Driving active, efficient, and transparent business transformation, particularly during M&A activity, has become a core institutional competency. A lot of time and effort are expended in completing a merger or acquisition deal and they can be very distracting for people – especially when things go awry in merging businesses which often happens during the blending of processes, structure and cultures and technology.
CULTURE
M&A success begins with culture. It can become a block to the successful integration of a merger or acquisition, or it can be the driving force behind value creation.
Unfortunately, culture is sometimes ignored when an M&A strategy is being appraised. This leads to:
- Management failing to communicate the rationale for the deal and what the new organization will mean for employees effectively
- Key talent leaving through cuts in pay/benefits or intolerable working practices
A study of 190 CEOs, CFOs and top executives on global acquisitions by Willis Towers found that cultural incompatibility is rated consistently as the greatest barrier to successful integration, but due diligence on corporate cultures is almost negligible.
Out of 150 deals valued at $500 million or more, about half actually destroyed shareholder value. A study by Aon Hewitt Associates that surveyed executives in 162 organizations who had been involved in at least one merger, found that 69% of the respondents reported the top challenge they faced was integrating two organizational cultures. There have been some high-profile mergers that have failed spectacularly for cultural reasons including Daimler/Chrysler, Sprint/Nextel and HP/Compact
In practice, no M&A integration checklist, however comprehensive, can compensate for a lack of buy-in by employees. There are a number of ways this can be addressed at the pre-deal stage of M&A activity.
Pre-deal, the buyer and target should:
- Devote attention and resources to human capital
- Assess intangible values such as employee satisfaction and knowledge
- Consider what may drive key talent away and what may help with retention and motivation
- Carry out an analysis to uncover the cultural differences and understand the impact of such differences
- HR are seldom involved with the appraisal of target companies as part of the M&A process. If they do not have access to the M&A strategy and appraisal of talent and culture in the early stages, they inevitably have to play catch up during the integration process which often result spending significant time solving problems, which could have been avoided with HR due diligence
From a culture perspective, successful M&A activity needs 3 things:
- Effective communication
- Focus on employee retention
- Consideration of culture.
1) Effective communication
During M&A activity, keeping employees of both the buyer and target companies informed of progress is paramount. E-mails, updates to the company intranet, town halls and briefings should be scheduled at regular intervals. Having some way to collect and track the questions, concerns and fears that employees might have and effectively communicating answers fosters a sense of transparency and trust which are vital to successfully integrating companies.
Aligning leadership across all teams is vital to successful M&A activity
Regardless of the terms of the merger or acquisition, executive teams absolutely must agree on the vision for the future and leaders must be provided with both adequate information relating to the deal, training on how to deliver it and learn how to deal with resistance which is an inevitable part of transformational integration activity.
If leaders give inconsistent messages about the future, or worse, demonstrate a lack of belief in the go-forward vision, talented employees usually start looking for new jobs and other employees become actively disengaged or waste time speculating about the future leading to a loss of morale and productivity.
Key tips for effective communication during M&A activity:
- Be clear on whether the deal represents a merger or an acquisition
- Articulate the vision, mission and goals and be consistent in messaging
- Translate the message to different parts of the organization e.g. the language used in communicating to the sales team is likely to differ from that used in addressing IT
- Seek objective feedback from employees
- Set clear timetables and ensure employees know what they are accountable for and to whom
- Design team and assign leaders who can be used as sounding boards during the M&A process
2) Focus on employee retention
Employee retention is often a challenge during the M&A process. Many deals are associated with retention issues – as a result of uncertainty over future direction, job security, perceptions of leadership and a sense of fear of confusion that arises due to a lack of effective and clear communication. This can result in a loss of knowledge/attrition of human capital and have a damaging effect on customer relationships. A merger or acquisition also gives great opportunity to upgrade talent across the organization, which in some cases is the main goal of M&A activity.
Whilst the type of deal usually guides the talent retention strategy, In practice organizations undergoing merger and acquisition activity have to tackle two key talent challenges:
- Retaining employees critical to company performance
- How to manage the employee selection process in the least disruptive way possible.
Key tips for talent retention during M&A activity:
- Provide access to information –communicate the benefits of the deal in a way that resonates with employees.
- Monitor workloads and provide support where necessary
- Provide opportunities for on-going professional development – the cost of human capital attrition can far outweigh the costs of training and development. Such initiatives give the message that employees are valued
- Communicate regularly with employees via one-on-one meetings or departmental catch ups
- Provide tangible performance management objectives and incentivize key talent.
- Encourage employee focus groups and proactively seek and respond to their feedback
- Provide sufficient managerial support – managers can be role models and play a critical part in the retention of employees during the M&A process
- Develop employee engagement surveys to monitor sentiment of the deal as it progresses.
3) Consideration of culture
M&A deals can add up strategically and financially but not culturally. Whilst it is easy for a deal to be treated as a financial transaction, combining two distinct corporate cultures can be more difficult to predict. There are a number of things a company can do to ensure the integration of two cultures can be successfully achieved. Key challenges include:
- Breaking down silos and creating end to end accountability
- Embracing shared processes and best practices
- Clarity of key objectives and expected results
- Fostering of transparency and trust
- Ensuring structured decision making
- Ensuring successful knowledge transfer
Key tips for focusing on culture during M&A activity:
- Make culture a core element of change management and essential to a successful integration process
- Consider the strengths and weaknesses of the two organizations – remembering strengths are sometimes incompatible so they cannot simply be added together
- Create a common approach to decision-making
- Adopt standardized processes – such as in the systematic and repeatable approach to the evaluation of targets or due diligence
- Conduct a Situational Analysis that looks at immediate priorities, quick wins and long-term objectives
- Document Processes – project plans, critical paths, issues logs, checklists
- Assign cultural leaders – typically HR representatives who can drive the importance of culture
- Create a team of best-practice champions to help roll out best practice initiatives
- Communicate the value of establishing best practices – all members of a deal team should understand the direction M&A processes are heading in and why:
- E.g. why best practices need to be put in place
- E.g. the benefits to the deal team and wider organization
- Create a new internal brand — which communicates the value to the employees of both Buyer and Target of being part of the new organization (this will depend on the extent to which the deal is a merger or an acquisition).
- Ensure that culture is tangible where possible – for instance, quantifying the results of a merged sales team working to the new adopted culture.
- Adopt standardized templates such as checklists and playbooks
- Capture lessons learned that reflect both the positive and negative experiences of M&A activity from the employees’ point of view.
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