Culture, mergers and acquisitions

Working with culture is a complex exercise that requires years of skill and experience.

By Stephen Rothgiesser

Academic research illustrates that half of all merger and acquisition (M&A) activities have failed to create lasting shareholder value. Studies on post-merger stock performance reveal that since 1990, in the two years after their deals closed, nearly 50 percent of the largest M&A transactions failed to produce total shareholder returns greater than their industry peers. Only 30 percent outperformed their industry peers by 15 percent or more. After five years of trading under the new structure, 70 percent of the survivors were still chronic under-performers in their industries. These abysmal statistics are the result that of the fact that, notwithstanding in most cases appropriate measures were taken to identify and quantify legal and financial areas of opportunity and risk, detailed measurement and mitigation of organisational risks emanating from culture were largely ignored.

What is culture?

Culture within organisations can appear to be a nebulous concept, however the literature and research in this field has increased substantially in the past 25 years and it now understood to be a critical aspect for consideration within the context of commercial transactions.

We define organisational culture as the set of assumptions and beliefs that employees hold collectively within an organisation, that give rise to patterns of behavior. This behavior in turn defines how work is conceived, conducted and produced and affects all aspects of the corporate value chain from innovation to client-centricity. As a result, understanding the culture of an organisation is critical to building a risk profile in the context of a merger or acquisition. This notwithstanding, working with culture is a complex exercise that requires years of skill and experience, and differing culture in some cases can in fact be a very positive factor in the context of a transaction.

The factors that The Change Consulting Group is most interested in when first engaging with a client around issues of culture, pre and post-merger integration and risk analysis in this context are as follows:

  • Who is the leadership of each company, how might we understand their individual personalities and how do they work together as a team? We are particularly interested in the character of the CEO. Is she the type of person who feels comfortable with change, is she charismatic and able to deliver a strong narrative about a transformation or transaction in a way that inspires others (especially during hard times), and is she open to examining sometimes-difficult dynamics within the company?
  • How does the leadership across corporate divisions interact, what are the politics at play between divisions and between executives, general managers and senior managers? Critically, are these various levels of leadership able to engage with one another and manage conflict well, and are minority and dissenting voices tolerated and encouraged.
  • What is the general feeling or tone within the organisation? Are employees engaged, enthusiastic and optimistic about the future consequences of a merger or acquisition and potential subsequent changes in the company structure?
  • Where is power located in the organisation and who might serve as key change agents within the context of a large-scale business transformation, merger or acquisition? These individuals are often not the most senior members of an organisation, but by virtue of their organisational influence and knowledge, are able to wield significant power. It is imperative to identify these individuals early in the piece, listen to their advice and win their support.

The more complex work begins when we overlay the answers to the questions above (and there would be many more we would examine) from both companies and begin to dissect the interdependencies and potential areas of conflict or disconnect between the two.

Stephen Rothgiesser is MD of The Change Consulting Group. This is an edited version of the article.