Common Derailers of Mergers & Acquisition

Mergers and Acquisition Mania – The Craze is on and
Companies can Go Crazy with it.
Human Resources – Hong Kong July 2000 issue, Volume 5:6.
By Alvin Lum, PH.D.
The mania has started again. And this time, it has swept its way into the New Economy.
On a monthly basis, traditional bricks and mortars giants are buying up telcos and
Internet businesses to help augment their e-strategy and claim a stake in the new order.
Like a tsunami, it has swept from the one end of the globe to the other at break-neck
speed, often bringing strange bedfellows together. Recent tussle for control of Cable and
Wireless by Singapore Telecom and Pacific Century Cyberworks brings the recent M&A
craze to a feverish peak on this side of the Pacific.
On a global scale, the mania started in the ‘60s where corporations were merging to
advance their business opportunities. However the situation for some now is quite
different. Organisations are merging for survival and to stay in the global competition.
Though the reasons that compel organizations to merge are different, one thing remains
the same – as with human relationships, these unions can fail. In fact, the success rate of
corporate unions is even lower than that of marriage – a full 77% of business mergers and
acquisitions fail.
More than 5 000 mergers took place annually in the last three years yet less than ¼ of the
companies will recover their investment. An exhaustive analysis by Business Week and
Mercer Management Consulting Inc., of hundreds of deals completed in the first half of
this decade indicates that their performance has fallen short of their promise. Deals that
were announced with much fanfare such as AT&T’s 1991 acquisition of NCR,
Matsushita’s acquisition of MCA and more recently the news-provoking Ernst and
Young plus KPMG merger have since crashed landed. Others, including KeyCorp’s 1994
merger with Cleveland’s Society National Bank, acquisition by big pharmaceutical
manufacturers of drug wholesalers, as well as software and entertainment deals are not
producing the results the acquirers had hoped for.
There are several reasons why mergers fail – Ranging from inadequate due diligence by
acquirer or merger partners to unrealistic expectations of possible synergies. But there is
one overriding reason why mergers fail that is all too often ignores. And that is that the
two companies have different cultures, which must be addressed to ensure a successful
union. A costly and too-common pitfall is that merging companies focus so heavily on
the financial side of the balance sheet that they neglect the cultural side. Failing to
address differences in values, beliefs and goals can have a devastating impact on quality,
productivity, turnover and morale. What matters in a merger are not what merges but
what emerges?
Author: Dr. Alvin Lum
Copyrights © 2000. All rights reserved.
Page 1 of 6
Common Derailers of Mergers & Acquisitions
The culture of a company is created by the behavior of the individuals; it can be
expressed in values, behaviors and traditions. A Company’s culture can be liken to that of
a communal culture – the same element distinguishing a community can also be
recognized in business. A local community is governed by rules and guidelines, in the
guise of laws and customs defining how people behave towards each other. Once you
know what the culture is, you can choose whether you want to live there, or move on
down the river.
Companies, too, are governed by a set of rules, reinforced by business practices including
division of power, chain of command, systems and processes – even employee benefits,
compensation, hiring and review processes. But rather than companies of like culture
decide to merge because they share business values and processes, most mergers
resemble badly arranged marriage where the two elders of the families exchange goats
and cows to sanction the union, ignoring the components that make marriages successful.
In a Oct, 1995 Business Week issue, it was reported that mergers fail for various reasons
including most important of them all –
 Conflicting Corporate Culture
 Failure to move quickly to meld the two companies
A common derailer of mergers has been inappropriate balance between business aspects
and corporate cultures. Indecision or taking too much time for key decisions can result in
low morale, low productivity and loss of valuable people. Organizations have to bring
the cultures together or decide to create a new culture, as well as put a strategy in place so
that they can accommodate each other. Decisions about power must be made up front.
Otherwise, the workforce will be divided into two camps, the defeated and the victorious.
Defeated armies can spend a lot of time taking pot shots and leaving land mines. The two
camps can be referred to as the ‘breakers’ and the ‘blockers’. The breakers want to make
it work, but the blockers resist change heartily. What you have then is a culture clash.
In one situation, an entrepreneur and owner of a small manufacturing
facility merged with another plant to increase their capacity. What he did
not realize was that the company he was merging with had a culture of
high involvement. The employees were used to an empowered
environment, in which they made decisions and took responsibility for
their actions and for the business’ successes or failures. The new owner
took a dictatorial approach from the beginning and did not communicate
any of his thoughts or rationale for his decisions. The clash in culture in
this case led to a massive walkout by the employees.
Author: Dr. Alvin Lum
Copyrights © 2000. All rights reserved.
Page 2 of 6
Even without resistance, it is no small feat to create a common culture. In a merger, it is
like taking a triangle and a square to create a circle. When two organizations merge,
neither will be the same again. It is important to act quickly in making some key
decisions to define the emerging culture for the new companies and people.
Common Derailers of Mergers & Acquisition
1. Lack of direction around future state of culture- It is critical to determine
which and how much of the two cultures will remain, or if a new culture
will be created.
2. Singular focus – Inappropriate balance between business aspects and
corporate cultures can result in bad business decisions and/or poor results.
3. Key organizational decisions take too much time – Indecision or decisions
that take too long result in low morale, low productivity and loss of
valuable people.
4. Unrealistic expectations – Expecting quick and smooth transition, rapid
paybacks in relatively short time ignores the reality of the ‘J’ curve
5. Lack of communication – Secrecy and inconsistency breed’s distrust and
cause people to rely on rumors and other informal sources of information.
6. Neglecting the people side – People; employees, suppliers and customers;
need to understand the personal impact of the merger and acquisition.
Unfortunately, what inherently results, often even before the ink is dry on the merger or
acquisition, is a decrease in trust. Employees, uncertain on their future, become furtive
and suspicious. Both sides wonder; what will happen to the company, and these people,
and their jobs? When trust goes down, morale, productivity and quality of work follow.
Only communication can get companies over the hump – communication that comes
from leadership with the skills to rebuild the trust and keep it from eroding further.
The way to do that is by putting together a plan for how the two companies will work
together and a strategy for implementing that plan. Companies need to look long and hard
at who will make decisions, and how involved the employees will be in the company. In
effect, they need to decide their vision, values and critical success factors for the new
Author: Dr. Alvin Lum
Copyrights © 2000. All rights reserved.
Page 3 of 6
“Only 23 percent of mergers end up recovering the cost incurred in the
deal, much less scale the shimmering synergistic heights of glory…Any
merger is doomed if there is no real effort beforehand to see whether the
two cultures have anything in common”
Fortune Magazine, January 24 1994
Helping Cultures Merge
To successfully merge cultures, the organization must have a sound strategy for making
people decisions, communicate the merger plans and move quickly. Leaders must
develop a strategy that deals with the cultural issues and communicates to all employees
what they can expect. Doing this quickly will reduce the risk of organizational paralysis.
In merging any organizations and their cultures there are four fundamentals that must be
1. Define and Align the Organization’s Culture with its Business Strategy
During a merger, the focus of leaders is financial, legal and marketplace issues; the
development of a unified corporate culture is often forgotten. Failure to envision and
create such a unified culture – quickly – results in low morale, increased turnover and
organizational paralysis.
The merging organizations must learn to work together and tackle five issues head-on:
 Assess the two or more cultures, looking for areas of compatibility and/or conflict.
 Create or clarify the vision, values and critical success factors that will drive
achievement of the business strategy for the new organization
 Translate those vision, values and critical success factors in competency requirements
for the workforce and align deployment decisions, selection, development and
performance around these requirements
 Analyze the key barriers to building the desired culture and develop a plan to
eliminate them
 Communicate the merger strategy to all stakeholders
By doing these, direction and purpose would have been set.
2. Making Effective People Decisions Quickly
Far too often, merging organizations lack a strategy and credible process to promptly
handle organizational restructuring and staffing redundancies. Failure to make staffing
changes quickly results in loss of key people, legal action by those who feel they have
Author: Dr. Alvin Lum
Copyrights © 2000. All rights reserved.
Page 4 of 6
been unfairly treated and an overall drop in productivity, quality and morale. To deal with
people decisions, four key actions are paramount:
 Clearly communicate the staffing process to be followed
 Determine which positions and departments will be affected by the merger
 Identify the key performance criteria for affected positions
 Establish an evaluation process for prospective jobholders. Evaluation should be
future oriented and not be solely on past performance data. Otherwise, it would be
like trying to drive forward by looking into the rear mirror all the time.
Making people decisions quickly and justifiably will allow leadership to place top talents
where they can best help the new organization meet its goal.
3. Align Systems and Unify Culture
Making the culture changes that support the business objectives of the merger will
require people to work in new ways; if they are unable to adapt, the expected synergy of
the merger will not occur. To ensure that the synergy is achieved, it is critical to align
systems so that the new strategic direction is reflected in the culture. To do this, five
actions are required:
 Align systems that motivate employee behavior (e.g. Compensation, promotions and
perks) with the organization’s strategic direction.
 Ensure that the performance management system translates organizational plans into
individual actions and accountabilities.
 Provide leaders with skills that build trust between people from the different
companies and between leaders and employees.
 Provide leaders with skills that increases partnership and tactical skills to manage the
 Ensure adequate skills-training to prepare employees to handle new responsibilities ,
structures and the change
This way, energy is focused on activities that help reach short-term objectives and a
foundation is laid to build a strong organization equipped to meet its long-term goals.
4. Plan for On-Going Success
Failure to evaluate the progress of the merger against established criteria can prevent the
organization from reaching its original objectives and realizing the expected synergy of
its marriage. Making a merger or acquisition successful in the long run depends upon
timely evaluation and making mid-course corrections:
 Evaluate progress in building a unified culture
 Review key performance data against critical success factors, customer service index,
financial health, etc
 Assess effectiveness of the new organizational structure
 Ensure continuing legal credibility of original selection process
Regular check-ups will keep the organization on track with its strategic objectives.
Author: Dr. Alvin Lum
Copyrights © 2000. All rights reserved.
Page 5 of 6
A successful merger or acquisition depends upon the timely planning and implementation
of each of the four fundamentals as they have been outlined. They build a unified
corporate culture and a positive, productive workforce. The short-term effect of these
factors is to retain key people, maintain customer loyalty and return to productivity
quickly. The long-term impact is the reinforcement of a culture that is aligned to achieve
your specific business goals.
Author: Dr. Alvin Lum
Copyrights © 2000. All rights reserved.
Page 6 of 6