Mergers and acquisitions: Cultural alignment for successful integration
Mergers and acquisitions: Cultural alignment for successful integration
Cultural alignment is a prerequisite, opportunity, and challenge for directors and CFOs to create value and synergies in post-merger integration
Too often companies put together matches look great on paper but are fraught with management and structural problems that end up turning deals into busts. Acquiring companies often underestimate the problems that unalike company cultures can inflict on a merger. In fact, the difference between success and failure of deal-making is often not a matter of strategy or money, but rather of relationships, culture and politics.
Putting two companies together normally gives the combined entity the resources and capabilities to compete with the market giants. It would also create dominant positions in many markets around the world. However, that was not the case for advertising giants Publicis Groupe SA and Omnicom Group Inc. After the merger, the two CEOs, Publicis’s Maurice Lévy and Omnicom’s John Wren, agreed to be co-CEOs for 30 months; while that sounded good, the reality was that they couldn’t agree on a management team, the way of splitting their duties, or even on which firm should be listed as the acquirer from an accounting perspective. The deal was eventually scuttled in 2003.
The challenge of putting the companies together can be further exacerbated if the two companies have vastly different business models and cultures. For example, in Valeant Pharmaceuticals’s long-running hostile takeover campaign of Allergan Inc., the Botox-maker, the company executives of Allergan have expressed their disagreement with Valeant’s proposal to slash the amount of money that the company spends on research, a move that would probably lead to layoffs of hundreds or even thousands of its employees. As such, Allergan has disregarded Valeant Pharmaceuticals’s proposal and instead, agreed to be sold to generic pharmaceutical manufacturer Actavis plc., a company that shares similar values.
How cultural issues affect the success of an M&A transaction
Integration can be defined in general terms as the process of combining two companies into one entity at every level. Post-merger integration, the most often-cited concern that could significantly impact the success of an M&A transaction, is the top concern for directors and CFOs. Post-merger integration has to be multi-dimensional, with inputs from various perspectives, including strategy, new management, organisation, business, finance and accounting, tax and legislation, information system, and human resources. Yet, studies have pointed out that plenty of M&A transactions fail to yield desired expectations or even erode shareholder value. The little secret about M&As is that the human dimensions and culture are at least as important, if not more critical, than the strategy, pricing, and positioning. Cultural unfitness is commonly found to have a direct and indirect linkage to integration failure. Unsuccessful cultural integration could lead to organisation distractions, loss of key talents, and failure to achieve critical milestones or synergies.
Cultural integration is the key to a successful merger
Many studies agree that cultural alignment is critical to a successful merger. Yet, due to the intangible nature of culture and time constraints, management would rather focus on things that are tangible and measurable, such as financial data and legal matters. Cultural integration is then left unattended and postponed to the post-deal phase. Nevertheless, culture is not something that can be changed or integrated without well-organised plans; it requires time and attention to bring two cultures together and blend into a new collaborative environment.
Approaches to cultural integration
So, how can two different cultures be integrated to achieve full value? First of all, we have to understand the term ‘culture’. Corporate culture is the beliefs and behaviours that determine how a company’s management and employees interact and handle outside business transactions. Often, corporate culture is implied, not expressly defined, which develops organically over time from the cumulative traits of the people that the company hires. A company’s culture can be reflected in its dress code, business hours, office setup, employee benefits, turnover, hiring decisions, client satisfaction and other operational aspects. No companies are cultural twins and thus careful attention is required in understanding the cultures of both merging companies and managing the cultural integration process.
Having said that, it is highly recommended to start the cultural assessment early and make sure that the human dimensions of the combination are incorporated into your due diligence and integration planning from the beginning, instead of an afterthought. Organisations can start with cultural assessment during the due diligence stage, which provides preliminary indications on cultural alignment or misalignment of the two merging companies and whether the existing cultures can be aligned with the overall business strategy. With the cultural and strategic alignment assessments, organisations can reach a tailored sale and purchase agreement and formulate integration strategies that facilitate smoother transition and more effective integration to capture post-merger synergies. The time spent on cultural assessment needs not to be long but should be good enough to obtain a basic understanding on the cultural and strategic background of both companies.
Second, more time should be spent on development and management of the action plan. Due to its intangible nature, culture-related issues are likely to be unpredictable and thus addressing the issues can be a challenging task for the management. In most M&A transactions, companies focusing on cultural integration tend to achieve post-merger synergies – apart from analysis of cultural differences, those companies also evaluate the cultural opportunities and obstacles, which guide their efforts to the right directions. The companies would also take initiatives in redesigning the organisational structure, determining leadership assignment, and modifying human resources practices such as compensation and benefits.
This is followed by communication to employees regarding the company’s new directions and meaning of the changes. Changes may create frustration and stress to employees, yet proper communication from management with a clear vision for the integration can relieve scepticism and doubt. Accompanying with employees retention strategies and other team building activities, companies can establish a new culture and concentrate on the post-merger business goals.
Potential value of cultural alignment
“People are valuable assets to an organisation and play an integral part to the success of a business. Effective people management is the key to achieving post-merger synergies so as to maximize the optimal outcome,” says Barry Tong, Transaction Advisory Services Partner of Grant Thornton Hong Kong. As cultural integration is one of the key factors of a successful merger, it is important to have a dedicated team to manage and oversee the whole integration process.
The causes of merger failure can be complex and varied case-by-case, and there is no perfect model to apply. Nonetheless, culture misalignment is commonly considered as a direct and indirect hurdle and mismanagement of any cultural unfitness can hinder the company from realizing synergies during the integration process. Cultural and strategic alignment, active management of cultural integration, as well as proper communication between management and employees, are the suggested measures that ensure smooth cultural integration and contribute to a successful merger.
Conclusion
Cultural compatibility can have significant impact on the ultimate success of an M&A transaction. It is suggested that a separate cultural integration plan be studied, created and worked upon in the early stages of a merger. Proper management of cultural issues is the key to realise successful post-merger integration, especially from a people perspective.
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