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Culture Club: Surviving the Next Merger

A corporate culture assessment can help to identify potential merger integration problems—before they occur

Cultural assimilation has long been considered a critical factor in successful mergers. No need to recount the challenges faced by the combinations of AOL (AOL) and Time Warner (TWX) or Chrysler and Daimler-Benz (DAI)—or of the on-again, off-again nature of the Microsoft (MSFT)-Yahoo (YHOO) negotiations—to point out the pitfalls of corporate-cultural misalignment. Our work with M&A clients indicates that companies have become savvier at addressing isolated elements of an organization's culture, including governance structure, decision-making hierarchies, and treatment of employees, customers, and suppliers. But as M&A activity begins to pick up, could these types of cultural assimilation initiatives fall by the wayside? With the analyst and investor communities looking for evidence that scarce capital is being put to good use, new mergers are likely to be judged even more closely around short-term measures of success, such as cost efficiencies gained or increased shareholder value. As a result, cultural alignment may once again take a backseat to more tangible merger metrics such as exceeding Quarter One and Year One synergy targets. That would be a mistake. By delaying a focus on cultural alignment, management risks allowing the culture of the new organization to move in a direction that is misaligned with that organization's objectives. Permitting a targeted company's center-driven decision-making style to remain intact in an innovative, customer-centric market, for example, could create a cultural gap that grows wider and becomes more difficult to address with each passing day. The culture of a combined company begins to take shape the first day the two parties sit down at the negotiating table and begin to form impressions of one another. In many cases, employees for the company being acquired simply never buy into the acquirer's vision, practices, or beliefs. The impact of a merger on a leadership culture can persist even after the incumbent executives have departed; a 2003 Harvard Business Review article cited research showing that attrition rates of executives in companies involved in mergers were twice as high as executive turnover at companies that had never been through a merger—a trend that continued for up to nine years after an acquisition. Organizations brought together in a merger rarely begin from a common cultural baseline. A management team's ability to assess the differences between the two cultures—and take steps to address those differences early in the integration process—can mean the difference between a value-creating deal and one that destroys value, and ultimately fails. A More Measured Approach to Cultural Analysis

How can prospective merger or acquisition partners help confirm that culture barriers will not impede their ability to realize the promise of their deal? Our experience indicates that by taking a more measured approach to cultural analysis, senior management teams can mitigate the inherent risks of combining two organizations. An objective, quantifiable approach to measuring the culture of both organizations, followed by specific action plans that drive improvements, will help the leadership team confirm a smoother integration and, quite likely, a more functional organization. Even companies that are still struggling to digest a large acquisition years later can benefit from a deeper cultural assessment and alignment plan. In other words, it's never too late to extract the benefits of a business strategy built around shared values and a common vision. Here are three steps CEOs and their management teams can take to help assess and improve the cultural alignment of employees who are coming together in a merger. Begin early, and be thorough. Even before a deal is announced, the due-diligence team should define the objectives around a cultural integration and include those objectives in the merger integration plan. A cultural assessment—built through surveys and interviews of key management constituents—will help teams define the desired cultural state along with the risks for different culture combination scenarios. These scenarios run the spectrum from keeping the cultures separate to full assimilation. Additional assessment tools can be used to dig more deeply into the cultures of the merging organizations. Employee surveys, for example, can help explore numerous cultural characteristics, such as teamwork (does the organization emphasize individual contributions or a more collaborative, team-oriented environment?), trust, diversity, autonomy (micromanagement vs. independence), information sharing, and financial fixation (how focused is the organization on financial performance?). Too often, management teams assume that because they share the same industry with a company they are acquiring, they must be starting from similar cultural baselines. In a recent asset deal between two specialty paper manufacturers, the acquiring company had a fairly innovative culture, whereas the large mill it acquired from the other party did not encourage innovation at the ground level. The acquiring company eventually acknowledged this mismatch and replaced the mill's management team—after several months spent trying unsuccessfully to make new grades of paper. Analyzing the information collected from employee surveys and other means can help management teams pinpoint key cultural differences among the merging organizations and prioritize the areas that require immediate attention. Provide short-term direction—from the top down. Employees—especially those coming over from an acquired company—can't relate to the three- or five-year strategic plans that many CEOs feel obligated to lay out immediately following a merger. They'd much rather hear about tomorrow's plan. One recent client of ours launched a change-management initiative (after a two-month delay) as part of its merger integration plan. It embedded members of a central change-management team within functional and business unit integration teams to assist with merger planning and implementation. During the pre-close planning period, however, the client decided not to address basic issues such as employees' roles and compensation in the new organization. And this client refused to explicitly safeguard the jobs of integration team members. As a result, integration planning slowed to a trickle as the deal's close approached. Team members became less motivated and distracted because they feared for their jobs. When significant head-count reductions were enacted shortly after the deal closed—including some members of the integration teams—the client was forced to reconstitute and rebrand its integration teams to recapture the lost momentum. Integrate culture assessments into all stages of the M&A life cycle. Assessing the cultures of two merging organizations is not a one-time event. Specifically, cultural assessment should play a key role during the following stages: Due diligence, when the risks to the deal's value capture potential are being identified Pre-close, when the merger integration plan is being developed At close, when the new leadership team is being installed; leadership must oversee the cultural transition within both the top team and the broader organization Post-close, when the initial cultural assessment is used to identify and address unanticipated challenges As with any transformation, the cultural integration should be measured on a regular basis to ensure progress toward the desired state. While quantifying "culture" can be much more difficult than forecasting the cost efficiencies to be gained from integrating technology platforms, it remains a critical part of the merger integration process. As the economic recovery continues, many analysts expect M&A activity to increase. Executives involved in this next wave of mergers should not ignore issues of cultural alignment at the expense of short-term synergy targets. By taking a more disciplined, analytical view of the two organizational cultures that are being brought together, leadership teams can identify potential problems and take steps to address them—before they slow down the new business.

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