Dangerous Liaisons: Hay Group Finds Most European Mergers Fail to Deliver.

M&As Derailed by Culture Shock

PHILADELPHIA -- Over 90% of European corporate mergers and acquisitions fall short of objectives, as companies struggle to combine corporate cultures or governance structures, finds a new study from Hay Group. The study reveals that just 9% of mergers are "completely successful" in achieving their stated objectives.

The report makes worrying reading in the light of last year's acquisitions boom, when European deals topped $1.8 trillion ([euro]1.35 trillion, per Thomson Financial).

"The enormous amounts invested in M&A are not delivering their promised value," said report author David Derain, Hay Group European M&A Director.

"In the intensity of the deal, too little attention is paid to cultural differences or to the lack of agreement on what the ideal culture should be," said George McCormick, Hay Group US M&A Director. "Focusing, as most do, on key financial, legal, and structural issues, they fail to institute a pre-merger cultural due diligence.

"And in the rush to close the deal, they often give short shrift to executive assessment and selection, the new organization structure and designing the key jobs that need to be done to implement the strategy."

Critical Omissions

Hay Group's study found firms are prioritizing financial and systems due diligence at the expense of the intangible assets critical to a merger process.

The great majority (93%) of business leaders made traditional financial due diligence a high priority, while over half (55%) focused on IT systems integration. However 58% confess that over-prioritizing systems integration resulted in insufficient focus on intangible assets and cultural integration.

The results come from a three-pronged research program of 200 senior European business leaders who have experienced a major merger or acquisition during the past three years, analysis of the 100 largest European M&As in the period and, finally, a survey of 300 global employees of merging organizations conducted by The Sorbonne.

"One of the most infamous deals was the 1994 acquisition of WordPerfect by Novell. After just two years and numerous troubles, Novell sold WordPerfect for about $1 billion less than it paid," said McCormick. "The problem was a colossal culture clash. The two firms disagreed on everything, from decision making to customer service."

54% state that neglecting to audit non-financial assets such as business culture or corporate governance increases the risk of underachieving.

Culture Shock

"The secret of a successful merger strategy lies in gaining an accurate picture of the target company's cultural, human and structural assets," said Derain. And Hay Group found businesses do want better data: 49% of executives want more robust reporting on intangible assets, while 66% see internal indicators such as workforce performance as more reliable predictors of success than financial data.

Yet, while business leaders say they need to audit and integrate intangible assets, there is a lack of focus on them during, not only during the due diligence stage, but also as part of the post-merger integration strategy. Perhaps this is because 70% believe - incorrectly - that it is too difficult to obtain intelligence on the corporate culture and human capital of M&A target companies.

Only 13% state that engaging and integrating senior management and the workforce was given high priority as part of their integration strategy, while 70% failed to prioritize intangible assets generally.

And only 27% analyzed the cultural compatibility of the firms to be merged; only 22% carried out a human capital audit. Crucially, 59% failed to prioritize a leadership capability review.

This is having a disastrous impact on the success of the integration: 78% of acquired company employees opposed the mergers, 50% of them actively.

In addition, 38% of employees expressed dissatisfaction with the post-merger climate, with 22% describing the early months as 'culture shock' and a further 16% labeling them 'trench warfare'.

"Culture is not an HR issue - it is a business issue," said David Derain. "Business culture represents a class of assets which must be protected and properly aligned during the integration process if a merger is to succeed."

For more information, including requests for interviews, please contact Neha Mukherjee, 212-584-5472, [e-mail]

About Hay Group, www.haygroup.com

Hay Group is a global consulting firm that works with leaders to turn strategies into reality, with 88 offices in 47 countries. It helps develop talent, organize people to be more effective, and motivate them to perform at their best. Its clients are from the public and private sector, across every major industry, and represent diverse business challenges. Its focus is on making change happen and helping organizations realize their potential. Hay Group conducts annual research on Most Admired Companies for Fortune Magazine and on the Best Companies for Leaders for Chief Executive Magazine.