Shall we dance?On April 28, 2014
There is a view in some quarters that companies merge but people and brands don’t. How often have we heard that shareholder value is ultimately damaged when acquisitions take place? According to a study by KPMG1 only 31 percent of acquisitions lead to enhanced value, in the rest corporate deals have a negative or neutral effect. It seems strange that the numbers in respective balance sheets and market data add up prior to an acquisition, but are undermined once a deal takes place.
In the same study, when senior executives were asked what companies would do differently leading up to an acquisition, the top response was plan earlier for post-deal management. Significantly, conducting cultural due diligence was cited as a secondary issue. This would seem to support the contention that organisations do not place culture high enough in their list of priorities, which can have bottom-line consequences when acquiring another company.
Indeed the corporate landscape seems to be littered with examples of organisations coming together but somehow lacking the “cultural glue” to reap the potential synergies promised. BMW and Rover, Time Warner and AOL, and Marks & Spencer and Brooks Brothers all seem to be examples of deals that culturally and commercially went wrong. Somehow people and process failed to deliver the added economic value that logic and planning suggested should happen.
Brand, Culture, and Business Performance
It is difficult to find evidence at a sufficiently detailed level to answer why this negative phenomenon occurs. However, anecdotally we hear of post acquisition scenarios where distrust rapidly enters the corporate atmosphere, integration costs escalate and worst of all leadership teams are perceived to be making decisions in a vacuum. There seems to be little appreciation of the issues employees face deeper in the organisation as they struggle to understand the implications of such fundamental change.
Another survey, carried out by US research company ORC International, targeted at communicators in some of the world’s leading companies, listed “understanding what the corporate brand stands for” as a critical factor in realizing business potential. The inference of the report was if employees understand their company’s values and purpose they are more motivated and active in contributing to its success. Given the fact that acquisitions create uncertainty, one can assume that corporate brands involved in such a situation can lose “emotional capital” as employees become distracted by news and rumour surrounding the acquisition.
Brand and corporate culture would therefore seem to be organisational bedfellows that managed effectively have the ability to galvanize people and their behaviour in the pursuit of improved business performance. However a lack of focus on these intangibles can unravel the most compelling logic for a corporate takeover.
The CEO of BP, John Brown, reiterated this during the company’s successful takeover of Amoco: “You have to create a single organisation—with common processes and standards, common values and way of working, which everyone can recognize.” During the transition to BP Amoco he recognized the importance of crystallizing the key integration issues to all employees—outlining the behavioural and performance milestones that the new company needed to achieve. There was no doubt that the cultural traffic was primarily one-way as the two businesses came together. BP was migrating its “way of doing things” into the enlarged organisation and this lead to some senior Amoco defections in the first 100 days. However, this was factored into BP’s strategy as it implemented a paternalistic approach to the initial stages of integration. It was willing to accept losses in the Amoco leadership team to clarify the aims, culture and positioning of the new business.
The successful integration led the company to outperform the oil and gas index by 20 percent as investors began to appreciate the global direction of BP Amoco. The unified management team and workforce delivered quickly on potential efficiencies delivering US$ 2 billion of cost savings in its first year.
There is growing acknowledgement that corporate culture does have a direct impact on the performance metrics that most organisations consider to be vital if their businesses are to flourish. Apart from the bottom line other important indicators include employee satisfaction, customer loyalty and corporate reputation. The “Value Profit Chain model” created at Harvard Business School established a robust framework to explain the interplay between employee satisfaction, customer loyalty, reputation and business success. It shows a virtuous circle that begins with satisfied employees in a strong and empowering culture, over-delivering against the needs of their customers. Customers are subsequently loyal and willing to pay a premium for the service they receive which in turn elevates the company’s reputation with the investment community.
So if brand and culture are so important what are the lessons that can be learnt in an acquisition situation when dealing with them? What causes some acquisitions to underachieve relative to their initial expectations where as others succeed?
Acquisition Challenges and Blows to the Brand
All integration teams in an acquisition scenario will talk about the importance of getting employees on side. However, all too often the reality of the post acquisition environment undermines this aspiration. Differing brand values and management styles create an environment in which functions and departments struggle to grasp key priorities and realign their activities. The first casualties are all too often employees as the pace of change begins to outstrip their ability to assimilate new information. Sightlines to cultural imperatives become impaired and behaviour that was once straightforward and intuitive becomes hesitant and unsure. This is a dangerous phase for any organisation as it becomes more inward looking and starts to take its eyes off the needs of its customers and just as importantly the activities of its competitors. Finally, shareholders witness an erosion of value in the corporate brand as its sense of purpose diminishes and potential transactional benefits are lost.
A current example of this seems to be Asda and Wal-Mart. A situation where at first glance two similar business models came together to create a win-win situation. Asda, a clear value player in UK retailing, is acquired by a similarly positioned US company. The benefits seemed all too clear and achievable—economies of scale in purchasing, increased investment in IT and infrastructure leading to enhanced service levels and even greater value for the customer.
However, so far the story just hasn’t quite played out that way. Qualitative research4 indicates that Asda customers have become increasingly confused with the proliferation of products and offers in the company’s stores—the Wal-Mart philosophy of volume and variety at a great price has not translated well to the UK market. Customers have detected the emergence of a “warehouse” feel to the stores where confusion—”you just don’t know where to look” has replaced clarity and the shopping experience has become strained.
The company has also received negative publicity in the way it deals with its employees.
A recent tribunal in Newcastle fined the company £850,000 for attempting to circumvent employee’s collective bargaining rights and some have been quoted as saying the new company lacks “compassion.”
It’s as if the things that Asda did naturally and well and were derived from its brand culture have become subsumed in the post acquisition phase. The net effect is lost market share to a resurgent Sainsbury’s and a struggle to redefine the Asda Wal-Mart brand proposition to employees and customers alike.
There are however clear cases (in addition to BP Amoco) where companies get it right and manage to achieve the synergies first outlined in the in the early stages of the deal. The key question is of course what are they doing right and can it be applied to other situations not necessarily in the same sector?
Brand and Cultural Balance: Getting It Right
An acquisition that springs to mind is that of VW and Skoda. The circumstances could not be more different from the Adsa Wal-Mart scenario, not only in terms of sector but also the respective positions of the two main brands. One a German brand renowned for quality and engineering, the other a peripheral player targeted at the lower end of the market with a questionable reputation for either of the above qualities.
It was clear that the integration team had devised a “collaborative and nurturing” strategy for the future development of the business VW had acquired. They wanted to avoid the “winner/loser” acquisition scenario and the leadership team talked about the virtues of Skoda’s history and culture. Integration teams and a wide cross section of employees in both organisations attended internal “learning” forums and shared their respective brand experiences. As Professor Jan Kubes of IMD said, “Volkswagen had the vision and heart to reawaken the dormant expertise of Skoda and its employees.”
VW understood that there was positive equity in the heritage of the Skoda corporate brand. It is one of only four automotive manufacturers with a 100-year unbroken history including a strong reputation in rallying. At the same time VW invested over DM 9 billion in new plant, people and working practices. It also safeguarded the autonomy of the Skoda corporate brand identity. This process was wide ranging from the retention of Skoda’s core values of Intelligence, Attractiveness, and Dedication to the continued production of a formal annual report for the company providing detailed financial information on all aspects of the company’s performance.
VW through its efforts has managed to migrate to Skoda the central tenets of its culture and brand in terns of engineering excellence, quality and reliability, whilst at the same time creating the appropriate internal and external “signposts” to encourage collaboration rather than confrontation. In essence it understood the functional and emotional employee “touch points” that needed to be addressed if the transaction was to be a success.
Understanding and managing the integration of culture and brand values is not a panacea for all acquisition problems; however, it does represent a strategic process that can bring people together with a unified sense of purpose. When organisations bring clarity, consistency and leadership to the issue of culture the change process can be more effectively managed with tangible benefits to the bottom line.
The first challenge facing integration teams is to establish the degree of cultural alignment (paternalistic, collaborative, nurturing, autonomous, etc.) required for their particular situation. This process should be targeted for completion in the pre-deal phase and form a key part of the cultural due diligence program.
The degree of cultural alignment adopted will vary from one acquisition to another depending on the degree of brand absorption envisaged. In certain cases, acquired organisations will retain a high degree of brand and cultural autonomy. One need only think of L’Oreal’s purchase of The Body Shop—the likelihood is that that the acquired brand will retain its distinct identity and culture, with any change limited to back office functions. At the other end of the spectrum when GE acquires a company it is rapidly immersed into its brand culture and the GE “way of doing things.”
Once the “alignment curve” has been established appropriate performance metrics can be put into place and disseminated to employees throughout the organisation. Alignment indicators are a useful tool in measuring progress in the post deal phase, and tend to cover both functional and emotional attributes. Personal motivation, organisational and managerial support, brand empathy and clarity of purpose will fall into the emotional category where as system and process integration will be essentially functional. The indicators could be synthesized from visioning workshops carried out with employees across the organisation.
Understanding cultural and brand issues is not a panacea for all acquisition problems, however it does represent a strategic process that can guide and unify business objectives. Company culture and brand identity represent the ultimate conduits by which organisations can achieve change and they have the potential to create a common language that encourages greater collaboration and improved business performance.
KPMG the Morning After—Driving for Post Deal Success, 2005.
European 300—ORC International, 2004.
Sasser and Hesketh, Harvard Business School.
ajder- associates research. Focus groups carried out in London, Reading, Bristol, Leeds, Liverpool, and Newcastle, April 2006.
Lessons from the Changemasters, Kube & Shaner, IMD, 2006.
Milorad Ajder is Managing Director of the Ipsos MORI Reputation Centre