Mergers and acquisitions: when corporate cultures collide
Hurrah — I’m finally back at Casa ORA, after a two-month hiatus for holidays and work.
The potential Microsoft-Yahoo merger is big news here in Silicon Valley. In many of the articles, there’s a throwaway comment about the two companies having big cultural differences — but there’s usually not much of substance said beyond that (other than the usual tropes of “Silicon Valley hates Redmond” and “Yahoo is boring because it’s not a startup anymore”). The meme that “organizational culture differences are a threat to M&A” seems to be widely-accepted trusim…but beyond that, it can be hard to find much of substance on the issue. (If you want to cut to the chase, I list a few sources for more information down at the end of this post.)
(There was one article that used baseball and football as metaphors for the two companies’ cultures, which IMO gets more points for creativity than insight. Although I’m tickled at the notion of using sports metaphors as a symbolic taxonomy for professional groups….so what company/professional group are the hockey players? the Olympic equestrian team? Ping Pongers?…OK I’m off topic.)
Back to corporate culture and M&A: Grant McCracken and I chatted on this topic last week. I’m not an expert on Microsoft or Yahoo, but the conversation got me thinking about M&A and organizational culture in general. We know a lot about the financial issues of M&As; those are easy to track, and that news doesn’t look encouraging (the truism is that 60-80% of mergers fail to meet financial targets). But what do we know about the cultural issues of M&As? (Side note: mergers do differ from acquisitions, but I’m treating them as one broad organizational dynamic in this post.)
M&As are inherently culturally disruptive — regardless of two original cultures similarity/dissimilarity. Painful but true. Taking two already-existing groups and smushing them together is guaranteed to cause conflict, particularly for the structures of authority (the organizational hierarchy, formal roles, decision-making rights). So M&A will cause conflict, even if the two organizations were friendly as kittens beforehand.
Robert Gallagher gives an overview here of three org culture patterns that are inherent to M&A situations:
1) employee concerns/paranoia about the uncertainty — what Gallagher calls the “over-your-shoulder” effect: that sense of looming, unpredictable doom. Will you lose your job? Your bonus? Be assigned to a new boss who hates you? Have to relocate? Who knows? And there’s very little you the employee can do about it - other than quit and move to another job.
2) the “winners and losers” psychological effect — both in actual terms of which individuals gain or lose power, and also the purely morale/psychological sense that your “side”/your “team” has gained or lost importance in the world. Like sports fans, employees feel elated when their side “wins” and deflated with their side “loses,” even if there’s no noticeable impact on their own life.
3) the “cultural isolation effect” — that despite areas of cultural alignment between the two management ranks, there are certain to be areas of disconnect/misalignment that will create conflict/tension, which can be difficult to resolve in the absence of a shared history. There’s no precedent as to how disagreements get settled, and that in itself causes anxiety.
We do understand some of the patterns by which organizational cultures get destroyed. Culture collapse (or culture transformation, depending on your perspective) seems to often be related to new management and new incentive structures, accompanied by mass defections of old (acculturated) employees and mass hiring of new employees (who then don’t acculturate to the old model, but to a new one). (Of course, in some M&As, high turnover in targeted employee groups is one of the goals, so attrition can be a feature, not a defect.)
(Side comment: there’s some interesting research to be done here on the social network effects, cascade behaviors and influence dynamics related to M&As. For example, how many of your officemates have to bail before you too decide to pull the rip cord; what are the characteristics of tipping points that precede a spike in employee defections; what factors influence an employee’s decision to stay or leave; etc.)
There’s room for improvement in how corporate cultures can be successfully addressed during M&A. M&A is often treated as purely a financial, and then operational/execution, activity: sum the two revenues, cut out X percent of the overlapping costs, and voila, improved profits. Companies could benefit from more and better tools for the cultural issues.
Scale (i.e. # employees) impacts the culture patterns in M&A. In general, small-scale M&A — large companies buying small companies — are a known method for a large company to take proven products and accelerate their sales via leveraging the existing capabilities of the larger org. Cisco is famous for this — see this article here from BusinessWeek in 2007.
Larger-scale M&A seems to have a different risk profile, mega-mergers in particular. With two corporate leviathans, perhaps there’s simply so much organizational mass — so much organizational weight and momentum, so many combatants, so many points of conflict and integration — that mega-mergers may be at inherent high risk for long-term, draining, internally focused cultural conflict.
Microsoft with ~80,000 employees and Yahoo! with ~14,000…solely in terms of headcount, that looks like Time Warner (~70,000 employees pre-merger) and AOL (~15,000). That comparison isn’t reassuring. Hewlett Packard-Compaq is more encouraging; that mega-merger of ~90,000 and ~60,000 is thought to have been pretty successful. There’s a CNet article here that touches on some of the culture issues of HP-Compaq. (Compaq’s earlier merger with DEC, however, is generally considered to have been flubbed.)
A few people doing work on organizational culture and M&A:
A great article here by Gene Gitelson, John Bing and Lionel Laroche called “The Impact of Culture on Mergers and Acquisitions” that lists Seven Pitfalls on the Path to Merger Success, from “#1: Preoccupation” to “#7; The Guiding Light” (the need for visible and articulate leadership).
Glenn Carroll of Stanford and Richard Harrison of UT-Dallas have a book on “Culture and Demography in Organizations” where they advise using demographic and process analysis of the two employee groups as a tool for understanding the culture issues (summary of book here). They study processes and patterns in hiring, promotions, retention and turnover, etc., in addition to the standard demographics of age, gender, ethnicity etc. Looking at who comes and goes, who gets promoted to leadership positions, etc. reveals lot about the culture.
Colin Camerer at CalTech has done some clever work — he studies what he calls “code [words]” in organizations — the corp terminology and slang — as a marker for organizational culture. The frequency of a given term can be observed and counted, thus providing a graphical representation of the two verbal cultures combining over time. He turns these into computer models of M&A behavior.