Mergers & Acquisitions: The Importance of Creating a Shared Culture
EXECUTIVE SUMMARY
Mergers and acquisitions (M&As) are key growth strategies for many organizations: entering new markets, acquiring new technologies, or leveraging scale and size. Culture is acutely critical during notable changes, such as M&As, which offer an opportunity for a renewed start on culture. When two organizations combine through mergers and acquisitions for economic reasons, it is doubtful that the two cultures will remain precisely the same. Sadly, evidence suggests that 50% to 85% of mergers fail to deliver on shareholder returns despite leadership's best intentions. The two cultures must harmonize to achieve the desired financial goals of the new organization and avoid a clash. Anyone who has endured an M&A knows how stressful it can be for everyone. The clashing of organizational culture is the most cited reason for failure. The leadership challenge is to figure out the best way to manage the formation of a blended new shared culture. Without intervention, it is most likely that a new culture will evolve, and the dominant culture will assimilate or reject members from the other culture. The best method to achieve the goals of the merger or acquisition is to identify the best parts of both cultures and create a new harmonized culture. This article explains the role of culture in M&As, cross-cultural issues, and the proven practices of creating a shared culture intentionally.
HOW TO READ THIS WHITE PAPER
This white paper has five sections. All sections are essential to understanding the importance of creating a shared culture. The white paper starts with understanding culture and a summary of the role of culture in organizations. The challenges and proven steps to harmonize the two cultures are then discussed. The white paper ends with a discussion of the significant benefits of creating a shared culture and a conclusion.
The purpose of this white paper is to provide an understanding of why creating a shared culture when bringing two organizations together is essential. As designed, this white paper presents a clear picture of the organizational culture and, ultimately, a leader’s role in leading culture harmonization for the merger or acquisition.
UNDERSTANDING ORGANIZATIONAL CULTURE
Culture has been studied for years, resulting in many different models and definitions. Also, if ten employees are asked to define the company culture, there may be ten different answers. The concept of culture is abstract and not well understood. Organizational culture is complicated because it involves individuals, their interactions, teams, and the organization as a whole. A working technical definition of corporate culture is an often hidden shared pattern or system of beliefs, values, and behavioral norms. A simplified working definition of organizational culture is how things get done within the organization when no one is watching. Culture lives in the stories that are passed on from employee to employee. An organization’s culture reflects the various lessons it has learned through its history and incorporates the many behaviors and processes that have developed over time. Often many elements of an organization’s culture are not visible to its employees. It is comparable to breathing. Breathing is essential to life but controlled unconsciously. Likewise, many elements of culture drop into the background and become automatic. However, highly visible and disruptive events like mergers and acquisitions can make cultural differences striking.
UNDERSTANDING THE LOCAL CULTURAL CONTEXT
Today many industries and organizations operate on a global scale. Understanding the dynamics of organizational and local cultural context is imperative for leaders in these organizations. Not understanding the impact of local culture on organizational culture can lead to grave miscalculations. Local culture is learned at the beginning stages of childhood and reinforced by local social, spiritual, economic, and education systems. Local culture is held deeply and typically changes slowly over generations. It influences how employees perceive and judge the organization's and leaders' actions. Also, local culture affects employee communication both verbally and non-verbally. Organizational culture does not replace local culture. Therefore, the opportunity for leaders is to harmonize local and organizational cultures. Leaders have to be experts in the paradox of local versus organizational culture. The diversity of employee and customer interactions are two significant issues most global organizations face. One company in the casual dining industry that has navigated some of these issues well holds to company quality standards and values but allows local flexibility on its customer menu. For example, rice is a substitute on the menu for fries in Indonesia and roasted pork for hamburgers in Korea.
ROLE OF CULTURE IN ORGANIZATIONS
Organizational culture impacts everything in business and plays a role at the individual, team, and organizational levels. The following is a short list of some of the critical roles of organizational culture by level:
Individual Level
Drive and reinforce profitable behaviors among employees.
Shape employee interactions in the workplace. A healthy culture promotes employee trust, community, positive competition, and effective leader-follower relationships.
Enhance individual commitment to the company within the workplace.
Influence the leaders’ leadership style.
Team Level
Shape the structure, performance, capability, and effectiveness of teams. A healthy culture promotes productive conflict, team member participation, and team engagement.
Organization Level
Support the brand image with a unique identity to the market. Organizations become known by their culture.
Provide policy guidance enabling the organization to bring out the best in each employee.
Influence organizational design in support of the vision, mission, strategies, and critical priorities.
CROSS-CULTURAL ISSUES IN MERGERS AND ACQUISITIONS
Many studies have reported that the first reason for merger and acquisition failure is the lack of cultural integration. Even companies with strong organizational cultures may develop into dysfunctional organizational cultures after a merger without actions to harmonize the two cultures. Mergers and acquisitions create volatile, uncertain, complex, and ambiguous environments for those trying to integrate cultures. Additionally, in recent years the push for a quick return on investments has impacted how cultures are integrated. This push leads to an organizational priority placed on financials, and creating a shared culture takes a back seat to financial needs. Also, as momentum builds, more people become involved, and it becomes more visible and harder to stop.
Lack of cultural due diligence is often a problem. Usually, due diligence is conducted by lawyers and experts in finance or accounting rather than experts in understanding and diagnosing culture. Because culture is resilient and implicit, it is not susceptible to change. The staying power of culture is because it feels right and natural; cultural values imposed are opposed and seldom replace existing cultural elements.
Employee communication is difficult during mergers and acquisitions. Both organizations struggle to know whom to communicate with and when to communicate, leaving employees in the dark about the merger and acquisition, amplifying the rumor mill, and fear among employees being left out. Communication is a skill that becomes critical for leaders during mergers and acquisitions. Listening becomes more complex as workloads increase. Awareness of employees' concerns and questions is crucial for knowing what to communicate.
Employee retention is a challenge during mergers and acquisitions. Negative thoughts and beliefs about the change can result in employees leaving. Also, the uncertainty, lack of job security, questions about leadership credibility and trust, and confusion frustrate employees. The added complexity of the merger and acquisition of the turnover creates distractions making it harder to get the work done. Also, the turnover contributes to the loss of tribal knowledge about how to get things done.
Global mergers and acquisitions can present a challenge of physical distance and time zone differences between employees. Also, language differences become cross-cultural issues in mergers and acquisitions and can create added costs for translations or misunderstandings. Additionally, variations in national culture can further complicate communication.
M&A may create a sense of fear among employees because of the anticipated changes and known high failure rate. Perhaps it is the fear of the unknown or the fear of repeating a past failure. Employees from the announcement start to wonder how this change will impact them personally, such as redundancy of their position, changes in reporting structure, changes in responsibilities and their capabilities to meet the changes, and many more factors.
PROVEN STEPS TO INTEGRATE CULTURE
The purpose of this section is not to provide expectations of a panacea that will guarantee success but to provide practical and proven steps and tools a leader can take to face the challenges of cultural issues in mergers and acquisitions. The key is to engage in efforts to create a shared culture early into the merger and acquisition process rather than waiting for a culture clash to occur.
Changing culture requires much more than creating and communicating a new company's catchphrase, vision, and mission statement. Successful mergers and acquisitions require more than integrating policies, organization charts, and systems that often get the most attention. Strategies need to include CEO sponsorship, reinforcement, and communication, as much as specific action plans. Proactive and transparent communication can help build trust. A frequently asked question (FAQ) document to communicate answers to questions employees might have in advance of them being asked can help reduce fears and rumors. Creating a shared culture requires lots of involvement, input, ideas, teamwork, and commitment to take place.
Culture During Mergers and Acquisitions
The merger and acquisition process has three phases. First, the organization identifies a growth strategy in the pre-combination phase, and potential targets are selected. Due diligence begins, the executives negotiate the deal, and then it is legally approved by shareholders and regulators. Second, in the combination phase, action plans start to combine both companies. Third, in the post-combination phase, the shared culture begins to form and settle in.
Creating a shared culture in mergers and acquisitions begins with the pre-combination phase to review potential targets and conduct due diligence. Once the company has selected a target for merger or acquisition, then the target’s culture should be discussed. Be discrete during the due diligence to allow for analysis. If not already defined, it is a good practice to assess the current state of the culture and identify the company’s strengths and weaknesses. Potential targets should be reviewed for known elements of the target’s external culture. Consider the target’s ability to adapt by evaluating their perceived customer focus, change resilience, mission, and vision. Also, it is vital to establish cultural goals along with economic growth goals.
In the due diligence stage, creating the desired end state for the culture is critical. It is a target, not an absolute. Through the M&A, there may be issues or opportunities, and the goal is to adapt as they arise. While there are many ways to define the end state (see Defining the End State figure below), ranging from using one culture or another or transforming a new culture, perhaps the best option is to utilize the best of both companies achieving synergy through harmonization. Blending the best of both cultures is often the most successful.
Anticipate that most people will initially respond to the merger or acquisition with concern. During the pre-combination phase of the merger or acquisition, it is an excellent practice to be confidential with a small team to allow for as much work as possible before both organizations find out. More work done in advance allows for a quicker response and minimizes employee turnover risk. Expect that the process of working toward a shared culture will take time. Plan on the creation of shared culture to take at least a year. Establishing a new culture is like pouring cement; it takes time to cure completely. Even after the initial work is done, do not let up. Don’t walk away.
Define the End State
Marks, M. L., & Mirvis, P. H. (2011). A framework for the role of the human resource in managing culture in mergers and acquisitions. Human Resource Management, 50(6), 859-877. doi:10.1002/hrm.20445
During the combination phase of the merger or acquisition, conducting a current state culture assessment of the newly merged or acquired company is essential. Do not accept comments that the two companies are exactly alike. The evaluation will surface strengths and weaknesses as well as identify any possible sub-cultures or areas of opportunity. Taking the time to assess both cultures allows for a better definition of the culture and behaviors necessary for teamwork and optimal performance. Engage in a discussion to create a shared understanding of the evaluation results and to discuss the implications of the current culture. This discussion helps clarify an approach to creating a shared culture. Next is choosing what to harmonize, gaining agreement on keeping the best of both, and focusing the efforts on areas with the most significant business impact. Lastly is creating action plans to move the shared culture forward by prioritizing and developing specific action plans. It is essential to anticipate and plan for likely reactions from both companies’ employees.
What leaders reinforce, either from positive reward and recognition or negative threats and punishment, will be done. Leaders at all levels play a vital role in the success of the M&A. When creating action plans, utilize the following primary and secondary actions and tools for leaders to embed the new culture :
Primary Actions and Tools
Pay attention to metrics that matter and provide regular updates
Respond to organizational crises
Resource allocation
Training and development
Rewards and recognition
Selection, promotions, and terminations
Manage change
Secondary Actions and Tools
Organization design
Policies and procedures
Rituals and events
Workspaces
Traditions and stories
Vision and mission statements
Remember that resistance is almost guaranteed with mergers and acquisitions, even when perceived as desirable. The disruption from resistance can derail or delay action plans. Make plans to respond to disruptions and quickly respond to questions, concerns, or rumors that surface from employees.
During the post-combination phase of the merger or acquisition, sustaining the efforts to create a shared culture is crucial. A culture assessment should be repeated to measure the progress of creating a shared culture. Also, the assessment results can be used to develop new action plans to support and shift to the new shared culture and connect culture back to the economic goals of the merger or acquisition.
BENEFITS OF CREATING A SHARED CULTURE
Mergers and acquisitions continue to be widespread forms of corporate economic growth strategies. In 2004, there were over 30,000 acquisitions completed globally, and in 2015 the total deal value equaled $5 trillion, which is more than the gross domestic product (GDP) of countries like Ireland and Switzerland.
Financially successful companies, according to Forbes, have identified organizational culture as the critical factor in their success. Also, empirical evidence has highlighted the importance of organizational culture on organizational performance. Ultimately every organizational result is the direct contribution of an employee. In addition to organizational outcomes, research has linked culture to employee morale, commitment, health, productivity, and well-being.
CONCLUSION
Most mergers and acquisitions (50-85%) fail to be successful. So why do organizations pursue mergers and acquisitions? If successful, they can lead to tremendous organizational growth. Creating a shared culture is the best method to achieve merger and acquisition success. The proven actions and tools leaders can use to harmonize both cultures and avoid culture clashes outlined in this article do not guarantee success. Best practices are to consider the culture and take action at each phase of the merger or acquisition from pre-combination to post-combination.
Leadership creates difficult choices. If you need help architecting a shared organizational culture or an executive coach, we're ready to partner to craft a solution specific to your organization's context and challenges. Getting started is as easy as scheduling a meeting by visiting www.organizationaltalent.com or contacting us via email at info@organizationaltalent.com.
REFERENCES
Cameron, K. S., & Quinn, R. E. (2011). Diagnosing and changing organizational culture: Based on the competing values framework (Third ed.). San Francisco, CA: Jossey-Bass.
Heffernan, M. (2012). Why Mergers Fail. https://www.cbsnews.com/news/why-mergers-fail/
Schein, E. H., & Schein, P. (2016). Organizational culture and leadership, 5th edition (5th ed.) John Wiley & Sons.
Marks, M. L., & Mirvis, P. H. (2011). A framework for the human resources role in managing culture in mergers and acquisitions. Human Resource Management, 50(6), 859-877. doi:10.1002/hrm.20445
