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Challenges with Mergers and Acquisitions

5 chapters

Challenges with Mergers and Acquisitions

It's no secret that mergers tend to fail. According to a KPMG study eighty-three percent of mergers do not boost shareholder return.

It’s no secret that mergers tend to fail. According to a KPMG study eighty-three percent of mergers do not boost shareholder return. Historically, roughly two thirds lose value on the stock market. The motivation that drives mergers can be flawed and, in many cases, the problems associated with trying to make merged companies work are all too concrete. Mergers are often driven for the wrong reason: Fear. Globalization, the arrival of new technological developments or a fast changing economic landscape all impact the executive’s decisions to merge or acquire other companies. When a company is acquired or when companies merge, the decision is typically based on a product or market fit, but employee differences are often ignored.

Communication challenges came out as one of the top factors that caused company synergies to fail. Communicating with employees, empowering them and creating a culture for them to thrive are all fundamental parts to integration.  When mergers and acquisitions occur, employees and management are generally left in the dark. Fear and lack of answers deter top management from providing the information that employees need to redirect their actions in the merged company. Rumours fill mystery and vacuums, and employees are left asking questions like: “Why is the organisation merging?”; “How will the merger affect my work?”; and “What support will I receive during the merging process?” This lack of communication creates distrust and uncertainty in the workplace, leading to lower employee engagement levels. Communicating is a skill that should come naturally, however it can be the hardest skill to learn. When managing any key project, such as mergers and acquisitions, it’s important to keep the employees from both parties informed at all times. Inform the employees of the progress of the integration through different communication channels (emails, intranet, etc.). Being aware of the questions, concerns and fears that employees might have, and, proactively communicating answers, will build transparency and trust, and lead to a successful merger.

During mergers and acquisitions, employee retention can be a challenge, as many believe it can be also a threat. Inherently, many mergers and acquisitions (M&As) deals have retention issues, which result from negative attitudes felt by employees. This can include uncertainty about the future of the organization’s direction, job security, perceptions of lack of leadership credibility and feelings of confusion due to lack of communication. In short, employees often lose trust in their organisation and feel betrayed by their leadership. During this process, it’s essential to keep employee turnover low because business continuity is key to realizing the benefits of the merger. there can be also large financial implications from the cost of hiring new employees. What’s more, employee turnover can result in loss of knowledge and customer relationships.

Generally, employees can have several reactions regarding the M&A. A merger brings several organisational changes, which can either lead to stress, anxiety, role conflict or to the feeling of not being treated fairly. These feelings often have implications for the employees and their future at the organisation. Companies must proactively work to maintain or regain employee trust to keep them and the intellectual talent they represent. Reduction and replacement strategies play a crucial role for the integration of a M&A. Its up to management to continuously communicate with employees to create transparency and address any concerns they may have.

Mergers and acquisitions usually occur because financial and business rationale add up, but fail to realise the cultural complications that may occur. Various studies conducted on the outcome of M&A’s show that 30% of them fail within 3 years, the majority are due to the disparities in organizational culture. During the process, it’s easy to treat a prospective transaction as purely mechanical and scientific process. However, the people aspect of any M&A is always critical. Culture fits can provide the assurance that combining two companies can gain synergies.

Culture is the long standing implicitly shared values, beliefs and assumptions that influence the behaviour, attitudes and meaning in an company. It’s difficult for a merged company to carry the culture of the previous company, because employees seldom replace their underlying values and beliefs in the long run. Generally, when mergers and acquisitions occur, they bring shifts in management practices and strategies, which can have negative implications on the people at the organisation. A sudden shift in these practices, brings disruption and unease to a company.

Pre merger due diligence will weed out all the measurable processes within an organisation, however it’s vital to conduct culture surveys to determine the norms within both organisations. Cultural influences have the potential to be broad and far reaching. For example, decision making at one company can be completely different to another, and this can be a huge issue after M&A.

  • There are various challenges like Cultural, communication and employee retention. These all challenges add up and hinder the companies way to gain the synergies from the merger or acquisition. Although companies do the due diligence before M&A, but but it only covers the quantitative part, cultural integration is as much important as the adding of financials.
  • For whatever reason mergers and acquisitions occur, it’s vital that the decision makers take the intangible factors into account. It’s difficult to quantify the human side to mergers, and they are often overlooked. Typically, CEOs would overlook this aspect because of the notion of being able to rehire employees and managers. However, in the long term this is detrimental to the outcome of the merged organisation. In order for CEOs, executives and managers to fully understand the extent to which the merger will affect the culture, they must develop a culture strategy.