With nearly $3 trillion in play last year, the land of mergers and acquisitions would be the world’s fifth largest country, nestling in comfortably between Germany and France.
The value created by this imaginary land is highly disputed, however.
KPMG published the most cited report on M&A value creation in 1999, noting that only 17 percent of mergers created excess economic value. Regardless of the successful percentage of mergers, there is a thread that holds the more credible M&A research together.
The people factor.
KPMG’s research highlighted that when acquiring companies focused on the people issues, specifically management and cultural differences, they were both independently responsible for upping the odds of success by 26 percent.
A more recent academic meta-analyses in Organization Science (Do Cultural Differences Matter in Mergers and Acquisitions?, Stahl and Voigt, 2008) has attempted to unwind the complexities of cultural differences to highlight its affects. One of the key findings was that while the cultural affects on economic outcomes were mixed, those differences often led to less shared identity, reduced feelings of positivity toward the company and less trust.
While the findings are mixed on economic success (which neither proves or disproves KPMG’s findings), the economic measure is often quite flawed as it doesn’t account for economic success more than a year after the transaction.
It is only at this point that inertia flags and the effects of those reduced feelings of commitment to the company and trust hit the bottom line.
With the long-overdue recognition of the importance of the employment brand, these matter now more than ever.
To avoid this kind of hit to the bottom line, several action items need to occur during the diligence and integration phase.
1. Understand the acquired culture. Too often, ‘culture’ is measured skin deep, which is to say only at the executive level. But nine out of 10 companies we work with at RoundPegg have major cultural differences between the executive team and the rest of the organization.
The majority of the work is done in the bowels of the company. These are the workers who will have to come in and mesh with your own. Identify the power centers in the acquired company, how they communicate, what they reward and how they make decisions.
2. Put a cultural integration plan in place. It’s difficult to start this process with your counterparts prior to a deal going through, but that time is critical. The strategic plan is always a part of the process, but rarely is one focused on cultural integration. By collectively identifying the strengths of the two companies and the various departments, you will be able to identify where the biggest risks lie and to put plans in place to help mitigate.
Which managers will struggle most with their new teams? What teams are going to have the most difficult time working within the new confines? What teams are at risk of creating dissent and discord?
Focus on which managers are best equipped to lead the ‘new’ teams from a cultural perspective, not just a skill perspective. Give them the insight into their new teams so they can put a custom plan in place to build team cohesion. And, most importantly, involve them in how best to evolve the culture.
3. Evolve culture*. Many times, the expectation of the acquired company is that they have to conform. Unfortunately, it is very difficult for people to change. If you tend to make unilateral decisions and enter a company that takes a more collective approach, neither side is going to tolerate it. You will think decisions are made too slowly, and they will think you are making ill-informed choices.
Instead of insisting that new workers conform, take the time to focus on the ‘new’ culture. Educate both parties to overcome the immediate and justifiable ‘us and them’ mentality. Shifting toward a culture that leverages components of both sends the message of ‘we.’
How can the strengths of each be leveraged? What behaviors will be rewarded going forward? How are those rewards decided?
*The size of the acquired company matters. If it makes up a small fraction of the new workforce, their effect on the ‘new’ culture will be minimal.
There are many valid reasons for mergers — geographic expansion, economies of scale, product extensions, etc. But too often, the due diligence is rooted in maximizing cell F72, rather than digging deep into the potential human pitfalls.
As heretical as this may be, people run companies, not Excel.
Excel is still missing the toggle to model having to work with someone whom you do not trust. Someone with whom you can’t see eye to eye. Someone who values different things and operates in a manner you just can’t fathom.
Business is personal.
Every interaction we have factors into our mental model of how much additional effort we elect to expend. Introducing foreign bodies into the organization creates countless new interactions. Some of those interactions will provide a multiplier affect. Many will not. If you knew that 60 percent of your workforce would provide 15 percent less effort, then the deal would be off immediately.
Merging companies requires thousands of worker-hours to integrate systems, processes and workforces, but scant time is spent understanding how well varying cultures will work together.
For all the effort, time and money that goes into these transactions it would stand to reason that you’d want to focus on the biggest lever you’re often buying…the worker’s effort levels.
With $3 trillion on the line, there are a lot of zeroes that are currently being left on the table. While others can debate how often these ventures are successful, we should all understand that, by focusing on the people, we could amplify the chances and magnitude of that success.
Brent Daily is the founder and COO of RoundPegg, a startup focused on improving workplace culture and engagement.