Unpicking the "Value at Risk" of Cultural Incompatibility in M&A

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Terry Tyrrell, Worldwide Chairman, Brand Union

As politicians debate the consequences of a ‘hard’ or ‘soft’ Brexit, the implications from this historic move are unavoidable. The pound has hit the lowest levels in three decades and uncertainty is prolific. However, for those looking towards the UK, a weak pound makes for an attractive market for acquisition. Meanwhile, a landscape of uncertainty spreads caution. Whatever the outcome, M&A activity continues to be high on the agenda.

M&A activity worldwide reached $4.6 trillion in 2015, the highest ever recorded. Despite the impression, this has not stemmed from a healthy global economic outlook. The appetite, on the whole, has bred from necessity as businesses combat difficult economic conditions and look to M&A to provide stability, consolidation and ultimately drive sales.

The picture in 2016 is looking very similar. This year we have already seen major deals such as Hewlett Packard Enterprise (HPE) merge its non-core software assets with Micro Focus International and the back and forth of AB InBev and SABMiller finally come to fruition for £79bn. However, are these companies truly prepared for the huge change acquisition can have on both companies? And what about all the hundreds of other mergers and acquisitions that didn’t manage to end with a deal? 

According to strategy consultants McKinsey, nearly 70% of all M&A are unsuccessful. The Society for Human Resource Management state that 50% of mergers fail because of cultural incompatibility. If the latter statistic is correct, then a huge proportion of potential mergers can pre-empt failure by examining each company’s cultural compatibility before closing the deal.

With this in mind, it is even more shocking that only 27% of businesses surveyed in the KPMG 2015 M&A Outlook survey analysed the cultural compatibility of the firms set to merge.

Financial and structural synergies are championed as the key ingredient for successful M&A. However, striking a successful long term partnership goes far beyond this. Understanding in advance how and whether or not the two company’s cultures can be effectively merged will help to  migitgate risk and avert potentially millions of pounds worth of costs and lost value.

When Publicis and Omnicom failed to make their merger dreams a reality, Omnicom’s CEO John Wren said that, “We knew there would be differences in the corporate cultures. We underestimated the depth of the differences”.

To avoid an M&A disaster such as this, ensuring the two cultures are compatible, before signing the dotted line, is vital. Cultural compatibility might seem like a subjective and intangible concept to measure. However, there are in fact scientific ways to analyse it across the two companies and even place a financial figure on the cultural incompatibility gap.

A small percentage gap can be rectified. However, there are some instances where, if the gap is too significant, it will simply be too challenging to make the merger function effectively. A huge financial saving can be made by working out this ‘value at risk’ prior to M&A taking place.

If the cultural challenges are identified early, there are steps that can be followed to bring about the desired outcome.

Unite your organization around a clear and compelling purpose

In order for the merger to be successful leadership and staff need to be aligned and know where they stand within the company. It’s important to develop a shared, clear and compelling purpose for the merged organisation. You then need to align your culture building on mutual strengths capabilities and business plans around that one purpose.

AB InBev and SABMiller’s merger had been rumbling on for months before finally coming to completion this month. However, as we all know, this isn’t AB InBev’s first experience of M&A. 

In 2008, InBev, the global beverage company acquired Anheuser-Busch.. Early in the integration process, an important part of the successful acquisition derived from  the leadership team focusing on the most effective way to introduce InBev's long-term global strategy to Anheuser-Busch employees, utilising InBev's "Dream-People-Culture" mission statement to excite the imagination of the AB organization. Only time will tell whether the current AB InBev – SABMiller merger will see a smooth transition.

Create a tailored action plan to achieve organisation–wide alignment

Once your purpose is in place, you need to have a clear plan of how the two companies will work together moving forward, with a united goal in mind.

When Disney and Pixar finally merged in 2006 after years of negotiations, it proved to be a huge success. Why? Because each company knew their responsibility and how they would move forward together. Under the merger, Steve Jobs became the majority shareholder of Disney and a board member. Pixar co-founder, Ed Catmull, became the president of Walt Disney and Pixar Animation Studios. Pixar executive vice-president John Lasseter became the Chief Creative Officer of both studios. This was something Jobs had fought for throughout the merger talk. It was imperative for him that Pixar would not lose its independence and be eclipsed by Disney.

Coach leaders to inspire and unify the merged organisation

An acquisition or merger needs a strong leader across the two companies. He or she must have the authority to make crucial decisions, coordinate taskforces and set the pace.

In 1998, Mercedes-Benz manufacturer Daimler Benz merged with U.S. auto maker Chrysler to create Daimler Chrysler for $37 billion. The logic was obvious: to create a trans-Atlantic, car-making powerhouse that would dominate the markets. But by 2007, Daimler Benz sold Chrysler to the Cerberus Capital Management firm, which specialises in restructuring troubled companies, for a mere $7 billion.

So what happened? Many felt that Daimler strutted in and tried to control the team at Chrysler. Such clashes tend to undermine a new alliance. A leadership team needs to be in place to ensure that the two companies are merging in unison and working together.

Therefore, it is clear that making sure that both company’s cultures can work together is a fundamental part of the overall integration process. However, this isn’t to be taken as an afterthought once other – usually financial - decisions have been made. It needs to be one of the first questions asked by both parties before considering the M&A and it requires its own rigorous financial measurement to assess the ‘value at risk’. If not, you are putting your business’ reputation and finances in serious danger