EXECUTIVE SUMMARYThe number of mergers and acquisitions (M&A) continues to increase, with a worldwide 2006 deal volume of 30,000 breaking the previous record set during the dotcom boom. All indications are that this high level of M&A activity will continue in 2007 and beyond. In the past, M&As frequently led to disappointing results in the form of decreased shareholder value. By contrast, today’s deals are enjoying greater success at increasing shareholder value, with medium-sized deals often outperforming larger ones. It’s hard to argue with the notion that company leaders play a vital role in successful mergers and acquisitions. As an example, good leaders can be especially adept at overcoming disruptions in accepted ways of doing things and at aligning organizational cultures that may be very different between the merging organizations — both key people-oriented challenges that companies face during an M&A. But until now, few frameworks have been available for assessing how leaders impact M&A success. But recent Towers Perrin research, coupled with experience with more than 400 mergers in 2006 alone, points to specific leadership characteristics that foster successful M&As, such as leaders who:
- set the right priorities and create positive busi- ness momentum and discipline
- imbue employees with the necessary level of commitment, engagement, confidence and comfort to work through difficult transitions
- inspire a sense of purpose, coherence, commu- nity and trust that allows employees to remain focused and highly engaged on the
TRENDS IN M&AsM&A volumes reached roughly US$4 trillion in 2006, eclipsing by a wide margin the previous record of approximately US$3.3 trillion set in 2000. The United States was the most tar- geted country for acquisitions, representing approximately 40% of global M&A activity. As of late December 2006, the value of European M&A deals was US$1.4 trillion, also surpassing the previous record set in 1999, with the U.K. the most targeted country. According to Towers Perrin’s Global Change Management Leader, Mark Arian, “We are at the beginning rather than the end of the wave because organizations have gotten better at doing M&A, which in turn has generated still more M&A activity.”
CHALLENGES FACED BY MERGED ORGANIZATIONSMergers and acquisitions almost always involve some level of transformational change and disruption, according to Towers Perrin Senior Consultant Clair Olson. Successful post-merger integration demands significant change on the part of both the acquiring and the acquired organization. The acquirer creates boundary disruptions — changes in stated goals, strategies, ways of doing things and customs. The acquirer also must deploy control mechanisms to manage transformational change and achieve the strategic goals that drove the M&A in the first place. For its part, the acquired organization must overcome any anxieties about being “absorbed” and learn to integrate itself into new corporate procedures and values. In short, a process of mutual adjustments and acculturation must take place for post-merger integration to succeed.
CULTURE — THE ORGANIZATIONAL DNAAnthropologists and experts in organizational behavior use the concept of “culture” to describe how members of groups understand their world and their place in it. Arian explains that organizational culture can best be thought of as “the pattern of actions, words, beliefs and behaviors that members of a business organization share,” sometimes referred to as the organization’s DNA. Because the human capital element is such a large part of any M&A, fostering a positive DNA — one that encourages employee engagement in the business and encour- ages flexibility during times of change — is difficult to get right. “Nevertheless,” says Arian, “it’s of great importance since it produces rules of behavior within the new organization.” A highly productive business invariably has a high-performing organizational culture that aligns well both internally and externally to support the overall objectives of the business. This organizational culture shapes the employee experience, which in turn impacts customer experience, business partner relationships and, ultimately, shareholder value. During a merger, two or more distinct organizational cul- tures must be integrated and fused. “As M&As increasingly become globalized, their complexity increases,” observes Olson, “and differences in national cultures need to be taken into consideration.”
UNDERSTANDING THE DNA OF ORGANIZATIONAL CULTURE AND THE IMPACT OF LEADERSHIPSo just how do you detect organizational culture? And how can you tell if it is effective and productive? An organization’s culture is embodied in what managerial leadership sets as its priorities: what it attends to, measures, rewards and controls. Organizational culture can be seen in how leadership reacts to critical incidents. And it can be found in leadership’s role modeling and coaching actions. Experts say that between 80% and 90% of employee behavior is determined by the way leaders attend to these factors. Other important dimensions of a corporate culture include an organization’s:
- criteria for employee recruitment, promotion, retirement and exit
- formal and informal ways of socialization
- recurrent systems and procedures
- organizational design and structure
- design of physical spaces
- stories and myths about key people and events, and
- formal statements, charters, creeds and codes of ethics
ADDRESSING ORGANIZATIONAL CULTURE IN M&AsCulture was ranked as the most challenging “people” issue in M&As according to respondents to a 2004 Towers Perrin survey whose organizations had completed at least one M&A deal during the past three years. Particularly challenging was achieving successful alignment between old and new organizational cultures. This was followed, in order, by effective leadership from the top; a well-executed employee communication program; integrating benefits, pay and other rewards programs on a global basis; and correct selection of the top management team.
LEADERS MAKE THE DIFFERENCE IN M&AsThe greater the frequency and magnitude of change, the more important leadership and culture become. “Leadership holds it all together,” says Arian. “It is a make or break function.” Towers Perrin research confirms that leadership is the most important driver of employee engagement.* During periods of transition and disruption, employ- ees look first to leaders for guidance about how to react and behave, for motivation, and for focus. Experience shows that what leaders do during mergers and acquisitions has a significant impact on how employees of both organizations react and promote a sense of community and purpose. Positive employee perception of leaders is crucial to successful change. Employees want to believe that leadership cares about them. When employees are convinced that leaders genuinely do care about them, they become more open and willing to make necessary transitions, says Arian. And companies that foster a high degree of leadership visibility and involvement during M&As instill a supportive organizational culture with a better than average chance of success, Olson adds. Leaders set the priorities and create the positive business momentum and discipline required during M&As. They instill in employees the necessary level of commitment, engagement, confidence and comfort to work through difficult transitions. Leaders, who by their statements and actions inspire a shared sense of purpose, coherence, commu- nity and trust, enable employees to focus and to remain highly engaged during M&As and post-merger integration. Establishing and sustaining cultural alignment during the first 100 days is particularly important, says Arian, in shaping the newly formed organizational culture and employee perceptions of it. Leadership intervention is “a critical symbol” of the new organizational culture, adds Olson.
*Towers Perrin defines employee engagement as employees’ willingness and ability to contribute to the company’s success — or, put another way, the extent to which employees put discretionary effort into their work.
ALIGNING STRATEGY, LEADERSHIP AND CULTUREPlacing leaders into the correct roles and ensuring a fit between leadership and the desired organizational culture and business strategy is another key priority in M&A integration, Arian and Olson point out. It is very important to engage and develop new leaders early in the integration process, through executive coaching, ongoing feedback and through formal onboarding activities. Properly engaged leaders will be able to focus on three key areas of a merger and acquisition:
- Due Diligence (leadership research)
- Integration Preparation (leadership strategy, assessment and selection)
- Integration (executive onboarding).