Mergers and acquisitions are a fact of life in today’s highly competitive global business environment. As the jostle for market share continues to drive business into Merger and Acquisitions there has been many failures and successes of the same measure. Some mergers are so successful, that one cannot remember a time when the two companies were distinct. Where would Disney be without Pixar, or J.P. Morgan without Chase? Also acquisition of Jaguar Land rover by Tata group or the various acquisitions by Piramal Group are examples of successful M&A Deals. However, many mergers fall flat on their faces and fail. The newly created company goes bankrupt, executives are fired, and in some cases, the merged companies disband in a sort of corporate divorce. For whatever the reason, there doesn’t seem to be a magic wand to corporate mergers. Mergers are inherently risky, and without the proper strategy, intuition, and knowledge, mergers, can get, well, ugly. Though many factors contribute to the success or failure of a deal, listed below are three separate failed deals and the core reason that led to their downfall.
- Two Companies One Culture
While it is clear that successful mergers and acquisitions are based primarily on strategic, financial and other objective criteria, ignoring a potential clash of cultures can lead to financial failure. Far too often, cultural and leadership style differences are not considered seriously enough or systematically addressed. The word “Cultural Clash” has been coined to describe what happens when two companies’ philosophies, styles, values or habits are in conflict.
Merging two corporate cultures from the same country with the same language and traditions is challenge enough. That challenge is compounded when differing country cultures and norms are added to the equation. What might be seen as a healthy, assertive “bias for action” in one society may be seen as rude, offensive and inappropriate behavior in another. These issues must be dealt with because more and more cross-border acquisitions are taking place.
There are various ways in which cultural integration can take place. For example, the acquiring entity may entirely enforce its own culture on the acquired entity or it may try and assimilate certain ways of the acquired entity into its own culture or it may altogether create a new culture comprising of the strengths of the two entities, creating a new cultural environment which can be related to by the workforce of both the entities; thereby creating a conducive work environment.
Various studies and surveys over the years have time and again demonstrated that failed cultural integrations are often at the heart of merger difficulties. There have been many failed mergers which could be case in point to prove the importance of cultural alignment for a successful M&A Deal. Whether it was the Sprint and Nextel Communications deal in 2005 or America Online and Time Warner deal in 2007 or Air India and Indian Airlines Deal in 2007; all the before mentioned unsuccessful deals had failed cultural alignment as a common factor. But the case that probably brought cultural alignment in M&A context in the spotlight would be the 1998 Daimler-Benz merger with Chrysler. It is probably the most famous of all international mergers that ended in a failure. It was this failed partnership that first rang the alarm bells that cultural factors cannot be just ignored on a global level, especially not within mergers and acquisitions. At the same time the Mahindra Satyam deal is an excellent case to enforce how proper cultural integration can boost the chances of a successful deal (covered in Dec 2013 issue of M& A Critique).
Daimler-Chrysler: A Case Study
What happens when two successful car producers with different know-how and a different knowledge background, different work processes, different product portfolios and last but not the least, completely different corporate cultures decide to merge? Daimler-Benz and Chrysler wanted to strengthen their position during economically difficult times for the car industry by juggling the crisis together and they hoped to be able to combine their strengths. Therefore, the two companies decided to fuse in 1998. But only ten years later Daimler-Benz once again sold all its shares of the Chrysler division. The dream to become the third biggest car producer of the world, behind General Motors and Ford, burst. The expected and wished for synergy effects stayed out. Instead of gaining competitive advantage over their competitors, the merger rushed the two car producers even deeper into crisis and did not provide the companies with the necessary tools to overcome the recession.
The biggest culprit for the failure was cultural clashes. Daimler was a German company which could be described as “conservative, efficient and safe”, while Chrysler was known as “daring, diverse and creating”. Firstly, the attitude to hierarchy was quite different. Daimler was a very hierarchical company with a clear chain of command and respect for authority. Chrysler, on the other hand, favored a more team-oriented and egalitarian approach. The other cultural difference lay in what the companies valued in terms of their clients. Daimler valued reliability and achieving the highest levels of quality, while Chrysler was placing its bets on catchy designs and offering their cars for competitive prices. These two factors resulted in conflicting orders and goals in different departments. American and German managers had different values which drove and directed their work. Different departments were heading in opposing directions. Moreover, The German culture became dominant and employee satisfaction levels at Chrysler dropped off the map. By 2000, major losses were projected and, a year later, layoffs began. In 2007, Daimler sold Chrysler to Cerberus Capital Management for $6 billion.
What the Experts said-
In order to avoid the failure of M&A’s, it is important to consider the following aspects even before the actual merger takes place.
- It is important to take into account in which areas it will come to cultural discrepancies and how they will influence day-to-day work. Make cultural alignment a transaction prerequisite.
- Cultural Integration is a slow process, but its needs to be given due importance as without cultural integration the transaction synergies would not be captured.
- The time and additional cost involved in Cultural alignment should be included in the Transaction cost.
- Creating a new culture comprising of the strengths of both entities would be more beneficial.
- Will there occur communication problems due to language barriers and how will they be solved?
- How should different leadership styles be managed and applied?
- Moreover is it crucial to identify and to define precisely common goals and to elaborate certain norms and regulations for business processes.
- Communicating Change
The days when communication was merely an afterthought are long gone. We live—and do business—in a world where communication is pervasive. Information is sent and received in seconds. Opinions, attitudes and perceptions are formed equally fast. When two companies merge to become one, there is much at stake. Managing attitudes and perceptions of stakeholders throughout the process of integration can influence the degree of success of any large scale transition or change. A lack of understanding, a casual rumor, too much information or not enough information can influence success or failure. Two factors drive successful communication during organizational change. The first: an organization must communicate early, frequently and consistently. There must be an ongoing strategic approach to communications before, during and after any organizational transition. Communication is—and must be—a constant. The second: the greater the value an organization has for its communications, the greater the likelihood for success. There must be an ongoing strategic approach to communications before, during and after any organizational transition. Communication is and must be a constant.
The acquisition of Merrill Lynch by Bank of America in January 2009 illustrates the substantive damage that can result from failing to communicate integration plans sufficiently early.
Bank of America and Merrill Lynch
Bank of America and Merrill Lynch hammered out one of the biggest deals in Wall Street history in less than 36 hours during the weekend of September 13th and 14th in 2008. With Lehman Brothers on the verge of bankruptcy, executives for both Bank of America and Merrill Lynch knew they needed to act quickly. It was generally understood that Merrill Lynch would be the next financial institution to fall, so there was a real desire to get a deal done before markets opened on Monday, September 15.
Three months later—even before the deal closed—the engagement was on the rocks, the mood soured by staggering losses at Merrill, and Bank of America’s executives were looking for a way to break it off. What followed was an unprecedented series of steps taken to keep the two companies together. Further, the real shortcomings in planning and preparation became apparent when, four months after deal-close, many of the major decisions had yet to be announced. These included key appointments such as who would run the core investment banking groups. Moreover, Merrill and Bank of America executives were still divided over whether even the “combined investment business will be run using the Merrill Lynch-style decentralized model or Bank of America’s centralized command and control structure.” This fear and doubt already percolating through the legacy Merrill ranks, in addition to a lack of definition around the consolidated outcome, and the absence of pre-emptive communications, led to the rapid departure of prominent Merrill bankers that ultimately sucked away the potential of the combined franchise.
- There will always be structural differences between two merging firms” but “communication is what makes it work.
- The Acquiring Company should make sure that it is not having a dictator attitude while communicating with the Target Company; as the same can create dissatisfaction amongst the target company employees.
- Get all the stakeholders on one page and communicate plans around organizational and leadership modifications as honestly, clearly — and most importantly — as early as possible.
- Facilitate communication across groups and divisions.
- A good and far-reaching communication strategy is indispensable.
- Ownership Dynamics
In an industry where transaction value, post merger synergies and cash v/s. stock are important factors in M&A deal decisions, the implications of ownership dynamics are left behind. Different ownership patterns and post merger ownership, its effects on the organization etc. could play a vital role in the success and failure of a deal. Dramatic changes in the ownership dynamics could result in mistrust and fear among the employees which could in turn be hazardous for the deal. The post merger ownership dynamics can be deal breaker as was the case in proposed merger of Renault and Volvo in 1993. It was neither transaction price nor consideration mix that rendered this deal unworkable, but rather the overwhelming impact of ownership on cultural dissent, which snowballed into a sequence of costly events.
Volvo-Renault Deal: A Case Study
The leadership teams at Volvo and Renault had mutually planned to phase into a merger by starting a joint venture, and were well on their way to consummating the deal in December 1993. In 1993 Volvo and Renault decided they would merge. Volvo, a Swedish automaker known for the safety and engineering of its cars, and Renault, a French automaker highly regarded for its vehicles’ design and style, decided to tiptoe into the merger with a joint venture. Looking back, the JV was the smartest decision they made; the rest was disastrous.
Not only did each company have a dissimilar brand, making it difficult to imagine the kinds of cars the combo would produce, but their ownership was off kilter. Volvo was investor-owned, while the French government owned a majority of Renault. Post-merger, Volvo would have held a 35 percent stake in the combined company, with the rest in the hands of the French government. Then, France kept murmuring about privatizing Renault, which made Volvo shareholders’ fearful the company might effectively become a French enterprise, with no jobs for Swedish workers. It was feared that the enterprise would effectively become a French company under French shareholder control. The combination of employee pressure, public dissent, shareholder disapproval, and management revolt not only forced Volvo to back out of the deal, but resulted in a slew of leadership resignations and threw the future of the two carmakers into disarray.
What the Experts said-
- Consider the ownership dynamics.
- Give thought to the scope and implications of shareholder composition.
- Different Perceptions create problems; the pre & post deal ownership dynamics, should be considered and their impact on the deal outcome needs to be addressed.
- Preemptively Address Implications of Ownership Structure.
Acquisitions are risky; they can fail due to various reasons. Tata overpaying for acquiring Anglo-Dutch steel maker Corus, Apollo-Cooper Tire deal going kaput due to faulty valuation and deal structure are examples of common reasons that lead to failed deals. In reality it is a combination of mistakes that lead to most failures. Success requires planning, strong management and good advice. Putting the gloom to one side for a moment, the upside of successful acquisitions can be substantial. They can make money in their own right, and they can also bring commercial or tactical advantage to the enlarged acquirer. With a high rate of failure, it may seem like mergers are always doomed from the beginning. But that’s not the case – really, it’s more a sign that businesses make the same mistakes again and again. The mistakes made in the above three deals provide plenty of valuable lessons for future M&A deals, so that can make sure they end up on the good side.
Main Contributor : Haresh