M&A—What’s Love Got To Do With It?
HOW SUCCESSFUL CULTURE INTEGRATION POSITIVELY AFFECTS M&A SUCCESS
Sometimes when people talk about the merging of two companies, they make a comparison to marriage. You know, where two people come together and have to learn just how they’ll live together as one. While it’s easy to understand the logic behind the analogy, it’s completely wrong! “Why?”
Well, the 1993 hit song by Tina Turner “What’s Love Got to Do with It,” sums it up perfectly. The merger of two businesses is not pursued from a motivation of love and devotion. While business leaders might love what a merger can do to strengthen their business, they are not ‘in love’ with the business being acquired and the target company is probably not ‘in love’ with their suitor either.
So, “What does any of this have to do with the business strategy of growth through acquisition?” It’s simply this: M&A’s fail at an alarmingly high rate. The Harvard Business Review has reported that 70-90% of all mergers fail outright, or fall woefully short of the expected results. Business leaders who go into an acquisition without a solid understanding of why they fail, and what it takes to make this kind of ‘corporate marriage’ work, do so at their own peril and with great risk.
In a global study, AonHewitt found that “Failed Cultural Integration is a top direct and indirect contributing factor” for the high failure rate. Bringing together two business entities is much more than just integrating products, processes, and balance sheets. Integrating the human element is a significant factor in determining success or failure. It’s also more difficult to pull off than most leaders realize.
M&A—MORE CHALLENGING THAN MARRIAGE
Unlike a marriage, where two people learn to adjust to their new roles while accommodating each other, a business merger involves dozens, hundreds, even thousands of people. It’s more than learning new roles and adapting to changing expectations at the individual level. The behaviors and expectations of the collective group are what make up the organizational culture and it’s the integration of disparate cultures that creates a very real risk to the success of the merger.
Numbers drive the deal and everyone finds the possibilities bound up in them intoxicating. If business leaders and investors understood the importance of integrating the cultures of two organizations to the realization of those proformas, they would devote much more time, energy, and resources than they do today first in the due diligence process and then post-closing. A global study from Pritchett, LLP found 81% of business leaders reported their past mergers would have benefited from a greater understanding of the cultures prior to the merger, while a study by the Hay Group found that just 27% of business leaders focused on the cultural compatibility of the firms to be merged. It seems that insight about the importance of corporate culture to an M&A deal often comes too late and usually during the post-mortem of a failed deal. This represents a huge opportunity gap that leaders embarking on such a course should take into consideration.
There is extensive research, going back decades, that supports the finding that cultural conflicts within organizations are one of the top reasons M&A’s fail. So why does the challenge surrounding the integration of culture continue to confound business leaders and investors? There are countless reasons but those most often cited to us include:
Culture is too “soft” and “touchy-feely” to get our arms around,
Business leaders like “hard” numbers and we don’t have any meaningful objective data to rely on,
There’s “no time” to slow down to understand culture, either during the due diligence phase or once the integration is underway,
The HR folks who worry about culture will figure it out eventually.
The sad thing about this state of affairs is that it doesn’t have to be like this. There are plenty of experts with insight, tools, and methodologies to help business leaders understand their culture and the importance of getting culture integration right. There are several scientifically valid culture assessment instruments that provide hard/objective data on organizational culture that can be used to measure the compatibility (or not) of two organizational cultures. Utilizing a strategic approach (i.e., a systematic plan that’s defined in advance) leaders will greatly increase the odds of successfully integrating two organizational cultures.
WHAT BUSINESS LEADERS MUST DO TO CHANGE THE SUCCESS CURVE FOR M&A DEALS
It starts with waking up to the importance of culture integration to the success of an M&A deal. If the organization driving the deal doesn’t have in-house expertise to measure the target’s organizational culture and create an effective culture transformation initiative, then the leaders need to build the time and expense of including that expertise into the cost of the deal.
Next, realizing that successful culture integration doesn’t happen all by itself. It’s critical that a culture integration strategy (or framework) be included in the M&A plans (and no, the HR folks won’t have time to ‘figure it out’ if they don’t have the expertise to begin with and it’s not planned into the overall M&A strategy).
A systematic approach to culture integration using proven tools (i.e., culture assessments) and techniques (i.e., change management practices) is the only way to reduce the risk of failure associated with culture integration issues while also accelerating the progress towards success and realized ROI on the deal. Research by Heidair-Robinson, Heyward and Edmonstone-West showed that companies that used a structured integration process were three times more likely to achieve their desired results.
PATHFINDER GROUP FRAMEWORK FOR M&A CULTURE TRANSFORMATION
The PathFinder Group has put together a comprehensive Framework for M&A Culture Transformation to improve the performance and success for M&A deals (see the graphic below).
This multi-phased approach starts with planning work that should be done during the due diligence phase of an M&A. It includes activities such as completing a ‘Culture Risk Assessment’ that will determine the areas of commonality. These areas can be used to create synergy. The assessment also highlights the areas of conflict that could require significant time and energy to align in order to avoid resistance and other obstacles to post-merger success.
The three other post-merger phases of the framework include the ‘commitment to cultural transformation’ by the leadership team, then ‘transforming to a new culture’ by engaging employees, and finally ‘sustaining the new culture’. This last is done by utilizing change champions to drive continuous culture transformation, measuring the results, and sustaining the transformation through ‘check and adjust’ change techniques. This framework combines traditional change management techniques with the science of organizational culture transformation.
M&A—WHAT’S LOVE GOT TO DO WITH IT?
Unlike a marriage, successful integration in a business merger cannot just be assumed because the parties are in love. Take, for example, the story of the merger of Whole Foods with Amazon. John Mackey, Whole Foods CEO, reportedly said of the impending partnership, “It was love at first sight.” But a year later, such optimism was hard to find at Whole Foods as stories circulated of employees literally crying on the job over the efficiency improvements that Amazon introduced. The prices of products were reduced because of the changes, but the personal-touch customer service was gone, and customer loyalty declined dramatically.
Again, I ask, “What’s Love Got to Do with It?” Business leaders must recognize the substantial risk that culture integration poses. They would benefit from deploying the necessary expertise and resources to ensure that the experience for employees is one that continues to engage and motivate them throughout the transition period and beyond.
If you are embarking on an M&A deal, you owe it to your shareholders, employees, and customers to follow a proven process rather than winging it as many leaders seem to do. Your efforts will pay off with better employee engagement, productivity throughout the integration, and hasten your return on investment.
Written By: John Foster
John Foster has 30 plus years of distinguished leadership and management experience with multiple companies at various stages of development across several fast-paced industries