When an Acquisition Goes Awry It's Usually Because of Culture

The following is largely excerpted from i4cp's study, Avoid Acquisition Acrimony: How to Analyze Culture Synergy Early (available to i4cp members only).

Salesforce-Tableau, Google-Fitbit, Raytheon-United Technologies, Bristol Myers Squibb-Celgene…2019 certainly saw its fair share of M&A activity. While these and the hundreds of other combinations in the last year are undoubtedly optimistic about their future together, historically most acquisitions are deemed failures. The reality of combining 2 or more large companies brings about a variety of complexities which are often overlooked or minimized in the euphoria of the deal.

In the past, AOL and Time Warner, Sprint and Nextel, Sears and Kmart, & Daimler-Benz and Chrysler also all embarked on their combinations anticipating success. While you can point to a variety of issues that prevented these deals from working, culture clash was a primary element in each one.

Let’s examine Sprint’s purchase of Nextel a little more closely, since many point to it as one of the biggest failures in corporate history. Looking back on this deal offers a vivid illustration of how incompatible cultures—and the failure to reconcile them—can send an acquisition up in smoke.

When the acquisition was consummated in 2005, both Sprint and Nextel had similar market capitalizations of around $30 billion. Because of this, the acquisition was initially championed as a "merger of equals" but definitely not treated as such. Sprint’s dominant brand and processes was the clear winner.

And while there were significant technology mismatches and clashing marketing strategies, at the heart of the issue was that the two organizations never integrated their cultures. In fact, both companies retained their respective headquarters, with Sprint in Overland Park, Kansas, and Nextel in Reston, Virginia.

There were other culture missteps: Nextel was renowned for a commitment to delighting its customers. Sprint had a reputation for subpar customer service. Nextel was known as an agile, fast-moving disruptor with an entrepreneurial spirit. Sprint? More traditional, more hierarchical, more rigid.

According to reports, Nextel employees often required approval from Sprint leadership to address culture and other integration concerns, which allegedly created friction and frequently led to no corrective measures being taken at all.

Not surprisingly, the exodus of Nextel executives and mid-level managers began just months after the deal was completed. A multitude of business struggles followed in the forms of layoffs, measures to slash costs, and, ultimately, a $30+ billion write-off a mere three years after the acquisition.

Some refer to it as one of the worst acquisitions in U.S. corporate history (Holson, 2008). 

P&G and Gillette: Getting the best of both

Conversely, when Procter & Gamble announced in January 2005 that it would buy Gillette Co. for $57 billion, Gillette investor Warren Buffett called it a “dream deal,” one that would create “the greatest consumer products company in the world.”

Buffett was right. In hindsight, the acquisition (executives at the companies preferred to call it a merger even though P&G was much larger, and clearly acquired Gillette) has plainly been a success, but not without its ups and downs in the years that followed.

Part of the reason for the success of the acquisition—which P&G declared at the outset would form the world's largest consumer-products company by adding Duracell batteries, Right Guard deodorant, and Gillette razors to P&G’s more than 300 consumer brands—was because the companies’ markets were highly complementary. Gillette’s core customer segment was men, while P&G was known for marketing primarily to women. While Gillette was strong in emerging markets such as India and Brazil (where P&G was often outperformed by Unilever), P&G was strong in China. The companies also had very similar organizational structures.

But another big reason was the focus on culture. A.G. Lafley, P&G’s chairman, president, and CEO at the time (Lafley retired in 2015), described how important culture was in his early acquisition discussions with Gillette’s CEO, Jim Kilt, who called him to propose a deal.

“It was a no-brainer from a strategy standpoint,” Lafley later recalled. “On that first day when Jim called, I asked him if he had a price in mind. He said the usual things about a fair price. He said, ‘Not $60. But not $50.’ I said, ‘Jim, I can do the math. Are you thinking $55 a share?’ Gillette was at $44 or $45 at the time.

“I [then] asked how well he thought the cultures were going to fit together. I said to him, ‘The P&G culture is more collaborative, open, and competitive than you may know it to be,’ culture was a big issue in deciding to do the deal” (Levine, 2005).

To make the deal work, the two companies adopted a simple cultural and process strategy from the beginning: Let’s get the best of both.

Initially, the companies formed nearly a hundred global integration teams, matching executives from the same functions in each company. They also publicized intranet postings with tips from employees who had joined P&G from previously acquired companies. And P&G respected the acquired culture; Gillette employees could use their own processes until they learned P&G’s way of doing business.

Building internal networks was a major emphasis to make Gillette people feel welcome, but also to get business done. P&G was largely a consensus-driven culture, so it was important to understand whose buy-in was needed for decisions. P&G paired seasoned and new employees to facilitate internal coaching and funded training programs on how to build networks and relationships.

Despite the focus on and initial success of their cultural integration, P&G and Gillette proved that merging two large organizations is never easy. Two years after the acquisition, the Wall Street Journal ran a front-page story describing the cultural challenges between the two companies.

Gillette and P&G resolved many of those cultural differences, but not without a significant investment of time and money. In 2009 a $50 million renovation of Gillette’s “World Shaving Headquarters” in South Boston was completed, moving senior Gillette executives into a new, open-layout campus with ample common space and conferencing facilities to adopt more of a face-to-face culture.

They also established a special task force to specifically ensure that the two cultures were tightly integrated (Fisman, 2013). More recently, market conditions have presented challenges. In July 2019, P&G announced that it had taken an $8 billion write-down on the Gillette brand for the fiscal fourth quarter of 2019.

P&G executives attributed the loss to a few key drivers: in addition to currency devaluations, P&G cited factors such as the market contraction of blades and razors—especially in the U.S., where the cool quotient of the beard has skyrocketed in recent years—as well as increased competition from online disruptors such as Harry’s and Dollar Shave Club, for example.

For the most part, however, investors have shrugged off the one-time charge, pointing to P&G’s earnings surpassing expectations—after accounting for the impact of the write-down—and the company’s optimistic forecast as reasons to remain confident in P&G.

Overall, it worked. While P&G and Gillette had many variables to tackle, attention to culture and communication clearly helped make the merger successful.

Early focus on cultural synergies should be a top priority

As both these examples show, cultural synergy plays a pivotal part in whether an acquisition succeeds or fails. Much of this success or failure stems from how much emphasis an organization places on cultural synergies early in the courtship.

And this presents a tremendous opportunity for HR to step up its game and demonstrate strong value.

As established in the i4cp study Culture Renovation: A Blueprint for Action, HR plays an instrumental role in organizational culture. The study found that, while it is clear the CEO must be the organization’s culture champion, the HR function (and specifically the CHRO), must be the organization’s culture conduit. In other words, HR should always be attuned to—and in the position to recommend strategies to address—the health of the firm’s culture.

Yet, while high-performance organizations are more than 2x more likely than lower performers (71% vs. 33%) to indicate they involve HR in identifying cultural similarities and differences in M&A targets, in almost all instances (95%) they involve HR too late in the game.

Why does cultural assessment fall by the wayside even though there’s clear acknowledgement of its importance? There are several reasons.

Most acquisitions are initiated by investment bankers and brokers who earn most of their money via a percentage of the transaction. Whether the acquisition ultimately succeeds or fails doesn’t impact this fee, which is part of the reason the deeper aspects of culture often go unexplored.

When an acquisition occurs, some type of change in culture inevitably follows. In i4cp’s Culture Renovation™ study, the data found that a recent merger or acquisition was the primary driver for almost 20% of organizations undergoing a culture change.

That same study, which involved more than 7,000 participants, also showed how critically important culture is to any organization, and how tough it is to change it. Most efforts to change an organization’s culture fail. In fact, only 15% succeed. But, of those that do succeed, a significant increase in business results usually occurs.

Despite the power of an organization’s culture on impacting financial performance, there are many leaders who still overlook or underestimate its significance. This neglect persists despite guidance to the contrary. Recently, the National Association of Corporate Directors (NACD) asserted in its report, Culture as a Corporate Asset.

“In many organizations, culture does not get the level of boardroom attention it deserves until a problem arises. We believe this must change. Oversight of corporate culture should be among the top governance imperatives for every board, regardless of its size or sector” (NACD, 2017).

Acquisitions unquestionably have an impact on an organization’s culture. But too often it’s a negative impact. It’s clear from the data that not only does more attention need to be paid to culture much earlier in the courtship of a potential acquisition, but HR should be a strategic partner from the outset.

Want more information? Contact us to learn how to prevent your next acquisition from being a cultural mismatch.

Kevin Oakes is the CEO and co-founder of the Institute for Corporate Productivity (i4cp)