Grant Thornton Hong Kong: M&A – Cultural Alignment for Successful Integration

Hong Kong

Too often companies put together look great on paper but are fraught with management and structural problems that end up turning deals into busts. Acquiring companies often underestimate the problems that different corporate cultures can inflict on a merger. In fact, the difference between success and failure is often not a matter of strategy or money, but of relationships, culture, and politics.

Putting two companies together usually gives the combined entity the resources and capabilities to compete with market giants. It can also create dominant positions in many markets around the world. However, that was not the case of advertising giants Publicis Groupe SA and Omnicom Group Inc. After these companies merged, the two CEOs – Publicis’s Maurice Lévy and Omnicom’s John Wren – agreed to jointly lead to the business for thirty months. While that sounded good, the reality was that they couldn’t agree on a management team; a way of splitting their duties; or even on which firm should be listed as the acquirer from an accounting perspective. The deal was eventually scuttled in 2003.

“Putting two companies together usually gives the combined entity the resources and capabilities to compete with market giants. It can also create dominant positions in many markets around the world.”

The challenge of putting the corporations together can be further exacerbated if the two companies possess vastly different business models and cultures. For example, in Valeant Pharmaceuticals’ long-running hostile takeover campaign of Allergan Inc. – the Botox-maker – the company executives of the latter expressed their disagreement with Valeant’s proposal to slash the amount of money that the company spends on research – a move that would probably lead to layoffs of hundreds or even thousands of its employees. As such, Allergan has disregarded Valeant Pharmaceuticals’ proposal and agreed to be sold instead to generic pharmaceutical manufacturer Actavis plc., a company that shares similar values.

Cultural Issues Affect M&As

Integration can be defined, in general terms, as the process of combining two companies into one entity at every level. Post-merger integration is the most often-cited concern that could significantly impact the success of an M&A deal. It has to be a multi-dimensional exercise with inputs from various perspectives, including strategy, new management, organisation, business, finance and accounting, tax and legislation, information system, and human resources. Yet, studies show that plenty of M&A s fail to yield desired expectations or even erode shareholder value.

The little secret about M&As is that the human dimensions and culture are at least as important, if not critical, as strategy, pricing, and positioning. Cultural incompatibilities are commonly found to have both a direct and indirect linkage to integration failures. Unsuccessful cultural integration can lead to distractions, loss of key talents, and failure to achieve critical milestones or synergies.

Cultural Integration Key

Many studies agree that cultural alignment is critical to a successful merger. Yet, due to the intangible nature of culture, and because of time constraints, management prefers to focus on tangible and measurable aspects, such as financial data and legal matters. Cultural integration is then left unattended or, at best, postponed to the post-deal phase. Nevertheless, culture is not something that can be changed or integrated without a well-defined plan; it requires time, attention, and considerable effort to merge two distinct cultures into a new collaborative and productive environment.

Approaches to Cultural Integration

How can two different cultures be integrated to achieve full value? First of all, we have to understand the term culture. Corporate culture comprises the beliefs and behaviours that determine how a company’s management and its employees interact and handle outside business transactions. Often, corporate culture is implied – and not expressly defined – and develops organically over time from the cumulative traits of the people that the company hires.

A company’s culture can be reflected in its dress code, business hours, office setup, employee benefits, turnover, hiring decisions, client satisfaction, and other operational aspects. No companies are cultural twins and thus careful attention is required in understanding the cultures of both merging companies and managing the integration process.
Having said that, it is highly recommended to start any cultural assessment early and make sure that the human dimension of the combination is incorporated into due diligence and integration planning from the get-go, as opposed to it being relegated to the backburner. Organisations can start with cultural assessment during the due diligence stage, which provides preliminary indications on cultural alignment or misalignment of the two merging companies and determines whether the existing cultures can be aligned with the overall business strategy.

With the cultural and strategic alignment assessments ready, organisations can reach a tailored sale and purchase agreement and formulate integration strategies that facilitate a smoother transition and a more effective integration to capture post-merger synergies. The time spent on cultural assessment need not to be long but should be sufficient to obtain a basic understanding of the cultural and strategic backgrounds of both companies.

Second, more time should be spent on the development and implementation of the action plan. Due to their intangible nature, culture-related issues are likely to be unpredictable. Addressing these issues can be a challenging task. In most M&A transactions, companies focusing on cultural integration tend to achieve post-merger synergies. Apart from an analysis of cultural differences, these companies also evaluate cultural opportunities and roadblocks, which guide their efforts into the right direction. Companies also take initiatives in redesigning their organisational structure, determining leadership assignments, and modifying human resources practices such as compensation and benefits.

This is then transmitted to employees who need to be aware of the company’s new direction and its meaning. Change may create frustration and cause stress amongst employees. Proper communication from management – preferably with a clear vision on the integration process – can reduce scepticism and doubt. With employee retention strategies and other team building activities, companies can establish a new culture and concentrate on post-merger business goals.

Value of Cultural Alignment

“People are valuable assets to an organisation and play an integral part to the success of a business. Effective people management is the key to achieving post-merger synergies so as to maximise the optimal outcome,” says Barry Tong, Transaction Advisory Services Partner of Grant Thornton in Hong Kong. As cultural integration is one of the key factors of a successful merger, it is important to have a dedicated team to manage and oversee the whole integration process.

The causes of merger failure can be complex and may vary – there is no single model that fits all. Nonetheless, cultural misalignment is commonly considered a direct and indirect hurdle to success and its mismanagement can hinder a company from obtaining synergies. Cultural and strategic alignment, active management of cultural integration, as well as proper communication between management and employees, are the suggested measures that ensure smooth cultural integration and contribute to a successful merger.

Conclusion

Cultural compatibility can have a significant impact on the ultimate success of an M&A transaction. It is suggested that a separate cultural integration plan be studied, created, and worked upon in the early stages of a merger. Proper management of cultural issues is the key to realise successful post-merger integration, especially from a people perspective. i

About the Authors

Barry Tong has nearly 20 years of experience in financial due diligence, transaction supports, recovery and reorganisation, forensic investigation, assurance and initial public offerings. With ample experience, Barry has literally helped clients in every stage of a deal cycle – from pre-deal due diligence and SPA support, to purchase price negotiations and post-deal dispute resolution. Over the years, he has been advising clients from almost every industry, including consumable and industrial products, health care, energy, security solutions, logistics, luxury goods, entertainment, education, banking and securities, construction and hotels, telecommunication, airline, information technology, media, food and beverages.

Benjamin Fong has extensive experience in supporting mergers and acquisitions, financial due diligence, forensic accounting, reviewing business valuation and internal control and monitoring financial forecast and cash flows. He has also provided auditing services for listed companies and multi-national corporations in Hong Kong, serving a variety of clients and industries including trading, manufacturing, retailing, construction, engineering, information technology and software solutions, logistics and service providers.

About Grant Thornton Hong Kong

Grant Thornton Hong Kong Limited is the member firm of Grant Thornton International Ltd (GTIL) in Hong Kong. We provide independent assurance, tax and advisory services to clients with a unique ‘one firm, one China’ approach, whereby we are fully integrated with Grant Thornton China with 22 offices and around 3,000 professionals across China. Our firm serves all parts of the China market and has a client base that encompasses more than 140 public companies and over 2,000 state owned enterprises (SOEs) and privately held businesses, as well as foreign-invested enterprises. Together with the wider international network, we help dynamic organisations around the globe unlock their potential for growth by providing meaningful, forward looking and actionable advice every day.