Effectively managing culture holds chief importance in the process of successful mergers and acquisitions (M&A). When approached with the right strategies, cultural integration can significantly enhance returns on investment.
Many companies view successful M&A as a crucial element of their broader long-term plans, a direct path to accelerated growth. Over the past decade, M&A activities accounted for $8.3 trillion in capital. These activities span a multitude of sectors among the world’s leading 2,000 companies. Moreover, a recent study from McKinsey highlights M&A substantial role in driving growth. It suggests that up to 75 percent of overall growth can be attributed to M&A. Despite these promising statistics, the failure rate remains high, ranging between 70 and 90 percent.
In fact, companies that effectively navigate the M&A landscape possess distinct capabilities throughout every stage of the process. These capabilities, ingrained at the core institutional level. They encompass regular reallocation of M&A capital and well-defined criteria for decision-making. They also involve knowing when to opt out of deals, and a relentless focus on value creation during integration planning and execution. However, one often overlooked capability is the adept adept management of culture throughout the entirety of the M&A journey.
The Role of Culture in Enhancing M&A Success
Culture plays a pivotal role within the acquiring organisation. It also influences the integration process with the target entities, ultimately unlocking value through M&A endeavours.
This holds especially true for cross-border or expansion-oriented integrations. For instance, those aimed at venturing into new segments with lower carbon footprints.
Disparities in organisational cultures can manifest at various levels and pose significant challenges to operations, potentially jeopardising integration efforts. Variances in decision-making cultures, for instance, where one organisation follows a top-down directive approach while the other adopts a consultative and process-oriented style, can lead to friction.
Failure to align cultures could significantly impede the smooth integration of companies and hinder the realisation of anticipated synergies. Alignment is crucial in areas such as accountability, communication, innovation, and operational management.
The study points that companies adept at managing culture during integration planning are approximately 50% more likely to achieve or surpass their synergy targets. These targets encompass both cost and revenue synergies.
Three Steps to Enhance Cultural Integration
Moreover, McKinsey’s study suggests that successful culture management in M&A hinges on three key steps:
1. Diagnosing ‘how work gets done’ by establishing a cultural baseline. This entails identifying common strengths between organisations that can be leveraged, uncovering transformation opportunities, and pinpointing differences that may impede integration. Recognising differences without overstating or labeling them as ‘good’ or ‘bad’ cultures is crucial. Success can be attained with diverse cultural strengths, and elements from each culture can be integrated during the transition.
2. Prioritising cultural aspirations for the integrated entity. This involves articulating the desired future culture and tailoring the integration approach to support these objectives. The cultural programme must be seamlessly combined with all integration initiatives. It should also resonate with individuals on a personal level to drive genuine behavioural change.
3. Driving change. Leaders from both organisations must develop a ‘change story’ to guide cultural transformation and implement targeted initiatives aligned with the desired culture. Effective communication, both top-down and bottom-up, is essential. Moreover, alignment among the leadership teams is paramount. These leaders may need to sponsor activities to facilitate progress.
In brief, failure to address culture management can pose significant obstacles to M&A success. However, the adoption integration strategies that prioritise culture can mitigate this challenge. The study indicates that M&A deals employing advanced culture management techniques consistently outperform those that do not.
Source: McKinsey & Company (2024)
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