Introduction
M&A transactions are often pursued in order to acquire a larger share
of an existing market, enter new markets, eliminate competitors, acquire
expertise or assets, transfer skills, save costs, increase efficiencies or
capitalise on synergies. It has, however, been found that between 55 % and 70 %
of M&As fail to meet their anticipated purpose (Carleton cited in Schraeder and
Self, 2003) or they take longer to do so than expected. In fact, recent studies
have found that significant percentages of M&As destroy profitability and
shareholder value (Sunday Times Business Times, 6 June 2004, 16).
M&As are complicated transactions involving many risks for all
contracting parties often bringing about fairly rapid large-scale change with
far-reaching impact. Merchant bankers, auditors, lawyers and tax consultants are
retained at great costs to manage certain risks through the negotiation, due
diligence, contract drafting and implementation phases of the transaction.
During the due diligence phase detailed information is obtained about the
parties, and the risks involved in concluding the transaction are evaluated.
Traditionally lawyers and auditors are appointed to conduct the legal and
financial due diligence investigation. Both these types of due diligences might
touch on the people aspects relevant to the transaction but rarely do they
include a culture or climate assessment that evaluates the cultural fit between
the organisations involved in the transaction before conclusion of the
transaction.
There is, however, a growing realisation that the successful outcome of M&A
transactions is dependent on wide-scale integration of people and cultures
including their processes, systems and practices and that cultural compatibility
issues can no longer be ignored. If the people side of M&As and the integration
of different cultures are ignored, the merging companies could face many
difficulties, including, ultimately not meeting the anticipated purpose of the
transaction. A survey of managers and companies involved in more than 1 000 M&As
conducted by Best Practices, a US–based consultancy, found that staff
productivity dropped by 50% and 47% of people in leadership positions moved on
(Sunday Times Business Times, 6 June 2004, 16).
Some of the other difficulties include:
·
Loss of skilled employees other than employees in leadership positions. This type of
loss inevitably involves loss of business know-how that may be difficult to
replace or can only be replaced at great cost.
·
Retrenchment of employees causing panic and a loss in motivation, which could in turn
also lead to a loss of productivity and a reduction in revenues.
·
Improper or incomplete alignment of employment terms, conditions and benefits leading
to anger, resentment and a drop in motivation.
·
Rushed or improper population of new organisational structures.
·
Increase in costs could result if the proper management of change and the
implementation of the M&A transaction are delayed.
·
Unhappy customers and the eventual loss of customers.
·
Build up of resistance to any future change initiatives.
Managing change in the highly complex world of M&As is not easy and research has
found that so much as 70% of change initiatives are unsuccessful. The fact that
the M&A process can sometimes takes as long as 3 to 5 years to be fully
effected, adds to the levels of uncertainty, ambiguity or confusion that
accompanies such transactions.
Organisational culture
One of the components of complexity of M&As is organisational
culture. Before an M&A transaction is concluded it is important to assess the
cultural compatibility of the merging firms. In this regard it is recognised
that such formal cultural assessment is usually not possible because the
negotiations leading up to the merger have to be kept secret. This creates the
risk, however, that the merging parties do not discover important differences
until after they have committed themselves to the new organisation (Schein
p.178).
It should also be remembered that the usefulness of a formal cultural assessment
is limited as assessments done on the merging companies would not indicate
whether they are even “using the same meanings for seemingly shared concepts”.
(Schein, p. 180)
To acquire true cultural insight, requires both parties to take part in each
other’s cultures. This can be done by sending employees into the other
organisation for some time or by creating “dialogues between members of the two
cultures that allow differing assumptions to surface. Dialogue is a form
of conversation that allows the participants to relax sufficiently to begin
examining the assumptions that lie behind their thought processes.” (p. 181)
Participants should feel “secure enough to suspend their need to win arguments,
clarify everything they say, and challenge each other every time they disagree.”
(p. 181) Reflective rather than confrontational conversation should be
encouraged. The process of creating dialogue can help focus on engaging people
and making issues discussable and in this way reducing uncertainty and anxiety
and the likelihood for employee resistance to the change.
Critical to the success of a cultural change process is a well-designed plan for
the management of such change. It has been found that companies with strong
integration plans created above-average value in their industries and effective
post-merger management policies were seen to improve the odds of success by as
much as 50 percent (Research was done by Mercer Management Consulting cited in
Tetenbaum, 1999: 3).
Just as critical as planning for the management of cultural change is
the need for effective communication, in every phase of the merger process.
Employee resistance to change can be a huge barrier to the successful
implementation of a merger or acquisition. Resistance is, however, a natural
part of the change process as change involves going from the known to unknown.
Individuals typically go through four phases during a major organisational
change: initial denial, resistance, gradual exploration and eventual commitment.
Keeping communication channels open will prevent anxiety from getting
out of hand and providing clarity about expectations will reduce distrust or
conflict. Kets de Vries (1995: 46) says frequent reviews should be conducted
during the transition process, during which people can talk about the reasons
for the merger and open the dialogue around future changes, and during which
management can attend to the psychological dimensions of the change process.
Related to the issue of communication is the identification of all
stakeholders who may be affected by the change. The business case for change,
the process of change and timeline must be communicated to all stakeholders so
that they may gain an adequate understanding thereof. Those stakeholders who
will be impacted significantly by the change must have a clear understanding of
how and when they will be impacted.
Clear and regular communication, including the process of creating
dialogues, should address stakeholder resistance and lead to stakeholder buy-in.
Communication channels must allow for effective feedback from stakeholders to
ensure that barriers to and opportunities relating to the change objectives can
be identified on an ongoing basis and be addressed.
Without collaboration, the process of culture integration may be
significantly hampered. In the initial phase of a merger, teaming up to create
cross-company task forces and project teams and articulating the new rules of
the game will help problem solving and ensure future collaboration (Kets de
Vries, 1995: 47). The role of the integration team leader is also considered
vital to the success of the implementation phase of culture integration and
integration management should be recognised as a distinct business function
rather than an “add-on” job for integration team leaders (Tetenbaum, 1999: 6).
In addition, commitment and patience are essential. Just as a
marriage “demands a lot of attention and commitment of resources” so does the
merger of two often divergent cultures. Kets de Vries says mergers are intense
relationships that often lead to high turnover as people are “psychologically
unprepared for the aftermath of a merger or acquisition” (Kets de Vries, 1995:
42).
M&As and the resultant changes to the organisational culture often require a
collective change of mind. But, minds cannot be managed, they can only be
inspired (Laurent, cited in Evans, Doz, Laurent, 1989:87) For this to occur, the
right style of leadership is essential. Leaders must communicate the vision of
the change and its impact as widely and effectively as possible. Thereafter they
have an important role to play in guiding the ongoing change effort and in
encouraging employees to stick to the change process until it is an integral
part of everybody’s lives.
The integration team leader/s should be involved in any discussion
around a potential merger from the outset of the process so that they can
provide valuable input into any ‘Go-No-Go Decisions’ taken. The earlier such
people are able to participate in the process, the more effective they will be
in working through any issues that could negatively impact on future business
outcomes, if ignored (Tetenbaum, 1999: 7).
Concluding remarks
It is clear that the success of a merger between two or more
companies depends as much on culture fit as it does on strategic and financial
fit and the proper management of change and employee response thereto.
References
1.
Kets de Vries, M.F.R. 1995. Life and Death in the Executive Fast Lane. San
Francisco, USA: Jossey-Bass Inc, Publishers.
2.
Laurent, A. 1989. “A Cultural View of Change”. In Evans, P., Doz, Y. & Laurent, A.
(eds.), Human Resource Management in International Firms: Change
Globalisation, Innovation. London: McMillan.
3.
Schein, E.H. 1990. Organizational Culture and Leadership. San Francisco:
Jossey-Bass.
4.
Schraeder, M. & Self, D. R. 2003. “Enhancing the success of mergers and acquisitions:
an organizational culture perspective”. Management Decision, vol. 41, no. 5, 511
– 522.
5.
Tetenbaum, T.T.
1999. “Beating the Odds of Merger & Acquisition Failure: Seven Key Practices
that Improve the Chance for Expected Integration and Synergies”. Organisational
Dynamics, Autumn, 22-36.
Paper adapted from Cowan, V & Swart, M. 2003. “The Petroleum Oil and
Gas Corporation of South Africa: What happens to organisational culture when two
or more companies merge”. Case Study Research Report presented to The UCT
Graduate School of Business in partial fulfilment of the requirements for the
Masters of Business Administration Degree.
