I remember reading that the three reasons mergers or acquisitions fail is that:
- You pay too much
- You don’t act quickly enough to take redundant cost out
- Cultures Clash
I read this at a time when I was responsible for doing acquisitions for the company I worked for and it left a lasting mark on me.
When you dissect these three elements the first two are purely financial. Fundamentally an acquisition is accretive when the two companies once merged are more profitable than either of the two companies prior. Getting to this state may take a few years but ultimately a deal has to be accretive or it is deemed a failure.
Paying too much is a problem that cannot solve itself once the deal is done. Acting quickly is a key feature of an acquisition strategy and the only way to correct if the deal was too rich. Taking cost out – or finding synergies is likely an important step in the due diligence. ‘Who do we need to keep?’ and ‘who can we afford to package off?’ is all about making the two companies more profitable when merged. Synergy discussions are not easy. Cut too much and you might limit operational success. Cut too little and you never make the deal accretive.
These two reasons that mergers fail are very cut and dried. The measure is the finances. If you are lucky enough to hold onto all of the customers the revenue is intact. And, if you can demonstrate that the two companies are more efficient than either of the merged entities then the deal was successful.
But here is the thing. Many times mergers fail not because you paid too much or because you didn’t act fast enough to take cost out. The cultures of the two companies clash and the friction reduces the effectiveness of the newly formed company.
Culture is often described as the unwritten code that helps people to understand how to fit in. These behavioural codes are likely the unconscious representation of the beliefs and values of the CEO’s and their management teams. If for example, one CEO believes in transparency because he believes that people are more effective when operating with all the facts and the other CEO believes that people should only be trusted with information pertinent to their jobs the situation is ripe for conflict.
Inevitably one of the company CEO’s becomes the leader of the newly minted entity. They operate as they always have. For the merged employees not familiar with their new CEO’s way of thinking this creates confusion. After all, they were successful operating with the old ideas – successful enough to do an acquisition or successful enough to be the target of an acquisition. People are less apt to change when they see their way of operating as successful.
As leaders we have different beliefs and values and when we lead companies these beliefs and values naturally inform our way of operating. Rarely do the due diligence processes include the analysis of values and beliefs. Largely, we believe what we are told about the culture of the intended target for acquisition. This means that cultures are always going to clash – it is only a matter of degree!
So, what can be done about this? After completing 4 acquisitions from beginning to end here is a short list of best practices with respect to cultural integration.
- Assess the culture of your own firm and be clear about the behaviours you expect from all employees. Also, recognize that your culture is in motion and you are trying to shift your culture. Cultures are never static because a company should always be growing.
- Assess the culture of the target prior to acquisition if possible. It shouldn’t be seen as a technique meant to affect price or to make a go/no go decision but rather to understand the culture of the company you intend to merge. Like your own culture it is in motion. The aspirations of the people can be seen in how they would like their culture to shift.
- With these two inputs make wise cultural decisions.
- You might discover that the target firm has already created the cultural behaviours you are hoping to create in your own firm. Recognize this and build on what is working. An emphasis here creates humility in your culture and pride in the target’s culture.
- Identify areas of significant risk and build a transition plan. For example how do you move from transparency to need-to-know or the other way around?
- Recognize areas of harmony and use this as a place of commonality and alignment for both groups of people.
- Communicate all of this aggressively.
- Assess the leaders of the target firm as soon as possible. Help them to understand the culture and your expectations of leaders. This is not about competency. It is about helping them to learn how to coach in the new culture. Most of the resistance from an acquisition is hidden resistance within the acquired management infrastructure.
When cultures clash they create unwanted friction and confusion. Cultural confusion is bad for both sides of a merger. When employees start to report to “foreign” managers the coaching becomes even more confused. The unwritten code – culture – of any company helps to create efficiency of action. We all know what is expected in any given situation. This short hand helps us to move quickly. When cultures clash the viability of an acquisition can be put at extreme risk.
Focus as much time on the cultural integration as is contemplated for the structural or the financial acquisition and chances are the culture will help you make the whole thing a resounding success. Assuming you didn’t pay too much! ☺