Article from ACG HUB NEWS

July 28, 2004 FEATURE ARTICLE
Beating the Odds on Cultural Integration
Published by ACG Boston Copyright © 2004 ACG Boston. All rights reserved.

Recently, a lawyer turned successful businessman reflected on his 30 acquisitions since the 1960's. This M&A "wheeler dealer" reported, "I concentrate on the financial and legal side of companies." After reading this paper, his skepticism of expanded due diligence became realization. When he figured these characteristics into a decision, albeit unintentionally, acquisitions succeeded. Conversely, when he did not, acquisitions failed, by a ratio of 10:1.

Dr. Frank Sondgeroth, an experienced acquisition integration and outsourcing specialist, reports that failure to include cultural evaluations results in understated integration costs, lost productivity, and consummation of inappropriate M&A deals. In his consultation practice and work as manager of Cisco's M&A integration group, he finds that upwards of 75% of M&As fail to meet expectations, and 95% of those failures result from cultural incompatibility and poor planning.

Today's fast-paced business environment demands that acquirers know what they are buying and why, along with strategies to maximize synergies using expanded due diligence. The recent corporate downsizing and increase in M&A activity leave fewer people available internally to perform integrations. The expanded due diligence minimizes the time and effort to successfully integrate an acquired entity while the acquirer reaps rapid bottom line benefits. These minimized productivity losses and increased revenues result from taking the merged products or services to market faster.

Background

After a 3-year hiatus, mergers and acquisitions (M&As) have recently picked up. (ACG Network, 02/04) This increased activity results from an improving economy, better operating results, more attractive financing sources and active, aggressive buyers. M&A remains a viable strategy to grow a business. Yet, unless acquirers pay attention to past failures, 50 to 75 % depending on the study, they are doomed to repeat these mistakes. (HBR, April, 2004; Booz Allen Hamilton research, 2001) Causes of these failures cluster around the:
· Loss of key employees and customers
· Decreased productivity and
· Conflict over day-to-day operations

All derive from the difficulties of integrating two organizations with different cultures and rules. Acquirers who know ahead of time about a potential failure can avoid deals that only work if forced, and even then fail.

Expanded Due Diligence

The customary financial/legal due diligence consumes time and effort of both organizations to determine business and fiscal value with the expectation that two together are greater than separate. Beyond compensation, benefits, etc. little about the people or organization is considered.

A parallel, equally rigorous assessment of the organization and people greatly improves success odds. Organizational experts analyze the strength of the structure, systems and human capital of the target, before the deal happens. They identify the potential sources of M&A failure in the cultures and the roles people play, two key factors in a deal's ultimate success.

Most organizational M&A advisers enter once the deal is underway, providing a kind of damage control. The M&A organizational due diligence affords the acquirer evidence to prevent an acquisition that should not happen. This process also supplies valid information to facilitate a seamless and thorough integration.

An organization's culture is a complex web of behaviors and accepted practices, but certain key indicators reveal the underpinnings of that culture. Individually, each component reveals one puzzle piece; together, they present a complete picture of values and routines that comprise culture.

1) Who are these people and what are they doing here? People and their functions represent the company's intellectual capital, sometimes attracting the acquirer's attention. The analyst identifies outstanding individual performers and exceptional groups or teams by finding standard-setters, those whose work is the benchmark for others. The link between their work and the company's final products/services must be determined, along with the relationship between standard-setters and senior management.

2) Whose call is it? Decision-making practices provide a measure of risk taking behavior. In one deal, the acquiring company approached decisions by looking at options, evaluating merits and costs, deciding and taking action. They acquired a firm that looked at options, gathered information endlessly, and often decided by not deciding. They were headed for conflict as they began making decisions. The only solution was to develop and implement practical strategies immediately to avert an acquisition doomed to fail.

3) Don't your clients just love me? Relationships with customers, clients, patients, and buyers are an organization's "reason for being." Interactions with them often indicate the marketplace view of the target company. Knowing how new customers are reached and how their changing needs are monitored and integrated provide key dimensions for integration. An engineering company where customers "don't know what's best for them" acquired another where "the customer is always right-no matter what." Managers clashed over this right away.

4) Didn't you get the memo? Communication with employees and middle managers reflects the company's value of employees and their contributions. At the same time, we find that employees form perceptions of the organization and "management" through this 2-way process. Employee perceptions shape the ways they treat one another, company property, and ultimately customers. Experience provides a range of companies from those that routinely e-mail everyone to those who rely on a rumor mill. Management's role in two such different transfer chains leads to conflict during acquisition.

5) Couldn't you make the meeting? Change planning and implementation can be as minimal as contracting new in-house computer technicians or as major as a company purchase. A proper examination considers change origins and the involvement of affected parties in planning. Do people hear about change as a top down edict? Or, like another acquirer, where managers routinely solicit employee input? One approach has to be selected to integrate two organizations. Either one inevitably has an impact on key people they count on for the deal's success and profitability.

Summary and Conclusions

The expanded due diligence value emerges from a retrospective review of M&A failures. It offers the acquirer the chance to assess, before deal signing, incompatibilities of culture and people when putting two organizations together. It identifies key areas to focus on and accommodate during integration to avert complications and the deal's financial failure. With a more complete picture, decision makers can determine whether an acquisition does, in reality, make good business sense.