Mergers and acquisitions (M&As) have been going on from the beginning of organisational life, symbolised as well in the merger of families in marriage. In spite of its long history, however, just like marriage (at least in the west) M&As often fail, and cross-cultural and cross-country M&As are more likely to fail than are domestic M&As. In fact, some recent data suggest that 50 per cent of domestic M&As fail, while 70 per cent of international M&As fail. It is estimated that 75 per cent of all M&As fail to live up to expectations. With such high odds against success, organisations must (though they often don’t) ask the question: what we must do to maximise the potential to succeed in an M&A. In my experience working with M&As, I have found that one of the major reasons for failure is an incompatibility of cultures between the two organisations.
I was recently involved peripherally in an M&A in the medical device industry. One company (let’s say company A) was extremely interested in acquiring company B. They found that the two cultures were very similar. Then, just before the agreement was signed, a third party, company C, stepped in and made a much higher (than market) offer for the stock, resulting in a very quick decision to merge companies B and C. But these two companies had very different cultures. Company C was directive, controlling, and non-participatory; company B had a history of employee involvement with freedom and autonomy. The employees in company B were shocked to know they would not be merging with company A but would become part of company C. The first day after the merger, the CEO of company C held an all-employee meeting in company B, making very clear in case of doubt, what the culture of the merged company was going to be. Employees in company B began to leave the company in droves, both voluntarily and by request, as company C began to replace employees in company B with its own. I don’t know what the outcome will be in long-term, but certainly in the short-term the outcome was not a positive one for employees of either company.
Many years ago, I closely observed the merger between Republic Airline and Northwest Airline. Republic Airline was well-known for its service, but did not have a good reservation system and was lacking in other important process infrastructures. Northwest, on the other hand, had a long history of poor service to its customers (late departures, lost luggage and poor customer interface) and to its employees (a very long history of poor labour relations), but it had great infrastructures. The hope was that the resulting airline would acquire the best from each to produce a really good airline. I flew on the first day of the merger; the Republic employees who were on the counter had not been trained to use the systems, and for two years, the metrics of performance for an airline were dismal. The merged airline has continued to be seen negatively by the flying public and by its employees. It is now going through the final stages of merging with Delta Airlines. This is another example in which HR was not involved in the process until well after the damage was done.
Another problem that can occur is a company goes too far afield in acquiring a company so that there is not a good mesh in the missions of the two companies. When American Express, several years ago, acquired a travel company, they anticipated compatibilities in their missions. But they found very little compatibility between its core competencies in its finance industries and the needed core competencies in the travel industry. Very shortly after the merger, American Express sold off the travel business.
A 2001 study conducted by Towers Perrin and SHRM (Society for HRM) found that substantial involvement of HR executives during the due diligence stage of acquisition was a key component in 72 per cent of successful deals, but their role was substantial in only 39 per cent of those that failed, suggesting that M&As are almost twice as likely to succeed when HR is involved. In fact, of the top five roadblocks to M&A success, three were related to HR: 56 per cent cited incompatible cultures, 53 per cent for loss of key talent, and 53 per cent to clash of management styles. No one will argue that the lawyers and the accountants shouldn’t be involved in the due diligence phase of the M&A, but evidence provided in this article should suggest that leaving HR ‘at home’ is almost certain to result in failure or at least a less-than-desired outcome of any M&A. Success will always depend on multiple factors, but the odds for success can be improved with involvement of well-prepared HR professionals.