- Finance and the Capital Market
- Strategic Management
- Organizational Behavior
- References
This chapter is from the book
This chapter is from the book
This chapter is from the book
Organizational Behavior
Researchers and counselors from the field of organizational behavior maintain that the primary cause of failure in mergers and acquisitions is the lack of consideration of the human factor during the process of the planning and implementation of the merger. In other words, even given the conditions of success according to the first two areas, namely, payment appropriate to the acquired company’s value and the M&A being conducted between two related organizations with the potential for synergy, the human factor might cause the merger failure. Managers and workers that do not adjust to the merger, consciously or subconsciously, as the consequence of cultural or management style differences, cause considerable costs and disable the exploitation of the synergy potential.
Following comprehensive research performed in recent years and the accumulated experience in many mergers, it is known that, in essence, the main factor that influences the managers and the workers, primarily in the acquired company, is the degree of the management/organizational culture differences between the two merging organizations. When the difference of the management culture is considerable, the merger is fated for failure. (Management/organizational culture differences exist between organizations in every field and in every country. International culture differences add to the difference that exists between the organizations.) Thus, the CEO of Daimler-Chrysler, the German Juergen Schrempp, maintained that the American James Holden did not succeed in adjusting to his management approach that includes, for example, a policy of cutting expenses and ongoing reporting of the important developments in Chrysler and thus induced ongoing uncertainty. Figure 1.1, which is based on research conducted in the United States and Israel including domestic and international mergers, explains the impact of cultural differences on acquisition success/failure.
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Figure 1.1 The Impact of the Management Culture Differences on the Success of Mergers and Acquisitions
This figure indicates that the culture differences cause tension/pressure and negative attitudes among managers and workers, primarily those of the acquired company. Following the tension and negative attitudes toward the acquiring organization, the commitment of the managers to the success of the merger is impaired. In addition, the level of cooperation between the two sides greatly declines. Thus, senior managers in the acquired company abandon the company and move to competitors or to other firms. This departure of managers, most of which occurs in the first year after the merger, is found in research studies to be related to the decline in the financial performances of the merger.
It is not surprising that Amos Michelson, the owner of the Canadian Company Creo, which purchased the preprinting division of the Israeli company Scitex, said, 1 year after the acquisition was completed that “This merger is not a simple task.” Indeed, 20 of the 25 senior managers of Scitex left in the first year after the merger because they did not want to adjust to the management style of Creo. At the end of that year, Michelson admitted that the return to the pace of growth of 30 percent a year that characterized Creo before the merger would occur only several years later. Actually, the company never returned to these performances.
The problem of the departure of managers and key personnel is especially exacerbated among hi-tech companies. In these companies, the professional knowledge is held by the people, and the ability to develop and innovate is also related to the interaction among the people on the research and development teams. In essence, a main reason for the acquisition is the innovativeness, professional knowledge, and talented personnel. If managers and key personnel leave the acquired company, then the acquiring company is left without the value that it paid for. It is not surprising that such mergers/acquisitions are doomed to fail, especially if the cultural differences and their influences are not identified and analyzed ahead and treated immediately, before, during, and after the papers are signed. This, of course, is important in every industry and in every area.
Indeed, Eli Horowitz, the previous chairman of the Board of Teva, which, due to M&A, has become the world’s largest generic pharmaceutical company, noted that “When companies are merged, it is possible to transfer a productive line but the organizational culture is difficult to transfer.”