8. Mergers and Acquisitions—Managing the Common Sources of Culture Clash
Chapter Contents
Handling Related “People” Risks
Applying Tangible Culture to Due Diligence
Applying Tangible Culture to Integration
Overview
This chapter applies Tangible Culture to mergers and acquisitions. The business and culture challenges are discussed, along with steps and examples of applying Business Practices, Right vs. Right, and Outcome Narratives, using our composite experiences to create sample outputs. This chapter will help people who are strategizing about future mergers and acquisitions (M&As), contemplating a pending merger or acquisition (for example, due diligence), or dealing with an integration underway.
Introduction
M&As are a permanent fixture—at least in today’s environment. In fact, many companies, including IBM, use acquisitions to propel growth and innovation strategies, and sell off older capabilities to open funding and attention for new areas.
However, M&As are challenging—always. Chapter 1, “Introduction—An Overview of Tangible Culture,” mentioned culture clash as a top reason for M&A failure. New approaches are needed—and this chapter provides one.
Business Challenges
Mergers and acquisitions promise many benefits: economies of scale, removal of entry barriers, easier market penetration, and access to new knowledge and resources. They may help prevent or resolve organizational rigidity, which could hamper future success.
However, M&As bring additional costs from integration activities and takeover premiums of 20 to 40 percent. In addition, they divert top management attention away from other activities, and may be undertaken for questionable reasons without adequate consideration of what is necessary to manage them (Vermeulen and Barkema).
Hmm. Sounds like a mixed blessing.
Then there are the financial results, which are more of a curse for many. Taking into account the estimates we have seen, it appears that mergers and acquisitions have—at best—a 50/50 chance of achieving their objectives. A 2004 KPMG report indicates that 34 percent of major deals completed in 2000 and 2001 enhanced value for shareholders, and this number is up from previous studies. Improvement is good, but these numbers mean many companies are better off before all that tough integration work—double whammy!
Joseph Bower of Harvard identifies five reasons for acquisitions:
To deal with overcapacity through consolidation in mature industries
To roll up competitors in geographically fragmented industries
To extend into new products or markets
As a substitute for R&D
To exploit eroding industry boundaries by inventing an industry
The business cases and integration strategies differ depending on the reasons for the deal. For instance, overcapacity typically means layoffs, and extending into new products or markets typically requires aggressive strategies to retain employees with vital knowledge.
Each merger or acquisition is unique, but there are some common business challenges:
Determining the best operating model and organizational structure to support it
Selecting the right leaders (and with each appointment, there is likely disappointment for those who weren’t selected)
Deciding how the organization should be governed and run
Determining the best human resources strategies and execution, which often require retaining key talent and motivating employees while effectively exiting others from the business
Ensuring everyone understands the new environment and responsibilities, which often means global training and even communicating with customers
Ensuring customer and market focus to retain the customer base and market share
Maintaining focus on the rest of the business to ensure that momentum is not lost
In many mergers, nearly everything changes—new strategies, products, processes, customers, management, systems, and locations. Although frequently less pervasive, acquisitions often bring broad-based changes, too. In other words, many things need to be reconsidered and changed, while juggling all the balls currently in the air.
Philippe Haspeslagh, Professor of Corporate Strategy at INSEAD and expert in M&A, raises some interesting points in “Maintaining Momentum in Mergers.” Frequently, members of each side, as well as members of each organization, perceive the deal differently, and this can be troublesome later. Also, value is not created by the dealmakers, but rather by those who operationalize it; however, there are different cultures, terminology, ways of doing things (which can block collaboration), and a sense of loss (which can reduce motivation to collaborate).
These are great points to segue into our next discussion.
Culture Challenges
On top of the business challenges is the strong potential for culture clash. No two organizational cultures are alike. Even if they are similar in many ways, there will be important and potentially contentious differences.
When culture has surfaced during preliminary discussions, some executives have been unable to describe their cultures (Grossman, Haines). Haines cites one example in which a lean, decentralized, field-based company merged with a centralized, well-controlled, office-based one. Despite these seemingly obvious distinctions, no one prepared the people for the differences—or for the mistrust and strife that followed.
GE, well known for acquisition success, provides an important lesson. During the final stages of due diligence, senior executives from GE Capital and a British company met to discuss GE’s expectations for the merged company. The discussion surfaced some key differences, which prompted GE to look more closely at the target’s culture. Its conclusion: The integration was likely to be difficult and contentious. Its decision: Walk away despite the favorable financials (Ashkenas, DeMonaco, and Francis).
This story reinforces the importance of choosing M&As wisely. The GE executives understood culture challenges and used that knowledge in their decision. Perhaps some of the questions in Table 6-3 in Chapter 6, “The Unseen Hand That Propels Organizational Action—Business Practices,” came to mind—the ones that identified the target’s Business Practices.
“As IBM exploits new growth opportunities, we’ll become a more aggressive acquirer. Several factors will enable our success. First, we need a clear strategic plan. Second, the targets need to share our vision. Finally, and perhaps most important, IBM and the target need a common approach to executing the strategy—which is where focusing on business practices becomes beneficial.”
Jim Liang
Vice President, Strategy and Business Development
IBM Global Services
Three additional questions are also important:
How do these answers align with the strategy for this merger or acquisition?
How do these answers compare to our company’s answers?
Are any national/regional cultural norms important to consider?
These questions are important because they impact what is appropriate. For instance:
The nature and intent of the deal drive the alignment needed. M&As are often one step in a transformation journey. When this happens, as it did for creating BCS,[1] it means that both companies need to change, just in different areas.
Different answers between the companies and across national boundaries are always relevant because they drive expectations and chances for culture clash. In many cases, the acquired company is expected to adopt the acquirer’s answers. In other situations, opportunities exist to leverage what both can bring. In either case, recognizing and understanding the differences is an important first step.
If you are not careful, one culture may quash elements of the other, even though (and perhaps because) some of those elements were intended as part of the future state. In one financial services acquisition, the acquirer sought to overcome its rigid decision making through adopting the acquisition’s streamlined process. Instead, the acquirer’s go-slow processes were eventually adopted by the acquisition despite the original intent. Also, some acquirers’ managers default to “our way or the highway.” We believe they do it because they do not know any other way to deal with the differences and want to move on quickly, even though they typically create plenty of problems with that approach.
So, what can be done?
“Mergers and acquisitions of services businesses (where ultimately people are the product) are extremely difficult. Unaddressed differences in culture can lead to missed expectations and value erosion. Making the intangible tangible—by identifying and addressing the specific differences in norms, behaviors, and operational and management methods early—can be the difference between winning and losing in M&A.”
Eric Pelander
Partner
Waterstone Management Group LLC
Handling Related “People” Risks
Let’s start with some brief advice about important “people” areas in an M&A:
No matter how much communication you do, we can safely say it is not enough. To address employee needs for information (from strategic to tactical messages), you will need different communication strategies for the initial stages (that is, post-announcement through due diligence), the early stages of integration (that is, the first 100 days), and for later stages of integration. Dedicating an ongoing team with communications expertise is vital, as is ensuring two-way communications and thoughtful, quick responses to questions and feedback received.
Human Resource plans need to help align and enact the intent and objectives. With M&As, some staff reductions may be required at the same time retention of key personnel is a primary concern. Plans are needed to assign employees to job classifications, determine compensation and benefits, and decide career progression schemes—just to name a few. Some of these details are top of mind for employees, yet they take time to decide, so communicating the decision timetable can be just as important as communicating the decisions.
You will want a strong focus on organizational change management to help reduce your risk. M&As are disruptive, which means you will experience resistance—even from those who think it is the right thing to do. Be sure to think broadly when you consider the stake-holders who are impacted (for example, you will likely need to include your customers in your plans). Also, recognize the importance of defining the new organization structure and roles/responsibilities quickly. People want to know where they fit in—and are likely to be very distracted until they know.
In addition, the organization may want to develop some new operating or guiding principles, values and/or behavior expectations. Several studies have found that during early stages of M&A transitions, management fails to communicate ground rules that create a context for learning (Gibson and Love; Haines). Operating principles can also communicate the intent and begin the important process of setting expectations.
Finally, remember that the benefits are not secured by signing the deal—they are created in the following months and years. You will need active leadership from both organizations to create a powerful company.
Let’s get down to how Business Practices, Right vs. Right, and Outcome Narratives can help address culture clash in two key phases for M&A: due diligence and integration.
Applying Tangible Culture to Due Diligence
In due diligence, companies evaluate success potential from a number of important perspectives—culture fit being one. However, human due diligence is often short-changed.
A Hewitt Associates study among European multinationals indicated less than 10 percent of management time was devoted to the human side during due diligence—this despite respondents acknowledging that human issues, including cultural fit, are the most critical and difficult to resolve during integration. This study also indicated that companies tended to focus on what could be easily measured within the first six months. Certainly, a full cultural integration of two companies is not achieved during that timeframe.
Carleton and Lineberry also mention the pattern that cultural factors are least likely to be included in due diligence even though a great barrier to success. They identify two potential causes: assuming cultural compatibility rather than testing for it, or believing that nothing can be done about it. Neither sound like good excuses, do they?
To address the risk, it is vital that due diligence includes a culture assessment and that actions be planned for integration. Business Practices and Right vs. Right can enhance understanding of cultural fit. Table 8-1 shows some key steps for both companies to perform during due diligence.
Table 8-1. Work Steps to Assess Culture During Due Diligence
Applying Tangible Culture to Integration
The 2004 KPMG report says that prioritizing synergies and integration planning favorably impact M&A outcomes. Good due diligence can jump-start the integration process. In general, two types of culture gaps must be addressed:
1. A gap where one side needs to change, meaning the other company’s Business Practices will be fully adopted, as identified in Table 8-1 Step 4
2. A gap where both companies have viable options and where Right vs. Rights need to be reconciled, as identified in Table 8-1 Step 5
Due diligence cannot tell you everything, so these are starting places. Figures 8-1 and 8-2 show the workflows. Figure 8-1 works with the first bullet above (Table 8-1 Step 4) and Figure 8-2 with the second bullet (Table 8-1 Step 5).
Figure 8-1. Method where one side needs to change.
Figure 8-2. Method where Right vs. Rights need to be reconciled.
Example
Let’s look at some output examples, then the steps to get you there. The following example shows Tangible Culture applied to a small acquisition. (Remember that there are additional M&A experiences in Chapters 4 through 7, “How to Get to the Right Place the Right Way—Outcome Narratives,” “The Good Thing That Can Cause Big Trouble—Right vs. Right,” “The Unseen Hand That Propels Organizational Action—Business Practices,” and “Putting It All Together—The Business Practices Alignment Method,” respectively.) Because mergers and acquisitions come in various types, we begin with an explanation of the context and overall intent.
Note that the following details are a compilation from a number of relevant situations.
Context: The deal is an acquisition of a European company (Company B) with similar products and services to the acquirer (Company A). Company A operates mainly in the United States, with limited operations in Europe and Asia. Its growth strategy includes global expansion through targeted acquisitions. Company A is very interested in Company B’s European customer base and its sales/marketing organization. Because many of Company B’s products and services are similar, an evaluation will be done to determine which should be retained or eliminated because Company A does not want a complex portfolio.
Excerpts from Due Diligence
Business Practices that need to change for the acquired company:
Company B will need to adopt the more rigorous approach to sales opportunity management. This will require updating the sales-tracking tool weekly, attending bi-weekly sales review calls, and participating in detailed territory reviews quarterly. Today, Company B’s approach is ad hoc and locally managed.
Business Practices that will require reconciliation of Right vs. Rights:
Both companies have excellent approaches to sales compensation and incentives. Although switching to the U.S. approach might seem efficient, we risk losing the motivation of the European sales force if we make changes in this sensitive area.
Table 8-2 shows an example Outcome Narrative where Company B needs to change.
Table 8-2. Example Outcome Narrative Where One Company Needs to Change
Table 8-3 shows excerpts from the practices charter and the Right vs. Right decisions.
Table 8-3. Practices Charter Excerpts
Table 8-4 shows an example Outcome Narrative to describe the future state.
Table 8-4. Example: Outcome Narrative 1
Table 8-5 shows excerpts from the gap assessment and the areas that need change.
Table 8-5. Gap Assessment Excerpts
Table 8-6 shows excerpts from the prioritized action plan.
Table 8-6. Prioritized Action Plan Excerpts
Table 8-7 shows excerpts from the progress evaluation and additional actions needed.
Table 8-7. Progress Evaluation Excerpts
Work Steps
To create the outputs for gaps involving one company (Figure 8-1), follow the steps in Table 8-8. To leverage both companies’ answers (Figure 8-2), use Table 8-9. Visit www.almaden.ibm.com/tangibleculture to download applicable tools and templates.
Table 8-8. Work Steps Where One Side Needs to Change
Table 8-9. Work Steps Where Right vs. Rights Need to Be Reconciled
Benefits
In general, Tangible Culture can help to mitigate the culture clash inherent when bringing multiple companies together. The activities are a proactive approach and, in addition to the benefits listed in Chapters 4 through 7, help to
Broaden the options for dealing with the culture challenges.
Enable the companies to consider multiple views, which helps to avoid mandated decisions—often the default when issues linger on.
Better leverage what both companies can bring to the combined organization.
Reduce the chances of alienating and losing key personnel.
Conclusion
Many organizations will experience a merger or acquisition, and for some, it is a way of life. Bringing multiple organizations together always risks culture clash, so a proactive approach is needed. Tangible Culture can be used to improve both due diligence and integration. In particular, it can facilitate decisions to leverage both companies’ capabilities and communicate new expectations. Now, let’s move on to another situation where companies join forces: alliances.
References
Ashkenas, R. N., L. J. DeMonaco, and S. C. Francis. “Making the Deal Real: How GE Capital Integrates Acquisitions,” Harvard Business Review, January–February 1998, pp. 169.
Bower, J. L. “Not all M & As are Alike—and That Matters,” Harvard Business Review, March 2001.
Carleton, J. R., and C. S. Lineberry. Achieving Post-Merger Success: A Stakeholder’s Guide to Cultural Due Diligence, Assessment, and Integration. San Francisco: John Wiley & Sons, Inc., 2004, pp. 14–15.
Davenport, T. O. “The Integration Challenge.” American Management Association International, January 1998.
Gibson, S., and P. Love. “Hidden sore points that can thwart a culture match,” Mergers and Acquisitions, May–June 1999.
Grossman, R. L. “Irreconcilable Differences,” HR Magazine, April 1999.
Haines, L. “After the honeymoon.” Oil & Gas Investor, (Suppl. Performance powered: The new value drivers for the energy industry), Second Quarter 1997.
Haspeslagh, P. “Maintaining Momentum in Mergers,” European Business Forum. www.europeanbusinessforum.com, pp. 2–3.
Hewitt Associates, “Is HR a Mergers & Acquisitions Deal Maker or Breaker?” November 2003, http://was4.hewitt.com/hewitt/worldwide/europe/uk/.
KPMG International, “Beating the Bears: Making global deals enhance value in the new millennium.” 2004.
Lublin, J. S., and B. O’Brian. “Merged firms often face culture clash—Businesses offer advice on ways to avoid minefields.” Wall Street Journal, February 14, 1997, p. A9A.
Panko, R. “After the Ink is Dry,” Best’s Review, June 1999.
Vermeulen, F., and H. Barkema. “Learning through acquisitions,” Academy of Management Journal, June 2001.