Mergers & Acquisition : Are you heading towards cultural mismatch?
There comes a time in the life of many organisations when they have reached as far as they can through organic growth.
When that time comes some opt to remain at that level, seeing the size/value proposition as being at the optimum for their type of business. Others however view the future in a different way and look to take their business to the next level through merger or acquisition.
M&As can be an extremely effective way of fast-tracking proposition & growth. Economies of scale, synergies, even buying in much-needed expertise can all help organisations to increase profitability, enhance shareholder value or deliver greater customer excellence. Because of this the appetite for M&As is stronger today then ever.
However, a word of caution. Five years ago we reported on a PwC report which quoted overall failure rates of 80% for M&As, with 50% failing to reach financial targets post merger. In the intervening years, reports from a variety of organisations have quoted failure rates between 60% and 80%, indicating that organisations are getting little better at successfully carrying out mergers or acquisitions.
So, should we be surprised? After all it is a rare merger which isn’t preceded by an army of accountants, solicitors and others; all intent on carrying out a robust financial, legal and procedural due diligence exercise. However, when the prime cause of failure is regularly revealed to be cultural mismatch, should those experts also have been engaged in cultural due diligence instead?
An organisation’s culture is its DNA. It governs the way in which things are done, internal and external relationships, reputation, customer loyalty and employee engagement. Misunderstand or ignore the cultural issues between two organisations and you have a recipe for disaster.
Let’s look at a few examples, starting with the potential issues which may arise when a long-established organisation acquires a rapid growth business. We all know that the majority of long-established businesses tend to have systems and processes which have built up over time. Legacy systems may have forced the organisation into set ways of working or to deliver workarounds in order to satisfy existing customer demands and processes and procedures are more likely to be hierarchical with identified chains of command.
The Journal of Business Strategy revealed that mergers and acquisitions destroyed leadership continuity in target companies for at least a decade.
On the other hand a rapid growth business is more likely to have a culture of flexibility. Systems will be more up-to-date and employees more likely to be empowered to take decisions. Processes and procedures will be more fluid with employees used to rapid consultation and change as the business has developed. Put the two businesses together and it’s easy to see where a cultural mismatch may occur.
In fact, even with organisations which are roughly compatible, there is still a potential for employee disengagement and cultural clashes. Even at board level when you’re choosing between two finance directors, two heads of IT, to HR chiefs and so on; inevitably reporting lines and relationships on one side or the other will be disrupted.
Witness the Journal of Business Strategy which as far back as 2008 revealed that mergers and acquisitions destroyed leadership continuity in target companies for at least a decade. And if a reconstituted board is taking that length of time to build new working relationships, just think what might be going on further down the organisation!
Due diligence benefits
Taking the time to carry out a robust and complete cultural due diligence exercise will help to highlight the potential areas of concern. In some instances it may even lead the executive team to decide that the merger or acquisition should not proceed but in any event understanding the potential difficulties will enable the executive team to prepare to overcome those difficulties.
In some ways, successfully delivering a merger or acquisition is somewhat akin to successfully carrying out a complete culture change within the organisation. It requires leaders to:
- understand where they are at the outset;
- to build a leadership team which will carry the combined organisation forward;
- to design the future shape of the organisation and to;
- create a communication and people engagement strategy
In fact, when we talk about cultural mismatch sitting at the heart of M&A failure it is the people factor which plays the greatest part. You are asking people to get used to new teams, new leaders, new structures and new processes; all at a time when there may also be uncertainty thanks to poor communication or a post-merger redundancy exercise for example.
When we talk about cultural mismatch sitting at the heart of M&A failure it is the people factor which plays the greatest part.
Quite frankly, if all you do is announce the deal and expect people to get on with it, then it is hardly surprising that engagement falls and key members of the team depart for pastures new. So even if cultural due diligence brings up few if any areas of mismatch (highly unlikely) executive teams would still do well to carry out a robust employee engagement exercise in order to boost alignment with the new organisation.
The employee factor
And whilst we are talking about employees, let’s not forget the impact of the M&A on the supply chain and customers. Any level of uncertainty potentially leads to discontent so the mantra here is communicate, communicate, communicate.
If the potential pitfalls deter you from the thought of growth through merger or acquisition, don’t let them. Any merger or acquisition brings a fantastic opportunity not only to grow the organisation to the next stage but also to reset and strengthen the culture at the same time. Think of cultural due diligence in the same way that you would look to carry out a cultural assessment as a prelude to resetting your internal culture or to move towards building a culture of innovation.
When you know where you are, you can start to build for the future. And with a merger or acquisition delivering a unified culture, that future can be game changing.
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Formerly head of HR for Goldman Sachs France and Switzerland and with 16 years experience working in change management for various investment banks across the globe, Jo Geraghty brings a wealth of practitioner experience to change projects. She is co-author of the book “...