Warning: Acquisitions can Seriously Damage Your Health

July 27, 2012  

According to a KPMG study, “83% of all mergers and acquisitions (M&As) failed to produce any benefit for the shareholders and over half actually destroyed value”. Interviews of over 100 senior executives involved in these 700 deals over a two-year period revealed that the overwhelming cause for failure “is the people and the cultural differences”. Difficulties encountered in M&As are amplified in cross-cultural situations, when the companies involved are from two or more different countries.

Of course acquisitions are, by their very nature, risky and culture is far from the only potential cause of failure. First of all, a deal can fail because it was not a good idea to begin with. Some executives get caught up in the ego-boosting idea of growth for its own sake and become blind to flaws in their own logic. Even where the business case is sound there are many challenges in execution, in the process of integrating separate entities in some meaningful way, that can cause defeat to be snatched from the jaws of victory.

It does seem surprising that, in spite of the demonstrably high failure rate, businesses continue to tackle the strategically critical tasks of acquisition and integration without fundamentally re-thinking the process to be applied – or even recognizing that different circumstances may well demand tailored methodologies. Of course many of the tried and tested approaches to financial and legal due diligence are still crucial, but what about understanding the real value of the business, which in today’s world is so often vested in its people, as opposed to other assets, the ownership and worth of which are easier to control? Management desires the gains that consolidation and economies of scale should bring, but in fact the great majority of M&As – across all industries – do not live up to their promises. On paper, two plus two should equal five; in reality, two plus two usually equals three, as has been conclusively shown by dozens of studies covering hundreds of companies across all industries.

Often the principal cause of this value destruction is the failure to manage the “human” or “cultural” issues that impact on acquisition and integration. Businesses are more than financial reports – they all include any number of people – people with uncertainties, self-interests, personal desires, needs, etc. A great number of acquisitions proceed with minimal consideration of such people aspects, if at all then probably too late to make the difference. By some estimates, 85 percent of failed acquisitions are attributable to mismanagement of cultural issues, which among many things may include communications, goal-setting, management styles and expectations, trust issues, work environments, implicit values and norms, and perceived equity in benefits and work rules.

Doesn’t this suggest the need for some form of cultural due diligence, to deliberately assess how the fabric of the two organizations will fit – or more tellingly not fit – together, once the deal has been done and the investors have been committed? Of course there are all the issues of confidentiality and reputation management that have to be taken into consideration, but surely this shouldn’t preclude a buyer and seller taking a better look at each other’s heart and soul – not doing so might imply that at least one party feels they have something to hide, or alternatively isn’t fully committed to a lasting marriage.

No, there has to a better way that is fair to all. We believe that there is, and that our Organizational Health Check represents a vital tool to assist cultural due diligence. As well as taking the pulse of the entities in question, the patterns of responses will quickly highlight where crucial mismatches might lie and provide a framework for some straight and material talking between buyer and seller. Where necessary the investigations can take place without generally disclosing the M&A context – and if the findings cause the deal to unwind, then at least both parties will come out of the process equipped with greater insight into their own health.

When substantial value in a business is vested in its people, wouldn’t it be reckless to not conduct some such form of cultural due diligence?

Ciarán Beary

Ciarán is a skilled facilitator and story-teller. Of our founders, he takes a keen interest in designing facilitative processes that work. His favorite quote is “Be all you can be”. Based in the UK, sometimes you can even find him there. More about Ciarán