Despite an apparently thorough ‘due diligence’ process, many mergers and acquisitions (M&A) still fail to meet pre-merger objectives.

While some mergers fail because of deal factors, including weak business cases and overgenerous premiums, many fail because of the lack of a sound post-merger integration plan. That’s in contrast to the effort spent doing the deal. Planning and preparing for what happens once the transaction closes makes the difference between a merger that destroys shareholder value and one that delivers real rand results to the bottom line. Integration planning that begins well before the deal closes allows the company to develop a deep understanding of the opportunities and risks involved. Unfortunately, too often the consolidations through mergers, acquisitions, and joint ventures promise more then they produce. Disappointment then reigns when expected synergies and cost savings do not materialize.

McKinsey & Co. research on acquisitions in the nineties, for instance, showed that up to 80% fail to reward their shareholders. Indeed, according to Grant Thornton survey (2003) of some 750 firms, the single biggest cause of failure post-deal was “Poor implementation strategy” (65%).

A Deloitte & Touche study (2002) found that only 1/3 of their total sample of 540 companies surveyed about M&A, could say that they thought that their merger was successful. Here are some of the reasons highlighted for failure of M&A-s:

1. People and cultures being ignored;
2. Slow integration;
3. Lack of communication;
4. Failure to address retention issues across all platforms; employees, customers and suppliers;
5. Failure to clearly define roles, responsibilities and incentives and a clear structure.

Part of the problem was that individuals were uncertain of the boundaries of their authority and autonomy, which had been clear in the pre-merger firms. During times of uncertainty, as in merger or an acquisition, employees scrutinize management actions to anticipate what might be in store for them and to judge the credibility of the messages being communicated. The original firms try to maintain their old identity and there is a constant struggle to impose ways of working, procedures, etc., onto the other. In public, deal-making executives routinely speak of acquisitions as “merger of equals”. That’s diplomatic, but it’s usually not true. In many, if not most, deals, there is not only a financial acquirer; there is also a cultural acquirer, who will set the tone for the new organisation after the deal is done. Often they are one and the same, but they don’t have to be.

Systems, processes, structures, procedures, etc., do not easily scale up. There is usually much duplication and no clear idea of how to integrate the duplicated systems quickly and effectively. It’s rare that two firms can be combined without making hard decisions about whose structure to adopt (“should business units be based on our products or their geographies?”), who should report to whom, how decisions will be made, and so on. For example, in most cases, executives looking at a deal will have ideas about which structure they prefer, but they need to know whether the proposed structure makes sense given the organisational realities of both companies.

Harding & Rouse (April 2007) propose a solution to this situation in performing a detailed human due diligence before or immediately after the deal is secured. The first issue to diagnose is whether the target has a coherent, functioning organisational structure that allows it to make and execute decisions effectively. This includes structure, procedures, information platforms, working culture and current work practices involved in the report, review and decision making processes. The second issue is to look for significant points of friction which can emerge in combining the target functions with those of the acquirer. From this research, the team should be able to identify the reporting lines, lay out flowcharts that track how decisions are made and implemented, and describe the various official mechanisms for controlling the quality of decision making.

The third issue in the human due diligence, as suggested by these authors, would be to determine a fact-based view of a target company’s culture and the strengths and weaknesses of its people, including compensation and promotion processes, job descriptions and responsibilities, and employee turnover rates by implementing tools of the organisational capability assessment such as culture audits, 360-degree feedback, internal satisfaction surveys, and measures of employee loyalty. This will also include interviews with key executives, customers and suppliers.

Human due diligence will (1) determine the structure of the organisation and help to resolve conflicts in the decision making processes, (2) set the tone for the combined culture and establish a process for migrating to a new culture, (3) help to file top jobs quickly and retain other key talent, and (4) implement programmes aimed at winning the hearts and minds of employees in the target organisation.

In our recent assignment in the construction industry, African Performance Specialists (APS) were invited to examine and compare site controlling and decision making procedures and team cultures of Concor’s Roads & Earthworks division with certain parts of Murray & Roberts (M&R), after those were combined as a result of M&R’s acquisition of Concor.

APS went through a comprehensive exercise at both companies’ construction sites to ‘map’ the systems, procedures, processes, structures and technology platforms which were currently used but focusing on daily and weekly cost, quantity and quality control; performance measurement system (selection of KPI-s, data capturing and reporting, reviewing and meetings management); internal and external communication, and suppliers and partners performance management. We then generated a comparative process flow map of both systems, showing the client efficient and inefficient parts, and presenting opportunities for synergy and improvement.

APS also conducted interviews with key clients and partners of both construction teams to learn about their experience and satisfaction in order to identify further opportunities.

In order to assess both teams’ performance capability and expected resistance to change APS used their own structured questionnaire to measure seven criteria: Competitive Intelligence, Individual Opportunity, Individual Accountability and Work Experience (PERFORMANCE ENABLERS); and Attitude Towards Change, Preference for Working in Teams and Flexibility of Internal Policies and Procedures (CHANGE ENABLERS).

Some companies are secretive and some are not. This difference in handling information can cause serious problems on the transition integration project team. Some firms communicate best via memos and others prefer simple informal conversations. Chevriere (1999) recommends a comprehensive synthesis analysis in order to extract all the potential benefits possible from a union e.g. to take the very best systems, structures and ideas from both companies. The same author recommends the four-step integration process:

1. Development of ground rules and framework,
2. Synthesis Analysis “Seeking the best”,
3. Organisational design “New look”,
4. Execution of the organisational design.

Again, it is very important to have the ‘people strategy’ while executing this change. So, what are the people-related issues one integration project team is likely to encounter? Robbins (2005) recognised six of them:

1. Avoid so called the “Noah’s Ark Phenomenon,” whereby many roles come in pairs. Inaction or wrong choices can have dire consequences.
2. Identify talent early and put in place appropriate stay bonuses and incentives.
3. Prepare your severance plans and timing. There is no better way to kill morale than to fumble with this piece.
4. Identify clear recruitment needs, as the existing talent (even in pairs) might not be up to the new, larger and performance-driven firm.
5. Plan well the compensation and incentive structures for the combined group; far better than reverting to the lower of the two by default.
6. Address the issue of founders or long-term leaders in acquisitions of smaller firms in particular. These are not easy to deal with.