The integration of people and culture has been rated as one of the most important factors in making an M&A deal a success. So says a report we launched today. The report goes on to show that the poor management of this aspect of M&A – and the lack of emotional buy-in by employees – has been highlighted as one of the leading reasons why many M&A deals are unsuccessful.
The report is timely. Recent reports show that the cash on corporate balance sheets has reached over $5.5 trillion, which will put a lot of companies under pressure to activate their M&A strategies. Global M&A activity is growing by a fifth every quarter, with Britain and Ireland seen as the major dealmakers in Europe. We may still be feeling a sense of caution and lack of confidence in the M&A arena, due to the compexities of cross-border regulation, but shareholders are likely to want to see a return on this cash.
Secondly, corporate culture is changing. Gen X and Y are unlikely to stick around in organisations where the contribution they make is not valued. A company's people are its best asset, so inspiring, motivating and engaging them in the future ambition of the business is vital. And in an M&A scenario, where the risk of losing your best talent is relatively high, this has never been so important.
So it's depressing to see that almost a third of respondents had experienced a deal that failed because of poor cultural integration. If the people engagement and cultural element is deemed so important in a transaction, why then do so many fail on this count? Is it because the reality is that it's hard to quantify and measure? Let's face it, an M&A team operates on the basis of analytics, data and numbers. Emotion and engagement are intangible. They can be dealt with tomorrow. Is it because it requires so much resource (the stats show that it's the second highest area of resource deployment in M&A)?
The research, carried out by Mergermarket, also illuminates the financial and operational cost of getting the cultural aspect of integration wrong, revealing that senior and middle management are most likely to leave an organisation, exactly when strong leadership and commitment is needed the most. And almost half of respondents who had experienced difficulties during the M&A process said that getting it wrong impacted negatively on the firm’s share price, with a reduction in productivity, lower-than-expected synergies, low levels of employee engagement and high levels of employee resistance being major consequences.
Highlights of the report include:
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Integrating people and culture is seen as the second most important factor in making an M&A deal a success, behind integrating systems and processes. It was also the factor rated as requiring the second largest quantity of resources.
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60% of respondents list integrating people and culture as one of the most common reasons that M&A deals are unsuccessful.
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93% of respondents say that the time taken for an employee to feel emotionally attached to their new organisation has a significant or very significant impact on the ease of integration and level of synergies.
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Early and continuous communication was seen as the most important step to encourage employees to connect emotionally to the new entity.
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Almost half (45%) of respondents that had been involved in a deal that got the cultural integration wrong said that it had a negative impact on share price.
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For an organisation of 1,000 employees, a takeover is likely to result in a cost of £1.3m from unwanted employee turnover, with this cost rising to £6.5m for an organisation with 5,000 employees.
Our attitudes and beliefs dramatically influence our actions and behaviours, so it’s no surprise that the human aspect of integration can make a huge impact either positively or negatively on the success of an M&A transaction. We’ve found that leaders from those organisations which invest time and effort in planning early on how to bring two ‘tribes’ together have reaped the rewards in terms of productivity, engagement and minimising resistance to change. All the rational reasons for bringing two businesses together may stack up, but failing to engage people emotionally in the purpose of the deal, what success might look and the part they can play in achieving that success, can be a major barrier to the rational factors playing out. The ultimate consequences – poor employee engagement, a fall in revenue and share value – make this a critical success factor.
