Author: Sandra Heinke, Group Head of People and Culture, Hays
Former Hewlett-Packard CEO Carly Fiorina is noted to have said: “A merger is hard to pull off under any circumstances.” And the businesswoman’s point was proven when she put together the deal that saw HP and Compaq merge in 2002. The union was met with opposition and scepticism and Fiorina faced criticism for how she managed key talent. By early 2005, she had resigned.
Fiorina, however, is not alone in her struggle to make a merger work. The failure rate of successfully being able to marry two companies is high.
In academic and business circles, a widely touted statistic comes from a 2011 Harvard Business Review article, ‘The Big Idea: The New M&A Playbook’, which states “study after study puts the failure rate of mergers and acquisitions somewhere between 70 per cent and 90 per cent.”
The cost of that wasted value is potentially enormous given that in 2016, according to the Institute for Mergers, Acquisitions and Alliances, companies announced over 48,000 transactions with a total value of more than $3.5 trillion.
A major factor that can lead to a successful deal is a well-executed, cohesive integration plan, and the people risk within that should not be underestimated.
People integration remains a challenge
A 2017 report from PwC highlights that today’s dealmakers are more ambitious than ever, using a merger and acquisition (M&A) not just to increase the bottom line but also to “stretch” their business by adding new and unfamiliar capabilities.
This can often mean combining organisations that have much less in common, which is riskier, says the study, M&A Integration: Choreographing great performance, since it requires a coordinated and well thought out approach to fitting together two cultures. “If people across the organisation aren’t on board with the transaction strategy, integration will likely falter,” it warns.
It’s clear from PwC’s triannual survey, which surveys 151 senior leaders (including from HR), that people integration remains a challenge. Although the percentage of respondents who said access to management and technical talent was very important as a deal objective, more than doubled between 2013 and last year (from 15 per cent to 33 per cent), there was a sharp decline in the numbers that achieved that goal – from 36 per cent in 2013 to 29 per cent in 2016.
Prayson Pate, Chief Technology Officer of Ensemble, a division of ADVA Optical Networking, has experience of M&A deals from different perspectives. ADVA acquired Overture, a company Pate co-founded, in January 2016. However, Overture previously underwent a merger with a company called Hatteras Networks in 2011.
Pate very much agrees that the human capital issue is a crucial element of successfully joining up two companies. Otherwise, he explains, you risk losing the very assets that made the deal attractive in the first place – key talent.
“In an acquisition, what you are trying to access is new products and technology but also new talent and customers. Organisations need to take steps to hold on to those assets, otherwise the deal isn’t going to live up to its potential. For new customers, that will mean reaching out to them and letting them know how you will support them. For employees, that translates into engaging them, helping them make the transition so everyone is working in ‘we’ mode rather than ‘us and them’ mode, and ensuring that the best talent is not walking out the door.”
Pate further highlights the importance of engaging staff beyond executive and senior leadership level. “What can be overlooked is engagement at the next level down, with middle management and the senior technical leaders and influencers. They are the ones that can make engagement at team level a reality and prevent a mass exodus.”
Retention of employees is one of a number of metrics that could be used to measure the success of a deal, Pate suggests. “In the case of the acquisition of Overture by ADVA, it was pretty successful – few employees left.”
How to generate buy-in
Beneath that overarching aim, however, what are the concrete issues to be extrapolated and then addressed? And how can HR lead in these areas?
First and foremost, Pate admits that no one likes change. Whether their company is being acquired or doing the acquiring, feelings of uncertainty are riding high as staff fear lay-offs, that they may lose status, their team or division may be restructured, what the future direction of the new company will be, how they will be treated and what it will feel like to work for this newly created organisation.
There’s a multitude of concerns to deal with that stem from a basic human need for reassurance when experiencing big change, compounded by a feeling of having no control.
What can ease this anxiety is being transparent about the deal from the moment it is announced, says Pate.
“This involves letting everyone know what is going on, why the deal happened, how it will be beneficial, what the risks are. This is important because, without sharing that information, people will simply assume the worst. Ideally, it should come from the executive level.”
Clarity is also important once a deal is finally closed. “This needs to include details such as an outline of direction, who is going to be in charge, the timeline, and process.
“I came into ADVA in January 2016 as a result of an acquisition. Once the deal was closed, there was publication of a timeline that included goals for various operational groups and action items that had to be accomplished. It was tracked and updated periodically and made available to everybody in the company. When certain goals didn’t meet their time deadline, this was publicly acknowledged and the steps being taken to get them back on track explained. It really helped people understand the deal.”
Ironing out inequality
Charlotte Sweeney OBE, an inclusion and diversity expert who also advises organisations undergoing M&As, explains that this can also be a time when staff coming together from different organisations are all too mindful of inequalities among colleagues.
The practical day-to-day HR components such as policy, benefits and processes ought to be dealt with as one of the top priorities, she advises. “I have seen that inequalities still exist in policies or benefits for employees five, even six, years after a merger. It creates a huge amount of resentment. In one example I’ve seen, two colleagues working alongside each other at the same level and in the same job had a ten-day disparity in annual leave, simply because they had come from different organisations.
“The best way to avoid this is for leaders and HR to get their house in order quickly and have as much equality and balance in the new organisation’s policies and processes as possible. Or, at the very least, make it clear to employees when that is going to happen.”
During any integration of organisations, addressing the issue of company culture and having to tie together two sometimes very contrasting cultures under one brand is fundamental. Yet it can often be neglected or managed poorly as the financials of the deal and return on investment take precedence.
Sweeney warns that it can be a complex issue to deal with but that timing is also everything. Inertia can be risky because culture is an intangible that cannot be kept ‘in check’ or controlled by set timetables, she says.
“Culture is ‘the way we do things around here’. What many companies fail to realise is that culture starts to be created immediately. It will be defined by every conversation that takes place, or every piece of communication sent out once the new organisation is formed.
“Both HR and leaders can fall in the trap of deciding that culture isn’t an immediate priority and can be looked at later. Rather, they ought to think about how to create a culture that will mean the organisation is a successful one from the start.”
However, given that there are many competing and time-sensitive priorities arising from M&A deals, Sweeney acknowledges that it’s a challenge. She advises that time should be devoted early on to agreeing, at least, the organisation’s ‘headline’ values (for example, collaboration, innovation, respectfulness) so they can be used to shape the tone and content of communications and influence other strategic decisions, such as who will be on the leadership team. This can be followed up later by a more detailed programme of work.
“At the early stages these values do not need to be honed or fine tuned, they just need to be agreed. So if the company decides it wants to be truly innovative, well, how are they demonstrating that? Are decisions being taken while pulling the company together to ensure teams are diverse? Does the communication reflect that? If these values are clear at an early stage it will help allay the feelings of uncertainty staff will have.”
Sweeney warns: “Your key talent won’t wait around if, early on, they don’t like the feel of a new organisation, even though ultimately the culture may change for the better later down the line.”
Combining cultures can be less than straightforward
Getting a company culture right is vital for any organisation; in a recent survey from Duke’s Fuqua School of Business, more than 90 per cent of CEOs and CFOs said that culture was important at their firms and 92 per cent believed improving it would increase the company’s value.
But Pate warns that combining cultures can be less than straightforward. “People talk about similar cultures as being one of the factors for success in an M&A. But very often the cultures aren’t similar.”
In the merger between Overture and Hatteras Networks, he explains, despite decision-makers believing the two companies had comparable cultures, it turned out they were very different, particularly in their people approach.
In this example, the incompatibility was pervasive and reached executive and board level, which impeded the company’s ability to move forward and take the right decisions on strategic direction, says Pate. “It made things very difficult so the only solution was a structural one, a wholesale change out of senior leaders. Three years’ later, only two people were left standing, that was the Head of HR and myself.”
Carol Gill, Assistant Professor of Organisation Behaviour at Melbourne Business School, says where cultures are different it doesn’t always follow that one has to be superseded by the other. “An organisation needs to consider the culture it wants in both organisations and the same culture may not be optimal because culture needs to fit the context.”
As such, decisions around culture should, in part, take into account the business environment organisations are operating in, she adds.
“Strong cultures influence an organisation’s success in competitive markets. In this case, evidence indicates that if the acquired organisation is successful, operating separate cultures in different markets and businesses can be more effective. So too, can capturing the best of both cultures – integration.”
Where the acquired company is unsuccessful (again in a competitive market) other options may be better.
“They can choose to go down the path of assimilation, where the weak culture of the acquired organisation adjusts to the strong one; or deculturation where a new culture is forced on one or both organisations and all artefacts [key features such as office layout, room names and so forth] are stripped from the organisations,” says Gill.
On the other hand, in complex or dynamic markets or where there is low competition, the relationship between a strong culture and performance is more complex, Gill stresses.
HR taking ownership
It all points to the need for HR to fully understand the impact of culture on business performance and in different contexts. An M&A is an opportunity to build optimal cultures and provide critical advice to senior management on culture strategy in both the short and long term. “Culture is often entrenched, making it resistant to change. So culture challenges are change challenges,” Gill says.
Indeed, once the new leadership team took the helm following the Overture and Hatteras deal, Pate says, HR and the new CEO worked jointly to drive some important changes through.
One example was in identifying and tackling some of the issues that were preventing the executive team meeting its performance potential.
A programme was put in place to improve collaboration and integration by pairing up executive members to work together to build on strengths and improve weaknesses.
“They would get together to try and help each other accomplish their goals or improve in a particular area by asking for feedback, for example,” explains Pate.
One other factor not usually given much attention in the early phase of trying to integrate two companies is diversity and inclusion.
“A change as significant as an M&A could shift the organisation’s composition and demographics,” Sweeney points out. “It could have a detrimental impact on all the prior diversity work that has been done. Companies tend to want to delay addressing this issue for a couple of years but by then the opportunity is lost. Being inclusive is an integral part of any business, it helps define culture and an organisation can’t be truly innovative without it.”
Progressive companies are tapping into their diversity programmes to foster engagement during an M&A and help them work through the integration process.
Sweeney explains how two UK companies in the financial sector undergoing an M&A have brought all of their employee resource groups together to create a single inclusion network.
“As part of trying to create the new company we then asked different groups from the network (ethnic minority members, for example) to consider what challenges they face and what aspects they would like to see improved in the new organisation. This was all fed back to the senior leadership.”
And, while a diversity agenda is important, getting staff involved in the thinking around cultural integration is beneficial anyway, says Sweeney. “It will help individuals create the environment in which they will give their best.”
As Pate concludes: “M&As are expensive to execute. The focus tends to be the purchase price and all the negotiating upfront. But the real value comes from how you bring the teams together. The leadership and HR can really help in making that succeed – or not.”
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