Cultural requirements in M&As

It was a “wedding made in heaven” according to the CEO. Business and financial synergies were aplenty. The combined entity would have revenue diversification, geographic de-risking, and an increased product range; creating the fifth largest seller in the industry. Shareholder value was evident — it would be the third largest entity in terms of revenue and market capitalization. On a merged turnover of over USD 150 billion, the cost savings were estimated to be USD 1.2 billion (~20% of the estimated profit). There were supply chain benefits and R&D knowledge to be shared. While it was cross border, governments fully supported the transaction. And yet the Daimler-Chrysler merger failed! It was not valuation or lack of efficiencies or poor diligence or any tangible factor; but a simpler, yet more nuanced reason — cultural and people difficulties.

Multiple studies, conducted by a diverse set of institutions, indicate that in the 21st century cultural and people issues in M&A are amongst the top 2 challenges that need topmost attention for success. While corporate leaders focus on valuation, diligence, synergies etc. the softer aspects may take a back seat creating cracks. In the current VUCA world, permitting insecurities and conflicts of interests to form in the wake of an M&A derails an aligned vision. When people have different views of tomorrow, actions are even harder to predict and damage control.

The DaimlerChrysler merger is a point in case to the above.  

Potential conflict of interest: The merger prospectus carried the following risk factor- Certain members of Chryslerís management and the Chrysler Board may have interests in the Chrysler Merger that are different from, or in addition to, the interests of Chrysler stockholders generally, and that these interests may create potential conflicts of interest.

Select senior management team including the CEO, were given compensation structures such that even if the merger failed and their employment was terminated within two years of the union, they would be eligible for lucrative pay-outs. Compensation of US companies traditionally seemed to be higher than that of the more socialistic minded Europeans. However, the structuring of salaries at the highest levels in this manner left discomfort.

The rise of insecurities: The Daimler organization was hierarchical with a management and a supervisory board. In contrast, the Chrysler team was cross-functional with independent directors on the board. Post-merger, the two chairmen Robert Eaton (Chrysler) and Jrgen Schrempp (Daimler) communicated a single vision and a robust integration plan led by a competent team. However, within six months, the perception was that Daimler’s way of life was prevailing. Then Robert Eaton left and a vacuum became conspicuous. Star performers departed. German senior management was sent to assume key positions. This led to deepening of anxieties and mistrust. 

Lack of an aligned vision: Chrysler management was not familiar with Daimler’s non-automotive business. Post-merger, they were unable to understand the decision making on those fronts. The 51 percent control of the entity by Daimler and unfamiliar ways of working, further created different aspirations. Schrempp’s pursuit of an Asian target despite failed talks with Nissan only furthered Chrysler employee discontent. 

Cultural differences: The different compensation and governances structures have been mentioned. But the cultural differences that plagued work varied from daily interferences such as language to the more challenging labor regulations, including but not limited to pension schemes. The Germans apparently conducted meetings in German, making it difficult for the Americans to participate. That Daimler kept aside USD 26 million for pension pay-out was not palatable for the Chrysler team. There was little done to educate people about the different ways of life in either country, and the typical work practices.

While cross border M&A have more culture and people issues, it is not only then that they need to be focused on. The AOL Time Warner deal, which in 2001 was 3 years after DaimlerChrysler was probably fraught with these challenges even before the deal closed. Senior executives, on either side, were caught unaware by the deal announcement. Such a surprise created mistrust. With a difference in approach to, for example, marketing and business development, people reorientation and goal setting was paramount but could not be achieved. The stock price of the combined entity plummeted more than 10x in less than a decade, and that speaks for value destruction.

Generalizing, these M&As are assessed based on financial and/or strategic valuation. Thus, there could be merit in leaving the acquired entity largely independent, leading to culture having the least impact on the success of the combined entity. For example, the acquisition of Whatsapp by Facebook. The driving factors of the acquisition, as enumerated by experts were – FB wanted leverage in the direct messaging space, access to a larger user database and diversification of revenues. But there was no desire to take away the independence of WhatsApp and FB has reiterated the same with its Instagram acquisition.

Coming together of equals, with the intent of driving learning and innovation along with harnessing strategic benefits from operations synergies, generates strategic & organizational efficiencies. Where need be, best practices are taken to formulate a common approach. Otherwise the entities operate in their own cultural environments as long as the strategic goals are met. Exactly what went missing with DaimlerChrysler and AOL TimeWarner. The complex alliance between Renault and Nissan in 1999 illustrates this. Renault excels in manufacturing small cars and Nissan specialty is large cars and light commercial vehicles. While the cultural foundation was very different, the decision to create cross shareholding and not merge the two completely led to acceptance. Strategic goals were defined to capture market share for each company’s core product base in the other’s home market. Cross training and cultural ambassadors were institutionalized. The success is amply visible today. 

When one company acquires another entity that seizes to exist in brand or culture, it creates an M&A where culture and people issues are most essential to focus on. Financial benefits maybe the primary assessment criteria for these deal types but integration needs a different mindset as resistance and friction are highest here. A good example, so far, is the acquisition of ING Vysa Bank in India by Kotak Mahindra Bank. Fairly soon after the merger, the branding changed on ING boards. ING personnel were absorbed and all staff were met by senior Kotak to communicate the roadmap. Office spaces were standardized and people from both entities moved to offices of the other as appropriate. The need for achieving coherence, the most important cultural requirement in this deal type seems to have been exhibited. According to MIT professor SC Myers, “Mergers are tricky; the benefits and costs of proposed deals are not always obvious”, and the most unobvious are people and culture costs. To prevent culture from eating up a good strategy, it is best to judge upfront, how much time and management effort must be devoted to softer issues; lest another debacle is created.