Mergers and acquisitions - a problem of culture

History has proved to be a rather critical judge of many mergers and acquisitions during the second half of the 20th century. In the 1960s and 1970s conglomerate organisations were in fashion. It was assumed that management and commercial success in one type of industry could be easily be transferred to other unrelated industries. Regardless of the fact that there were few or no synergies apparent between the merged or acquired companies there was an enthusiasm for companies to come together and hopefully pool resources and achieve economies of scale either in manufacturing, distribution or marketing. Empirical evidence has shown that many of these acquisitions/mergers did not achieve their objectives. Returns on investment fell as did many share prices. There was a reaction to this and during the 1980s there was a reverse process. Many companies divested themselves of some of their expensive acquisitions.

However, at the end of the 1990s (and still continuing) there has been a renewed growth in merger and acquisition activity. However, currently the focus is on related industries. There is an awareness that different industries may need different skills and resources. Concentration is now on building relationships with firms operating in similar or related technologies. Acquisition for the sake of diversification is not a major factor in these moves. These linkages vary from strategic alliances, joint ventures to full-scale integration with mergers or acquisitions. These moves are well illustrated with the current activities world-wide within the financial, retail and pharmaceutical sectors. Nevertheless, there is still some evidence which suggests that these strategies do not always achieve the objectives which were hoped for.

Possible reasons for mergers and acquisitions failing to fulfil their potential

• Age of firms

  New organisations are often seen to be more vibrant and responsive than older ones, which may appear to be more conservative or bureaucratic. Often it proves difficult for management to accept this change in the speed of doing business and decision-making. This mirrors the differences which were commonly held to exist between Japanese and US organisations. Although the views have been exaggerated it has been argued that until recently US corporate decision-making was centralised and very speedy, whereas Japanese companies, unhappy with confrontation politics, sought to win over doubters and opponents within a company by consultation. This resulted in agreed positions but often at the cost of delay.

• Size of firms

  Again we see the contrast between the entrepreneurial firm and the supposedly more ponderous bureaucratic organisation. There has been sound empirical evidence demonstrating that smaller firms feel threatened when they are acquired by or are closely associated with larger companies. Financial muscle and entrenched power can result in smaller units being neglected. Decision-making may become more remote, resulting in less flexible and responsive actions.

• Technology

  Although this factor may not seem to have an immediate cultural link it becomes apparent that when older technologies associate with newer ones there can be difficulties. This was seen in the printing industry when the introduction of computer-based technology generated problems with the more traditionally-based industry which had depended on the older-fashioned printing presses. Problems associated with this mix in technologies have occasionally been solved by isolating the different factions. Highly innovative units such as R & D have been set up away from the more bureaucratic structures, often required to administer large companies. In the 1980s IBM set up its division, which was to develop its new PC in Florida so that it had the freedom to operate in an entrepreneurial and innovative fashion. It was believed that if this division had been located within the normal IBM framework it could have interfered with the development of this product and denied IBM the market opportunity it needed.

• Management style

  Mergers or acquisitions can bring together senior management who have operated with different styles. Some managers are ‘hands-on’ and wish to be involved in all decision-making. They are unwilling to delegate. This is possibly acceptable in a relatively stable environment where the technology is simple. However, increasingly many large firms, particularly those involved in mergers and acquisitions, are operating in leading edge technologies and on a global scale. In these circumstances the external environment is likely to be dynamic and technologies are becoming increasingly complex. It is unlikely that senior management can operate within a highly centralised structure. It could prove difficult for managers who have been accustomed to being the focus of all decisions to be suddenly expected to surrender such influence or to work with managers who expect to see more decentralisation.

• Type of employees:

  As organisations become more global the culture of the employees will vary considerably. Levels of education, ability and expectations will vary. What might be an acceptable style of management in one country may be unacceptable in another. Some employees may expect to be consulted and enjoy working in a participative culture. Others may find this unusual and find the unexpected ‘freedom’ difficult to handle. This cultural problem is becoming more prevalent as the moves towards globalisation increase.

A model for understanding how conflicts may occur as companies embrace differing cultures

1. The strategic apex - the senior management who make the key policy decisions.
2. The operating core - the performers of the basic work in providing goods and services.
3. The middle line - the managerial hierarchy between the operating core and the strategic apex.

4. The technostructure - the analysts who plan and control the work of others. This section could include accountants if their major responsibilities are concerned with drawing up financial plans and controlling expenditure.

5. The support staff - people who provide various internal services - PR, legal, catering. These functions are now frequently being outsourced. These can also include R&D and even IT services.

Mintzberg has suggested that where one of these parts dominates then the organisation will lean towards a particular structure (see Figure 1).

Where the strategic apex is powerful the organisation is often seen as an entrepreneurial structure. The leader is mostly concerned with giving the company a sense of direction and takes control of all significant decision-making. The leader is often the owner. This tends to predominate in younger and smaller organisations. However, as organisations grow larger and become older they frequently take on the characteristics of a bureaucracy. The technostructure becomes more powerful here, organising planning and controlling. Mintzberg has termed this structure a machine bureaucracy and the major purpose is to provide increased efficiency. This type of organisational structure is most applicable where there are stable environments and simple technologies where change is relatively minor. As organisations diversify into different markets and different technologies it proves difficult to manage these ‘conglomerate’ structures. The tendency is to divisionalise the organisation, allowing each division or subordinate company to focus on a specialist geographical area or a specific technology. The objective is to allow the company to concentrate on these areas and not to try to manage over too diverse a set of companies. The key part of the structure here is the ‘middle line’. These are the divisional managers who can act as local chief executive officers, reporting to the strategic apex who are the directors at the Headquarters. Because of the differences of both internal and external environments the only logical means of controlling these diverse divisions is by using financial measures. It is not surprising then that such managers can become obsessed by ‘bottom-line’ criteria.

Companies do not always follow this seemingly logical process from an entrepreneurial company to a machine bureaucracy and on to a diversified company. If people orientation is dominant a company may proceed from an entrepreneurial company to a professional organisation. This can be typified by many public sector industries such as education and healthcare. Here the major influencing part of the organisational structure is the operating core. These may be teachers, professors or doctors. Accountants could be seen in this capacity if they were operating at a more corporate level and had a greater input in helping shape the strategic direction of the firm, as distinct from being part of the planning and control structure. Their function is to carry out the key work, but they are the custodians of the expertise required. Their main preoccupation is to become as proficient as possible, providing the highest level of quality performance available. This can, of course, conflict with an efficient level of provision. This has led to considerable arguments about the purpose for health-care provision throughout the world. The final structure is the adhocracy. This focuses on the need for innovation. This is a suitable organisation orientation for a firm operating with leading-edge technology. Specialist consultancies involved in IT and scientific applications could be suitable examples. Innovation means breaking away from the established patterns and applying new methods to problem solving. Therefore, the innovative firm cannot rely on any form of standardisation. The innovative firm must avoid the trappings of bureaucracies. Above all, it must remain flexible. The innovative adhocracy company usually has outside clients and does work on its own behalf. The work provided by the company can be considered a type of outsourcing — hence the linkage with the support part of the basic Mintzberg structure.

Each of these five structures reflect the dominance of one part of the organisation and pursue the five individual objectives of:

1. direction;

2. efficiency;

3. concentration;

4. proficiency;

5. innovation.

However, it is apparent that, if carried to extreme, this will generate conflict within the organisation. Just as the excess of one virtue can easily become a vice, it is also true that the focus on one of the key objectives at the expense of others will alienate other members of the organisation. A few examples should illustrate this point.

Example 1

Within a machine bureaucracy there is a temptation to concentrate solely on efficiency targets. Whilst this is important within a large firm, where waste can easily occur, it is important not to concentrate only on rules and procedures, intended to promote order and efficiency, if this discourages innovative and entrepreneurial activity. It is difficult to imagine managing an R&D facility in the same structured way in which one might manage a production line.

Example 2

In a professional organisation the danger is that the specialists, who have the expertise in that environment, may seek proficiency at the expense of efficiency. No organisation, however well-meaning, can afford to ignore the financial consequences of their decisions. This example can be illustrated by the conflicts that are occurring in the health-care environments.

Example 3

A similar type of conflict may exist within innovative organisations whereby consultants may become so obsessed with the innovative issues that they ignore the managerial and financial aspects of the business. Furthermore, within the diversified context the middle managers are being judged by their financial performance. The danger here is that short-termism may predominate because annual financial results are all important, and therefore less adventurous strategies may be chosen, so adversely affecting future outcomes.

From this Mintzberg model it can be seen that a dominant culture within an organisation, although seemingly appropriate for pursuing an acceptable objective, may also engender conflict which could adversely affect the performance of company. The culture within a company should be seen as having many strands and they all need to be considered, and integrated wherever possible, if a company is to be successful. Focusing on only the dominant part of the organisation’s cultural framework can be harmful to the future well-being of the company.

It should be noted, however, that culture does change over time.Often change is incremental, but it is possible that there could be a fundamental change in culture, particularly if there is a sudden change in senior management or if the company faces some crisis - the result of a failed strategy or poor financial performance. Then the company may have to adopt a less participative culture.