cultural clash

in mergers
and acquisitions
Mergers and acquisitions are a fact of life in
todays highly competitive global business
environment. Unfortunately, statistics indicate
that up to one third of mergers fail within five
years, and as many as 80 percent never live up
to their full expectations.

A great deal of evidence indicates that the

ultimate success of mergers and the amount of
time it takes to get them on track is determined
by how well the cultural aspects of the
transition are managed.

This article provides insights on how to

systematically and consciously avoid cultural
clash to gain the most synergy from any merger
or acquisition.

By Dr. Larry Senn

Mergers and acquisitions management company in America. The banking and brokerage divisions plagued
question in each case is, Can merging Morgan Stanley/Dean Witter for years
are a key part of many companies achieve the necessary synergy, and unseated a CEO.
or will the cultures clash?
organisations strategies.
Statistics indicate that up to one third
Often, billions of dollars are An article in the Los Angeles Times of mergers fail within five years and as
entitled, After Back-Slapping Wanes, many as 80 percent never live up to their
at stake as well as the very Mega-Mergers Often Fail concluded full expectations. The majority of merger
that Perhaps more than anything else, shortfalls are due to human factors, not
future of the organisations
seniour management stumbles over cul- to quantitative analysis. You can run
and the executives who are tural issues. They noted that: The most all your discounted cash flows and have
important issue is trust. Along with culti- the numbers come out perfectly, but its
coordinating the merger. vating trust, the keys to success in pulling the human resources side of a merger
Unfortunately, more often together companies are crafting a shared acquisition that spells failure or success
vision, developing a precise transition (Training Magazine).
than not, the benefits of plan, which includes more than structure
and processes and avoiding the common Its interesting to note the parallel in the
mergers or acquisitions fail to
pitfall of focusing so much on the merger divorce rate in America and the fallout
materialise or fall short details that customers (and employees) in mergers. The number of divorces each
are neglected. year is approximately 50 percent of the
of expectations.
number of marriages. The number of suc-
While it is clear that successful mergers cessful mergers is about the same.
and acquisitions must be based primarily
Learning to systematically and consciously on strategic, financial and other objective The Importance of addressing
avoid cultural clash is a necessary skill criteria, ignoring a potential clash of the Impact of culture
because mergers are a fact of life in cultures can lead to financial failure. Far
business. One reason is the continuing too often, cultural and leadership style Since the human factor is so critical, it
consolidation of industries. Phone com- differences are not considered seriously is important to understand the role of
panies, cellular companies, utilities, oil enough or systematically addressed. Many this phenomenon and to address it in
companies, financial services companies, acquisitions that looked very promising each phase of the merger or acquisition
insurance companies, healthcare organ- from a strategic or financial viewpoint process.
isations, retailers, defense and electronic ultimately fail, require major surgery
companies, and dozens of others are a and/or extensive subsequent hand- Over a period of time, organisations, like
part of this consolidation trend. holding because these soft issues were people, develop distinctive and unique
neglected. personalities. This personality of the
Historical, industry-shaping mergers are organisation has been referred to most
common today. Examples include the Evidence of the magnitude often as corporate culture. An individuals
telecommunications industry, with SBCs of the challenge personality is made up of ones habits,
acquisition of AT&T, Sprint and Nextel, beliefs, values and behavioural traits. A
Cingular and AT&T Wireless and Verizons Most articles written about mergers men- companys culture is also made up of its
acquisition of MCI. tion cultural compatibility as an obvious habits, values system, customs and norms
challenge. The AOL/Time Warner merger that govern behaviour within the organ-
In retailing, Federateds acquisition of The never lived up to expectations. The con- isation. The culture reflects the unwritten
May Department Stores Company and cept of leveraging the content and dis- ground rules of behaviour, or simply the
Kmarts surprise acquisition of Sears are a tribution advantages that each company way we do things around here.
part of competitive strategies for compa- brought to the deal sounded great, how-
nies to fill their niche and compete with ever, the cultural clash wasnt addressed, The term cultural clash has been
winning formulas like those of Walmart and that kept them from making the coined to describe what happens when
and Target. vision a reality. The traditional publishing two companies philosophies, styles, val-
world and the Internet were on different ues and habits are in conflict. That may,
In healthcare, Anthems acquisition of wavelengths. The cultural and style differ- in fact, be the most dangerous factor
WellPoint made it the largest healthcare ences between deal-oriented investment when two companies decide to combine.

Culture clash in mergers and acquisitions [2]

One classic example of a cultural clash This can be seen with the new mega- panies. They also quickly begin to keep
was the merger of Price Club and Costco banks and one-stop-shop financial ser- score on who are the winners and los-
Wholesale. While Costco has gone on to vices organisations where the big win will ers. It is typical in an acquisition for the
be ultimately quite successful, the merger come from cross-selling and cost savings acquiring company to see themselves as
almost derailed the company and took from shared services. To date, few, if any, the winners and the acquired company as
far longer than it should have to come have pulled that off. Unfortunately, all too the losers. Typically, the controlling com-
together. According to Michael Shea of often, different parts of the companies pany wants to impose changes and views
Charter Investment Group: The Price have their own styles, norms and biases those in the acquired company as highly
Club guys had much more of a real estate and never really merge. resistant to change.
strip mall mentality. The Costco guys were
the type who started working at grocery The challenges, as well as the techniques On the other hand, the most frequent
stores bagging groceries when they were and approaches that bring the cultures of complaint from employees of companies
10 years old and worked their way up the two different organisations together, are that are being acquired is that the new
ladder. Since no team alignment work discussed in the sections below. owners dont appreciate them. They often
was done to bridge the gap, the combi- feel that they dont get any credit for
nation was deadly. Key human problem areas to avoid what theyve done well and what is work-
ing and that their new leaders only want
International acquisitions 1) Loss of key people to point out how the new way is better.
cross-cultural challenges
Whenever acquiring an organisation, In a newly merged or acquired company,
Merging two corporate cultures from the remember that the natives have the the appointment of people to positions is
same country with the same language maps. Even if you need to downsize, if closely watched. This is a specific area in
and traditions is challenge enough. That not handled right, the wrong people will which people immediately keep score, tal-
challenge is compounded when differing leave and the venture can be jeopardized. lying which side won or lost on each issue
country cultures and norms are added to A number of studies document the high or appointment.
the equation. What might be seen as a exit rate from acquired companies. One
healthy, assertive bias for action in one survey indicated that only 42 percent of 3) Judgment versus respect
society may be seen as rude, offensive the managers remained with the acquired for differences
and inappropriate behaviour in another. company for as long as five years
These issues must be dealt with because (Merging Human Resources, Merger There is a tendency for each group to
more and more multinational acquisitions and Acquisition Magazine). be judgmental about the way things
are taking place. Chrysler and Daimler are handled by the other. Rather than
greatly underestimated the challenge and SBCs acquisition of Pacific Bell is an respecting and building on differences,
have still not fully sorted it out. example of an exodus of senior talent. It people frequently enter into right and
was heralded as a merger of equals when wrong judgments.
Within-company merger issues the two chairmen announced the historic
coupling. It didnt turn out that way. 4) Fear of the unknown
The success of a number of critical inter- Within months all six top officers were insecurity is the enemy
nal initiatives and strategies are depen- gone, having either retired or quit. Of its
dent on a form of within-company 35 corporate officers, just six remained, Uncertainty and insecurity are associated
mergers of different teams or divisions. reported the article Executive Exodus in with almost all mergers or acquisitions. As
Shared services, cross-selling, reengineer- the San Francisco Business Times. a merger is announced, fears and anxiet-
ing, customer single source and zero Mmost of this was due to a clash in ies are fuelled by uncertainty about what
inventory manufacturing all require that cultures and no attempt to bring the cul- the changes will bring. There is typically
different parts of the company (and often tures together. a feeling of personal vulnerability and
suppliers) come together and perform loss of control. People often spend time
as a single enterprise. The same kinds of 2) Winners versus losers updating their resumes and exploring
cultural clashes found between merg- we versus they their options. People fear the unknown.
ing companies often happen within It might be more accurately called fear
companies as they try to work together When companies are acquired or com- of the imagined,since people have a
on broad cross-organisational issues and bined, people almost immediately start tendency to fill in the blanks of what they
opportunities. to focus on the differences in the com- dont know by imagining the worst.

Culture clash in mergers and acquisitions [3]

Harry Levinson, a management psy- the reporting structure. In one study to communicate the benefits of the
chologist and Harvard professor emeritus, of merger successes and failures, it merger. People may not like it, but if
stresses the psychological consequences was found that 81 percent of the fail- they see that it has a legitimate pur-
of the merger experience. He states that ures were characterised by frequent pose, and the benefits are obvious,
even when a merger offers new oppor- changes in the reporting relationship there is less resentment and employ-
tunities, it still tends to be perceived as a after the merger. Successful acquisi- ees are more likely to accept it.
threat to ones equilibrium. tions were characterised by clear
reporting relationships that were 8) Make sure the acquiring compa-
Whether a merger is for the better or established early on and not changed nys leader(s) communicates in per-
worse, it throws relationships, norms, (Merging Human Resources, son as much as possible. It is easier
work behaviour and support systems out Merger and Acquisition Magazine). to be resentful towards an unknown,
of balance. If these psychological losses invisible ogre, than it is to be resentful
are not addressed early on, chronic prob- 4) As leaders of an acquiring com- about a person you have personally
lems in attitude and behaviour can result. pany, go out of your way to experienced as being real, rational and
acknowledge as many positive concerned. Successful mergers only
5) Loss of organisational aspects of the acquired company happen when senior managers make
effectiveness as possible. At the same time, set themselves visible and accessible to
clear expectations and create an envi- all employees affected by the merger
The uncertainty surrounding the change ronment in which there is a high level and promote the benefits at all levels.
often causes the employees to lose of openness to change. Employees at all levels need to experi-
enthusiasm about their work and their ence the buy-in and support of their
organisation, and a drop in morale and 5) Avoid throwing out the baby leaders for the merger or acquisition.
organisational pride follows the merger. with the bathwater by identifying
Countless hours are spent feeding the which cultural factors have histori- 9) Create an integration plan. Do due
rumor mill, and large numbers of people cally made an organisation great. diligence on the cultures both before
adopt a wait-and-see attitude. Results For example, if a company had histori- and after as systematically as you do
usually suffer and customers are lost. cally been successful based on its cul- on the numbers, and create a specific
ture of service and quality, rapid and cultural integration plan led by the
Guidelines for creating insensitive cost-cutting could begin to CEO and seniour team, not just del-
a successful merger destroy what made that organisation egated to an HR team.
great in the first place.
1) Retain key leaders. It is essential to A cultural challenge
identify those people critical to con- One example is the acquisition of a familiarity blindness
tinued success and initiate a plan to smaller, highly entrepreneurial com-
ensure that these key people stay and pany by a larger, more formalised one. It is hard for people in a culture to see a
remain engaged and aligned. That combination poses cultural chal- culture. That is why outside strangers
lenges because it is hard to provide eyes are needed. One of the difficulties
2) Communicate the vision. The direction and additional structure. of meshing two organisations is that each
sooner that some semblance of However, this must be done without group tends to see the world through its
certainty about the future can be killing the entrepreneurial goose that own biased cultural filters.
communicated, the sooner people lays the golden eggs.
will settle down. Once a new vision This is often referred to as familiarity
for the organisation is created, new 6) Be clear about the nature of the blindness, or a cultural trance. For exam-
future targets are set and new teams union and be willing to talk about ple, if everyone around you is risk-averse,
are connected and aligned, people it. Is it a true merger of equals, an then it appears to you as if the world is
can refocus their energy in a forward acquisition that attempts to use the that way and should be. That is often
direction. best of both, a stand-alone holding the case when two organisations get
company or just an assimilation? together. People in each company look
3) Address the new organisational at the same events, the same decisions,
structure as early as possible. 7) Communicate the reasons. Most the same situations, but coloured by
Failed mergers are characterised by a people understand that mergers and their culture and past experiences, they
tendency to have unclear reporting acquisitions take place for business legitimately see them from two different
relationships and frequent changes in reasons. It is important at the outset points of view.

Culture clash in mergers and acquisitions [4]

Understanding how things are seen in the
Figure 1
other culture, learning mutual respect and
being open to exploring different points
of view are the keys to the human factor autonomous
in any merger or acquisition.

The Wall Street Journal ran a front-page

article entitled Culture Clashes after A B A B
Combinations Spur a New Brand of Due
Diligence. It stated: Fights over every-
thing from management style to company cultures before cultures after
picnics can foul up corporate marriages.
So, some executives weigh a companys
Figure 2
corporate culture as well as its finances
before clinching a deal. Cultural audits
identify potential conflicts and solutions. absorb
The article cited a new legal question
facing mergers: A Delaware court has
A A
recognized culture as a valid criterion for
deciding a deals merit and ignoring it
B B
could bring shareholder law suits.
cultures before cultures after
Avoiding familiarity blindness

The analysis of mergers and acquisitions

during the due diligence process under- considerations, but the similarities 1) Autonomy or semi-autonomy
standably focuses heavily on financial and differences in the cultures and
information. A lot of money is spent on the proposed nature of the cultural In the hands-off scenario, the goal is to
accountants and lawyers even though it is integration, e.g., autonomous organ- create mutual support and synergy with-
now better understood that the cultures isations, assimilation or creation of a out necessarily changing the nature of the
will make or break the deal. new entity. organisations. It is unrealistic to assume
that the acquiring company will not want
Equal attention is needed using strang- Variations in the nature of mergers some modifications. For example, there
ers eyes to understand the cultures and and acquisitions may be a desire to shift one or more
the areas which may clash. A process qualities, such as innovation, bias for
should be used to: Specific steps needed to deal with the action and a higher level of expectations.
human side of the merger or acquisition
Develop a simple and quick profile of are greatly influenced by the basis for However, when the basis for the acquisi-
the two companies cultures through the merger as well as the cultures of the tion is autonomy or semi-autonomy, it
surveys and interviews and note organisations. For example, in a merger is important to respect the reasons for
similarities and differences in decision where the acquiring company is interest- the differences in culture and to proceed
styles and the internal reinforcement ed only in the physical and financial assets slowly with integration activities.
systems, including compensation/ of a target company and expects to lay
benefit systems, performance review off most managers and employees, major The result of such a shift is shown in
systems, performance criteria (written efforts to manage culture are unneces- the Figure 1, above.
and unwritten) and hiring and firing sary. However, when a true marriage of
criteria and practises. two equals is the end goal, attention to 2) Absorb and assimilate
the management of culture becomes criti-
Compare philosophies of the domi- cal and detailed planning is most crucial. If the goal is to completely absorb and
nant leaders, especially if they are The varying goals for merger outcomes assimilate the acquired company (Figure
both to stay on, and have them are shown below in their three most com- 2), then the primary need is to educate
openly discuss not only financial mon forms.

Culture clash in mergers and acquisitions [5]

the acquired employees in the rules of the
Figure 3
new game.

It should be remembered that they have

been playing a different game under a
co-create
different set of unwritten as well as writ-
ten ground rules. Orientation to the new
organisation should include letting them
know about the vision and values of their
A B C
new organisation. It is also important to
focus on how the new game is going cultures before cultures after
to be different and not on judging the
past or telling them why what they were
doing was wrong.
monly understood signals and no time to pany and the merger. If leaders show up
3) Co-create a new entity learn to play well together. It wouldnt unaligned, the two merging companies
matter how good the individual players will be unaligned. If they fight over turf,
While avoiding cultural clash is always were; they probably wouldnt succeed. A so will all those who look to them. That is
important, the greatest attention should customised process can be used to embed why the leaders need to spend time com-
be paid to successful cultural integration the new values and shape the culture ing together as one team and aligning
when a true marriage of equals is intend- through values and guiding behaviours. vision and strategy.
ed (see Figure 3).
Inspire and align people around The shadow leaders cast across the
Here are several key steps to vision, mission, and shared values organisation is a powerful form of com-
successfully integrate cultures: munication. For that reason, it is critical
During a merger or acquisition, people that the new senior team be the first
Integrate teams and shape culture need to be inspired to move towards new team to come together (beyond the tran-
goals and visions. In the absence of a sition planning team). Members should
Whenever new leaders or new teams compelling purpose for a new organisa- spend time in a series of well-designed
at any level are put in place, processes tion, people tend to stay locked in the off-site sessions. The alignment process
to align those teams around the greater past and to unhealthy speculation. described earlier can be used by the
vision and direction are vital. Companies seniour team not only to build the team,
can no longer afford to take months to In a true merger designed to create a but to come together around the shared
get acquainted and work out differences. new combined entity, the senior teams of values and guiding behaviours for the
each organisation need to work together merged entity. Because of its importance,
Off-site sessions with the top leaders are to clarify the new mission and the shared this process is best handled with assis-
vital as part of a process to begin reshap- values, or behavioural ground rules by tance from skilled and experienced out-
ing the culture to a desired new state. which they are all going to play. side facilitators.
This brings new teams together in a
relaxed and collaborative environment to In acquisitions that are assimilations, The emotional cycle of change
focus their energy in the same direction. the acquiring company needs to have a
clear vision and set of values and guid- The integration process should be entered
Use of a more formal, customised culture- ing behaviours and a process to orient into realistically with full knowledge of
shaping process is often skipped due to employees of the acquired company. If the obstacles that may be encountered.
the demand of business. This leads to the company is not clear about these Most acquisitions considered to be suc-
unintended loss of people, slow starts for things themselves, it is very confusing and cessful follow a pattern that has been
teams, and wastes time and energy. disruptive. described as the Emotional Cycle of
Cultural clash is not hypothetical. It is Change (see chart on page 7).
real and it happens among people who Role of the seniour team
havent taken the time to develop open- Phase one is uninformed optimism, when
ness and trust. Think of a team of newly- Studies on culture point to a powerful people are excited about the new venture
drafted ball players trying to play in the phenomenon we call the Shadow of the and have not as yet faced the challenges
major leagues with no practise, no com- Leaders. As leaders go, so goes the com- and complications.

Culture clash in mergers and acquisitions [6]

 Most acquisitions considered to be
emotional cycle of change
successful follow a pattern that has
1

optimism
been described as the Emotional Cycle
5
of Change.
Phase 1: uninformed optimism 2 4
Phase 2: informed pessimism

pessimism
Phase 3: realism
Phase 4: informed optimism
3
Phase 5: Rewarding completion
time

Phase two is informed pessimism when all Team members operate more quickly are better captured. This leads to
of the issues, rumours and disruptions are and effectively in their new or newly- improved productivity and profitability
being faced. It can take one of two cours- revised organisation without loss of in a shorter period of time.
es. Without a systematic plan, pessimism momentum.
can become a long-lasting reality. The process of creating a vision, mis-
There are fewer defections. People sion, and shared values creates excite-
In phase three realism sets in. The issues dont move on because of uncertain- ment, inspiration and commitment
and challenges are understood and suc- ty or imagined concerns and issues. with all people working for a new
cess requires determination. However, future goal as opposed to living in
with a plan in place and continued com- Impact on morale is lessened. People the past.
mitment, the tide will begin to turn to dont waste countless hours on spec-
phase four, or informed optimism. In ulation or on feeling victimised. A sense of community is created
phase five, planned benefits begin to sooner since shared vision and values
become a rewarding reality. Focus on the customer is not lost and link individuals to the organisation
customer disruptions are minimised. and bind people together.
Benefits of a systematic The planned synergies, such as cross-
integration process selling, are captured.

Among the benefits that can come Consolidation of functions is done

from systematically dealing with cultural faster and more smoothly and
aspects of mergers are: the cost benefits of consolidation

Dr. Larry Senn is chairman and founder of international culture-shaping firm Senn Delaney, a
Heidrick & Struggles company. Larrys vision and leadership for more than 35 years has helped
Senn Delaney become an international firm that is widely recognised as the leading authority
and practitioner in the field of culture shaping. Larry has led culture-shaping engagements for
the leaders of numerous organisations, including dozens of CEOs of Fortune 500 companies,
U.S. state governors, members of two U.S. presidents cabinets, deans of business schools
and the presidents of major universities. Larry is an accomplished consultant, business advisor,
group facilitator, author, CEO coach and public speaker. He has co-authored several books,
including Winning Teams, Winning Cultures and 21st Century Leadership. In 2013, he
published his latest book, Up the Mood Elevator: Living Life at Your Best.

Culture clash in mergers and acquisitions [7]

about Senn Delaney
Senn Delaney, a Heidrick & Struggles company, is widely recognised as
the leading international authority and successful practitioner of culture
shaping that enhances the spirit and performance of organisations. Founded
in 1978, Senn Delaney was the first firm in the world to focus exclusively
on transforming cultures. More Fortune 500 and Global 1000 CEOs have
chosen Senn Delaney as their trusted partner to guide their cultural
transformation. Senn Delaneys passion and singular focus on culture has
resulted in a comprehensive and proven culture-shaping methodology that
engages people and measurably impacts the spirit and performance of
organisations.

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