Cultural Change Management During M&A Deal Execution

Cultural Change Management During M&A Deal Execution

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“Failure to anticipate and solve cultural changes during an M&A can result in poor business performance, loss of key people, and synergistic leakage”

Mergers and acquisitions have undeniable value. According to an analysis report of acquisition deals over 11 years by Bain and Company, companies that engaged in M&A activity had greater average shareholder returns than inactive or other passive companies. However, many leaders become derailed in merger integration, while having the best of intentions to employ M&A to enhance their organic efforts. Therefore, people, culture, change management, and communication are cited as the top causes for integration failure by business leaders, yet few firms fully comprehend how to address these difficulties.

Mergers cause significant organizational concern about the future: in most situations, the operating model and culture of one or both merging organizations will alter drastically. These changes go beyond a new name and top leadership; they test an organization’s basic identity, purpose, and day-to-day operations. Employees can be rattled by even minor tactical changes, such as new cost policies or cafeteria alternatives. Anticipating and resolving these “organizational emotions” might help lay the groundwork for successful integration. Failure to anticipate and solve them can result in poor business performance, the loss of key people, and synergistic leakage.

One fundamental issue here is management’s proclivity to focus on improvements that will directly aid in capturing a deal’s value targets while mostly ignoring those necessary to sustain and improve the company’s health. For example, organizational design is always top of mind in the early stages of merger planning, but corporations frequently overlook cultural differences until problems arise.

What do we mean when we say ‘cultural changes’ in the context of Mergers and Acquisitions?

A comprehensive, effective integration program should anticipate the full range of changes your employees might face as a result of the integration. Managing through such an attempt entails two broad tasks: cultural change implementation and operational change management.

When we talk about culture, it refers to what an organization stands for and how the work is carried out. From the more evident difficulties (such as attitudes toward work-life balance and employee empowerment) to the less noticeable ones, the unavoidable culture differences between the two merging organizations must be addressed and tackled well. (feedback styles, directness, punctuality at meetings). During mergers, cultural issues, as well as the frustrations that develop when the merging organizations’ working standards and management methods do not align, generally come to the fore.

Adapting to new operating models, such as new structures, processes, and governance, is the second challenge in mergers, and it presents some of the most apparent and tough issues for employees. The fundamental issue is that corporations frequently are unable to reveal these changes early in the merger planning process. Employees must grasp the process and the timescale until the organization can announce its decisions, which necessitates an effective, proactive communication plan. Meanwhile, processes must be rebuilt and conveyed in such a way that the basic challenges, such as how different teams will interact and choices will be made, are highlighted. Employees must thoroughly comprehend these changes to function effectively when the deal closes.

If we try to find conclusions, there are four major reasons why we should be concerned about implementing good change management

  • Reinforce new behaviors and shift mindsets to improve our capacity to achieve planned business results and ROI.
  • Minimize delays to shorten the lifecycle of change projects due to apprehension and aversion to change.
  • Keep staff involved and informed about the change to minimize productivity loss.
  • Increase employee satisfaction and retention by efficiently managing personal transitions and boosting engagement.

Clarifying operational changes and training personnel to grasp them are both important aspects of the integration team’s planning job, which we can discuss in more detail in a future piece. This article focuses on how businesses can incorporate cultural transformation.

Change the way you think about culture

Setting the direction, energizing the company, hardwiring the changes, and driving execution are the four steps of our approach to change management during an M&A. Although these stages overlap in some ways, organizations are unable to carry out all of the parts at the same time.

Setting the direction

The new leadership management needs to agree on the operating model, cultural priorities, and integration architecture as early as feasible in the integration planning process. All of these decisions must be made per the deal’s business logic. Although a complete strategic review would never be possible by the end of the year, significant parts of the strategy—including, of course, any substantial changes—should be identified and reviewed. While these movements appear simple, they are frequently difficult to execute. Legal and regulatory constraints might make it difficult, if not impossible, for merging leadership teams to hold the necessary dialogues early in the integration planning process. In any event, executives are frequently strapped for time and prioritize just what they perceive to be the most important operational objectives, leaving cultural issues to be addressed later. For example, in some mergers, the leadership team creates an excellent plan to capture synergies only to discover that it failed to account for cultural differences, resulting in ineffective execution.

Therefore, it becomes very important for the leaders to set the direction properly for all the members so that in the later stages of the deal, any kind of unwanted confusion can be avoided.

Re-energize the company

People at all levels of the company must grasp the rationale for change before adopting and supporting it. The organization must present a clear and compelling case for change, and the leaders must model it regularly in person and in all of their communications to assist them to acquire such an understanding—which may also produce energy and enthusiasm. The message must be consistent with the deal’s strategic rationale, allowing executives to tailor it to the needs and perspectives of various internal and external stakeholders.

It’s crucial to deliver these ideas early because employees will only learn the key aspects after multiple efforts, each with a different method. By gathering ideas from the integration teams, an early start also helps employees throughout the business engage with one another, provide comments, and develop their own stories. In the meanwhile, executives can use focus groups, polls, social media campaigns, and community-building activities to involve the organization more broadly. This type of communication engages employees and gives them the impression that the changes were driven by the business as a whole rather than imposed from on high.

Putting changes in place or hardwiring the changes

Companies should hardwire new procedures, policies, structures, and governance into the merged organization at this phase, focusing on levers like new evaluation and performance-management systems, decision rights, and cross-functional business processes. Companies frequently organize large-scale capability-building programs, ranging from leadership development to training in new systems, to help staff adjust to these changes.

Cultural hardwiring is also required. Taking the example of a recent integration, the CEO and his senior team put a lot of effort into developing the new organization’s culture and considering the consequences for the company’s governance and important cross-functional processes. The team addressed its internal dynamics in a series of working sessions and decided on the required decision rights, governance, and interaction. It also decided which new ways of working its members would role model as a group. Once the top executives reached an agreement, they kicked off a series of similar sessions for each of their leadership teams. When disputes arose, the top team could refer back to these agreements, which also helped it to role model the new ways of working consistently.

Companies may create a solid change-management strategy based on the influence model’s quadrants: creating knowledge and conviction, implementing reinforcing mechanisms, expanding skills, and ensuring that executives lead by example.

Execution is the key

A corporation must actively monitor the execution of its change-management program, as well as the alignment of the senior team, to sustain the period of change into the development of a newly merged organization. A pulse survey, for example, is a brief questionnaire sent out regularly to employees across the firm to gauge their impressions and feelings during the integration process. Key organizational health indicators, such as staff attrition, absenteeism, recruiting referrals, and inbound job applications, can be shown on a tracking dashboard monitored by the integration management office (IMO) and the integration leader. Linking the core KPIs to the primary change themes ensures that the effort truly embraces the deal’s business goals.

The integration leader, as well as the integration-management office as a whole, should play a key role in developing the change program, offering feedback, and even managing its implementation. For example, the IMO has a birds-eye perspective of the entire organization’s pulse, including the risks connected with proposed changes, their supporters, and areas of ambiguity. As a result, it may be in the greatest position to identify change agents and implement programs that are appropriate for the merging firms’ current cultures.

Because the outcomes are difficult to quantify, managing change in mergers can be intimidating. However, when good change management aids the merging firms in moving in the same direction, mergers can add more value and have a longer-term impact.

Our team at MergerWare thinks that capturing value and avoiding early risks are the keys to a successful transaction. We ensure better transparency and control of the system by using a sophisticated M&A platform where executives may automate and systematize their procedures across the organization.

MergerWare is a SaaS-based, secure enterprise digital platform dedicated to creating the most efficient M&A deal management and execution process from discovery to due diligence to post-merger integration activities.

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Author

Muskaan