An increasing body of evidence shows that how a company relates to its community can directly affect its success or failure. Part of that evidence indicates that this is particularly relevant during mergers and acquisitions (hereafter collectively referred to as mergers).

One question that comes up with increasing frequency and intensity during mergers is what will happen to the community or communities?

Working with companies in an area we term “community investment” – being in the community in ways that produce real ROI – we find a new and important consideration. Because community investment (CI) affects stakeholder relationships, how it is handled before, during and after a merger can contribute to the merger’s success or failure. How CI is handled can affect stakeholder reactions to a merger, smooth the transition and help determine the post-merger company’s success.

Knowing that, a company can maximize the likelihood of success.

Three trends support our premise. The first is the growing importance of corporate citizenship to customers, employees, regulators, government and even shareholders. If the business world learned one lesson from Enron and other meltdowns, it is this – reprehensible behavior is not justified by short-term financial gain.

A part of corporate citizenship is CI, or what a company gives to its communities in terms of cash and in-kind donations, volunteer time, and other resources in order to help achieve its business goals and objectives, and build sustainable communities.

The second trend is the perception that mergers, while generally regarded as good for business, are not good for people. A Roper-Starch Worldwide poll of 2,002 adults in 1999 found that 57 percent thought mergers produced “more financially sound companies.” At the same time, 59 percent said they lead to fewer jobs and 42 percent said they result in worse customer service. And mergers are uniformly seen as detrimental to communities.

Many post-merger activities are counter to good corporate citizenship – job reductions, budget cutbacks, headquarters relocations, and wholesale changes in culture, values and leadership. CI can be a compelling counterweight, showing that financial reality is balanced with citizenship.

The third trend is perhaps the most interesting, even if it is the newest and subtlest trend. Many companies link announcements of mergers with announcements of their commitment to equal or even enhanced CI activities. They do so to recruit support for the proposed mergers and are often successful. How, then do you make CI work for you in a merger?

Donations of any sort are considered a one-way street. They are given without expectation of anything coming back to the donor. Investments, in contrast, are always made with an eye to a return. Companies participating in their communities can turn donations into investments by bringing business discipline to the process.

Donations are heart-driven. CI is business strategy-driven. Four components make the difference:

• Being strategic in what you do and with whom;
• Being proactive in reaching out to appropriate issues and partners;
• Linking CI to business goals and objectives; and
• Handling it like any other business function, including measuring success.

The real key to success and achieving a business ROI lies in relating strategies and initiatives to stakeholders and their interests.

Obvious stakeholders are customers and employees. In today’s marketplace, however, there are more stakeholder groups that want to have a say – and can smooth or block a company’s progress – than ever before. Part of this is due to transparency, part to increased activism and part to increased access.

CI’s value in a merger then becomes obvious; it can sway the stakeholders whose opposition or support can make the difference.

Obviously, grand-scale mergers didn’t wane with the 1980s. In the 1990s, there were mergers where the total value exceeded the gross domestic product of many developing countries. Time Warner-AOL’s merger came in at an astounding $183 billion, Glaxo Wellcome-SmithKline Beecham’s at $76 billion, Exxon-Mobil’s at $75 billion, British Petroleum-Amoco’s at $63 billion and SBC-Ameritech’s at $57 billion.

What happens to the two companies’ CI after a merger is important.

According to a 2000 Conference Board report titled “Maintaining Community Relations During Mergers,” post-merger contributions budgets tend to be less than the sum of the two pre-merger companies’ budgets. Besides the obvious need to trim expenses, this may result from elimination of redundant or overlapping support, or a more strategic and focused approach to CI.

On the other hand, Bank of America, Banc One Corporation, Morgan Stanley Dean Witter, BP Amoco, Chase Manhattan Corporation, First Union Corporation and SBC Communications all increased giving after their mergers.

In fact, the Conference Board report also said that nearly half the surveyed companies decided to maintain or increase support. They did so to reaffirm their commitment and reduce the impact of changes, even when the outcomes were contrary to immediate business needs.

Are the two key findings of the report contradictory? We believe they reinforce the notion of a trend – not throwing the CI baby out with the pre-merger bathwater.

An excellent example of the new approach is the merger of equal energy utilities in Southern California in the late 1990s. Enova Corporation, the parent of San Diego Gas & Electric (SDG&E), sought to merge with Pacific Enterprises, the parent of Southern California Gas Company. The proposal was taken public about a decade after an attempted acquisition of SDG&E by Southern California Edison failed miserably.

The difference? The acquisition attempt was foiled by San Diego community leaders (led by the Greater San Diego Chamber of Commerce) who didn’t want to lose a local company and its community support. The merger, on the other hand, was positioned to benefit the San Diego community with the post-merger company to be headquartered in San Diego.

Enova’s leadership sought support for the merger, in part by anticipating that the addition of jobs and revenue within the region would naturally lead to an increase in CI. The Chamber pointedly asked about the post-merger company’s community involvement prior to endorsing the merger. A commitment to increasing charitable contributions was even contained in the Corporate Statement of Principles that guided future business policies and was aggressively distributed in the San Diego community.

The merger was supported by the San Diego community and was completed in June 1998. The result is Sempra Energy, a Fortune 500 company whose charitable contributions, as well as other CI activities, have indeed increased significantly.

It should be noted that companies based in different markets are less likely to reduce contributions budgets. Companies in the same market are more likely to reduce budgets and CI staff size, especially if the combined budget is less than the sum of the pre-merger budgets.

Also, we need to emphasize that community investment and its many benefits are not just available to Fortune 500 companies, which we use as examples. We find that middle-market and smaller businesses are actually closer to their communities, and doing considerably more (proportionally) than big businesses, which are expected to practice CI.

As a result, middle-market companies looking at mergers could potentially gain even more than Fortune 500s by including focused CI efforts in their planning.

We see three imperatives – plan, communicate and transition – and one option – grandfather.

The more pre-merger CI planning, the more benefit to the post-merger company. Ideally, companies would include CI representatives in the overall planning. An excellent example is Chase Manhattan. After announcing its merger with Chemical Bank, at the suggestion of a community advisory board, it surveyed 350 not-for-profits and community leaders to solicit input for use in post-merger planning.

Communication is key. It should begin with employees, then ripple out to other stakeholders. Communications should be honest, immediate and frequent … and include a clear expression of concern for the affected communities. Communicate with the not-for-profits that may be affected so they can plan for their future. It serves no one to hide the ball and will engender very bad feelings for the post-merger company.

SBC Communications created a comprehensive booklet titled “Vital Connections” that introduced the company to new stakeholders and highlighted its commitment to corporate citizenship. International Paper brought media to other markets to see how it handled other mergers and made differences in those communities.

Include some sort of CI transition, ideally forming a CI transition team. This would include representatives from both companies to identify synergies, conduct a strategic review, reduce overlap, and even come up with fresh insights and approaches.

By grandfathering, we mean maintaining existing commitments, even if the new headquarters is in another community. For example, Honeywell International, based in Minnesota, merged with AlliedSignal, based in New Jersey. The CEO immediately pledged to fund not-for-profits in Minneapolis for the rest of the year, even after the headquarters moved to New Jersey. In fact, Honeywell still has a presence there.

But there is an exception to almost every rule. When Gillette acquired Duracell in 1996, there was no attempt to integrate their two programs. Both were operating effectively, were identified with their respective brands and were effective with stakeholders. If it ain’t broke ….

To successfully manage CI in a merger situation, communications is the number one must-do. It also helps if the two CI teams know each other, as was the case with Procter & Gamble and Iams, before the merger. And if the brands are distinct, maintaining separation and identity for some period of time is helpful.

Barriers to success occur when the two programs are structurally different. Perhaps only one formally involves employees, e.g., or the programs and policies themselves are in conflict. The more different they are, the more difficult to integrate.

And activism on the part of shareholders – an increasingly common and vexing problem that more and more corporations are facing – can create barriers. That is why we suggest communicating with all stakeholders the way Chicago residents were once encouraged to vote – early and often.

Mergers are difficult and the success factors are all critical. Miss one and the result can be failure. Focusing on CI is a big success factor in this brave, new world. Doing it can give a post-merger company a much better chance of succeeding. What is that worth?