Don’t Underestimate the Importance of Culture to Merger Success

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Financial strategy is important, but culture is the true lynchpin of M&A success.
Adam Arron, CFO AMC Entertainment
Adam Aron, CFO AMC Entertainment

Whether the goal is to find a perfect complement to a product portfolio, eliminate key competition or realize scores of synergies, proposed mergers begin with the highest of aspirations. But in the majority of deals, something unfortunate happens on the way to a successfully combined company, agreed CEOs gathered for a roundtable discussion cosponsored by Chief Executive and AlixPartners.

In fact, study after study puts the M&A failure rate at between 60 and 90 percent. “It’s never because it was a bad idea around strategy or product. It’s almost always around culture, around people,” said Ted Bililies, head of the organization & transformative leadership practice at AlixPartners.

Sometimes mergers fail because the acquiring company failed to grasp what it was buying, said Adam Aron, who was CEO of Starwood when the company was sold to Marriott International. Aron cited the 1980 merger of Pan Am and National Airlines as an example of poor merger management. “Whatever decisions Pan Am made, just do the opposite of that.” Among other things, those mistakes included a fundamental misunderstanding of the product and of the cost structure, which led to ballooning costs.

Putting People First

But more often than not, mergers fail because employees didn’t get behind them. “The vision wasn’t sold,” said Bililies. “The CEO did not help hearts and minds really grasp the vision and did not get that commitment. There may have been a lot of head-nodding, but they didn’t grasp, ‘What’s in it for me?’”

When employees don’t get information from leadership, added Rena Reiss, EVP and general counsel of Marriott, “they’ll make it up—and usually what they make up is really bad.”

Transparency is paramount. “You have to, as the CEO, be very straightforward,” said Jay Sidhu, CEO of Customers Bank and BankMobile. “You need to say, ‘This is what we’ve done, this is where we stand, this is the purpose. We’ll have 30 percent cost savings over here, and this is the criteria and the timetable we will use.’”

It’s not enough to say it once, added Bililies. “I do a lot of executive coaching and CEO will say to me, ‘I’ve told them what the strategy is. I told them where we’re going.’ And I say, “You have to tell them 10 times as much. Until you’re ready to just get nauseous, you have to keep communicating.’”

When synergies are a key goal of the merger, it becomes even more important to communicate, as the anxiety that swirls around potential layoffs can be corrosive, said Christopher Missling, president and CEO of Anavex, who lived through the merger of Hoechst AG and Rhone-Poulenc. “We had a lot of uncertainty and it was aggravated by the differences in culture.”

Coupling Cultures

Combining two companies’ cultures, particularly when both are strong and distinctive, is often the greatest challenge, noted Reiss. “How do you welcome the other company into the organization without suffocating whatever it was that made it attractive to you in the first place?” That was the task Marriott set for itself when it acquired Starwood Hotels in 2016. “What you’re trying to do is get the best of both companies, to bring them together to make a one-plus-one-equals-three as opposed to one-plus-one-equals-two,” Reiss said.

To get there, employees at both companies need to feel fully welcomed. “You need to work hard to make it clear there is no second-class citizen at the new company,” said Aron. “It doesn’t matter where you came from, it just matters that you’re here now, and that we’re all in one boat together in whatever it is that survives.”

That message comes through in seemingly small gestures, such as repainting walls in the new company colors or giving out bags with the combined company’s logo on integration day. Those are the sorts of details that signal employee equality, regardless of which company acquired the other. “People underestimate the power of symbols,” added Bililies. Leaders can be overly focused on redundancies and the bottom line and miss the opportunity to take steps that really resonate with and motivate people.

Symbolic gestures go a long way for senior management as well, said Missling. In the case of the Hoechst/Rhone-Poulenc merger, he was invited to a senior management lunch with the CEO. “They all spoke French, even though the agreed-upon language [post-merger] was English. “That made the difference to me,” he said.

Culture change is even harder when your company is in a legacy industry and working on transformation, said Alan Maserek, who joined Vonage as CEO five years ago to lead a shift from residential telephony to business communications. He has since led the company through seven acquisitions, totaling about $1 billion, of small and midsize B2B software companies.

“You can just imagine the complexity of all this change,” he said, noting that many from the original organization, including nearly the entire management team, were not able to adapt. Even seemingly transferable skills, such as accounting, did not always cross over successfully. “You think, it’s just debits and credits, they can handle that in a B2B environment,” he said. “But almost uniformly, it’s not been the case because those who self-selected into the former environment, which was slow and lethargic, they’re just not well suited [to the new culture].”

For the CEO of the target company, managing culture through the selling process can be equally challenging. When watchmaker Tourneau was bought by European retail giant Bucherer Group, CEO Ira Melnitsky knew he might not be a part of the combined entity’s management team. “But I also had to manage a team behind me who didn’t know what was going to happen,” he said, adding that, ultimately, the entire management team remained post-merger. “But when you’re the seller, you don’t know what the acquirer will want to do or who the acquirer is even going to be.”

Once the deal is done, CEOs should use all the tools they have available to communicate, ad nauseum, about the future. That means getting out to plants and business units, meeting with people and sharing the vision, said Alan McLenaghan, CEO of Saint-Gobain SageGlass, who recommends supplementing visits with social media. “I challenge CEOs today to use social media, not where someone else is writing it for you, but you’re writing it yourself,” said McLenaghan, who uses his LinkedIn account to highlight team achievements. Recently, he sent a traditional thank-you card to a team member, who then posted it on LinkedIn.

“If my people are saying, ‘I got this thank you card from the CEO,’” he notes, “there’s not much I have to say about what the culture of the company is—it’s pretty much there.”

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