What Makes Mergers and Acquisitions Fail? Culture.



Some of the most intriguing stories in business media are about mergers and acquisitions (M&As). Unlike your average corporate news story, reports of M&As — like telenovelas — exude a sense of drama. Who will be in charge? Will they live happily ever after? Who will leave, and who will remain?

There’s no shortage of material to cover, either. By September of last year, M&A deals had totaled $3.3 trillion worldwide. Most interesting about all these deals is that the vast majority of them flop. Martin Prosperity Institute Director Roger L. Martin estimates anywhere from 70-90 percent of M&As fail.

While many factors can make M&As more or less successful, one element that often goes overlooked is also the common denominator in many spoiled M&As: culture.

Ah, culture. It has little to do with foosball tables and happy hours and more to do with the ways team members think and act to accomplish goals. And it is often the difference between a failed merger and a successful one.

The dirty little secret about M&As is that culture and human elements are at least as important as strategy and financing, if not more so. Unfortunately, the latter two elements often receive the heaviest emphasis. Why? Think about the people who put together and strategize M&As: CEOs, CFOs, investment bankers, strategy consultants, etc. These decision-makers tend to be numbers-driven, highly analytical, and logical thinkers. Consequently, the projected financial and strategic benefits of a merger are typically weighted more than the less quantifiable human factors.

I could tell you why this is a recipe for disaster, but there are plenty of real-world examples that can do the talking more convincingly. Here are a few M&As that failed because of culture:

1. Daimler-Benz and Chrysler

The $36 billion merger of Daimler-Benz and Chrysler in 1998 initially met with high hopes. It was to be the perfect union of carmakers, the joining of two companies that specialized in different areas of the automotive market. Unfortunately, differences in language, management styles, and philosophy on issues such as pay and expenses meant the two companies were at war as soon as they merged.

To quote Miami University economics professor John Brock, this friction resulted from trying to force together “an upright, hierarchical approach to things at Daimler-Benz and … a risk-taking, entrepreneurial, loose organization [at Chrysler].” The culture of Daimler-Benz became dominant, and as a result, employee satisfaction at Chrysler plummeted. By 2000, major losses were projected. In 2001, layoffs began. In 2007, DaimlerChrysler sold Chrysler to Cerberus Capital Management for $7.4 billion.

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2. Google and Nest

As its entry into the smart home market, Google acquired Nest in 2014. A startup founded by former Apple employees Tony Fadell and Matt Rogers, Nest was known for its sophisticated Learning Thermostat. While Google was an A-player in building software, it was lacking in hardware and product innovation.

For $3.2 billion, Google wasn’t only buying the company; it was also buying Fadell, co-creator of the iPod and a close confidante of Steve Jobs who had been mentored in the art of elegant products by the master himself. Fadell’s entry into Google was seen as an attempt to inject the company with Apple’s hardware expertise.

However, things didn’t exactly go the way Google expected. After years of working under Jobs’ rigid and autocratic leadership at Apple, which is more than 20 years older than Google, Fadell found Google’s more open and collaborative culture a bit harder to navigate. From Nest’s inception, Fadell was the heart of the organization. He built an entity centered around his singular vision, and those who joined the company knew exactly what they were signing up for: not an easy ride, but a chance to create a legacy.

While the plan may have been convincing on paper — Nest would focus on the product and vision while Google would provide support through its infinite resource pool — this was a romanticized vision that glossed over the cultural polarity of the two companies. Nest, with its Apple-like DNA, had a top-down culture where only one person was in charge. Google, on the other hand, had always been engineering-driven and bottom-up. Some say that its massive size makes it impossible to be managed from the top. Trying to unify the two opposing cultures was inevitably going to lead to a breakdown.

In 2016, The Information published a story about Nest’s difficult culture. Shortly thereafter, to add to the insult, Dropcam founder Greg Duffy — who had sold his company to Nest — wrote a scathing criticism of Fadell on Medium: “There is a lot I could say about my extreme differences on management style with the current leadership at Nest, who seem to be fetishizing only the most superfluous and negative traits of their mentors.” Less than a month later, Recode reported on the undiplomatic memes that Google employees had been circulating about the Nest founder, revealing some of the tension between the two companies.

Fadell ended up leaving Nest in June 2016. Rogers made his exit in 2018.

3. Hewlett-Packard and Compaq

In 2001, Hewlett-Packard (HP) announced it would acquire its similarly struggling competitor, Compaq, for $25 billion. Amidst the buzz, critics were quick to point out the cultural disparity between the two: HP’s engineering-driven culture was based on consensus, while Compaq’s sales-driven culture prioritized swift decision-making. This poor cultural fit resulted in many bitter years of fighting, which all climaxed in a writedown of $1.2 billion.

Although the acquisition itself was generally perceived as a failure, HP has hung on. It has since been able to implement critical cultural and management changes that have led to long-term stability.

It is clear from these examples that failing to bridge cultural differences can undermine even the most strategically sound and meticulously planned M&As. While originally driven by desires to grow market share, acquire research and development knowledge, and/or cut costs through synergies, many M&As end up being more trouble than they’re worth. History has persistently demonstrated that the M&A game is won or lost on the culture field. Get that wrong and nothing else matters.

Henry Goldbeck is the president of Goldbeck Recruiting, Inc.

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