We watched with awe and curiosity in 2021 as the global market passed $5.8 trillion on acquisition transactions, surpassing the former annual record of $2 trillion. Cash-rich and eager to grab more market share, the companies made more than 63,000 transactions, according to a Harvard Law School Corporate Governance Forum Paperemerging from their cautious 2020 to capitalize on the surge in equities, high corporate valuations and low interest rates.
Analysts expect the buying spree to continue into 2022 as, according to Morgan Stanley, the “key elements that made the M&A market so strong in 2021 are largely in place.” This is good news for the overall health of the world economy. However, deal executives would do well to refresh themselves on the Amazon and Whole Foods story.
The tech retail giant bought the iconic grocery brand in 2017 to over $13 billion, a transaction that many thought was paired with ideal partners. It turns out that their cultures didn’t match at all.
Whole Foods employees shared stories of food shortages and “Crushed Morale” under the governance of Amazon. harvard business review detailed the incongruity of their operating styles, citing the discrepancy between Amazon’s “tight” culture and the “loose culture” of “Whole Foods”. They didn’t fit and the employees suffered.
According to Deloitte, 30% of merges fail because companies do not integrate their cultures. McKinsey reports that 25% of executives cite the “lack of cultural cohesion and alignment” as the main reason for failed mergers.
With more companies pursuing more M&A deals, others will likely fail because executives make superficial attempts at cultural integration or don’t tackle everything. In a pandemic (or even post-pandemic) environment, this strategy becomes even more inadequate.
The Great Resignation that began in 2021 brought to life the discontent of a workforce. A record 4.5 million US workers quitting their jobs in November, according to the Bureau of Labor Statistics, with 22 states reporting an increase in quit rates from October. Mergers and acquisitions may not have driven this trend, but the stress of acclimating to a new corporate culture may have driven many of them to their breaking point. .
COVID-weary employees have faced two years of disruption and uprooting. When a new stakeholder enters the scene, employees may feel pressured to say enough. But when done correctly, a merger could entice people to stay.
To do this, CEOs must appreciate the corporate cultures they are acquiring. In addition to their strong finances, leaders must bring a human component to these transactions, creating not only massive market share, but also a new organization that people want to work for.
In my nearly two decades as CEO of consumer products and industrial companies, I’ve had the good fortune to observe what works and what doesn’t in mergers and acquisitions. Successful results occur when the acquiring company approaches it as a partnership, merging the best of both companies to drive growth.
How to do that? Here are three suggestions.
Bringing high emotional intelligence to M&A
Employees spent two years coping with stress and anger. They are anxious and tired. As a result, many are disengaging, a circumstance that more workplace disruption could exacerbate.
According to Gallup, only 20% of employees worldwide consider themselves engaged at work, and 41% said they felt “a lot” of worry. Gallup estimated that this combination cost employers $8.1 billion worldwide.
“If 80% of an organization’s employees are unengaged, the organization’s resilience during a crisis will be at high risk and leaders will not be able to achieve their goals consistently,” Gallup concluded in his State of the Global Workplace 2021 report. “There is no way for a leader to be effective when his people don’t pay attention to him.”
Already understanding what employees are up against, leaders need to bring strong emotional intelligence to mergers. Be open, genuine, transparent and humble when onboarding new employees. Introduce them to your culture while welcoming theirs. Transitions are difficult. Leaders who communicate effectively, show empathy and demonstrate positivity will be more successful.
Match words to actions
Words are important, but employees – from those in the warehouse to those in upper management – pay attention to actions. I’ve seen several CEOs give speeches about respecting a new company’s culture, but then act antithetically.
In one instance, I saw a CEO telling associates of a newly acquired company how inefficient their current management was and how better new management would be. In another instance, I observed a CEO poking fun at a company’s culture that was learned directly from team members, humiliating them as a first impression. This group would be underperforming under its new leadership.
Leaders have a responsibility to demonstrate their commitment to newly acquired units through deeds as well as words. The firing of incoming employees and their culture immediately raises questions about a leader’s integrity. It can also demoralize a workforce before the onboarding process has even begun.
M&A transactions can lead to painful reorganizations and separations. As a result, your new employees will activate their reflexive mode of job retention. From this space, they watch, wary but alert. To calm them down and engage them, show them your leadership style and your intentions. Don’t just tell them.
Recognize the value of “human capital”
Human capital may not reach the balance sheet but is one of the main assets of an acquisition. Executives who acquire companies spend considerable time evaluating the finances of their targets. They should invest the same diligence in evaluating the people behind those assets.
“We buy companies to have excellent employees” Meta CEO Mark Zuckerberg once said, but some companies haven’t learned that lesson. In M&A transactions, employees of the acquired company are more likely to leave than employees of the acquired company. That’s true, especially in the tech industry, which has implemented a strategy known as “acqui-hiring,” or acquiring startups to hire top talent.
Yet J. Daniel Kim of the Wharton School of the University of Pennsylvania found that in acquisitions of high-tech startups, acquired workers leave their new companies at a much higher rate than regular hires. Kim’s study found that 34% of acquired workers leave within a year of an acquisition, while 12% of conventional hires leave their startup during the same period.
“… [U]Like regular hires who voluntarily choose to join a new company, most acquired employees have no say in the decision to be acquired,” Kim wrote. “I posit that this lack of worker choice causes organizational mismatch, thereby increasing turnover rates among acquired workers.”
Integrations are difficult even during the best times. After two years of COVID, they have proven to be more difficult. Therefore, managers should view the M&A process as an opportunity to improve their company’s culture as well as its market share.
Be sensitive to what new employees value before making major changes. Guide new employees through this change with candor. Understand their culture before the acquisition process begins and give top talent a reason to stay. Ultimately, your new company could provide better access to opportunities, more transparency about leadership, and a more positive work environment.
Written by Robert Logemann.
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