Mixed Mergers Spell Trouble

Companies with markedly different cultures set themselves up for failure when they try to merge. Pro or con?

Pro: Due Diligence on Cultural Differences Is Overlooked

Experts may argue that some can beat the odds, but the truth is that most mergers fail. A Businessweek study showed that 61 percent of buyers destroyed shareholder wealth. And there is no doubt that culture is a culprit.

Successfully merging is dependent on analysis of the context and culture of the company being acquired. Context—which includes business performance and incorporates traditional due diligence of reviewing financial records, labor contracts, etc.—informs what changes are needed in the new company and how quickly they should be made.

Analyzing culture is more difficult, and most companies simply do not know how to manage this type of due diligence. Leaders must get a pulse on the company’s culture prior to the merger by examining its behavior, relationships, attitudes, values, and general environment. This provides critical insight into the organization’s readiness for change, which translates into how quickly the leader of the new company can implement changes without facing backlash and causing irreparable damage.

AMN Healthcare Services has completed 11 acquisitions over the past 25 years. Some worked better than others. Its chief executive, Susan Salka, explained to me that the least successful acquisitions generally ran into trouble because the acquired company’s management philosophies and values didn’t aligned with those of AMN. She describes these as the "basic pillars of what drives" behavior and results. It’s hard to move forward when those aren’t aligned.

In theory, leaders can overcome the challenges of integrating companies where culture differences run rampant. But in practice, most won’t.

Con: Dramatically Different Cultures Can Co-Exist

Sure, culture is important, and companies should enter into mergers and acquisitions with their eyes wide open. But dramatic differences in culture don’t necessarily spell disaster. According to Sue Cartwright and Carey Cooper, authors of Managing Mergers and Acquisitions (Butterworth-Heineman), it depends on what kind of "marriage arrangement" you’re looking for. If you want an "open marriage," where each partner operates independently, dramatically different cultures can co-exist. Look at the portfolio of companies that Johnson & Johnson has acquired over the years: Personal products company Neutrogena certainly has a different culture from that of stent maker Cordis.

Similarly, a "respectful marriage" can bring together companies with different cultures that want to learn from each other and build an even better culture over time. For example, even though they were in the same industry, Price Waterhouse and Coopers & Lybrand had very different cultures when they merged in 1998. By learning from each other, they eventually created today’s PricewaterhouseCoopers, which operates differently from the way either of the legacy companies did.

Different cultures become problematic with a "traditional marriage," where one of the partners is forced to adopt the traditions and culture of the other. The issue here is not just cultural difference—but willingness to change. Chrysler, for example, was not willing to become like Daimler, and their 1998 merger was indeed a disaster. In contrast, many companies acquired by General Electric and Cisco Systems willingly change their cultures and become highly successful.

So do "mixed mergers" spell trouble? Only if you want them to.

Opinions and conclusions expressed in the Debate Room do not necessarily reflect the views of Bloomberg Businessweek, Businessweek.com, or Bloomberg LP.

Reader Comments

George Bradt

"Only if you want them to." Come on Ron--nobody goes into a mixed merger wanting them to spell trouble. The issue is not the type of marriage. The issue is the combination of context and the culture's readiness for change.

I certainly agree with you that dramatically different cultures can co-exist. But the data says that is merely the possibility, not the norm.

Harry Kangis

Two key reasons that I'm with George on this big time (well a third if you count that he is my friend).

First, the rate of mergers and acquisitions that don't achieve their promised economics is a much higher 75%-80%. You'd be better off just taking your money to Vegas! Divergent cultures add a substantial risk factor that will require a great deal of time and resources to offset this. Most acquirers lack the will and patience to address this.

Second, having done three acquisition integrations myself, I believe there is no such thing as a true "merger" of equals. There is always an alpha player. You better make sure that the other culture is prepared to substantially buy in to the alpha's culture, because that is what is going to happen!

Bill Berman, Berman Leadership Development

George's notion that you have to match company cultures in order to have a successful merger/acquisition is overly simplistic. Since companies make acquisitions (hopefully) either to improve their current position, eliminate a competitor, or change their business model, executives and management consultants will rarely focus on the culture over the financial benefits. And culture is such an amorphous concept that it would be virtually impossible to match companies on it. Unfortunately, Ron's belief that you just have to clearly define the type of "marriage" is a bit of a truism. If all you want to do is combine balance sheets, you don't have to do much regarding culture, but that isn't how the vast majority of m&a is handled.

The real answer is that m&a activity is most likely to succeed when both companies treat each other's people with mutual respect, give each other the assumption of positive intent, and work their tails off to bring the two organizations together. Rosabeth Moss Kanter (2009) makes the simple point that value is created when you devote as much time to integrating the people (not talent or human capital) as you do to integrating the finances and IT systems.

George Olcott

It depends on the extent to you want to integrate the operations of the organisations as Ron says. However, the "all you need is the willingness to change" sounds too easy-by-half analysis for how to make mergers of disparate cultures work, especially if you want full integration. Corporate culture evolves over a long period and is shown to be very difficult to change. Most people also assume that it is up to the acquired company to change. It is in many cases just as important for the acquiring company to adjust itself to the new reality. Cultural due diligence is a must: not just of the other company but your own as well.

George Bradt

Responding to Bill Berman's comment that "George’s notion that you have to match company cultures in order to have a successful merger/acquisition is overly simplistic":

That's not my notion. Matching company cultures is not overly simplistic. It's impossible.

Per my friend Mr. Kangis' point that there are no mergers of equals, and Mr. Olcott's point that cultures evolve, the issue is not matching; it's understanding the context and the culture so that you can manage the evolution. This is what's so difficult about merging cultures and why the odds are stacked so far against "mixed mergers."

Ron Ashkenas

In answer to George...perhaps I should have said that "mixed mergers" only spell trouble if you let them. As others have commented, putting two companies together is hard work no matter how willing people are to change. I would also add that it's hard work even if the cultures are similar--because in reality no two companies have exactly the same cultures. Even if they look similar and profess to have similar values, there are subtle differences that can override the best of intentions. For example, when two advertising firms merged a few years ago, they thought that it would be simple because the cultures were alike. But when they started working together, they realized that they communicated differently, placed different emphases on creativity, and treated customers differently. This made things extremely difficult, and the combined firm was ultimately not successful. So in the end it's up to leadership--to determine the goals of the merger, and drive the necessary work to achieve those goals. If they relax in their intensity because they think the cultures are similar, it can lead to the same failure as with mixed cultures.

Wes Siegal

Too often culture, especially of an acquisition target, is viewed as a liability rather than an asset. Too often growth play acquisitions fall apart when the culture of the acquired company is not leveraged, resulting in talent and customer loss (think Daimler-Chrysler). Cultural differences are more likely to become liabilities when the strategic purpose behind an acquisition is poorly realized. But when acquisitions are well realized, a synergistic culture is more likely to emerge (think Disney-Pixar).

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