Deloitte survey: 60% of companies cannot achieve the anticipated business value from merger & acquisition

Published: 29 October 2009

While merger and acquisition (M&A) transactions have underpinned economic growth in China, 60% of enterprises cannot achieve the anticipated business value from their M&A activities, of which two-thirds attribute to inefficient post-deal integration of corporate cultures, according to a survey by Deloitte. Despite the economic impact from the global financial crisis, it was shown in another Deloitte survey that M&A transactions will continue to increase alongside steady economic growth in China. In fact, M&A transactions among domestic companies in China reached a total value of US$8.2 billion in the first quarter of 2009, while outbound M&A transactions initiated by Chinese companies valued at US$4.9 billion. Transactions which involve the takeover of domestic Chinese companies by overseas investors hit US$22.9 billion.

Mr. Jungle Wong, Partner, Human Capital Advisory Service, Deloitte China said: "As a mechanism for sifting out weaker companies and allowing stronger ones to thrive in a market economy, M&A is an effective way to improve resource allocation, refine the industry structure, optimise economies of scale, expand production and capital, and facilitate modernisation. However, companies which have initiated an M&A deal face the challenge of overcoming gaps between the two companies, integrating the strengths of their corporate culture, and establishing a new and standardised corporate culture."

Titled "Survey on post-deal integration of corporate culture among Chinese companies", the report followed the release of M&A data by Deloitte for the period between 1998 and 2008 with the intention to understand the post-deal integration of Chinese companies, especially in terms of corporate culture and people. This is the first Deloitte report which focuses on leading companies in over 10 industries (including automotive, retail and logistics, finance – insurance and securities, metal, steel, petrochemical, energy, food, etc.) with reference from typical M&A cases and significant first hand information.

The report found that most companies are highly concerned about cultural integration after completing an M&A transaction and would implement some internal communications to foster integration. What companies can do to improve however, includes implementing various measures before and after the M&A transactions such as a cultural assessment, execution of the integration plan and feedback assessment.

With regard to pre-deal expectations, 55% of companies favour a merging approach, in which the culture of the two companies will be integrated and adjusted individually to complement each other's strengths and weaknesses, while 35% expect that the acquired company should give up its own culture and adopt the culture of the buyer. In actual practice, the Deloitte survey found that 60% of companies would adopt the culture of the buyer company, while 30% would integrate the culture of the two companies. This finding is not consistent with their pre-deal expectations.

"This is due to the fact that the acquired company is in a weaker position already entrenched when the transaction agreement decides on the new allocation of power and resources. If cultural integration is taken at the final stage of the transaction, the party being taken over has already lost its negotiation power and will have to adhere to the culture of the buyer. Supported by our interviews with senior executives, we identified two ways of successful cultural integration depending on the situation. In the first situation, involving a stronger and a weaker company, the newly merged entity will adopt the culture of the buyer company as the core framework, but will not put aside the culture of the seller company. It will improve and develop based on the core culture of the seller company. In a situation involving two equally strong companies, the new entity should respect the culture of both companies. However, they will complement each other's strengths and weaknesses and create a ‘third new’ culture," said Mr. Wong.

The survey revealed that over 50% of companies perceive values and mode of management control as the most important elements for cultural integration. After the M&A transaction, 75% of companies have set a clear vision, mission and strategic objective, but 40% of companies believe that internal communication of the new vision and mission is either inadequate or unclear. In terms of integrating business vision, 15% of companies indicate that their management fail to fully consider and reflect the differences in culture and the competitive strengths of the two parties into their decision making process. Another 15% of companies purport that there is no consensus among employees in their understanding of the requirements of major job tasks, such as quality, efficiency balance, plus the balance between short and long term returns.

Cultural integration is a key success factor for M&A transactions and should be one of the major considerations throughout the M&A process. Based on the survey results, Deloitte has identified five key areas of consideration for Chinese enterprises. It is necessary to: assess the culture of the target company and make recommendations on the compatibility of the cultures of the companies; offer preventive measures and solutions to mitigate pressure arising from cultural differences; establish an integration management office and appoint senior managers to put together a cultural integration plan; to clearly understand the future culture, direction and vision of the company and to be stringent with the execution, and; stress constantly the importance of communication.

At the time this report was released, the financial crisis continued to impact the world's economy while the M&A market in China continued to thrive, with state-owned enterprises speeding up M&A restructuring and outbound M&A. Mr. Wong said: "Along with the rise in M&A value and the number of deals, how companies adopt a systematic M&A approach will determine the level of success and the value they can obtain from these transactions. The approach includes formulating their M&A strategy, identifying the M&A target, conducting due diligence and post-deal integration."