Millions of dollars are lost every year in M&A deals value through a lack of understanding of the people element involved in a merger.
According to a recent Mercer study, people issues such as cultural integration issues, have resulted in 60 per cent of global M&A deals reporting a loss, or having a direct implication on deal value.
The study found that implementing structured cultural integration processes and programs from as early as the due diligence phase can significantly reduce the risks of M&A failure.
“One organisation estimated that its failure to quickly manage conflicting cultures early on ‘cost’ them hundreds of millions of dollars of lost revenue over a three-year period,” said Elisa Hukins, leader for cultural integration in Mercer’s M&A global consulting business.
Hukins said that when the synergies lost as a result of cultural misalignments over time are taken into account, the sheer impact of cultural integration issues is realised.
Of 119 organsations across the US and Europe, 44 per cent of US respondents reported that between $US1 million ($1.27 million) and $US5 million was lost or not realised in a transaction their organisation had recently undertaken because of cultural issues, with nearly a quarter estimating that it was more than $US5 million.
Meanwhile, another recent white paper found that half of all business mergers are classified as unsuccessful in terms of dealing with people issues. The paper, Top Tips for a Successful Change Management Program, by HR consultancy firm Astor Levin, found that the reasons for failure were: lack of readiness, insufficient planning, failures in effective management of the change program and ineffective communication.
“Really, the number-one culprit for the failure of change management programs … is not understanding and dealing with the human element of the process,” said Sonya Melbourne, director of Astor Levin. “What looks good on paper can very quickly become undone if this is not taken into account.”
According to Bob Bundy, Mercer’s M&A global leader, making assessments of cultural differences that will affect deal value as early as possible during the initial consideration of a deal is vital.
“It is remarkable just how much information we are able to gather and analyze even without ‘touching’ the target,” said Bundy. “Using non-invasive methods, we are able to inform senior teams about just how differently the two organisations operate and behave, and identify potential challenges and risks to deal success. This information is invaluable to factor into purchase considerations — including the purchase price and the cost of successful integration.”
Although 72 per cent of survey respondents cited culture as an important contributor to creating value in M&A transactions (with nearly a third stating that it is critical), the survey highlighted the fact that many organisations were not well-prepared to effectively manage cultural integration issues. While nearly a quarter of companies are moving towards developing a more formal cultural integration process, 68 per cent still do not regularly use a systematic approach to identify gaps between organisational cultures.
Another challenge identified by survey respondents was the lower levels of executive engagement in leading M&A-related cultural change. Only 37 per cent of organisations surveyed said that they had invested to some extent in developing managers with the expertise to understand and lead cultural change, with 28 per cent indicating that they had invested very little or not at all.
Additionally, many organisations may not have the right people leading the changes required for cultural integration. While HR professionals were viewed as being key culture change champions, only a quarter of senior executives were reported as co-leaders of cultural integration efforts in their organisations.
Mercer’s survey showed several positive developments in the M&A cultural integration arena.
“Some organisations that are focused on driving higher levels of value, faster, from their transactions are taking actions to address cultural integration issues more proactively,” said Hukins.
“In fact, over half indicated that they plan to invest more heavily to improve the management of cultural issues in deals in the short term,” she said.
“As our survey shows, not doing so can have a tangible and dramatic negative financial impact, and especially in the current climate, maximising and accelerating value from each and every transaction is critical.”