Analysts are bullish on Australia’s mid-market mergers and acquisitions in 2017. The Australian market was strong overall, Mergermarket and Pitcher Partners said in their “Dealmakers: Mid-market M&A in Australia 2017” report.
Leadership is fundamental to success in the complex M&A journey. We have all seen or heard of high-profile cases where M&A deals didn’t work out. AOL–Time Warner, HP-Compaq, Quaker-Snapple — these are just some of the big ones. An analysis of 2,500 such deals shows that more than 60% of them destroy shareholder value (HBR, 2016). Perhaps such deals should come with an official warning: “Acquisitions can result in serious damage to your corporate health, up to and including death.”
According to the Society for Human Resource Management (SHRM), over 30% of mergers fail because of simple culture incompatibility. Let’s consider a few well-known cases of spectacular culture clash:
When German Daimler (the makers of Mercedes-Benz) merged with American company Chrysler in the late 1990s, it was called a “merger of equals.” A few years later it was being called a “fiasco.” Discordant company cultures had the two divisions at war as soon as they merged. Differences between the companies included their level of formality, philosophy on issues such as pay and expenses, and operating styles. The German culture became dominant and employee satisfaction levels at Chrysler dropped off the map. One unhappy joke circulating at Chrysler at the time was “How do you pronounce DaimlerChrysler?… ‘Daimler’—the ‘Chrysler’ is silent.” By 2000, major losses were projected and, a year later, layoffs began. In 2007, Daimler sold Chrysler to Cerberus Capital Management for $6 billion.
In January of 2000, Time Warner stock sold for $71.88. By 2008 you could buy a share of Time Warner for less than $15. What happened to the media giant? A failed $350 billion merger with AOL. Culture clash was widely blamed for the failure of the joint venture. Said Richard Parsons, president of Time Warner: “I remember saying at a vital board meeting where we approved this, that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different… It was beyond certainly my abilities to figure out how to blend the old media and the new media culture.”
In 2005, in a bid to keep pace with industry giants like Verizon & AT&T, Sprint acquired rival Nextel for $35 billion. By 2008, the company had written down 80% of the value of the Nextel, confirming the widely held belief that the merger had been a failure. That failure is widely attributed to a culture clash between the entrepreneurial, khaki culture of Nextel and the buttoned-down formality of bureaucratic Sprint. A Washington Post article written two years into the merger stated: “The two sharply different cultures have resulted in clashes in everything from advertising strategy to cellphone technologies.” In early 2012 Sprint announced it would be ridding itself of the Nextel network, marking what CNET calls “a concluding chapter in one of the worst mergers in history.”
Clearly organisational leadership and culture must be skilfully addressed to achieve the full value of any M&A deal. Unfortunately, leadership and culture are traditionally hard to define, difficult to shift, and evasive to measure.
Here are 3 key considerations to improve your odds of success:
1.Make culture tangible. Rather than thinking about norms or cultural rites – terms commonly used to discuss culture – we urge executives to focus on management practices: “the way we do things around here.” A company’s leadership style, it’ extent to which it holds employees accountable for their performance, its approach to innovation – these are the management choices that define an organisation’s culture and shape its performance. Merging companies that have incompatible cultures because their management practices drive conflicting behaviors risk loss of top performers, a messy and prolonged integration period, and, ultimately, failure to capture merger value. Viewing culture as the result of management practices makes it tangible and actionable- enabling merging companies to assess cultural differences and find ways to address them.
2. Recognise that leaders shape culture. Creating a culture that leads to success is a leader’s primary job – especially in M&A which provides an opportunity to create a new culture for the new organisation. This takes more thought than simply writing new Values and having HR post them on the intranet. Establishing the culture of an organisation “head on” is difficult. Building stable, collectively assumed beliefs, values, and assumptions does not happen overnight (Thompson, 2001). We must position leaders to be aware of, and shape specific properties of the work environment, which in turn influence day-to-day employee behaviour. This is known as Organisational Climate – an observable, behaviourally based construct that is measurable and amenable to change (Isaksen, 2007). So if we want to establish an effective culture, we must help leaders establish the climate.
3. Leadership Assessment and Development must take place at various points in the M&A timeline.
- Due Diligence Talent Assessment – assessing the relative strength of the Target company’s Leaders and Lead Team. This assessment is then broadened to include the Buying company leaders to form the objective basis for selecting the leaders who will take the combined organisation forward.
- Post Deal Lead Team Alignment – the CEO of the new entity must quickly assemble and align the post-merger executive leadership team. This is done via a 2-day offsite Leadership Summit to set the new team’s Mission/Vision/Critical Goals and Accountabilities. Energetic, ambitious and capable people are always required, but they often represent different functions, products, lines of business or geographies and can vie for influence, resources and promotion. Building a team remains as tough as ever.
- Year 1 M&A Insurance Plan – the CEO and ELT regroup every quarter for the critical first 12 months to review progress and refine strategy together. This critical element helps ensure course corrections are made to ensure successful leadership of the strategy and culture.
An experienced guide can be the difference between success and failure. Lighthouse has been developing Leaders and Leadership Teams since 2003. Our purpose is to Make Change Possible by Making Leadership Practical. Our team is comprised of experts in Leadership who have also been business leaders themselves.
At Lighthouse, We make leadership practical for companies that want to grow through change. We would be delighted to partner with you to successfully navigate the treacherous waters of M&A.
Eric Miller, Sr. Partner at Lighthouse wrote this article. Eric can be contacted at [email protected] and 0439 659 593.