A KPMG study reported that 69 percent of M&As carried out between 2007-2009 reduced or added no corporate value. Jane Kirk, Commercial Director at Armstrong Craven, looks at recent cases and what can be learnt to improve outcomes.
Addressing culture is a problematic concept; it is soft, elusive, complex, multifaceted and hard to measure. It ranks as one of the biggest challenges in M&As, yet due diligence on HR related issues remains a low priority among acquirers in the KPMG study. Certainly Armstrong Craven’s research on this issue found that it is mainly the business leaders who have experienced the difficulties of integration first hand, and the impact on performance down the line, that are likely to invest the necessary time and money in this aspect of people due diligence.
“Mergers fail when employees don’t know what’s expected of them in terms of behaviours and outcomes in the new organisation. Act to quell employee fear and uncertainty, resentment, resistance or anxiety”
There are plenty of examples of companies who have felt the full force of cultural differences. National & Provincial, for example, originally looked at a merger with Leeds Permanent but pulled out due to differences in culture and went on to merge with the Halifax. When cautious commercial Bank of America brokered a deal to acquire risk-taking Merrill Lynch, it wasn’t just the speed that drew attention but how two such opposing corporate cultures could live in harmony. So which factors tilt the balance in favour of successful integration? Is it a question of the bigger the acquiring company, the better the success rate? Not necessarily, according to Armstrong Craven’s research among leading private equity investors and HR leaders who, whilst acknowledging the benefits of experience and dedicated resources in large organisations, highlight a number of other important factors at play. “Large companies do indeed have a better chance as it is not the first time they have been there,” observes Keith Cameron, former HRD Marks & Spencer (2004-2008), “they have more resources to organise and manage change and make it happen.” However, these learnings are only of value if they are applied in practice. “The size of the acquiring company doesn’t necessarily make a difference, but having a process does. If you don’t have a process which includes culture, style and management approach, you are going to find integration difficult,” says Stephen McCafferty, group head leadership and talent, Bank of Ireland.
“Equally damaging is the belief that a large organisation with an established culture should always absorb a smaller acquisition; particularly when the business in question is entrepreneurial”
“Knowing how to do it and actually putting it into practice are two very different things. I’m not sure that larger companies are better at it – it comes down to the correct emphasis and focus as opposed to size,” agrees Claire Bremner, principal psychologist Work Group. Even with a robust process in place, each deal requires a tailored approach; a clear set of objectives which are clearly communicated and drive the ensuing strategy. “Companies need to think why they are buying and who they are buying” says Peter Baynham, former head of M&A UK & Middle East at Mercer. If buying expertise, then the people and specific skill sets are fundamental to its value and should be looked after. Disney recognised this when it purchased Pixar; deliberately keeping it as a separate business with its own culture and so allowed it to thrive. In the case of an oil company, however, which acquired a Norwegian rigs business specifically for its hard-to-find engineering expertise, not involving the employees in the process cost them the very asset they thought they had bought – the engineers left the company.
Equally damaging is the belief that a large organisation with an established culture should always absorb a smaller acquisition; particularly when the business in question is entrepreneurial. Storehouse, for example, bought several companies in a drive to create one large retailing entity; one of which was Blazer a six store menswear chain with around £6m turnover. “We ruined it by establishing a big corporate culture and ended up closing the business,” says Cameron. These types of deals present their own challenges. The founder will inevitably stamp their own personality on an entrepreneurial business. Generally they will leave immediately or within a given time period. Employees suddenly lose their identity and possibly engagement, so the transition phase needs careful management to avoid any feelings of bitterness within the workforce; the aim is to keep the good whilst changing how the business operates. With shorter reporting lines, greater autonomy and faster decision making compared to the acquiring large complex organisations, an entrepreneurial business can, in certain circumstances, be a positive influence. “It can add clarity which is often not obvious,” observes Norman Pickavance, ex-group HR director WM Morrison.
The extent to which cultural differences need to be recognised is even greater when the M&A is across international borders. The same questions around job security, management and operational structure come up, but when a company is bought by a foreign-owned one the challenges are more acute. “Improved communication, trust and transparency are key. The situation is very different particularly with regard to language and, even if the problems are not evident in the boardroom they are visible at operational level,” says Pickavance. The failed merger of Daimler and Chrysler is a case in point where cultural differences – along with a lack of shared vision – are widely blamed for the high profile breakdown. So what can a business do to bring two opposing cultures together? Negating the detrimental impact of one culture and accelerating co-operation requires a process which clarifies the context and goals. This in turn should drive the desired behaviours which underpin the success of the overall strategy. Armstrong Craven’s research shows that most companies don’t have a successful integration process yet alone one that also aligns culture. When a process is put in place, it must be tailored for each deal; don’t use a one size fits all approach, as it will show a lack of understanding and engagement. Strategies should be built on a strong platform of communication, collaboration and trust.
In terms of good practice, planning for corporate alignment should take place ahead of deal closure. Ideally cultural and technical HR due diligence should be carried out at the same time; it won’t stop the deal but will inform how to integrate the businesses. Equally crucial is referencing the management team to ensure relevant experience is matched by the right capabilities and behaviours to succeed in a merged organisation. The overwhelming trend however is to look at integration post-deal and, at this stage, a carefully planned and coherent approach should include a number of important steps: Understand culture: ideally conduct a culture audit pre-deal – this will inform how to integrate the business.
Ask simple but revealing questions; what is encouraged here, what is forbidden, or valued, what are people held accountable for and so on; assess organisational behaviours: understanding how things get done by region will help to identify flash points of clashes. Develop hypotheses of behaviours for success; articulate business strategy and expectations; the reasons for the merger, implementation and goals. Lay out what is expected; 75 percent of leaders cite harmonising culture and communication with employees as key priorities post-merger. Most mergers fail when employees don’t know what’s expected of them in terms of behaviours and outcomes in the new organisation. Act to quell employee fear and uncertainty, resentment, resistance or anxiety. Also, show no-one is alone in the change, without this step you won’t connect with employees. Employees know that mergers tend to mean job losses, so valued and marketable members of staff start looking. After Citibank merged with Travellers to form Citigroup – the world’s biggest financial services firm – it quickly reaped big profits from cost cutting, though rather less from its original aim of cross selling different financial services to customers; Develop business led behaviours: work on commonality of cultures and be mission critical in your approach. Concentrating on changing culture will impact on the bottom line so must come from the top. Leaders must always be on message and hold everyone to account; this approach will ensure behaviours cascade to the front line and are adopted; Design and update systems and implement programmes for success; create processes which reinforce behaviour to ensure employees understand, support and are capable of executing new ways of working. Address divergent ways of working with people which will create bridges and positive behaviours; continue to communicate: create an open and engaging environment; connect with employees and gain their buy-in; empower employees: encourage participation from a cross section of the workforce, using social networking and web based technology for intranet discussions can be highly effective and doesn’t demand excessive funding.
Given that 80% of the culture within an organisation is dependent on the message and actions of the leadership, there needs to be a clear shared vision which comes from the top and guides the workforce. Clarity of behavioural direction and the business case for this change must be consistently articulated and reinforced. Only by creating and implementing a robust process, which identifies and enhances cultural similarities from the start, will the merged business successfully navigate the transition to integration, creating a strong foundation to take the new organisation to the next level.