Liaquat Lal explores the importance of people in mergers and acquisitions.
It’s boom time again for mergers and acquisitions (M&A). 2015 set a new global M&A activity record: a total value of $4.3 trillion, according to MergerMarket, and a 30 per cent increase over 2014.
While we might assume that a slowdown in emerging markets and continuing Eurozone troubles are driving this upswing, market commentary suggests that – in the US, at least – relative market strength is the predominant factor. As global head of M&A, Philip Isom, commented in KPMG’s 2016 report: “The US. continues to be the favoured M&A destination because of its relatively healthy economy.”
While remaining competitive in the face of declining confidence in organisations’ ability to generate growth organically had dominated in respondents’ 2015 replies, their primary motivations in 2016 – whether in relation to geographic reach, business lines or customer base – were all expansionary.
Counting returns or counting chickens?
But the challenge of extracting value remains. Like any promise, an M&A’s intentions must be realised, and history makes uncomfortable reading. Given their track record, any deal motivated principally by survival should ring alarm bells: ‘survival’ is not readily divisible.
Most of us can recall high-profile deals that should never have been done: the stories of the New York Central and Pennsylvania railroads, Daimler and Chrysler, of AOL and TimeWarner should sound alarms down the years. Many other deals may have seemed worthy or potentially profitable, yet shareholders will still have been fortunate to break even on their investments.
This danger that the promise will evaporate, with wealth destroyed rather than created, has long been recognised. McKinsey’s 2010 report, commented almost blithely that “Anyone who has researched merger success rates knows that roughly 70 per cent of mergers fail.”
Hindsight reveals familiar patterns: too little listening (of the serious, active kind) and too much talk (of an over-confident or bullish variety); organisational structures that sought radical change without making any; strategies that rewarded the wrong behaviours, and acquirers acting more as victors than as new, relatively equal partners.
Cultural insensitivity is perhaps the single most prominent factor, underlining two important truths. Firstly, any M&A is ultimately only as good as the organisational change programme that succeeds it: ultimately, people rather than numbers lie at the heart of success. And secondly, organisations don’t change until their people do.
Yet the triumph of hindsight over insight remains common. In a 2015 Journal of Business Strategy article, Peter Buell Hirsch reminded us that “In a survey of 90 executives with experience in handling M&A, McKinsey found that 92 per cent believed that their past efforts would have substantially benefited from greater cultural understanding prior to the merger.”
‘Our people are our greatest asset’
So why do these patterns continue to repeat themselves? It seems that the history books occupy one of the corporate bookcase’s less visited shelves; the question has already been answered, but the lessons have not necessarily been on-boarded.
Deloitte’s M&A Trends Report 2014, for example, showed that ‘achieving cultural fit’ was considered the most challenging factor in achieving successful integration, but only 22.2 per cent of respondents considered it important. (By comparison, 39.9 per cent listed ‘customer retention and expansion’.)
While it is employees’ abilities and efforts that ultimately deliver organisational objectives, respondents’ identification of the objectives considered important with respect to company M&A strategy showed the same skewed focus.
‘Talent acquisition’ (49 per cent) ranked as only the sixth most important, far behind ‘expand customer base in existing markets’ (73 per cent) and ‘pursue cost synergies or scale efficiencies’ (66 per cent).
The hidden costs of the people dimension
The psychological and potential performance impacts of change are well-documented, and any skilled manager should already be aware that their responsibilities include leading people through change as much as they do leading change through people.
Yet while M&As greatly impact the people in both companies, this ‘people dimension’ often receives scant attention. But while operational issues demand immediate and diligent attention, newly merged companies that give too low a priority to longer-term ‘soft’ issues can find themselves learning a swift, hard lesson.
Where M&As fail to deliver their promised benefits, it is usually a result of people-related issues, not poor commercial strategy: culture clashes, management conflicts, or a loss of key talent.
These ‘people issues’ are business issues, and organisations must recognise that purchase valuations are not the only price they potentially pay. Losing and replacing staff, especially senior staff and key talents, can cost them dearly, as the COLT© and CORT© formulae developed by the Chartered Institute of Management Accountants illustrate.
For a hypothetical multinational organisation with 100,000 employees, losing a senior manager (assuming a vacancy of c.20 weeks) might, for example, cost around £35,000. Taking into account both opportunity and acquisition costs, replacing them could cost five times as much.
Paying attention to cultural issues
While 18 per cent of KPMG’s 2016 Survey respondents identify ‘ effective due diligence’ as a critical success factor, the history of M&A outcomes suggests that this ‘diligence’ may not always be appropriately focused.
M&As marry not just organisational capabilities, but characters, styles and values. Looking beyond systems, structures, processes and other ‘hard’ operational concerns, successful integration requires rigorous review of current cultures to identify how each is defined, and how they align to the new organisation’s strategic objectives. Those leading integration must understand what made the constituent businesses function effectively and decide which aspects of each culture to retain or change.
Strategic people management is critical. In this context, employees – and especially those from the acquired company – are being asked to ‘remain’ loyal to a redefined organisation they may barely recognise. With the emphasis on forward-thinking and ‘the new’ that company transformations encourage, many may feel that history is being erased. Where corrections or modifications were required, this may be desirable, but ‘history’ is also an element of personal workplace identity and the sense of belonging that underpins commitment and engagement.
Bluntly, people are not processes. We can merge databases and back-office systems (with varying degrees of ease or difficulty) and streamline office layouts and org charts, but it is harder to merge two employees into a single fully-functioning, highly engaged person. Organisational values – described in abstract terms but embodied in behaviours, relationships and shared understandings of ‘how we do things here’ – are complex and nebulous. Even where new values are clearly communicated, people must also change the way they behave.
As HR and L&D functions should recognise, but the finance division may not so readily appreciate, few of us can change our behaviour without failures, false starts and relapses into old, comfortable ways of working. Most need not only time to adapt, but ongoing encouragement, motivation and support.
Behaviour is also interpersonal. Post-M&A, many will find themselves in new teams or working relationships. Even where familiar colleagues remain, everyone is now operating in new terrain. We may all be ‘in the same boat’, but an unfamiliar one: simply sharing it does not guarantee a happy, harmonious crew.
Working with cultural change
Organisational culture can drive either competitive advantage or strategic drift, but it is manageable. HR functions must take a strategic role, underpinning organisational transformation with change management programmes and learning interventions that help managers to implement them.
Beyond structures and systems modifications, changes in behaviours and attitudes require encouragement, reason and clear ongoing communication. To earn and keep trust and engagement, this communication requires honesty and transparency.
The skills of leading change
Change cannot impact on an organisation without impacting on its people. To manage both, leaders must demonstrate self-awareness, attentive listening, a keen understanding of personal impact and a capacity for empathy: emotional intelligence is vital. Unless leaders can inspire others.
The Kubler-Ross Transition Curve’s familiar roller-coaster trajectory is, leaders must remember, another simplification: in truth, we each travel it at our own speed, experiencing different highs and lows.
Those leading change are always further along the curve, while they experience the final upward climb, others still face its downward arc.
Leaders must also remember that resisting change is a natural human response. Clearly and continuously communicating future benefits can help those yet to experience them that the longer term holds more promise than the challenging, uncomfortable present.
About the author
Liaquat Lal is principal consultant at ASK Europe plc and can be contacted at email@example.com or on 01234 757575