Company acquisitions are a well-worn, highly trodden path. They are also notorious for their failures.
It’s a statistic that ought to make most of the C-suite sit up and take notice: Somewhere between 70-80% of mergers and acquisitions typically fail. And it’s a stat that’s backed by a study from KPMG, which found that 83% of mergers had not delivered the returns expected by shareholders. Another study by A.T. Kearney concluded that the total returns on the lion’s share of M&As were negative.
These are sobering numbers. However while COVID-19 is expected to impact the rate of M&A activity as Australia emerges from the pandemic, cashed-up companies are looking for opportunities in the market and others are looking to divest underperforming businesses. In either case, merging and demerging companies is an exercise fraught with challenges that rarely come to light until the implementation project slate is well underway.
And ultimately, the deepest risk to success lies in the ability to blend and leverage cultures. In our experience, it’s almost always a culture and leadership failure that leads to organisations being unable to capitalise on the strengths of two organisations.
The key ingredients of success or failure: People, culture and leadership
As we navigate a time of unprecedented change and M&A activity is increasing, what are the critical ingredients in delivering a successful implementation slate of projects that support a successful merger?
While there are several studies that point to the failures, the successes tend to show three requirements to success: the people inside the merging organisations understand the vision and feel supported in delivering it, the cultures that exist and the efforts made to blend those cultures are negotiated early, and ultimately the leadership that is taking the merging organisations into the implementation phase understands how critical it is to build a new culture reflective of the organisation’s ambition.
When we look at the world’s most successful sporting teams, such as the All Blacks or Barcelona Football Club, what becomes obvious is that success is not an overnight achievement, nor is it the individuals who deliver the wins. The teams that focus on culture and leadership as vital to success attract like-minded players and managers to work together to deliver powerful performances for a greater purpose: a successful club.
That link between leadership, the way the team works together and with their support staff, and the focus on delivering a successful outcome are critical to delivering the wins that both fans and investors expect to see.
Those that fail tend to marinate in cultural problems and conflict. There is enough evidence in the sporting world to show what happens when club cultures are toxic or players work against their teams for self-interest, rather than engaging and cultivating new talent as it joins the club. The dominance of star players who focus on their ‘proven success formula’ rather than promoting collaboration and valuing the talent around them can skew the potential of the team as a whole.
It’s an illustration that highlights the real challenge of successful mergers: the heavy hitters aren’t always the ones who are able to lead the charge toward success. And the organisations that succeed tend to negotiate the cultural question with as much rigour as the financial and legal due diligence required to bring two companies together.
Merging can be a difficult marriage if the vision and purpose aren’t clear
Successful outcomes generally have the same starting point: A shared vision and purpose with the key focus on the ‘how’ of putting that vision and purpose into practice. When organisations combine, it’s rare to have synergistic visions and cultures. More often and not, the drivers to merge are financial and market leverage.
As mentioned above, 83% of M&As fail to deliver shareholder uplift, according to KPMG. And there’s enough evidence that sometimes mergers don’t start on steady ground. In 2015, the US saw some of its most significant financial M&A activity, but it’s the outcomes that might make your eyes water as organisations like Microsoft, Google, HP, and News Corporation wrote off staggering business losses. Typically, history shows that 70-90% of acquisitions are failures.
The HBR article One Reason Mergers Fail: The Two Cultures Aren’t Compatible demonstrates the risk and potential elegance of M&A.
The authors illustrate that when the optimism of an M&A fades and the realities of integration set in, failure is inevitably the result of two cultures coming together and proving to be incompatible. Whilst two companies may see the value in capitalising on each other’s strengths (a financial focus), the difficulties tend to arise because the cultural due diligence has not been given the same level of scrutiny that the business potential has received. As the authors explore, if you bring an organisation with a tight culture focused on processes together with an organisation that has a looser approach, clash inevitably happens when those organisations can’t – or won’t – gel.
However, when the culture is negotiated with the same level of scrutiny as other due diligence before integration projects commence, there are opportunities to negotiate how those teams will work together, or what the authors call flexible tightness and structured looseness. Finding the pros and cons and points for negotiation is essential to support the blending of teams. The points of negotiation may ask the teams that are more familiar with tightness to embrace some level of looseness and the team more comfortable with looseness to embrace tightness features in delivery such as greater levels of assurance. This sets up a situation where there is greater potential that the strengths of both teams can be leveraged.
The vital ingredient, however, is leadership and shared vision to help smooth the way for each team to navigate change.
It’s not enough to explain what will change: People need to join the journey
We’ve seen it enough in our project delivery work: the projects that succeed and deliver well are those that bring people across the business along for the journey by communicating the vision, the change, the rate of change, and the anticipated impacts.
Given the sheer scale of change and disruption brought about by COVID-19, this is an area of leadership and culture that deserves intense scrutiny before an M&A gets past the financial and regulatory due diligence hurdles. It is critical to ask whether the cultures of the organisations coming together have the potential to blend well and leverage each other’s strengths.
Unfortunately, there’s a fundamental reality that in more mergers than not, a dominant team emerges and forces change into the less dominant teams. This can lead to immense friction that derails the vision for the business and few things will derail a project quicker than disgruntled and change-resistant people.
It’s also the time that those same people start to consider their options e.g. when the factors that attracted staff and critical talent into those organisations no longer exist post-merger. This is particularly true when the vision and culture of the new organisation or business units deviate significantly or the management styles shift and a new culture emerges by osmosis rather than by design.
Dig a little deeper: we’ve seen many situations in the project world where staff retention or release are made on past performance without the insights into the capabilities that can be leveraged for the new teams that need to form to drive implementation projects. The loss of critical talent and knowledge then only becomes apparent when fractures in the implementation phase begin to appear.
Success starts and ends with leadership
Our experience suggests that forming a leadership team for the merging cultures with representation from both sides is essential for defining a new culture for the merging businesses.
If we view culture as how people behave when no one is watching then, at its heart, this is the most powerful leadership asset any collaborative effort, be it sport or business or community service. We could label this an organisational motto that sits above all else in everything we do such as “Just do it” by Nike or “Think Different” by Apple.
But it must be more than words or new branding. Acknowledging and communicating this cultural vision from day one – to borrow the sporting analogy – the leadership team must demonstrate their commitment to it from day one. This engenders a sense of belonging, ownership and pride in the new organisation that is far and above the single most effective strategy to achieving effective engagement between two organisations.
Those staff who do not share the new vision, no matter how talented, should be transitioned out and replaced with those that do.
Effective leadership is adept and tuned-in
Effective leaders often have high EQ, meaning they can engage, influence and create a feeling of self-worth in those they engage with. They listen more than speak and achieve success through the pursuits of others (their teams), not on their own. There is nothing like an M&A to foster a collective sense of anxiety amongst staff (on both sides of the table) and the better leaders are attuned to this.
They draw out the strengths of each organisation and put them front and centre, then work to help newly forming teams to leverage the best from each to achieve the outcomes, all the while looking for opportunities to clarify change and outcomes to settle anxiety. They don’t assume the more dominant (usually the purchaser) has the best of everything and the acquired company just falls into line.
They ensure all key decisions are marked back against the organisational motto and expected behaviours to align to the cultural aspirations. And they hold themselves and those around them accountable for doing so.
Focusing on star players is misguided; it’s the vision and ability to lead that matter
Stepping back again to the sports analogy, it’s rarely the case that coaches and managers were star players of the past. More often than not, they are the people who bring out the best in the talent that is on the field for the win whilst equally building a cohesive support unit off the field.
In business however, this is not always the case. In the M&A space, past performers may be promoted into more senior positions as the organisation wishes to replicate the traits that made them successful. The risk is that the success may come from singular focus and pursuit of achieving the result rather than the necessary group focus, empathy, and acknowledgement of the support of people who contributed to their success. The problem with singular focus is that the hunt for success doesn’t always translate as leadership.
In the project space, and this particularly applies to implementation projects that spin out from M&A processes, we often see this arising in the way sponsors are allocated to those projects. Taking two organisations through integration is the domain of an experienced sponsor and one who has proven chops on how to lead, influence, negotiate, and ultimately deliver successful projects. They are always the servants of two masters: the stakeholders that are driving the merger and the people they need to bring along for the journey.
Given that the interactions a sponsor will have with newly acquired staff are likely to be the first engagement they experience in the new organisation, it is critical they possess the EQ and experience that enables them to lead as we described above. They set the tone for how the new culture and ways of working collaboratively will work for both the new staff and their existing teams. They will model the behaviours, decision-making, and expectations that can lead to success or failure.
Getting the formula right takes time and focus
In our experience, it’s almost always a culture and leadership failure that leads to organisations being unable to capitalise on the strengths of two organisations.
Our experience is that when sponsors and decision-makers make the time to do the due diligence on the objectives, talent, strengths, weaknesses, and address skill gaps in their teams before embarking on the implementation project slate, they have the ability to set up a collaborative environment leveraging all strengths and fortifying weak spots. Layering in appropriate assurance, frameworks, augmenting their teams with missing capability, then playing back to the delivery of benefits expected from the merger are additional ingredients for success.
However even when those elements are in place, cultural clashes and poor leadership can still derail the best-planned implementation. There are times when bringing in an independent perspective to support the business as a non-partisan ‘honest broker’ is the circuit breaker needed to bring all parties onto the field or provide leadership with the right layers of support to build a cohesive, robust team.
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