A Successful
Organizational Marriage:
Cultural Integration is the Secret to a Successful M&A
By: M. Beth Page
Merger &Acquisition Overview
Mergers and acquisitions (M&As) are a significant activity for
many organizations. Yet most mergers are not successful,
primarily because the “merger of two organizations is actually a
merger of individuals and groups.” Buono and Bowditch, authors
of The Human Side of Mergers and Acquisitions: Managing
Collisions Between People, Cultures, and Organizations.
A merger means that two previously separate organizations are
combined into a third new entity. An acquisition involves the
purchase of one organization by the new parent firm. M&A
activity is characterized in the academic literature as an
“organizational marriage,” complete with courtship. Cultural
integration is often linked to a metaphor of a family where a
parent who has departed is replaced by a step-parent. These
relationship and familial metaphors illustrate the significant
impact M&A activity can have on organizational life and its
members.
Unfortunately, few M&As make any effort to integrate different
cultures and workforces, even though M&A activities bring about
significant change involving employees, organizational entities,
systems, shareholders, customers, and many other stakeholders.
Companies initiate M&As for numerous business objectives,
ranging from achieving market entry to gaining proprietary
technology. Companies that want to expand strive to acquire
businesses that enhance their product portfolio and secure
additional employees with specialized skills. But too many enter
into M&A activity without recognizing the impact on the
organization and the overall impact on the human element within
the two merging companies. M&A activities that are improperly
managed can result in lost revenue, customer dissatisfaction,
and employee attrition.
Honor is their Due
The traditional M&A approach has included financial and legal
evaluations of the acquisition target with little attention paid
to the people and culture. Successful M&A strategies acknowledge
and honor the importance of organizational culture as a critical
element in the long-term integration success.
Cultural compatibility can have significant impact on the
ultimate success of M&A activity. A number of credible cultural
assessment tools, such as culture surveys and facilitated focus
groups, are available and should be utilized. As Dr. Edgar
Schein points out, the challenge of assessing an organization’s
culture “is more a matter of surfacing assumptions, which will
be recognizable once they have been uncovered.” Identifying
cultural compatibility on such core values as corporate ethics
and quality are important considerations in the assessment of
the M&A. The impact of not assessing the degree of cultural
similarity might have significant consequences for the combined
firm, as cultural tensions and clashes between merging
organizations are a common cause of combination related
difficulties (Buono and Bowditch).
Cultural Integration is one aspect of the integration process
that is often overlooked. It’s necessary to initiate cultural
assessment during due diligence This cultural due diligence
assessment should be made before the deal is finalized, to avoid
culture clashes that diminish the potential of the deal.
Placing Cultural Due Diligence on the M&A Agenda
Conducting culture due diligence allows the acquiring company to
assess cultural compatibility with the target firm. Cultural
compatibility and all of its ramifications need to be understood
completely to ensure a successful M&A. The literature on M&A
activity used familial metaphors to describe mergers and
acquisitions. This is powerful language that further emphasized
the significance of organizational members’ experience as a
result of an M&A. One internal M&A expert encouraged companies
to be capable of articulating the key facets of cultural
compatibility to the acquiring company. Identifying the “must
haves” of cultural compatibility is like assessing marital
compatibility; some compatibility issues are negotiable, while
others could be considered “knockouts.”
Executives who worked on a high-profile computer-technology
merger participated in cultural due diligence activities. They
made the results from their culture surveys available as the
selection process for executives of the combined firm began, and
the survey results became a component of the selection process.
They also introduced “fast-start” workshops to welcome the
thousands of new employees to the acquiring company, and
articulated the approach to working together.
Unfortunately, because M&A practitioners often fail to link
integration with pre-combination activities such as due
diligence, they neglect questions of organizational fit in the
early stages of acquisition analysis.
When the management of a company decides to merge with or
acquire another company, it checks the financial strength,
market position, management strength, and other health
indicators of the other company. Rarely checked, however, are
the “cultural” aspects: the company’s philosophy or style, its
technological origins which might provide clues to its basic
assumptions, and its beliefs about its mission and future. (Schein,
1997, pp. 268-269)
The greatest barrier to successful integration is cultural
incompatibility. According to Edgar Schein, “The poor
performance of many mergers, acquisitions, and joint ventures
can often be explained by the failure to understand the depth of
cultural misunderstanding that may be present.” Research on
cultural factors is the least likely to be undertaken as part of
due diligence.
Integration planning, which takes cultural factors into account,
should coincide with the initiation of due diligence. When these
two are strongly linked, new corporate knowledge can facilitate
consolidation.
Four-Step Approach to Cultural Due Diligence
Researchers have identified the following steps for conducting
cultural due diligence:
1. Integrate cultural criteria early in the merger discussions.
2. Prepare due diligence teams with cultural criteria.
3. Have the due diligence teams collect data on culture.
4. Use tools to assess potential culture fit and issues.
How companies choose to deploy this model depends on their own
structure and culture. Acquirers are encouraged to operate under
the assumption that cultural differences exist, and they must
actively work to manage these differences throughout the
integration process. Companies are also encouraged to create
joint projects that allow the teams to build success together.
One large telecom company that actively engaged in M&A activity,
tasked one of its HR professionals with strengthening the
company’s acquisition process by educating executives and due
diligence teams on culture.
Exploring Cultural Integration
According to academic and business thought-leader John Kotter,
“The biggest chore associated with an acquisition of any size is
to merge the two (or perhaps more) different cultures. If this
part of the transformation is ignored or handled poorly,
problems will surface for years, maybe decades.”
The importance of an organization’s culture, particularly as a
risk factor in M&A integration, cannot be underestimated.
Researchers at Harvard Business School found that firms that
managed their culture realized a nearly seven-fold increase in
revenue, compared with a 166% increase for firms that did not
manage culture.
Yet specific, focused efforts to integrate different cultures
and workforces remain the exception rather than the norm in M&A
activity. Poor cultural compatibility continues to be cited as a
factor in M&A failure. Cultural signs of the so-called “merger
syndrome” include a “we versus they relationship, with a natural
tendency for people to exaggerate the differences rather than
the similarities between the two companies.” (Marks & Mirvis,
1998) The key to a successful Done Deal, is selecting a
culturally appropriate model of integration.
An organization’s culture consists of the underlying values,
beliefs, and principles that define an organization’s management
system, as well as the firm’s management practices and behaviors
that reinforce those principles. (Denison, 1990). A more
detailed definition of organizational culture comes from Dr.
Edgar Schein, who defines it as the pattern of basic assumptions
a given group has invented, discovered, or developed while
learning to cope with external adaptation and internal
integration challenges. The assumptions, says Schein, should “be
taught to new members as the correct way to perceive, think, and
feel in relation to those problems.”
Keys for Successful Cultural Integration
Successful cultural integration begins with an early
understanding of the cultural differences and processes that
exist between the acquiring and target companies. Stages of
culture clash include employees reevaluating the way they do
things, followed by viewing their way of doing things as
superior to the other company. This is followed by attacking the
other’s way of doing things while defending their own. For a
successful cultural integration to occur, each company should be
coached to look at how the practices of the other company might
be beneficial in the new entity. Conducting cultural due
diligence early in the M&A process helps prepare the integration
team as well as the companies’ leadership for the efforts that
are required to join together two distinct organizations.
M&As emerge from a managerial approach that values process,
structure, formal roles, and indirect communication over people,
ideas, and feelings. (Buono & Nurick, 1992). Despite the
importance of successfully integrating an organization’s people
and culture into a new entity, the published literature is
filled with reports pointing to limited involvement from HR
professionals in the early stages. This restricted involvement,
in turn, limits HR professionals’ ability to effectively
influence the process. Unfortunately, legal and financial issues
are given precedence over the possible traumas that might be
experienced by organizational members impacted by M&A activity.
Another strategy for facilitating cultural integration is
through the use of transition teams. Transition teams (internal
practitioners prefer the term “integration teams”) that involve
employees from both the target and the acquiring company ensure
a successful deal completion. Consider the transition team a
lever to share cultural intelligence between the two companies.
To improve M&A cultural integration efforts, the following
action steps must be taken. Conduct extensive due diligence
surveys; look at the cultural values of potential leaders being
retained from the target company; evaluate the underlying
cultural factors and values that determine long-term success for
the M&A; and determine the key facets of cultural compatibility
important to your company.
Conclusion
Business leaders and M&A practitioners have rich opportunities
to humanize what is often treated by companies as merely a
business and financial transaction. Organization development
practitioners have the tools and resources necessary for the
successful navigation of all kinds of change management
projects, including M&A activity. Any M&A should be viewed as an
activity good for both the organization and for the employees
rather than as a time of employee uncertainty and insecurity.
The focus on the human dimension of M&A will significantly
impact the bottom-line success. It will also result in less
organizational turmoil, and ultimately determine the overall
success of the M&A transaction. All practitioners working on the
M&A have the opportunity to serve as role models by working
collaboratively from the outset to realize the possibilities of
a successful M&A.
