Would you buy a house without carrying out a full survey? No, of course you wouldn’t. So why would you buy a company without surveying the people and the culture, as well as the financials?
It’s undeniable that a merger or acquisition is a major disruption for any organisation, and all too often the results fall short of original expectations. The cause of such disappointments is invariably the presence of people somewhere in the mix. For people can be, at best, unpredictable and, at worst, downright disruptive.
Research shows that most M&A deals fail to accomplish their strategic objectives.
- Just 23% of all acquisitions earn their cost of capital.
- In acquired companies, 47% of executives leave within the first year and 75% within the first three years.
- In 70% of cases, projected synergies do not materialise.
- In the first four to eight months after completion of a deal, productivity may fall by up to 50%.
- Some 85% of acquisitions are based on intangibles.
- CEOs and CFOs routinely cite “people problems” and cultural issues as the top culprits in failed acquisitions.
- Research on cultural factors is the aspect of due diligence least likely to be done.
- Only progressive organisations consider culture and people as key to the due diligence process.
- A study of 190 CEOs and CFOs and other top executives experienced in global acquisitions found that cultural incompatibility is consistently rated as the greatest barrier to successful integration.
- Given the potential to have very different cultures within any single organisation, achieving a successful post-deal outcome hinges mainly on the people and cultural challenge.
How human and cultural due diligence can mitigate the risks
You can purchase the fixed assets, but you can never really purchase the people. They can all too easily vote with their feet. However, there is a great deal you can do to mitigate the risks. Start by looking in detail at the people and the culture they will want to belong to.
There are the obvious questions:
- What processes and procedures are in place?
- How is performance assessed?
- What are the existing terms and conditions and, perhaps more importantly, how are people rewarded, beyond financial rewards?
- What feedback — in the form of compliments and/or complaints — has been received through channels such as employee surveys, assessments of the leadership, and customer feedback?
- How much emphasis is there on learning and development? Is this backed by a budget that allows for continuous improvement?
- What do the statistics tell you about labour turnover, the number of internal promotions, and any outstanding tribunals?
- What culture will the new organisation adopt?
- What structure should the new organisation adopt?
These indicators will help you to value the business. You don’t want to discover, when the deal has been signed, that there is a large potential cost around the corner!
More importantly, they will enable you to get a good feel for the culture of the organisation and the calibre of the people employed, plus a sense of how attached they are to the status quo. All this information will be vital when you come to look at the integration process
Issues in hostile takeovers
In an ideal world, you have gathered all the information you need to set out your new vision and strategy. But what if this is a hostile takeover? There is no doubt that this scenario makes it much harder, and you’ll need to make a more concentrated effort to get everyone on side.
At this point it is critical to carry out covert mapping of the key players and stakeholders as part of your risk management strategy.
In essence, this will provide you with an outline of the existing organisational structure, and will give insight into both the performance of the current people — so that you can identify the movers and shakers — and a sense of how they feel about the organisation. All this information is priceless if you want to ensure a successful acquisition.
What happens now?
It’s very exciting: the deal has gone through and your business is now significantly bigger!
However, in more than 70% of M&A deals, projected results are not achieved and productivity can fall by 40% or more. The human fallout can be the biggest downside: trust, coherence, focus, clarity, resilience and alignment can be adversely affected.
To avoid these pitfalls, you need to implement an effective integration programme that is more than process re-engineering. It is equally important to have a programme that measures human motivators, drivers and mindsets as well as systems, processes and management. It is critical to decide quickly who is staying in the senior team and who is going, and take action.
But before making these critical decisions, it is essential to have real clarity about your vision for the future:
- What type of business do you want to be?
- What are your measures of success?
- What are the values — and therefore the culture — of this new business?
When you are clear about these things, the decision-making around people becomes significantly easier. You will be able to identify the players who will be key to delivering business success, and put in place retention packages to keep them on side.
What about the people who will not be part of the new business?
Be straight with them as soon as possible. The worst thing for people is not knowing what their future is. This leads to a period of complete inertia, which can be absolutely crippling for your business.
Treat the leavers with dignity, and support them with outplacement initiatives and career counselling. Do not underestimate the impact this has on those you are retaining. Seeing their colleagues supported sends a clear signal about the type of business you are.
In the early stages, building an integration team from both of the previous businesses is key to ensuring the sustainability of the new business. The integration team does need some leadership input. However, it works best if it includes a diverse range of employees from all parts of the organisations. Select people who have the energy to really drive this!
The leadership and integration teams should work with external experts to ensure objectivity, clarity and focus, and to avoid costly incorrect initiatives. The external experts will work with the leadership team on the vision, purpose and values of the future and the type of business you are seeking to become. Share this information with the integration team and then trust them to identify the systems, processes, behaviours and measures that will underpin the way in which you do business.
Absolutely crucial is the level of communication, which needs to be increased tenfold. Ideally, the business leaders should conduct as much of this as possible face to face. This will reap massive dividends!
In addition, use every medium available to build in-house communities: regular blogs, voicemail, in-house newsletters, to name but a few. The integration team can lead on this and find ways to get upward feedback, which the leadership team can act upon.
When these measures are in place it is easier to monitor performance and share those quick wins. It’s human nature to want to be part of building something successful. Reminders of what is working well will charge those batteries to keep going, no matter what. Get it right and the results are dramatic. Get it wrong and the fallout is disastrous.
Have you factored human and cultural due diligence into your M&A plans? If you’d like further guidance, email me or call me on 020 7099 2621.