Just one in four mergers result in success, and according to TRA’s Colleen Ryan, that comes down to companies focusing too much on the tangible aspects of the balance sheet and too little on the intangible aspects of company culture.
New Zealand has been running against the tide of late with potential mergers falling by the wayside, either blocked on the grounds of unfair competition or not getting across the line for other reasons. NZME/Fairfax is one of the most recent, and the dust is still settling on the Sky/Vodafone on/off merger.
Around the rest of the world, mergers are still in fashion, especially in the media and entertainment space and the most recent merger of Microsoft and LinkedIn. Historically, mergers were fashioned to optimise and leverage physical production resources (manufacturing and factories) whereas now it’s much more about audiences and owning share or attention.
Yet, if we were rational decision makers and calculated gamblers, we’d run a mile at the suggestion of a merger. I challenge you to find a single report that doesn’t quote a number between 60 and 80 as the percentage of mergers that fail – 75 percent seems to be the consensus mean.
Failing is defined in regard to delivering value to shareholders, and in fact, a whopping 30 percent of mergers actually erode the shareholder value of both companies. Innovation stalls or reverses, the operational cost savings are invariably less than expected, and perhaps the most worrying is that customers of both companies suffer.
Looks like NZME and Fairfax dodged a bullet, unless they believe they were in the elite group of one in four that does deliver a success story. As Jeffrey Pfeffer, a professor of organisational behaviourat Stanford Graduate School of Business says: “Mergers go on anyway, even though there’s not much evidence they work out. Everybody believes they are going to be different.”
Not only is there consensus on the low probability of success with mergers, but there is also a high degree of agreement on why they fail. Culture is the culprit. Or more specifically, two cultures, and the failure to leverage the value of two businesses because of cultural differences. It is this failure rate that should make us sit up and acknowledge just how important and unique a company’s culture is. If it were not so, then it would be much easier to merge two companies.
Yet with all this evidence available, companies still focus their due diligence on the tangible aspects of the business they are buying or merging with and neglect applying the same rigour to the intangible element of culture. And just because culture isn’t an asset on the balance sheet doesn’t mean you can’t do due diligence.
Company culture is an amalgam of its accepted tacit rules, habits, values, customs and norms, and these create a rhythm and cadence that govern behaviour – there is a sense of “it’s the way we are and the way we do things here”. And this is an emotional territory so the rules and behaviour patterns don’t always seem rational. But it is because it is an emotional territory that getting it wrong can be so costly. We are naturally herding creatures, we stand by our tribe, and attempts to disrupt the habits we have learned in the way we work together can feel very threatening.
Cultural Due Diligence
Having described culture as an intangible does not mean surrendering the notion that it can be examined and diagnosed. An analysis of the language that is used within a business (called discourse anlaysis) including emails, notices, instructions, contracts, internal communications, and verbal communications both formal and informal, is a powerful tool that can be used to diagnose a company culture.
An illustration of the power of discourse analysis to drive transformation of company culture can be found in The British Prostrate Cancer Charity who undertook just such a project. Discourse analysis revealed that the things that had helped it succeed in the past had outlived their usefulness. But they were now baked into the culture, perpetuated through habits of language and, because invisible, very hard for them to change.
Commenting on the insights from the analysis, Seamus O’Farrell the new chief executive who had ambitious targets for growth and a much higher public profile for the charity said: “It was incredibly energising for the organisation. It was lovely to see people go ‘oh, yeah!’ in a totally non- defensive way: ‘Oh, we are like that, aren’t we?’”
The result was frank internal conversations which were not always comfortable, but important things are now being said, challenged and openly debated. As a result of changing the language patterns and thus changing the culture, the charity has had recent successes in winning significant corporate partnerships. So if language is so important in a single company, it’s not hard to imagine how critical it can be when two cultures come together and where it is likely to cause of conflict, mistaken blame and a break on the speed at which things happen.
As an example, a series of experiments conducted by Weber and Camerer at Carnegie Mellon University had people work in small teams to sort and identify photographs which they had to describe to others in their team. They then had to carry out various tasks which involved use of the images. They quickly assigned shorthand names for images – the one ‘with the girl and mother sitting’, ‘the powerpoint image’, ‘the portrait picture’. They then merged the teams and applied various tasks using the images. The execution of tasks was significantly slowed in the newly merged teams and confusion, irritation and misunderstandings were common. Scale that up to two merged companies and you can almost hear the talent running out of the door.
The acquirer and the acquired
Though the chief executive of each company may have a bigger vision and see the benefits to both organisations in the merger, there is nevertheless always a sense of a winner or dominant company. That would no doubt have been true of the two New Zealand mergers had they gone ahead.
The recent acquisition of LinkedIn by Microsoft is another one to watch, especially in light of Microsoft’s poor record. Neither Microsoft’s acquisition of digital advertising firm aQuantive nor the mobile unit of Nokia were a great success. But Satya Nadella, Microsoft’s chief executive, seems determined to get this one right and has asked LinkedIn CEO Jeff Weiner to take the lead on an integration team responsible for merging their two companies: a responsibility that normally falls to an executive at the acquiring company.
But how will Weiner go about it? Culture can’t be a mash up. It’s not like throwing two cultures into a blender and seeing what comes out. A structured framework is needed, and employees have to have a voice. Otherwise it hinders morale and talent leaves. You need a new culture, not a mash up, and it can’t just be plucked out of the air.
An internal culture has to be built on core truths about the business. The building blocks for the culture are both business based and people/ belief based – the rational and the emotional mix gives the internal culture meaning and depth, and allows for a sense of ownership and belonging.
But culture can’t be imposed from above. This can’t be Weiner and Nadella’s vision alone. The power of ‘How we do things here’ is an intangible that is owned by the entire business. As Mike Spose, CMO of Epic Media Group who managed a successful merger with a smaller advertising network, says: “Empower people to have a voice in defining the new culture.”
Culture doesn’t just determine how well the company will function internally (talent retention, efficient working practices, innovation and creativity), it also creates an employee experience which has a direct impact on customer experience. Clients and customers suffer during mergers unless the issue of culture is managed early, managed well, and given as much time and energy as operational issues.
Due diligence of cultural issues prior to a merger prepares the company for the intangibles of the merger. It sets a comms strategy in place, it starts joint projects where common language and ways of working can be developed, and it sets up a new culture with common agreement. The operational stuff will follow, if the merger survives that long.
Colleen Ryan is head of strategy at TRA.