Why culture plans are essential to merger success
Theoretically, bigger companies mean stronger companies with more efficiency. But the reality is that most firms merge without strategies to maximize the new organization’s bottom line.
Spectre, like all Bond films, is about cars, women and harrowing escapes. But most of all, it’s about mergers and acquisitions. The Joint Intelligence Service merge MI5 and MI6, moving HQ from the castle-like SIS across the River Thames to a modern glass and steel building. Their new leader, C, immediately shuts down the double 0 program, calling its reliance on targeted hits “obsolete.” Bond, M and the rest of the team are less than thrilled, and C’s calculated plan is demolished. Director Sam Mendes’ plot is timely, as 2015 is on track to be the largest ever for M&A, with $4.1 trillion in global deals. Big guns are coming together in most major categories: Pfizer and Allergan, Marriott and Starwood, IBM and the Weather Company, Walgreens and Rite Aid, Anheuser-Busch InBev and SABMiller, Kraft and Heinz, Anthem and Cigna, AT&T and DirecTV, Dell and EMC.
Although these deals may look great on paper, the outdated M&A roadmap all too frequently leads to disarray. Publically, there’s blowback from politicians, journalists and investors, who raise concerns about competition, taxes and consumers. Internally, a specialist team of bankers, lawyers and management consultants pave the way for integration. Ironically, though, they’re ill equipped to deal with team building. (As WPP CEO Martin Sorrell pointed out at the 2014 Media Summit, McKinsey and Goldman Sachs’s internal strategy forsakes M&A to focus on organic growth instead.) Theoretically, bigger companies mean stronger companies with more efficiency. But the reality is that most firms merge without strategies to maximize the new organization’s bottom line.
83% of mergers don’t boost shareholder returns. 83! And half of mergers fail because of cultural incompatibility according to the Society for Human Resource Management. There are two underlying issues in play: 1) It’s not the 1890s anymore. The oil and rail days of simple horizontal or vertical takeovers are long gone, yet we still seem to think M&A guarantees seamless transitions. 2) Companies fail to create communication and relationship frameworks between the people who will run, manage, execute and consume their business. Focusing on business processes, corporate structure, market opportunities and operational synergies are the table stakes. They can improve business performance by 30%. But when companies create post-merger frameworks around brand and vision, leadership behavior, culture, experience and communications, there’s a 70% uptick, according to Hay Group research.
“Culture doesn’t always have to be about people meeting people,” says Brand Union Worldwide Chairman Terry Tyrrell. “Culture can be the number of clicks users need to navigate a website.”
If UX needs consensus, imagine the problems merging companies face when addressing, say, a shared brand. Post-merger organizations have to create value hierarchies rather than just assuming either the big guy wins or that you can split everything 50/50. Bank of America is a fantastic example of doing it right. In 1998, NationsBank acquired San Francisco’-based BankAmerica in what was then the largest American bank merger. NationsBank set ego aside, deleted its own name from history, renamed the brand company Bank of America, infused the new company with a red, white and blue color scheme and moved national HQ to NationsBank’s home in Charlotte. “It made both teams realize that they had to make sacrifices,” says Tyrrell. Another example is Zappos, whose CEO Jeff Hsieh wrote a lovely letter to his company after Amazon’s acquisition. “Our vision remains the same: delivering happiness to customers, employees and vendors. We just want to get there faster.” Hsieh emphasized speed, explicitly maintained leadership and let his quickly growing company know that everything they were doing was just fine. Blick, the national chain of art supply stores, maintained a brilliant 100-day plan after acquiring Utrecht in 2013. Instead of cutting costs by moving Utrecht’s paint factory, the Illinois-based company invested in and expanded the Brooklyn plant. CEO Robert Buschbaum, a former McKinsey post-merger management specialist, kept authentic ties with the New York art scene and made staff proud. If you go back to the press coverage at that time, there was no blowback, only acclaim.
Post-merger success requires deeper planning than just taking advantage of the new tech, regulatory changes and easy credit that create a friendly M&A environment. On paper, every deal looks nice – but that diligence assumes everything will play out perfectly. In reality, huge swathes of value are at risk unless teams, communication and culture are aligned. Daimler and Chrysler merged in 1998 for $36 billion and dissolved in 2007 for $7.4 billion. “We obviously overestimated the potential of synergies,” CEO Dieter Zetsche said at the time. “I don’t know if any amount of due diligence could have given us a better estimation in that regard.” Zetsche is right on both accounts, but his use of the term due diligence highlights the exercise’s faulty framing. Due diligence is a legal/financial undertaking that assesses the present and the past. It doesn’t predict teamwork, communication, culture or experience. It doesn’t assess whether the team that’s in place will execute on the vision communicated to the media and financial analysts. DaimlerChrysler—like eBay and Skype, AOL and TimeWarner, Nextel and Sprint (and likely a few of the mergers mentioned in the first paragraph)—didn’t research, assess or strategize around a plan for cultural compatibility. So they failed.
Tyrrell’s research, done in partnership with a leading Swiss business school, points out that less than a third of leaders analyze cultural compatibility before a merger. Less than a quarter carry out a human capital audit and 60% fail to carry out a leadership capabilities review. It’s not a surprise then that companies leave up to 40% on the table post-merger. There’s no one at the table. What’s needed is a new blueprint that develops shared purpose and intention and establishes a trade-off of hierarchies based on skill or value, not size. With a roadmap in hand, companies can create KPIs, 100-day action plans and measurement tools to benchmark their progress. In real life, not on paper.