Cultures are like chemical elements, said Thomas Armstrong in the book, Multiple Intelligences Around the World. “You can mix two of them and you might get something useful like water or table salt. But you might also blow up the kitchen.”
Hundreds of factors can cause a merger or acquisition to fail. But when the deal goes through and synergies do not come together as expected, the blame often falls on culture clash. Culture clash is what happens when two companies’ philosophies, styles, values, and habits are in conflict. In a Bain survey of executives who have managed through mergers, culture clash was the top reason for a deal’s failure to achieve the promised value.
A classic case study is the 2002 Daimler-Benz and Chrysler merger. Daimler was an upright, hierarchal German company while Chrysler was entrepreneurial and American. Chrysler eventually took a backseat in leadership, which created a sense of doubt and uncertainty in their employee base. Daimler never tried to dispel the impression that a proud American company had weakened under German pressure, ultimately hurting Chrysler’s car sales. The two entities split up in 2007.
Even if the culture gap isn’t discovered and the deal goes through, there are a few different ways companies can address cultural differences and ensure the deal’s synergies materialize.
Take stock of differences early on
Companies that pursue a merger often make the mistake of just looking at the financials and don’t spend enough time looking at whether or not the corporate culture of both firms align, says Adam Rosenberg, head of M&A in the UK at Mercer, an HR consultancy.
“Definitely take advantage of the time before the acquisition to get a hold on the culture fits and gaps,” says Kay Cruse, vice president of Strategex, a middle-market management consultancy. “If started only after the merger, it’s often too late.”
Even before the letter of intent is signed, a company may perform a compatibility assessment to try to quantify “soft” cultural factors like how the company conducts meetings and make decisions, the physical environment, hierarchical structure, work hours, dress code, age of employees, communication style, and employee and customer sentiments.
This can be done as a series of interviews across the business. Management interviews should focus on uncovering managerial styles and priorities, while employee surveys can help you understand accepted behaviors, attitudes, and priorities.
Talk to customers
Strategex has a system in place to help acquirers gather the point of view of the target company’s customers before the deal goes through. Their Voice of Customer process helps them glean deep learnings without the customer knowing a deal is underway.
For one private equity client, Strategex was able to identify that the president of a B2B middle-market company had serious leadership issues that were impacting his entire team as well as his customers. Says Cruse, “One customer commented, ‘There’s nothing I like about them,’ and others reported that they had a difficult time keeping their internal contacts because there was so much turnover among employees. Needless to say, the deal value had to be recalculated. Ultimately, the president elected not to sell, which turned out to be a good thing for our private equity client.”
Rally around the mission
After the deal closes, the senior teams of each organization should work together to clarify the new mission and the shared values. In the case of an acquisition, the acquiring company needs to have a clear vision and set of values and guiding behaviors as well as a process to orient employees. “If the company is not clear about these things themselves, it is very confusing and disruptive,” says Larry Senn, founder of Senn-Delaney Leadership Consulting. Off-site sessions with top leaders from both sides, working in tandem with a consultant, can help mold the culture to its desired state.
Communicate the value to employees
The combined companies should highlight the positive reasons for the merger and why it came about. A CEO might appoint cultural ambassadors to align the two sides and empower employees that may otherwise feel swept to the side by the changes. A strong business case can win over dissenters from both sides and help weaken any cultural stronghold.
Now’s the time to bring up organizational goals (including job- and team-specific objectives) and implement programs to drive positive behaviors. Compensation, incentives, benefits, and rewards will go a long way in nurturing engaged employees.
Start a cultural intervention
Whether you’re acquiring a company outright or want to blend the two cultures, a cultural intervention drives alignment and more formally sets change in place. There are two main methods:
- A top-down approach is led by the CEO and a senior team, and imposes a given management style on the new company with little input from others. Most corporate leaders favor this formal approach; they adjust reporting lines, decision rights, processes, and IT systems at the outset and expect employees to adjust to them. The disadvantage is that this approach neglects the informal, more emotional side of the organization such as how a company networks and interacts with peers.
- A targeted approach is more inclusive and focuses on specific areas that are important in order for synergies to materialize. An upside to targeted cultural intervention is that it can motivate and engage your most talented people and enable them to collaborate better. For example, if the objective of the deal is to acquire more customers, the intervention team will evaluate both sales teams’ behaviors and solicit feedback to determine best practices moving forward, then hold workshops and training programs to induce cultural change. The downside is that a complete transformation of culture won’t happen overnight.
No two cultures are alike, and culture is notoriously difficult to change. But culture clash doesn’t have to derail your M&A efforts. Focus on aligning your mission, communicating well, and intervening where needed to achieve post-merger synergies and success.