Importance of Strategy Alignment & Culture in M&A

December 14th, 2017

Significant merger and acquisition (M&A) activity thus far in 2017 shook up various markets; tech companies acquired grocery stores, airplane manufacturers merged, and pharmaceutical giants grew even more powerful. 2016 saw nearly 1,500 mergers and acquisitions in the U.S., totaling roughly $1.5 trillion. Although deal value fell 22.5% from 2015, deal flow in 2016 was strong despite significant geopolitical uncertainty, which surely carried over into 2017. However, not all M&A succeed. It’s estimated that about 70%-90% of all acquisitions fail, turning M&A opportunities into a risky business. In this blog, we’ll highlight some major reasons for why M&A may fail, and emphasize how important it is to properly analyze and vet your target company in a merger or acquisition.

According to Aswath Damodaran, M&A crumble for several reasons, such as poor analysis or cultural differences, which may lead to a lack of synergy within the new combined company. An example of this was in the 1990s when Daimler and Chrysler merged. As great as it seemed at the time, once the deal was finalized, divisions of the combined company were at war with one another over “the level of formality, philosophy on issues such as pay and expenses, and operating styles.” This brings up the question: why does culture and strategy have such a big impact on M&A, and how do executives better understand and assess culture to have more successful transactions?

Firms seek M&A opportunities for several reasons, including growth, strategic positioning, and expansion into new markets. However, M&A investments can be risky. Considering the diverse goals for businesses which are active in M&A, a large percentage of failures are tied to the misalignment of business strategy, such as PwC’s acquisition of Strategy&. PwC attempted to expand its strategic consulting practice globally; however, due to the legality of the deal and the global consulting practice, among other things, the acquisition didn’t succeed as expected. This hurt PwC and the global brand tremendously because the company’s domestic and global strategies weren’t aligned. Unsurprisingly, this led to significant losses. When companies don’t perform the appropriate levels of due diligence and M&A deals don’t properly align with the business strategy, inefficiencies occur. As a result, poorly executed deals may even slow company growth, hurt shareholder value, and drastically impact management going forward. While many M&A deals look great on paper, they may still fail if the companies don’t objectively analyze the opportunity.

Even if the business strategies are perfectly aligned, the combination of multiple company cultures can lead to failure through the misalignment of core values. Although analyzing a potential acquisition based on quantitative data is truly important, so too is understanding the more qualitative cultural and operational differences through numerous in-person conversations. In fact, the Society for Human Resource Management found that over 30% of mergers fail because of simple culture incompatibility. When companies merge, there can be overlaps, reorganizations, and new responsibilities. According to a CNBC article which referenced an Accenture survey, more than 40% of 900 workers who were part of a merger or acquisition stated that it took roughly three or more months before they understood how the deal would impact them in terms of reorganizations, responsibilities, and layoffs, among other changes. Clearly M&A activity shakes up more than just in the financial operations of a company.

Failing to properly assess the quantitative and qualitative factors of M&A can be even more impactful for ARM companies due to the highly fragmented nature of the industry that leads to more individualized company cultures and market specializations. However, the potentially lucrative strategic and financial M&A opportunities in a fragmented market are hard to ignore.

As we’ve discussed in previous blogs, reports, and speaking engagements, with data that can be accessed for free on KG Prime, the industry is trending towards consolidation. Factors such as heightened operating costs, expensive technology investments, and increasingly strict regulations tend to make the potential synergies associated with M&A even more appealing. From a strategic and cultural point-of-view, it’s essential that ARM companies objectively assess the opportunities before them since the potential clash in culture and operations can be extreme. As such, collaborating with a professional, experienced, and thorough strategic advisor to help guide the process is crucial.

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