M&A 2011 Style: The Cultural Fit Factor

Why do 75 to 80 percent of mergers and acquisitions fail to meet financial projections or return on shareholder value? Companies ignore the necessity of culture fit when combining workforces. An enormous amount of money is being lost; here’s how to capture it.

May 26 2011 by Lizz Pellet


Ahh….spring is in the air. It’s a time of budding relationships and longing for new adventures. The New Year used to be celebrated at the spring equinox for this very reason. It’s not a new concept that this is the time of year for new beginnings and it is not all puzzling that the merger frenzy continues amid unstable markets and high unemployment. Some under performers are prime picking at the moment.

What have we learned in the past decade that can lead us to fresh approaches to these couplings? Have we learned anything at all? The data still shows 75 percent to 80 percent of mergers and acquisitions fail to meet financial projections or return on shareholder value. Statistics indicate that only 15 percent to 25 percent of all mergers and various business combinations live up to expectations. 25 percent to 30 percent are reported to be outright failures with the acquired entity being liquidated at a loss within three to five years of acquisition. The remaining 45 percent to 60 percent result in little or no apparent benefit to the buyer’s shareholders. Here are just a few notables and their purchase price:

  • AOL – Time Warner ($164B)
  • MCI – WorldCom ($42B)
  • Daimler Benz – Chrysler ($37B)
  • Sprint – Nextel ($36B)
  • HP – Compaq ($25B)
  • JDS Uniphase – SDL ($13B)
  • Alcatel – Lucent ($11B)
  • Excite – @Home ($6.7B)
  • Mattel – The Learning Company ($3.5B)

For the sake of argument, let’s say 50 percent of these mergers failed to attain the ROI or shareholder value that they estimated. That’s a whopping loss of $169 billion!

Here we are in the middle of Q2 and it appears that 2011 is off to a big start in the M&A game.  Every sector is getting on the band wagon, even the U.S. government, yet they are looking at the mergers with a cautious eye.

The U.S. Defense Department welcomes mergers among defense companies as long as they don’t involve the top five or six suppliers acquiring each other. The Pentagon will not approve transactions that lead to consolidation of the major defense contractors such as Lockheed Martin, Boeing, Raytheon, Northrop Grumman, or General Dynamics. So if the Pentagon is saying no to the mega merger trend, where do they see the transactions? “There are small businesses, there are parts suppliers which may grow in this time and that’s good,” Ashton Carter, Under Secretary of Defense for Acquisition, Technology & Logistics, said. Those transactions “could be in the interest of economic efficiency” and the Pentagon would welcome them, he said.

Right…see, the little guy is becoming more and more attractive in the 2011 M&A approach. While looking to acquire smaller companies rather than one goliath is not a new trend, the way the combination is viewed by the consumer and managed by the organization appears to be the “new normal”. With the incredible popularity of social networking and availability of information, companies must be authentic and congruent to their organizational culture – especially during an acquisition.

In adopting a new way to look at these combinations, first we must agree that there really is no M in M&A. It’s all A and the majority of the A team believe they are numero uno in driving the success of the acquisition.

Independent studies by Watson Wyatt Research have linked the failure or success of integration efforts as being directly relational to the attention paid to the culture of the impacted organizations. Yet still the human integration issues are not addressed and Human Resource teams are frequently not involved in the initial investigation activities surrounding integration efforts. This is where the Cultural Fit Factor becomes a lynch pin in the success or failure of a deal. How many times have we hired an executive with outstanding skills, pedigree and demonstrated positive results only to transition them out of the organization within the first year? And when asked, “what happened?” the answer is inevitably “they didn’t fit”. Same goes for the integration process. If we can slightly steer the integration process to focus on fit in the first 90 – 120 days, we could see dramatic positive results.

The Cultural Fit Factor is the process of investigating, assessing and defining the cultures of two or more distinct business units or organizations through a cultural assessment to discover areas of similarity and difference that will impact integration efforts and achievement of strategic objectives. I will reiterate that this activity can be focused on business units or functional areas and not the entire organization. It is up to the strategic drivers of the organization that will determine how wide the cultural fit net will be cast in the first 90 to 120 days. The results of this assessment should be used as a foundational tool for identifying cultural gaps, creating integration and intervention plans to bridge those gaps and set a baseline for measuring organizational progress in the integration effort over time. This encourages engagement and ensures the organization is aligned and on-track with achieving strategic, human system integration objectives.

Most of all, this will help mitigate risk to your shareholders.

An additional output of this assessment will reveal who in the two organizations are viewed as better leaders, motivators, and coaches as well as who has a higher level of employee engagement in their respective departments. We again can read the statistics on how engaged employees are more loyal and productive to the organization.

While many people do not like to talk about the process of identifying who will stay and who will go, it is the hard side to the soft side in M&A – keeping the right fit and letting go of the individual who doesn’t fit (even if they are on the A team) is the best strategic move to positioning the best leadership to move the combined company forward.

Again, for the sake of argument, let’s assume that taking the cultural fit approach could mitigate shareholder risk by 25 percent, then our numbers from the previous example could have saved nearly $85 billion. And it’s safe to say that the process wouldn’t have cost even 1 percent of that figure. Now that’s just good ROI.