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Stop failing in Mergers and Acquisitions!

By: Anna Balk-Møller, Principal Consultant

Whether it is 70% or 90% of Mergers and Acquisitions (M&A) that fail is a much debated topic. It hardly matters though, as both numbers are unacceptably high. Failure is the unrealised potential of the benefits initially calculated. And it can be extremely expensive. But why are we failing? Research shows that current success has very little to do with previous success, as the success and failure rates are similar for both experienced and novice acquirers.

In the due diligence phase of an M&A process, the focus is strictly on financial, strategic (products, customers) and legal considerations. A post-mortem analysis of merger failure and underperformance usually only examines the factors that initially determined the decision to engage. The argument here is, that the cause of death (figuratively speaking) is often found where nobody is looking – in the human factors.

Here’s why

Mergers are decided and designed by a strategic thinking management – often surrounded by heaps of equally strategic thinking management consultants and legal counselors. They are formulated and disseminated in a strategical language, which to most employees is gibberish. But mergers are fulfilled by employees.

Employees are people and therefore complex by nature. People who need to change their behaviour, mindset and habits. So, employees do not follow management strategies they don’t really comprehend. They do follow social norms (culture) and are guided by 185 (and counting) currently identified cognitive biases that prescribe their behaviour. Therefore, culture cannot be overlooked when considering whether two companies are fit for a merger and when designing the integration strategy.

Culture is said to eat strategy for breakfast. So, it should be obvious that cultural understanding ought to be a central aspect of the foundation on which strategies are build. But it is often neglected. Culture is the characteristics of groups of people. Not simply national groups, but multiple clusters of social belonging. In a professional context, culture is made up of the norms of organisational groups or specific professions.

A change process with offset in cultural understanding

A merger or acquisition is a change process. A big one. According to statistics by Prosci® (market leader in best practice change management) 90% of 1,800 respondents report that cultural understanding is important or very important when managing change. So, it is simply not enough to incorporate a change management track into the project plan when implementing the merger strategy.

A complete due diligence should include a broader perspective and include culture, processes, IT and leadership. The root cause of failure is likely to be found in the aspects that were overlooked in the traditional due diligence exercises.

Including culture in the due diligence phase provides valuable input to the:

  • Synergy potential – can the synergies expected be realised from a human perspective? Are the organisational cultures compatible?
  • Price – how much effort (time and resources) we must expect to put in the integration process before seeing the desired results on the bottom line might affect the price setting.
  • Integration risks – what are the pitfalls we clearly will run into and how do we mitigate for these?
  • Implementation plan – what strategies of alignment do we want? What activities will get us there and what is the total cost of implementing these (cf. price setting)?

The implications of not including culture in the due diligence is that the price is often wrong, the integration process takes longer, and the synergies are not grasped. And what you hoped for – that ‘two + two = five’ – is seldom realised.

A cultural due diligence process

Hence, the complete due diligence process should include cultural aspects. Here’s our simple three-step process for a cultural due diligence. We have developed the model as we have experienced, that the simple mapping of cultures changes nothing. It is awareness with no direction and we need to follow it through to create the desired results.

Step 1: The fascinating part of the process. Mapping both companies’ culture to identify gaps and levers for integration.

There are tools available that can map organisational culture. But be aware that the mapping is not simply a desktop exercise. Our mapping tool data is collected with far reach into the organisation from surveys, interviews and focus groups. This is not a management task!

Step 2: The painful part of the process. Understanding the consequences of the fit and alignment strategies.

This step is indeed a dialogue with the management teams of both companies. If we do not make these decisions early on and with both parties involved, we will have power struggles going on for years after a merger with ‘us and them’ mentality and employee confusion consequently. They are difficult and sometimes painful dialogues, but they will not disappear simply from neglect.

Step 3: The tricky part of the process. Planning the right integration activities and estimated cost.

This is where we transform strategic decisions into initiatives to be executed. And this is where the cultural due diligence starts to correlate closely with a change management exercise. So, though the project plan initially intended to onboard the change management team in a later phase, this is where you want to get them in place.

We now know what cultural challenges and levers we will meet and manage. We also know how we want to go about it and what specifically to do. And when combining this knowledge with a dedicated change management effort to ensure organisational readiness you have a higher change for success, than the standard merger.

…And what makes this particularly exciting for people with KPI inclinations is that we can measure the progress of the cultural integration along the way and benchmark it to both the starting point and the target.

Anna holds a Master’s degree in Religion and Psychology from the University of Copenhagen. She also has a communication profile (both strategic and operational). Since 2009 Anna has worked with change projects in both the public and private sector. From her background as well as her experiences with cross-cultural projects, Anna has a deep understanding of the inter-cultural aspects that make complex projects succeed.

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