For many companies, successful M&A is a critical aspect of their long-term strategy—and a clear pathway to accelerated growth. In the past decade, M&A accounted for $8.3 trillion of capital deployment for the world’s 2,000 largest companies across all sectors. M&A is also a large contributor to growth, and McKinsey analysis has shown that it can be responsible for driving 75 percent of their growth.1 Despite this, the rate of failure is high, standing at between 70 and 90 percent.2
Organizations that acquire successfully have distinctive capabilities at every stage of the process. Qualities they have embedded at deep institutional levels include reallocating M&A capital regularly, having clearly defined “go” and “no go” criteria, knowing when to walk away from deals, and the ability to focus relentlessly on value creation in integration planning and execution. A capability that is often overlooked, however, is the ability to manage culture throughout the M&A process.
In this article, we explore how culture can be used to drive success during integration and how by managing culture efficiently, companies in the energy sector could improve costs and revenue following M&As.
Culture can improve M&A success
Culture—both within the acquiring firm and throughout the integration planning process for targets—is critical to creating value through M&A.3 This is especially true for cross-border or step-out integrations, for example, to gain a foothold in new lower carbon segments.
Differences in the cultures of organizations can exist at any level and have the potential to seriously disrupt operations and jeopardize integration processes. For example, companies may differ in their cultures around decision making—one may have a top-down, directive culture while the other’s is consultative and process-driven. Such issues are especially common where large, established energy players are acquiring smaller start-ups.
Failing to align culture could meaningfully inhibit the companies’ prospects of smoothly integrating and capturing the anticipated value. Similarly, parties in an M&A must align in areas such as accountability, communication, innovation, and operational management.
Our research shows that companies that manage culture effectively in their integration planning are around 50 percent more likely to meet or exceed their synergy targets—across both cost and revenue synergies (exhibit).
Three steps to improve cultural integration
Evidence from McKinsey’s integration engagements in energy and beyond suggests that managing culture through the M&A process successfully could depend on three steps:
Diagnosing “how work gets done” by establishing a cultural baseline. Doing this allows for the identification of common strengths that can be built upon between the organizations, revealing potential transformation opportunities, as well as differences that may cause friction. While recognizing differences, it is important not to exaggerate them or think of them as differences between “good” and “bad” cultures: companies can succeed equally with very different cultural strengths, and aspects of each culture can be bought in during the transition.
Prioritizing cultural aspirations for the integrated company by articulating the future culture and tailoring the integration approach to support these priorities. The cultural program can’t be viewed as an isolated job—it must be interwoven with all integration initiatives. And, for the program to achieve true behavioral change, it must resonate with people on a personal level, requiring rational and emotional intervention throughout the change management process.
Driving change, with leaders in both companies developing a ‘change story’ to plot the desired cultural transformation and determining a set of targeted initiatives for building toward the desired culture. Here, communication must go in both directions (to both the leaders and employees in the acquirer and target organizations). Alignment among the top team—as well as modelling—is crucial for success. These new leaders may be called upon to sponsor activities to keep things moving forward.
Lack of attention to culture management can be a major hurdle to the success of M&As. But by applying an integration strategy giving due attention to culture, this need not be the case. Research suggests that M&A deals that deploy advanced culture management strategies far outperform those that do not. Companies in the energy sector could replicate these successes by performing a cultural diagnosis, prioritizing cultural aspirations, and driving change among the leadership in the target organization and acquirer alike.