Managing mergers

Kamran Hafeez
October 18, 2021

Mergers and acquisitions have been the most opted strategies for growth and expansion for businesses. Mergers happen where minimum two or more, separate legal entities convert into a single entity. Based on recent corporate research, when considering the stated goals of any merger, only 50–60 percent M&A are successful. Soft issues (human resource and culture-related problems) have been widely considered as a prominent reason for post-M&A failure or underperformance.

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Mergers and acquisitions have been the most opted strategies for growth and expansion for businesses. Mergers happen where minimum two or more, separate legal entities convert into a single entity. Based on recent corporate research, when considering the stated goals of any merger, only 50–60 percent M&A are successful. Soft issues (human resource and culture-related problems) have been widely considered as a prominent reason for post-M&A failure or underperformance.

The aspects of soft issues are more important in Pakistan where weak corporate culture and judicial system increase the need for better management practices during and post mergers. Even most professionally managed organisations such as banks have been unable to effectively overcome challenges and faced issues managing mergers. In 2007, an acquisition deal between Royal Bank of Scotland (RBS) and ABN AMRO Bank was executed. Internationally, it was one of the biggest deals of acquisition in banking sector and interaction of different cultures (Dutch, British, and US shareholders). The consultants of this deal were much concerned about cultural, employees and unions related problems that may prove this deal difficult, costly, and unfavourable, which was the case with RBS subsequently ending operations in a number of countries. In the context of Pakistan, the acquisition of Union Bank by Standard Chartered Bank is an interesting example. Union bank was a Pakistan-based bank with different organisational culture and employees working style from international culture and operational style of Standard Chartered Bank (Pak) Ltd. These cultural and operational differences between Union Bank and Standard Chartered Bank affected the post-acquisition performance of Standard Chartered Bank with decreased financial and non-financial performance after the acquisition. M&A brings transformational changes which create uncertainty, tension and sense of career insecurity among employees which requires effective management.

However, M&A activity is critical for any developing economy to spur economic growth and create business/industrial power houses provided the organisational issues are effectively managed. Mergers tend to create organisational anxiety about the future: in most cases, the operating model and culture will change dramatically for one or both merging companies. These changes go far beyond a new name or new leadership team; they challenge the core of an organisation’s identity, purpose, and day-to-day work. Even small tactical changes, like new expense policies or fuel allowances, can rattle employees. Anticipating and addressing these “organisational emotions” can set the foundation for seamless, effective integration. Failing to anticipate and address them can lead to poor business performance, a loss of critical talent, and the leakage of synergies.

A key problem during mergers is management’s tendency to focus mostly on changes that would directly help to capture a deal’s value targets while largely ignoring those issues required to maintain and enhance the company’s operational well-being. Organisational design, for example, is always top of mind in the early stages of merger planning, but companies often sidestep cultural differences until difficult issues come to light. At that point, the base business will already have suffered, top executives may already have looked for external opportunities, and achieving synergies may have become more difficult.

An effective organisational integration programme has to proactively address the full scope of changes the employees will experience in an integration. Such a programme should involve two broad tasks: embedding cultural changes and managing operational challenges. Culture, of course, is what an organisation stands for and how work gets done. The inevitable cultural differences between the two merging companies must be resolved, from the more obvious issues (such as attitudes toward the work life balance and employee empowerment) to less noticeable ones (feedback styles, directness, punctuality at meetings). Cultural problems usually arise during mergers, and so do the frustrations that arise when the working norms and management practices of the merging organisations don’t align. The second task in mergers requires adapting to changed operating models, such as new structures, processes, and governance, and poses some of the most visible and difficult issues for employees. The basic problem is that companies often can’t announce these changes early in the merger programme. An effective, proactive communication plan is therefore critical to ensure that employees understand the process and the timeline until the company can reveal the decisions it has made. Meanwhile, processes must be redesigned and communicated in a way that illuminates the fundamental issues, such as how roles will interact and decisions will be made. To work effectively after the deal closes, employees must fully understand these changes. Clarifying operational changes and training employees to master them are generally core parts of the integration team’s planning work.

As early as possible in the integration planning process, it is critical for the board to agree on the operating model, cultural priorities, and integration architecture. All of these decisions must be consistent with the deal’s business rationale. Although a full strategic review will never be possible before the close, key elements of the strategy including, of course, any major changes should be identified up front. While these moves may seem straightforward, they are usually hard to execute.

Legal and regulatory restrictions can make it difficult or even impossible for the merging senior management to have the right discussions in the early stages of integration planning. In any case, executives are often so stretched for time that they prioritise only what they see as the key operational deliverables and address cultural issues too late. In some mergers, for example, the leadership team develops an effective plan to capture synergies only to realise that it hadn’t taken into account cultural differences that lead to ineffective execution. In other cases, the cultural work stream isn’t a priority, so when the new company rolls out the new operating model, the integration planning team scrambles to understand which aspects of it represent the biggest change to current management practices and working norms.

It is critical that before accepting and supporting change, people throughout the organisation must understand its rationale. To help them develop such an understanding, which can also generate energy and enthusiasm, the company must make a clear and compelling case for change, and the leaders must role model it consistently in person and in all their communications. The message has to be consistent with the deal’s strategic rationale, as well as modular so that executives can tailor it to the needs and outlook of different groups of stakeholders, both internal and external. This kind of communication engages employees and helps give them a sense that the changes have emerged from the organisation as a whole, not just imposed on them.

As the transition takes place, companies should also implement new processes, policies, structures, and governance into the combined organisation, focusing on levers such as new appraisal and performance management systems, decision rights, and cross functional business processes. To make employees comfortable with these changes, companies often mount large scale capability building efforts, from leadership development to training in new systems.

Companies can develop a robust change management plan around the quadrants of the influence model: building understanding and conviction, employing reinforcement mechanisms, developing capabilities, and ensuring that executives role model the changes.

To sustain the period of change into the building of a new combined organisation, a company must actively monitor the execution of its change management programme, along with the management team’s alignment.

Managing change in mergers can feel daunting because the results are relatively hard to measure. Yet mergers can create greater value and have a lasting impact when effective change management helps the merging organisations to move in the same direction.


The writer is a staff member



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