“With global M&A hitting new highs, more companies are pursuing deals, thus more will likely fail because their leaders either make cursory attempts at cultural integration or do not address the requirement at all.” (Financier Worldwide Magazine)

In 2014, Google acquired the startup Nest, known for its innovation and automation capabilities. However, the two companies soon proved to be incompatible. Nest had a transparent top-down approach, while Google was more engineer-driven and had a bottom-up culture. Both companies failed to examine their respective cultural characteristics to identify the differences and thus could have addressed them by finding commonalities and building on them.

The 2017 merger between Amazon and Whole Foods is a notable example of where efficiency clashed with idealism. Although both companies recognized the potential benefits of leveraging each other’s strengths, they neglected to consider their cultural compatibility. The stark disparity in values and organizational culture, particularly in terms of hierarchy versus egalitarianism, resulted in a suboptimal outcome for the merger.

Amazon’s culture is hierarchical, structured, and precise, characterized by defined processes aimed at maximizing efficiency. Employees operate within a clear hierarchy and know the guidelines that dictate their behavior. On the other hand, Whole Foods was driven by ideological approaches and values. Before the Amazon merger, the company had an egalitarian structure organized around self-managed teams, granting individual employees significant decision-making power. Face-to-face interactions between workers, vendors, and customers were the norm, and managers could operate their stores with autonomy and tailor products to customer preferences.

These are not isolated incidents. The history of mergers and acquisitions is littered with failed deals because the significance of addressing culture was either misunderstood or ignored. Numerous surveys have shown that between 50 and 75 percent of all post-merger integrations fail to achieve their original objectives due to cultural conflicts. Some sources suggest that the failure rate could be even higher, exceeding 80 percent.

Finn Majlergaard, the CEO of Gugin argues that companies can face significant consequences if they overlook cultural integration. When key employees depart, customers leave, and employee satisfaction decreases, the result can be costly. Unfortunately, all of this can be prevented if companies recognize the importance of cultural integration from the start and understand that it is not their core competency to facilitate such integration.

This apparent lack of interest contradicts a recent Deloitte survey of top executives. 76% emphasized that cultural compatibility is crucial for successful post-merger integration.

So, why does culture matter?

Each company has a unique culture shaped by its purpose and brand. Companies must understand how these elements interact to build and maintain a strong culture.

Secondly, a strong company culture is a magnet for top talent. The most successful companies in the world clearly define, consistently execute, and effectively align their culture throughout their organization, inspiring high employee commitment. This approach to culture attracts talented employees and motivates them to consistently deliver on the company’s brand promise to its customers.

Thirdly, culture fosters alignment. Culture distinguishes between engaged teams moving in different directions and engaged, aligned teams working toward a common goal.

Fourth, culture impacts performance. Companies with a well-defined culture have a competitive edge in the marketplace and have been shown to enhance performance outcomes across various measures.

Addressing culture becomes critical when two large global companies with dissimilar cultures wish to integrate all aspects of their business quickly and thoroughly. This is precisely what happened to the Israeli company, “IronSource.”

IronSource employees enjoyed a close-knit, informal work culture emphasizing an “Open Door” policy between employees and management. They also appreciated perks such as seven annual “Sunday off” days and off-site trips to exciting locations. However, things changed after the merger with Unity. The new corporate structure shifted from an informal culture to a more formal, hierarchical environment. This change also meant a departure from the focus on work-life balance and the perks, such as vacations to tropical islands, that employees had previously enjoyed.

The most significant change was perhaps based on shifting from an outcome-oriented culture to a process-oriented one. Like many Israeli high-tech organizations, IronSource had fast, agile decision-making processes and a quick product launch cycle. However, they had to adapt to a more structured American process orientation after the merger. This required them to explain each decision, which slowed down their usual work style. Additionally, every change necessitated the creation of a new strategy plan, and implementation required coordination and approval from multiple stakeholders. Productivity decreased, and employee motivation and retention suffered as a result.

A starting point to more successful M & As’

Developing and executing a strategy to merge cultures effectively is not just a good idea; it’s a necessity for the success of mergers and acquisitions. The potential business implications of cultural incompatibility are profound and can lead to significant challenges. It’s crucial to remember that forcing one culture onto another is a recipe for failure.

Digital solutions

More and more organizations are using artificial intelligence (AI) technologies, such as natural language processing (NLP), to identify and address cultural differences and areas for improvement in preparation for integration. According to PwC’s ‘2020 M&A Integration Survey’, almost nine out of 10 companies use digital tools during post-merger integration. These techniques can assist acquirers in identifying targets that closely align with their corporate culture. Additionally, they can help pinpoint any gaps in their respective cultures, allowing for dedicated efforts to improve cultural coherence during the post-deal integration stage.

According to the Society for Human Resource Management (SHRM), acquiring companies must take the three key steps outlined below to ensure a transaction does not go awry.

First, culture should sit at the table already in the diligence phase.  Culture does not reveal itself quickly, but knowledge of differences and the assumptions upon which they are based can be gathered during diligence and used to move forward post-merger. It’s essential to have a clear understanding of operational culture. Operational culture includes the values and norms of the company – how people think, act, and make decisions. These also include differences in leadership styles, standards, communication, decision-making, risk-taking, protocols, training approaches, and more.

Second, it is essential to determine the culture of the target company. This will provide a clear understanding of the similarities and differences between the two companies. This understanding will facilitate the strategy for integrating the cultures and help assess the difficulty level. Additionally, if multiple acquisition candidates are under consideration, it is essential to consider the difficulty level in integrating all cultures.

Finally, organizations need to create an integration plan. The key elements of such a plan are a dedicated integration team (including people from all levels and all critical departments of the two companies), a team leader whose sole responsibility is the success of the integration effort, and constant communication of the new company’s goals.

Human capital integration

Let’s not forget that the success of organizations is largely due to the people who work in them. However, when it comes to mergers, decisions are often based solely on numbers, and the “people equation” is either an afterthought or not considered. What is frequently overlooked and needs to be addressed is the fear and confusion that often result from mergers and acquisitions. It is best practice for both organizations to inform employees about the integration plan, explaining not only what will happen but also why it is being implemented. Furthermore, clear communication and sharing the vision with the teams will reduce anxiety and encourage employees to support the integration. This happens when they understand the significance of integration for the organization’s future and their role in the process. Lastly, establishing formal and informal communication channels across the merged organization will foster trust and allow employees to express their thoughts.

In conclusion, companies that have successfully integrated a cultural component into their merger strategy are more successful in the long term. As Peter Drucker famously said, “You can’t change culture; you can only work with the cards you are dealt.”

Published in Jerusalem Post