How often have we read that cultural differences are the cause of a failed merger?
For many years, I have been intrigued, puzzled and occasionally confused by organization culture. Complex, defying easy definition or manipulation, company culture has been noted as an essential ingredient of greatness in many situations while being fingered as a key determinant of failure in others.
In casual business discussion, we have found useful shorthand for visible cultural attributes and often hear statements such as, “This organization has a collaborative culture,” or “The CEO makes all the decisions in that company.” We make connections between cultural attributes such as these and the organization’s relative effectiveness only to find out that similar attributes have led to the opposite outcome in another situation. Furthermore, a culture that once supported growth and profit might not prove as successful in the future for the same company. Culture and success are moving targets, and often we invoke culture to explain successes and failures that can’t be attributed to other causes.
So, how do we deal with the widely-held belief that cultural differences are behind most merger failures? I was brought to this question by a client recently, a senior executive who had been in a similar role in a company that was sold to a strategic buyer around a decade ago. He related that the leaders of both companies had been certain at the time that the integration would go smoothly since people in both organizations shared the same values. Both organizations valued highly ethical behavior, a commitment to “doing the right thing.” Both companies had long histories of encouraging innovation and a commitment to cost savings. With these values in common, surely the organizations would fit together well.
As it played out over the next year or two, many unexpected fundamental differences emerged, and most of the leaders of his function left the new organization voluntarily. My friend’s insight was that while the values were similar, the cultures of the two companies were very different. In his view, the larger organization operated like the federal government. One was expected to “come in, do your job accurately and well, but avoid causing consternation or conflict.” His own organization, by contrast, had rewarded people for what they referred to as “constructive dissatisfaction.” In this organization, people were expected to come in to the office prepared to think about how to save money in a product, or push an idea with one’s boss. People were expected to challenge the status quo in one company and avoid disruptions in the other. So, while common values represented agreement in principle on basic commitments, culture differences determined that there would be big differences in the way the organizations behaved in achieving those ends.
So, what do you do if you are contemplating an acquisition, either as buyer or seller? Can you reduce the unintended consequences of cultural differences in merger integration?
In a surprising number of mergers and acquisitions, there is literally no thoughtful discussion of cultural differences and of either the impact that these might have on the success of the integration or the ways in which cultural differences could be addressed to reduce the disruption of culture clashes. In our experience, there are some general approaches that make sense in certain circumstances:
- The two cultures are significantly different, and can stay that way. If the acquirer is building a portfolio of unrelated businesses, or if the intent of the deal is diversification rather than operational leverage or market penetration, then cultures can be left alone. An extreme example is Berkshire Hathaway, which regularly buys “a wonderful company at a fair price” and lets it operate with a lot of independence within its holding company structure. There are fewer examples today than in decades past of this kind of acquisition: strategic buyers make relatively few diversifying acquisitions today.
- Create a new culture from the best that each company has to offer. This approach is considered most seriously when two large, successful companies merge in what is sometimes dubbed a “merger of equals.” Often proposed but rarely achieved, creating a new culture requires deep trust and collaboration between the companies and relentless reinforcement on the part of the CEOs of both companies. HP and Compaq successfully followed this approach in their very public 2002 combination. In addition to using the 8-month announcement-to-close period to carefully plan the integration, the integration team adopted Compaq cultural dimensions where they believed that these would be better than some less effective dimensions of the HP culture. By contrast, in the example discussed with my friend above, the leaders professed intent to pursue this approach, but faced overwhelming resistance from their own bureaucracy, and failed in the attempt. Many merger negotiations, such as those recently between ad giants Publicis and Omnicom as well as those between many of today’s large law firms, break off over cultural differences.
- Insist that the acquired company adopt the buyer’s culture. This approach is often employed when there is a significant size difference between the parties and when the acquirer is consolidating an industry by rolling up numerous similar but smaller entities in the same market. NationsBank (now Bank of America) and Rinker Materials (now Cemex) pursued this approach during their periods of frequent acquisition in the 1990’s, creating strategic advantage with their highly predictable and unwavering integration approaches. Financial buyers seeking to build companies off of initial platform investments would do well to consider which culture would be most helpful in achieving their goals.
Many deals today fall outside these convenient categories. Most challenging from a cultural perspective is that of the corporation seeking to fill a void in its product line, sales channel or geographic footprint by acquiring a very successful smaller firm. In these situations, one must balance two truths. The culture of the acquired firm contributed, perhaps significantly, to its success. The acquiring firm has its own cultural profile linked to its long-term performance. There is no simple solution to striking the correct balance, but ignoring cultural differences, and culture’s contribution to success, is a poor approach indeed.
Culture differences will always be a topic of discussion after the integration has been underway for some time. What will it take for leaders to think about culture before cultural differences throw a wrench unexpectedly into their integration plans?