FSN: Bridging the cultural divide

Bridging the cultural divide

28th April 2008
Why is it that companies still have problems when it comes to mergers and acquisitions? In many cases the blame is placed firmly at the door of the IT department, but this is far from a closed case. Mark Dye , FSNs contributing editor, reports.

Can it be that in this day and age we're still struggling to communicate with one another and have problems getting IT to do the same? That perhaps we're sometimes not all as clever as we'd like to be? When it comes to mergers and acquisitions (M&As) you would be forgiven for thinking that this might be the case.

The general idea in this scenario is that by bringing together two separate organisations the resulting merger or acquisition will deliver commercial value and benefits to the newly created company and its shareholders. At least that's what's supposed to happen.

However, evidence suggests this is far from true. Indeed, according to a recent study from the Hay Group, less than one third of mergers actually create any kind of new value as those involved struggle to combine corporate cultures and structures. The same report also suggests that 97 percent of mergers involving UK organisations failed to achieve stated objectives.

The report, ‘Dangerous Liaisons: Mergers and Acquisitions – The Integration Game', which looked into more than 200 major European M&As since 2003, provides worrying reading for those in the boardroom, particularly those involved in the acquisitions boom of 2006-7 which saw deals exceed a staggering €1.35 trillion just two years ago.

The group is just one to voice concerns that firms are prioritising financial and systems due diligence at the expense of vital, intangible assets such as business culture, human capital, organisational structure and corporate governance, all of which remain critical in this process.

Their figures lend weight to this argument, with 93 percent of business leaders making traditional due diligence a high priority while over half focused on IT systems integration. However, with more than half of those questioned seemingly knowing that neglecting to audit non-financial assets such as business culture increases the danger of making a wrong acquisition and 49 percent pointing to the need for a robust form of reporting on intangible assets, it makes you wonder how we even get to this point.

Bloor Research was equally as damning of the part IT plays in the M&A process in its report ‘Mergers and Acquisitions and their IT Impact', preferring to cite poor planning and execution of the IT integration process post-merger or post-acquisition as reasons for undermining the success of M&As.

Their results showed 50 percent of respondents admitted to having failed to integrate assets for their newly merged business within three months when the deadline to disclose consolidated financial information comes into effect. A further third did not expect to have this within two years.

“Post-merger IT and operations integration are essential for providing the foundations, bringing people and culture together, and for achieving cost savings through synergies and improved processes,” adds Rick Simmonds, partner and head of Financial Service Sector at Alsbridge, a global outsourcing consultancy. “This area has often been ignored in the past, possibility because with a rising market fuelled by cheap credit, operational improvements and integration benefits were given lower priority, as returns can be made in a rising market just by maintaining the status quo and focusing on revenue generation.

What the above does suggest though is that this failure to examine the differences between firms and their culture at the outset leads to very real problems that hamper firms further down the line.

“Integrating intangible assets six months after a deal has gone live is too late,” says David Derain, a director at the Hay Group leading its M&A work in EMEA. “Companies should be examining the compatibility and differences between the two firms well before the deal is made public, in order to have a clear plan of action in place right from the start.”

The trouble is that obtaining information on corporate culture and human capital has proved difficult until now, something 70 per cent of senior executives agreed with in the Hay Group's findings.

“With the laws on M&As being as they are, it is difficult to see how anything can be changed,” admits Clive Longbottom, service director, Business Process Analysis a t Quocirca. “Full due diligence requires that all parties are aware of what's happening, but this isn't easy to do with the legal framework that is in place, and with so much of the pre-work on M&As done essentially in the dark its not surprising that much of it fails or dilutes the value of the combined entity.”

“Often, it's crossed agendas that can derail or undermine a successful merger or acquisition,” says Gary Read, president and CEO, Nimsoft, his company having just gone through this process with its acquisition of Indicative Software.
He says the two progressed only after a thorough review of the respective company cultures and similarities. “We found that both companies shared a common product strategy and a common focus on customer satisfaction,” he adds. “Both executive teams believed that the acquisition would strengthen their position in a well established marketplace against four large incumbent players. Having established this, it was possible to move forward with the plans.”

As Read points out, the ‘blame game' is often a smokescreen used to cover up a lack of open and honest discussions and possibly a mismatch of expectations between two companies.

“While it may be difficult to obtain accurate information about the corporate culture and human capital ahead of any merger discussions, some well planned questions, such as a customer satisfaction rates and support management, target markets and product development can shed light on business strategy and philosophy,” he adds.

However, once such discussions are under way, priority must be given to establishing the strategic business advantage to be had from the M&A.

This, says Read, means the executive team should have frank discussions about how the management should be organised to take advantage of the strengths of the merged companies.

”In our case, we were fortunate that both sets of executive teams broadly agreed on the core strategy and were able to openly discuss and agree the management priorities,” he adds.

However, in many cases, as Longbottom points out, so much of the work done in the primary stages is carried out behind firmly closed doors. This is one reason he believes that the IT side of things cannot be taken into account as the more variables that become common knowledge early on pose significant risks to deals going ahead.

This, he says, means CEOs tend only to be concerned with things at the highest level and whether the combined companies can save money for instance. “IT will always be way down the list in this sort of thing,” he adds.

For Nimsoft and Indicative, the advantage came from the fact that the two operate in a market where IT integration is an everyday occurrence.

“Our software solutions allow companies to manage their IT infrastructure from the perspective of IT service delivery,” adds Read.

Consequently, this meant the two considered how respective technologies would come together and how the supporting IT infrastructure would be merged to support the new business.

Part of the business plan for the combined company included a detailed analysis and roadmap of exactly what IT would be retained or removed and how the two differing IT environments would combine, overlap or operate independently.

“The fact that the IT aspect is anchored in the business integration and merger plan is central to how enterprises can ensure that their merger gains are not wasted through a failure of the IT environment,” adds Read.

About Us