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3 Organizational Culture Mistakes to Avoid During an M&A

Colin Lange
Colin Lange is the North American executive director of culture and engagement at Landor, a global brand consultancy. He leads the agency’s brand engagement practice across the region. Send questions about this story to hreletters@lrp.com.

According to research published in the Harvard Business Review, between 70 and 90 percent of M&A transactions fail to increase value. And HBR isn’t the only source for this alarming statistic; multiple studies back it up. Worse still, research like EY’s Global Corporate Divestment Study and Deloitte’s Integration Report show that many M&A deals result in exactly the opposite of their intent–they erode shareholder value rather than increasing it.

Yet mergers and acquisitions have remained at record high levels over the last three years and are forecast to prevail as a strong driver of business growth. There are many solid reasons for pursuing acquisitions: gaining market share, expanding into new markets, getting hard-to-find talent, adding new products or technology. But regardless of a merger’s purpose, it’s critical to keep one thing in mind: Business performance–and therefore M&A success–hinges on people.

Sound like hyperbole? It’s not.

Whether you sell commoditized widgets or design society-changing software platforms, it’s your people who transform ideas into action and generate results. It’s your people who fuel the genius of invention. And ultimately it’s your people who make a merger or acquisition valuable.

But people are complex, emotional creatures, typically averse to changes they don’t see as in their best interest. This aversion becomes even more pronounced–and can compromise organizational performance–when compounded by the fear and uncertainty of a merger or acquisition.

How do you foster a positive, productive work environment before, during, and after an M&A? Start by avoiding these three performance-stealing mistakes.

Mistake No. 1: Treating business as a numbers game

Remedy: Remember that people are human

There’s no way around it–financial analysis is critical for businesses, especially during an M&A. But while figures like revenue, profit margin, and goodwill may help quantify a deal on paper, they don’t tell the whole story.

To get an accurate idea of a company’s total worth, it’s imperative to remember that business is fundamentally human. People do the work, create the ideas, and establish the relationships. So organizational culture (“how things get done around here”) plays a major role not only in each individual company, but also in the future of the combined entity.

The relationship between culture and performance may seem obvious, but many organizations struggle to articulate exactly why corporate culture is so important to the bottom line. In reality, it’s simple: Relationships with the management team, the business structure, and the company’s policies, rewards, and recognition programs–among other culture drivers–determine how well employees can accomplish the objectives assigned to them. Great organizational culture promotes great engagement. Employees who are happy, driven, inspired, and appropriately challenged feel more committed to their company and are more productive. They work harder, they’re champions for the brand, and they provide better consumer experiences. The result is performance–for the employee, the team, and the company’s bottom line.

For HR executives, best practices suggest frequently measuring engagement; but engagement and organizational culture are not one and the same. A merger or acquisition doesn’t fail because employees are “unhappy,” but rather because the fundamental way people work within the two companies isn’t compatible. Make sure to select and deploy an assessment tool that evaluates and exposes the gaps in organizational culture. If you can assess the true culture gaps, then you can put strategies in place to close them.

At Landor, our culture assessment tool helps companies analyze their culture on a quantitative scale and compare attributes of the merging entities. Companies that rate similarly on culture characteristics may align more easily, while those with highly distinct cultures may find the process more difficult. In these cases, finding common ground and scaling up on those attributes can help the new company bridge the gap.

Taking the best unique attributes from both companies is another approach to creating a new, combined culture. Either way, assessing culture and aligning it closely with business strategy sets the internal transition up for success and substantially increases the likelihood of employees driving value for the new company.

Mistake No. 2: Keeping the deal under wraps

Remedy: Keep people in the loop

 The changes inherent in M&A can be challenging but aren’t necessarily negative. “Bad” and “good” are often simply matters of perspective.

To minimize resistance to change, make sure your employees understand each stage of the merger and feel connected to the organization’s vision for the future. This buy-in and sense of camaraderie are essential to the process. If employees feel every change is being sprung on them without warning, it leads to a battle mindset of “us versus them,” pitting the rank and file against executives. When people feel disconnected or slighted, their willingness to adapt drops precipitously, and negative, fearful thinking proliferates.

Mergers and acquisitions also tend to be shrouded in secrecy, discussed behind closed doors and known only to the most senior executives. But secrecy promotes distrust, and distrust quashes motivation. If you want to keep performance levels high, continually evaluate the deal process through the lens of your employees. While you can’t bring everyone into every conversation, clearly articulating and reiterating the company’s vision can galvanize your people around the prospect of a brighter future post-M&A.

For proof, just consider the 2016 merger between Tesla and SolarCity. Elon Musk used the collective power of purpose and shared belief to accomplish a merger that was wildly criticized by Wall Street. By joining the two companies around the mission of “saving [the world] from the destructive forces of climate change,” Musk shifted the acquisition’s focus from current worth to future value. In just a 14-minute presentation, he transformed shareholder opinion and gained an 85 percent approval vote.

As Tesla demonstrated, brand is key to maintaining performance levels throughout a deal. A well-crafted brand story acts as a North Star, a point of reference employees can trust. It holds employees’ shared beliefs and emotional drivers, helping them to see why their roles and actions are valuable. Most importantly, it helps employees understand how they are connected to the company’s future.

The HR function has the final word on many policies, procedures and workplace expectations. Take advantage of this powerful position within your organization to ensure that your employees remain in the know and have a resource for questions. This helps them remain emotionally connected to the organization throughout the inevitable ups and downs of an M&A.

Mistake No. 3: Relying on words to change behavior

Remedy: Show, don’t tell

A company’s culture is not typically valued in the deal-making process–and what isn’t valued isn’t considered. However, conflicts in culture have a tremendous impact on post-merger integration, and can determine whether performance at the new company thrives or falters. The now infamous Daimler-Chrysler merger is the quintessential cautionary tale: The disconnect between the companies’ thinking and behavior was so substantial that nine years later, the $36 million merger was dissolved and Chrysler was sold off for just $7.4 million.

Most companies try to instill post-merger culture through mass communication. This often fails because the approach goes against human nature. Behavioral and biological research tells us that people make decisions emotionally and then apply rational thinking to justify those decisions in retrospect. In other words, it’s easier for people to behave their way into new thinking than to think their way into new behavior. For example, if a company wants to embed more innovation into its culture, it could consider creating a reverse mentorship program, where new employees model innovative behaviors and thinking for long-standing employees. Companies that align behaviors with desired outcomes experience far faster and more successful cultural change.

An organization’s leaders play the most important role in aligning behaviors to thinking–and it all starts with the C-suite. The executive team should establish a clear vision for the desired post-merger organizational culture before the deal closes. This means considering how people will behave in that culture; but more so, determining how management can model these behaviors to help shift the thinking of other employees.

As HR leaders, you are responsible for helping management spread the new vision and culture to employees. Focus on modifying your learning and development programs–particularly those aimed at leaders and people managers–to include the desired post-merger behaviors that will drive the new business’ strategy. This will help equip your organization’s leaders and managers with tools and techniques to better manage through change.

A merger or acquisition is one of the most fundamentally transformative events a business can undergo. Amid all the other challenges of completing a deal, don’t forget that business is fundamentally human, and that your employees are one of your most important assets. As an HR executive, you hold an important but often overlooked role in ensuring the success of any M&A. Culture, engagement and employee experience tend to sit squarely within your purview. If you take care to avoid the common cultural, behavioral and leadership pitfalls, you’ll be instrumental in positioning your new company to thrive.