Of the many strategic decisions a leadership team makes, mergers and acquisitions are among the most difficult – and important. With millions – even billions – of dollars in play, as well as the diverse and often competing interests of employees, partners, and investors, how does a leadership team know if they are making the right move?
While the financial “bottom line” is still critical, many CEOs are taking a broader, more holistic view. For example, Google’s Larry Page uses what he calls the “toothbrush test.” He asks, “is the acquired company or technology something they will use once or twice a day, and does it make their life better? Essentially, Page’s criteria values usefulness over profitability, and long-term potential over near-term financial gain.
With so much at stake, the “toothbrush test” may seem frivolous to some. But evidence suggests that Page is not alone in moving toward a “softer,” less profit-centric decision-making framework. According to analyst group Dealogic, in 2014 the acquiring company did not use an investment bank in 69 percent of American technology acquisitions worth more than $100 million. That number was just 27 percent 10 years ago. By any measure, that’s a significant departure from relying on margins, earnings per share and other traditional measures of compatibility as the driving force in M&A.
Amin Zoufonoun, Facebook’s vice president of corporate development sums it up like this. “The most important thing is that soft stuff…and that soft stuff is more challenging for a bank or an adviser to tap into.”
The “soft stuff” that Zoufonoun is referring to is culture. And cultural integration is vital to the long-term success of any merger. In fact, nearly six out of 10 executives cited incompatible cultures as the primary reason for a merger’s failure or underperformance.
This brings up an interesting question. Should CEO’s only acquire companies with similar cultures to their own? Can opposites not only attract, but also succeed? We say yes. In fact, there are often elements of the acquired company’s culture that could strengthen and enhance the new combined entity.
But, here’s the danger – letting the new culture emerge by “accident” rather than by design.
For example, in their rush to remain productive and capitalize on the new capabilities of the combined organization, leaders often integrate teams without giving members opportunities or tools to understand each other, make thoughtful and cohesive decisions, and view the business through the same lens. This can lead to:
- teams who misjudge misunderstand each other,
- individuals who focus on jockeying for position and politicking, and
- “top dog/underdog” syndrome.
When this happens, you often end up with culture by “default” – a mix of the most prominent and/or most engrained values and behaviors (good and bad) from each company. The natural friction arising from this often results in exhaustion, frustration, the departure of top talent, and eventually a drop in productivity and engagement.
That’s why we believe organizations should develop and implement a strategic plan for cultural integration of the two companies – a plan that enables trust and business literacy to build as well as new working relationships to form and succeed. Indeed, culture integration that is designed to unify and elevate employee engagement is the most important element of any merger or acquisition.