91% Of Mergers Fail Due To Culture Shock

More than 90% of corporate mergers and acquisitions are falling short of their objectives, as companies struggle to combine corporate cultures and structures, according to the results of a major new study from global management consultancy Hay Group.

- M2 Presswire
27 March 2007

More than 90% of corporate mergers and acquisitions are falling short of their objectives, as companies struggle to combine corporate cultures and structures, according to the results of a major new study from global management consultancy Hay Group.

The study of senior business leaders with M&A experience, launched today, reveals that just 9% of mergers are considered "completely successful" in achieving their stated objectives. This plummets to an alarming 3% of mergers and acquisitions by UK companies.

The findings are contained in the forthcoming Hay Group report: Dangerous Liaisons: Mergers and Acquisitions - The Integration Game. Hay Group studied over 200 major European M&As taking place over the last three years.

The report makes worrying reading in the light of the frenetic acquisitions boom of last year, when deals topped an eye-popping *1.35 trillion*, and which research suggests is set to continue in 2007 and beyond.

"The M&A feeding frenzy over the last year has been fuelled not only by cheap debt and the rise of private equity, but also by companies' strategic focus on consolidation," said report author David Derain, European M&A Director at Hay Group.

"However, the enormous amounts invested in M&A are not delivering their promised value."

Critical Omissions Hay Group's report identifies critical omissions in companies' due diligence and post-merger integration strategies as the primary causes of M&A failure.

Firms are prioritising financial and systems due diligence at the expense of the vital, intangible assets critical to a merger process - such as business culture, human capital, company structure and corporate governance.

The great majority (93%) of business leaders made traditional due diligence a high priority, whilst over half (55%) focused on IT systems integration. However 58% confess that over-prioritising systems integration resulted in insufficient focus on intangible assets and cultural integration.

And more than half of business leaders believe that this intensified the risk of failure: 54% state that neglecting to audit non-financial assets such as business culture increases the danger of making a wrong acquisition.

"Business leaders must recognise that the value of today's companies is primarily in their intangible assets - the strategic, people and cultural factors that don't show up on a balance sheet," said David Derain, European M&A Director at Hay Group.

"A strategic focus on aligning the intangible as well as tangible assets of companies is critical to the success of any merger or acquisition."

Lack of Transparency Businesses are demanding a robust form of reporting on business culture, human capital and company structures as part of the due diligence process.

70% of senior executives believe that it is currently too difficult to obtain intelligence on the corporate culture and human capital of M&A target companies.

Half of executives (49%) point to the need for a robust form of reporting on intangible assets, whilst two thirds (66%) see internal indicators such as workforce performance as more reliable predictors of success than financial data.

"The secret of successful merger strategy lies in gaining an accurate picture of the target company's cultural, human and structural assets," said David Derain. "Our research shows that companies failing to take these factors into account when planning and implementing a merger will fail to deliver against their objectives."

Culture Shock While business leaders pay lip service to the need to audit and integrate intangible assets, there is a worrying lack of focus on them during, not only during the due diligence stage, but also as part of post-merger integration strategy.

Only 13% of business leaders state that engaging and integrating senior management and the workforce was given high priority as part of their company's integration strategy, while as many as 70% failed to prioritise intangible assets generally.

Little over a quarter (27%) analysed the cultural compatibility of the firms to be merged. Fewer still (22%) carried out a human capital audit. Crucially, two thirds (59%) failed to prioritise a leadership capability review.

This is having a disastrous impact on the success of the integration process, according to executives: 78% of acquired company employees opposed the mergers, 50% of them actively.

In addition, well over a third of business leaders (38%) expressed dissatisfaction with the post-merger climate, with one fifth (22%) describing the early months as "culture shock" and a further 16% going so far as to label them "trench warfare".

"Culture is not an HR issue - it is a business issue," said David Derain. "Business culture represents a class of assets which must be protected and properly aligned during the integration process if a merger is to succeed."

About Dangerous Liaisons

Hay Group's Dangerous Liaisons report combines the results of a three-pronged research programme. Firstly, interviews with 200 senior European business leaders who have experienced a major merger or acquisition during the past three years. Secondly, desk research into the 100 largest M&As to take place in Europe over the same period. Finally, qualitative research amongst 300 global employees of merging organisations conducted on behalf of Hay Group by The Sorbonne.

About Hay Group

Hay Group is a global consulting firm that works with leaders to turn strategies into reality. We develop talent, organise people to be more effective, and motivate them to perform at their best. With 88 offices in 47 countries, we work with over 7,000 clients across the world. Our clients are from the public and private sector, across every major industry, and represent diverse business challenges. Our focus is on making change happen and helping organizations realise their potential.

For more information please visit: www.haygroup.com

* Thomson Financial reports *1.35 trillion in Europe, 2006.