Message to Merging Corporations – Cultures Matter

Poorly matched cultures can sink even the most promising merger or acquisition if they’re not joined effectively. Poor cultural integration reduces morale, hurts productivity, pushes out talent and saps profitability.

Fusing two cultures effectively is a delicate and difficult undertaking, with too much at stake to be carried out incorrectly or approached haphazardly. To successfully blend two cultures during a merger or acquisition, organizations need to build a cultural integration plan pre-merger, with senior leadership buying into the process wholeheartedly and seeing it through to fruition.

Recognize the importance of your company’s culture

For this to happen, corporations must first recognize the central role culture plays, and the significance culture assessment holds during the due diligence and integration stages of the merger or acquisition process. This is often where trouble starts.

A global study by Aon Hewitt showed that nearly half of 123 organizations ranked culture assessment and integration in their top three priorities in due diligence process, with 30 percent placing them in the top two priorities. However, during the integration stage, only 24 percent rated cultural integration in the top two priorities.

Put more bluntly, a McKinsey article stated that 95 percent of executives agreed that post-merger integration only succeeds if both cultures fit, while just one quarter attributed integration failure to poorly matched cultures. Too few executives appear to understand the role culture plays during the integration process.

Keep it tight. No, keep it loose.

McKinsey said an organization’s culture should aggregate its vision, the values that guide employee behavior and the management practices, norms and attitudes that characterize how work gets done.

As visions, values and management practices vary among companies, successfully joining any two cultures together often entails avoiding clashes and bridging fault lines. The biggest tensions between two companies often stem from a clash in “tight” and “loose” cultures, according to a Harvard Business Review (HBR) article.

A tight company culture prizes predictability, routine, organizational efficiency and consistency; they maintain cultural traditions through rigid rules and processes. By comparison, fluid and creative loose cultures mostly shun rules and encourage new ideas. The stark differences in these cultures often erupt when they’re joined in mergers or acquisitions.

HBR studied the matter more closely, aggregating numbers on more than 4,500 international mergers from 32 different countries between 1989 and 2013. On average, they found that companies battling divides between tight and loose cultures saw their return on assets fall by 0.6 percent three years after the merger, or $200 million in net income per year. For more pronounced mismatches, the decline grew to $600 million.

McKinsey noted, corporations with more aligned cultures and stronger organizational health generate on average three times the shareholder returns of companies that lack these features.

Leadership must take the lead

To succeed with cultural integration post-acquisition or merger, senior leadership should take a number of steps when designing a cultural integration plan. An important but frequently missed first step is to appoint someone to lead cultural integration on behalf of the senior leadership team with direct access to the CEO to ensure culture stays on leadership’s agenda. Without this, senior leadership often find themselves ill-equipped to navigate the integration process and are more at risk to endure cultural clashes.

While there’s no single approach to constructing a cultural integration plan for a merger or acquisition, these general tips and guidelines should be considered:

Due Diligence and Culture Audit

  • Include culture as part of the due diligence process to gain a good understanding of it pre-acquisition or merger
  • Determine, before agreeing on the future culture, how wide the current gap is between the existing cultures of both parties; some ways to achieve this are:
    • conduct culture interviews with management and staff
    • run employee surveys to provide an anonymous culture temperature check
    • use employee focus groups to identify differing perceptions of each organization

Setting the Direction and Cultural Agenda

  • The CEO sets the vision for the newly merged or acquired company and the values that flow from it. This is crucial, as it provides direction and a sense of purpose
  • Set the cultural agenda, understanding that the combined future culture will require time, consideration and the commitment of all senior leaders and Merger and Acquisition stakeholders
  • Understand that the process of selecting the new senior management teams sends a strong message to employees around future culture and expected behaviors
  • Lock in key talent early in the process

Teaching Desired Behaviors

  • Identify the desired behaviors and expectations that align with the expected values around leadership styles, how work gets done, decision making, innovation, governance and employees
  • Host workshops or team-building sessions for the most senior to the most junior level staff to communicate and provide training on these behaviors and expectations
  • Design Human Resources programs and practices to further ingrain these behaviors and expectations

Enroll and Empower Leaders at All Levels

  • Empower middle management to assist cultural change as employees tend to follow their immediate manager’s example, even when that behavior is at odds with policy or procedure
  • Inform and equip leaders with the required resources to actively implement a successful cultural integration
  • Enroll leadership from both organizations to model behaviors, drive change and address any developing power conflicts, uprisings or turnover rapidly

Overarching Messages as You Progress

  • Complete the assessment phase in a timely manner, then enact planned changes to organization structure
  • Manage employee engagement proactively using a communication plan that monitors and measures results continuously
  • Communicate progress and the importance of the process regularly to all employees and additional stakeholders; listen to and address their concerns

Understand that even the best conceived cultural integration plan can fall apart once the deal is signed, as priorities change and day-to-day business demands take priority. Many leaders do not fully grasp the importance of cultural integration and the compounding effects of its failure until it’s too late.

It can take several years for mindsets and behaviors across organizations to adapt to changes in culture. However those shifts can only happen if companies plan accordingly, which means prioritizing culture in the due diligence, planning and transformation stages. Developing the right approach to integrating cultures beforehand can be the difference between a merger or acquisition that brings out the strengths of both companies and one that leaves the combined company weakened and struggling to find its direction.

Veronica van der Hoeven is Managing Director of People Strategy at MUFG Investor Services