August 25, 2021

Post-Merger Integration: Culture clashes and how to avoid them to maximise deal value

Posted in Commercial, Corporate
post merger integration

Yet, as Professor Scott Moeller, Director of the M&A Research Centre at The Business School, highlights in his White Paper  with close to 50% of all deals failing – and the urban myth that it is even much worse than that’’. Bias of excessive optimism and overconfidence could play a part in the decision making process. Cultural issues can derail the opportunity to maximize the deal value, leading to a failed marriage.

Catherine Hawkes, Associate in RWK Goodman’s Employment Team comments, Integrating cultures following a merger is critical to its success, yet this is often a key element which is overlooked. The company’s culture will impact decision making; leadership style and how people work together. This cultural shift arising post-merger may cause uncertainty and unrest for some staff. The success of a deal therefore cannot be left to chance, care needs to be taken when dealing with personnel issues”.

Bharti Moore, Senior Associate in RWK Goodman’s Corporate team comments, “A business is only as good as its people, research and studies indicate that high percentage of failed deals are attributable to people and culture issues.  Yet the due diligence phase of M&A transactions still focuses primarily on financial and legal aspects of the deal, and not enough on people and culture. It is essential for the buyer’s board and management team to navigate integration matters in a clear and effective way, to mitigate legal risks and crucially to help deliver the operational success of the deal value.”

In the latest instalment of our <Headroom> series on M&A deals, we look at the challenges faced for buyers and employers on the buy side around culture integration, and look at tips to  help smooth the transition.

What is culture and why is it important?

Culture encompasses shared beliefs, values and assumptions that influence behaviour and attitudes in a company. Developing a complementary culture post-merger is essential to maximising efficiency and achieving the deal objectives.

Alison Gill, HR Manager at Advo Group comments, “that widely used term ‘culture’ incorporates a multitude of factors within the workplace. In thinking about culture, the biggest element in any engagement survey highlights culture as being centred on open communication, leadership and recognition.”

Buyers should gather information and get a sense of the target’s values and culture early on. These shared values would form the synergies going forward.

Corina Forman, HR Director at the Alternative Parcels Company comments, “assuming that differing cultures will align organically is a risky strategy. Individual and collective identities are often bound and reinforced by the cultures within which they are embedded. Cultures shape attitudes, which in turn shape behaviours, and these can contribute to cultural “fault lines” which can cause conflict, toxic working environments, lost productivity, and stress where they are not aligned and mutually supportive”.  

What are the biggest risks to buyers?

The biggest risks to buyers when it comes to taking on employees of the target company are:-

  1. lack of employee buy-in, resulting in a decline in workplace performance,
  2. employee wellbeing issues including stress and burnout; and
  3. talent retention.

Alison Gill, states that “In any mergers and acquisition, the HR professional should focus on the people element and successfully influence business owners to believe in, create and follow a robust road map relating to the integration of employee’s post-merger. Extensive research relating to the previous company’s ways of working and expectations will undoubtedly prepare the incoming company about any potential bumps in the road. These ways of working are not just about contractual terms and conditions, it is often the little things that will make a huge difference”.

Corina Forman states that “Another risk is to assume that culture can be changed through words alone. Changing behaviours is also key to supporting cultural evolution. This means ensuring that desired behaviours are clearly defined, role modelled by organisational leaders, and supported by organisational processes and systems. It also means ensuring that undesirable behaviours are constructively challenged.”

Case study

Alison Gill states that in her experience “the most successful acquisitions and subsequent integration are those in which senior managers and HR are involved from the outset.”

She goes on to provide an example of when she was working in a well-known and successful fashion and accessory retailer. “In order to expand the business, the company acquired approximately fifty sites from a fast fashion retailer whose products were significantly cheaper and focused on a much younger age group. This acquisition involved consultation with approximately 1,000 transferring employees.

This acquisition was in the pipeline for some time but was, of course, shrouded in secrecy. The business understood that as a customer facing business, the integration of incoming employees was key and behind the scenes, the Operations and HR Team worked in unison to formulate time line plans and huge information packs for all incoming employees. At the point of sale, the team were ready to ‘go’ and all employees were consulted with at an early stage with the incoming Operations and HR Team travelling the length of the country to meet with everyone in group settings and individually. The teams also made themselves available for any questions and an open-door approach was taken. In effect, a mini-induction was delivered and the initial and ongoing communication and training enabled a smooth transition. The effect on the business was minimal in terms of complaints and looking back, was hugely successful. This way of operating has personally been implemented throughout a range of acquisitions, from logistics and warehousing operations through to the hospitality sector.”

Here are some practical steps which buyers should consider

  1. Prioritise employee engagement throughout the business

Time should be invested to ensure employees are on board and engaged in the process of change, otherwise, it is likely that productivity levels may drop. One consequence of mergers and acquisitions is that employees are often concerned and uncertain of the role they will play in the merged entity.

Corina Forman comments, “organisational and HR leaders need to proactively manage and shape the desired culture following a merger. Involvement and engagement are key to securing buy-in; the best approaches view merger as a process of evolution which draws on the positive cultural aspects of both organisations. Involving employees in this process enables organisations to articulate an evolved set of shared values and beliefs which underpin cultural change and integration”

Employers should require managers to have conversations with employees about their roles and, if required, support them in developing or learning the knowledge and skills necessary to be effective in the role. Through these meetings, managers should also communicate care and concern about the wellbeing of the employees as individuals.

  1. Create effective communication strategies to ensure credible leadership

Communication with employees and other stakeholders will be essential to ensure accurate information is provided to direct any concerns and importantly that the theme and tone of the messaging is on brand. This dialogue can help the new Board and the senior management teams to understand significant changes in the post-merger landscape, anticipate any future challenges and trends, and re-align the vison and strategy.

Effective communication strategies can help to ensure that individuals have a clear understanding of any changes to employee roles, working practices and performance goals, facilitating a smooth transition.

According to Corina Forman “in a post-merger situation, incoming employees are often moving from a context of high uncertainty, employment insecurity, and poor communication to a new and unfamiliar culture; this presents both risks and opportunities. A shroud of secrecy often surrounds mergers and acquisitions, and although this may be necessary for the organisations involved, it can inevitably damage the trust and confidence of employees. Rebuilding the “psychological contract” is therefore essential. First contact with the leadership team and clear, consistent, daily communication are key to supporting good integration. If incoming employees can see that they are moving to a context of improved certainty, security and transparency then they are more likely to appraise the change as positive.”

Alison Gill comments “a failure to communicate clearly and provide direction at the outset, can leave employees floundering and unhappy and future attempts to turn the situation around may become a mountain to climb. Moreover, the dissatisfaction of incoming employees can be so infectious that it can affect productivity and brand damaging.”

  1. Secure employee loyalty

To enhance employee retention, an effort should be made to secure employees loyalty, as employers would do with clients or customers. It will be essential to establish an internal brand that expresses the value of being part of a newly integrated company which should appeal to employees of both companies.

Emphasis should be placed on career opportunities, progression and rewards. Further, for employers to understand the compensation programs in each legacy company and present any steps to integrate them in a way that employees see as beneficial to their interest.

Alison Gill advises to “treat all incoming employees as ‘new’ employees in terms of them joining your company. Think about the things that are everyday to you, the jargon, acronyms and even expenses forms and processes will be different. Present a tailored mini-induction that gently explains things such as the history of your company and the future vision. Give them follow up information to refer to and digest later”.

  1. Manage outgoing employees with respect and dignity

Corina Forman comments that “outgoing employees can also represent risk in a post-merger context. The practicalities of consultation meetings and settlement agreements can result in a process driven and dehumanising experience for outgoing employees, who will inevitably be socially connected and networked with other employees. When employees see other colleagues treated unfairly, or without dignity, this inevitably influences their perceptions and commitment to the organisation.

It is often assumed that employees will move forward with a sense of adaptability and flexibility, but discontent around culture has the power to derail any deal. This integration process requires carefully planning and managing.

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