Culture Clash: Why M&As Often Fail

“Mergers are like marriages. They are the bringing together of two individuals. If you wouldn’t marry someone for the ‘operational efficiencies’ they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?” — Simon Sinek

Perhaps no other business endeavor has a more abysmal success rate that Mergers and Acquisitions. As far back as 1999, The Economist noted that “Study after study of past merger waves has shown that two of every three deals have not worked.” In 2016, the Harvard Business Review put the failure rate at between 70% and 90%.

It’s hard to imagine an organization undertaking any other strategy with — at best — a 30% likelihood of success.

The cost of M & A failure is immense. In 2003, the National Bureau of Economic Research (NBER) found that, over the previous 20 years, U.S. takeovers had led to losses of more than $200 billion for shareholders.

And yet, the number of mergers and acquisitions continues to grow. According to US MergerMetrics, the number of merger deals grew over 35% in the year between August 2020 and August 2021.

So, What Gives?

There are many reasons why organizations choose to merge with or acquire another: They may seek to:

Sometimes the motivation is the personal interests and goals of top management: more power, prestige, and compensation. In addition, ego may be a driving force; the desire for “empire building.”

An oft-stated impetus for a merger or acquisition — as well as a presumed benefit — is Synergy: the belief (hope?) that the combined value and performance of two organizations will be greater than the sum of the separate individual organizations.

A Bain survey of executives showed that around 60% of them stated that they’re guilty of overestimating synergies from deals. This may indicate a focus on capturing short-term financial synergies rather than taking an overall view, overlooking the overall business and operational compatibility of the organizations, and/or drastically underestimating the complexity, resources, communication, and management focus needed to execute a successful integration.

An example is the 2005 News Corporation acquisition of MySpace (remember MySpace?) for $580 million. News Corporation, with its specialty in delivering media ads, thought Myspace would generate $1 billion in synergies per year. Six years later, it was sold for approximately $35 million. An excellent example of negative synergy.

Whatever the goals, that stunning lack of success remains. There are many reasons an M & A may fail to achieve the desired outcomes.

But one stands out from the rest…

The Overlooked Challenge

In nearly every analysis of the causes of M&A failure, one word appears over and over: Culture. According to SHRM, over 30% of mergers fail because of a Clash of Cultures.

Do a Google search of failed mergers or acquisitions and you’ll get an avalanche of examples where Culture caused things to go horribly wrong: Amazon/Whole Foods, Daimler/Chrysler, Sprint/Nextel, AOL/Time Warner…the dismal roll call goes on and on.

So if it’s the cause of so much M&A failure, why is Culture so often overlooked?

First off, Culture can be difficult to measure or manage. As a result, it’s often not a factor when a potential merger or acquisition is being considered.

Secondly, one or both organizations may lack a clear understanding of their own Cultures and the resulting difficulties when it comes time to integrate the two organizations.

Yet these challenges are worth overcoming.

Avoiding Culture Clash

There are three steps to avoiding a merger or acquisition going sideways:

1. Understand your own Culture
2. Understand the other organization’s Culture
3. Plan and execute how the Cultures will be integrated.

The best time to take these steps is before you undertake a merger or acquisition. The next best time is as soon as possible.

The process begins with having a clear understanding of your Operational Culture: the one that drives how your people think, act, and make decisions. This may or may not be the same as your Espoused/Desired Culture. Either way, it’s vital to know the true nature of your Culture.

Operational Culture includes:

• The Values and Norms of your organization.
• What’s important, what gets rewarded or punished, and what the “rules” are (both written and unwritten).

You also have to know whether or not your Culture is consistent throughout the organization: all levels, all departments, all locations.

Often it is difficult to accurately assess the nature of your own Culture. It can be helpful to have an outside perspective — for example, a Cultural Audit performed by Success Authorities.

Next is determining the Culture of the other organization. The outcome is a clear understanding of the similarities and differences between the two organizations, which will inform the strategy for integrating the Cultures, as well as the level of difficulty it will entail.

If several acquisition candidates are being considered, an important factor is the degree of difficulty you may have in integrating the Cultures.

When these two steps are complete, you can then create your Integration Plan. There are several key elements to successful integration:

• A dedicated Integration Team that includes people from all levels and all critical departments of the two organizations.
• A Team Leader whose sole responsibility is the success of the Integration effort.
• Constant communication of the goals of the new organization and how each employee fits in. This includes an awareness that fear and confusion are byproducts of any M&A, and must be addressed.

Consider Culture

As history shows us, mergers and acquisitions are often disastrous. But they don’t have to be. By considering Culture, you can minimize the danger of failure, and improve the chances that the hoped-for results will be achieved.

“For acquiring companies, the excitement is almost always about where they are going – that is, their strategy for gaining greater growth and productivity. But when mergers fail, it’s often because no one focused on who they are – that is, their culture, which is critical to successfully bringing different groups of people together” — Punit Renjen