Jim Jeffries recently asked me “what’s new” in the second edition of my book Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions and Alliance. I responded that, since the book’s initial publication, the role of culture in M&A has become much more widely recognized, but not in an obvious way. Recent research conducted for the new edition shows that culture—and, in particular culture clash—can be a boon or a bust to M&A outcomes. So, it is not a matter of whether culture clash will emerge when two previously independent organizations join together but, rather, of how that culture clash will be managed. In this blog I will briefly review just what culture is, what causes culture clash as companies combine, and the circumstances under which culture clash benefits a deal.
Culture in Combinations
Culture encompasses the way things get done in an organization. It represents the shared goals, roles, norms, and ideologies held by a given organization and its members and includes the set of important, often unstated assumptions, beliefs and values that guide an organization’s business practices. Consider some examples of cultural factors in combinations:
- Do managers make quick decisions and spend time selling others on their merits or do they take time up front to build consensus and then implement decisions in a relatively quick manner?
- Does a business have monthly or quarterly meetings? Are there formal presentations or do managers roll up their sleeves? Is the emphasis mostly on financials or all aspects of the operation?
- Does an organization invest in training and developing human resources or is it content with buying talent from elsewhere?
Of course, organizational members are not just influenced by their company culture overall. There are sub-cultures within companies that center around divisions, projects, or occupational groups. Engineers from two combining companies, for instance, may have more in common than engineers and salespeople in either partner company. In many large companies, built through combinations, there are often sub-cultures based on employees’ prior affiliations. People who work at Hewlett-Packard, for example, are quick to note whether a colleague is from HP, Compaq or DEC (which was acquired by Compaq prior to its merger with HP).
And, there is the matter of national culture. Organizational cultures do not operate in a vacuum—they are embedded in national cultures and sometimes regional cultures (e.g., when a “laid back” west coast firm combines with a “buttoned down” east coast company in the United States). Recent research points to a relationship between national culture and M&A performance, but sometimes that relationship is positive and sometimes it is negative. Some studies reveal higher levels of cultural distance between partners from different countries or regions to be associated with greater postcombination conflict. Other studies, however, find that differences between national cultures between parent and target firms benefit the buyer by expanding the knowledge base available to establish distinctive competencies worldwide. It may be that cross-border combinations are successful, despite their complexity, because the integration challenges are more obvious, prompting leaders to pay closer attention to culture and culture clash throughout the combination process.
Why Company Cultures Clash
Companies have distinct histories, folklore, and personalities, as well as products, markets, and ways of running the business. A combination brings together companies with different cultures. What people notice first are differences between the two company cultures and what makes their own unique. Think, for example, of traveling abroad. What one notices is how a foreign land is different from one’s homeland. The same is true of a combination: people notice how their own company is different from a partner’s and begin to pay attention to what makes their company unique.
Culture clash in a merger or acquisition is a lot like breathing. You don't think about breathing, you just do it. You may be aware of your breathing now, because it’s been raised to your attention. If someone came up from behind, cupped their hands firmly around your mouth and nostrils, and threatened your ability to breathe, then you would certainly pay attention to breathing. The same holds true for culture in a corporate combination. People don't regularly notice their corporate culture, but when thrust into a merger, employees become aware of how their ways of doing things differ from those of the other side. When they feel threatened by a combination—often because they see themselves on the weaker side—employees not only see differences but also feel a sense of vulnerability and fear over losing their accustomed way of doing business.
When Cultural Differences Benefit a Deal
The failure of a merger or acquisition to achieve its financial or strategic objectives is frequently blamed on a clash of cultures between the combining entities. Just as an organization cannot effectively run with multiple incompatible information systems, it cannot succeed with multiple incompatible cultures. But successful combinations do not require the partners to be “cultural clones.” In fact, a moderate degree of distinction between the partners’ cultures results in the most successful integrations—the parties have sufficient enough similarities to take advantage of the differences, but they are not so disparate as to be like “oil and water.”
In some cases, differences between the organizational or national cultures of combining firms can drag down M&A performance. Cultural differences have been related to polarization, negative evaluations of counterparts, anxiety, and stereotyping between members of combining top management teams. Cultural differences also have been negatively related to stock price performance and to information systems integration and effectiveness. However, research has also shown that diverse routines and practices imbedded in national culture can enhance post-combination performance. In particular, differences in organizational culture in cross-border M&As can have a positive effect on enhancing synergy realization and sales growth and on reducing employee resistance.
If properly managed, cultural differences can be a source of value creation and learning in M&A. This is because differences rather than similarities between combining organizations create opportunities for synergies and learning. Cultural differences have the potential to break rigidities in acquiring firms, help them to develop richer knowledge, and foster innovation and learning. M&A also can provide buyers with a competitive advantage by giving them access to unique and potentially valuable capabilities that are embedded in a different culture.
While the relationship between degree of cultural differences and M&A outcomes is not obvious, researchers have established a clearer relationship between actively managing culture and desired M&A outcomes. Whether cultural differences have a positive or negative impact on M&A performance depends on the nature and extent of those differences, the interventions used to manage them and the integration approach taken. Thus the answer to the question of how best to manage cultural aspects of M&A is not necessarily finding a partner with a similar or compatible culture. Rather, it is a matter of managing cultural differences through a comprehensive framework which builds cultural understanding and awareness each step of the way.
To sum up, there are costs and benefits associated with cultural differences and their impact on eventual M&A performance depends on how they are embraced and addressed. Practice shows that, despite the cacophony of a culture clash, the opportunity to proactively build a strong culture remains one of the great benefits of joining forces. I have worked with executives who have used a combination to replace entrenched aspects of their precombination culture with more desirable cultural characteristics. Two large health care systems freed themselves of bureaucratic constraints and nurtured a more entrepreneurial approach to conducting business; two consumer products firms found a comfortable medium between one side's labored decision making style and the other's shoot-from-the-hip approach; and two aerospace companies melded one side's engineering orientation with the other's penchant for sales and marketing.
In the next blog, I will share some tactics for managing culture in M&A—both to minimize the undesirable consequences of culture clash and to maximize the opportunity to use culture to achieve desired business results. And, I will fill you in on the situations in which it is better to do nothing than something to manage culture clash.
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About the Author: As a member of the M&A Leadership Council’s Board of Advisors, Mitchell Lee Marks, Ph.D. brings a unique viewpoint based on his scholarly and applied experience in M&A. He is on the faculty of the College of Business at San Francisco State University and President of the consulting firm JoiningForces.org. He has been involved in over 100 mergers and acquisitions as both a researcher and consultant and has written six books and scores of articles on organizational change and corporate culture.