[An edited version of this article appeared in the June 2016 edition of Training Journal]
It’s boom time again for Mergers and Acquisitions. 2015 set a new record for global M&A activity, according to MergerMarket’s Global and Regional M&A: 2015 report, with a total value of $4.3 trillion, a 30% increase over 2014. Activity was particularly strong in the US (up 40%), Asia-Pac (up 43%) and Japan (up 91%), and in the Pharma, Consumer and Financial Services sectors. In Europe, where activity value increased 22.4% on the previous year, the UK accounted for 38.7% of deal-making, its highest share on record.
While we might assume that unrelenting competition, a slowdown in emerging markets, and continuing troubles in the eurozone are driving this upswing as Boards seek to strengthen strategic positions, market commentary suggests that – in the US, at least – relative market strength is the predominant factor. Writing in KPMG’s 2016 report, US Executives on M&A: Full Speed Ahead in 2016, Global Head of M&A, Philip Isom, commented that ‘The U.S. continues to be the favoured M&A destination because of its relatively healthy economy.’
Business giants are not penguins: when they huddle together, it is not necessarily for warmth against a cold wind. This is, perhaps, just as well: given the track record of M&As, any deal motivated principally by survival should ring alarm bells. ‘Survival’ is not readily divisible.
While remaining competitive in the face of declining confidence in organisations’ ability to generate growth organically had been a key factor in respondents’ 2015 replies, their primary motivations in 2016 – whether in relation to geographic reach, business lines of customer base – were all expansionary.
Counting returns or counting chickens?
But whether their intentions were in growing sales or shedding costs, the challenge of extracting value remains. Like any promise, the intentions behind any M&A must be realised, and history makes uncomfortable reading. Most of us can readily recall a number of well-documented, high-profile deals that should never have been done: the stories of the New York Central and Pennsylvania Railroads, of Daimler and Chrysler, and of AOL and TimeWarner should sound alarms down the years. And many other deals may have seemed like worthy or potentially profitable adventures, yet the shareholders involved will still have been fortunate to break even on their previous investments.
The danger that the promise will evaporate, with wealth destroyed rather than created, is not a new phenomenon and it has long been recognised. McKinsey & Company’s 2010 report, Perspectives on Merger Integration, commented almost blithely that ‘Anyone who has researched merger success rates knows that roughly 70 percent of mergers fail.’ Further back in time, The Hay Group’s 2007 report, Dangerous Liaisons: Mergers and Acquisitions – The Integration Game, surveyed 200 European M&As and concluded that:
‘After a merger, more than 90 per cent of businesses believed they had failed to achieve their original aims.’
Even casual hindsight of this historic catalogue reveals familiar patterns: too little listening (of the serious, active kind) and too much talk (of an over-confident or bullish variety); organisational structures that clung to the old, perhaps believing that radical change could be delivered without radical change; strategies that rewarded the wrong behaviours, and acquirers acting more as victors than as new and at least relatively equal partners.
This insensitivity around culture and values is the one factor that is perhaps more prominent than any other, and underlines two important truths. Firstly, any M&A is ultimately only as good as the organisational change programme that succeeds it: in the longer term, people rather than numbers lie at the heart of success. And secondly, organisations don’t change until their people do.
Yet the triumph of hindsight over insight remains common. In a 2015 Journal of Business Strategy article, Being awkward: creating conscious culture change, Peter Buell Hirsch reminded us that ‘In a survey of 90 executives with experience in handling M&A, McKinsey found that 92% believed that their past efforts would have substantially benefited from greater cultural understanding prior to the merger.’
And even this hindsight was not new. In his introduction to Jeffrey A Schmidt’s 2002 book, Making Mergers Work: The Strategic Importance of People, Louis Forbringer cited a CFO magazine article in which a survey of Forbes 500 company CFOs ranked ‘Incompatible cultures’ as the top pitfall in achieving synergies. (Another people dimension issue, ‘Clash of management styles/egos’, was ranked sixth.)
‘Our people are our greatest asset’
So how and why do these patterns continue to repeat themselves? Exploring where organisations typically focus their attention and energies around the M&A process suggests that the History books occupy one of the corporate bookcase’s less visited shelves: the question has already been answered, but the lessons that might have been drawn have not necessarily been on-boarded.
Deloitte’s M&A Trends Report 2014, for example, showed that ‘achieving cultural fit’ was considered the most challenging factor in achieving a successful integration, but only 22.2% of respondents considered it important, compared to the 39.9% who listed ‘Customer retention and expansion’.
The same skewing of focus – akin to obsessing about the chickens while paying insufficient attention to the preceding eggs – was evident when respondents were asked to identify which objectives where considered important with respect to company M&A strategy. While employees’ abilities and efforts are the means by which organisational objectives are ultimately delivered, ‘talent acquisition’ (49%) was ranked as only the sixth most important, some way behind ‘Expand customer base in existing markets’ (73%) and ‘Pursue cost synergies or scale efficiencies’ (66%).
Returning to KMPG’s 2016 report, the cultural pitfall continues to be dangerously overlooked. Asked to rank the importance of factors when evaluating a target, ‘cultural compatibility’ finished last. In sector after sector, industry respondents rank the biggest key challenge to deal-making in the sector as being ’Valuation disparity between buyers and sellers’. The commentary from Alex Miller, KPMG’s US Service Leader, Strategy, was very plain:
‘Cultural fit may get fewer votes as a lens for evaluating acquisition targets. But cultural fit is pivotal in the long run to achieve the stated acquisition thesis. Merging cultures often determines strategic outcomes.’
The Hidden Costs of The People Dimension
The psychological and potential performance impact of change are well-documented issues, and any skilled manager should already be aware that their responsibilities include leading people through change as much as they do leading change through people. Yet while M&As have a profound impact on the people in both companies from senior leadership down – after all, even the staff of the acquiring company find themselves working for a profoundly changed organisation – this ‘people dimension’ often receives scant attention.
But while operational issues demand immediate and diligent attention, newly merged companies that give too low a priority to longer-term ‘soft’ issues can find themselves learning a swift, hard lesson.
Where M&As fail to deliver their promised benefits, it is usually as a result not of poor commercial strategy but of people-related issues: culture clashes, management conflicts, or a loss of key talent. These ‘people issues’ are business issues, and organisations must recognise that purchase valuations are not the only prices they can potentially pay. Loss and replacement of staff, especially senior staff and key talents, can cost them dearly, as the COLT© and CORT© formulae developed by the Chartered Institute of Management Accountants’ illustrate. For a hypothetical multinational organisation with 100,000 employees, the cost of losing a senior manager (assuming a vacancy of c.20 weeks) might, for example, be in the region of £35,000. But the cost of replacing them – once opportunity and acquisition costs are also taken into account – could be four or five times higher.
Paying Attention to Cultural Issues
While 18% of KPMG’s 2016 Survey respondents identify ‘Effective due diligence’ as a critical success factor (albeit rather lower than those who identify ‘The correct valuation/deal price’), the history of M&A outcomes and the prominence of cultural factors in cases of failure or under-performance suggest that ‘diligence’ may not always be appropriately focused.
M&As marry not just organisational capabilities, but characters, styles and values. Looking beyond systems, structures, processes and other ‘hard’ operational concerns, successful integration also requires a rigorous review of current cultures to identify how each is defined, and how they align to the new organisation’s strategic objectives. Those leading integration initiatives must understand what made the constituent businesses function effectively and decide which aspects of each culture they wish to retain or change.
The role of strategic people management in achieving M&A success is hard to understate. In this context, employees – and especially those from the acquired company – are being asked to ‘remain’ loyal to a redefined, reshaped organisation they may barely recognise. With the emphasis on forward-thinking and on ‘the new’ that comes with company transformations, many may feel as if history is being erased. Where corrections or modifications were required, this may be desirable, but that ‘history’ is also an element of personal workplace identity and of the sense of belonging that is crucial to commitment and engagement.
Bluntly, people are not processes. Databases and back-office systems can be merged (with varying degrees of ease or difficulty) and office layouts and org charts streamlined, but it is not so easy to simply merge two employees into a single fully-functioning, highly engaged person. Organisational values – often described in abstract terms but embodied in behaviours, relationships and individual understandings and interpretations of ‘the way we do things here’ – are equally complex and nebulous. And even where new values are clearly communicated, people must also change the way they behave.
As HR and L&D functions should be aware, but the Finance Division may not so readily appreciate, very few of us can change our behaviour without failures, false starts and relapses into old and more comfortable ways of working. Most of us need not only time to adapt, but on-going encouragement, motivation and support.
While its drivers may come from within, behaviour is also interpersonal. Post-M&A, many will find themselves in new teams or working relationships. Even where familiar colleagues remain, everyone is now operating in new terrain. We may ‘all be in the same boat’, but it’s likely to be an unfamiliar one that we must master navigating as much as the surrounding seas. Simply sharing the boat does not, in itself, create a happy and harmonious crew.
Working with Cultural Change
Organisational culture can drive either competitive advantage or strategic drift, but it is manageable. HR functions need to take a strategic role, underpinning the organisational transformation with change management programmes and with learning interventions that help managers to implement them. Beyond changing structures and control systems, there must be changes in behaviour and attitudes and they will require encouragement, reason and clear on-going communication. This communication requires honesty and transparency: trust and engagement will be harder to earn and keep unless people believe their new leaders understand what they are asking of them.
The Skills of Leading Change
Change cannot impact on an organisation without impacting on its people. To manage both, leaders must more than ever demonstrate self-awareness, attentive listening, a keen understanding of their personal impact, and a capacity for empathy: emotional intelligence is vital. Unless leaders can inspire others, ‘We’re all in this together’ can turn out to be a simplification too far.
The familiar roller-coaster trajectory of the Kubler-Ross Transition Curve is also, leaders must remember, a simplification: in truth, each of us travels it at our own speed, experiencing different highs and lows. Those leading change must also remain mindful that they are always further along the curve: those they lead will still face a downward arc while they are experiencing the subsequent upward climb.
They must also remember that resisting change is a natural human response: clearly and continuously communicating future benefits can help those who are yet to experience them that the longer term holds more promise than the challenging and uncomfortable present.
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