Organizations invest billions of dollars annually in corporate mergers and acquisitions, yet more than 70% of deals fail to create the intended shareholder value. The human side of M&A is too often overlooked, resulting in significant voluntary attrition, loss of organizational knowledge, and internal conflicts that undermine organizational effectiveness. Retention of critical talent has the potential to significantly enhance deal value, while attrition can erode it.
At Perceptyx, our purpose is to enable people and organizations to thrive. In the context of M&A, or more specifically, post-merger integrations (PMI), thriving requires that people involved anticipate success for themselves and the organization at large. The anticipation of success inspires people to fully engage, adopt a shared identity, commit to the change, and apply discretionary effort. When these things happen, success for the individual and the organization becomes a nearly inevitable outcome of the process.
M&A Strategies
There are multiple reasons organizations are willing to invest in M&A despite the high cost and associated risks. Successful M&A opens access to technology, resources, and market share, enabling organizations to establish and maintain a sustained competitive advantage. In recent years, many deals were tech-focused based on the belief that acquiring new solutions with a viable proof of concept was quicker and safer than a traditional, internally-funded research and development approach.
M&A activity allows organizations to sustain growth rates that are more significant than an organization would accomplish through traditional organic means or internal R&D activities. Organizations also invest in M&A to gain access to intellectual property and market share while denying their competition access to the same valuable resources.
The organization’s motivation influences the design of the PMI. Integrations exist on a spectrum with varying levels of incorporation. The least disruptive integrations look more like strategic partnerships where companies maintain unique brands and identities. The most disruptive is a full assimilation of the acquired company into the parent company.
M&A Disruptions
Few events are more disruptive than a merger or acquisition, especially when one firm is fully assimilated into the other. Recently acquired employees often maintain a sense of identity with the former entity and may introduce themselves as “Legacy X” or “Legacy Y.” These employees are often left feeling they lack agency and involvement, such that changes are happening to them as opposed to with them. On top of the stress associated with change management is the fact that these employees are onboarding into a new organization while being expected to maintain their prior workload, albeit now with ever-changing and often limited resources.
Cost reductions and increased efficiency are common motivating factors for organizations to engage in M&A. For employees, this introduces the stress of possible layoffs. Top performers may feel it's in their best interest to leave the organization early to avoid the stress of working through the integration only to have their role eliminated later in the process.
Merger Valence
For employees to fully engage during the PMI, they need to anticipate success at three specific levels. The first is success for the customer. Do employees believe the product/service/customer experience will benefit from the integration? The second level is anticipating success for the organization. Will the integration secure the company’s future, and benefit key stakeholders? The third level is the individual. Will the integration positively affect the employee experience and create opportunities for growth and development? Some employees may look at the PMI and focus on new resources and opportunities that are now available to them, while others may focus on the loss of autonomy or feeling like “a little fish in a big pond.”
One CEO of a recent acquisition in India described his situation as feeling “like a tiger without any teeth.''. He ran a company with approximately 400 employees and said that previously when someone came to him with an issue, he could typically fix it the same day. The integration added many layers of approvals which which negatively affected his sense of authority and autonomy. Managing experiences and expectations is critical to help colleagues successfully navigate changes to everyone’s benefit.
Identity and Psychological Safety
One of the most significant shifts that take place during PMI is the change in formation of a new identity. One survey question that many Perceptyx customers undergoing M&A activity use is, “When I talk about [acquiring company], I say ‘we’ rather than ‘they.” It's normal for this question to have a higher neutral score early in the process as employees adapt to their new environment.
Asking this question allows leaders to make two important comparisons. First, are there groups that are slower in adopting the new identity? This could be evidence of change resistance that would benefit from additional support. Second, leaders can compare the data and experiences of those who have adopted the new identity with those who have not to understand organizational and managerial behaviors that, with improved consistency and intentionality, can move a successful integration process forward.
Following one executive presentation, I had a customer confide in me, “It occurred to me during the meeting that I now work for a different company.” This was an executive who had been with the company that was acquired by and integrated into a different organization. She shared that if she had quit her old job and been hired by the new company, she would have been less resistant to change and quicker to adapt to new ways of working. However, she realized that she was resisting some change because it felt like a loss of something familiar. That realization helped her adopt a different mindset and engage more productively from that point forward.
Understanding the Impact to Organizational Culture
Organizational culture determines how work gets done. It often reflects the values and priorities of senior management. There are multiple ways Perceptyx partners with organizations to measure and diagnose organizational culture through both quantitative and qualitative methods. Regardless of the specific measurement, the insights provided help leaders understand early perceptions, identify sources of conflict, and design targeted interventions to remove barriers to people anticipating the success of the PMI.
In the case of PMI, cultural congruence is positively associated with higher employee retention rates. Perceptyx regularly conducts M&A pulse surveys for customers, and our analysis of archival data from three specific acquisitions showed that employees who felt the organizational cultures of the acquired and acquiring firms were not aligned were 3x more likely to leave the organization in the first eighteen months following the deal close. This is the difference between 10% voluntary attrition and 30% voluntary attrition.
The Next Reality for M&A
For the past decade, capital was cheap and access was easy. This helped fuel an arms race of sorts with corporate acquisitions. It was equivalent to a seller’s market in housing. However, that changed in late 2022 and will likely continue to change. Organizations' weighted average cost of capital (WACC) is increasing and the economy is slowing. This means that the motivation behind M&A is likely to shift significantly. Rather than an attitude of “1+1=3,” mergers are more likely to become a tool for organizational survival, resulting in companies that see themselves as direct competitors today joining forces.
This happened following the dotcom crash in 2000. Leaders had to navigate the challenges of fostering a new shared sense of purpose and overseeing teams where people were forced to work alongside others who had once comprised “the enemy.” An additional factor that exists today is the strong emphasis on fostering people-first cultures that prioritize belonging and inclusion. One characteristic of these organizational cultures is a stronger in-group bias. While the values and cultures may align across organizations, combining those cultures can feel like trying to mix oil and water.
Employee Listening Is Key
Despite the specific strategy, level of disruption, or culture of organizations involved, employee listening plays a critical role in measuring and shaping employee experiences. These programs are not academic research projects. In the case of academic research, special care is taken to avoid influencing the thing that is measured. With employee listening, organizations have the opportunity and obligation to influence employee perceptions to improve outcomes both for individuals and the organization.
Leaders can intentionally leverage the Hawthorne effect — a type of reactivity in which individuals modify an aspect of their behavior in response to their awareness of being listened to — and thereby help employees play an active role in determining their destiny. By adopting a human-centric approach to PMI, organizations can build the anticipation of success, leveraging the latest in I/O psychology to enhance deal value by ensuring their mission-critical employees remain mentally and emotionally engaged at work. The process also enables organizations to unlock their organization’s full potential by listening to those closest to the work and then designing experiences that involve and empower them.
See the Way Forward Before, During, and After M&A
The Perceptyx People Insights Platform gives your organization the flexibility to adapt your listening strategy during M&A activity and other rapidly-changing real-time events. Combined with support from our analytics experts, our platform can help you keep a finger on the pulse of your people’s needs in order to provide support during periods of intense change and uncertainty. Schedule a meeting to learn how we can help your organization elevate and enhance the employee experience.