Four big “Cs” traditionally matter to merging companies – competencies, content, channels and customers – but Tim Galpin tells Tsering Namgyal that a fifth should be added: culture.Given the cross-border nature of so many mergers and acquisitions (M&A), post-merger integration of companies presents significant challenges today, especially at the cultural level, according to Timothy J Galpin, associate professor of management at the University of Dallas and a widely published specialist on M&A.
To avoid mistakes, merging companies may need to look closely at how the combining corporate cultures fit with each other and also pay close attention to issues such as the people factor, says Galpin, who has spent nearly 20 years working with clients around the world on M&A integration, strategy execution, human capital management and culture change.
Since the issue of culture has turned out to be an important factor in the success of merger cases, companies may need to add sophisticated “cultural fit” analysis to the traditional analytics of M&A, he says.
The need for such analytics is underscored by the fact that most transactions these days are transnational in nature and often involve several countries, with different cultures and customs. Such analyses will show how corporate cultures are likely to mesh together post-merger and if there are causes for concern over the compatibility of the corporate cultures.
“Since 2003, when global economic activity picked up again, companies have had a focus on growth and M&A has been a quick route to adding the four Cs – competencies, content, channels and customers,” says Galpin.
He suggests certain points that investors can monitor to gauge whether deals are likely to succeed. Apart from cultural compatibility, they may want to ensure that the management plans for integration early enough and will follow through on those plans quickly, normally within the first year after the deal is completed. It is also imperative that managements have clear integration targets and milestones and implement a measurement tracking and reporting process throughout integration.
However, Galpin concedes that such due diligence is easier said than done for investors because they are often not privy to the fine detail of the M&A process. They normally lack the knowledge and the rationales invoked by the board and the directors to push forward the deals.
“But there are a few externally visible signals that identify when a merger or acquisition is going well or not so well that investors should be looking for,” says Galpin.
Investors can monitor such things as whether there are signs of deterioration in service or the company continues to be handled well, whether key managers are staying or leaving and whether product quality suffers or continues to be good after the deal is closed or announced.
Galpin notes that M&A analysis can take many forms, but the most common analyses that acquirers undertake include studies of variables such as financial performance, customer segments, products, technology and operations of the target companies.
Despite the challenges, he predicts that M&A activity will continue to stay at a high level or even register further growth over the next 10 years, owing to globalisation as well as companies’ growth strategies. “Companies seek M&A as a short cut to growth,” he says.
Galpin predicts that the highest M&A activity over the next 10 years will occur in sectors such as banking, telecoms and biotech, energy and car manufacturing.
Most investors are likely to think that M&A deals around the world are driven by the logic that the bigger the company the better the economies of scale and the greater the competitive edge, Galpin says. But he points out that sometimes small businesses are also privileged over bigger rivals. “Both big and small are good business models for success, as each have their advantages.” Bigger companies may have more resources, a much wider reach and more visible brands, he explains, but small companies generally consider their advantages as being more nimble, niche market-orientated and better able to concentrate on the quality of goods and services. Smaller companies are normally also good at looking after their customers.
The worst place to be, says Galpin, is in the middle, because mid-sized companies typically have the worst of both worlds – the slowness of the big companies and the limited resources of the smaller firms. This is the why mid-sized companies tend to be good acquisition targets. “The mid-sized companies will either merge with each other, or be acquired by larger firms,” says Galpin.
M&A processes are rife with challenges. The hardest part is implementing the mergers and integrating the companies after the transaction is sealed. The integration can be a long process, particularly if it involves differing or even polarised corporate cultures. “Effective integration is the biggest challenge in M&A,” Galpin says. “Deals look good on paper but they are complex and difficult to integrate effectively.” He suggests that integration efforts should begin as soon as the transactions are completed.
The processes are further complicated when the transactions involving companies in strategic industries trigger nationalistic debates or even turn into a political issue at both local and national levels. Grassroots organisations and labour unions would also like to have a voice in the debate, particularly when these deals involve layoffs in one part of the world or another. Sale or acquisition of high-profile companies may well be a cause of concern for citizens. Galpin mentions, as an example, the debate generated by Daimler’s purchase of Chrysler in America.
Deals may create social unrest in the countries where transactions trigger large-scale layoffs. Attention to the people factor is particularly important, Galpin believes, for corporate marriages to endure in the long term.
“Cross-border deals are more complex in that companies encounter languages, currencies, cultures, laws, regulations and business models that they may not be familiar with,” Galpin suggests. “This added complexity means that companies doing cross-border deals need to focus on even better detailed integration planning and execution to ensure success.” Tim Galpin is also a senior fellow at the New York consulting firm Katzenbach Partners and formerly worked as an adviser for Watson Wyatt, an international consulting firm. He is the co-author, with Mark Herndon, of The Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level. He is the author of Human Side of Change: a Practical Guide to Organization Redesign; and of Making Strategy Work: Building Sustainable Growth Capability.