One word is critical to M&A success – CULTURE

One word is critical to M&A Success – CULTURE

One word is critical to M&A success – CULTURE

We learned last week that Hewlett Packard Enterprise is merging its enterprise services unit with Computer Sciences Corp (Read the full story). This is a perfect opportunity to talk about the consequences of mergers on identity and brand, and how having a solid strategy for both is key in your merger’s success.

Research has shown that as many as 83 percent of mergers fail to achieve their original business goals. Brand value, or goodwill, suffers right along with business value, often destroying the appeal and premium that might have inspired the acquisition in the first place. Why is this? Because culture, and the purpose behind each organization being combined, is often ignored in favor of the numbers.

These deals are put together by attorneys and investment bankers, who fail to consider the cultural implications of the merger. These people think in terms of “synergy” and 1 + 1 = 3, when the real goal should be 1 + 1 = 1.

The Importance of Culture

Culture is very powerful, and the cultural differences between one organization and another must be taken into account. Culture is the answer to, “Who are we?” It’s the areas of agreement that establish a company’s identity and sense of purpose. It would make sense to understand how the cultures of the two merged entities align or not, because if they don’t, they will need to be brought together or the merger won’t work.

Mergers only succeed when employees of the new entity feel a sense of belonging to something bigger than themselves. Something with which they identify, and to which they are motivated to contribute. We have seen this take place a few times, but have seen many more missed opportunities, whether with technology clients gobbling up startups, or our Fortune 500 clients absorbing rivals.

The Equity Argument

Any business that has existed for any amount time has developed some brand “equity” (visibility or awareness) in its marketplace. Acquired companies often lean on this notion of equity to defend not changing their name or their culture. The ideal, however, is for the equity of an acquired company to enrich the larger equity of the acquiring company.

At the end of the day, the question of equity shouldn’t be “What can your company do for you?” but rather “What can you do for your company?” This becomes more complicated when the two companies have served different customer segments with different service needs, needing different organizational and managerial approaches. Deeply embedded organizational routines need to be managed carefully, but they still need to be managed.

When Mergers Work
There are two primary models within which we’ve seen mergers work – both have to do with resolving culture and brand questions up front.

1. The assimilation. When Jack Welch was running GE, and he acquired a company, the acquired CEO would typically want to know whether he/she could keep their job, and whether the acquired company would keep its name. The answer was inevitably: “You’ve been acquired.” GE imposed its brand, and its culture of excellence on all acquisitions, because in general, it improved everyone’s performance and satisfaction. The company became so successful at this that in a few short years, new acquirees would ask, “If we are acquired, do we get to use the GE brand?”

2. The transformation. The new generation of companies growing by acquisition, most notably Facebook, are demonstrating how multiple cultures and identities can broaden a company’s relevance. Recent acquisitions including Instagram and Oculus Rift have largely been left independent, because their success brings new audiences to the Facebook Platform. While this may be looked at as a rationale for “equity,” it is instead a rational and deliberate effort by Facebook management to continue to transform their organization. The decisions to keep the acquired brands are not ad-hoc, they are strategic, and addressed up front.

An example of where this hasn’t worked is Yahoo, who left acquisitions such as Tumblr and Flickr independent – to keep them ‘cool.’ Yahoo was unable to demonstrate any brand transformation, and the independent brands withered under Yahoo’s negligence.

A Merger to Watch
One merger in particular that we find both fascinating and troubling is the deal that Alaska Airlines made to acquire Virgin America. We are fascinated because we know that Alaska plans an assimilation. We are troubled because we are Virgin America loyalists, and we worry about the combination of two very different cultures.

Alaska has made it clear that they plan to learn from the Virgin America’s cultural and operational successes, and to fold those into their own brand experience. Brand savants including Richard Branson, a former (non-controlling) owner of Virgin America, have made it clear that this merger is yet another loss of a potentially market changing culture.

We would suggest that Alaska Airlines ought to thin out this merger as less assimilation, and more transformation. Figure out how the two companies equal one great brand, vs. two middling ones. And above all, remembering that culture is critical to this merger’s success – embrace the unique and valuable Virgin America culture and brand rather than pick it apart.

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