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Cultural Differences in Mergers and Acquisitions (M&A)

One of the most common ways through which organizations achieve growth and other strategic goals is through the use of strategic alliances, mergers, and acquisitions (Green, 2016). Such arrangements are common in today’s dynamic business environment, with increased competition, globalization, and the need to expand operations. Companies enter M&A intending to take control of and build on another company’s strengths or combine strengths with another company, to take advantage of synergies (Green, 2016). In an acquisition, both companies involved survive and continue to do business as one, while in a merger, only one of the companies survives. Companies use M&A to reshape and redirect corporate strategy. Today, many corporate executives and managers regard entering mergers and acquisitions for better access to market, technology, resources, products, and management talent as easier, less, risky, and better than achieving all these goals through internal efforts.

While such corporate transactions are more common today more than ever before, the chances of success depend on the level of planning and preparedness that both companies involved engage in, as well as proper management of the companies post the acquisition transaction (Nelson, 2018). Many M&A fail to live up to the expectations of the executives since there is a huge difference between entering such arrangements and making them work. It is, therefore, important to understand how M&A work and how they can be properly managed to ensure that the objectives of such arrangements are achieved. Targeting organizational growth through M&A strategies promises organizations a wide range of opportunities, from eliminating competition, to rapid growth and easy access to new markets. However, these opportunities and outcomes are not always achieved.

One of the most significant reasons why M&A may fail is the misalignment of the culture of the organizations involved (Waverman, 2019). Organizational culture misalignment results in culture friction after M&A, which creates havoc as the members of each organization collide over how to drive performance gains forecasted. During planning, M&A focus on the external factors: how the organization is going to gain access to new markets and opportunities, how the arrangement is going to improve market share, how the arrangement is going to afford the organization economies of scale and synergies, and what will be the overall benefit to the organization. After the merger or acquisition deal is complete, things change and a closer look at the internal factors is adopted: how will the organization sort all the payroll systems and integrate the Human Resource Information Systems, how will the organization ensure operations integration as fast as possible, and what sales compensation models will be most effective.

At this stage, the risks are more prevalent compared to during the planning stage. If the merger or acquisition was started for reasons focusing on the external factors, focusing on internal integration, later on, distracts people from the initial goals. Also, the promise or expectation of financial gains is often misleading, which often results in organizations finding examples and data to support the idea that the organizations are suited for integration. Managers often end up not looking at or analyzing data objectively. During M&A, it is very common to hear organizational executives talking about how the cultures of the organizations involved fit or are well-aligned, and how the integration of cultures will be easy. However, most of the time these leaders have no factual data or understanding that they can base their claims on. M&A deals often involve millions, if not billions, of dollars. However, there is a lot of recklessness that occurs during planning, which ultimately becomes a precursor to culture misalignment and failure.

There are various reasons why mergers and acquisitions fail. M&A may fail as a result of regulatory pressure that occurs before, during, and after the deal is complete. A good example is the proposed merger between Sprint and MCI WorldCom that failed even before it started as a result of regulatory pressure. M&A may fail because one of the companies involved overestimated the value and worth of the other, overpaying for its acquisition. An example of such a scenario is the deal between Snapple and Quaker. M&A may fail as a result of poor market strategy and synergy, poor resource synergy, or poor product strategy, as with the merger between Sears and Kmart. Such reasons are always discussed during M&A planning. However, organizational culture is often overlooked during planning. This is mostly because of its nature – it is difficult to manage and measure. As a result of overlooking culture, many mergers and acquisitions end up not working, making culture the most common reason why M&A fails (Dixon & Nelson, 2005).

Examples of mergers that failed as a result of organizational culture incompatibility are endless. In the late 1990s, America’s Chrysler merged with German Daimler in a merger that was looked at by executives as a merger between equals (Badrtalei & Bates, 2007). A few years after the deal, the union was regarded as a fiasco and the companies could not work together. After the merger, the two divisions were at war as a result of discordant organizational cultures. The operating styles, level of formality, and strategies for issues such as expenses were different. The merger resulted in the German company’s culture becoming dominant and the levels of satisfaction of Chrysler employees dropped significantly. By the year 2000, layoffs began and major losses were projected. The merger failed gradually, eventually resulting in Daimler selling Chrysler to Cerberus Capital Management in 2007 (Badrtalei & Bates, 2007). The incompatibility of organizational cultures was the reason why the merger failed and eventually collapsed.

The Time Warner – AOL merger is one of the most popular mergers in American business history, valued at over $300 billion (Arango, 2010). In 2000, Time Warner stock was valued over $70. In 2008, a few years after the completion of the merger, a share of the company was valued less than $15. This was a result of a failed merger. Discordant cultures were widely blamed for the failure of the merger, with many analysts and leaders within Time Warner stating that different cultures were to blame for the failure (Arango, 2010). In 2001, Hewlett Packard planned on acquiring Compaq, its competitor. From the start of the merger, business experts expressed criticism, pointing out that the sales-driven Compaq culture and the engineering-driven HP culture could not fit (Stachowicz-Stanusch & Śląska, 2009). The joint venture deal resulted in a very poor cultural fit, which was the reason for a lot of infighting in the organization formed. Huge losses were incurred in the years after the merger, but the companies stuck together and have been able to make leadership and cultural changes that have turned fortunes around.

While there are various reasons why mergers and acquisitions fail, culture is the most common factor in M&A failure. Having a cultural fit or a synergized organizational culture ensures that companies do not hit merger bumps and collapse. Cultural factors – differences in corporate values and culture, lack of coordination, and lack of trust amongst the employees – are the major reason why mergers and acquisitions fail. To ensure that M&A does not fail as a result of a culture misfit, organizations should consider the following recommendations:

  1. Ensure proper data analysis and objective investigation during planning: Organizations must avoid assuming that the cultures of organizations involved in a merger are a perfect fit. Instead, proper analysis of available company data and the cultures should be conducted during planning (Nguyen & Kleiner, 2003).
  2. Emphasizing core values instead of imposing them: By emphasizing core values, an organization avoids challenges in the pursuit of growth. Such values have to be absorbable and practicable.
  3. Counter any resistance to change: Instead of one company blaming the employees of the other for conflict and misfit, focus on eliminating resistance to change and encouraging employees to work together towards a common goal (Nguyen & Kleiner, 2003).
  4. Minimize changes in management: during a merger, the exit of key leaders and managers is often an indication of coming failure. It destabilizes the employees and minimizes confidence. Top talent within the company soon leaves, resulting in a talent drain and company failure. The concerns and issues raised by managers and leaders should be listened to and addressed to prevent a talent drain.
  5. Ensuring effective, open, and honest communication: managers and executives should encourage the development of good relationships across the merger boundaries. Employees should be able to appreciate and communicate effectively with their counterparts in other countries and divisions to establish strong bonds (Nguyen & Kleiner, 2003).

Proper M&A planning, effective communication, and honesty and openness with the employees go a long way in the integration of cultures during M&A. It is only through these that organizations can survive the transition during a merger and achieve the merger goals set during planning.

 

Managing the Acquisition of ABX

The proposed acquisition of ABX for purposes of expanding operations into Scotland is a good strategic move by the company. However, there is a need for proper planning and research to ensure that the potential challenge of cultural misfit, as well as the other challenges discussed above, are avoided, minimized, or handled effectively to guarantee the success of the strategic move. The company can effectively manage the acquisition and the change resulting from the deal using Kotter’s 8 Step Model (Tang, 2019).

Kotter’s 8 Step Model.

  1. Creating a sense of urgency

The company should present the proposed change as a solution to a problem. The proposed acquisition should be presented to employees as a solution to the increased competition and the need for organizational growth. The opportunities that the acquisition provides should be discussed to ensure that everyone understands the benefits expected and the problems that will be solved through the move.

  1. Forming a powerful coalition

Allies and stakeholders are important in the process of change implementation. As such, the company should involve the managers and employees as much as possible in the planning and execution of the acquisition to ensure that the vision and goals are supported and shared by all. All the key stakeholders involved in the acquisition should be identified and their support sought in the implementation of the plan and the vision.

  1. Creating a vision for the change

The companies should develop a strategic vision for the merger, including the goals and targets that employees should focus on achieving. This vision has to be made clear and easily understandable. The core values that are to be embodied in the change should be listed, as well as a mission statement that captures the important parts of the envisioned future.

  1. Communicating the vision

The developed shared vision between the organizations should be communicated often, persuasively, and should be tied to every aspect of the organization after the merger. the issues and concerns of employees and managers should be listened to and addressed to eliminate resistance and anxieties within the organization.

  1. Eliminating obstacles

Resistance to change will be present to some extent, even with the fulfillment of the above four steps. This resistance is an obstacle to the achievement of the vision developed. To overcome resistance to the acquisition and internal restructuring, the leadership should ensure that the developed vision aligns with all the levels of the organization, identify the people that are more resistant to the change and work towards eliminating their doubt and resolving their concerns (Mourfield, 2014), and reward the people and change leaders who implement and support the change during its early phases. This would encourage support and ensure the smooth implementation of any changes associated with the acquisition.

  1. Creating short-term wins

Since the acquisition process will not occur within a single day or week, it is important to develop short-term projects and activities that are not costly and that take short durations. Each project should have targets upon which success can be measured. The employees who play an essential role in the process of meeting set targets in these short-term projects should be rewarded to motivate their colleagues. Such projects could include understanding how different divisions within the organization work and developing marketing, product, and sales goals.

  1. Building on the change

Even though the completion of short-term projects is important, it is not adequate to sustain the change. Quick achievements may end up giving employees a sense of change completion and security (Tang, 2019). It is, therefore, important to build on change by analyzing the lessons learned from the short-term projects, developing more ambitious targets to build on the momentum, and bringing in change experts to diagnose any hurdles and provide advice on the way forward.

  1. Anchoring the change in corporate culture

The last step is to ensure that implemented change becomes embedded in the corporate culture. Change needs to remain part of the corporate culture to ensure its sustenance. After the acquisition is complete, the progress and success should be talked about at every possible opportunity. The contributions and efforts of key change leaders and employees should be recognized and honored to motivate others to follow their example.

Conclusion

An acquisition is a good way of realizing the strategic objectives of a company. It enables an organization to realize growth and expand its market, amongst other benefits. The proposed acquisition of ABX by Z Limited is a good move to achieve organizational expansion and gain entry in the Scotland region. However, proper planning and research have to be conducted to increase the chances of the success of the proposed deal. Through proper planning and understanding of how acquisitions work, and the management of the acquisition through Kotter’s 8 Steps of change management, the company can achieve its objectives through the acquisition deal.

References

Arango, T. (2010). How the AOL-Time Warner merger went so wrong. New York Times, 10.

Badrtalei, J., & Bates, D. L. (2007). Effect of organizational cultures on mergers and acquisitions: The case of DaimlerChrysler. International Journal of Management, 24(2), 303.

Dixon, I., & Nelson, N. (2005). SHRM case study: Culture management and merger acquisitions. Retrieved on January 21, 2010.

Green, M. B. (2016). Mergers and acquisitions. International Encyclopedia of Geography: People, the Earth, Environment and Technology, 1-9.

Mourfield, R. (2014). Organizational change: A guide to bringing everyone on board. Management.

Nelson, T. (2018). Mergers and Acquisitions from A to Z. Amacom.

Nguyen, H., & Kleiner, B. H. (2003). The effective management of mergers. Leadership & Organization Development Journal.

Stachowicz-Stanusch, A., & Śląska, P. (2009). Culture due diligence based on HP/Compaq merger case study. Journal of Intercultural Management, 1(1), 64-81.

Tang, K. N. (2019). Change management. In Leadership and Change Management (pp. 47-55). Springer, Singapore.

Waverman, L. (2019). Corporate globalization through mergers and acquisitions. Routledge.

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