Merger risks
Risk #1 Culture shock
During mergers and acquisitions, there is the potential for culture shock that occurs when people feel that their personal safety, status, influence and relationships are threatened. Added to this may be culture tensions caused by differences in leader behaviors and key practices such as decision-making practices, management style, compliance and autonomy that signal that the way of working will dramatically change. Culture clash can emerge draining organizational adaptation, productivity and innovation. Here are some signs that culture clash may be emerging.
- People point out differences in behaviors and practices and start to re-evaluate the way that things are accomplished
- Their own ways of getting things done start to be perceived as the 'best' way
- They worry that what is 'good' in their culture will be sublimated by the other organization's culture
- They defend their own way of doing things and at the same time attack or denigrate the 'way' of the other organization
- Resistance mounts. Top talent starts leaving.
Case example: AOL/Time Warner merger -$162 Billion "(Chairman AOL Time Warner) Case learned Time Warner's notorious culture of fiefdoms the hard way, as multibillion-dollar businesses bristled at the idea of working with their new AOL masters." Time, May 28, 2009
Risk #2 Extent of integration
The risk of culture clash induced failure is greatest in dissimilar organizations that are pursuing a full integration strategy involving a system-wide merger of structures, people and processes. In these situations, culture clash is pretty much guaranteed unless focus is paid to organizational practice and leader behavior differences. The risk lessens somewhat when the organizations are from the same or a complementary industry and have other key similarities such as leadership style and philosophy. Yet, even in the latter situation the power dynamics (win-lose) that accompany M&As frequently interfere with goal achievement unless an informed and purposeful approach is taken to culture integration. Putting culture on the agenda with the same importance as operational change is important to mitigate these risks.
Case example: Daimler-Benz/Chrysler merger -$37 Billion
"They look like us, they talk like us, they're focused on the same things, and their command of English is impeccable. There was definitely no culture clash there." Robert Lutz, Former Vice-Chairman, Chrysler, following merger announcement
Risk #3 Size
A BCG revealed that deals that are above $1 Billion destroy nearly twice as much value as transactions under $1 Billion, reflecting the difficulty of integrating large targets. Too often, not enough time is spent at the front end on planning for culture change, which requires a different set of strategies and tactics, distinct from change management practices which are simplify not sufficient.
Case example: MCI-WorldComm merger -$42 Billion
"The benefits of this merger are compelling for the stockholders of both MCI and WorldComm -- powerful synergies and ownership in the best performing communications stock over the past decade. This merger is about growth -- value for stockholders, enhanced products and services for customers and new opportunities for growth." J. Ebbers, CEO WorldComm
Risk #4 Not knowing what you don't know
Too often distinctive culture strengths are eroded right from the start of a merger or acquisition. If you don't know what the culture strengths are that create the competitive edge for the acquired firm, how will leaders know what to preserve and what to change? Understanding the way the culture operates helps leaders shape their interactions to retain what is valuable.
Case example: Daimler-Benz/Chrysler merger -$37 Billion
What happened to the dynamic, can-do cowboy culture that I bought? Former Daimler Chrysler CEO Jurgen Schrempp
Four fast facts about the impact of culture on M&A success
- Fewer than one quarter of mergers and acquisitions achieve their financial objectives, as measured in ways including share value, return on investment, and post-combination profitability (Marks & Mirvis, 2001)
- 83% of all mergers and acquisitions failed to produce any benefit for the shareholders and over half actually destroyed value (KPMG Study)
- A ten-year study of 300 U.S. companies involved in a merger or acquisition conducted by Mercer Management Consulting found the total return to shareholders was below industry average in 57% of the merged firms
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Interviews of over 100 senior executives involved in 700 deals over a two-year period revealed that the overwhelming cause for failure is the people and the cultural differences. (KPMG Study)
Sprint-Nextel -$36B
HP-Compaq -$25B
Mattel-The Learning Company -$3.5B
