mergers & acquisitions

Build value from acquisitions

In 2007, a previously unheard of $4.5 trillion was spent on mergers and acquisitions (M&As) by organizations striving to achieve the rapid growth that isn’t possible through slower, internal, organic approaches. This is in spite of the fact that there is clear evidence that most M&As fail to achieve their financial objectives, and many even destroy shareholder value in the acquiring company. For example, 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. A similar result is reported in a Canadian study of 100 large companies involved in an M&A that found that about 60% destroyed acquirer shareholder value.

Why does this happen? Unfortunately, many organizations fail to pay sufficient attention to the effect of cultural differences on their merger or acquisition. While financial due diligence is considered mandatory in M&As and many organizations also include a “soft” due diligence this rarely includes an effective assessment of cultural compatibility. Instead, the latter typically focuses on human resource practices in areas such as benefits, pensions, compensation and resource planning.

Case (Chairman AOL Time Warner) 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

Culture Shock – Culture Tensions – Culture Clash

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 decision-making practices, management style, expectations regarding compliance and other key practices and behaviors that signal that the way of working will dramatically change. The result is overt and passive resistance to changes to the way things get done. ‘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.

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Culture due diligence and integration planning

Rather than waiting and wondering if such issues will emerge during mergers and acquisitions, we can help you establish a proactive approach to culture due diligence and integration to:

·         Identify early in the process if the two organizations' cultures are sufficiently aligned to proceed with the merger and/or acquisition

·         Capitalize on culture strengths and manage culture tensions proactively

·         Identify the cultural aspects that could be the source of clash and productivity drain that need paying attention to

·         Assess the risks of culture differences during mergers and acquisitions

·         Make informed decisions about the degree of integration of groups with different sub-cultures

·         Use leader behaviors as levers to shape a culture that supports the future needs of the new entity

·         Maintain productivity and morale and retain talent

Assess the potential for Culture Clash

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, processes, and so on. In these situations, culture clash is pretty much guaranteed. 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.

The first step is to assess the potential for Culture Clash by identifying the similarities and differences (potential tensions) in the cultures of the combining organizations. We accomplish this by using the Culture Snapshot™ for M&As; an on-line survey that compares the culture of the organizations taking into consideration the goals of the merger or acquisition and other critical contextual factors. The survey includes twelve dilemmas that have proven to be significant sources of tension when there are differences in the organizations. These include:

·         Risk Tolerance

·         Tolerance for Change & Ambiguity

·         Control Orientation

·         Short - Long Term Orientation

·         Open - Closed Communications

·         Consultative - Centralized Decisions and more

Dig into the unspoken ‘rules’ shaping practices and behaviors

Organizations requiring deeper insights into sub-cultures and the implicit ‘rules’ that operate to shape behavior and practices also benefit from other innovative approaches used independently or in conjunction with the Culture Snapshot for M&As. Story analysis (AI), organizational photography, and other proven methods open up new kinds of conversations that shift attention to the beliefs required for the future and enable the selection or development of best practice approaches that can be embraced by stakeholders. These approaches help to connect people deeply during mergers and acquisitions around shared values, purpose and strategic intent.

Culture due diligence includes the acquiring organization’s readiness

Even before culture due diligence starts, the Culture Snapshot for M&A can provide you with a window into your organization’s culture and the potential impact they may have on retaining value in a merger and acquisition. Having deeper awareness of the way culture patterns, such as consultative versus centralized decision making, short versus long term thinking, risk tolerance and other factors operate can raise the ‘red flag’ early that culture clash may occur. Knowing the capacity of your own organization for change and the potential areas of culture clash can provide the key insights needed to help upcoming mergers and acquisitions deliver the anticipated benefits and not become one that drains value from both acquired and acquiring firms.

"We've observed many kisses, but very few miracles. Nevertheless, many management princesses remain serenely confident about the future potential of their kisses - even after their corporate backyards are knee-deep in unresponsive toads." Warren Buffett