Reducing the divorce rate for mergers

by Dr Sanna Balsari-Palsule, PhD & People Science advisor, Workio

It’s a sad truth that one in three marriages end in divorce, but this looks like a blazing success rate when you realise that two out of three mergers and acquisitions fail.

Mergers and acquisitions are the most delicate organisational operations in today’s climate. Research has suggested that the rate of M&A failure can range from 55 to 70 per cent (Erez-Rein et al, 2004). If a success, the dual benefits of growth, expansion and profitability are significant, but when a failure, there are serious ramifications from plummeting stock prices, lower brand value, reduced goodwill and loss of talent.

In the overwhelming majority of cases, the reason for the failure of M&A is culture clash.

Embedded in every company is a distinct organisational culture. Organisational culture encompasses both the organisational climate and workplace environment, but is also key in defining employees’ identity, and how they experience and make sense of organisations. You don’t have to dig deep into organisational literature to find that researchers have documented the impact of organisational culture for decades, whether on employee job satisfaction, turnover, organisational commitment, customer satisfaction or performance.

However, cultures, similar to the unique patterns and traits that make up our personality, are not always harmonious. Think of it this way - in the same way that romantic partners can clash in their values and preferences, the same is true for culture.

Take the high-profile example of Sprint and Nextel Communications. In 2004, Sprint acquired a majority stake in Nextel Communications in a \$35 billion stock purchase, with the two combining to become the third-largest telecommunications provider in the US. However, soon after the merger, Nextel executives and mid-level managers left in droves.

Why?

A stark difference in culture. Nextel was relaxed, idealistic and entrepreneurial. Sprint on the other hand, was structured, precise, built on hierarchy, and highly regulated. One way to better understand this is how researchers have characterised it is as “tight” and “loose” cultures - while Nextel was a loose culture that heralded a flatter organisation and entrepreneurial spirit, Sprint was tightly wound.

Given the sheer number of high-profile failures around M&A like Sprint and Nextel, there is an abundance of good practice guides around mergers and acquisitions in the digital realm. However, most of these are ad-hoc and situationally dependent, when what we often need is principles rooted in data that guarantee success.

Here are three that we consider to be paramount:

1.Diagnose and define the culture of both companies in a merger or acquisition

Company culture is not about beanbags and free coffee in the office, it is the values, the personality, structure, communication and the way that work is done. Before addressing a merger, first define what your company culture consists of and how it is embodied by your employees.

2. Do your research

It sounds simple but is remarkably overlooked. Proper planning is absolutely key - one of the biggest problems companies fail to recognise is cultural compatibility at the start of the post-merger integration process. What is important to remember is that successful integration requires research and a deeper understanding of the organisation, but most importantly, should focus on people within the organisation, from their values, to ways of communicating. to operating styles.

3. Leverage data

In the information age, leverage data and rigorous analytics to both create a baseline understanding of culture and understand the nuances of each company’s employees’ experience in effective, efficient ways.

This is where Workio comes in.

Workio combines a deeper understanding of human behaviour with data analytics, to ensure that mergers and acquisitions don’t end in divorce and recriminations. This process involves the measurement and evaluation of what employees value in their own cultures, rather than making assumptions of what works.

By using a standardised quantitative process, Workio provides precise outputs, so that companies can clearly define focus areas (for example, certain aspects of different cultures which are likely to be a source of culture clash between merging companies). This can aid companies in generating solutions to address these challenges specifically.

Although the use of analytics is key, Workio is very much people-focused. We believe that transparency and visibility are key in ensuring that employees feel a sense of agency and belonging, rather than feel at the mercy of senior management decision-making. Seeing company culture as a system created by the individuals within it enables companies with whom we work to drive performance by ensuring a strong and well-functioning culture.