Combining Cultures: Social Integration in M&A

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By Roselinde Torres

Over the last few years, there have been widely reported struggles between merging companies that failed to achieve the original vision and intended value of a deal. A major reason for the high rate of M&A failures is that business leaders too often concentrate on purely financial aspects of the deal and neglect key strategic and organizational issues. Most companies have clear plans and detailed checklists for the integration of capital assets, infrastructure, and other financial dimensions of an acquisition. Yet fuzzy thinking about 'synergies' frequently substitutes for a hard-nosed assessment of how common ownership and management will create strategic advantage, and mishandled integration of organizations and people can nullify the value of a good financial plan and genuine sources of leverage.

Increasing numbers of business leaders have recognized that companies are more than simply financial or technical systems. They are social systems with unique histories, and their employees have mindsets, assumptions, and values that inform how they view the business, how they lead and manage, and how they interface with customers. Are resources and responsibilities controlled by the corporate center or delegated to business units? Does research and development or sales define the culture of the company? Does the business deliver products or services and solutions to customers?

Building a shared a set of norms, values, and culture for a new enterprise is called 'social integration.' The goal of this process is to ensure that employees are engaged in, connected to, and willing to identify with the organization. If people understand the business case for an acquisition and develop mindsets and values that support the sources of leverage, there is a greater likelihood that the combination will create, rather than destroy, value.

Strategic Combinations

To understand social integration, it's helpful to see how the process fits in the overall integration of two businesses. Mercer Delta Consulting utilizes the Strategic Combinations Framework to describe various stages of integration (Figure 1). In the first phase, the strategic context and history of the transaction help shape the definition of the business case. The basic form of the deal — a collaborative combination or a more expensive hostile takeover — is central to the development of the business case for the acquisition.

The first phase of the Strategic Combinations Framework helps acquirers achieve greater clarity on the sources of leverage. They may include but are not limited to:

• access to new markets, either by geography or customer segment;
• acquisition of a well-known brand or reputation;
• additional lines of products and services;
• new technology;
• key people with unique skills or customer relationships;
• new or more efficient distribution networks; and
• economies of scale.

To help clients clarify the business case, Mercer Delta works with key executives to analyze in detail the rationale for a merger. How will the new combination make money? What is the value added from combining two organizations as opposed to them remaining separate? What are the underlying assumptions about the synergies of the combination? Sometimes executives' answers to these and other questions are quantified, but the metrics often lack depth, and intended market and business synergies are not well understood. Structured inquiries into executives' understanding of the business case for a transaction can also reveal divergent points of view and business model paradigms within a company.

In the second phase of the Strategic Combinations Framework, leaders need to identify activities, consistent with the business case, that create strategic leverage. In most deals, there are a few critical success factors — for example, retaining technical or managerial expertise or eliminating redundant operations to achieve economies of scale.

One Mercer Delta client acquired a company that had more customer relationships and a better reputation with its customer base. The integration, however, did not initially value the capabilities and strengths of the acquired company, and few of its leaders were appointed to senior management positions. This feeling of 'second-class citizenship' was passed on to the customer base, undermining the fundamental rationale for the deal. We worked with the client to understand better the perceptions in the acquired company and to develop effective interventions.

By defining critical success factors, business leaders can identify the degree and scope of integration — in essence, the organizational architecture of the combined enterprise. Acquirers must determine how much of their own culture should be retained and how much of the target company's culture should be absorbed.

The third phase of the Strategic Combinations Framework is the sequence of steps for achieving integration. In this phase, parties in the combination use tools and concepts from change management to move from two separate 'current states' to an integrated 'future state.' Key questions from the social integration perspective include: What kind of operating environment will the new organization have? What are skills and experiences its people need? What are the leadership requirements?

Committed Leadership

The level of social integration depends on the degree of combination. An acquisition that is either loosely coupled or a separate holding does not require the same match of norms and mindsets as a fully integrated combination. A merger that combines best practices — for example, in technology, production, and customer processes — requires more social integration because people often have different mental models, values, and ways of operating.

As with any major organizational change, active, engaged, and committed leadership is essential to success. In the early phases of integration, the CEO or the highest-ranking executive becomes the symbolic representation of the acquirer. He or she can play a key role in setting the tone and modeling desired norms. (We find that most CEOs and senior executives underestimate the impact of their behaviors.) Over time, employee perceptions are shaped by line managers.

The often politically sensitive challenge of creating new leadership structures represents an opportunity to create harmonized values and norms. Key leaders must agree on a common vision of success and honor company differences in the interest of forging a common bond. Including leadership from legacy organizations in a new governance structure can build support among a broader group of employees.

Open and fair selection processes for employees of an acquired company present an opportunity to demonstrate values of the new organization. Avoid creating an environment in which people wonder where they fit in by defining their status as quickly as possible. Even if people are let go, the way an organization treats departing employees sends a strong message about its culture to those who remain.

There are often huge gaps between senior management's understanding of an acquisition and other employees' grasp of what is happening. It is essential that leaders articulate the rationale and the business case for the combination. Because sporadic and incomplete communication contributes to the rumor mill, leaders should maintain a steady flow of information that encourages dialogue between managers and staff.

Yet even with the most committed and communicative leadership, the complexity of integrating two companies provides many chances for failure. Potential risk points at various stages of the deal are shown in Figure 2. Interestingly, most seeds of failure are sown early in the integration process and grow through benign neglect. Mercer Delta advises its clients to include in their deal deliberations an open discussion of the potential risk factors perceived by both companies.

Organizational Due Diligence

Most companies have an integration team that has plans and checklists covering legal, financial, and regulatory dimensions of an acquisition. The programmatic aspects of human resources — for example, compensation and benefit programs — also receive considerable attention. Mercer Delta works with the integration team to ensure that all elements, including social elements, are included in the plan. Progress on social integration must be measured and leaders held accountable. If a company pays attention to social integration, it can move people to think and behave in new ways and thereby increase the probability of realizing the vision and value of the merger.

Roselinde Torres is a partner with Mercer Delta Consulting, which works with CEOs and senior executives on the design and leadership of large-scale organizational change. Ms. Torres can be reached at .