While the coronavirus may have slowed down mergers and acquisitions, or put negotiations on pause entirely, they are very much part of the business landscape in 2020. Cultural alignment can and should be part of strategy discussions in M&A negotiations to increase the probability of long-term success.
As many businesses struggle with continued change and a recession, firms such as Marsh expect to see the rate of M&As increase over the coming months. ‘Acquisition’ and ‘merger’ are sometimes used interchangeably, and though they’re not identical, they do present similar challenges in terms of cultural alignment.
There are plenty of differences between acquisitions and mergers, and the strategies required for cultural alignment. The clearest delineations between an acquisition and a merger from an outsider’s perspective are in the name and stock holdings. Mergers will form a new name, where acquisitions will be brought under the acquiring company name, or be endorsed by that brand. When an acquisition takes place, no new stocks will be issued, while with a merger, new stocks are usually issued under the new name of the company.
Because acquisitions aren’t always voluntary, the term is generally considered to have negative connotations – though not all acquisitions are hostile. Mergers are considered friendlier in nature. They are usually accepted as a positive, mutually beneficial strategy for the companies involved, with benefits that might include economies of scale, efficiencies, growth, diversification, utilisation of tax shields. However, that doesn’t mean that cultural alignment will be frictionless.
Because an acquisition, hostile or not, is effectively buying a business (be that a competitor, a supplier, or in an unrelated entity), it may seem straightforward to implement ‘our way of working’ in the acquired organisation. However, that mindset undercuts some of the very reasons that made the acquisition attractive in the first place, such as specialised knowledge and processes. The unified businesses may share a name, but if they don’t share a culture, the resultant infighting can be akin to an organ transplant rejection.
With a merger, no matter the history or success of either business, the agreement is creating a new entity. It’s much like a marriage; both parties in the merger have their own habits and ways of doing things that may or may not integrate into this new partnership.
Whether horizontal, vertical or conglomerate, we have to acknowledge that a merger or acquisition represents a shifting power structure. Contract negotiations will focus largely on assets, lay-offs/redundancies, physical locations of business and the like. A merger can take years to arrange, and fall over in a fraction of that time, as 40% to 80% of mergers fail to meet objectives. In large part, these failures come down to the human side of the business and whether there is cultural alignment in the new organisation.
According to a 2018 report by Mercer, 100% of UK employee respondents stated they would consider leaving a job if it was not a good cultural fit for them.
There is no one cultural alignment playbook for mergers and acquisitions. However, we have found through experiences consulting across business structures, that at the core of an organisation’s culture you’ll find a clear purpose, vision and values.
That purpose goes beyond profit, into how the organisation delivers a positive impact on the community, environment and wider society. Employees need to feel inspired by that purpose; knowing how they contribute and feeling aligned. A workplace with purpose brings energy to the less pleasurable parts of a job and a reason to get out of bed in the morning.
Your purpose can be clear on paper, but it’s up to leaders to communicate it authentically and compellingly. Leaders can and should openly share their own why, how it aligns with the organisation’s, and of course, walk the talk.
Where the (previously) two entities may find differences, is in their vision. A vision set many quarters ago may have included expanding into Asia, diversifying product lines, or becoming renowned as the most customer-centric business in the industry. The M&A process may mean needing to craft a new shared vision, one with wide input, that aligns with the purpose of the organisation and is achievable within the agreed system of values.
As early as possible, both companies also need to understand how work gets done, including management practices and working norms. In the past, how has each organisation made decisions, motivated people and held them accountable? The process might mean codifying a specific set of behaviours, or management practices, that will be maintained to strengthen the new company.
Horizontal mergers tend to pool a split customer base, such as Facebook and Instagram in 2012 (both platforms geared towards data as the new oil), as Exxon Corp. and Mobil Corp in 1998 (oil as oil). Where integration is vertical, the risk is in creating two mega-siloes competing for the same customers, each with a different idea of what a win looks like.
The AOL Time Warner merger has been retrospectively dubbed by the media as “the worst merger in history.” But at the time – the height of the first internet bubble – it looked to be one of the largest and most successful. AOL, an internet provider, merged with Time Warner, an entertainment conglomerate, combining into a $350 billion media machine with production and distribution rolled into one.
Following the 2001 stock market correction (aka Dot Com Bust), things started to look shaky. Management infighting, cultural clashes, the adhesion to dial-up internet in the broadband age and many other factors led to extraordinary losses, with AOL eventually spun off, and later bought by Verizon in 2015.
According to Fortune’s Rita McGrath, “Merging the cultures of the combined companies was problematic from the get go.” The professionals did their due diligence on the numbers, but evidently not on the culture. “Cooperation and promised synergies failed to materialise as mutual disrespect came to color their relationships.”
Respect is at the core of cultural alignment in a merger or acquisition. Where mutual respect breaks down, collaboration and communication soon follow. As with trust, it’s earned through action; both require open, honest and transparent communication. Respect can be shown in many ways, including through integrity to the purpose, vision and values of the organisation. A disciplined approach to running meetings can reinforce a culture of respect for other people’s time.
Respect means delivering on promises and telling the truth, even when it’s not good. It’s not enough to simply say that respect is valued in the organisation, however. Nurturing a culture of respect can become part of company policy, as well as a KPI in individual performance reviews and compensation decisions.
Staff ownership is the other big piece that’s perhaps worthy of another article. Mergers and acquisitions can upend understanding of who’s doing what for whom. With mergers especially, it’s important to remind everyone in the organisation that: ‘this is a new business, and you’re a part of building what that looks like.’
Whatever the organisation’s cultural aspirations, they need to be tracked with the same rigour the organisations use for measuring financial targets. Ultimately, each impacts the other. Innovation, agility, collaboration and development is underpinned by a team’s adherence to cultural standards. Importantly, by codifying these standards and developing leadership that can demonstrate they are invested in positive cultural change, organisations face the best chance of success in the new business. One we’re all building together.
If your organisation is considering or going through a merger or acquisition, it might be time to partner with a trusted adviser to help you navigate the change. Keogh is well-positioned to help, with extensive experience in change management, leadership development and cultural alignment. Get in touch and let’s start the conversation.
