In the first 30 to 60 days after Phil Rykhoek announced that his company, Denbury Resources Inc., would be buying Encore Acquisition Co., his phone rang constantly. On the other end were angry shareholders who didn’t understand why he was doing the acquisition.
“You just have to work through it, and you have to see what their concern is and focus on their concern,” the CEO says. “Many of the phone calls, particularly there in the first couple months, would go for an hour and a half, two hours, because you had to walk through the whole thing.”
He had one-on-one phone calls. He had had road trips with senior management. He had conference calls. It wasn’t fun most of the time, but he knew this was the right choice for the oil and gas company.
“There were days when it was kind of difficult, but we all believed that this would be a good deal for Denbury, and it would turn out to be a long-term, very strategic, profitable acquisition. That’s the message we had to get back to shareholders,” Rykhoek says. “We tend to be a longer-term-focused management team in that we try to make decisions that were going to help us long term. Unfortunately, Wall Street is a bit more short-term-focused. It was a little bit of a disconnect there. We had to convince them this was going to make sense in the long term.”
Add to the stress of trying to convince shareholders from both companies of the merits of the acquisition, but he also had to deal with moving both companies to a new, combined headquarters and the normal responsibilities of carrying out an acquisition.
“It was just a lot of extra work that comes from putting two companies together that puts a strain on everybody, and in the meantime, you have to keep the company operating, so the day-to-day work didn’t go away.”
Get employee buy-in
While Rykhoek fielded angry shareholder calls, he and his team also had to convince employees at both companies that this was a good thing.
“We tried to be very upfront with employees right away,” he says. “We had several group meetings and employee meetings right after we announced the deal and talked to them about our plans and how this was going to benefit the combined companies.”
When you present news like this to employees, be prepared for not everyone to see it how you do.
“You always get a mixed reaction,” he says. “Some people love it — the ones that are more aggressive and wanting to grow and get excited by the change. Those people love it, but a lot of employees don’t adapt to change as well, and those are the ones that will resist it.”
It’s critical to get everyone to buy-in. First, he wanted to make sure his current employees knew where Denbury was going and how the acquisition plays into that.
“You try to, one, point out how important this is to Denbury and how it’s going to benefit the future growth, and that’s the reason you came into this acquisition,” he says. “You try to get that message out, and then you try to give existing Denbury employees assurance that this is not going to hurt them — this is going to help them. The company’s growing — it presents new opportunities and presents opportunities for growth in different areas, so you try to present that side.”
But it’s not just your current employees that are affected. Rykhoek also knew he and his team needed to communicate well with the Encore employees, as well.
“The new employees from Encore are harder because they’ve just had their company sold out from under them, so to speak, so we spent a lot of time letting them get acquainted with us and spend time with management and spend time with HR in the different areas and see we’re not a bunch of bad guys, and it’s a fun place to work,” he says.
It was important for them to point out the fun aspects of Denbury to the new employees and tell them about the culture and how the company has extremely low turnover because employees are generally happy. He also explained how the compensation strategy is team-based.
“We all get paid based on how well the company does, and we really try to reinforce the team concept rather than disjointed, free-for-all, where people try to point out individual performance or, ‘I did this, I did that,’” he says.
As such, to get people excited about the acquisition, they told employees that they would increase their target bonus by 25 percent, and that would be evaluated based on how well the transition went.
He hoped that sharing the benefits of a team-based culture would get them excited about the new combined organization.
“Basically, sell the company to them,” he says.
Create a team
Once he had repeatedly and effectively communicated the reasons behind the acquisition to both sides, Rykhoek had to work on merging both sides into one team.
“When you’re trying to integrate, you of course want to present that culture to them, but you want to get them into the team as fast as possible,” he says.
This required a couple different approaches, starting with face time between the two sides. They rented out a place and had a food and music get-together event after work in Fort Worth, where Encore was headquartered.
“We took a load of Denbury people over and gave them a chance to interact and meet one another,” he says.
The bus also went both ways — they brought Encore employees over to the Denbury headquarters in Plano.
“We brought the Encore folks over in different batches by department or by discipline and gave them tours of our office and had several of the managers spend time with them,” he says. “They could answer their questions and get acquainted and get a feel for what Denbury is like. … It was just trying to get face time, if you will, between Denbury employees — in particular the managers — with the Encore employees.”
In addition to getting both sides comfortable with each other, he had to also physically merge them into one location. While many acquisitions bring layoffs, this wasn’t the case with the Denbury-Encore acquisition. While there were a few isolated cases where some people weren’t needed, for the most part, all employees were invited to come on board. Despite that invitation, only about half of the Encore people did.
“It wasn’t like there was a big dislike of Denbury,” Rykhoek says. “It turned into a geographical issue. The corporate headquarters are about 45 miles apart, so depending on where you lived, in some cases, it was impractical for them to commute to Plano.”
Because of that, they wanted to make it easier for employees and offered them a relocation package to move closer, but still many didn’t accept it because they didn’t want to uproot their families.
Rykhoek and his team also did something many would see as crazy — they paid out severance packages to anyone who didn’t want to come over.
“One of the criteria in most severance plans is if you have to go more than X miles to the new company, you could leave for good reason and get severance,” he says. “In their severance plan, the criteria was 50 miles — we were less than 50 miles. In theory, we could have been a little bit more hard line and said, ‘Tough, you need to come work for us, or we’re not going to pay you,’ but we chose not to take that approach.”
They told employees that they understood it’s a tough commute and asked them to at least stay on to help with the transition. They put a time limit on the transition period so employees had an end in sight, and then they rewarded those who stayed to help.
“We said that if they would stay with us until we could transition that we would pay them all the normal severance that they would have gotten, so we gave them an economic incentive to stay,” he says. “People were cooperative with that, so that helps us.”
Merge your systems
With people on board and his employees merging, one of the other key steps Rykhoek needed to do was get the systems merged between both companies. This is one of the many areas that Rykhoek depended largely on his team to effectively complete.
“Generally, the CEO’s role is overview, strategy, direction,” he says. “I do quite a bit of communicating with shareholders, and as part of the negotiations, I was pretty heavily involved in the negotiations to acquire Encore. … But the day-to-day decision of which software package to use, most that I had very little input, if any, because that was handled by the experts in those areas.”
Instead of having a team at the top decide which systems to use, he charged the people in each department to make those decisions for themselves.
“People are aware of using the different software packages in the industry and in their area,” he says. “If you’re an engineer, you know what the options are. If you’re an accountant, you know what the options are.”
He gave them very loose guidelines so as to not micromanage and ensure the best decisions were made.
“The guidelines were just, ‘Figure out which has the better system, and let’s go with that,’” he says.
It was critical that both sides worked together to come to a conclusion to avoid the us-versus-them mentality when they started using the systems side by side. Encore people took the time to explain their systems and how they worked, and the Denbury people listened. If both were similar and there wasn’t evidence heavily leaning in either direction, then there was a tie-breaker.
“If it got to be that close, if it was a real tough decision … then we probably kept the Denbury system because Denbury was slightly bigger, and if you look at the transition and the conversion, it would have been more difficult to convert Denbury to Encore than vice versa.”
These decisions were made within several months, but some of the conversions took almost a year. Most of the operational and technical systems could be integrated more quickly, but they also had to consider Sarbanes-Oxley and didn’t want to do anything that could disrupt that, so the accounting system didn’t move over until Jan. 1.
The acquisition was complete in March 2010, and now Rykhoek is seeing real benefits.
“Most people got better with it as time went on,” he says. “The Encore people got more comfortable with Denbury and vice versa.”
He’s amazed at how well his people responded throughout the process. The employees made a huge difference, and, as a result, those target bonuses that were increased by 25 percent if the integration went well were paid out at the full 25 percent as a reward for the extra efforts.
“There was a lot of overtime and a lot of extra effort put into it, and we couldn’t have done it without everybody’s help,” he says. “It’s just wonderful to have a group of dedicated employees that put forth the extra effort when you ask them.”
The acquisition also took Denbury from $889 million in total revenues in 2009 to $1.9 billion in 2010. Looking into the future, Rykhoek is excited about Denbury’s future.
“We have a much larger company, our leverage is good, our balance sheet is very strong,” he says. “We’re an oil-focused company, and obviously oil is doing very well in today’s market, and we have a lot of potential, so we think we have a great future.”
And Rykhoek’s phone has stopped ringing as much as it was because even the shareholders are now happy about the deal.
“Now, they look back at it and say, ‘This made sense,’ because what we did was we took Encore, we kept the core assets we were interested in and sold the rest to pay for the deal,” he says. “That all went smooth, we got good prices, it happened very quickly. In a period of a year, we got our leverage back down to where it was pre-acquisition. Now the shareholders look back on it and say, ‘That was not such a bad plan.”
How to reach: Denbury Resources Inc., (972) 673-2000 or www.denbury.com
Phil Rykhoek, CEO, Denbury Resources Inc.
Born: I grew up on a farm in Iowa, and I didn’t want to be a farmer so there wasn’t anything to keep me there.
Education: Degree in accounting and management with a minor in economics from Evangel University in Springfield, Mo.
What was your first job, and what did you learn that still applies?
The first real job, other than trying to sell things that kids sell, was I was working construction. I built grain bins.
I don’t know if it’s specifically on that job, but if you look back at my past, we were taught as kids to work hard, and I think that’s some of the culture you get being a farm boy. You’re put out, at a very early age, in the fields and doing chores and you had responsibilities at a pretty young age. We were taught to be responsible and taught to work hard, and that carried through my whole career. We worked very hard in construction, too. It was hard work.
As a child, what did you want to be when you grew up?
I didn’t want to be a farmer. I really didn’t know until I got into at least early college that I wanted to go into accounting and finance. As a kid, I didn’t know. Some of the work outside got to be quite hot and nasty and dirty, and I decided early on that I didn’t want to be a farmer. I remember, I unloaded the oats into the storage facility, and it was hot and nasty, and I don’t know if you’ve ever been around oats, but it’s real chaffy, and it gets all over your shirt and itches and it drives you crazy. I said, ‘There’s got to be a better life.’ Of course, I have to admit, today, the farmers have got it a little bit better for them, and now a lot of the tractors have air-conditioned cabs and climate-controlled cabs, so it’s not as bad as it used to be, but it’s still very hard work.
What’s the bed advice you’ve ever received?
Work hard and do things with integrity. We try to run the company — all four of us operate this way — with integrity. Do things right, do things the correct way, and when doing business deals, we try to do things that are win-win situations and that pays off in the long run.