One of the leading causes of M&A integration fails according to Investopedia…poor and inefficient processes when it comes to cultural integration. Before we get into that, let’s take a step back and review.
A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. Normally, firms that agree to merge are roughly equal in terms of size, customers, and scale of operations. Acquisitions, unlike mergers, occur when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets.
Companies acquire other companies or merge for various reasons. They may seek economies of scale, diversification, greater market share, increased synergy, operational cost reductions, revenue growth, or new niche offerings. While significant deals and acquisitions of large well-known companies tend to dominate the news every so often, mergers and acquisitions (M&A) occur more regularly between small and medium sized firms. Regardless of the nature of how firms come together, it’s essential for business leaders to evaluate the following when considering such activity:
Pricing: The metrics investors use to value an acquisition candidate vary by industry. When acquisitions fail, it’s often because the asking price for the target company exceeds these metrics.
Debt Load: A target company with an unusually high level of liabilities may foreshadow problems ahead.
Undue Litigation: A good acquisition candidate is not dealing with a level of litigation that exceeds what is reasonable and normal for its size and industry.
Operational & Financial Organization: A good acquisition target will have clear, well-organized, and transparent financial statements and operational procedures, which allow for due diligence to run smoothly.
What’s often missing from this assessment — and more of an afterthought — is culture fit. According to collated research and a recent Harvard Business Review report, the failure rate for mergers and acquisitions (M&A) sits between 70 and 90 percent — post-merger integration issues often cited by leaders as a critical challenge.
We think adding a careful culture appraisal to the list above can help identify potential employee relation issues, crucial projects and products, sensitive processes and matters, and impactful bottlenecks — the sum of which accounts for your culture — before they become the downfall of your M&A.
A Lesson in Culture
In 1998, when the impending merger of Daimler-Benz and Chrysler was announced, it heralded the biggest cross-border industrial merger ever. The amalgamation of the two companies was to be a shining example of what globalization could achieve; in fact, market analysts initially heralded the deal as a textbook example of a global, scale-enhancing, industry consolidation play with a unique market-segment extension opportunity to reach all principal auto-buyer segments from one single manufacturer.
With $8 billion in anticipated cost synergies and a ground-breaking combination of legendary brands, what could possibly go wrong? In addition to geographical culture differences, a clash of organizational cultures is what went wrong.
Compounded by structural and procedural issues, differences in communication styles and expectations within teams and across the organizations served as key challenges — the what, why and how of these organizations. The failed Daimler Chrysler merger now serves as a case study on the challenges inherent in cultural integration issues and a cautionary tale on failing to consider, assess, and manage differences in knowledge, behaviors, motivators, work styles and processes, and product portfolios — in essence, organizational culture.
Despite a training model focused on communication patterns and use of language, core beliefs, listening habits, body language and non-verbal communication, the concept of status, interaction, gender, leadership style, language of management, motivation factors, negotiating characteristics, manners, and more, the two once successful companies did not succeed in joining or complementing one another nor in bridging their gaps.
Avoiding Merger Meltdown Before It’s Too Late
In early March, the Alliance of Merger & Acquisition Advisors hosted a webinar moderated by Steve Nunn, CEO of Intista (formerly Nunn Better Consulting). The webinar featured a range of panelists who reinforced the importance of addressing culture integration during M&A. They shared their experiences along with practical advice on how to take culture into account during mergers and acquisitions.
Some of the most important takeaways around thinking about culture more strategically during M&A included the following:
Clearly defining the purpose of an acquisition and establishing a range of acceptable parameters for selecting a company — keeping the ability to blend cultures top of mind
Building relationships with middle management and people managers across each organization
Leveraging technology to measure and compare the organizational cultures and corresponding functional areas of acquirer and acquiree
Getting granular on things like performance management systems, KPIs and how employees will be measured, timelines for changes in basic components like benefits or compensation structures — identifying and communicating these early — and setting the standards of what success looks like both behaviorally and financially
Determining if a culture reset makes the most sense, which means arming Human Capital Management with the tools needed to develop the new collective aspirational culture to which the organization will strive
According to panelist Juan Betancourt, CEO of Humantelligence – a culture and talent intelligence software company, organizations should align on cultures and business strategy at the onset (not as an afterthought) to increase the odds of success.
“Those M&A’s that fail to deliver on expected synergies often do so because of culture integration issues, but that doesn’t have to be the case any longer…with psychometrics + data analytics + AI/Machine Learning, companies can leverage technology to anticipate culture friction points and figure out game plans before they become bigger issues — measuring differences in culture, team by team, group by group, division by division in order to help merging companies integrate more smoothly.”
Culture is not doing engagement surveys, not disseminating coffee mugs with logos, not listing values on a website, and it’s certainly not a policy in a handbook — because it can’t be. Those things are stagnant, and as COVID-19 taught us, culture is ever changing; it’s an aggregation of people’s behaviors, motivators and values, and work styles; it’s how an organization does things. And because of that, York Flik, employment attorney and Partner at Allen, Norton & Blue, tells us that often the answer for the joined organizations is a new blended culture. So even lawyers involved in these processes need to be aware of which employees contribute to a healthy and positive culture of harmony and respect across levels, as well as those not baked into the fabric of the organization because they may not well integrate and will be damaging to culture — which could lead to bigger legal issues.
Jose Tomas, Principal & Managing Partner at BrandSparc echoed these sentiments saying, “culture is not a fuzzy thing anymore; it can actually be measured, and with culture, we should be measuring all elements of M&A, including management practices and how the different levels of management will collaborate, how individuals are promoted, how titles and individuals are going to being integrated — not doing so could lead to the deal’s derailment.”
Tomas points to the July 2015 Anthem, Inc. and Cigna Corporation merger agreement to demonstrate the costly and damaging effects of not considering culture prior to and during integration. Clashing leadership styles and a host of operational and procedural integration roadblocks ultimately resulted in the termination of the merger agreement. Read more about the final injunction against the merger on antitrust grounds here.
With 75 add-on acquisitions under his belt, Micah Dawson, VP of Portfolio Support at Trivest Partners, views culture as an outcome during these processes. “There’s a strong correlation, if not causation, between culture and value creation,” and recommends that organizations take heed of the measures that influence culture in our organizations.
He reminds us that if it’s important enough, make it someone’s job. Because of the high-stakes nature of these activities, integration planning should be centralized, and someone should be charged with assessing the integration by functional area — finding the most significant risk areas and making sure that the rest of the integration process isn’t impacted by those.
The Bottom Line
Now more than ever, as organizational cultures evolve and reset during this pandemic, Culture as a Service should be viewed as a driver for value — measuring it in order to be able to manage it, assess potential areas of cultural friction, and then ultimately optimize it. The importance of aligning on culture fit during M&A activity could mean the difference between a smooth integration and success or undue stress, financial loss, and failure.
Don’t let culture be an afterthought. For a better idea of how to take culture into account during merger and acquisition planning — the pitfalls to avoid, how to assess it, and ways to support a culture in which employee engagement, collaboration, and productivity continue to increase during a time of change — we just need 12 minutes and we’ll show you the value of building culture analytics into your strategy.