trying to acquire Forenede. Firstly, knowing that Forenede's strategy was to keep Forenede as an independent entity rooted in the Trondheim community, Gjensidige saw no choice but to make an unfriendly take-over attempt. This
would imply a real fight and probably involve much commotion and publicity. Moreover, Forenede's articles of association implied that there was a substantial risk involved.
Secondly, Gjensidige faced the challenges of combining the two different organisations.
These main differences are outlined in Table 7.2.
Table 7.2. Features of Gjensidige and Forenede
Gjensidige Forenede
Dominant activity Non-life insurance Life assurance
Head office Oslo Trondheim
Organisational Co-operative Line management
structure
Decision-making Participative Centralised
process Time consuming Swift
Core competencies Technical skills Marketing skills
Personnel Caring Harsh
policy Low turnover High turnover
This section will be divided into three main parts which will discuss the implications for the integration of tasks, unification of power and integration of cultures and identities. In the first sub-section I discuss potential gains in the combination and discretionary slack. This is followed by a description of the balance of power between the parties before Gjensidige made its offer to Forenede. Finally, I review the historical background and discuss the acquisition regime chosen.
7.2.2 Tasks Potential gains
When Helge Kvamme became CEO in Gjensidige in 1986, he initiated a strategic process in the company leading to an ambitious strategy to expand in the market for life assurance. In line with Gjensidige's traditions this expansion strategy was strongly rooted in its co-operative organisation. After a few years, the management realised that it would be difficult to obtain the growth it aimed at by purely organic growth. Hence, Gjensidige started to look for possible candidates for a merger, acquisition or some form of alliance.
By gaining a larger share on the life assurance market Gjensidige would obtain both economies of scale and scope. This was particularly important regarding the substantial
investments in computer technology, investments that had accelerated in the changing regulatory environment. Moreover, a merger would be beneficial if it was to maintain
itsGjensidige's full range ofproducts and fine-meshed network of distribution, the latter being perceived as one of Gjensidige 's competitive advantages in the market. Third, Gjensidige's operations were unevenly distributed between non-life insurance and life assurance, and its opportunities from cross-selling the two product ranges were far from utilised.
Forenede was about the same size as Gjensidige in the life assurance market, and there was a high potential for reducing the relative costs by merging the operations. Secondly, by
merging operations, the number of customers with both life and non-life insurance contracts would increase substantially.
Forenede was also considered an interesting candidate because of its attractive portfolio of professional associations and trade organisations. Furthermore, Gjensidige was attracted to Forenede's competence within marketing and its ability to motivate its sellers. This core competence in Forenede will be further discussed in section 7.2.4 below.
Discretionary slack
Gjensidige was a co-operative organisation which in 1991 consisted of Gjensidige
Skadeforsikring and Gjensidige Livsforsikring and a number of independent and local fire-insurance companies. All entities were mutual fire-insurance companies, meaning that the policy holders were the owners of the company and were represented on the boards. According to Gjensidige's top management this structure allowed the company to plan and act with a long-term perspective, not having to adjust to short-long-term pressures from shareholders.
Gjensidige was among the most profitable and solvent companies in the insurance industry, in particular in the non-life insurance sector which traditionally had been its dominant activity.
As for its co-operative ownership structure, this strong fmancial position gave Gjensidiges management the opportunity to act on a long-term basis. In addition it gave the corporation resources to spend in facilitating the cultural integration process.
Implications for task integration
The plans for realising gains had important implications for the integration of tasks. First, to maximise cost reductions, a high level of integration would probably be desirable. However, this high level of integration was not necessarily compatible with preserving, and over time, transferring the core competence from Forenede.
Moreover, Gjensidiges ownership structure and financial resources would possibly affect the pace and extent to which synergies were realised. Firstly, synergies would probably be
realised over time. Secondly, the pressure for realising gains might not be as strong as in a shareholder company with limited slack resources.
7.2.3 Power
Balance of power pre-merger
Both Gjensidige and Forenede had three major operations; life assurance, non-life insurance and financial companies. InGjensidige the financial companies accounted for less than 20 per cent of the total assets and less than 10 per cent of the employees in 1991. In Forenede the fmancial companies accounted for 13 per cent of the total assets and 20 per cent of the employees. Since the bulk of the corporation's business was in the sectors oflife and non-life insurance, I will concentrate on these sectors.
Interms of premium volume and man-labour years Gjensidige was more than twice the size of Forenede. However, these differences in size were unevenly distributed between the non-life and non-life assurance sectors, see Table A7.1.
Gjensidige was the second largest company in the market for non-life insurance in 1991 with a 15.7 per cent market share and was more than five times the size of Forenede in terms of premium volume. Forenede was the seventh largest company in the industry with a 2.8 per cent market share including Forenede Norge. Though Gjensidige was more profitable than Forenede and had a higher solvency margin, both companies performed well in comparison to the industry as a whole. Gjensidige had traditionally been the low cost producer in the market.
The main reason for the relatively high costs in Forenede was that its portfolio was too small to reap economies of scale.
Inthe life assurance sector Gjensidige had gained market share in the past few years and in the early 1990s the size of the two companies' operations were approximately equal. Both Gjensidige and Forenede had higher operating expences than their main competitors. This was mainly due to the fact that both companies had a large part of their portfolio in the labour intensive private sector and substantial fixed investments in computer technology. However, whereas the relative costs in Gjensidige were reduced from 1990 to 1992, the trend in Forenede was one of increasing costs.
Forenede was listed on the Oslo Stock Exchange in 1981. In 1984 a new group of
shareholders entered the company, and these shareholders were in constant opposition to the majority of the shareholders. Gaining influence in the Forenede Corporation was extremely
difficult due to the strict articles of association. These articles stated that no shareholder could own more than 10 per cent of the company, or vote for more than 5 per cent. The reason for limiting the shareholder's influence in this manner was to keep Forenede as an independent company situated in Trondheim. The shareholders entering Forenede in the middle of 1980s were strongly restricted by this articles, not the least because they were consolidated as a group.
In the early 1990s the market started to react to the unstable ownership situation in Forenede, and the share price in the corporation fell from above 200 NOK in the Spring 1990 to just above 100 NOK in the Autumn 1991. On 10th October 1991 Gjensidige's Asset
Management Division made a fmancial investment in Forenede, buying 8.8 per cent ofits shares for 115 NOK. This acquisition of shares triggered the minority shareholders in Forenede to offer their shares to Gjensidige.
Implications for unification of power
At the time when Gjensidige made its offer to Forenede's management, Gjensidige was a larger, more profitable, less cost-intensive and more solvent company than Forenede. The differences in size would probably have significant implications for the integration process in the non-life insurance sector where Gjensidige was substantially larger than Forenede. The differences in profitability and level of relative costs would probably have less impact since Forenede was known to be a profitable and attractive company.
The unstable ownership situation implied that a large part ofForenede's shares could come into play if the minority shareholders represented by the Kinnevik group were offered an opportunity to withdraw from the company. Hence Forenedes ability to pursue its primary goal to survive as an independent Trondheim company was weakened.
7.2.4 Cultures and Identities
In this section I examine the historical background of Gjensidige and Forenede
respectively. Itis important to emphasise that the description of the corporations focuses on the differences rather than the similarities. The reason for this somewhat biased focus is to detect the areas in which problems of integration are likely to occur. A more thorough description of the two companies is included in appendix 7.3.
Dominant activity. The dominant activity in Gjensidiges insurance business was non-life insurance. Although the corporation had expanded its life assurance business substantially in the late 1980s, non-life insurance was still dominant. Life assurance was sold as a
supplementary product to non-life insurance utilising the opportunity of cross-selling products
in Gjensidige' s fme-meshed network of offices. Gjensidige' s strategy was to expand further into the market of life assurance to utilise this opportunity of cross-selling.
The core activity in Forenede was life assurance. Non-life insurance was sold as a supplementary product to life assurance. Forenedes strategy was to grow in the non-life insurance sector which was quite a profitable business for the company.
Head offices. Forenedes head office was situated in Trondheim. However, a substantial part of Forenedes operations tookplace in Oslo, and indeed there were more employees in Oslo than in Trondheim in the life assurance operations. As various positions and functions were re-allocated to Trondheim, the employees in Oslo began to feel insecure about their future in the company. Thus, the tension between Trondheim and Oslo was increasing.
Gjensidige's head office was in contrast situated in Oslo close to key corporate customers and the Norwegian authorities.
Decision-making. In 1991 Gjensidige had five regions with full business responsibility in addition to a number of legally independent mutual fire insurance companies and regional units, with 200 sales offices altogether. Although these entities were legally independent with full business responsibility and their own board of directors which appointed the managing director, there was a strong interdependence between the independent entities and the central units. This interdependence was reflected in group loyalty, commitment and co-operation.
Because of this constitutional structure the central units were not in position to command the legally independent units to follow their instructions, but had to "sell" their ideas and
opinions. Managers and employees in Gjensidige describe decision making in the corporation as a democratic, time-consuming process where a large number of people were invited to participate and influence the process.
Forenede had a line management with centralised control in the Trondheim head office.
Managers and employees in both Gjensidige and Forenede describe Forenede as a
commanding organisation where a decision was taken at the top and expressed as an order through the system. In contrast to Gjensidige where there was a lengthy and time-consuming debate before making important decisions, the decisions in Forenede were made in a swift and dynamic manner.
Core competence and marketing approach. The core competence in Gjensidige were in the area of technical insurance. The corporation had a separate unit of development in this area.
Both in Gjensidige Skade and Gjensidige Liv professionals held the key management positions.
The driving force in Forenede was the marketing unit. This unit not only directed the
corporation's marketing and sales initiative, but also product development in the corporation.
Few professionals in Forenede were involved in product development, and no department was dedicated solely to this purpose.
Gjensidige's reward systems were directed towards preserving its customers, apparently no . matter how much they contributed to the total earnings. Compared to Forenede, Gjensidige was less focused on selecting specific customer segments and less outreaching.
In Forenede, there was a close relationship between the assurers and the marketing
management, and the insurance sales people were followed up on a daily to weekly basis. The assurers were rewarded and assessed in a manner that stimulated the sale of new insurance, more than the maintenance of customer relations.
Personnel policy. One of the most prevalent features of Gjensidiges culture as described by managers and employees ofboth former organisations was its caring orientation which was reflected in its attitude towards its customers.
The turnover in Gjensidige was extremely low. In the central units, it was below the average for the country, in the local units there was hardly any turnover at all. Gjensidige' scaring culture was also reflected in the organisation's reluctance to layoff people.
The personnel policy in Forenede was in contrast quite harsh. The corporation had a high rate of turnover among its insurance agents. To lay someone off was perceived as mere routine in the company, and respondents claim that the company controlled their insurance agents by the means of threats.
Acquisition regime
To maximise the values of Forenede, Gjensidige decided not to act as an acquirer once it had gained controlover the company, but to treat Forenede as an equal party. In line with this approach Gjensidige made a number of concessions in a letter of declaration to Forenede's board of directors. The rationale for this strategy is illustrated in the following statement from a representative in Gjensidiges top management group:
If one organisation is substantially larger, then the larger and the leading
organisation in the merger has a choice between two strategies. One strategy is to
choose the victor's course, and cut offwhat can't be used in the smaller organisation and capitalise whatever possible. But one can also choose another strategy. Because of one's size one can afford to take longer to seek out what is valuable in the smaller organisation.
We have chosen the latter strategy, because we believe this is a better way of securing the long-term values ... Psychologicaly speaking, this variant has an important advantage. The people coming from the small organisation will not perceive this as a threat, and in addition, the large organisation will not feel run over because it is so big and is the owner anyway.
By presenting this approach to the broad layer of management in the company and giving them a chance to have a say, Gjensidige committed their leading managers to this approach.
The declaration of Gjensidiges intentions was made on request from Forenede's board of directors after the first meeting between the two boards of directors in Gjensidige and the board of directors in Forenede on 15th December 1991. The declaration was made out by Gjensidiges top management and according to representatives from the top management became a kind of a constitution for the process. This declaration contained a number of important concessions on behalf of Gjensidige, and demonstrated the corporation's attitude towards Forenede as an equal party in the process.
The most important concessions made in this document sent to Forenede's board of directors 20th December 1991 are outlined in appendix 7.4.
Implications for integration of cultures and identities
The structures and cultures in Gjensidige and Forenede were fundamentally different in many respects. However, this did not mean that they necessarily were incompatible.
First, the dominant activity in Gjensidige was non-life insurance as opposed to Forenede where there was a dominance of life assurance. However, both companies were aiming for a better 'balance between the two sectors. Hence, they fitted each other very well.
Secondly, the joint corporation faced the challenge of either maintaining both head offices or choosing between them. Maintaining both head offices would probably facilitate the cultural integration in the short term signalling to the employees in the Forenede organisation their value to Gjensidige. However, in the long run, this could result in the preservation of two cultures, and hence have a negative effect on cultural integration.
The organisational structures were incompatible. However, Gjensidige made it clear at an early stage in the process (see the concession made in appendix 7.4) that its co-operative structure would be chosen at the expense of Forenedes line mangement structure.
Other areas where the two organisations seemed to be incompatible were the decision-making process and personnel policy. As for the organisational structures, a choice probably had to be made between them, and it is probable that this choice would be influenced by the area
managers and the relative strength of the organisations.
As for core competencies, they seemed to be compatible, and the new organisation could benefit from having strong skills within technical insurance and marketing. Nevertheless, the new company would have to make changes in the reward and incentive structure to fit this mixture of core competencies.
Anacquisition regime that stressed the preservation ofkey features in Forenede and invited participation had the potential to make up for some of the negative impression an unfriendly take-over would make on the management and employees in Forenede. However, to have a lasting positive effect on cultural integration, Gjensidige would have to act on their promises in the post-acquisition process.
7.2.5 Summary
Implications for the following phases. Due to Gjensidige' s high discretionary slack, i.e.
strong financial position and its co-operative structure, it is likely that gains would be realised over a long-term perspective. Hence, the realisation of gains would be pursued both in phase three and phase four.
The power relationship between the parties, in particular the ownership structure in
The power relationship between the parties, in particular the ownership structure in