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Posted: August 22, 2011

Beating the M&A odds

Five ways to make it work

Tim Larson

After several quiet years, mergers and acquisitions have resurfaced on the front pages of Colorado business publications.

Despite the excitement generated from these deals, 70 to 90 percent typically fail to deliver on their expected value, the Harvard Business Review reports. Underestimating the impact of culture differences between the organizations involved can be one of the primary reasons. Integrating cultures can be particularly challenging for the small- and medium-sized business mergers seen most often in Colorado.

Cultural considerations are less concrete than financial statements, but they are critical to post-merger integrations. Recall the merger between US West and Qwest, for example. As one of the old Baby Bells, US West had a heavily unionized, process- and quality-driven culture. A slow pace was fine if it produced the right result through the right process. Qwest was from another world. Its competitive start-up culture emphasized speed and productivity over order. Following their unhappy marriage, the turmoil produced by their cultural differences contributed to the decline in shareholder value.

To beat the odds and achieve a better outcome, senior executives must assess culture fit as part of the due diligence process and develop a culture integration plan. Here are several key considerations:

Realize that culture Is not just about countries. When multinational deals are on the table, culture is typically one of the factors considered. Culture encompasses far more than languages and monetary systems, however. From an organizational perspective, culture includes the basic assumptions, values, norms and behaviors of the people within the business. In practical terms, culture governs how people communicate, make decisions, embrace or avoid change, treat customers and structure work.

Weight culture according to the people value. The importance of culture integration is directly related to the value of the people who make up the acquisition. If the value lies in the intellectual capital, skills or networks of the people, then culture should be one of the deciding factors during due diligence. The recent merger between AOL and The Huffington Post is an example. If a poor fit between the two organizations caused Arianna Huffington and her top editors to leave, AOL would gain little from the deal. The people value is often important for small- and medium-sized businesses as well. These companies derive significant worth from the reputations, networks and knowledge of their leaders. But culture is not critical in every instance. If the primary purpose of an acquisition is to gain access to financial capital or facilities, for example, then culture may not matter.

Know yourself. Know your partner. Assessing culture typically starts with a survey that measures foundational elements of organizational culture. The survey should be supplemented with focus groups and observation. The acquiring company should include itself in this process as well as the company being considered for purchase. The goal is to evaluate both culture traits and the relative importance each organization places on them. For example, a mature organization that prides itself on personal, long-standing customer relationships is unlikely to embrace a high-pressure, high-volume sales approach. The change is too great and involves a shift in values, mindset and behavior. On the other hand, a change that incorporates more structured processes into various aspects of the business might be achievable.

Focus on the vital few. After the assessment is completed, both companies should evaluate the similarities and differences between them. A key question to consider is how the culture traits of the organizations contributed to their current success. One culture isn't better than another, but some cultures are more compatible or supportive of the business that would be created from the merger. In the best cases, the merged company reflects the cultural strengths of both organizations. The two leadership teams should discuss the shared culture they want to develop and identify the vital few traits that need to change to create that culture. If they agree the changes are unlikely to succeed or would alienate vital talent, they should walk away from the deal.

Engage, commit and recommit. If the merger is desirable, assemble an executive team to plan and execute the culture integration. At this point, the team needs to shine a light on the barriers that block the changes that need to be made. The team should establish specific goals around dismantling those barriers and develop communication plans and incentives to encourage change. Communication with line staff is absolutely critical, as employees need to know that their leadership understands-and has a plan to address-friction points. Each member of the executive team needs to own a part of the process and understand that it will take sustained effort to reach the desired results. Culture change is a slow process, and it requires ongoing conversation, feedback and recommitment.

If this process sounds like a significant investment of time and executive resources, it is. Many executives underestimate what successful integration requires and allocate too little time and leadership to it. However, it doesn't have to be this way. With sustained focus and critical examination of cultures involved, mergers and acquisitions can produce companies whose combined value exceeds the value of their parts.

One plus one can equal three.
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Tim Larson is Denver practice director for Point B Inc., an employee-owned management consulting firm that offers mergers and acquisitions and related services to companies in a variety of sectors and industries. Before joining Point B, Larson was a mergers and acquisitions integration leader at GE Capital.

 

Tim Larson is Denver practice director for Point B Inc., an employee-owned management consulting firm that offers mergers and acquisitions and related services to companies in a variety of sectors and industries. Before joining Point B, Larson was a mergers and acquisitions integration leader at GE Capital.

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Readers Respond

Great perspective and excellent advice. When doing the cultural assessment what questions and how they are asked; what is and is not said and the nuanced differences in defining cultural traits are all critical to understanding the actual culture of each organization. Not just the stated or aspirational culture. By Jeff Julin on 2011 08 24
Congratulations, Tim Larson, for sharing your experience on M&As;. Too often executives negelct the important issue of blending company cultures and they loose opportunities. A merger and acquisition is a difficult time for the very people you count on to be productive and supportative. Properly addressing cultural intergration includes establishing a vision of future opportunities for the joint success of the new organization and its people. Failure to do so results in a lack of focus when it is needed the most. By Michael Gaughan on 2011 08 22
I've experienced the results of mergers first-hand in both the government and private sectors. The importance of integrating IT and other business systems is clear, but I agree that culture integration is also key. Unless they are contractually obligated to stay for a period of time, top talent can--and will--leave if the culture that results from a merger is dysfunctional or undesirable. The resulting loss of leadership, knowledge, skill and credibility can be devastating. Putting resources into getting "culture" right can be a tough sell these days, as it seems like a soft goal compared to increasing the bottom line. It's an investment worth making, however. By Jennifer Watson on 2011 08 22
Good and timely article. Based on my experience, the statement that "executives underestimate what successful integration requires and allocate too little time and leadership to it" is on the money. By Jeff Jones on 2011 08 22

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