Most studies find that the majority of M&A activity does not create value for the companies involved, and that over 50% can be considered a failure, and clashing corporate culture is cited as a major contributing factor.
Over 50% of all M&A activity fails to meet goals.
A KPMG study from 2008, shows that most of the companies engaged in M&A activity do not improve their valuation. Actually, over a 10 year period, the proportion of deals that have had no impact on value, or reduced value of the company fluctuated between 66% and 83%, meaning that only 17-34% of the companies included in the study, increased in valuation.
Given that M&A is the preferred growth strategy, and it’s high failure rate, what can companies do to try and increase the M&A strategy’s succes rate?
To find out, we first need to learn why so many of these activities fail.
Clashing corporate cultures are cited as a major reason for failure
Below is a compilation of the most often cited reasons for M&A failure.
- Differences in corporate culture and clashing leadership
- Lack of post-acquisition integration planning
- Lack of understanding regarding the market and industry of the company acquired
- Lack of prior acquisition experience
- Overestimating Potential Synergies
- Paying too high of a price for the acquired company
- Poorly managed integration
- Ignoring customers during integration
- Poor due diligence
- The acquiring company followed a poor strategy, and acquired the wrong company
A 2006 study by Coopers and Lybrand found that the main reason for failure, cited by management, are the cultural differences between the organizations. they ranked lack of post-integration plan second. Many other studies also point to the clash of corporate cultures and lack of post-integration plan as major reasons for M&A failure.
Because corporate culture plays such an important role in merger and acquisition activities, it warrants special attention and focus This is especially true when acquiring across borders, and the set of cultural differences become even more complex.
What is corporate culture
Corporate culture is typically defined as the “shared beliefs and values” held by the employees of a corporation. It results from such “environmental” influences as historical experiences, management style, market and industry, company strategy, employees, and national culture. Corporate culture influences how the corporation and its employees interact, with each other and with the outside world.
Corporate culture manifests itself in three different forms (Edgar Schein, Organizational Culture and Leadership):
- Visible culture (buildings, offices, furniture, dress code, newsletters)
- Publicly stated values and beliefs
- Usually unconscious, shared basic assumptions, reflected in deeply embedded, taken-for-granted behavior.
Strong cultures provide employees with widely accepted guidelines, processes and rules of behavior. A weak corporate culture results in employees reacting to an event in a number of different ways. The strength of a culture is measured by its homogeneousness. The more homogenous, the stronger the culture.
Culture change and post-acquisition integration
As companies merge or are acquired, the different corporate cultures may or may not change. they may change a lot or just a little:
- The acquired company may be entirely absorbed by the acquirer and become fully integrated. The acquirer does not change, the acquired company adopts the acquirer’s corporate culture.
- The two companies may merge and form a new integrated company of equals, meaning that both companies will have to change to form a commonly shared corporate culture.
- The acquired company may remain fully independent from the acquirer, integration is only needed at the corporate level, while both companies can basically maintain their particular corporate cultures..
The level of integration between the different cultures varies based on the type of transaction that is being contemplated starting with the integration of corporate functions to full operational integration.
Choices regarding the level of change and the type of integration that is expected have to be made and communicated, and once the choice is made, the integration plan has to be staffed with individuals capable of implementing the plan.
It is immediately clear that M&A in an international environment adds an additional layer of complexity.
There is a need to develop a “corporate culture aware” M&A strategy
Since corporate culture plays an important part in the success or failure of M&A acquisitions, it makes sense to develop a “corporate culture aware” M&A strategy, starting with understanding your own corporate culture.
Making “corporate culture” an integral part of your M&A strategy will help you focus on “corporate culture” as part of both the due diligence process, the drafting of the transaction agreement, and the post acquisition integration plan.
Emphasis should be placed on communicating and managing the changes to the culture.