I want to talk about post-merger integration, because memetics gives us a fascinating insight as to why this rarely works.
You would expect that rational managers would ensure that any acquisitions they make create wealth rather than destroy it: in other words, that the economic value of these businesses combined would be greater than the economic value of the businesses as separate entities. However, repeated studies over the last seven decades have consistently shown that only a small proportion (20–35% – the actual proportions vary from study to study) of mergers deliver benefits, and about half actually destroy shareholder value.
Additional research by Deloitte and Touche has shown that demergers – breaking the company up – increases the wealth of both parent corporation and the spin-off. Yet company break-ups are relatively infrequent.
So mergers and acquisitions, which destroy value, are a dominating forces of the economy while demergers, which create value, are infrequent. What on earth is going on here?
Of memes and mergers
Some types of company benefit from economies of scale (not all - see Camrass and Farncombe 2004), and, if companies of this type are individually below critical mass but together above it, then a merger may be the best option. There are also some ‘natural monopolies’ where competition does not yield benefits to the customers, generally in tightly regulated markets such as utilities. Other oft-quoted reasons for mergers include ensuring access to a critical skill or technology, or ensuring access to new markets or to a global production base.
These arguments are valid, although alliances between companies usually deliver the end result without the drawbacks of decreased efficiency. Finally (and infrequently), small companies may buy a much larger company in order to make themselves an unattractive takeover target - the so-called ‘poison-pill’ acquisition.
On to the perverse reasons: private (unlisted) companies have the luxury of taking a long-term view, but most publicly owned companies need to deliver quarter-on-quarter growth if the CEO wants to survive. The poor CEO has only three levers he can pull to deliver this:
- Organic revenue growth, achieved by selling more stuff and hiring a few more people to make it, is the time-honoured way of growing revenues and profits. This takes a lot of effort by a lot of people, and if the net margin is low it can take a long time to work. Besides, it hardly gets the CEO’s picture on the front page of the Wall Street Journal, does it?
- He can make the company leaner, reducing the workforce and operational costs. An effective way of doing this is to outsource everything the company doesn’t actually need to do itself, and slimming everything else down. This is highly effective at increasing margin, but there are limits to how many times an organisation can be cut without it bleeding to death.
- Finally, he can increase revenue by buying another company and hope that the debt and integration costs don’t eat up too much of his new profit stream.
Why acquisitions destroy value
So a common reason for mergers is to increase profit by increasing turnover and margin, which means a relative decrease in operating costs. Say a CEO runs a $2 billion company making 10% net profits and buys a $1 billion company also making 10% net profits - you would want an outcome whereby the future company is worth more than $3 billion and will generate more than $300 million profit, right?
But what usually happens is that the future company is worth less than the sum of its parts and profit often decreases as well. A CEO contemplating a merger is taking a huge risk with only about a one-in-three chance of it increasing the wealth of the owners.
Our CEO has overlooked three factors that will reduce the profitability of the new entity:
- He probably needed to borrow heavily to acquire the target company. Although he will have taken into account the interest and debt repayments in his calculations, if the economy is anything other than buoyant, those repayments can eat all the profits, and more.
- He knows there will be merger integration costs, such as paying for redundancies or the short-term loss in efficiency that results from the merger, and unless this integration process goes well, the short-term loss of efficiency ends up as a long-term loss of efficiency.
- What he probably won’t have factored in is that the new company is inherently less efficient because it takes more effort to move information through the larger structure. It’s harder to find out what is going on, and harder to exert control, even when there are no meme clashes.
Memetic drivers for mergers
I think that there are two main memetic explanations for mergers, which go part-way to explaining this recurring form of economic madness. áThe first are the memes that the CEO is running and the second is the underlying memes of the corporation.
The mind of the CEO will be a swamp of power-seeking memes. He will get a buzz out of power, and will actively seek to gain it. áHow do we know that? Because people who are not motivated by power will not be driven enough to achieve, or even care about achieving, senior roles. If a mind is nothing more than a stack of memes then power seeking is a useful trait to have. So the first explanation of the irrational number of mergers is that the power-seeking memes of the CEO lead him to increase his empire and provide rewards for doing so.
The second explanation returns us to the old idea that organisations are memeplexes, and memeplexes exist to perpetuate themselves. Most of the people in decision-making positions in our company will be running its strategic memeplex, and will believe that the company is worthwhile and a good place to work (otherwise they wouldn’t be there).
Because they value these strategic memes, they will be motivated to explain and extend them to others: this can be seen in hiring procedures, induction programmes and, of course, mergers. This process can often be quite explicit, especially in the way that the buyer targets the staff of the target to reduce hostility to the merger. We also see an anti-meme in the way that staff in the target company spread ‘ghost stories’ about how unpleasant the buyer is.
So a combination of the CEO’s ego and the drive of the company to replicate itself may be factors that overcome the realisation that mergers, on average, are a losing bet.
And de-mergers? Given that break-ups generally yield better results than mergers, you might expect them to be commonplace. They are not, and this might be because the spun-off corporation (which does fewer things) will run a smaller set of memes than its parent. Since the corporate memeplex wants to reproduce with fidelity, shrinking the corporation is less attractive to the managers who are running it.
Ironically, the process of spinning off and starting up the new entity allows examination and simplification of both memeplexes, and the cleaner set of memes will lead to greater efficiencies and therefore to better financial performance in both parts of the corporation.'
Why mergers fail
Let me start by saying that I really don’t want to overplay the contribution that meme clashes play in merger failure. Probably the largest cause of failure to deliver value from a merger is that it was a stupid idea in the first place, either because the strategic fit was wrong, or because the expected sources of value did not exist. But I am certain that meme clashes contribute to merger failure, a topic we explore here
Take, for example, Chrysler’s merger with Daimler-Benz at the end of the 1990s. This is seen as a catastrophic failure: within three years, the combined company had lost two-thirds of its value. There were certainly culture clashes - it was evident that American and German middle managers loathed each other - but this massive destruction of value can’t be put down to integration failure, because very little integration occurred. Brands, manufacturing and distribution chains remained essentially separate, and Mercedes and Chrysler sank with their hands around each other’s throats.
Even if we exclude the ‘bad idea’ mergers, we run straight into the next class of failure, which we can call ‘badly executed’ mergers. Most of us who have been involved in mergers have seen some decisions taken that might be charitably called insane, but I don’t believe that taking bad decisions is as fatal as not taking decisions at all. The enemy of a good merger is delay. One of the consultancies I used to work in had a saying: “if it doesn’t get done in the first hundred days, it doesn’t get done”, and that’s good advice. A merger inevitably introduces meme clashes (of strategic and tactical elements) into the combined organisation, and if these don’t get resolved they will quickly poison it.
Successful integration requires strong leadership, a good plan, clear communications and relentless execution. A fairly obvious (but common) error is failing to define who is to occupy the top two or three layers of management (and, by implication, who is to leave). If this is not done immediately, the company will be paralysed for months by a set of brutal political duels. Similarly, process and data integration is often put aside as ‘too difficult’, causing trouble for years thereafter as the parts of the company struggle to work together.
Then we get to short-term efficiency losses. In the early stages of a well-managed merger, there is usually a honeymoon phase, where management paints a rosy picture of the future to staff and (more importantly) analysts - a future of product synergies, shared markets and reduced costs. When it comes to changing the organisation or decision-making processes of the company, the differences between the cultures cause resistance to change, and this damages both acquiring and acquired corporation. Post-merger uncertainty reduces the effective productivity of an organisation from 70% to 25%, hence the need to get it over with as quickly as possible.
Yet I’ve been involved in a number of merger failures, either as victim or perpetrator, and I’ve seen mergers that should have worked. There was a reasonable strategic fit, where the acquirer was clear about their intentions, the political issues were sorted out speedily, data and process integration was not a major problem. But they still failed. And now I think I know why.
Tread softly, for you tread on my memes
We all invest a lot of emotional effort in our work - we have to, or we won’t be able to survive the tedium and disappointment that every working day brings. Let’s take a look at how that emotional effort can undermine the merger process.
As we will see in the section on being a good corporate citizen, the people who thrive in a corporation and create most of its wealth are those who believe and who most espouse the corporate values - i.e. run a reasonably complete copy of the corporate memeplex.
Put yourself in the shoes of one of these managers in a company that has been suddenly acquired. As you weren’t the one doing the buying, there is an implication that your memeplex was somehow inferior, and pretty quickly it becomes clear that you are to be forced to adopt the buyer’s way of thinking if you want to carry on getting paychecks. In some cases, this just means switching tactical memes, which can be stressful, but in other cases it can mean a complete change of vision and values.
But you can’t just discard everything you believe and hold dear, can you? You will resist integration, and when that doesn’t work you will have to grudgingly defect to the new memes, or find another employer that is more in tune with your way of thinking.
So the missing factor in the failure statistics is cultural imperialism - the buyer expects the people in the acquired company to rapidly assimilate a new meme set. This expectation may be subconscious or explicit, but it’s almost always there. The levels of resistance in the acquired company to assimilation will depend on the depth of the difference between the two companies in management methods and culture. They also appear to depend on the degree to which the takeover was hostile, perhaps because a fostered sense of resentment strengthens the immune system.
Getting post-merger integration right
Just as I was happy to ‘borrow’ Aristotle’s ideas back in the section on the art of persuasion, am now going to borrow from what I think is the best book on merger strategy ever written. This book comes from that excellent sixteenth-century management consultant, Nicolo Machiavelli. He has an unjustly bad reputation, but for practical advice he has few peers.
In The Prince, Machiavelli advised Lorenzo de Medici that he had a number of options when acquiring another country. An acquisition, Machiavelli pointed out, was easier when the customs of the acquired were very similar to that of the acquirer; all you had to do to ensure a successful transition is kill all the old ruling class and leave the people be. Peace would ensue and you might even learn something from the conquered state.
When the customs and laws were different, however, Machiavelli’s advice was to crush the old culture rather than trying to change it. The prince could do this, quite simply, by slaughtering absolutely everyone and colonising the country with large numbers of people from the dominant state, equivalent to absorbing the assets of the acquired corporation and firing all the people. This avoids cultural clashes by eliminating one of the cultures, but it only works if all you need is the assets.
Machiavelli also talks about enforced submission: imposing the Prince’s will on the subjugated culture and ruling through fear. Anyone who has lived through a bad merger knows how well that works.
Next, Machiavelli accepted that isolation can work well: where you allow your new principality or company to exist as an entirely separate subsidiary with its own culture. Of course, the synergy savings you promised the analysts will never be delivered, but you are less likely to destroy corporate value by fighting a war that neither acquirer or acquired will win.
The option you choose will of course depend on the outcome you want to achieve - if you only need access to the acquired company’s technology, then you can eliminate all but a few engineers: remember to take Machiavelli’s advice that brutal actions should be ‘swift, effective and short-lived”.
At the other extreme, isolation is appropriate when you have no wish to integrate the acquired company because you are treating it merely as a source of profits or an asset for later sale. This is common where the buyer is a private equity firm, and while it avoids most of the problems of enforcing submission or cultural synthesis, it is not stress-free: the bad memes that made the acquired company a target in the first place still have to be tackled, and many of these will be dear to the workforce’s hearts.
If however, you need to assimilate the acquired company and there is no clearly dominant culture (for example, because it was a ‘merger of equals’), then synthesizing a new culture for both organizations is the least worst option.
Synthesising a new culture
Many managers talk about the need to ‘create a new culture’ following a merger, but few attempt it and even fewer succeed, despite paying small fortunes to management consultancies. Cultural synthesis is very difficult, but here are some ideas...', '
First, let us assume that there is a clear rationale for, and no substantial opposition to, the merger, and that you have a good plan to address the reorganisation required. We have to assume that, because, if the rationale is unclear or stupid, or if there is substantial internal opposition to the merger, or if you have no plan, then you are already doomed.
If there is a substantial asymmetry in the sizes of the companies (e.g. if the acquired company was much smaller), then it may be easiest to suppress the minority culture. This is a standard ‘culture change’ problem based on asserting your current culture and assimilating the new employees, and we’ve looked at that in the articles on Change. The immune system of the acquired company will be a problem, and here Machiavelli’s advice on colonisation is sound: you should consider a reorganisation that breaks up the smaller company and merges it into the fabric of the buyer - this will prevent the employees of the old organisation forming pockets of cultural resistance. If that isn’t possible, then identify some ‘true believers’ in your culture and place them in positions of influence in the new organisation. Cisco used this tactic by folding its acquisitions into its operating arms.
If you must suppress the existing culture, be resolute but not thuggish: the person seen to be driving the integration must also earn the right to spread his memes in the eyes of those to be assimilated. That right comes not so much from power and status as from the basic human aspects of courtesy and persuasion. A successful outcome depends on the willingness of the people you need to keep happily surrendering their own culture, and to do this they must perceive that the new culture is worth adopting. Morale could be fairly low (because the new employees are relatively powerless) and if the process is handled insensitively then the results will be widespread disillusion, acts of sabotage and petty theft, staff departures, and increased sickness and absenteeism.
Regardless of how good a job you do at communicating the values of the new culture, there will be those individuals, generally less porous to new ideas, who will not wish to move away from their current meme set, and you must expect a high attrition rate. You may want to identify key individuals or sets of workers whom you do not want to lose and target these with special ‘culture counselling’ sessions that give them the chance to explore their doubts and fears with you. Again, Cisco’s process handled this very well.
But where the acquirer and acquired are about the same size, or where you seek to retain the entire workforce, you will be forced to try out cultural synthesis. But why is this so hard?
Imagine being the leader of the Roman Catholic church and trying to integrate the essential elements of Hinduism into your religion - different numbers of gods, different holy books, vastly different religious practices, and different ideas about good and evil. How do you think that would go?
Synthesising organisational culture is rarely that bad, except possibly where there is an international dimension, but the problems are similar. The new culture must contain elements of the previous cultures that were consistent with each other (remembering, of course, that memeplex consistency is more important than memeplex perfection), and decide what is ‘true’ where inconsistencies exist.
Creating a new culture from scratch that is consistent with two precursors is extremely difficult, but hopefully you will have gathered some ideas on how to do it on this website. You do have one thing on your side: although you have a much larger population who have to abandon some of their old memes, the fact that it’s a modification of everyone’s value set as opposed to outright abandonment on the part of some of them means that resistance will be widespread but meek.
Let’s finish this section on mergers with Machiavelli again: “There is no more delicate or dangerous task, nor more doubtful in its success, than that of a leader who introduces changes. For he who innovates will have for his enemies all those who are well off under the existing order, and only lukewarm supporters in those who might be better off under the new”.