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.
Table of Contents
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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