Features

Many mergers & acquisitions ultimately don’t add any value: Prof. Ulrich

16 Jan 2014 - {{hitsCtrl.values.hits}}

By Dinesh Weerakkody

Professor Dave Ulrich, the global HR Guru explains in an interview why so many corporate combinations that looked like such great opportunities and so good on paper often do not materialize or fall far short of expectations. The result more often than not is value destruction. Professor Ulrich has authored over 25 books and has consulted with half of the Fortune 500 companies. Excerpts:

Q: To begin, why are mergers and acquisitions important for business success?
Companies need to grow to succeed. Growth can occur with new products, new geographies, or new customer connections. M&A are a key pathway for growth in each of the three growth strategies. Therefore, with the globalization of the world economy, companies are growing through mergers and acquisitions in a bid to expand operations and remain competitive.

Q: In the M/A world, is culture still the critical predictor of success?
When leaders want to shift strategy, they may proclaim a shift from product to service, from domestic to global, from efficiency to growth, but quickly run into an embedded culture that keeps desired changes from happening. In the M/A world, culture is no doubt the critical predictor of success. Therefore, being aware of and trying to integrate culture as part of merger improves success.

Q: It is said that most mergers fail because of cultural ignorance. There is ample research to show that despite investment banks giving a plethora of figures quantifying the synergetic benefits of the combination. Yet what finally determine whether a merger succeeds or fails is really its people. What are some of the people challenges surrounding Mergers and Acquisitions?
The broad question is how to make the whole more than the sum of the parts. This means:

1.Pre merger: making sure that cultural/HR issues are considered in merger choices. This is SO important. With pre merger HR involvement, the changes of merger success go up dramatically.
2. Post merger: Using HR practices to integrate the firm:
a. People: making sure that the right people are in the right position ... doing an assessment of position requirements
b. Performance: aligning the performance management process so that they match ... this is often a reflection of the cultures
c. Information: sharing an abundance of information about the new merger and its goals
d. Organization: building new organization roles and responsibilities
3. Merger process: mergers are about change and HR should be the change architect in a company ... who to involve, how to involve them, etc.

Q: How do you deal with issues like talent retention, loss of productivity, incompatible cultures, clash of management styles etc. before and after the combination?
There is an evolution in the merger integration where these issues need to be dealt with much more openly, honestly and aggressively keeping the end results in sight.

Q: Can you share some research insights into how the culture integration must take place to ensure the combination delivers value for the companies involved?
I like to box into three phases.

Phase 1: Pre 1995: cultural ignorance
M/A had about a 20-30 percent success rate, success defined as returning cost of capital for the investment in the 5 ensuing years. Often in this time period, M/A specialists would look for an economic fit (can save money by reducing costs) and a strategic fit (product or service complementarity) and the M/A would go forward. Only to run into cultural headwinds when the two firms came together.

Phase 2: 1995-2010: cultural integration
M/A success rated improved to 45 to 55 percent. Culture was considered before the M/A to make sure that there was a fit and/or to anticipate the price (time and money) to merge the culture. The focus for the newly formed company was to discover common values and to emphasize them in the newly formed organization. The good news with this approach is an awareness of culture (considered before the merger), the overlap of the two cultures (before the merger) and the pathway for the culture of the new company (after the merger).

Phase 3: 2010 beyond: cultural innovation
In Phase 2, the culture focus was on common values looking backward. In Phase 3, we think we can get to 70 to 80 percent successful integration of the M/A work by creating a new culture. In this case, the firms each come to the M/A with a set of cultural values based on their past. But, the newly created firm should use a clean sheet of paper to innovate the new culture for the new firm.

Q: How do you create this new culture?
Creating a new culture often starts from the outside in. Think of culture as a brand reputation: what does the organization want to be known for by its key stakeholders?   This external brand identity should be connected to the internal cultural values. By defining the internal culture through the expectations of the firm’s brand, the new company creates a new culture aligned with the intent of the new culture.

Q: Another challenge would be to sustain financial performance and realize the synergies that were envisaged pre merger? What are the key steps to ensure the KPIs are met?
Companies can take one of two extremes in mergers: leave the new company as it is or quickly integrate the company. Generally, the best strategy is to quickly integrate in two phases. Phase 1 is efficiency. A merger should drive out redundant costs and build efficiency. This means replacing duplication ... facilities, headcount, etc. It is best to do this quickly. Phase 2 is leverage ... learning to leverage customers and products across the merged companies. Some companies get into leverage where the largest long-term gains will come, but it is important to drive efficiency first.

Q: Lastly, at Boardroom level what are some of the challenges? Because according to research 60 percent of the cases, shareholder value was destroyed.
The Board’s role should be to ensure the synergetic strategic benefits of the union are fully realized by playing a leadership role.
Therefore, the Board should be asking management forward thinking, thoughtful questions such as:
1. What are our criteria for merger? (e.g., strategic fit, financial leverage, cultural integration?)
2. Why does this proposed merger make the most sense for growth?
   a. What are the opportunities of the merger?
   b. Why should we merge vs. growing organically?
3. What are the integration risks we will face in this merger: people, customers, Tax, competitor responses, etc.
4. What are the early indicators that we are on target?

Features

Many mergers & acquisitions ultimately don’t add any value: Prof. Ulrich

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