Organizational Culture in Mergers and Acquisitions

Human psychology is amazing; there are truths and constants found across many seemingly disparate situations.

Take, for example, the parallels between corporate mergers and acquisitions, and the resilience and capabilities demonstrated by the citizens of Ukraine as they face down the Russian attack.  You can find similarities based on how people perceive and react to various approaches, despite the extreme differences in circumstances.

Russia greatly misjudged the unity of the Ukrainian people and their willingness to fight. According to Lowell Barrington of Marquette University, Putin “underestimated Ukrainians’ attachment to their own country and overestimated their connection to Russia,” although it’s unclear whether he actually had faulty intelligence or simply just that the people around him told him what he wanted to hear. Russia was under the impression that large parts of the Ukrainian population would welcome them with open arms. Yet there is research on Ukrainian identity, that, had Russia done some homework, might have provided a more realistic picture of what lay ahead for them.

Since 1932 the Soviet Union had been classifying people based on a mutually exclusive combination or a conflation of nationality and ethnicity. For instance, people living in Russia were not simply Russians, but they fell into one of 180 categories, such as Russian, Chechen, Tatar, Cossack, Jewish and Ukrainian. If you were Jewish, for instance, you were not Russian. Even though the goal of the Soviets was to forge a unified national identity, there was a social structure and ladder that firmly placed those categorized as ethnic Russians at the top, along with the associated benefits. The Kremlin today apparently believed that these categorizations, and their associated sense of belongings or identification, were immutable and did not change over time. It was believed that those who would have been categorized as Russians in the past, even if they were living in Ukraine for most of or their entire lives, on a personal level maintained their Russian identity.

In 1991, when Ukraine regained its independence, it granted Ukrainian citizenship to almost all living within its borders. Their passports simply said Ukrainian. In the 2000s the old Soviet categorizations were also removed from Ukrainian birth certificates. Over time these and other changes caused a larger and larger percentage of the population to identify as Ukrainian; research indicates that since the Russian invasion of the Crimea and Donbas areas that the trend has accelerated. It is complex, but simply put, this solidifying of a merged Ukrainian identity has reaped tremendous benefits as Ukraine is successfully fighting off a Russian invasion partly powered by the unified sense of belonging and culture. The Ukrainians strongly believe they are defending their homeland from outside invaders (Science News 5/7/22, Gupta, S.). And the ongoing war is likely further cementing the Ukrainian national identity.

So how does this relate to the corporate world? In the corporate world mergers and acquisitions are routine but often don’t yield the kind of benefits that are hoped.

“The pace of mergers and acquisitions (M&A) activity in recent years has broken all records with more than 40,000 deals announced globally in 2021. However, fewer than 50% of M&A deals ultimately deliver their promised value.” (Fortune 3/15/22, Sirower, M., Weirens, J.). The authors state that one of the elements often neglected is an integrated culture for the two organizations. The importance of culture can’t be overstated if you are going to be successful at bringing together two or more separate entities into a unified entity.

Sometimes corporations want to act as a holding company where each component is allowed to operate independently, with its own branding, marketing and sales, operations, systems, processes and culture. Operating this way makes it easier to acquire and divest of organizational components. The components are viewed as fungible, like a hand in a card game, where you can trade in a card and get another, in an attempt to achieve an overall stronger hand. Sometimes the logic goes that the components are so diverse that integrating them would be impossible. Afterall, it can take years and a huge amount of effort for a large organization to integrate an acquisition from a cultural perspective.

One technique we use to determine cultural integration is called discriminant analysis, where we attempt to classify each survey respondent by their heritage company simply by their pattern of survey responses.

If, for instance, the stats were 75% correct at determining which company a respondent was from by the pattern of their responses, the culture is not fully integrated. Once that dropped to 50% – meaning that you would have as much success determining which company the respondent was from if you flipped a coin – you could say with some confidence that cultural integration had been achieved. This typically takes longer than two years to achieve. One CEO put the challenge this way; “I can integrate structures and finances pretty quickly; I need you to tell me when we are successful at integrating the culture”.

A question often arises as to whether approaching M&A through full integration or a holding company would lead to higher levels of performance. And while I am loath to speak in generalities, the evidence I have seen is pretty compelling that those who don’t fully integrate are, at least sometimes, leaving money on the table.

It is quite common in a merger and acquisition situation to ask a series of questions about how it will affect the customers, how it will affect the company performance, how it will affect staff, and how it will affect each employee personally, of each component company. We often ask about internal functioning, external offerings, as well as personal future and career opportunities, and more. Invariably in those organizations that integrate, employees reported better career prospects, better potential for organizational performance, higher levels of satisfaction and an intention to stay longer at the company. New hires are often more attracted to a larger, more integrated company as it represents more future opportunity for them.

One company asked their sales people on the survey about cross-selling opportunities in the integrated company. They actually had the sales people write down the opportunity in detail on the survey. They estimated that resulted in $20 million dollars in new business within 12 months.

A caveat here. Sometimes along with a merger comes a number of terminations, sometimes a substantial number, as redundant functions and staff are eliminated. And contrary to what you may expect this does not necessarily lead to lower levels of satisfaction or engagement among the staff. It depends on how quickly it is done (all at once is better than drips and drabs), how the terminated people are treated (severance, attempts to place them elsewhere within the company, retraining, or outplacement efforts), how the future vision is communicated, how each person’s position in that future vision is communicated, and how that person is prepared to be successful in that new future.

A second caveat. Don’t call an acquisition a merger unless it truly is a merger. People will look at who is getting which jobs, which processes are used, which systems are eliminated and they will draw conclusions very quickly as to which company in the merger is dominant. There is rarely such a thing as a merger among equals.

A third caveat. There are of course organizations out there, that to them buying and selling companies are simply investments, and they have little to no intention to actually run those investments, other than giving them direction to hopefully increase the value of those investments. This advice is more squarely aimed at those who when merging or acquiring are attempting to make something new, something where the whole is greater than the sum of the parts.

Bottomline: More often than not it is worth the extra effort to integrate organizations from a cultural perspective during a merger or acquisition as the long-term benefits outweigh the costs.

The psychology that so fascinates me is that when people feel part of something bigger than themselves, serving a higher purpose, with a vision of what the future could hold and where they have a place in that future, they go way above and beyond the “transactional” relationship in order to make that future happen. That is true in a country at war for its very survival and at an organization bringing together components to achieve a new and greater whole.