Irreconcilable differences - includes related articles on J. Michael Payne, Michael Leckie, Compaq Corp. and Julia Bushkov - clash of corporate cultures when corporations merge - Cover Story

HR Magazine, April, 1999 by Robert J. Grossman

When cultures clash, it can be almost impossible to keep newly united companies from slicing apart again.

Professional Cleaning Network (PCN) seemed like a fantastic business to acquire. As the largest independently owned carpet and upholstery cleaning company in the nation, PCN had experienced double-digit sales growth each year for the past five years. And the potential for expansion seemed almost limitless.

When Textrol Acquisition Company of Baltimore, Md., bought out PCN, its financial analysts saw an opportunity to quickly and profitably propel PCN into a national player.

But things didn't work out that way. last summer, just eight months after the deal closed, PCN was bankrupt. In the end, business had plummeted by 60 percent and all of PCN's top management was gone.

"The cultures clashed and that brought the whole thing down," says Vincent Giordano, a consultant from Louisville, Colo., who provided management training after the deal closed. "Textrol was run by time-management people; cost of labor could not exceed 18 percent of revenue. Anyone who couldn't deliver the mandated cost efficiencies was out. PCN's guys were customer-driven people who believed in delivering some services at a loss just to keep people happy."

Merger Mania

PCN's experience is hardly rare. And more firms risk similar fates as the nation continues to experience a boom in mergers and acquisitions. In the United States last year, 11,655 domestic merger/acquisition deals were made for a staggering $1.6 trillion, according to Securities Data Company, a research or organization in Newark, N.J. The number of deals has more than doubled since 1990, when 5,654 transactions were reported.

In most merger and acquisition cases, the parties involved follow a well-established mating ritual called due diligence, which allows them to explore the merits of the marriage. Behind the scenes, lawyers. accountants and high-priced financial analysts join with top executives to make sure the move is strategically and financially smart.

Yet somehow, when the dust clears, most of these deals don't cut the mustard. Even though predicted synergies point to handsome profits down the road, when the earnings reports start rolling in, the outcomes are often disappointing. Seven out of 10 mergers and acquisitions don't live up to their financial promise; 47 percent of the acquired executives leave in the first year; and 75 percent leave in the first three years, according to Mark Herndon, regional service leader, mergers and acquisitions, at Watson Wyatt Worldwide in Dallas.

As the Textrol-PCN disaster demonstrates, the major cause of failure may have nothing to do with the financial or legal details that have been so carefully ironed out between accountants and lawyers.

"People think that if you do the financial deal, the soft and squishy stuff will fall into place," says Tom Davenport, a partner at Towers Perrin in San Francisco. "Not true. It's the soft and squishy stuff that will make or break the deal.

"There are two ways to screw up a merger," he explains. "One is to pay too much; the other is to integrate so slowly or badly that you destroy value, rather than creating it. And misapprehending culture is the No. 1 culprit in screwing up integration."

The Culture Gap

When organizations attempt to mesh their workplace cultures, productivity in the target company drops as much as 50 percent, some firms estimate. And even if the merger or acquisition ends up a success, it can take from three months to three years for the new joint organization to recover from the culture shock. Meanwhile, the meter keeps running as market forces gauge whether the new entity can make it in the marketplace.

That's assuming the deal is a success. Some organizations never bounce back.

"It's not on the [radar] screen that this cultural thing is what kills the project," say Jacky Sherriton and Jim Stern, co-authors of Corporate Culture, Team Culture (AMACOM, 1996). Sherriton and Stern's firm, Corporate Management Developers/Health Management Consultants, Inc. in Hollywood, Fla., surveyed more than 500 senior managers who have gone through a merger or acquisition. The managers cited culture as the primary reason for failure to achieve financial goals.

"Eighty percent say there was no agreement or plan to address cultural issues," Sherriton says. "We find a lot of companies do the financial and legal due diligence and assume everything else will fall into place. They never really come together to analyze 'What is our culture and how do we get people to be where we want them to be?'"

Watson Wyatt Worldwide, which has its headquarters in Bethesda, Md., reports similar findings from its recent survey of 125 major U.S. employers and 45 Asian companies. Seventy-three percent of the respondents said the most important limitation to merger integration - or the biggest failure factor - was cultural incompatibility.

HR as Anthropologist: The Cultural Audit

What is culture? "It's the DNA of an organization, not always visible, but it controls the form and function of what the organization ends up being," Davenport explains.