How good culture management drives M&A success

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Andy Moseby, corporate partner at tech specialist law firm Kemp Little LLP, discusses why the key to successful integration lies predominantly with the successful management and integration of people, and how data can be used to predict cultural conflicts, identify any differences in management style and plan workforce integration processes.

It seemed like a perfect marriage. In December 2004, when US wireless carriers Sprint and Nextel announced their $35 billion merger, the plan was to create a telecommunications behemoth. Sprint was, at the time, ranked third in the market in terms of revenue with Nextel in fifth spot.

On paper, it should have been a slam-dunk: in reality the realisation that the two were woefully mismatched began to sink-in almost immediately. The story goes that in a Nextel manager meeting held to celebrate the merger announcement, Nextel’s CEO Tim Donahue pumped up the executives pep-rally style. Dressed in casual sweater and khakis, he led a chant of “Let’s go stick it to Verizon!” to cheers from the crowd. Donahue then introduced a special guest: Gary Forsee, Sprint’s CEO. Wearing a buttoned-up suit, Forsee strode on stage and launched into a detailed PowerPoint presentation, setting out his expectations for the merger. The excitement drained from the room, and the Nextel managers sat there in dumb-founded silence.

Donahue left shortly afterwards. Forsee stayed on but resigned in 2007, unable successfully to integrate the businesses due to the contrasting corporate cultures. Nextel executives who witnessed the benefits of Donahue’s “Be first, be different” philosophy and customer-centric entrepreneurial style became frustrated with their Sprint counterpart’s insistence on sign-off from superiors and bureaucratic processes; Sprint employees, brought up on numbers-driven management and adherence to playbooks, viewed Nextel as reckless and impulsive.

By 2008, Sprint had written off $29.7 billion of the acquisition cost (effectively wiping out 80% of Nextel’s value) and by the summer of 2013 what remained was sold off to SoftBank in Japan.

Not all culture clashes are as apparent as in the Sprint /Nextel deal, but the effect they can have on the success of an M&A transaction may well be as devastating. We’ve known for a while that integration is the key to M&A success, yet recent studies have revealed that the key to successful integration lies predominantly with the successful management and integration of people.

For its 2017 M&A Integration Survey Report, PwC surveyed Fortune 1000 companies which had undertaken M&A deals in the previous three years. They found that dealmakers are becoming more ambitious –54% of the survey respondents described the largest transaction they completed in the previous three years as transformational: a deal that involved acquiring new markets, channels, products or operations in a way that moves the business materially in another direction.

For many companies involved in this type of M&A transaction, the result is an integration of two very different business models or cultures. Perhaps unsurprisingly, PwC reports a decline in strategic success: high-performing deals represented just 5% of the total reviewed, and less than half of serial acquirers reported strategic success.

When even deal-machine companies are getting the post-completion integration process wrong more frequently than they are getting it right, is it time to change the focus of integration?

About the same time as Gary Forsee was falling on his sword at Sprint, another large deal was happening on the other side of the world: Haier, China’s leading manufacturer of home appliances formed a joint venture with Sanyo to develop refrigerators in Japan.

Culturally, the companies were arguably further apart than Sprint and Nextel. Haier promoted staff on merit and remunerated on the basis of results; Sanyo was run in the traditional Japanese way, rewarding age and longevity.

The man responsible for the integration, Haier’s Asia chief executive, Du Jingguo made the decision to focus on the people. He split the workforce into small groups and night after night, over drinks, he gave them the opportunity to voice their concerns. Over time, he was able to gain their trust and began implementing change: younger employees were promoted, but in a manner which spared the pride of their seniors. The Haier-Sanyo deal became one of the most successful in the region at the time, mainly because of Du’s commitment to staff integration.

Typically, the focus of any post-M&A integration is on business processes and their underlying IT systems. Yet that means that integration of staff is often neglected. PwC reported that 42% of its respondents described their integration of people in deals up to three years old as “incomplete” (the highest of any category).

The reason for this is usually because management find full integration of people to be notoriously difficult: “soft” issues like communication and culture are often left to HR, allowing leadership to focus on integration which can be measured and tracked with reportable metrics.

However, behavioural science and behavioural economics have shown that the culture of an organisations has its own measurable metrics; a variety of methods can now be used to measure the attitudes, priorities and skills of the target workforce as well as the individual characteristics of management inherent to the target and acquirer organisations. This data can then be used to predict cultural conflicts, identify any differences in management style and plan workforce integration processes, just as most acquirers plan for IT integration.

Studies consistently peg M&A failure rate at a level between 70% and 90%, and it’s not hard to see why if the newly acquired team aren’t able to work with the staff of the wider group. Moving workforce integration issues higher up the agenda is a good start. This would enable both the acquirer and the target to manage change through its employees, as opposed to managing its employees through change.

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