Post Merger Integration research over the past decades has shown that a great deal of mergers and acquisitions did not yield the desired value as was previously stated. Although success rates are difficult to compare, most surveys point to a success rate of around 30%. Approximately 70% of mergers and acquisitions fail to achieve expectations and more than 50% destroy value (read for instance Booz Allen Hamilton ‘Merger Integration: Delivering on the Promise, 2001′; KPMG Consulting ‘M&A Study Report, 1999’). Many of the surveys mention insufficient attention to the people and cultural aspects of the integration as one of the causes of failure. Overlooking or underestimating the effect of cultural differences can seriously hinder the integration process and can destroy value.
Here is the thing: this was important for mergers and acquisitions in the past, but it will be even more crucial for mergers and acquisitions in the future. Mergers are taking place in globalized multinational and multicultural markets. Corporate cultures, but also national cultures play an increasingly important role.
Leaders who embark on the acquisition path need to be fully aware of this. They should reflect critically on the objective of the takeover. What do they really want to achieve? Secure bonuses for the executives, creating short-term shareholder value, becoming the biggest? Or is the goal to use and combine the qualities of both companies and creating sustainable value (for shareholders, employees and customers) by building synergies, complementaries and economies of scale? If it’s the latter, then creating cultural alignment is an indispensable part of the integration process.
Paying attention to cultural aspects needs to start early in the M&A process. A focus on financial, legal, technical, and procedural aspects alone will not guarantee success. Already in the pre-deal phase sufficient time and energy needs to be spent on cultural topics. This means that especially the C-suite has an important role to play because they are primarily the architects of the deal and of the integration strategy.
I have encountered many cases where C-suite members tend to underestimate the importance of the people and culture side of the merger. They put it on the list of things that need to be addressed, but often they postpone it to the post-deal phase. Why? Because it is too complex and intangible, and they rather deal with it when all the financial and legal stuff is finished successfully and the deal is closed. I’ve even once heard a CEO argue that including cultural differences in the pre-deal phase could complicate things and might be a risk to the successful closing of the deal. Unfortunately he was wrong! Without sufficient awareness in the C-suite of the cultural differences between the companies and the potential impact it can have on the integration process, the chance is high that expected objectives of the merger will not be reached. It is inevitable for the C-suite to have a clear view on cultural differences, and on the integration strategy it wants to follow to address these topics effectively. I’m not talking about having all the answers upfront, but about having enough information to be able to define an appropriate integration approach.
What kind of key questions should be on the pre-deal agenda of the C-suite? I list a few:
- What key characteristics of our company’s culture create our success?
- What key cultural characteristics of the other company create their success?
- How will our managers and employees perceive a merger of both companies?
- How will their managers and employees perceive a merger of both companies?
- What cultural differences will play a role in the integration of the two companies?
- What could be the potential impact of these cultural differences on the integration process?
- In what way could it affect the value creation objectives that we want to achieve?
- How can we prevent that these cultural differences will lead to the loss of key people, the lack of synergies and to not creating value?
- What integration strategy would address these potential issues adequately?
- What type of integration process do we want to follow?
Of course the way the C-suite will use and communicate this list will vary depending on the kind of merger and of the role of the C-suite in the deal (take over versus being taken over, companies of similar size or not, etc.), but spending time by both companies on these type of questions can significantly increase the chance of a successful post-deal integration. Performing a cultural due diligence could be a very helpful instrument and can offer very useful information to the C-suite in the pre-deal phase.
And here’s another thing, do not expect cultures to change or integrate easily! It requires more than attention and time alone. It requires the right mindset.
Fons Trompenaars and Maarten Nijhoff Asser describe in their book ‘The Global M&A Tango’ five interesting categorical types of leadership behaviors in mergers:
1. Mergers where leaders stick to their own values and proclaim: ‘My values first!’ and ‘I win, you lose!’ The result is creating winners and losers. An open door to destroying value.
2. The second type is to abandon your own orientation and to go native. A ‘When in Rome, do as the Romans do’ approach is adopted. Result: other cultures will mistrust you and you won’t be able to offer your own strengths to the merger.
3. Denial, avoiding and ignoring value dilemmas by operating at arm’s length and assuming the synergy will take care of itself. Guess what, it won’t.
4. Compromise between values. Sometimes adopting the acquirer’s way of doing things, and sometimes that of the organization being acquired. In the end synergies are not really or only partially achieved.
5. Focusing on reconciling cultural differences. Trompenaars and Nijhoff Asser: “Both sides improve beyond themselves and synergize into a new entity, with a higher value than the sum of their former parts.”
If you really want to create value, the last type of leadership behavior is required. It will not work if we believe we can simply change the other culture. Leaders will have to build cultural alignment instead: taking the strengths of both sides and turn it into something new that is even stronger. And this applies to the leaders of both companies. For the acquirer it is crucial to have respect for the culture of the other and not to believe our own culture is better. For those being acquired it is crucial to being open to the other’s culture and not to join in our defense (see my earlier post ‘Post merger integration: Who is your enemy?’), but to believe the other’s culture can offer new perspectives to our benefit.
If you are interested to read more about cultural alignment I gladly refer you to the e-book ‘Return on Culture’ by the Sustainable Business Forum (download free copy).
How do you deal with post merger integration? What cultural differences do you encounter? How do you create value by reconciling cultural differences? Feel free to leave your comments below.
As international business consultant, change leader and executive coach Aad supports companies, their executives and leadership teams to deal effectively with post merger integration challenges. He works with his clients on accelerating the integration process, cross-cultural issues, creating leadership alignment, and amplifying business performance. Find out more about Aad and his services.
- Leading Change in the 21st Century: The Power of Letting Go (leadershipwatch-aadboot.com)
- Cross-Cultural Leadership: How Will China Influence The World? (leadershipwatch-aadboot.com)
- Leaders Who Create Alignment: Two Historical Examples (leadershipwatch-aadboot.com)
- Leading Change: How Great Leaders Deal with Criticism (leadershipwatch-aadboot.com)
- Cross-Cultural Leadership: How to Avoid Making People Lose Face (leadershipwatch-aadboot.com)
Interesting to read about the challenges and importance of Integration of culture in a Merger and Acquisition activity. Just read an excellent white paper on strategies for successful merger integration http://bit.ly/pGoP25
Thanks for sharing!
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Interesting discussion on post merger integration as mentioned in the research says that a great deal of mergers and acquisitions did not yield the desired value as was previously stated. Approx 70% mergers fail. Many severe considerations need to be taken related to reconciling of cultural differences, abandoning self orientation etc. Such issues need to be resolved with strategic mindset.
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