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Why mergers fail

According to a KPMG Mergers and Acquisition Report, 83 percent of mergers were unsuccessful in producing any business benefit as regards shareholder value. Catherine Mercer Bing, Managing Director & Principal Consultant, ITAP Americas and Clinton Wingrove, EVP & Principal Consultant, Pilat HR Solutions investigate.

Why do some mergers fail, despite rigorous financial and business due diligence and powerful commitments on both sides to make them work? For the purpose of this article we are defining ‘M&A failure’ as those that either did not increase and/or lost shareholder value.

Some significant examples from the recent past include AOL/Time Warner, HP/Compaq, Alcatel/Lucent and Daimler Benz/Chrysler. The KPMG report into M&As s also says that deals were 26 percent more likely than average to be successful if they focused on resolving cultural issues and those acquirers who left cultural issues until the post-deal period severely hindered their chance of deal success, compared with those who dealt with them early in the process. One of the prime causes is the lack of integration of both the cultures of the employees and the organisational cultures. Effective integration of processes requires the people element to work, but not enough attention is paid either to the organisational cultures within which the people work, or the internal values (embedded cultural orientation) of the employees that drive how they approach the integration.

Most organisations recognise that a merger or acquisition is likely to cause trauma for the employees, they find it hard to do anything much about it except for offering Change Management training. During a merger or acquisition, the primary pressure is on senior management to reduce the time scales to effect the change. Yet, cultural integration typically takes up to three years. Any significant reduction in that time-frame is an improvement. Not only does it reduce the time during which there is not enough attention paid to ‘doing the job’, but it also reduces the time for lower levels of management and staff to experience the uncertainty, concern for jobs and pressures of internal competition. While senior executives will have been working on any M&A for months or even years, once the deal is announced, employees have little or no time to go through the change/grief process.

The sudden impact of an M&A, irrespective of the magnitude of the cultural clash, causes emotional casualties and demotivation. These impact the quality of work and the level of discretionary effort exerted. It also causes a talent drain, with the best, and sometimes the most critical employees, seeking stability elsewhere. Despite these widely known facts, organisations typically conduct insufficient cultural due diligence even though it is possible and practical to measure the cultural differences between any two organisations, and to assess whether the internal values of employees will be a help or a hindrance. They also often have insufficient processes via which to define and communicate the new strategy and direction, and do not have enough access to the data on which to make informed decisions about the new organisational structure and the individual selection and development actions and plans needed to support the new organisation.

Measurement and comparison of the respective corporate cultures or values frameworks helps define how much of where each focus their energy in terms of the four ‘cultures’ as identified by Kim Cameron and Robert Quinn in their book ‘Diagnosing and Changing Organisational Culture’. They identified that organisational cultures have ‘competing values frameworks’: Hierarchical Culture is characterised by a formalised and structured place to work, procedures govern what people do and the organisation is concerned with stability, predictability and efficiency. Market culture is one that focuses mainly on actions with other constituencies (suppliers, customers, contractors, licensees, etc.) to create competitive advantage. The organisation is concerned with profitability, bottom line results, strength in niche markets, competitiveness and profitability.

Clan culture is characterised by shared values and goals, cohesion with a focus on teamwork, employee involvement in programmes, where customers are thought of as partners, and corporate commitment to employees held together by loyalty and tradition. Adhocracy Cultures are mainly in the business of developing new products and pioneering initiatives that lead to success. They foster adaptability, flexibility, creativity and activity on the cutting edge. Comparing both M&A partners’ perspectives on the ‘now cultures’ identifies where there are current differences. More importantly, the same measurement can be conducted in each organisation, seeking perspectives of the ‘vision culture’. Early agreement and alignment are the key to reducing the uncertainty about the types of priorities on which the new corporate culture will focus. If the two groups cannot agree, it is better to stop the process in its tracks than to allow dysfunction and failure to occur later.

Defining the new strategy and direction typically takes months. If done correctly, strategy definition has to integrate the perspectives of the different stakeholders, if we succeed, how will we will look to our shareholders, customers staff and employees. Plus which processes must we excel at and, to achieve our vision, how must our organisation and our people learn and develop? Having the appropriate technology to collect data and drive these decisions can easily facilitate conversations at the senior levels, while polling employees back at the office to ensure employee involvement in the process and decision making.

In addition to using technology to involve employees in the strategy decisions and to shorten the time involved in the creation of a new strategy, KPIs and action plans (mini-maps), technology can also be used to manage employee data. It can collect information/conduct assessments and increase objectivity about people decisions, collate information about people’s hopes, fears and expectations and manage the transitions and to monitor the movement toward the ‘vision culture’. The key people-issue with any M&A is rapidly getting the right people in the right jobs, utilising the M&A as a development opportunity for those that need it and ensuring that there is equal opportunity for all in terms of being kept and being appropriately deployed. Sound familiar? These are no different to the concerns for any long term talent management strategy. Yet, faced with the tsunami of work associated with doing that for an M&A, many organisations cut corners, compromise and try to do it with inadequate tools.

Despite being in an era when you can control your car radio by voice and your iPhone knows where your friends are and can even ‘name that tune’, few organisations seize on the power of contemporary technology for handling M&A people-issues. Anecdotes indicate that this is largely due to a lack of knowledge of what is possible. M&As are not a common experience for most HR professionals so they resort to their comfort zone of talent review meetings and spreadsheets. But, using technology is the only way that an organisation can efficiently and effectively manage the people-decisions in an M&A. It can help to answer questions such as: Who do we have? What talent is available in both organisations? Where are they? What positions need to be filled? What are the job holder requirements? Who best meets those requirements? Who wants to be considered for each available position? And Who eventually should be awarded the position Going into the M&A contracting (or immediately the pens are put to the paper!), both organisations need to attend to the issue of HR technology – irrespective of what systems they have already. This may be one instance when ‘buy-use-throwaway’ is a good decision – although most suitable tools have long term utility. Depending on the likely scale of the impact (the amount of structural and headcount change) relatively simple solutions may be needed. In the simplest cases, an application may store: the current positions; the new positions, where different; the new hierarchy(s); old organisation hierarchy, plus current incumbents (preferably including their compensation, length of service and other factors that could determine costs and savings from retention, redeployment or outplacement). And then support: data collection by employees, managers and HR (to fill in the knowledge gaps about the people and the positions). This can rapidly accumulate comprehensive data which can have utility post-M&A; modeling of the new structure(s); red-ringing critical incumbents; informing transition discussions/evaluations; managing and costing transitions and costing outplacements.

In a more complex solution, which can also be implemented within days or a few weeks at most, additional functionality can be supported such as: a data feed from the two HRISs (if possible); modeling of new structure options and costing them; supporting job-posting; supporting bidding for positions including personal portfolio creation and managing outplacements. Companies often fail to build into their financial plans the investment needed in such tools but, far more importantly, the cost of dysfunctionality and non-managed attrition during the initial implementation. Typically, through the M&A process, HR effects the entire process listed above – mostly manually. This puts the HR professional in the position of a ‘gatekeeper’ at best and typically ‘the doer!’ However, by managing the employee integration process using technology, the HR person becomes facilitator of information sharing and decision making. Of course, in ‘need for certainty’ cultures, information is often not ‘open’ so employees and managers do not have access to information that might help the organisation make informed organisational decisions: “It takes a long time to do it right”, is typically the excuse when it should be “the very reason we need to do it”.

During any M&A, more than at any other time, it is critical that HR professionals can: Rapidly assess the two or more cultures, determine the potential impacts of mismatches and plan actions to address those; Rapidly acquire profile and assessment data on all of the employees who may be affected by the M&A; Bring objectivity and speed to people decisions as related to specific positions and structure; Genuinely manage deployment transitions – this almost demands technology for all bar the smallest M&As and Shorten the time/reduce the uncertainty of the transition period. Plus Monitor/measure ongoing transition progress including effectiveness of placements, not merely speed and cost of transition and avoid embedding or creating new dysfunctions during the transition.

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