I’ll steal a bit of the title of an article I’m going to be referencing from Clayton Christensen et al – “The Big Idea: The New M&A Playbook” You’ll note that this article is from March 2011 – and sitting on this side of the decade, I can tell you that the failure rate of M&A’s is still unacceptably high – and for much of the same reasons as the authors quote.
While I’ve spoken and written quite a bit about cultures and mindsets, I’ve also done the same on costs – especially opportunity costs, foundations of change, process and making better use of the technology platforms available (get to the cloud!). So much so in fact, I created an entire personality & compatibility assessment & report that has raised interest in PE firms looking to drive M&A activity and board member selection – an unintended use but a happy surprise for the utility they’ve received from it.
Let’s go back to a key point in the article:
“…the acquirer uses the target’s business model as a platform for growth. Because the business models with the most transformative potential are often disruptive, they can be difficult to evaluate, and CEOs often believe that such acquisitions are overpriced. In fact, however, those are the ones that can pay off spectacularly.”
What that should tell you and me is that there is a fundamental benefit to M&As, they just tend to fall apart for one reason – the effort to truly integrate – culture, process, technology – all of it – isn’t being executed on.
Let’s unpack another great quote:
“A company can’t, however, routinely plug other elements of an acquisition’s business model into its own, or vice versa. Profit formulas and processes don’t exist apart from the organization, and they rarely survive its dissolution.”
And this is where we see many M&A’s start to breakdown. Beyond the technology & process harmonization, there’s the underlying condition of creating a new, harmonious system that is greater than the sum of its, formerly, two separate parts. And, as experience has shown us, technology and process – much less culture – are very much an artefact of their cultures. Too, the national culture very much leaves its fingerprints on the company culture, and it’s choice of technology & process stack.
Here’s a couple real world examples, but the caveat is that you will still find significantly differentiated examples. Company A, based out of Asia, transacting business throughout the entirety of the Pacific Basin and Europe. There is high power distance, and a very high level of formality within and across business units. Hierarchy is very much observed and not disrupted. Processes however are extremely loose and undocumented, and technology is largely open source with some cloud deployment to national cloud providers. Company B, based out of the United States, transacting business throughout North & South America, with some market penetration in Western Europe. Power distance is medium and there is a fair amount of informality & autonomy, however, hierarchies are still largely respected even if they’re not strictly observed. Process is evolving steadily and is mostly in ITIL Level 3. Technology has some one-of installations but the enterprise stack is otherwise standardized on a road map to be 20% hybrid & 80% cloud deployed within 4 years.
Those two firms merged, many meetings were successfully held until there was a growing sense of unease that information flowing from A to B was coming up incomplete. Yet the entire reason for the merger was that A had much greater margins (22% on $12B revenue) on their business (as compared to B (8% on $40B revenue) and – you guessed it – the desire was to get B to run A’s processes and achieve similar margins!
Great idea. Yet already there were concerns on process & technology harmonization before communications became an issue. Dissecting those conversations would have shown that cultural tone-deafness, on both sides of the equation, was leading to increasing error-rates on communication back and forth – and it was starting to spin more and more out of control. Ideally, the merger plans would have included team building and culture change in both organizations towards something that was workable (at first) for both with the intent of understanding what was behind the greater margins and how to translate those between the two companies.
Yes, I’ve intended to end right back on the same topics that are central to our work – communication, and culture. Technology & Process are the easy parts – once you have transparent communication & a new emerging culture. When those components aren’t tended to, you’re going to have an increasingly harder time trying to harmonize systems. There are plenty of smart folks that built those system – and the harmonization challenge isn’t technology or process based. It’s having that same team environment that was there when these systems were built, tested & deployed – something that is distinctly not in place in the case of an M&A unless it is specifically planned for.
If you’re considering or are part of an M&A – think about team and company culture differentiations & differentiators – and what culture you want to create that’s a combination. Don’t go it alone. Make sure leadership and teams are involved in those very intentional, planned conversations. You want to focus on building rapport, establishing clarity in intent, actions & goals – and from there, trust will come about – trust, which is central to any type of relationship.
Here’s the TL;DR version:
If you’re in an M&A situation (regardless of role or work load), focus on these 3 things first:
- Build rapport by creating clear intentions, actions and goals
- Gradually establish transparent, candid, safe conversations – this will be the step where taking cultural differences will be critical
- Actively build trust by creating team building exercises – if your teams are virtual and remote this is important, and it can be done, it simply requires more effort
Finally consider this quote from Benjamin Franklin:
“We must all hang together, or, most assuredly, we shall all hang separately.”
PS: We’ve done this a few times, drop us a note.