How Culture Can Make or Break Your M&A Integration
We’ve seen a surge in M&A activity across industries worldwide this year, with major deals frequently making headlines. And it’s not just the giants of the industry who are aiming for growth. We see companies of all sizes using M&A strategies to position themselves competitively.
After a decline in deals in 2022, M&A activity is picking up again in 2023.-AlphaSense
Now let’s imagine blending two friend groups with different vibes – things can get awkward. We know mergers and acquisitions (M&A) often promise strategic advantages, such as rapid expansion to market dominance. Yet, their outcomes often fall short of our expectations due to cultural misalignment.
According to Financier WorldWide, between 50 and 75 percent of all post-merger integrations fail to meet their original objectives due to cultural clashes. Harvard Business Review (HBR) sources put the failure rate above 80 percent.
So what sustains our M&As to the finish line?
Supporting our employees during mergers and acquisitions should be the primary goal. Not tending to a new culture impedes effective communication, hinders employee engagement, and undermines intended synergies. Addressing cultural disparities during the early stages of M&A helps us navigate integration challenges.
During M&As, the focus tends to be on getting the top leadership team in place. But a recent EY report suggests that 47% of key employees leave the company within a year of the transaction and that 75% leave within the first three years. –Gallup
Culture’s Role in M&A Setbacks: A lookback at history
- DaimlerChrysler Merger (1998): The merger of German automaker Daimler-Benz and American car manufacturer Chrysler was plagued by cultural differences. The German hierarchical management style clashed with Chrysler’s more informal approach. Communication breakdowns and power struggles hindered decision-making and operational efficiency. The result? A $40 billion loss and eventual divestiture of Chrysler.
- AOL-Time Warner Merger (2000): The AOL-Time Warner merger is often cited as one of the most disastrous deals in history. The clash between AOL’s internet-driven culture and Time Warner’s traditional media approach led to strategic misalignment and internal conflicts. The merger resulted in a loss of over $99 billion in market value and eventually unwound.
- HP-Compaq Merger (2002): The merger of Hewlett-Packard (HP) and Compaq faced significant cultural challenges. The different organizational cultures led to internal conflicts, stifled innovation, and management infighting. The deal failed to deliver the intended cost savings and synergies, and HP incurred substantial costs.
- Microsoft-Nokia Acquisition (2014): Microsoft’s acquisition of Nokia’s mobile division faced difficulties due to cultural misalignment. Nokia’s culture of innovation clashed with Microsoft’s more bureaucratic approach. This led to talent attrition, lackluster product releases, and a nearly $7.6 billion write-down.
- eBay-Skype Acquisition (2005): eBay’s acquisition of Skype, a technology-driven communication platform, faced integration challenges due to cultural differences. eBay’s focus on online auctions must align with Skype’s technology-focused culture. This cultural misalignment led to the eventual sale of Skype at a significant loss.
What are the consequences of cultures being misaligned during an M&A?
A revealing insight from ScienceDirect showcases the impact: a mere shift from the 25th percentile to the 75th percentile in the gap between trust-oriented behavior or individualistic tendencies can result in a staggering 28% drop in the median combined announcement return.
Explore how a client tackled post-merger cultural disparity as employees navigated varying time zones, leading them to seek a cohesive digital workplace solution for enhanced engagement and unified culture.
This statistic underlines the intricate relationship between cultural alignment and M&A success. We often venture beyond our borders for M&As, attracted by the prospect of higher returns. However, the pursuit of greater financial gains comes with a challenge: the cultural barriers across organizations can be complex.
Cultural disparities hold particular significance for us in cross-border mergers, where individuals with potentially different values must collaborate. Instances of culture clashes in cross-border mergers, such as the Daimler-Chrysler case, are commonly cited. As an example, certain cultures may find it more permissible to challenge authority compared to others. Similarly, we might see teamwork prioritized over individual goals in some cultures, whereas the opposite holds true in different cultural contexts.
Talking of this reminds us about the complexities of a cross-cultural marriage, where harmony necessitates understanding and bridging cultural gaps. Without cultural alignment and communication, misunderstandings can emerge, and we might jeopardize the harmony of the relationship.
During an M&A of two culturally diverse organizations, financial benefits or strategic opportunities alone aren’t enough – the harmonization of thought processes and value systems is essential to navigate the complexities of integration successfully. We’ve seen how the interplay of these orientations can significantly influence how we collaborate, communicate, and make decisions. Likewise, in our own M&As, overlooking the significance of cultural alignment can lead to:
- Operational frictions
- Employee disengagement
- Failure to capitalize on anticipated synergies
In a survey by Deloitte, it was revealed that 76 percent of participants emphasized the significance of cultural compatibility as a crucial factor influencing the success of post-merger integration.
Just as love alone can’t ensure the longevity of a cross-cultural marriage, we also realize that the promise of financial gains or strategic advantage isn’t enough to guarantee M&A success. We believe it’s the nuanced alignment of our underlying cultural values, thought processes, and operational styles that plays an important role in the success of an M&A.
According to a study conducted by KPMG, 83% of merger transactions failed to enhance shareholder returns. This outcome is attributed to inadequate handling of factors such as strategy, organizational cultures, and management capabilities.
Financial losses can stem from operational inefficiencies caused by clashes in our work practices and values. Our actions aimed at boosting growth may falter as incompatible cultures hurt our collaboration. Instead of amplifying market presence, the misalignment can lead to internal strife and decreased productivity. Ineffectively managed cultural differences can undermine the core purpose of M&A – to create a stronger, more successful entity – and, ironically, results in a weakened, less sustainable organization.
Cultural Elements | Implications and Consequences |
Decision-making Styles | Misaligned decision-making styles can lead to slow decision-making, indecision, and failure to implement strategic choices, hindering progress and integration. |
Leadership Approaches | Clashing leadership styles may trigger employee turnover, particularly top talent, eroding intellectual capital and market contacts essential for success. |
Change Readiness | Differences in change readiness can impede the implementation of new strategies, hinder adaptation to challenges, and obstruct the creation of a unified company. |
Collaboration and Work Styles | Inconsistent collaboration approaches can disrupt workflows, weaken cross-functional communication, and cause frustration among employees, delaying integration. |
Definitions of Success | Conflicting definitions of success, such as individual achievements vs. teamwork, can lead to personal conflicts, hamper cooperation, and hinder goal attainment. |
Communication Norms | Varied communication styles can result in misunderstandings, lack of information sharing, and decreased transparency, undermining alignment efforts. |
Customer-Centric Philosophies | Divergent customer-centric strategies can lead to service disruptions, confusion, and potential alienation of client bases, impacting business growth. |
From Friction to Fusion: Navigating Culture in M&A
The provided illustration depicts information about corporate executives recognizing the vital role of individuals in M&A endeavors. Moreover, it highlights that companies prioritizing increased time and resources for people during the early stages of a deal’s lifecycle tend to experience positive results.
Here’s our concise 9-step guide that contains tips for us to navigate culture in a successful M&A.
- Get to Know the Cultures: Start by understanding the different cultures in the merging companies. Figure out what’s similar and what’s not, so you know what you’re working with.
- Set Integration Goals: Think about what you want to achieve by blending these cultures. Make sure these goals match the big-picture plans for the new company.
- Leaders on the Same Page: Make sure the big bosses understand how culture matters. Get them talking about how culture will shape decisions and how they’re on board.
- Blueprint Your Culture: Imagine the ideal culture for the new team. Write down how you want everyone to work together, talk, and support each other.
- Talk, Talk, Talk: Plan out how to talk to everyone about the changes. Help them see why this cultural shift is exciting and good for everyone.
- Build Your Dream Team: Put together a team to make this happen. People from HR, and communications, who will make sure the culture blend stays on track.
- Learn and Share: Teach everyone about the new culture. Answer questions, address concerns, and make sure everyone knows what’s coming.
- Team Up Across Teams: Encourage everyone to work together, regardless of their old team. This will help build a strong new culture that everyone can be proud of.
- Keep Checking In: Don’t stop here! Keep an eye on how things are going. Ask for feedback and be ready to change things if they’re not quite working.
Related: Explore how a client tackled post-merger cultural disparity as employees navigated varying time zones, leading them to seek a cohesive digital workplace solution for enhanced engagement and unified culture.
Humanizing M&A: The Power of People-Centric Integration
In the story of mergers and acquisitions, we know it’s all about the people. Through clear communication, showing genuine commitment, and blending cultures together thoughtfully, we can turn obstacles into pathways for lasting growth and enduring success.
Curious to learn more about how to prioritize culture in your M&A strategy?
