The Merger Seemed SO Right. So, Why Did It Fail?

Failed Mergers

Thorough due diligence was conducted prior to the deal. The numbers checked out masterfully. The synergies between the two organizations seemed like a perfect fit. The communications plan was executed flawlessly. The management team is proven and up to the task. You know that people downstream are resistant to change but you believe that everyone who makes the final cut for the go-forward entity will surely embrace the change. This deal is going to soar. Time to celebrate, right?

Less than a year into the deal that you thought was sure to be heralded as a best-of-class case study in the perfect “merger of equals” (or acquisition) by Harvard Business Review started to reveal some cracks in the foundation. Operating efficiencies were realized and market growth projections seem to be on track but the sense of a cohesive “team” is becoming more of a battle between two teams, “us” and “them” between the two original companies, “Company A” and “Company B.”

The CEO and the bulk of his management team are from “Company A” but a few leaders from “Company B” were added to the combined management team. Company A is all about decisiveness, collaboration, and nimble execution. Everyone is expected to speak their mind in the meeting and once all views have been heard, a decision is made, everyone salutes, the meeting is adjourned, and the team rallies their respective divisions and executes the plan. Participants are encouraged to speak their mind in the meeting but once the input is given and a decision is made, discussion is over. It is time to take the hill. No second-guessing after the meeting. No sniping afterwards.

Company B is stuffy and highly political. It isn’t known to move so quickly and decisively. The former CEO of Company B is known to issue a direction to his management team. By and large, the team will silently nod in approval or a brave soul will throw out a safe but respectful point to consider and that would be that. The CEO’s inner circle may whisper privately some course corrections to him shortly after the meeting and after additional days (or weeks) of contemplation, the edict is given. Lots of water cooler conversation ensues over the next couple of days and people will speak their minds more freely. People are expected to follow. Factions will develop but eventually, people will fall in line.

Now, do you think there could be an issue festering in this scenario just based around communication, behavioral expectations, and culture differences?

In my experience, cultural compatibility issues are huge contributors to the “perfect M&A deal” that ultimately hits the wall in flames. Curiously, I’ve RARELY seen cultural compatibility systematically assessed as part of the due diligence process of an M&A deal. Why do you think this is?

I don’t know for sure but I have a suspicion that it is largely due to primarily having skilled MBAs and financial analysts driving the due diligence and not including someone with experience in cultural compatibility assessment at the table to drive the evaluation.

Cultural compatibility assessment may seem too “touchy/feely” for some numbers-driven CEOs but all you have to do is look at historical mergers that were eventually undermined by vast cultural differences — the dissolution of Daimler-Chrysler is a great case in point. (An insightful article about this is found at http://www.edmunds.com/autoobserver-archive/2007/05/daimler-chrysler-why-the-marriage-failed.html. It reveals some cultural issues that I experienced first-hand when I did some brand strategy work for the company in 2002 — great people on both sides but vastly different cultures in many regards.)

I remember thinking that, in spite of the tangible cultural differences I experienced between respective Daimler and Chrysler teams, perhaps a merger of that magnitude could overcome what I had seen undermine other “merger of equals” scenarios. In the case of Daimler-Chrysler, the dissolution took longer than others I had seen but the end result was the same. Divorce.

I was tasked with assessing the cultural compatibility of organizations when I was with a private equity firm that did a number of M&A deals. The assessment process doesn’t take a rocket scientist to make it fly. It’s pretty simple when it comes right down to it but it requires a commitment from the CEOs and management teams of the two organizations to commit to the relatively short process and a willingness to get real honest – no matter how great the numbers look or how badly each team wants to do the deal.

When we committed ourselves to the process, it helped us avoid almost certain disaster on one deal and it proved to be foundational to our most successful acquisition. In both cases, I think everyone involved would say to this day that it was worth the two-day investment as part of the due diligence process to address the thing that stands apart from the numbers yet is one of the first things to make the numbers ultimately turn south.

Before you do your next M&A deal, consider learning from the likes of the Daimler-Chrysler deal and consider having the compatibility of the two cultures assessed as part of your due diligence process BEFORE you ink the deal. It might just save a lot of money and a lot of people unnecessary heartache.

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