Company culture during mergers & acquisitionsBlog / November 3, 2023 / with Christoph Drebes
How can you preserve the best company culture during and after a merger or acquisition?
Mergers and acquisitions can be challenging for all parties involved. They’re big financial risks for investors, but for employees, they are often a time of intense uncertainty and fear. Even during a friendly acquisition or a conglomeration, jobs can be on the line and restructuring is highly likely. With so many people concerned for their futures, it can be a challenge to keep morale high.
In this article, we’ll look at different kinds of mergers and acquisitions, their potential impact on company culture, and how you can plan ahead to keep a unique culture alive through tough times.
What are the different kinds of mergers and acquisitions?
The term “Mergers and Acquisitions” covers a lot of different situations. Here are some of the main varieties of merger, their benefits, and a brief summary of how they can put company culture at risk.
Forward merger (Direct Merger)
In this kind of merger, one company buys another and completely integrates the acquired company into the acquiring company. The acquired company ceases to exist as a legal entity, and the acquiring company takes on responsibility for clients, products and services, and liabilities of the acquired company. The benefits of this kind of merger are that very few changes for the acquiring company – they simply grow larger and may have new products and services to sell.
The risk to company culture is that some functions and departments now potentially have more people than they need. Members of the acquired company might face redundancy, particularly in operational roles like HR, Finance, and Administration. When redundancy is on the table, it’s hard to maintain a positive atmosphere.
The acquired company will also likely have to change many of its internal processes to match those of the acquiring company. For long-standing employees, this can mean a lot of disruption and potential friction. Some might not agree with the way the new management team runs things. There will certainly need to be a period of adjustment, and some employees may choose to leave the company rather than adapt.
This kind of merger has the least impact on company culture. In a conglomeration, one company purchases another that has little to do with the acquiring company’s business. As they don’t have any customer or product overlap with their parent or sister companies, they generally don’t have to change too much about how they operate.
Naturally, at C-level, quite a lot will change. There may be additional reporting requirements and new stakeholders on the board. But many of the regular employees won’t notice a big difference.
Reverse Merger (Reverse Takeovers)
Reverse mergers are rare. They occur when a small, private company acquires a larger, publicly listed company – which is often a shell company. This is often done to help a small company become a publicly listed company without having to go through an IPO.
Since many of these mergers take place between an active company and a shell company, without having to integrate their day-to-day processes, there’s no pressing issue for company culture. Most of the “merging” takes place in legal and financial documents and many employees won’t notice an immediate difference.
One exception is that publicly traded companies have different standards for compliance. As a result, employees may notice new colleagues or even whole departments whose role it is to ensure compliance. These new regulatory pressures may cause some degree of social friction.
This kind of merger takes place when two companies offer the same products or services but in a different market. The acquiring company can use the acquired company’s resources and relationships to extend into a new territory or sector.
The benefits of a market-extension merger are:
- The acquired company is often already relatively successful as a business, so you may not need to adapt their way of working very much.
- By acquiring a business in a new market, the acquiring company is de facto eliminating one competitor that they would have faced if they’d chosen to expand their own operations directly.
- Insights into the product from a different market can generate ideas for new features or strategies.
The risks of this kind of merger are largely financial – if the management and processes of the acquired company remain largely the same, then most of the friction will come at the level of the C-Suite. However, many companies choose to centralize some functions to make the most of economies of scale and uniformity. In these cases, questions of redundancies and position in the hierarchy can cause difficulty.
Counter to a market-extension merger, this kind of acquisition takes place when one company wishes to extend its offering to its existing customers. They achieve this by acquiring a company with a compatible product that either opens up new business opportunities or allows the new owners to merge the products to create something better.
This kind of merger can be extremely sensitive, and not only because, as in other kinds of mergers, teams in central functions will also likely be downsized. For SaaS companies, this kind of merger means that product management and software development teams will also have to find a way to reconcile their different practices. Some of the product roadmap may have to be rethought entirely.
For more traditional companies, this task might fall to the R&D and production teams. Marketing and Sales teams will also have to find a new way of packaging and selling the new hybrid product. If these departments fail, then the anticipated benefits of the merger will likely not emerge. And there are plenty of opportunities for friction, conflict, and uncertainty.
Why should company culture be a priority during a merger?
We’ve given you a few ways that different kinds of mergers can be damaging to company culture. But why should it be at the top of your list when managing a merger or acquisition?
Well, mergers are a risky proposition, and success is dependent either on a new acquisition’s integration or its ability to acclimate quickly to having new ownership. At the core of both needs are people. Here are some risks to keep an eye on:
- Employee retention
For a merger to be successful, you need to ensure that the knowledge and expertise of the acquired company aren’t lost in the process. Employee retention is, therefore, a key issue that can look very different depending on the kind of merger taking place.
At a bare minimum, you will need a transition period where knowledge from the existing staff is transferred to the people who will be responsible in the future. Whether these individuals intend to remain with the company long-term or not, you need to make sure that they are an enthusiastic and active part of the process and don’t leave before key handover events have taken place.
Often, the acquired company will be smaller, dynamic, and growing healthily. An acquisition by a larger, more corporate entity won’t always be greeted with joy by employees who are used to the way they do things. Change can be stressful.
Low morale can reduce productivity and increase the rate at which employees leave the company. It’s also catching. It can be difficult to turn the tide once employees’ opinions have gone sour, so it’s important for acquiring companies to work with the existing management on a plan for announcing the merger that presents it with the right energy.
When employees feel that their jobs are at risk, they won’t be interested in collaborating. In cases where two departments are being combined before being streamlined, this can become an acute issue. If employees feel like they are competing with their new teammates to keep their jobs, they won’t work together as well as they should.
For example, if there are idiosyncrasies in an accounting system that only someone from one company can answer, they might think that their job is secure. In that case, they can decide not to share all the information needed to properly integrate the departments.
This can delay any transition work, and it can also prove disruptive to productivity and morale more generally.
Culture impacts and is impacted by all employees, but it’s strongly influenced by managers. They often set the example, particularly when it comes to healthy communication and feedback, and they are key to providing psychological safety in the workplace.
When managers are replaced or are demoted to a lower position in the overall hierarchy, it doesn’t only create stress for them but also for their staff. Someone who may have been in a good position to advocate for their team previously might have lost that ability. And a new manager who has been hired or seconded to the acquired company is unlikely to inspire the same level of trust.
That being said, when an acquired company is rescued from insolvency, the new management team might be greeted with open arms. But there are things that all acquiring companies can do to ensure that their management team isn’t facing open hostility on day one.
How can you build culture into your M&A process?
We’ve established that company culture is always important to employee retention and productivity – and that it’s even more important during major transitions such as mergers. But how can an acquiring company make sure that they don’t kill a successful culture during the acquisition process? And how can they make sure that they don’t accidentally cause resentment?
Here are some tips:
1. Start assessing compatibility as early as possible
Compatibility isn’t just about product- or market-fit. Depending on the kind of merger you’re planning, you’ll need to assess how well the cultures of the two parties align. Are both company missions and visions aligned? If not, how can you ensure that the important messages aren’t lost after the merger?
What do the employees feel are the most important aspects of the existing company culture? It could be generous paid time off, flexible working, great insurance or other benefits, or a flat hierarchy and open communication. It might be regular fundraisers for charity or large-scale work events.
These factors will be different for each company involved, and the key here is to look for things that are completely incompatible and can’t be taken forward post-merger. How can you ensure that the important contributors to company culture don’t disappear? And if there’s no room to maneuver, what can you offer in exchange?
2. Identify the key players that drive culture
Every company has people who take the lead in culture initiatives. It could be a motivated People & Culture department. It might be the Office Manager. It could be a head of department who has created a fun and productive working environment for their team. It could even be the CEO who comes up with ideas and provides the energy (and resources) to make them happen.
We discussed earlier that there might be key individuals you need to retain for knowledge transfer. There may also be individuals whose knowledge might not be so essential but whose loss would impact company culture. It doesn’t look great, for example, to fire the longest-serving employee who onboarded almost every other team member.
If someone who everyone associates with team spirit and good work ends up leaving – whether via redundancy or no longer feeling welcome – it can lead to a slow unraveling of company culture.
3. Identify pocket cultures
One often overlooked area is the presence of pocket cultures in the workplace. Does everyone think the existing culture is fantastic, or is one team often left out? Or is one team always having a great time while others struggle?
The existing management or HR team might not have this on their radar when discussing company culture – particularly if one department is feeling overlooked. For instance, perhaps IT feels like a service department rather than one that is respected for adding value. Or Finance might feel as though they just have to clean up all the other departments’ mistakes. This resentment might mean that team members don’t go to events, read internal newsletters, or have any social contact with those outside their own team.
For unhappy teams, the merger could be an opportunity to restate their place in the company. For happy teams, the question is about how to tap into what’s working for them and ensure the rest of the company isn’t left behind.
4. What is the target state?
Once the acquiring company knows what it’s going to be working with, it’s time to define the ideal target state. What are the elements of the acquiring company’s culture that you would like to roll out to the acquired company? What pieces of the acquired company’s culture are important to maintain? While a happy workforce is important, these decisions should also be made with productivity and performance in mind.
For example, a team that is happy but underperforming may need more hands-on oversight and support to reach their business goals. That might change their internal culture, but it can be a positive change if communicated in the right way.
In this stage, it’s important to set certain KPIs for where you want to be post-merger. Where do you want your Employee NPS (Net Promoter Score) to be six months or a year after the merger? What is an acceptable employee retention rate, especially for key employees? Will you track increases in sick leave or burnout?
5. Plan communication: who gets to know what, when?
A lot of damage to culture can happen on day one: you announce the merger to both companies, and the employees have questions that you can’t answer yet.
It’s difficult to have good communication during a merger. Good communication is based on transparency, and there are often very good reasons why you can’t disclose information during a merger. So, how can you make sure that employees know you are communicating in good faith and are sharing everything that you can?
- Control information. It’s important that the people involved in planning and executing the merger understand not to gossip or share news ahead of time. Rumors can damage morale, especially if the merger ends up not going ahead. Make sure the team involved knows that all communication has to be carefully worded and planned.
- Plan thoroughly for the announcement day. Be clear about what you need to communicate on the day of the announcement, both internally and externally. Have key decisions made in advance. Make sure that the news doesn’t reach the press before you’ve told the employees of both companies.
- Be prepared for hard questions. Employees are likely to have concerns about job security, compensation, and existing benefits. If you don’t have the answers, make sure that there is a way to submit questions and respond in a timely manner. If there are things you don’t know or can’t share yet, then try to give people a timeframe for when they will know.
- Maintain respect for all involved. Even if the merger is coming as bad news for one party or if several people will be leaving the company immediately, it’s important to maintain a professional and positive tone of voice. Whatever has happened in the merger process, all public discussion should be about the ways that the merger is going to be beneficial in the future. And if team members are leaving, then their past contributions should be recognized by senior staff of both companies.
Tips for bringing two cultures together
The merger has been announced; the companies are beginning the process of joining forces. There’s uncertainty in the air. In this tough environment, what can you do to bring two different company cultures together?
- Create a new brand identity and value statements
Sometimes, it makes sense to combine the brand identities of two companies. This might be largely to help customers understand that their products and services will stay the same. However, it can also help the two sides of a merger to feel more united. When designing a new employer brand and values, make sure to integrate employee feedback and to include several representatives from each side in the process.
- Celebrate the past achievements of both companies
While it’s likely that, over time, the company story will simplify down to the essentials, it’s important in the short term that milestones and achievements are celebrated for both parties in the merger. If a team won an industry award for work done prior to the merger, it should be a reason for the entire company to celebrate. The same is true for product launch anniversaries or long service awards for individuals.
Valuing the achievement demonstrates that the new management team values the work put in by employees that makes present-day success possible. It makes sure that employees don’t feel overlooked or second-class.
- Fund team-building events at all levels
Particularly for the first year after a merger, be prepared to spend more on team-building events. You’ll likely need to arrange them for individual teams and departments, who will need to establish all kinds of ground rules, KPIs, and expectations. The leadership team, particularly if it’s made up of managers from both sides, will probably also need several workshops and events to get to know each other.
Whole-company events are also helpful in building a sense of the new business. However, you may need to think about how to organize them to avoid people networking exclusively with people they already know.
- Encourage networking across all groups
Events help people meet as individuals and groups, but it’s often hard to make strong connections when there are so many people around.
As an additional initiative, you can encourage employees to connect individually with one another. Platforms like Mystery Coffee or Mystery Lunch randomly match individuals so that they meet a new colleague every time. These initiatives allow employees to connect with people in other departments, regions, or hierarchy levels, breaking down silo mentalities and giving them a new and more robust network.
This is particularly useful for small companies that merge with large corporations, as it can be tough for individuals to navigate the new company structure. After meeting a few colleagues from the larger firm, they’ll have people that they can ask for help getting settled in.
Culture during M&A: an interesting challenge
There are a lot of elements of mergers and acquisitions that aren’t fun at all. Performing due diligence, tough negotiations, and detailed planning for the integration process. It can be disheartening to think that it might all fall apart because of a culture clash.
However, for CHROs and People & Culture Managers, it might be one of the most fascinating challenges they ever face. There might be tough decisions to make, but there’s also a lot of potential for growth – for the company and for every individual involved.
We hope that this guide to communication and corporate culture has helped you to better grasp the different risks, strategies, and potential rewards of investing in company culture during a merger.
About the author:
Christoph is an entrepreneur from Munich and co-founded Mystery Minds in 2016. Mystery Minds' mission is to make the world of work more human by creating meaningful, personal connections between colleagues. The remote-only team already works with over 250 international companies, helping them to strengthen internal networks and overcome silo mentalities.
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