As the economy slowly heats up, the corporate appetite for mergers is returning.
Mergers happen for what seem to be many business reasons — access to new markets and distribution networks, scale in consolidating industries, product diversification and new revenue streams, acquisition of strategic assets such as technology, etc.
But in spite of the heady promise, many mergers fail. And they fail for just one reason: cultural differences and the subsequent failure to integrate.
A stream of studies has shown that corporate mergers have even higher failure rates than the liaisons of Hollywood stars. One report by KPMG concluded that more than half of mergers have destroyed shareholder value and one third made no difference.
The business landscape is littered with examples of corporate marriages that were going to change the world and ended up as small change. Let’s take a look at America Online and Time Warner. Positioned as a merger of equals (although technically a takeover of Time Warner by AOL) the world’s biggest online service was expected to inject its “Internet DNA” into the stodgy media giant Time Warner. But the ensuing turf wars at AOL Time Warner, as it became, and the struggle to merge two distinctly unequal and disparate cultures soon overwhelmed the media giant. Time Warner spun off the entire AOL Internet unit in 2009, reversing the failed $124 billion merger that triggered record losses.
In 2005, another major communication merger occurred, this time between Sprint and Nextel Communications in another merger of equals. These two companies believed that merging opposite ends of a market’s spectrum — personal cell phones and home service from Sprint and business/infrastructure/transportation market from Nextel — would create one big happy communication family (for only $35 billion). But the family did not stay together long. Soon after the merger, Nextel executives and managers left the new company in droves, claiming that the two cultures could not get along and the stock plummeted.
Alcatel-Lucent struggled with many of the same issues. Formed in 2006 by the merger of equals between Alcatel of France and Lucent of the US, Alcatel-Lucent struggled to make the merger work. The partnership of CEO Patricia Russo and Chairman Serge Tchuruk was problematic, according to observers who said the company struggled with integration issues as cultural differences sparked intense rivalry. After six successive quarters of losses, the Paris-based company chose a Dutchman, Ben Verwaayen, to replace Patricia Russo as CEO.
It’s an old story. Mergers of equals are sold to shareholders in terms of synergies, cost savings, scale and size. The focus is on the legal and financial arrangements of getting the deal done and the ‘social issues’ of who will be CEO and where corporate headquarters will be located. The rest is business as usual. But there is no ‘usual’ to get back to. Underneath, anxious employees from two strong brand cultures are left to figure things out. A “we versus they” mentality quickly sets in. Rivalries develop. Integration becomes nothing more than political trades as employees cling to the old ways of doing things and the spiral down begins until one culture dominates or the whole thing falls apart.
The truth is, these companies were not so much merged as bolted together. The conjoined names — AOL Time Warner, Sprint (Together with Nextel), and Alcatel-Lucent — manifest the inherent problem of the merger-of-equals: the two original companies intend to co-exist rather than merge and create something new.
As Joanne T. Lawrence says in her definitive book “From Promise to Performance” about the successful, transnational merger SmithKline Beckman of the US and Beecham of the UK: “Many mergers don’t work because completion of the merger and structural integration is seen as an end, rather than a beginning.” It is in the cultural vacuum of the critical post-merger period where factions develop and mergers become unraveled.
At BrandingBusiness, we have developed a comprehensive Employee Engagement program that has helped many companies to successfully build powerful, brand-based cultures as part of the integration process.
We have found (through experience) with many mergers, the the past has to be very quickly replaced with a unifying and compelling new vision for the future — a new brand reality around which people can unite, let go of the past and move forward together with confidence. By actively engaging employees early as part of the brand building process, their support for the entire merger becomes that much more enthusiastic. Engagement builds momentum, shapes attitudes and beliefs, generates confidence, sustains loyalty and, ultimately, creates value.