Navigating Culture Change In Mergers and Acquisitions

Growing Trend of Mergers and Acquisitions

The global market of business is a constantly changing landscape with new challenges arising all the time. As markets change and develop, some grow volatile while others grow flat, forcing companies to question how to navigate the future to insure it will be bright and prosperous. A growing solution by many organizations is to seek out mergers and acquisition (M&A) possibilities that will open up new growth opportunities. M&A can be a highly risky endeavor for organizations, and the time and energy can be overwhelming for leaders, employees and even customers caught up in the process. As with any business venture, high levels of risk can potentially yield high rewards, or catastrophic results. If an organization does desire to pursue such an opportunity, though, the possible outcomes can prove to be greater than any reality the separate organizations could have hoped for without coming together. For many organizations in volatile or flat markets, M&A endeavors can sometimes be the only option for avoiding a long and painful process of closing their doors. Choosing survival by diversification through acquisitions and moving away from markets that are volatile and flat may be the only option, regardless of risk.

Failure of Most Mergers and Acquisitions

In recent years M&A activity has risen considerably. In 2012, M&A activity rose 26% from 2011, and around the world M&A acquisition has been booming for nearly three decades. Unfortunately, there is a high rate of failure and dissatisfaction with M&A performance. Though M&A endeavors can save organizations from closing their doors by creating new opportunities for revenue and partnerships in a very competitive global market, they also present a good number of high risks that many organizations are unable to navigate. A tax and advisory firm, KPMG, cited in January of 2014 that issues in culture, human-capital, operational, and rationalization are the top concerns when integrating two organizations in a merger. Dolan and Reich discovered in a similar study that senior management often fails to perceive the necessary changes, or fail to take action on necessary changes, which leads to catastrophic consequences for both organizations. The findings indicated it was necessary for senior leaders of a merger to make a fundamental shift away from dominating forced change to an approach built on partnership.

Often times, M&A is portrayed from an ideal perspective as an integration of two legacy cultures, preserving the best of both companies. The reality however can be a much different story. Often, M&A endeavors create a mentality that some in the merger are winners while others are losers. This perspective by those within the merging organizations gives rise to fear and apprehension leading to fevered maneuverings, political dealings, and survival driven behavior at all levels in the organizations. According to analysis by the Hay Group in 2007 of over 200 European M&A’s, executive leaders considered only nine percent of M&A endeavors as completely successful in achieving their stated objectives. Countless surveys have revealed the determining factor of M&A success resides in the cultural integration of the merging organizations, primarily in the success of obtaining methodical and thorough measurements of the cultural differences between the merging organizations. Understanding the cultures that exist within the merging organizations, and having a clear strategy as to how they will become one healthy culture, is the key to a successful merger.

Overview of Culture

To understand how to properly navigate the cultural integration of two existing organizations, it is important to have an understanding of what culture ultimately is and how it relates to the effectiveness of executive leadership.

Culture is an organization’s reflection of the values, dominant leadership styles, language, symbols, procedures and routines, and success definitions that make a given organization unique. It is the feel of an organization and the collective existence of the individuals that make it up. Culture is the foundation of social order that governs how individuals in a given group operate. It is through culture an organization is able to achieve stability giving a sense of how individuals are supposed to perceive, feel, and act in various circumstances that comes to be understood as the social order of the organization.

A given organizational culture has a great number of influences that assist in its creation. The primary influence of any organizational culture is the macrocultures the organization exists within. Most influential is the national culture of an organization. An IT company in Dubai, UAE is going to have strong cultural differences than an IT company in Paris, France because of the great distance between the national influences of both organizations. There are strong religious differences, national customs, as well as historical values that are unique to both countries and will influence the cultures of both IT companies. Despite both organizations being in the same business sector, the cultures are going to be vastly different. This is a paramount concept to understand if a merger is to be considered, even if the cultures are not as different as this example.

Culture is an abstraction which is hard to conceptualize for most people, but vital for executive leaders to understand. Schein gives eleven observable events and underlying forces that can help executives conceptualize culture.

  1. Observed Behavioral Regularities of Interaction: cultural elements such as language, customs and rituals
  2. Group Norms: standards and values that evolve in a working group
  3. Espoused Values: publicly articulated principles a group is attempting to achieve
  4. Formal Philosophy: broad policies and ideological principles that guide a group’s actions
  5. Rules of the Game: unwritten rules a newcomer must understand to survive within the organization
  6. Climate of an Organization: the physical layout of the space and how members interact with customers and other outsiders
  7. Embedded Skills: those skills deemed necessary abilities for members of the organization in order to accomplish given tasks, but are not necessarily articulated in a formal way
  8. Habits of Thinking: mental frameworks guiding the perceptions and thoughts of members
  9. Shared Meanings: emergent understandings created and shared by group members
  10. Root Metaphors: the way a group is characterized in material artifacts such as office layout and buildings
  11. Formal Rituals: celebrations that reflect importance of key events

These eleven underlying forces of cultural identity can help executives begin to grasp the culture of the organizations they lead. It is important to understand these underlying forces are strong and deeply ingrained into every organization, so to assume merging two distinctly different cultures can be done without full understanding of each is naïve and even neglectful.

To better equip executives to understand the existing cultures in their organizations, there are three levels of manifestation to observe. The levels range from being tangible manifestations that are seen and felt, as well as deeply embedded assumptions that make up the essence of culture. The three levels of culture are artifacts, espoused values and beliefs, and basic underlying assumptions.

Artifacts are the visible products of the group that are seen and felt by outsiders. They can include language, technology products, artistic creations, clothing, stories and legends, posted values and ceremonies held.

Espoused beliefs and values are time tested and proven methods of operation, decision making, thinking processes and interaction guidelines that a group collectively adopts due to sustained reliability with clear results.

Basic underlying assumptions are nonconfrontable and nondebatable assumptions held by the individuals of a group that give the group identity, behavioral guidelines, and relational parameters.

These levels of culture analysis allow executives to see culture in a more tangible way than the abstraction they more often see culture as. They will understand culture acts as the internal rules of engagement for those on the inside of the organization, and during a merger, culture is disrupted as those on the outside suddenly become a part of the inside, creating lines of demarcation for individuals in both organizations.

Since organizational culture will vary in strength and stability depending on the length and emotional intensity of each organization’s history, the length of time necessary to merge two organizations can vary from a number of months to several years. It is advantageous for a quicker integration of the two cultures within a merger, even before the merger is finalized if possible. Those organizations that wait to integrate the merging cultures until after the transaction is finalized are the companies who struggle and often fail in the merger endeavor. Culture provides people with a system of beliefs with which they operate from, filtering the world in such a way that equips them with the tools to confront the reality they face. In a merger, this filter is disrupted and creates instability, and the longer that instability exists, the higher the risk the organizations will lose their human capital. Culture is a function of human interactions, and fundamental changes to those interactions create uncertainty in the evolution of the culture being formed, which may yield unknown and unwanted results. It is for this reason that executive leadership must be in the forefront of navigating the cultural changes of a merger, and be intentional about the kind of culture being created.

The Value of Leadership in Culture

Culture and leadership are closely intertwined with one another, despite the fact that many executive leaders are unaware of culture and have no understanding as to how to manage and shape it. Ultimately, culture is created, embedded, evolved, and manipulated by leaders; they are the main architects that shape culture. Leadership and culture are two sides of the same coin.

Despite being common knowledge that cultural integration is a primary factor in successful M&A, the lack of understanding regarding the connection between leadership and culture continues to contribute to only nine percent of mergers being considered successful. Too often, the focus of mergers is on the financial diligence and not on culture and customer retention. Both the theoretical literature and the empirical findings spanning the last twenty years suggest the success of M&A is hinged more on executive leaders navigating the cultural differences between the merging organizations, yet it is still widely ignored by executives when making decisions regarding M&A. There are two main reasons for this neglect by executives. First, scholarly literature focuses on the role of culture only in the last stages of M&A, and second, culture is a relative unfamiliar concept for executives that make it difficult for implementation for practice. This is why merger integration consultants are brought in late in the merger process after problems arise, often after the merger is finalized, and both sides are entrenched in their previously existing cultures. For executive leaders in a merging organization, it is vital to understand that culture integration may be the primary area of concern to be considered if a merger is going to be successful. As the architects of an organization’s culture, executive leaders must engage in the process of creating a new, healthy, and cohesive culture for the new merged organization.

How to Successfully Merge Organizational Cultures

Though there is a low rate of success in organizational mergers, and the endeavor is incredibly challenging, it does not remove the great opportunities that can be achieved, nor does it take away the dire need for some organizations to choose to attempt a merger. Since the opportunity and need still remains, the need for executives to understand how to successfully navigate cultural integration is what remains. Through a deeper understanding of culture, a realization of how valuable executive leadership is to culture development, and compassion for the needs of the people within two individual cultures, any executive can successful pull off organizational mergers.

There are three stages of organizational change executive leadership can navigate their merging organizations through.

Stage 1: Unfreezing – Creating the motivation to change

Unfreezing is the state an organization is in when there has been enough disequilibrium experienced that members go into coping processes that go beyond reinforcing existing assumptions. In a merger situation, members are thrown into a reality of instability and uncertainty naturally, so disequilibrium is quickly established. It is in this stage executives are able to identify dysfunctions in both organizations, identify similarities that can be built on and differences that need to be addressed. It is this stage that executives have the opportunity to dispel fears and apprehensions, while instilling security and trust among the members of the merging organizations.

Stage 2: Learning New Concepts and New Meanings for Old Concepts

This stage allows executives to reinforce shared values between the existing organizations while introducing positive concepts from the merging organizations that are new to the other. It is also when executives can introduce new ideas and concepts that are going to shape what the new merged organizational culture is going to look like. Finally, it is the opportunity to redefine old concepts and point to positive future on the horizon.

Stage 3: Internalizing New Concepts, Meanings, and Standards

It is this stage, also called refreezing, that the new concepts, meanings and standards are tested for validity and success possibilities. If the new concepts, meanings and standards prove to be unsuccessful, the culture of the new organization returns to stage 2 for another restructure, but if they prove to be successful, the new cultural identity becomes a part of the individual members of the merged organization and a new identity is established.

These three stages will equip executive leaders to begin to understand how to navigate cultural change in a merger, however nothing replaces cultural change of executives. Culture change is most effective when it starts at the executive level and permeates through the newly merged organization. Executive leadership culture development is about developing a system of beliefs, values and assumptions that can be shared by others members of the organization so adjustment to a new cultural environment can happen. Focusing on culture development at the executive leadership and management levels is advantageous because it allows cultural change to be accomplished at a relatively low cost. The danger is in assuming that organizations from a similar business sector have similar executive level cultures, however every management team develops different management cultures despite sharing similarities like business sector or even country of operation. Once a new executive level culture is established and the beliefs, assumptions, and fundamental hypotheses become a complete system shaping processes of decision making, strategy choices, principles and policy adoptions, then the overall organizational culture of the merged organization is able to take shape.

Closing Thoughts

Organizational mergers and acquisitions are challenging endeavors, even for the most seasoned executive leaders. There is a high rate of failure in merger and acquisition attempts, and the primary reason for the failure is a lack of understanding on how to navigate the cultural integration of the merging organizations. Culture of two merging organizations is the single most determining factor of success for merging organizations, and it hinges on whether or not executives can properly navigate the tumultuous waters of culture integration. There is hope though. If executives will put in the time to understand the existing cultures of the two merging organizations, even before the merger is finalized, will put together a strategic plan for intentional integration, and seek to build a strong culture that is quickly adopted by both merging organizations, then merger failure can be avoided. Executives who become architects of effective merging cultures can reap the financial, market share, and technological opportunities available in an ever-changing global market.

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