In 2011, Aon Hewitt surveyed 123 organisations from around the globe across various industries to learn more about M&A integration. What they found was that a major cause of M&A failure is paying too little attention to workforce needs, which in turn creates problems integrating company cultures.
In a separate survey, the Hay Group reported that more than one-third of business leaders it surveyed had expressed dissatisfaction with the post-merger climate. 20% described the early months as “culture shock” and 16% percent went as far as to label them as “trench warfare”. Assertions like these illustrate how critical it is to get the people process right and that in the end, employees must come first in M&A. Too often management’s excitement overshadows the anxiety felt by employees, who worry that their needs are being overlooked.
Veterans of M&A put a premium on keeping productive employees; they cite higher rates of collaborations and buyout success as justification. Moreover, they recognise that key employees stay when they are engaged, paid well, mentored, promoted, respected, and trusted. To the contrary, M&A that is devoid of cultural understanding leads to high employee turnover, which in turn damages morale, slows productivity and destroys enterprise value.
There are five crucial tenets to successful cultural integration in M&A.
The CEO is Critical
80% of surveyed CEOs who sell their company leave within two years. Many walk away from parts of their earn-out and cite a lack of leadership support, authority, and opportunity to make additional money as reasons why they left.
Just as a franchise quarterback can ensure success in the NFL, so too in M&A, can keeping (or finding) a good CEO. The CEO is the most important position to start with and dramatically increases the odds of a successful acquisition. A stable CEO steadies the environment, sets the tone for the merger and establishes the culture for the newly combined entity. He or she communicates the vision, stresses a sense of necessity, has the authority and capacity to build partnerships, and the capability to remove barriers that are a hindrance to success.
Make Communication Clear, Candid and Consistent
It is no secret that when employees feel in the know, their work satisfaction is higher. In the world of M&A, uncertainty presents employees with questions, breeds contempt and the unknowns lead to a loss of talent. Instability is the catalyst for uncertainty, and the sense of instability is worsened when people are kept in the dark.
Video conferencing and town hall-style meetings are important aspects that allow managers to be accessible, eliminate uncertainty and be responsive to employee concerns. These meetings become platforms to gather information and help avoid pitfalls by acting as an organisational scan that can confirm or invalidate what managers believe about their company’s culture so they may take action accordingly. By contrast, communication that runs counter to a well-thought out plan causes confusion, kills employee morale, and can greatly affect the flow of production.
Create a Merger and Integration Office (MIO)
A strong transition team can be a catalyst for M&A success. Typically, there is an oversight committee of senior executives who monitor the two companies’ integration and keep the process on track. Other teams report to the oversight committee and are made responsible for tasks such as integrating divisions, technology, and human resources.
Creating an MIO structure is a highly sophisticated retention tool, in part because it keeps key people active and motivated. Supplementing the structure with outside guidance can add objectivity, reinforce processes and messaging, and help to reduce team conflict and keep key people.
Identify Cultural Differences Early On
68% of firms surveyed during M&A had lost critical talent at higher-than-normal rates because there was no specific approach to how to understand and deal with culture.
Charles Schwab & Co. Inc.’s $2.7B merger with US Trust Corp., in January of 2000 is a not-so-subtle reminder of the inherent risks of failing to identify divergent organisational cultures. Schwab’s libertarian and thrifty environment was a driving force in helping it win customers in the competitive discount brokerage space. When that culture was mixed with US Trust’s white glove relationship-oriented environment it became dysfunctional, internal conflict ensued and talented employees left in droves.
Contrast that with the Abitibi-Price Inc. merger with Stone Consolidated Corp. in May of 1997. Abitibi’s CEO, Ron Oberlander, created an internal auditing index. The Merging Cultures Evaluation Index (MCEI) was a questionnaire used to identify cultural orientations such as concentration versus diffusion of power, innovation versus tradition, wide versus narrow flow of information, consensus versus authoritative decision-making. The index became the foundation upon which Abitibi-Price merged with Stone Consolidated thus creating the world’s largest paper and pulp firm.
When Possible, Make Decisions Quickly
In M&A, things move quickly and employees are looking for guidance and stability. By making timely decisions, merging companies reduce periods of uncertainty and lessen degrees of anxiety, thus they increase retention rates. Moreover, a strategy that enables the transition team to make decisions quickly will help the business to continue running smoothly.
Because of the continually changing and highly chaotic environment, contingency planning amongst the transition team is crucial. To help offset chaos, establishing digital libraries and periodic azimuth checks create a sharing environment. These steps better equip a team to know which decisions require consensus and which need only minimal input.
Successful M&A Integration
These are but a few tactics that have generated scores of successful mergers and when put into practice help to increase the odds of a successful acquisition. Effectively integrating two separate businesses requires communication and flexibility. Both nurture organisational learning and the ability to draw on the knowledge of key employees.
Using what employees already know helps to anticipate and prevent conflicts as well as quell struggles quickly when they do occur. A collegial working environment is created when each part of the two firms participates in every phase of the merger. Clearly, the levels to which employees participate will vary, but in the end, it doesn’t matter if they worked directly on the deal or not, their participation in the overall process will build commitment.