Expect an acceleration of merger and acquisition (M&A) activity in 2018. According to the latest research by Deloitte, over 1000 corporate and private equity executives report an anticipated increase in both the number of deals and the size of transactions.
A number of studies over the past decade have documented the acceleration of M&A activity and the issues they face. (e.g. Marsh Mercer Kroll, 2008; Allen&Overy 2014; and Aon Hewitt, 2011, 2015)
These studies show that while deal activity continues to increase, the rate of deal failure is alarming – over 50% of mergers fail to meet their targets!
Lack of Culture Integration
Culture integration issues were reported in every study as a primary factor in deal failure and has increasingly become recognized as a top issue in M&A.
The Aon Hewitt study concludes that “cultural quicksand makes doing deals a very risky proposition.”
The Consequences of Not Addressing Culture Integration
Most companies have no clear approach to addressing culture integration. According to Aon Hewitt, 58% percent of companies reported that they did not have a specific approach to assessing and integrating culture in a deal. And the numbers were even higher for those firms who lost a significant number of critical talent – 68% did not have a specific approach for culture integration.
Companies that fail to manage culture integration effectively experience slower and more painful integration which includes:
- Lower productivity and performance
- Loss of key talent
- Decreased employee engagement
- Employee resistance to process change
- Tension and poor morale
- Failure to meet critical milestones
- Slower execution
Why Culture Integration Efforts Fail
What about the companies that report they do have a culture integration plan? Why do so many of their culture integration efforts fail? According to Aon Hewitt the top reasons for the failure of a culture integration effort are:
– Lack of agreement among leaders on the vision of desired culture. (48%)
– Lack of leadership support (44%) – giving lip service to the effort but shortchanging it on investment and attention.
– Inadequate communication and involvement of employees. (34%)
Allen&Overy concluded that dealmakers need to be “more aware of the need to manage the complex employment issues that inevitably arise before and during integration.”
What Successful Companies Do
According to research conducted by the Research and Analysis Division of The Economist Group, the sister company to The Economist newspaper, “The antidote to these problems is pro-active management of culture integration… Organisational cultural differences and human capital integration issues are the two most significant transaction issues faced, and dealmakers must pay close attention to people issues in every phase of the transaction.“
Companies that are successful in culture integration communicate and involve employees throughout the company in these eight activities, with the full attention and commitment of senior leadership:
1. Determine the ideal future culture.
2. Assess current state of culture(s).
3. Identify gaps between current and identified culture.
4. Identify the desired behaviors and expectations.
5. Conduct team building sessions.
6. Redesign HR programs and practices.
7. Actively manage employee engagement and involvement in change.
8. Track progress towards the ideal culture.
Equally there is a question to be raised on the dynamics of Business divestments when organisations go their separate ways.
The M&A of Britain’s place in Europe is a case in point where the Anglo-Saxon culture failed to properly integrate into a collaborative framework. A belief that outside that collaborative cultural framework the UK can somehow forge new collaborations completely fails to understand the cultural evolution of society on a global stage.
Globally M&A needs to account for not only corporate culture but also cultures of countries. SAP has had to address how as a German-based company they can best work with the parts of their matrixed organization located in India and the US. The trick is to ensure the values that drive behaviors around how the work is done for the practices that are critical to the success of the entire enterprise are supported consistently. And for there to be latitude and tolerance for those that aren’t.
Appreciate your question about the dynamics of business divestments. Sometimes, like a bad marriage, it’s the only solution. But hopefully, more deals will be successful if we can learn how to do it right.
Culture develops naturally or not at all. I think the biggest reason culture design fails is the whole approach is arranging deck chairs on the Titanic. Declaring values, designing icons, using declarative feel-good buzz phrases about what the culture is supposed to be miss a key definition of what culture embodies. Worse, culture design “relies on a naïve assumption that culture unambiguously brings people together” (https://goo.gl/4MD6AM).
Culture, as concerns organizations trying to design one, should be viewed as the presuppositions that define a behavior as good or bad. That approach allows us to focus on standards and accountability. Accountability in order to fix problems, not lay blame or punishment, but adverse action is available.
So how to merge two cultures? Stop trying to. “CEOs who have successfully led major transformations—say that culture isn’t something you ‘fix.’ Rather, in their experience, cultural change is what you get after you’ve put new processes or structures . . . (https://goo.gl/si9WhG).
So executives need to treat M&As like The Brady Bunch. Mom and Dad need to sit down and decided if Tom’s policy or Carol’s policy is best, or create some hybrid. Then those new standards of employee behavior are enforced, and the shared values have fertile ground on which to grow, naturally. And those trees create the forest of culture.
You make some good points, Jim. The idea of merging cultures is a recipe for disaster. Your Brady Bunch approach makes sense (although it’s a bit of a simplification). The danger is in ignoring the need for a unified culture (as all the research over the past decade shows that lack of culture integration is the primary cause of deal failure.) We can all learn by studying companies that have figured out how to do this well. Cisco’s growth strategy is through acquisition and they have a standardized plan for integration. The result is one culture, one company, one identity for employees, one face for customers. https://www.glassdoor.com/employers/blog/cisco-built-winning-culture/
One of the reasons Cisco was so successful was because for each of their merger/acquisition’s they went down into the cell of cultural congruence for every single employee.
Excellent point, Stewart! The key to success is for each individual to understand and commit to the change and to see how it affects the work they do on a daily basis.