It is a truth, universally acknowledged, that a company in possession of a good fortune must be in want of a merger. And, at present, thanks to the historically low interest rates in many western economies, there are many cash-rich firms seeking to invest in businesses that can make their money work harder.
Indeed, global M&A deals in the first six months of 2021 were worth £2tn, according to Refinitiv – the highest half-yearly total the research firm has ever recorded.
Decision-making in M&As necessarily focuses on factors such as the potential for economies of scale, competitive advantage, return on equity and the cost of acquiring intellectual property, all of which will affect the bottom line. Yet the financial results of a merger often disappoint. Research suggests that at least half of M&As don’t work – with ramifications extending to huge write-downs or even the failure of the acquiring business.
In 2005, for instance, eBay acquired Skype for $2.6bn. Two years later it took a $1.4bn write-down on the deal because it “had not performed as expected”. After a period under private equity ownership, Skype was acquired in 2011 by Microsoft for $8.5bn. Microsoft quietly absorbed it without any reported hiccups.
Why does one merger work and another fail? In the case of eBay and Skype, it may have been the former’s overestimation of what the latter’s technology could do for it. But a key factor in the happiness of any corporate marriage is culture.
What is culture and why does it matter?
In February 2021, Skype’s co-founder, Niklas Zennström, spoke about the importance of culture at a virtual conference hosted by Digital Life Design.
“A team is just a set of people if you don’t have what unites them, which is really the culture,” he said. “That is what really makes successful companies very successful.”
His fellow speaker was Ben Horowitz, a founding partner at venture capital firm Andreessen Horowitz, which made early investments in companies including Facebook, Twitter and Airbnb.
He said: “Culture is not a set of beliefs; it is a set of actions. The challenge in building a company culture is: how do you incentivise the behaviour that reflects your values? You really have to be thoughtful and intentional if you’re going to move something into the culture that counteracts the regular business incentives of making money and wanting personal status.”
Getting it right on the ground
So what happens when two different cultures combine, particularly when the reasons for the merger include making money and wanting personal status?
Dr Naaguesh Appadu is a research fellow specialising in M&As at Cass Business School in London. He says: “When couples start talking about getting married, they’ve usually known each other a long while. They have done their emotional due diligence, yet they will still face problems. In a merger, you’ll perform deep due diligence by inspecting all the documentation, but it’s still very hard to understand the human factors.”
If unexpected information later comes to light, Appadu notes, “there is a huge risk that the deal will not be successful”.
The cultural risks can be heightened when companies marry in haste. For instance, when US supermarket chain Whole Foods agreed to be acquired by Amazon in 2017, the company’s co-founder and CEO, John Mackey, described the situation as “love at first sight”, with the deal coming only six weeks after a first “blind date”.
In a recent interview, Mackey described the relationship as a “happy marriage” in which Whole Foods has largely been left to run things as before. Yet its shopfloor staff have been trying to unionise ever since the takeover by Amazon – a notoriously anti-union employer. Having started in the late 1970s as a vegetarian cooperative serving the hippie community in Austin, Texas, the business could hardly have a more different culture from that of the efficiency-obsessed online behemoth.
Even when the parties involved do know each other well, cultural problems can still emerge. Steffen Giessner, professor of organisational behaviour and change at the Rotterdam School of Management, notes that it is “very difficult to manage people’s sense of affiliation. In times of stress, such as a merger, they seek certainty and belonging. They will feel a strong sense of connection to their old organisation – even if they didn’t like it before.”
Although managers appreciate that significant changes will always encounter resistance, they tend to underestimate its strength in the case of M&As, according to Giessner. “There is no merger of equals,” he says. “And it takes a long time to forge a new culture – often many years.”
Giessner believes that, for a merger to be successful, all staff need to appreciate the reasons behind it. Most senior managers do have good reasons beyond self-interest for proposing a deal, but mergers tend to fail at the next level down, he argues. That is because middle managers not only have the task of convincing everyone else; they also have the most extra work to do because of the merger.
When two sides go to war
“It can be a problem when managers see themselves not as part of a particular organisation but as part of a wider elite group of leaders,” Giessner notes. “Their aims may not be congruent with the organisation’s best interests.”
For a merger to be successful, senior executives must communicate as much as possible “and more than they expect to”, he says, citing the example of a successful recent hospital merger. The doctors were not won over by the idea until the new CEO had spoken to each of them individually.
And what about mergers in a time of remote working? Does that make things even more difficult?
“There is no data yet on what working from home will mean for mergers,” Giessner says. “But I think you can’t compensate for the value of informal, in-person communication.”
He points to the basic problem that every merger faces: people tend to look for someone to blame when they are feeling uncertain, while managers need to be able to communicate well to make people feel that their concerns are being heeded – even under optimal conditions. Not every senior executive has that ability.
Given that few things will make people more uncertain than being part of a merger during a pandemic, it hardly seems the best time to try forging a successful new culture. That doesn’t mean it can’t be done, of course, but the mergers of the Covid era look set to be a real test of what managers can achieve.
It is a truth, universally acknowledged, that a company in possession of a good fortune must be in want of a merger. And, at present, thanks to the historically low interest rates in many western economies, there are many cash-rich firms seeking to invest in businesses that can make their money work harder.
Indeed, global M&A deals in the first six months of 2021 were worth £2tn, according to Refinitiv – the highest half-yearly total the research firm has ever recorded.
Decision-making in M&As necessarily focuses on factors such as the potential for economies of scale, competitive advantage, return on equity and the cost of acquiring intellectual property, all of which will affect the bottom line. Yet the financial results of a merger often disappoint. Research suggests that at least half of M&As don’t work – with ramifications extending to huge write-downs or even the failure of the acquiring business.
