Millions Lost in M&A Deals Due to Cultural Integration Issues

Sept. 29, 2008
New Mercer study finds 44% of respondents report that $1-$5 million was lost

Cultural integration issues in M&A transactions have direct financial implications on deal value, according to the results of Mercer's Cultural Integration Snapshot Survey. The survey, which included 119 organizations from across the Americas and Europe, found that more than half of respondents reported that the success of recent M&A transactions was negatively impacted by cultural integration issues.

Asked to estimate the financial impact of cultural integration issues, respondents differed only slightly between the American and European surveys. In the American survey, 44% of respondents reported that between $1 million and $5 million was lost or not realized in a significant transaction their organization had recently undertaken, with nearly one quarter estimating that it was over $5 million. In the European survey, 43% of respondents reported that between €1 and €5 million was lost or not realized in a recent significant transaction, with nearly 30% estimating that it was over €5 million.

"Cultural integration has a significant impact on the benefits of deals for organizations," said Elisa Hukins, the leader for cultural integration in Mercers M&A global consulting business. "According to several of our clients, the impact of cultural integration can be much greater when the synergies lost, as a result of cultural misalignments over time, are factored in. We are working with one organization that estimated that its failure to quickly manage conflicting cultures early on 'cost' them hundreds of millions of dollars of lost revenue over a three year period."

"Our research confirms that organizations are starting to turn this tide by developing processes, tools and capabilities aimed at reducing the risks and taking advantage of the opportunities presented by organization culture before, during and after a deal closes. Significantly, organizations citing a more positive impact of culture in recent major transactions were those that had invested in implementing structured cultural integration processes and programs from as early as the due diligence phase."

Although 72% of survey respondents cited culture as an important contributor to creating value in M&A transactions (with nearly one third stating that it is critical), the survey highlighted the fact that many organizations were not well-prepared to effectively manage cultural integration issues. While nearly one quarter of companies are moving towards developing a more formal cultural integration process, 68% still do not regularly use a systematic approach to identify gaps between organizational cultures.

Another challenge identified by survey respondents was the lower levels of executive engagement in leading M&A-related cultural change. Only 37% of organizations surveyed said that they had invested to some extent in developing managers with the expertise to understand and lead cultural change, with 28% indicating that they have invested very little or not at all. Additionally, many organizations may not have the right people leading the changes required for cultural integration. While HR professionals were viewed as being key culture change champions, only a quarter of senior executives were reported as co-leaders of cultural integration efforts in their organizations.

Mercers survey showed several positive developments in the M&A cultural integration arena. "Some organizations that are focused on driving higher levels of value faster from their transactions are taking actions to address cultural integration issues more proactively," said Ms. Hukins. "In fact, over half indicated that they plan to invest more heavily to improve the management of cultural issues in deals in the short term."

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