In the first half of 2014, cross-border deals represented 46.1 per cent of all mergers and acquisitions (M&A) transactions, the highest percentage ever, and with a total value of $724 billion, international M&A is back to pre-recession levels (Ungerman,2014). While there are numerous factors driving this growth, the continued, if slower, growth of emerging markets, particularly China, India and Brazil, has played a significant role in this pronounced increase in cross-border M&A.
Economists vary in their explanations of the consolidation going on in so many different industries, but the literature is reasonably consistent in taking a skeptical view of large business combinations. According to strategy consultants McKinsey, nearly 70 per cent of all M&A are unsuccessful (Deutsch and West, 2010). A 2000 KPMG study went even further, citing evidence that 83 per cent fail to increase shareholder value (Milligan, 2014). While the executives that McKinsey surveyed attributed some of this lack of success to inadequate due diligence, an overwhelming majority attributed the biggest problems to the challenge of integrating different corporate cultures at the companies being brought together whether through a merger or an acquisition. In a survey of 90 executives with experience in handling M&A, McKinsey found that 92 believed that their past efforts would have substantially benefited from greater cultural understanding prior to the merger.
Moreover, 72 per cent also said that too little effort is traditionally focused on culture during the post-merger integration period. In light of the almost universal unanimity on this question, the question naturally poses itself as to why there appears to have been so little success in handling this issue.
On its face, finding an effective way to merge two cultures would not appear to be a complex challenge in comparison to, for example, combining information technology systems or sales forces. Nonetheless, the history of corporate consolidations is littered with examples of M&A that have foundered on the rock of culture. A review of some of the more notorious examples of cultural failure in post-merger integration should help shed some light on how to avoid the more obvious pitfalls.
The evidence suggests that cultural problems most often begin with a simple failure to understand what a corporate culture is and how it should be defined. This is not a trivial exercise, as culture can be very elusive, especially in large organizations. One should, perhaps, adopt Supreme Court Justice Potter Stewart’s famous words in Jacobellis vs Ohio (1964), when he said that he could not exactly define what was hardcore pornography, but he knew it when he saw it (Posner, 1988). In any event, it is probably helpful in describing the impact and influence of culture on post-merger integration as running a spectrum from the concrete and highly specific to the almost indescribable shades of differences between the ways in which people in the two different organizations treat each other. Most observers would group, at the concrete end, practices such as whether the company closes between Christmas and New Year or whether it offers childcare on-site at its facilities. These cultural differences are relatively easy to adjust even if a change in them makes some employees unhappy.
At the other extreme lie those evanescent psychological and emotional states that plain words such as leadership, flexibility, courage or optimism almost completely fail to do justice to. While many organizations recognize the importance of these characteristics of culture, very few have much understanding in how to engender them.
It is, however, in the middle of these two extremes that so many companies fail to create successful merged cultures. Getting this part of the calculus right often begins with something as apparently uncomplicated as being candid about the nature of the deal itself. When the German automaker Daimler acquired the Chrysler Corporation in 1995, it described the transaction as a “merger of equals”. Unfortunately, executives of Chrysler’s new owners saw themselves as the buyers and behaved very much that way, leading to huge resentment in the American firm.
One commentator reported that in the years after the merger, there was a bitter joke circulating in Detroit: “how do you pronounce DaimlerChrysler? Answer: Daimler, the Chrysler is silent” (Jacobsen, 2012). The merger was dissolved in 2007 when Daimler sold Chrysler to Cerberus Capital. Candor and transparency about the nature of a transaction goes a long way to promoting healthy cultural alignment.
“Being awkward: creating conscious culture change” appeared in The Journal of Business Strategy, Vol. 36 Issue: 1, pp.52 – 55, and is reprinted with permission from Emerald Publishing Group Ltd.