'Getting Culture Right' during Mergers and Acquisitions

Dr B K Mukhopadhyay

(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)

Dr. Boidurjo Rick Mukhopadhyay

(The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University)

When companies go through strategic Mergers and acquisitions (M&A), they promise a continuum of promises – from rapid growth, eliminating competition, building new resource capabilities, to accessing new markets (locally or internationally). At the same time, a strategic move such as M&A has also demonstrated an opportunity where organisations could potentially unite talents, build new efficiencies and boost growth. However, a report by McKinsey shows that 70% to 90% of mergers and acquisitions eventually fall apart. Cultural factors and organisational alignment are critical to the effectiveness of mergers. Though one of the expected gains from such strategic moves is meant to unite talents and build new capabilities, only 8% of organisations put talent retention on the agenda while evaluating M&A possibilities. This is true in the majority of the sectors today, from banking, IT, media, to airlines, and beverages. When things go right, particularly when both the companies start aligning to a commonly agreed culture, they create the synergy that an M&A promises (i.e., 2+2 = 5). Some examples would be Disney and Pixar, Google and Android, IBM and Compaq, in addition to Disney and Marvel. However, in a recent report by PWC, 65% of business leaders attribute cultural issues to negative effects on value creation in alliances such as M&A. Forbes reports that about 95 per cent of executives describe the cultural fit as critical to the success of integration. Yet 25 per cent cite a lack of cultural cohesion and alignment as the primary reason integration efforts fail.

Again, the matter of cultural compatibility is critical. For example, the merger of Amazon and Whole Food provides useful insights. While Amazon's culture is tightly controlled using structure and precision, which is firmly rooted in the manufacturing industry, Whole Food on the other hand had an egalitarian structure focusing on self-managed teams. The organisational system that Amazon follows is built to maximize its efficiency where employees operate within a hierarchy and their behaviour is guided and monitored strictly by guidelines; on the other hand, Whole Food's structure (before the merger) empowered individual employees with significant decision-making power. Face-to-face interactions between workers, vendors, and customers were the norm. Branch managers had full autonomy of their units and had the liberty to tailor products to customer preferences.

Surely, given the global success and scale, the leaders at Amazon are expected to maintain the highest of standards and performance is subject to constant measurement and review (including the riders and delivery tracks whose every move is tracked at all times during work hours). One could argue that while this tightly controlled surveillance also ensures that employees are constantly reminded of the company's objectives, it also at the same time create a high level of dissatisfaction due to the inability to customise or localise some services where it may be necessary. If a 'tight' culture works well for the company's bottom-line, it can also create a culture of fear and lack of empathy which contributes to high employee turnover. At the same time, with a relatively 'loose' culture, Whole Food (again, a company that relies on supply chain and procurement channels daily) also managed to secure high-profit margins, fast growth, along with a good name by earning the first certified organic national supermarket in the US. Decentralisation and lack of rigorous structure worked well for this company though subsequently led to high product prices and internal inefficiencies. Resultantly, the woes of the merger between the two companies soared with time and employee turnover and staff dissatisfaction reached a record level high. The differences in the company culture are huge. A tight culture merging with a loose culture.

On the other hand, when Disney bought Pixar in 2006, the then CEO Robert Iger agreed to, at the very outset, a set of ground rules to ensure Pixar's 'looser' (relative to Disney's) culture does not experience a blow from the new acquisition. One example was that Pixar employees weren't required to sign employment contracts with Disney, they were A) at liberty to decide on the titles on their business cards, B) free to have their cubicles and offices which they could decorate as they wished, and C) they were free to continue their annual paper aeroplane contest. Culture at its core consists of the long-standing, largely implicit shared values, beliefs, and assumptions that influence behaviour, attitudes, and meaning in a company, which needs careful investigation by a company taking it over or going through a merger before imposing a new culture that is different/ misfit.

Culture is what an organization stands for and how work gets done. Culture can also be seen as the outcome of the vision or mission that drives a company, in addition to the values that guide the behaviour of its people, management practices, working norms, and mindsets that guides how work gets done. Therefore, at some level culture becomes implicit by its nature. Therefore, the most insightful cultural observers often are outsiders, because cultural givens are not implicit to them. Culture is also resilient, and therefore friction occurs almost immediately when there is a sudden change is introduced at the core (The case of Amazon and Whole Food, as shared above).

When there are inevitable cultural differences between the two merging companies it must be investigated with time before imposing immediate solutions to resolve the emerging challenges. It could be more visible issues such as attitudes toward the work-life balance and employee empowerment, to less noticeable ones such as feedback styles, directness, punctuality at a meeting. Strategic choices, alliances such as mergers could create significant organisational anxiety about the future. And upon completion of the alliance, the working culture subsequently starts changing for at least one of the two companies which do fundamentally affect an organisation's identity, purpose, and ways of doing things. Therefore, understanding 'organisational emotions' is important before even small changes are introduced. While mergers and acquisitions could unite talent and help enhance internal capabilities and performance, equally there could be a loss of talents, and leakage of synergies if not managed well. For example, a McKinsey survey reports that M&A executives show that organisational issues like cultural differences and changed operating models account for almost 50 per cent of the failure of mergers to meet expectations.

There is no magic bullet in this scenario to get 'how to get the culture right' during M&A, but certainly, some suggestions would be- A) Leaders need to investigate and truly capture the essence of how the work gets done in the new company that they are merging with or taking over. Most importantly, what makes the target company tick which in the first place attracted a merger or parent company. B) set tactical priorities that would benefit employees and key talents of the companies involved; C) Support changes with the right understanding and necessary resources; and most importantly, D) Execute and drive the necessary change that does not compromise on the integrity and purpose of the organisation. Best to have people with culture change knowledge and also experience (having been a part of stories of the organisation) on the teams who are better positioned to define the key interfaces in the revised organisational model. In scenarios where cultures are different, a thorough assessment could help evidence which elements could be integrated. The purpose of integrating the cultural components that go well together by bring the core purpose and values to life. When such integration seems problematic, the focus would be on the relationship between cultural assumptions and business results.