Article -> Culture is Key to M&A Success or Failure
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Date Added: October 2004
More and more companies are participating in mergers and acquisitions (M&As). M&As provide organizations with a method to increase market share, enter a new market, consolidate the industry, or eliminate a competitor. The objective is to generate additional profits.
Organizations face several strategy choices after an M&A. Choices include shutting down the acquired company and retaining the assets, allowing the company to run as a separate organization, or integrating the company into its own.
In the past six months, Associated Bank acquired First Federal Capital, WS Packaging purchased Promo Edge, School Specialty acquired The Guidance Channel, Broadway purchased Van Boxtel, and PacifiCare Health Systems acquired American Medical Security.
Despite the constant increase of M&As, the failure rate continues to grow. As high as 75 percent of M&As do not achieve their desired results or are outright failures. Almost 50 percent of senior executives in acquired companies leave in the first year, and more than 30 percent of acquired firms are sold within five years.
It’s clear that organizations are not achieving their M&A objective of generating profits, but why?
The most common M&A strategy is integrating the acquired company into its own. This requires integration of systems (ordering, IT, operations, etc.), customers, and people (culture). Culture integration of people has been noted as a main reason for M&A failures.
Too often, M&As only focus on financial, legal, and business factors. Culture is not taken into consideration until it is too late. There are three key processes that companies should consider to achieve successful culture integration. These include: cultural assessment, cultural integration analysis, and cultural selection.
Process 1: Cultural assessment. Cultural assessment should be completed during the M&A due diligence process, approximately 30 days before the M&A is finalized. It compares the current organizational culture with the acquisition target’s culture. Cultural assessment may relate to company beliefs and values, services, products, locations, and many other factors that make up an organization’s culture.
Since the acquisition is not yet complete, cultural assessment is based on perceptions, assumptions, and discussions with senior leaders from the potential acquisition. Significant culture gaps can indicate future problems, resulting in less-than-desired M&A expectations.
Process 2: Cultural integration analysis. Cultural integration analysis should occur within four months after the M&A is finalized and is a more comprehensive analysis of cultural assessment. Cultural integration analysis is given to acquired employees and provides feedback of the acquired employees’ perceptions, engagement, and understanding.
Cultural integration analysis serves as a benchmark to identify more specific culture gaps and opportunities for improvement. A follow-up should be completed 6-9 months after the initial analysis to determine if improvements have occurred – another indicator of long-term success or failure.
Process 3: Cultural selection. Cultural selection should begin during due diligence, about one week after cultural assessment. This involves discussions with senior leaders from the potential acquisition to obtain their feedback on top performing employees. Identifying and retaining quality people should be a high priority.
Within four months after the M&A is finalized, one-on-one meetings should occur with all new employees – focusing on cultural criteria. This involves knowing which acquired employees are future leaders and culture “matches.” If top performing employees are not communicated with quickly, they may leave the company.
Summary: M&A success is dependent upon all three processes. Cultural assessment provides a high-level view of potential culture gaps, leading to an extensive cultural integration analysis, which is used during the cultural selection. The result is a comprehensive cultural view of the acquired company and employees.
Timely communication is essential throughout an M&A and each process. Once an announcement is made, employee productivity instantly declines. To reach M&A objectives of generating profits and uninterrupted customer service, an excellent communication plan is necessary.
This includes being honest and focusing on employees’ needs such as: Will I have a job? What are my benefits? What are the plans for this facility? Who will I report to? M&A communication may be addressed in more detail in a future column.
M&As will continue to occur. History tells us that most will fail to meet business objectives, and a main reason is culture integration of people. Effective preparation and culture integration are determining factors to either becoming another statistic to a failed M&A, or forging a new path to success and profitability.