Company culture is the DNA of an organization, not always visible, but it controls the form and function of such elements as decision making, communication style, reward and recognition methods, reporting hierarchies and leadership values. A lot has been written about the financial aspects of merging companies. Less attention has been focused on the human element. More and more firms risk similar fates as the nation continues to experience a boom in mergers and acquisitions.
Last year there were 11,655 domestic mergers and or acquisition deals for a staggering $1. rillion, according to Securities Data Company, a research organization in Newark, NJ The number of deals has more than doubled since 1990, when 5,654 transactions were reported. In most merger and acquisition cases, the parties involved follow a well-established mating ritual called due diligence, which allows them to explore the merits of the marriage. Behind the scenes, lawyers, accountants and high-priced financial analysts join with top executives to make sure the move is strategically and financially smart.
Although predicted synergys point to handsome profits down the road, when the earnings reports start rolling in, the outcomes are often disappointing. Seven out of ten mergers and acquisitions do not live up to their financial promise. Forty seven percent of the acquired executives leave in the first year; and seventy five percent leave in the first three years, according to Mark Herndon, regional service leader, mergers and acquisitions, at Watson Wyatt Worldwide in Dallas. The major cause of failure may have nothing to do with the financial or legal details that have been so carefully ironed out between accountants and lawyers.
People think that if you do the financial deal, the soft and squishy stuff will fall into place, says Tom Davenport, a partner at Towers Perrin in San Francisco. Not true. Its the soft and squishy stuff that will make or break the deal. After understanding the steps for a merger, the major considerations associated with a firm’s culture are the chemistry or compatibility of the individuals and do they share a common philosophy of how to do business. Stating the common goals for two or more diverse groups is a lot easier than achieving those goals.
Cultural goals such as quality client service and teamwork are generally common to most firms, but how they achieve those goals may differ dramatically. To determine if potential mergers complement one another and if a common operating culture exists a these questions must be addressed: How do partners show their commitment to quality client service? Are there major differences in the compensation systems of the respective firms, as to partners’ earnings and staff salaries? What are the work ethics prevailing in each of the firms?
What are the competencies of personnel? Are they comparable? Do the available technical resources in each firm complement one another? What is the turnover rate for staff and administrative personnel? Have there been partner departures, voluntary or involuntary? Are there any client specialties or special services? How comparable are the average total hours worked, as well as chargeable and billable for like personnel categories? How does the investment in computers, office equipment, and other office facilities compare?
What direction is the marketing effort taking, how much is being spent, and are there any benchmarks? Is a merger still a merger when the respective sizes of the firms are ninety percent and ten percent? Is it just an acquisition, where the ten percent should quietly accept the culture of the ninety percent? Whether you call it a merger or an acquisition, each firm has its own culture, and the smaller entity, if substantially different from the one around it, will continue to survive as a discordant subculture, unless an effort is made to integrate all the players.
Frequent mergers leave little opportunity for establishing a value-added firm culture. The surviving firm’s culture is absorption, which sooner or later like overeating will probably be self-destructive. If we truly believe that people are our most important asset we need to treat them that way. A merger or an acquisition gives us an opportunity to do well by our people by being honest with them, keeping them in the loop, and giving them all the information we can as early as we can.
Get people in both the merging company and the company being absorbed together as early as possible. Discuss the issues that were the perceived potential benefits behind the merger openly and frankly. If Company A’s strength is sales and they are absorbing Company B in part because of B’s distribution capabilities, make sure A’s distribution people know to listen to B’s distribution people and B’s sales force understands the opportunity to learn from A. You probably need to reduce the number of people. Cost savings through combining redundant tasks is a common goal for mergers.
The trick is to release the individuals least equipped to contribute in the new organization and to hold on to the best people. Make sure the evaluation of best looks at both companies’ people equally. After all, you don’t want to lose a great person from Company B so you can keep a mediocre person from Company A. Be honest with people. We all appreciate frankness. We may not like to find out that our job is going away, but we would much rather hear it up front than to find out when we get our two weeks notice from someone who has been telling us all along our job is safe.
Merging two companies with their different policies, procedures, and culture will create stress for all the people involved. The survivors from both companies will have to deal with new people, new procedures, possibly more work, and the loss of previous coworkers and friends. Be realistic in your work flow planning. Plan for people to be less productive than normal as they deal with the changes. Expect to lose some good people who are not comfortable with the new organization. Give yourself and your department time to work through the changes and get back up to full speed.