by John Perry

Contributing Editor - WIIE

Introduction

The prospect – or specter – of a potential merger with another company has impacted many in the telecommunications industry. Sadly, the track record for telecom leadership is not a good one in that regard. The results of the below-indicated 2008 Maritz poll measuring telecom employee satisfaction (contrasting those who had experienced a merger versus those who had not), are arresting: telecom employees who had undergone a merger are more deeply disenfranchised and mistrustful of management than their non-merged counterparts. Generally, as can be seen in the table below, merged employees under-indexed 11%-13% in their answers regarding basic work needs being met compared to those telecom employees without merger experience. This data suggests that telecom companies are less than fully successful in dealing with vital people and culture issues.

Leadership has a profound effect on stakeholders, particularly during periods of systemic change, such as corporate mergers. Given the historically high failure rate of M&As to return shareholder value, and, in turn, recognizing the propensity of leaders to focus on objective vs. subjective cultural components, the need clearly exists to identify best in class leadership practices to effect successful corporate unions.

In perusing this topic, contemplation must be given to three primary spheres of influence contributing to the issue: mergers and acquisitions, corporate culture, and leadership. Accordingly, a short primer on each ensues:

Mergers and Acquisitions

A merger is a transaction in which two companies opt to meld into a single entity. Conversely, an acquisition involves the takeover of one company by another. The companies’ assets are combined in the former scenario, while an outright purchase occurs with the latter.

Mergers historically occur in periodic bursts, typically induced by economic shocks (positive or negative), such as technology, deregulation, cost of goods, political uncertainty or favor, and demand reduction. The U.S. has seen five such merger waves since the late 19th century and, according to some, has entered a sixth.

Specific drivers of M&As are myriad and can include obvious motivations (growth, globalization, competition) as well as more obfuscated one (hubris, opportunism, myopia). The historic motivation to acquire has been cost savings/economies of scale.

Experts concur that mergers often fail to achieve anticipated value. In fact, records show that a majority of corporate unions see little symbiosis and often result in outright defalcation. Merger value underachievement ranges from 50% to 80%, raising the obvious question of why business entities choose to continue pursuit of this strategy.

Figure 1: Failure of Mergers to Achieve Anticipated Value

Explanations for the underachievement of M&A value are many, including misalignment with overall corporate strategy, insensitive management, lack of trust, poor communication, slow execution, politics/power struggles, leadership vacuum, insufficient due diligence, disproportionate focus on finances, lack of communication, failure to address “me” issues, unwillingness to seek input from employees at all levels of both organizations, lack of preparation, and lengthy integration. However, the most glaring barrier to successful mergers has been attributed to executive inattention to cultural issues, as confirmed in the data below:

Figure 2: Principal Causes of Failure in M&A Activity

Source: Johnson and Kapoor, “The role of human capital in M&As” (2002)

Case studies of mergers strongly support the claim. “Good” mergers (e.g., Renault-Nissan or HP-Compaq) generally complete the marriage ahead of schedule upon compatibility confirmation, creating a distinct new culture from the two existing ones, with dedicated teaming and high-visibility executive sponsorship. “Bad” mergers (e.g., Daimler-Chrysler or AOL-Time Warner) generally fail to exercise pre-merger due diligence, or accommodate people and cultures during and after transition.

Organizational Culture

Organizational culture can be defined as the behavioral complex of business associations enveloping actions, words, knowledge, morals, and beliefs that are required of legitimate members of function properly. In fact, experts frequently refer to organizational culture as “social glue” or “company DNA”. The ingredients comprising corporate culture are holistic, historically determined, “soft”, and difficult to change. The last point is especially important; people resist change vigorously because it represents a threat to existing culture, which defines and provides basic needs (a la Maslow), such as security, stability, and validation. Change can only be effected if it is emotionally compelling enough.

Two constructs of corporate culture are intrinsically important to M&As: subjective culture (i.e., heroes, myths, rituals, and “Mecca”), which is unique to each firm, and objective culture (i.e., office décor, location, amenities, etc), which is rarely company-specific. Unfortunately, executives tend to overlook subjective culture during mergers, since validation of the transaction to Wall Street and stakeholders concerns tangible assets.

Acquirers often create disequilibrium unintentionally by absorbing the acquired company into the mainstream culture, even though the unique culture of the target firm was integral to the initial acquisition determination. Buyers impose boundary disruptions on the target firm, forcing modifications in beliefs, actions, and procedures. This unwelcome assimilation can have a calamitous effect, leading to employee flight and ensuing loss of innovation and intellectual/social capital, resulting in lack of productivity and devaluation of the combined entity, hence defeating the purpose of the merger.

Leadership

A utilitarian description of leadership is the ability of a superior to influence the behavior of subordinates and persuade them to willingly follow a desired course of action.

History’s leaders chronicle the case for change: leadership, per se, is not required to maintain the status quo, merely management. The two represent static vs. dynamic organizational states, and are, in many ways, diametrically opposite forces: managers seek stability (“do things right”), while leaders seek chaos in the form of change (“do the right things”). Corporate leadership’s primary function, then, is to trigger change.

In order to motivate and spur action, different leadership styles are employed. Leadership styles can be thought of as multiple techniques and approaches engendering a leader’s role establishment, performance criteria, responsibility assignation, and relationship development among followers. Six distinct leadership styles have been identified, each one wielding a positive or negative affect on individuals and overall organizational climate, as show in the following table:

Leadership dimensions can be thought of as behavioral patterns undertaken by leaders to stimulate followers to action. They are often categorized in tripartite fashion: transformational (inspiring), transactional (results-oriented), and laissez-faire (avoiding). Studies have shown that transformational leadership factors (idealized influence, inspirational motivation, intellectual stimulation, and individualized consideration) are uniformly associated with exceptional organizational performance. Additionally, transformation leadership, unlike transactional or laissez-faire, positively impacts individual commitment to change, branding it as an ideal behavior for leading corporate change.

Conclusion

So how can an organization increase its chances of merging successfully? As mentioned, even while increasing in occurrence, mergers continue to fail for numerous reasons already mentioned: executive insularity, incompatibility of initiatives, overabundance of management and dearth of leadership (especially transformational), and, finally, callousness toward corporate culture/people issues. The last point appears again and again as a primary impediment to M&A success. Culture is the “make or break” factor in integrating companies. It is a firm’s people that, ultimately, determine the success of mergers. With exposure to nurturing leadership styles under the penumbra of transformational leadership, followers can and will embrace change. Early attention to “me” issues (people and culture) and ongoing communication are both instrumental to this coveted end.

Given the sum of information reviewed in this article, the following checklist is suggested for ensuring a successful merger. If merging companies – in telecom or any sector - devote rigorous adherence to the steps indicated, the likely outcome will produce greater achievement of synergies, swifter integration of merging companies, and less resistance to change from employees.