Merging Successfully- The importance of understanding organizational
culture in mergers and acquisitions
By Dr Kent Rhodes
A Critical Concern in Merger and Acquisition Strategies
Mergers and acquisitions as growth strategies are once again in
vogue. This business drama seems to be fueled by recent highly visible
mergers between rich and famous players. Even speculation around
a low ball offer by Comcast to acquire Disney seems to excite global
interest in corporate marriages. However, like all such deals, long-term
success is rarely accomplished by a mere combination of cool stuff
and know-how. In the midst of all the hype, a well documented fact
is that most merger and acquisition activity rarely delivers the
highly anticipated synergies between companies. Throughout a merger
or acquisition, people in an acquired company often complain that
they don’t know what is happening, express fear about losing
their jobs, and feel demoralized as to the future of their contributions.
Failed mergers that otherwise have a sound strategic and financial
fit are typically the result of the irretrievable loss of intangible,
messy-to-measure, and difficult-to-implement human factors on which
the company’s tangible assets ultimate rest.
Traditional integration practices have been built around consolidating
key resources, financial and physical assets, brand names, and tradable
endowments. The most forward thinking integration strategies also
capture key pieces of elusive core competencies, such as an organization’s
best practices, skills, knowledge bases, and routines. Typically
excluded are critical root strategic assets, which can make or break
a union that is otherwise “made in heaven.” These root
strategic assets include collaborative leadership, cultural cohesion
and talent retention.
The Impact of the Merger or Acquisition on the New Organization
Mergers and acquisitions immediately impact organizations with changes
in ownership, in ideology, and eventually, in practice. Of the three
root strategic assets noted above, cultural cohesion is most often
the critical asset in the eventual success or failure of the overall
deal and the one that impacts the extent to which qualitative talent
retention can be attained.
Despite the fact that it is increasingly common these days for
companies to publish their cultural traits or values, what is listed
does not always reflect the actual culture of the place. Anthropologists
have long known that the task of learning about a specific group’s
culture does not start by asking members themselves to identify
the specific traits. In fact, cultural traits are not readily identified
by the members of a social group. Understanding the depth of cultural
influences that are practiced over time within a specific group
or organization requires long periods of reflective observation
and the formation of key questions about beliefs, disciplines and
innovative problem solving strategies.
Cultural Cohesion
Discerning a company’s cultural cohesion is based on identifying
the organization’s bedrock cultural components, which are
the functional equivalents of the structural elements of a building:
the foundation, beams, pilings, etc. Careful inspection, identification,
and assessment of the supporting walls of a building are crucial
to determining the ultimate integrity of the space before it can
be effectively and safely renovated or restructured. While a company
might be acquired because of the synergies around brands, competencies
or physical assets, the success of the merged firm may well depend
on whether or not steps have been taken to identify and retain the
organization’s primary cultural underpinnings that support
and maintain those valuable resources.
The practice of cultural cohesion as a root strategic asset in merger
and acquisition integration involves identifying the underlying
disciplines, conditions, and beliefs that make up the internal weight
bearing structures of an organization and lead to the formation
of outward cultural traits. However, identifying and describing
a company’s culture is inadequate, in and of itself, for maintaining
key structural supports of the organization. Even if cultural traits
are accurately identified, the process of maintaining their integrity
within a new organizational structure presents an entirely new set
of challenges that most managers are ill equipped to meet successfully.
Cultural traits by themselves don’t provide enough information
to determine where specific structural supports are located in a
company. Cultural traits tend to be simple outward manifestations
of the more complex underpinnings that hold a company together,
help define what the company does, and, more importantly, how the
company does it.
Terminology to Identify Cultural Cohesiveness
Developing terminology that identifies cultural cohesive elements
common to all organizations can be a first step for managers to
begin the process of understanding of how cultures form and the
ways in which cultures determine behavior, as well as of identifying
elements required to retain structural and cultural cohesion throughout
the merger and acquisition process. This first step of understanding
cultural cohesiveness and the origins of cultural traits provides
critical strategic information that managers need in order to make
an acquisition produce true synergy and add real value.
By borrowing terms from diverse disciplines, we can create language
that helps us examine specific bedrock origins of culture that are
common to most organizations and that result in visible cultural
traits and practices. Each of the cultural cohesion classifications
listed here describes a cultural origination point and its outward
cultural trait and suggests implications for effective merger and
acquisition integration strategies. In mergers and acquisitions,
immediate replacement of cultural cohesion practices can result
in the loss of a key cultural driving force for individuals in the
organization who are crucial to the work of the new organization.
Following are seven of the most important of these concepts.
Metallurgy
Traditionally, metallurgy describes the structures and properties
of metal, the way it is extracted from the ground and is refined,
and the various means of creating things from it When describing
organizations, the term refers to a system of processes and procedures
that occurs in all organizations and that creates specific cultural
traits around the ways people approach their work on a day-to-day
basis.
Over time, a successful organization’s approach to truly
innovative work that is done to create a product or service becomes
a “best of” practice. Possible cultural traits that
develop as a result of a company’s approach to “organizational
metallurgy” could be a sense of overall pride of accomplishment,
reverence for the company’s long history of always carrying
out processes and procedures in a particular way, and overall openness
or resistance to change. In view of the cultural traits embedded
in the “organizational metallurgy” of a given company,
managers involved in mergers or acquisitions might not want to rush
to replace these practices. The history of such processes can be
leveraged to the acquirer’s competitive advantage if investigation
of the practices’ validity warrants. The extent to which that
history of practice does or does not result in pride or stagnation
is a critical piece of information for managers moving forward in
an effective integration strategy.
Mythology
Mythology is the group of stories, ideas, or beliefs that become
a part of an organization. While these stories are not necessarily
based on facts, they usually reflect historical accounts of greatness
or tragedy and will likely show up in the organization either as
a respected legend or common gossip. Mythology in a company can
serve either to create a culture of inspiration or a culture of
mistrust. During the process of mergers and acquisitions (M&A)
integration, managers should identify organizational myths. If those
myths serve inspirational purposes or appropriately link current
work to the company’s history, creating ways to acknowledge
such stories could improve the odds of talent buy in.
Missiology
Missiology is the process of persuading others to accept or join
a belief, cause, or movement. Most organizations have a tacit, though usually quite subtle, process
through which new employees are effectively assimilated into or
blocked from the organization. Depending on the unspoken practices
of the organization, this assimilation process may also include
opportunities to commit to or question company values. The attitudes
that current employees have in supporting or prohibiting the integration
of new talent directly impact the integration process. It is particularly
important to realize that this informal socialization process may
not be the same as the new employee recruitment, orientation, and
professional development programs set up by the Human Resources
Department even though the latter may be held up as providing ways
to acculturate new members so that they learn valuable cultural
traits.
Implications for effective M&A integration include a realization
by senior managers that an attitude of “This is a great place
to work” is a powerful resource to fold into the company.
Its antithesis, “We hate this place,” offers a challenge
to replace that negative attitude and create a productive outlook.
Managers who correctly identify a company’s existing missiology
or approach to integrating new people have an advantage in designing
new strategies that represent well-thought-out processes for enlisting
broad support of the integration process. At the end of the day,
it is the people within a company who have the most impact on how
effectively new talent is integrated into the organization and whether
that integration is into a positive or cynical culture. Managers
who leverage in a positive manner the resources of those individuals’
attitudes can increase the odds of successful integration of those
resources.
Meritocracy
A meritocratic system gives opportunities and advantages to people
on the basis of their contributions and abilities rather than on
the basis of their job longevity, connections, status, or other
such attributes. People are more likely to contribute genuinely
to the organization and maintain trust when there are clear and
fair promotion, advancement, and recognition practices. More importantly,
the degree of meritocracy can be an indicator of the real ethical
practices of a place. The degree to which meritocracy is perceived
to be the norm translates into cultural traits of reward expectations
and the extent to which such expectations are fair or not. Implications
for effective M&A integration include addressing ways in which
individuals’ contributions are recognized and valued. People
will take notice if the merging companies have differing traditions
and systems for advancement and reward regardless of whether or
not they perceive a company’s practice of meritocracy to be
positive or negative. Since each organization weights contributions
and abilities differently, it is important for managers to recognize
the real reward systems that are in place in the merging companies
and how these systems differ in the ways they are implemented and
perceived by employees. These differences could impact employees’
resistance to or acceptance of integration efforts.
Modality
Modality is a treatment or strategy applied to a specific disorder
or circumstance that needs improvement. Typically used as a medical
term, modality can be medication or therapy used to treat an illness
or disease. In a company in which there is a healthy awareness that
dysfunctional behavior and processes can exist, appropriate modalities
must be chosen to address or remedy specific problems rather than
ignoring or accepting the problems. Over time an organization may
have accumulated an impressive “medicine chest” of very
specific remedies that could bring value to the acquisition. Managers
would do well to identify and evaluate these modalities for integration
into the new organization. On the other hand, if an organization
has routinely avoided or ignored organizational maladies, a triage
approach to those challenges might be necessary in order to move
the integration process forward. The way successes and failures
are acknowledged and dealt with is important to successful integration.
Effective “treatments” within a company may be worth
close scrutiny and an effort to bring them into the merged organization.
By the same token, preparing strategies to integrate into a new
entity an organization that has a history of ignoring problems or
treatments requires particular attention during the integration
process in order to avoid the transference of ineffective modality
practices.
Mores
Mores are customs and habitual practices, especially as they reflect
moral and ethical standards that a particular group of people accept
and follow. This cultural cohesion classification reflects the ways
ethics plays out in the daily life of the organization and the ways
in which ethics statements and/or ethics training impact behavior
within an organization. Implications for effective M&A integration
include paying attention to the ways ethics is practiced in the
organization: How do ethics training programs affect employees?
Is training pushed down throughout the organization simply to meet
requirements, or is living with integrity actually valued and rewarded
within the organization? Managers should identify the mores of each
organization and the ways in which they can be effectively shared
across organizations. If an acquiring company’s mores are
viewed as being based on low standards, people in the acquired company
will be less likely to support integration initiatives and may leave.
Strategies should be formulated to equalize mores between organizations
by advancing a “best of” approach to mores and ethics
development in the new organization.
Mettle
Mettle -- the courage, spirit, or strength of character of a group
within an organization or the particular mental and emotional character
unique to an individual. The extent to which individuals pay attention
to their own spiritual development or are encouraged by the organization
to develop mettle can result in an important cultural value. This
cultural cohesion classification has only recently begun to receive
attention as a valuable characteristic of companies and individuals.
Effective M&A integration suggests that managers should look
closely at ways that individuals show their mettle by practicing
altruistic concern and respect for others within the organization.
Enhancing and supporting these behaviors is critical to the success
of the organization and could serve as a positive leavening effect
throughout the organization.
Conclusion
The concepts of organizational integration, or diffusion, continue
to provide challenges to increasing the success of mergers and acquisitions.
Noted anthropologist John Honigmann sums up those challenges:
“Successful [cultural] diffusion is never automatically accomplished.
Innovations diffuse when they meet certain conditions and diffusion
promptly slows down or ceases when other conditions exist. Anthropologists
who have studied what lies behind the spread of culture stress the
importance of compatibility. Diffusion speeds up whenever an origination
is congruent with strategic features of the receiving culture.”[i]
While these eight cohesive classifications tend to be consistent
across organizations, they are also highly interactive with each
other. They offer glimpses into the origins of culture within an
organization. They provide a framework for developing sustainable
integration practices of root strategic assets and have implications
for increasing the success of mergers and acquisitions.
[i] J. Honigmann, Understanding Culture. (New York: Harper &
Row, 1963): 338.
References
R Grant, “The Resource-based Theory of Competitive Advantage:
Implications for Strategy Formulation,” California Management
Review, 33, Issue 3 (1991): 114-135.
E. Penrose, The Theory of the Growth of the Firm (New York: John
Wiley and Sons, 1959).
R. Amit and P. Schoemaker, “Strategic Assets and Organizational
Rent,” Strategic Management Journal, 14, (1993): 33-46.
K. Conner, “Historical Comparison of Resource-based Theory
and Five Schools of Thought Within Industrial Organization Economics:
Do We Have a New Theory of the Firm?” Journal of Management,
17, Issue 1, (1991): 121-154.
J. Honigmann, Understanding Culture. (New York: Harper & Row,
1963).
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