This article is written by Prashant, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

“Culture is more often a source of conflict than of synergy. Cultural differences  are a nuisance at best and often a disaster”-Hofstede G. 

Mergers and Acquisitions are business expansion strategies that compliment the  organic growth of a business. They allow a business to combine with other  businesses for fast track growth and accelerate expansion in existing and new  markets. Organizations all over the world spend billions of dollars in pursuit of this  strategy. However, the success rate is less than what is expected. One of the  reasons attributed to the same is the clash of corporate cultures. The cultural aspect  of mergers and acquisitions has been identified as one of the key issues that may be  the reason for failure of many mergers and acquisitions. 

As the major reasons behind the Merger or Acquisitions transaction are operational  synergies, economies of scale, diversification, competitive and tax advantages,  revival of week or sick company etc. Enhancement of top line and bottom line  becomes the main objectives of the transaction and one of the most important  aspects i.e. cultural integration is ignored or gets relatively little attention. It is true  that mergers and acquisitions fail due to financial and economic reasons, but  making a merger or acquisition successful is more than ‘getting the sums right’.  Many studies have found that as many as 75% of merger and acquisition deals fails to produce desired financial results because people do an inadequate job in engaging employees and integrating the culture of merging or acquiring  organizations. Underestimating the importance of the cultural element is one of the  key issues for the failure rate of many mergers and acquisitions. Changing external  aspects such as name, brand, colors, technology, etc. also involve changing a  symbolic world that used to be part of many people own identity.  

The cultural difference in companies after Mergers & Acquisitions is much more  enhanced in cross-border cases when more challenging integration is required for  companies from different national cultures. Differences in companies involved in  mergers & acquisitions always occur even in those sharing common features,  furthermore in cross-border mergers & acquisitions, differently embedded cultures  keep companies away from successes. In another word, cultural differences in companies after cross-border mergers are considered as much more intense due to the fact that cross-border mergers & acquisitions experienced less adaptability to the new business environment. Since a cultural gap can easily hinder the  cooperation, especially in case of cross-border mergers & acquisitions, their  negative impacts often arise as a result. 

What is Corporate Culture? 

Culture of an organization means the sum total of things the people do and the  things people do not do. It describe the way people communicate with each others,  the way they resolve conflicts, how they celebrate, reward, manage to do their  work, the language they speak and how they proceed towards their work. The key  success of any merger and acquisition is dependent on how an organization  understands the culture of their organization. 

People play a very important role, hence while going on any merger or acquisition  organization must lay emphasis on their people, their culture and attitude. 

Cultural Aspects in the phase of Merger and Acquisition

The merger is a period of great uncertainty for the employees of the merging  organizations. The uncertainty relates to job security and status within the  company leading to fear and hence low morale among the employees. The  possibility of a change in compensation and benefits create a feeling of great  insecurity and unease. It is natural for employees to fear the loss of their revenue or  change in their status within the company after a merger since many of these  employees literally invest their whole lives in their jobs. Hence the possibility of a  change in their position is likely to be viewed with fear and resentment. 

The influx of new employees into the organization can create a sense of invasion at  times and ultimately leads to resentment. Further, the general chaos which follows  any merger results in disorientation amongst employees due to ill defined role and  responsibilities. 

Common mistakes made by the corporate while carrying out  Mergers and Acquisition

∙ The first and most common problem is that of ego, it is on both sides i.e. the  buyer or seller or merging companies, it frequently results in clashes and  make situation worse. 

∙ The second problem or mistake that may emerge is attempted to hasten the  integration between both parties which ultimately raise the likelihood of  making serious mistakes. 

∙ Companies during the course of merger may cut off its crucial employees  from acquired company. 

∙ Competitors may enter into market, when the company is busy with  integration efforts. 

∙ Unless the acquired business is in the exact same field, different dynamics  might apply. 

∙ Many buyers asserts their ownership by moving quickly to convert the  acquired company, this does not always work in right direction.

Variations in the nature of Mergers and Acquisitions

Specific steps needed to deal with the human side of the merger or acquisitions as  they are greatly influenced by the basis for the merger as well as the cultures of the  organizations. For example, in a merger where the acquiring company is interested  only in the physical and financial assets of a target company and expects to lay off  most managers and employees, major efforts to manage culture are unnecessary.  However, when a true “marriage of two equals” is the end goal, attention to the  management of culture becomes critical and detailed planning is most crucial. 

Cultural Integration for different nature of Mergers and  Acquisitions

∙ Autonomy or semi-autonomy: In this the goal is to create mutual  support and synergy without necessarily changing the nature of the  organizations. It is unrealistic to assume that the acquiring company will not  want any modifications. For example, there may be a desire to shift one or  more qualities, such as innovation, bias for action and a higher level of  expectations. However, when the basis for the acquisition is autonomy or  semi-autonomy, it is important to respect the reasons for the differences in  culture and to proceed slowly with integration activities. 

∙ Absorb and assimilate: In this the goal is to completely absorb and  assimilate the acquired company then the primary need is to educate the  acquired employees the rules of the new company. Orientation to the new  organization should include letting them know about the vision and values of  their new organization. It is also important to focus on how the new  company is going to be different and not on judging the past or telling them  why what they were doing was wrong. 

∙ Co-create a new entity: In this a new entity is formed and a mixed  culture is adopted, while avoiding cultural clash is always important, the  greatest attention should be paid to successful cultural integration when a  true marriage of equals is intended. Adopting a new set of culture is  comparatively easier as the biggest reason of clash, i.e. We versus They aspect will not come into the picture. 

The successful merger demands that strategic planners are sensitive to the human and cultural issues of the organizations, for the purpose following checks have to  be made constantly to ensure that: 

∙ Serious efforts are made to retain key people. 

∙ A replacement policy is ready to cope with inevitable personnel loss ∙ Employees are informed of what is going on; even bad news is  systematically delivered. Uncertainty is more dangerous than the clear,  logical presentation of unpleasant facts. 

∙ Training department is fully geared to provide short, medium and long term  training strategy for both production and managerial staff. 

∙ Sensitive areas of the company are pinpointed and personnel in these  sections carefully monitored. 

∙ New policies to be clearly communicated to the employees specially  employees at the level of managers, supervisors and line manager to be  briefed about the new responsibilities of those reporting to them. 

∙ Family gatherings and picnics are organized for the employees and their  families of merging companies during the transition period to allow them to  get off their inhibitions and breed familiarity. 

Merger that killed by Culture : Hewlett-Packard & Compaq

On September 04, 2001, two leading players in the global computer industry  Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq)  announced their merger. HP was to buy Compaq for US$ 24 billion in stock is the  biggest ever deal in the history of the computer industry. The merged entity would  have operations in more than 160 countries with over 145,000 employees, and  would offer the industry’s most complete set of products and services. 

The Hewlett- Packard Company (HP,) is an American multinational information  technology company headquartered in Palo Alto, California, USA founded in 1938  by Bill Hewlett and David Packard. Initially it was in the production of electronic  test equipments and measurement equipments. The company grew into a  multinational corporation widely respected for its products and its management  style and culture, popularly known as the ‘HP Way’, which was adopted by other  businesses worldwide. By the year 1999 it spun off its electronic and bio-analytical  test and measurement instruments business and focused fully on manufacturing  computers and printers. 

Compaq Computer Corporation (Compaq) was founded by Rod Canion, Jim  Harris, and Bill Murto in the year 1982, headquartered in Harris County, Taxes,  USA. The company is majorly into the production of compatible personal  computer, related products and services. During its first year of sales (second year  of operation), the company sold 53,000 PCs for sales of $111 million, the first  start-up to hit the $100 million mark that fast. Compaq went public in 1983 on the  NYSE and raised $67 million. In 1986, it enjoyed record sales of $329 million  from 150,000 PCs, and became the youngest ever firm to make the Fortune 500. In  1987, Compaq hit the $1 billion revenue mark, taking the least amount of time to  reach that milestone. By 1991, Compaq held the fifth place spot in the PC market  with $3 billion in sales that year. 

In the year 2002 Compaq is acquired by Hewlett- Packard for $24.2 billion.  Compaq shareholders would own 36% of the combined company while HP’s would have 64%. The expected layoffs at Compaq and HP, 8500 and 9000 jobs,  respectively, would leave the combined company with a workforce of 145,000.  Both companies had to seek approval from their shareholders through separate  special meetings. Compaq shareholders unanimously approved the deal, there was  a public proxy battle within HP as the deal was strongly opposed by numerous  large HP shareholders, including the sons of the company founders, Walter  Hewlett and David W. Packard, as well as the California Public Employees’  Retirement System (CalPERS) and the Ontario Teachers’ Pension Plan. The  merger was approved by HP shareholders only after the narrowest of margins and  allegations of vote buying haunted the new company. 

The stock prices of both companies dropped in the months after the merger  agreement was made public. Particularly rival Dell made gains from defecting HP  and Compaq customers who were wary of the merger. Capellas, Compaq’s last  chairman and CEO, became president of the post-merger Hewlett-Packard, under  chairman and CEO Carly Fiorina, to ease the integration of the two companies.  However, Capellas was reported not to be happy with his role, being said not to be  utilized and being unlikely to become CEO as the board supported Carly Fiorina. Several senior executives from the Compaq side including Jeff Clarke and Peter  Blackmore would resign or be ousted from the post-merger HP. Though the  combination of both companies personal computer manufacturing capacity initially  made the post-merger HP number one, but it soon lost the lead and further market  share to Dell which squeezed HP on low end PCs. 

The Cultural Differences between the two Giants 

The merger was ill-fated from the start, as HP engineering driven culture was  based on consensus, as against this Compaq has sales driven and rapid decision  making culture. This poor cultural fit resulted in years of bitter infighting in the  new company, and resulted in a loss of an estimated 13 billion dollars in market  capitalization. Overall, it has been said that the purchase of Compaq was not a  good move for HP, due to the narrow profit margins in the commoditized personal  computers business. 

Conclusion

The relationship between cultural differences in mergers and  acquisitions performance is more complex than it appears. Cultural differences  have substantial impacts on multiple aspects of merger and acquisition deals. The cultural integrations issues should be addressed simultaneously same as financial  and legal issues, if they were ignored then the success may only be of temporary  nature. People belonging to each defined culture needed to be acquainted with  other culture of the merging companies. People should be mentally prepared to  adopt the good points of other culture and shed the blockades of their own culture; an open approach will make the fusion of cultures and ethos easy and effective.

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