Professional Documents
Culture Documents
Submitted to:
Dr. Beena Dias
Professor
AIMIT
Submitted by:
Mr. Nithin Pradeep Saldanha
Reg. No. 0816093
IInd MBA ‘B’ Batch
AIMIT
• profit-to-earning ratios;
• stock-price fluctuations;
• managerial assessments.
According to Steve Tobak is managing partner of Invisor Consulting LLC, the kinds of
problems companies face with mergers range from poor strategic moves, such as overpayment, to
unanticipated events, such as a particular technology becoming obsolete. "You would hope these
companies have done their due diligence, although that isn't always the case," he says. Aside from
those extremes, however, many analysts view clashing corporate cultures as one of the most
significant obstacles to post-merger integration. In fact, a cottage industry of sorts has emerged to
help companies navigate the rough terrain of integration -- and especially to help them overcome
the internal inertia that comes with facing change.
"It's like changing a wheel on a bus," says Cari Windt from Access GE, which offers GE
best practices to clients who are undergoing M&A transitions. "You can't skip a beat for your
customer." Windt says the earlier a company attempts to plan, the better. Often times, however,
companies don't plan as thoroughly as they should: "It's unusual that companies work on
developing quality solutions for the acceptance side of mergers."
Still, despite planning and good communication, things can go awry. According to
Analysts, one-third of mergers create shareholder value, whereas one-third destroys value, and
another third don't meet expectations. For shareholders, these deals can be "a crap shoot,"
however, that being in the successful one-third can add tremendous value.
Aside from solid preparation for a deal, then, how can presence in that top third are predicted?
"Companies that acquire with frequency and make it a major core competency tend to do well and
perform better than their peers". In fact, he adds, more companies regard M&A as essential for
growing value. He cites the recent history of M&A activity as evidence: As M&A activity has
cycled over the past decade, the downturns have tended to be less extreme than years before. In
other words, even when there's a lull in activity, there are more companies engaging in mergers
than there were before during slow periods. In fact, according to press reports, last year's U.S.
M&A volume ($886 billion) was almost double the volume of 2001 ($466.5 billion). It's more of
an established structure. "More companies are equipped to do it, and it's more an integrated part
of doing business."
Integration is really about mobilizing chang. The key question is, what is the change
dynamic of the companies involved -- how quickly do they adapt? Although companies may
seem similar on the surface and therefore a perfect match, they are often vastly different in terms
of change orientation, leadership style, organization systems, and methods of dealing with
conflict, she notes. In addition to the ordinary due diligence of getting to know the acquired
company and industry thoroughly, speed is essential in these transactions -- especially with regard
to anything that will impact employees, including layoffs, benefits changes, location, etc.
"Difficult decisions need to be addressed early on so that they are not lingering and hit later."
One of the most important aspects of the process, according to analysts, is a strong
commitment to change on the part of management. First, there needs to be consistent
communication regarding the process; ideally, there should be a "rhythm" of communications for
employees, which might take the form of regular email updates, newsletters, and general visibility
on the leadership level. Secondly, management needs to assign resources to complete the
transition successfully. Acquiring companies should consider assigning an "integration leader" to
help oversee the process. This is a ‘multi-directional ambassador" with leadership skills,
"aggressive project management’ capabilities, and ‘exceptional people skills.’ ‘Listening is key.’
A definite answer as to why mergers fail to generate value for acquiring shareholders
cannot be provided because mergers fail for a host of reasons. Some of the important reasons for
failures of mergers are discussed below:
Excessive premium:
In a competitive bidding situation, a company may tend to pay more. Often highest bidder
is one who overestimates value out of ignorance. Though he emerges as the winner, he happens to
be in a way the unfortunate winner. This is called winners curse hypothesis. When the acquirer
fails to achieve the synergies required compensating the price, the M&As fails. More you pay for
a company, the harder you will have to work to make it worthwhile for your shareholders. When
the price paid is too much, how well the deal may be executed, the deal may not create value.
Size Issues:
A mismatch in the size between acquirer and target has been found to lead to poor
acquisition performance. Many acquisitions fail either because of 'acquisition indigestion' through
buying too big targets or failed to give the smaller acquisitions the time and attention it required.
Lack of research:
Acquisition requires gathering a lot of data and information and analyzing it. It requires
extensive research. A carelessly carried out research about the acquisition causes the destruction
of acquirer's wealth.
Diversification:
Very few firms have the ability to successfully manage the diversified businesses.
Unrelated diversification has been associated with lower financial performance, lower capital
productivity and a higher degree of variance in performance for a variety of reasons including a
lack of industry or geographic knowledge, a lack of focus as well as perceived inability to gain
meaningful synergies. Unrelated acquisitions, which may appear to be very promising, may turn
out to be big disappointment in reality.
Cultural fit between an acquirer and a target is one of the most neglected areas of analysis
prior to the closing of a deal. However, cultural due diligence is every bit as important as careful
financial analysis. Without it, the chances are great that M&As will quickly amount to
misunderstanding, confusion and conflict. Cultural due diligence involve steps like determining
the importance of culture, assessing the culture of both target and acquirer. It is useful to know
the target management behavior with respect to dimensions such as centralized versus
decentralized decision making, speed in decision making, time horizon for decisions, level of
team work, management of conflict, risk orientation, openness to change, etc. It is necessary to
assess the cultural fit between the acquirer and target based on cultural profile. Potential sources
of clash must be managed. It is necessary to identify the impact of cultural gap, and develop and
execute strategies to use the information in the cultural profile to assess the impact that the
differences have.
Faulty evaluation:
At times acquirers do not carry out the detailed diligence of the target company. They
make a wrong assessment of the benefits from the acquisition and land up paying a higher price.
Ego Clash:
Ego clash between the top management and subsequently lack of coordination may lead to
collapse of company after merger. The problem is more prominent in cases of mergers between
equals.
Incompatibility of Partners:
Alliance between two strong companies is a safer bet than between two weak partners.
Frequently many strong companies actually seek small partners in order to gain control while
weak companies look for stronger companies to bail them out. But experience shows that the
weak link becomes a drag and causes friction between partners. A strong company taking over a
sick company in the hope of rehabilitation may itself end up in liquidation.
After signing the M&A agreement the top management should not sit back and let things
happen. First 100 days after the takeover determine the speed with which the process of tackling
the problems can be achieved. Top management follow-up is essential to go with a clear road map
of actions to be taken and set the pace for implementing once the control is assumed.
Lack of proper communication after the announcement of M&As will create lot of
uncertainties. Apart from getting down to business quickly companies have to necessarily talk to
employees and constantly. Regardless of how well executives communicate during a merger or an
acquisition, uncertainty will never be completely eliminated. Failure to manage communication
results in inaccurate perceptions, lost trust in management, morale and productivity problems,
safety problems, poor customer service, and defection of key people and customers. It may lead
to the loss of the support of key stakeholders at a time when that support is needed the most.
Not giving sufficient attention to people issues during due diligence process may prove
costly later on. While lot of focus is placed on the financial and customer capital aspects, not
enough attention is given to aspects of human capital and cultural audit. Well conducted HR due
diligence can provide very accurate estimates and can be very critical to strategy formulation and
implementation.
Immediate results can never be expected except those recorded in red ink. Whirlpool ran
up a loss $100 million in its Philips white goods purchase. R.P.Goenk's takeovers of Gramaphone
Company and Manu Chhabria's takeover of Gordon Woodroffe and Dunlops fall under this
category.
If a merger goes well, the new company should appreciate in value as investors anticipate
synergies to be actualized, creating cost savings and/or increased revenue for the new entity.
However, time and again, executives face major stumbling blocks after the deal is consummated.
Cultural clashes and turf wars can prevent post-integration plans from being properly executed.
Different systems and processes, dilution of a company's brand, overestimation of synergies and
lack of understanding of the target firm's business can all occur, destroying shareholder value and
decreasing the company's stock price after the transaction.
Soon after the merger, multitudes of Nextel executives and mid-level managers left the
company, citing cultural differences and incompatibility. Sprint was bureaucratic; Nextel was
more entrepreneurial. Nextel was attuned to customer concerns; Sprint had a horrendous
reputation in customer service, experiencing the highest churn rate in the industry. In such a
commoditized business, the company did not deliver on this critical success factor and lost market
share. Further, a macroeconomic downturn led customers to expect more from their dollars.
Cultural concerns exacerbated integration problems between the various business functions.
Nextel employees often had to seek approval from Sprint's higher-ups in implementing corrective
actions, and the lack of trust and rapport meant many such measures were not approved or
executed properly. Early in the merger, the two companies maintained separate headquarters,
making coordination more difficult between executives at both camps.
Sprint Nextel's managers and employees diverted attention and resources toward attempts
at making the combination work at a time of operational and competitive challenges.
Technological dynamics of the wireless and Internet connections required smooth integration
between the two businesses and excellent execution amid fast change. Nextel was simply too big
and too different for a successful combination with Sprint.
Sprint saw stiff competitive pressures from AT&T (which acquired Cingular), Verizon
and Apple's popular iPhone. With the decline of cash from operations and with high capital-
expenditure requirements, the company undertook cost-cutting measures and laid off employees.
In 2008, the company wrote off an astonishing $30 billion in one-time charges due to impairment
to goodwill, and its stock was given a junk status rating. With a $35 billion price tag, the merger
clearly did not pay off.
It is reported that one of the main reasons for failure of a merger or acquisition is based on
Human Resources neglect. People issues have been the most sensitive but often ignored issues in
a merger and acquisition. When a decision is taken to merge or acquire, a company analyses the
feasibility on the business, financial and legal fronts, but fails to recognize the importance
attached to the human resources of the organizations involved. Companies which have failed to
recognize the importance of human resources in their organizations and their role in the success
of integration have failed to reach success. While it is true that some of these failures can be
largely attributed to financial and market factors, many studies are pointing to the neglect of
human resources issues as the main reason for M&A failures. PricewaterhouseCoopers global
study concluded that lack of attention to people and related organizational aspects contribute
significantly to disappointing post-merger results. Organizations must realize that people have the
capability to make or break the successful union of the two organizations involved.
Cartwright and Cooper (2000) acknowledged that the leading roles of modern human
resources functions are to be actively engaged in the organization and perform as a business
partner and advisor on business-related issues. Employees do not participate enough in the
integration process of a merger. If a merger is to reach its full success potential, they need to be
informed and involved more actively throughout all the stages of the merger process.
Human resource professionals are key in pre-merger discussions and the strategic
planning phase of mergers and acquisitions early as to allow them assess to the corporate cultures
of the two organizations (Anderson, 1999). Being involved in the pre-merger stage allows HR to
identify areas of divergence which could hinder the integration process. They can play a vital role
in addressing any communication issues, employees concerns, compensation policies, skill sets,
downsizing issues and company goals that need to be assessed.
Making It Happen
Making a good organizational marriage currently seems to be a matter of chance and luck.
This needs to change so that there is a greater awareness of the people issues involved, and
consequently a more informed integration strategy. Some basic guidelines for more effective
management include:
Conclusion:
When contemplating a deal, managers at both companies should list all the barriers to
realizing enhanced shareholder value after the transaction is completed.
• Cultural clashes between the two entities often mean that employees do not execute post-
integration plans.
• As redundant functions often result in layoffs, scared employees will act to protect their
own jobs, as opposed to helping their employers "realize synergies".
• Additionally, differences in systems and processes can make the business combination
difficult and often painful right after the merger.
Managers at both entities need to communicate properly and champion the post-
integration milestones step by step. They also need to be attuned to the target company's branding
and customer base. The new company risks losing its customers if management is perceived as
aloof and impervious to customer needs.
Finally, executives of the acquiring company should avoid paying too much for the target
company. Investment bankers (who work on commission) and internal deal champions, both
having worked on a contemplated transaction for months, will often push for a deal "just to get
things done." While their efforts should be recognized, it does not do justice to the acquiring
group's investors if the deal ultimately does not make sense and/or management pays an excessive
acquisition price beyond the expected benefits of the transaction.
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