Although successful mergers and acquisitions must be primarily based on strategic, financial and other objectives, it should be more than just numbers and cash flow
In today’s highly competitive and globalized business environment, mergers, acquisitions and joint ventures are here to stay. The large number of mergers and acquisitions worldwide give credence to the belief that most markets can provide revenues to three large suppliers and a merger is on the cards when more than three exist. The spate of mergers in Indian telecom industry after the onslaught on Reliance Jio, with Vodafone-Idea, Airtel-Telenor and Reliance-Aircel-Sistema is a proof of this. Mergers create value and synergies for companies by the way of technology acquisitions in addition to new products and markets; creating economies of scale and scope and establishing global brand presence. Although mergers and acquisitions are imperative for surviving and staying ahead of competition, according to collated research and a recent Harvard Business Review report, between 70-90 per-cent of all mergers and acquisitions fail, which means that somewhere, somehow merged companies lose value inspite of having obvious synergies due to which the companies merged in the first place. So the inevitable question that arises is “what reason is powerful enough to thwart the synergistic value-creating benefits of mergersIJ” Culture has emerged as one of the dominant barriers to effective integrations and more than half of the mergers fail due to lack of cultural integration.
let us begin by defining “culture”IJ Culture consists of the long-standing, largely implicit shared values, beliefs, and assumptions that influence behaviour, attitudes, and meaning in a company or society. Since, it is a soft concept having a set of implicit influences, and it is difficult to account for completely or accurately, therefore, it becomes the responsibility of the top management to stop culture clashes from undermining their desired goals.
History is replete with examples of well-analysed and thought-of mergers having failed due to cultural clashes as they play a role in preventing post-integration plans from being properly executed. January happens to be the 18th anniversary of one of the worst mergers in corporate history - Time Warner and AOl. Merging the cultures of these two companies was problematic from the word go. The aggressive and, apparently ‘arrogant’ AOl people shocked the sober and corporate Time Warner side. Cooperation and promised synergies failed to materialize as mutual disrespect came to colour their relationships.When German Daimler (the makers of Mercedes-Benz) merged with American company Chrysler in the late 1990s, it was called a “merger of equals.” A few years later, due to discordant company cultures like differences in the level of formality, philosophy on issues such as pay and expenses, and operating styles, the merger turned into a fiasco. After major losses and layoffs, in 2007, Daimler sold Chrysler to Cerberus Capital Management for $6 billion. Similarly, within three years of acquisition of Nextel by Sprint, the value of Nextel went down by 80%. Although, the acquisition was motivated to keep pace with industry giants like Verizon & AT&T, it was a failure mainly due to a culture clash between the entrepreneurial, khaki culture of Nextel and the buttoned-down formality of bureaucratic Sprint, which, ultimately resulted in clashes in everything from advertising strategy to cellphone technologies.
Another example of merger gone wrong due to cultural differences is the acquisition of Snapple by Quaker Oats. Quaker was not able to repeat its successful merger with Gatorade this time and their differing cultures translated into a disastrous marketing campaign for Snapple. Taking an example from India, the merger between Kingfisher Airlines and Air Deccan failed due to their cultural differences with Kingfisher being a full-flight service catering to premium segment and Air Deccan’s primary vision to empower every Indian to fly.
Meanwhile, some mergers endured the cultural challenges to turn failures into success stories. One such example is that of Hewlett Packard (HP) and Compaq. In 2001, struggling computing giant Hewlett Packard acquired similarly struggling competitor Compaq. There were major cultural differences as HP’s engineering-driven culture was based on consensus and the sales-driven Compaq culture on rapid decision making. This poor cultural fit resulted in years of bitter infighting in the new company, and resulted in a loss of an estimated 13 billion dollars in market capitalization. However, the company hung on, and by making significant cultural and leadership changes resulted in long-term success.
Since, integrating and redefining culture and values and reconciling the differences is essential for the success of mergers. The acquiring company should avoid a ‘bear hug’ to impose its culture on the acquired company. To integrate cultures, the first step is to define the cultural objective based on where the deal’s greatest value lies. An acquirer can assimilate the acquired company and continue with its own organizational culture or it can even use the merger to import the acquired company’s culture into its own organization. In some cases, it can create a blend of cultures. The next step is to diagnose the cultural differences between the two companies to identify and measure the differences among people, units, geographical regions and functions using a variety of tools like process flow maps, customer interviews and employee surveys. The third step after setting the agenda and diagnosing the gaps is to create an actionable plan that is much more than the vision and values statements, and is concrete enough to be executed by managers. At this step, culture must be defined with specific behaviours and measures and incentives to encourage those behaviours need to be identified. The new culture should be co-created and elaborated by defining the mission, vision and collective values of the new company by being as inclusive as possible, seeking out opinions, providing regular feedback, and reporting progress at all levels. Finally, senior leadership should take the responsibility for communicating regularly and frequently using all new technological innovations and techniques such as social media, online platforms, gamification, and web-based employee forums, so that the new defined cultural objectives percolate to all the departments and employees. Merging companies must eventually come to a shared vision, mission, strategy and statement of new values in order to build trust that can bring economic value from those relationships.
Cultural integration of merged companies is not easy and since companies are nothing but people with differing personalities and working styles, acquiring companies should pre-empt cultural differences as one of the major challenges of the deal that might jeopardize the synergistic values of mergers and identify possible cultural clashes as part of their due diligence well in advance of a merger or acquisition. Apart from a well-planned strategy to integrate cultures, leadership with their clear communication style plays an important and positive role in the success of mergers. Although a successful mergers and acquisitions must be primarily based on strategic, financial and other objective criteria, it should be more than just numbers and cash flow analysis; it has to be more human for it to survive and in turn create value and synergies for all stakeholders.
(The writer is Assistant Professor, Amity University)
