This is an excerpt from an article on mergers and acquisitions written by Stephanie Garforth for the HR Director magazine. ‘Us & Them‘ appears on page 28 in the January 2016 edition. For more information about the magazine please click here.
Despite the enormous volume of mergers and acquisitions that take place every year, most research and experience shows that around half of them fail to create real value for the acquirer.
In our experience as expert advisers to businesses pursuing merger and acquisition deals, this is because a disproportionate amount of energy is spent on the due diligence processes relating to the strategic, financial and legal fit without the effectively addressing the people elements – which are so crucial for post-acquisition success. The danger is that an organisation may end up destroying the very essence of what it seeks to acquire.
To maximise the value and minimise the risk in any deal, organisations need to take a more ‘holistic’ view – to consider the human due diligence pre-acquisition and focus on what can remain intact as well as what needs changing. At OE Cam, we believe that two of the most fundamental aspects of human due diligence are effective assessment of culture and a proper audit of people capability.
With most acquisitions, the assumption is that the acquired company is the one that must change to fit within the structure of the acquirer. However, it is important to do a cultural audit on both the acquired and acquirer in order to understand the cultural ‘fit’ and how to build upon the ‘best of both’. If the acquiring company can truly understand how both organisations work – in terms of behaviours, values and the ways of working for each business, then they can:
- Identify differences early on to ensure that potential mistakes which could prove costly, in terms of morale, finance and reputation, are avoided
- Inform decisions about what will work well and what won’t to set a course of action on areas requiring attention
- Understand the opportunity to add to and change the culture for the better
- Inform what model of integration to take and the supporting change management approach.
When Ryder Europe led the £154m acquisition of Hill Hire to double the size of the business and create one of the leading commercial vehicle rental and contract hire companies in the UK, the initial assumptions could have been to swallow or to maintain their autonomy given the similar sizes of the acquired to the acquirer. However, with the support from OE Cam in conducting culture audits, it was clear there were vast differences in culture with one being very flexible and adaptable to customer needs and the other being process driven and commercially focused. There were benefits of both cultures that could be leveraged and the decision was made to seek the best of both cultures to build a stronger business with a new ‘third’ culture. As a consequence, this has led to great success.
The key question when deciding on a specific model of integration is whether each business needs to remain autonomous, whether one business needs to assimilate the other, or whether they could combine to create a new identity. Understanding the degree of integration required determines just how much the acquiring business needs to do in culture change management. OE Cam’s approach includes one-to-one meetings with senior managers and directors as well as ‘no holds barred’ focus groups with colleagues. The value of external facilitation by experts with no preconceptions or personal investment is that it generates a more objective view on the businesses’ cultures.
From a financial perspective, the understanding obtained from the cultural audits can have a significant impact on the decisions pre-acquisition. The Connect Group, the founding part of WHSmith with a 200 year heritage, has seen rapid change through thoughtful acquisitions and has developed a systematic, rigorous process to human due diligence as part of its M&A approach. Working with OE Cam, the organisation is now acutely aware of the significant affect this approach can have on an acquisition as well as positively assisting with the future strategies once the acquisition has been finalised.
Half-hearted considerations of the people, teams and relationships can potentially result in the newly merged business becoming ‘fractured’ – generating under performance and ultimately failing.
Conducting a people audit will deliver informed decisions around:
- Whether to exit, retain or develop capability to ensure individuals are fit for the roles
- Where individuals are best placed in the new organisation with positive impact
- How best to accelerate team capabilities to work effectively and to lead the integration.
A key factor in deciding whether to exit or retain top leadership is the interdependencies or relationships that exist. For example, it is important to recognise the connections and loyalties between MD, CEO and senior executives so the acquiring business can go into the integration process with ‘eyes wide open’ and make decisions around who is best aligned to which role.
The MD or CEO may have a defined vision for an integrated organisation but his/her acquired new top team may not be so keen… Senior managers who are not aligned to the future organisation may disrupt the delivery of the planned synergies so it is important to know the allegiances towards the acquiring/acquired CEO’s and MD’s and their motivations. It is vital to be decisive and make personnel changes quickly as nothing gets done without the right leadership direction.
Two key questions an acquiring business should ask are:
- Should it keep all, part or none of each the top teams considering the future organisation it is trying to create?
- Is the power and decision making authority with the right individuals invested in making a positive change?
Staff of the two organisations may also have a strong sense of loyalty to their existing employer. In my experience, I have observed small, but very destructive behaviours – such as factory workers leaving their tools in the way of the other party, and purposeful exclusion of others within staff meetings – all derived from strong feelings of ‘us and them’. Ignoring these negative emotions can destroy enthusiasm, engagement and motivation putting the delivery of your benefits at risk. If the decision is to combine, the positioning of colleagues to encourage transition is crucial. For example, consider integrating existing colleagues into the acquired offices (rather than assume the opposite), and have acquired managers lead a team of colleagues of the acquiring business (and vice versa) to provide opportunities to observe and learn from the differing ways of working.
Of course, it is essential to ensure these leadership teams have the right capabilities to lead the transition and to operate the new business model. Often there is a greater need to collaborate amongst functions and business units and changing levels of control. As such, some may find it difficult to operate within the new regime. It is also important to support these leadership teams by putting the right teams in place.
OE Cam’s approach is to conduct individual and collective reviews against key business criteria by using a mix of exercises to gain deep understanding of the capabilities. This could be done by combining 360 degree feedback and psychological and competency assessments undertaken through development centres. The individual reviews translate into personal development plans for focus within individual coaching and mentoring. The collective review provides indicators of the capability of the acquiring / acquired teams to run the business in the style required of the new organisation and the different personalities and leadership styles. This provides insight as to how teams need to develop and how the existing and acquired colleagues can best work together moving forward. Team development sessions addressing these issues can also help teams build on each other’s strengths to ensure collective effectiveness is maximised. The lower an acquiring business can assess management and leadership capability as part of the due diligence process, the better. If it can’t be done as part of the process, then our advice is to do it immediately post acquisition.
The transition needs to be thoughtful but quick. People are expecting change early on – if you leave too long, they assume all is okay. It can be quite a shock if the acquiring business later instigates change when they are not expecting it. However, exactly how fast the transition needs to be done requires insight into the people dimensions to ensure the cultural elements can be taken into account as well as the capability and capacity for change. An acquiring business needs to be ready for skeletons to come out and should build contingency plans for the unforeseen. OE Cam advises its clients to remove ambiguity as much as possible and to have strong confident visible leaders. The cultural audit can help to anticipate some potential obstacles and the people audit can help a business be confident the leaders are the right ones leading.
By investing in human due diligence, organisations can:
- Address potential cultural clashes and capability issues early on in the process
- Ensure that the right individual and collective capability is in place to deliver the strategic plan
- Create clarity around staffing plans well in advance of integration
- Support and advice on key relationships between existing leaders and new people to accelerate build of effective relationships
- Improve and accelerate the understanding of the intangible factors of the acquired business beyond classic due diligence e.g. accountabilities, governance, key players
- Engage early on with key stakeholders to facilitate exchange, expectation setting and early decision making
By adopting this holistic approach, business can avoid getting caught out by the risks of culture, people and relationships and avoid spending a small fortune on a failed acquisition. As a specialist firm of business psychologists and consultants, at OE Cam our experience shows that these essential steps to gain insight can help tailor the approach to mergers and acquisitions, and increase the chances of integration success.