Written by Ed Cook
The amount of research on why Mergers & Acquisitions (M&A) succeed or fail is voluminous but not particularly clear. M&A is often not successful. Early research focused on strategy and structural factors, but the results were mixed. More recently cultural factors are the focus, but this opens up significant complexity onto the study of M&A. Still, the work is revealing.
Intriguingly, some scholars have found a positive effect between cultural differences and the success level of M&A.
This finding seems to be explained by the core strategic idea that merging two different sets of capabilities can produce a better performing combined company. With more skills and a broader knowledge base, the new combined company can more readily succeed. The key activity is capability transfer so that the abilities of the two organizations are combined into the new one. To get fantastic success means that the capabilities must be complimentary and not just additive to the existing capabilities of each organization. But the more different the organizations are the more difficult it is to bring them together culturally.
What is the path to success?
Success then lies in two factors. One, having two organizations with different capabilities that are complimentary. Two, managing the change that will come with the cultural integration of the two organizations.
For the capabilities portion taking a broad view is best. Capabilities can be the knowledge, skills, and experiences of the individuals in the organization and the mechanisms that are available to allow those individual capabilities to be brought together into a well-working whole. We see failures of this all the time. A sports team with superstars but an inability to win (no mechanism to bring them together); A family run business that both tolerates and does not take action to help a poor performing relative without the skills to do their job (lack of the needed capabilities). Both capabilities and a cooperation mechanism are needed to achieve success for a company. For M&A, this is true as well.
The first step is to map those capabilities. This begins before the deal is done in the “Data Room,” the mysterious place where information about the companies is shared confidentially. In their blog post: How To Prioritize Human Capital in M&A Due Diligence, Visual Workforce provides a step by step guide as to how to do this. The idea is straightforward, maybe so much so that it is often skipped: map out the skills of the two organizations by each person and then recreate an organizational structure that can take advantage of the full set of skills. Too often M&A activity is about fitting one organization into another and engaging in a Procrustean looping off the parts that don’t fit. Some of this may be needed, but it is akin to adding great guitarists to your band and then telling them not to play the riffs which make them great.
The second step is to get in front of the change process especially as it related to culture. This is critical. The strategy may be perfection, the skill synergy magical, but failure looms because of inattention to the change. Having been through many variations of M&A activity from both the acquiring and acquired sides, I have seen the comedy movie moment too often where there is a pronouncement and the supporting actor/comedian in the movie turns and says “Wait...what?” Befuddled and surprised is the worst place for your employees. It is rarely funny as it happens.
To alleviate this sort of change surprise, we suggest the use of a simple tool called The Change Story. The Change Story walks a leader through the steps to help their team understand what is going on why, as well as help the leader to understand the impacts of the M&A work they are about to undertake. To be sure a large M&A effort would require more work and analysis, but this is a good start.
To be sure, M&A is a difficult and often fraught part of business. Although it fails often to deliver on its promises, it can succeed. It takes clarity of purpose and a willingness to understand the skillsets of each member of the team and the cultural impacts of coming together. Do that and you’ll be on the positive side of the hurdles to success!