Industry leaders highlight why organisations tend to ignore culture during M&A, how it leads to M&A failure, and recommend solutions for a smooth transition.
The Walt Disney Company announced its plans to acquire 21st Century Fox in December 2017. As the Disney effect percolates three years on, its reverberations are being felt in the top-most echelons of Star India. The media giant has bid goodbye to many senior leaders over the past year. The most recent exit, of chief Uday Shankar, has set industry speculation abuzz. Rumour has it that a cultural mismatch may have played spoilsport between the mouse and fox.
Surprised gasps may be echoing in industry corridors but veterans who’ve long been on the mergers & acquisitions playing field aren’t surprised. It’s well known that the majority of announced M&As rarely see the light of day, and the role of culture in these fallouts is recognised too. Why then, despite the sea of evidence, do organisations continue to ignore culture at the time of a merger or acquisition?
Wake up and smell the culture
A variety of reasons including financial, technical and legal lead to M&A failure but “they’re not significant,” notes Patnam Dwarakanath, non-executive chairman, GSK and veteran HR leader, adding, “If you look at the statistics, most of the failed M&As are due to a lack of cultural alignment.” N Balachandar, managing partner, PGC Consulting, agrees, “The concerned entities don’t engage their employees to integrate the culture.”
The handful of M&As that do succeed, invest “time, effort and money to integrate their people, teams and practices effectively. Good financial integration isn’t the only reason for their success,” adds Balachandar. A thorough cultural assessment right at the beginning is a must, says Dwarakanath, “No two company cultures are similar.”
Finances drive decisions
Most organisations are preoccupied with getting financial, legal and technical nitty-gritty in order. “People doing M&As are well aware of the key pillars,” says Dwarakanath, “but at the time of inking the deal, the focus is more on the financial, technical and legal aspects. There’s always talk of compliances and a hurry to close the deal.”
Balachandar further explains, “In a merger, you’re normally looking at the cost reduction targets or what we called integration savings.” This financial strength, customer base and potential growth that the merged entity will gain “takes precedence over cultural dimensions. Most of the time, financial metrics are the pure driver,” notes Balachandar.
Unseen taken lightly
It’s not like the culture is not considered at all. “Though everybody talks about it, ultimately they don’t do that kind of in-depth study at the time of signing,” notes Dwarakanath. “Even when all advice is given, organisations think cultural integration can be managed easily at a later stage.” Balachandar adds, “They say ‘okay, we must be conscious of this’ but actually spend time on the cultural aspect only after the announcement is made.”
One of the reasons culture is taken lightly is perhaps because it’s intangible. “Companies are into talking about numbers, ratios, synergies, alliances, technology, legalities and those kinds of things,” points out Dwarakanath. “I think culture doesn’t get its due because it’s largely based on anecdotal evidence,” says Yeshasvini Ramaswamy, founder, Culturelytics. “We don’t have cultural analytics or the kind of granular detail that business planning experts look for.”
After experiencing the entire M&A journey from all its many angles over her 18-year career, Ramaswamy is now building an AI-powered tool to analyse organisation culture. “We’ve brought on chartered accountants and financial analysts who calculate the culture’s dollar impact on business,” says Ramaswamy. “It’s a guesstimate but the fact that we’re able to give a dollar value to culture makes everybody take notice.”
This empirical evidence could be the missing piece. “When we say we have deep data science and statistical models, it lends credibility,” explains Ramaswamy. “You’re looking at very scientific data for your decision making and then there’s ownership from the leadership to do right by the business.”
Low morale, high on anxiety
Some of the key symptoms of a cultural clash in a newly merged or acquired entity include low employee morale and anxiety over one’s role and future in the company. “Any type of change induces fear and this is a transformational one so the first questions to hit anybody are ‘what will happen to me, to my boss’,” explains Dwarakanath. Balachandar adds, “I’ve heard many times, ‘sir you’ll buy us and then we’ll lose our jobs so let me find one before that happens’.” Such anxieties are common, rampant and start setting in “while the merger is being discussed and not even announced yet,” notes Balachandar.
The multi-level organisational change further stirs up unsettled feelings because “it affects the belief systems that the employee used to address in line with his company’s former culture,” says Dwarakanath. Meanwhile, a drastic change in work process impacts motivation. If the new entity’s culture dictates that “your reporting structure has changed or that now you have to go to a committee when you have an idea, the talent will say ‘I’m out’,” illustrates Ramaswamy.
Lack of clear communication and transparency on the merger’s purpose and following processes further fuel fears. “If the workforce is kept in the dark and not comforted, the deal is bound to fail. Employee anxiety then leads to low morale, lack of enthusiasm and resistance to change,” points out Dwarakanath, adding, “This finally results in lesser productivity and profits.” Experts believe that organisations must take into account that it’s ultimately the people who make the difference.
CEO has left the building
One of the most prominent signs of a cultural disruption is senior and key talent exits. “The acquired company tends to lose its leadership team and there’s a vacuum,” notes Balachandar. “How best to retain the acquired company’s leadership is a big challenge,” he adds. Top management is the most vulnerable. “You can’t have two CEOs, CxOs,” explains Dwarakanath.
Companies also tend to lose key talent. “Competitors are waiting to grab the talent,” says Dwarakanath, “When a merger or any kind of restructuring takes place, you are bound to lose critical talent.” He explains further, “Particularly those who aren’t sure of their growth and future in the organisation and are capable of getting a job elsewhere.” In such a case, “the confidence of the key and critical talent at every level” is usually the tipping point.
Size matters
Most importantly, the cultural match rests on the size of the entities in question. The merger of two equals is a rarity and it’s usually more an acquisition. When a merger of equals does take place, “both sides put in a lot of work because you have to invest more time to understand each other’s cultures and decide what the leadership will look like,” says Balachandar.
Most companies like to portray it as a merger of equals but it’s usually not done justice in execution, notes Dwarakanath. When aspects like “which company’s name will come first, where the headquarters will be, the number of board members from each side” are amicably settled, it’s a sign that “the entities are treating each other as equals”.
Big fish world
Acquirers are infamous for an ‘upper hand’ attitude. “There’s always the ego that my culture should prevail,” observes Dwarakanath. While Balachandar adds, “With most large companies, that’s what you hear; the larger company gobbles up the younger or smaller one. Cultural dominance is bound to happen.”
Ramaswamy calls it the ‘big boy attitude’ that “a lot of acquirers bring in”. Large companies often forget that it’s the unique talent, technology or culture that made the entity acquisition-worthy in the first place. “It’s a classic mistake we’ve observed. It defeats why you acquired the company.” Through her work, Ramaswamy strives to remind organisations that “You own the idea, not the people. And the idea can get richer only when you let people be.”
Assess & analyse
The experts highlight key points to ensure a smooth transition. It’s imperative to take the time and effort to “analyse the current cultures and compatibility, assess the kind of leaders, roles, structures and values they have,” points out Dwarakanath. Most of these facets should ideally be etched out in the merger terms itself, advises Balachandar.
“Rather than a ‘my way or the highway’ attitude, the agreement terms could dictate how much of the culture should be preserved and which critical positions will be retained,” says Balachandar. Experts believe that the strengths, best practices and policies of both entities can find a comfortable middle ground when given due diligence.
Assimilation activities
A successful M&A eventually comes down to a process of discovery. There are many creative ways by which organisations can get acquainted with each other’s cultures. Balachandra recommends perception drawing and off-sites.
The resulting conversation between the leadership teams is bound to be fruitful. The rest depends on “a strong leader who ensures that the new entity internalises the best of both worlds and a board which enables smooth integration,” notes Balachandar.
Intelligent analysis
The latest technology now helps organisations to analyse culture intelligently. That’s where Culturelytics comes in. “We’ve developed a Culture Coherence Quotient or CCQ as we call it,” informs Ramaswamy. After intensive work with private equity firms, the venture capital community, CHROs and CEOs, Culturelytics aims to “help investors approach culture proactively”.
The tool helps businesses assess current cultures and predict compatibility. “It tells one how aligned the culture is with the CFO’s forecasts. If the CCQ is really low, the acquiring company needs to invest more on integration budgets,” explains Ramaswamy. It’s the first time an intangible aspect like culture is being translated into hard data. “For the first time, we’re able to advocate a ‘go’ or ‘no go’ decision,” says off Ramaswamy.
[Originally published by HR Katha in October 2020]
