Post Merger Integration: Change Management And Due Diligence Key To Success
In the late 1990s, when the German automaker Daimler merged with American automobile company Chrysler, DaimlerChrysler was touted as the next big thing in the industry.
The marriage between the biggest automobile brands was expected to bring out a disproportionate competitive edge. But the narrative did not turn out on the expected lines and cracks started appearing post the merger deal leading to a bitter divorce.
The merger was expected to yield big numbers in terms of volume and profits but it ended up being a loss-making proposition leading to Chrysler’s sale to a private equity firm in 2007.
While the deal looked like a bonanza for everyone involved, the Chrysler employees reported a decline in job satisfaction as they felt consumed with a more dominant and formal German work culture. Grapevine has it that the Chrysler employees would often joke around saying how Chrysler is silent when pronouncing DaimlerChrysler.
Reflecting on the primary cause of failure, Atul Juvle, General Counsel, , Schindler India, says that a significant number of mergers fail due to a lack of cultural integrity.
While the focus is on numbers, culture, in my view, does not receive the attention it merits during the merger process. Nevertheless, the true value emerges when the newly created entity fails to live up to expectations, he adds.
Another widely reported case of an M&A deal going down the drain is the HP-Compaq merger in the tech industry. The merger that was carried out after a proxy fight did not pay rich dividends. While HP had a consensus-driven engineering approach, Compaq was said to be a more sales-oriented approach to decisions making.
News reports are filled with stories of how failed mergers impact the bottom line and the employees at work in equal measure.
Why failed cultural integration fails mergers
A company's culture includes its business practises, leadership style, workforce age and demographics, as well as the variety and concentration of its customer base and their preferences.
Instances of large corporations struggling to blend contrasting styles of functioning, leadership and decision-making, eventually leading to layoffs, employee exits, reduced productivity and losses are not uncommon.
“Over the years, promising mergers have failed to deliver the expected results owing to a failure of cultural integration, says Bishen Jeswant, Partner, Cyril Amarchand Mangaldas.”
"Longstanding cultural practices are crucial to the growth of an organization. For instance, while some organizations prefer to operate in a structured, well-defined manner, others benefit from the freedom associated with an informal setup" adds Jeswant.
Building on Jeswant’s example, an acquiree company operating in an informal and autonomous work culture may face a culture shock when subjected to stricter policies and norms. It could be something as simple as directing the employees to adhere to a dress code when previously there was none or it can be taking away the benefits and perks employees were previously used to. (read cost-cutting and restructuring)
Clear communication, diligence and change management key
The post-merger integration process demands clarity in communicating and addressing change management issues. At a micro level, employees of both organisations may feel uncertain about their jobs, their KRA’s or expectations from the new management.
Managers need to identify and resolve resistance to change and bring employees into the merged entity to operate in a shared culture with a shared vision. Needless to mention that it all starts with the leadership at the top.
"Prior to a merger, it is important to identify the commonalities and differences in cultural styles, devise a structured approach to merge the cultural values and inform and train the workforce for such change. Not only is this crucial for a smooth transition but also for the success of the merged entity in the long run", says Jeswant.
One must also not forget how valuable a prior due diligence exercise is, as part of the merger exercise. On the aspect of carrying out the necessary due diligence, Juvle shares a pro tip. When undertaking operational due diligence, don't forget to include the profiling of customers and vendors and comprehend the general perspective on the volume of complaints and potential hazards. This goes hand in hand with gauging the ethical maturity of the target company.
"Before the deal, every facet needs to be reviewed and reset/ preset in the process to ensure the planned performance of the newly merged unit", asserts Juvle.
