Activision recently completed its acquisition of King Digital, author of mobile gaming juggernaut Candy Crush Saga. Activision spent $5.9bn and the acquisition is being positioned as “accelerating Activision’s move into mobile gaming”. This makes a lot of sense. Activision is a successful, powerhouse game publisher with mega-hits like Call of Duty in its stable. King Digital is profitable and knows how to make a successful mobile game. Complementary products and expertise, good revenue: what could go wrong?
The answer is, of course, a lot. Acquisitions that make sense on paper, that seem to be mutually beneficial, often stumble and fall. Sometimes the acquired company is allowed to remain “independent” within the new corporate framework; WhatsApp or Oculus at Facebook are examples. Those acquisitions seem to work well more often than not.
It’s when the new company is integrated into the teams and processes of the acquiring company that things often begin to go wrong.
Google’s acquisition of Nest is an example. Nest’s acquisition of Dropcam is another. You tend to see key employees leave and products falter. Sometimes an acquired company is spun back out, wounded, in the hope that it can survive on its own as it once did. Microsoft’s acquisition of Nokia is an example.
The problem is that the decision to acquire or merge companies is usually made with the logical brain, the part of the brain that can explain things and make them sound like a good idea, for example:
- The expertise / IP complement each other.
- One company is prevalent in a market the other one isn’t.
- There are economies of scale.
These logical reasons miss one important truth. When the companies come together, human beings need to work together every day, share information and integrate process to make the acquisition work.
When human beings can’t get along, we call it a “Culture Clash”. Mergers and Acquisitions expert Alan J. Smith, of Pacific Group, says culture clash is the top reason mergers fail. Culture is formed gradually over time and is based on the shared experiences of everybody at the company. Culture is built up of very subtle things. It’s the habits and patterns of behavior that become the norm and the way a particular company works.
- The nuance in the language used by the organization.
- Is it OK to ask questions in meetings?
- Do you wear a shirt and tie, or shorts and a T-shirt?
- Is the company driven by engineering, marketing or sales?
- If someone asks how you’re doing, do they expect an honest answer?
- Are you supposed to respond to e-mail immediately?
The list is endless and different for every company. Cultures are extremely difficult to change, in part because people are resistant to change. When you start thinking about all the little things that make up culture, it’s hard to imagine that any mergers could ever work out.
The good news is that occasionally, very occasionally, culture integration is considered during large company mergers and acquisitions. It’s rare but it happens, and culture experts make money advising how to integrate cultures.
Unfortunately culture it is rarely considered during re-orgs or team mergers inside companies.
I was involved in an internal merger at HTC that brought together three teams that created services to support HTC phones. The merger made sense. There was duplication of work and conflicts in product strategy that confused customers. The leadership team didn’t consider that the teams had fundamentally different cultures, from their approach to product planning to their engineering processes.
The 3 teams were lead by strong, successful entrepreneurial leaders. This merger required these leaders to give up power, and there wasn’t clear delineation of responsibilities prior to the announcement. Chaos ensued after the announcement and it was reversed a couple of weeks later. I still have the mug given to all members of the shortly lived “Content and Services” group.
The problem is that most senior managers think about products, markets, profit & efficiency and miss the fact that people are what make it successful. I don’t blame leaders. The incentives in most companies are aligned with business measures like market share and maximizing profit. Employees are simply resources to be used in the pursuit of business metrics. Research from Gallup and Google, among others, says that businesses with high employee engagement enjoy many benefits, including 20% more profitability. Yet only 30% of employees in the US report being engaged in their work. The task of engaging employees usually falls on a “Human Resources” department that is underfunded and it has no influence in the company. This simply has to change.
We must make a meaningful effort to understand the culture of both organizations before we plan a merger or re-org.
We must work hard to identify gaps and potential areas for friction in the merged organization. We must make plans to smooth and support the integration of cultures, without simply expecting people to “get along”. If one culture is going to be allowed to dominate, that needs to be clear and communicated at the outset. Employees need to be given and give people the option to leave with a severance package if the change of culture is going to be a problem.
While we continue to execute mergers, acquisitions and re-orgs without any consideration to culture integration, we’ll continue to kill promising companies and products. And we’ll exacerbate the chronic state of employee engagement.