A study by KPMG International highlights that 83% of acquisitions and mergers fail to create the intended value. Mergers and acquisitions are designed and executed to create growth, competitive advantages, technological acquisition, eliminate competition and more in order to create value.
The report also suggests that while strategic, cost, revenue and legal issues drive most deals it is cultural issues that determine their success. It is not an exaggeration that how companies handle culture issues is probably the single most decisive factor that can make or break a deal. Although cultural integration is of high importance it is often hard to anticipate, analyse and quantify.
It is of no surprise that the most often quoted reason for the failure of an M&A is culture differences. While utmost effort is regarded in the pre merger phase (identifying the target, negotiations & due diligence); post merger phase is often overlooked. This is the phase when actual integration takes place & companies look forward to derive the synergies from the deal but most of the deals bomb owing to failure in acclimatizing the parties involved in the most optimum cultural fit.
Most of the studies indicate among other factors the most critical is paucity of Cultural Intelligence. Cultural Intelligence (CQ) is the ability to cope with national, corporate & vocational cultures as described by Earley & Mosakowski in HBR, 2004. Cultural intelligence is to have an empathetic point of view for unfamiliar contexts & adjust to same to derive mutual benefits. CQ shares some of its characteristics with Emotional Intelligence but CQ goes one step beyond as it emphasizes on ability to distinguish behaviours based on the culture.
CQ disaster will entail low morale, satisfaction, commitment, reduced trust, reduced productivity, poor communication, and increase absenteeism as possible outcomes. Many acquisitions are evaluated based on their compatibility regarding financial figures, technological advantages, or market share, never focusing on the soft (people issues) M&A issues.
People issues are generally considered as “soft” issues mostly taken for granted, but organizations have learned it hard way. The costs to ignoring or mismanaging people issues are huge & perhaps organizations are now striving hard to manage post merger session as well smoothly i.e. post transaction workforce integration, selection and retention of specific personnel, communications with severed and retained personnel, analysis of the pre and post transaction cultural operating environment etc.
For instance DaimlerChrysler Merger was a complete Cultural Mismatch; obviously the deal has not seen light of the day. Both sides in the partnership underestimated the influence of culture, and due to culture clash, almost two years later it is still struggling to become a unified global organization. People in both organizations expected that their “merger of equals” would allow each unit to benefit from the other’s strengths and capabilities but it went against predictions. Similarly Cendant Corporation’s 1997 acquisition, ignored importance of integrating human resources. Their CEO believed that: "If the numbers work, don’t worry about the soft side-the people stuff". As a result it bombed.
Failure in creating conducive cultural fit can lead to following bottlenecks in the organization:
- Lack of Direct Involvement by Human Resources
- Loss of Key People and Talented Employees
- Loss of Customers
- Corporate Cultural Clash
- Power Politics
During Integration Phase, the new firm strives to achieve planned benefits of the combination & it requires sound Cultural Intelligence which plays phenomenal role in the closure process for any merger/acquisition and ensures that an overall plan matches the goals of the merger and the two merging companies.
Mergers are difficult transitions for any organization because everyone must think and act differently about so many different aspects of the business. Often, companies need to "re-wire" their organization while trying to accomplish the new organization’s work. "Re-wiring"-implementing an integrated human resource strategy-should support the new organization’s business strategy and the desired Guiding Principles. It has to happen at three levels:
- Organizational (structure, roles, rewards, processes)
- Individual (the way people work together, individual and small group goals)
- Leadership (strategy, governance, supervising work, external relationships and modeling new values)
The organization must strive to foster a culture which is respectful of diverse beliefs & practices to maximize collective gain for all to avoid pitfalls.
Thoughts welcome !