As you’ve probably heard, Optimal Networks recently acquired Database & LAN Solutions (DBLS). So, successful acquisitions have been top-of-mind for me. By all accounts, this one proves to be a winner—and it isn’t because of the accounting due diligence that took place on both sides. What is contributing to this acquisition’s success is the time spent in assessing DBLS’ corporate culture and evaluating if and how it would merge with Optimal’s service-based model. Turns out, we spent this time in the right way.
According to a study conducted by international tax, audit, and advisory firm KPMG, 83% of all mergers and acquisitions failed to produce any benefit from the shareholders and over half actually destroyed value. Interviews with more than 100 senior executives involved in these 700 deals over a 2-year period revealed that the overwhelming cause for failure “is the people and the cultural differences.” Additional research suggests that up to 65% of failed mergers and acquisitions are due to ‘people issues.’
Organizations are operating at full throttle when in the midst of an acquisition or merger; with all the deadlines, it is easy to get sidetracked with an influx of new employees, revenue growth, determining price, and valuing assets. Businesses often forget that a financially-driven deal has real and important human components—and that service and service delivery is the genesis of all organizational successes. Consumed by the numbers, businesses forget to vet the company they are considering acquiring on their values and culture, their beliefs and service practices.
Have there been conversations about service systems and personal beliefs? Has the acquiring company shared service stories to prompt employees from the company under acquisition consideration to contribute how they would have responded? Do their people emphasize the same things the acquiring company emphasizes? In addition, how does the company being acquired treat their employees? After all, employees treat clients as a reflection of how they themselves are being treated by their employer. These are all questions we asked and issues we investigated when vetting DBLS in the acquisition process. Happily, we discovered that this company shared Optimal’s service philosophies and so, when the numbers matched up, it became an easy decision, and integration continues to go smoothly.
Unfortunately, this is not always the case. Piero Morosini, author of Managing Cultural Differences: Effective Strategy and Execution Across Cultures in Global Corporate Alliances, argues that when organizational cultural differences are ignored during the evaluation and negotiation stages of a merger, integration inevitably fails. Some examples of acquisition failures include the 2005 majority stake purchase by Sprint of Nextel. Cultural clashes and incompatible wireless technologies caused billion dollar losses and thousands of layoffs. The 2000 union between Time Warner and AOL is considered one of the worst mergers of all time. The reason most often cited? “The two companies always seemed out of sync.”
I have my eye on the merger of Southwest Airlines (known for its impeccable service) and Air Tran (known for its less-than-stellar service). I have no doubt that Southwest vetted and continues to vet former Air Tran employees on their service beliefs and systems; I also understand that a company like Southwest has the resources to devote to concentrated, comprehensive service training. Stay tuned.
What do you think?
- Do you think vetting cultural and service beliefs is as or more important than vetting the financials in a merger?
- Do you think, with enough resources, successful service and cultural integration can occur in companies that are not aligned at the outset?