M&A Synergies Framework—Management

A merger leads to many difficult management decisions. Successfully leading an organization through a transition requires management to understand that cultural preferences dictate which leadership styles will be most effective. A merger has more chance for success when management will take time to understand the leadership styles that employees expect and best respond to.

Leadership

Leadership Turnover. “Executives from acquired firms are an intrinsic component of the acquired firm’s resource base and […] their retention is an important determinant of post-acquisition performance.”1 Leadership turnover refers to any changes in top management within an organization. Because of the business combination, there may be a redundancy in leadership and the acquiring company will face decisions about which executives to maintain and which to let go. Additionally, some executives could elect to leave of their own accord. A research study on management turnover revealed that, “…executives were more likely to stay when they were offered challenging positions with greater status and when they viewed the long-term effects of the combination to be positive.”2

“The clashes of the differences of the management styles in M&A deals can be the biggest reason of the deal failure,” and high leadership turnover is often indicative of trouble within a merger.[3] Top management could leave for many reasons, but if they leave because they are unhappy with the merger, it is likely that employees will follow. Employees tend to follow the example of top leaders in their company. Keeping executives visible to employees will teach employees how to act under their changing circumstances. Companies should make a concerted effort to keep communication lines between the corporations the same pre- and post-merger to have a smooth integration.

It is important to plan out management turnover beyond just the CEO position; other management positions may be just as important and may make or break a deal. For instance, in the attempted merger between marketing firms Omnicom (USA) and Publicis (France), the companies made a provision for CEO responsibilities yet failed to articulate other leadership positions. This caused tensions later when Omnicon’s CEO wanted to fill other positions with his own CFO and general counsel. Ultimately, this deal was called off, citing tax and regulatory issues as the primary reasons. Still, the tensions which arose due to disagreements surrounding leadership turnover precipitated the other cited reasons.3 Merging companies should focus on retaining the top management of both companies to improve employee morale and give employees an example of how to act in a different cultural environment.

Employee Turnover. Employee turnover refers to the decisions to retain or release employees in the case of M&A, as well as employees that voluntarily leave due to the merger. “Employees’ organisational commitment appears in many ways to be critical to the success of an acquisition.”4 Both employees of the target company and employees of the acquiring company generally see mergers and acquisitions as a threat to their job security since there is often a redundancy of positions. Management must carefully employees about organizational direction if they are to be retained. Gaining loyalty may be a strategic goal: “[…] securing the commitment of acquired employees will enhance the attainment of the operational and strategic objectives of the acquisitions, and commitment to organisational changes.”5

In fact, retaining the target company’s employees, as well as their knowledge and skills, can be as important—or even more so—than that of retaining upper leadership.

”It is often helpful to keep employees of the target company, especially if the target was purchased for their unique talent or culture. […] Not only are effective managers required to operate the autonomous units within a firm, but the transfer of valuable, knowledge-based resources that are tacit and embedded in the firm’s social system may be dependent on the retention of certain employees throughout the organization, rather than simply senior executives.”6

In some cases, obtaining skilled employees may be the most important motivation for the transaction, and the transaction price might include a premium for this talent. For instance, in 2000, Broadcom acquired SiByte, a chip making company, for an amount that was considered “paying $18 million for each of SiByte’s 113 engineers,” a price tag not unusual “when there’s a shortage of this kind of talent.”7

Employees may choose to walk away from a company following an acquisition, but tendencies may vary depending on culture. For example, the Japanese CEO of Suntory, a whiskey company, admitted to the press that there were difficulties with retaining U.S. employees after acquiring the company Jim Beam: “Niinami said that while Japanese employees generally don’t leave a company, Americans have a three-to-five-year horizon, and will leave if they can’t find a better job within the company after that. ‘I don’t have solution yet in my hand, but at first definitely we have to recognize differences like that,’ he said.”8 As human capital represents one of a company’s most valuable assets, merging companies should concentrate much of their efforts and attention on retaining talent. This will lead to optimal results in the short- and long-term.

Large Power Distance vs. Small Power Distance (Hofstede). The power distance dimension refers to one’s toleration towards unequal distributions of power between lower – and higher-ranking members of society.9 A culture tolerating large power distance accepts a hierarchy in which everyone has a place, status is important, and inequality is normal. Small power distance cultures prefer an egalitarian structure where organizations are flat, inequality is considered undesirable, and direct communication between boss and subordinate is appropriate. The merger of Daimler-Benz and Chrysler exhibits the importance of knowing each culture’s preference in order to act and communicate properly between ranks. The conflict between large and small power distance was evident in the Daimler-Chrysler merger:

”Daimler embraced formality, hierarchy and structured decision making, while Chrysler promoted cross-functional teams and free form discussion. German executives spoke English while none of the Americans spoke German. Moreover, the organizational structure was an issue as Chrysler operated as a strategic business unit while Daimler had a traditional structure with autonomy of its 23 business units.”10

Chrysler, an American company, practiced small power distance by maintaining cross-functional teams while Daimler Benz, a German company, worked in hierarchical chains. This was one of many conflicts, which eventually resulted in the merger failing. Management and employees of both companies in an acquisition should learn the power distance preferences of the opposing company to know the best form of communication between managers and subordinates. Figure 3.1 illustrates the spectrum of high versus low power distance countries.

Figure 3.1: Adapted from Hofstede 2001

Decision Making

Consensual vs. Top-down (Meyer). The consensual vs. top-down value focuses on who makes decisions and how decisions are made. In a consensual decision culture, “decisions are made in groups through unanimous agreement.”11 In consensual cultures, it is important that everyone’s opinion is heard. In contrast, top-down decision cultures operate with authoritative leaders acting as the primary decision-makers. Management should understand the decision-making process of the target company to correctly make and communicate decisions with the target’s management and subordinates.

When Ford acquired Volvo, employees noticed the difference in decision making between the American and Swedish organizations:

”As perceived by employees from both organisations, Volvo is a decentralised firm and teamwork oriented. The participatory style of management prevails in the Volvo corporate culture. Volvo’s decision making process happens at the lower levels of the organisational structure. ‘That is the Scandinavian way of working together, there is no hierarchy…you get credibility due to the knowledge you have and to your contribution to the company. It has nothing to do with ranking.’…By contrast with the Swedish organisation, Ford is perceived as a structured and hierarchical American operation.”12

Because culture is relative, successfully navigating the decision-making process requires companies to understand where their counterparts fall on the scale. This will precipitate enhanced collaboration at every level of the combined company and enhance the company’s global mindset. Figure 3.2 illustrates the spectrum of consensual versus top-down countries.

Figure 3.2: Adapted from Meyer 2014

 

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Next: M&A Synergies Framework—Environment

  1. Cannella., A. A., & Hambrick, D. C. (1993). Effects of Executive Departures on the Performance of Acquired Firms. Strategic Management Journal, 137-152
  2. Krug, J. A., & Hegarty, W. H. (2001). Predicting Who Stays and Leaves After an Acquisition: A Study of Top Managers in Multinational Firms. Strategic Management Journal, 185-196
  3. Faelten, A. I. (2016). Essays on mergers and acquisitions. Tilburg: CentER, Center for Economic Research. Retrieved from https://pure.uvt.nl/ws/files/13554302/Essays_on_Mergers_and_Acquisitions_Anna_Faelten_October_2016_003_.pdf, p.92
  4. Hassett, M. (2011). Organisational Commitment in Acquisitions. In C. L. Cooper, & S. Finkelstein, Advances in Mergers and Acquisitions (pp. 19-38). Emerald Group Publishing Limited
  5. Hassett, M. (2011). Organisational Commitment in Acquisitions. In C. L. Cooper, & S. Finkelstein, Advances in Mergers and Acquisitions (pp. 19-38). Emerald Group Publishing Limited
  6. Ranft, A. L. (2006). Knowledge Preservation and Transfer During Post-Acquisition Integration. In C. L. Cooper, Advances in Mergers and Acquisitions (pp. 51-68). JAI Press Inc.
  7. Alexander, K. (2000). Broadcom to Buy Chip Maker SiByte for $2 Billion in Stock. LATimes
  8. Moritsugu, K. (2016). Suntory’s president says merging the US and Japanese work cultures remains a challenge, more than 20 months after acquiring the maker of Jim Beam. Usnews.com. Retrieved from https://www.usnews.com/news/business/articles/2016-01-15/merging-us-japan-work-cultures-a-challenge-for-beam-suntory?offset=20
  9. 10 minutes with Geert Hofstede… on Power Distance 10112014 [Video file]. Retrieved from http://geerthofstede.com/training-consulting/online-lectures/
  10. Aldaoud, T. (2015). M&A Towards a Global Reach Strategy: Cross-Border M&A Success and Failure: The Case of Daimler-Chrysler Merger. Faculdade de Economia Universidade do Porto, p. 47-48
  11. Meyer, E. (2014). The Culture Map: breaking through the invisible boundaries of global business. New York: PublicAffairs, p. 150
  12. Salama, A., Holland, W., & Vinten, G. (2003). Challenges and opportunities in mergers and acquisitions: Three international case studies – Deutsche Bank-Bankers Trust; British Petroleum-Amoco; Ford-Volvo. Journal of European Industrial Training. 27(6). 313-321