Cultural Compatibility in M&A

by Warren on January 27, 2012

Investment bankers, company directors and senior executives, commentators and analysts are constantly developing rosy scenarios for mergers and speculative strategies for acquisitions. The current landscape, while quiet recently due to the economic turmoil of the past few years, is beginning to change with increasing IPO/company stock offerings, aggressive acquisitions by cash-rich corporations and accelerated IB, hedge fund and VC investment activity. This trend indicates that the reticence for deal making is abating, reflected by M&A activity picking up steam.

Be it AT&T-T-Mobile (now abandoned), Scripps-Medco, Google-Motorola Mobility or Microsoft-Skype, catastrophic failures such as Time/Warner-AOL and a litany of disappointing mergers such as HP/Compaq, seem a distant memory to those orchestrating new deals. Refreshed optimism, however, has not changed a fundamental truth: most mergers and acquisitions fail to produce the expected synergies, increased profitability and explosive growth touted during the courting and announcement process. Much of this failure is attributed to overly optimistic predictions, untenable valuations, flawed strategies, executive egos blind to reality, unrealized operational efficiencies and botched integration. Rarely do we hear of failure as a result of employees not being aligned with expectations or performing to meet the promise of the integration. It must take hold where it matters most—in the trenches. Fundamentally it is cultural incompatibility that fosters disillusioned employees who are not aligned to the corporate vision, become quickly disengaged and thus lack the motivation to meet the demands and expectations of the new entity.

Once the investment bankers have pitched the idea, executive teams have decided to merge and the lawyers have drafted an agreement, managers and employees hold the key to ensuring success. This success depends on how well the two employee groups are integrated—not only operationally, although that is vitally important, but culturally. Much due diligence is conducted to determine financial, operational and strategic advantages to both companies. Unfortunately the same level of investigation is rarely if ever done to determine whether or not the distinct cultures are compatible. This is not to say that the two cultures need to be identical, only that some scenarios are more likely to produce success than others. For example, if bringing together a staid and consensus-driven culture with one based on aggressiveness and brusqueness (HP-Compaq), the reality is that the incompatibility of distinct cultures and the powerful resistance legacy employees have to change are usually grossly underestimated. Consequently it becomes very difficult to mobilize the collective employees to deliver what executives had promised.

So, what about me?
M&A is a major source of employee stress as they reconcile their feelings about the change and how they will be affected? They understand there will be changes…but the big questions remain, “will I lose my job?” and “what does this mean to me?”
Employee engagement and communication is never more important than during times of significant change. Companies often do a fine example of business due diligence, but on the human side they drop the ball (or hide it). The management of human capital is always important. However, during the merger/acquisition process, employee needs and concerns are too often not fully considered and potential problems ignored until they fester into major issues. Sophisticated research tools exist to identify these trouble spots, allowing for the mitigation of potential problems, including the establishment of a cultural compatibility index that shows where gaps exist and affords leadership and the integration team the opportunity to develop programs to address potential issues in a constructive and positive way.

From the perspective of culture and communication that build alignment, enhance employee engagement and ultimately lead to sustainable performance, three key failings that need to be avoided are:

  1.  Diverse cultures and their differences aren’t understood
    How valuable would it be if a cultural audit of both companies were conducted as part of the investment analysis due diligence before the decision was finalized and the deal announced? At worst, executives charged with integration and motivating the new behaviors required of employees would be aware of the challenges that lay before them and could, proactively, define policies and programs to mitigate potential problems. At best, a decision could be made to not do the deal, recognizing that the challenges may be insurmountable—a decision that recently led to Zynga losing out to EA for the acquisition of PopCap, even though Zynga offered $200m more in cash!
  2.  Inarticulate vision and strategy do not define new expectations
    Beyond the excitement of the merger or acquisition news, it is vital that the vision and strategy be clearly defined and articulated. Also key is recognizing and understanding the perspective of the employees and their likely response to the news and further ongoing communications. Executives focus most of their time and energy with their counterparts from the other company and with outside stakeholders, from board members to investors, customers and media. Employees are often left wondering what is expected of them and, more importantly, “how does this affect me?” Most of those outside the company, particularly customers, touch the organization through personal interaction with employees. Imagine how powerfully positive (or destructively negative) an employee’s words could be during conversations and meetings after the merger or acquisition is announced. When handled appropriately, by bringing the employee clearly into the picture—meaningfully explaining the rationale and strategy around the M&A activity, and ensuring clarity and understanding of the role the employee plays and the advantage to them and the company as a result—they become the most powerful of brand ambassadors. Furthermore, when employees understand and believe, they will diligently apply their efforts in support of the vision, implementing with passion and commitment based on a strategy with which they are aligned.
  3. Insufficient employee dialog that is not action-driven
    In many cases, the first employees hear of the news is when they read it in the newspapers the morning after the announcement. Few activities are as damaging to employee engagement and morale as feeling excluded from what their company and their leaders are doing. The more included employees feel the more likely they are to support management decisions. It is vital that leadership-employee dialog (not merely one-way corporate to employee communications) is continuously and regularly maintained to ensure M&A success—what employees say in response is as important as what they hear and allows for real-time program adaptation. Transparency is also a vital element in building trust; and an ongoing dialog, regularly measured and assessed to determine how employees are responding to developments, messages and, most importantly, their perception from the battlefield of what is really going on, must be religiously adhered to. There is one audience with whom “spin” will not work and that’s an employee. They know the truth and anything said by leadership that doesn’t resonate in this context will be dismissed, having a potentially fatal impact on successfully reaching the vision. Understanding how employees will respond to messages delivered by the company and its leadership is the essence of recognizing what needs to change.

Our perspective therefore, is that understanding the employee and cultural aspects of M&A compatibility is as important as the other traditional due diligence elements and provides a perspective that is invaluable in defining any solution to potential issues. The reality is that many of the common mistakes many companies make can be avoided simply by following the three simple precepts outlined above. The expected outcome can then be largely assured of a significantly increased probability of success. By embracing this approach, those responsible for advocating, deciding on or implementing M&A scenarios, can produce an expected outcome that beats the historical odds of failure, avoiding the cultural incompatibility that spells integration disaster.

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