Challenges of a Tech Acquisition: Integrating Tech and Non-Tech Talent
If a company is a machine, then a company with a great corporate culture is a well-oiled machine, and most companies in 2019 realize this. They pour in extensive resources into training employees and maintaining morale because the corporate culture has a direct impact on company performance and productivity. In essence, a good corporate climate is great and quite trendy in 2019.
But equally trendy are mergers and acquisitions, with hundreds and thousands of companies planning and executing mergers and acquisitions for aggressive expansion, new market opportunities, acquisition of innovative technologies, and more. But there’s a problem.
Technical talent doesn’t merge all that well with non-technical staff, often leading to a cultural divide.
Tech and Non-Tech Transactions
Technological innovations and advancements in the last decade have skyrocketed, leading to a major transformation across industries where two things are happening.
First, non-tech enterprises are facing fierce competition from smaller tech-based companies and are thus forced to digitize their operations and modify their business model to better compete with new rivals. This entire process is known as digital transformation and though it’s quite common, it’s also quite expensive. To help reduce costs and disruption, non-tech giants will often buy out startups so the technological platforms can be integrated, instead of creating a new platform from scratch. This is the strategy of buying it, instead of building it. On the other hand, “natively” tech companies like Amazon are acquiring or merging with established non-tech companies in order to expand their reach.
But the problem is, despite many of these transactions being high-profile with significant amount of resources being invested into due diligence and pre-deal activities to ensure a smooth transition, most will lead to high (voluntary) employee turnover, decreased morale, and loss in productivity.
Cultural Integration Issues (and How To Solve Them)
Cultural issues during transformation are possible in nearly every deal but the risk is elevated with tech and non-tech integrations because tech companies often take a completely different approach to their business operations. Tech startups are also accustomed to more freedom and creative thinking while large non-tech companies usually prefer relying on tried and tested ways of doing business.
The drastic and often sudden change in management and leadership styles has a big impact on the human capital of the company which in turn affects productivity. Here are some of the key cultural integration issues that need to be dealt with after a non-tech and tech transaction.
- Culture Shock
The vastly different corporate cultures of two fundamentally different companies will have consequences during the integration phase at every level. The SOPs employees of one company are accustomed to might seem completely alien to the other. The severity of this shock will vary from transaction to transaction but it is almost always present in non-tech and tech mergers.
The impact of this culture shock also becomes evident after the integration period (after the two business entities become one) and during the transformative period. Problems range from social difficulties like formal and informal communication and managerial like change in work schedules, salaries, reporting relationships, and more.
2. Uncertainty and Anxiety
The second key issue stems from the inability or perceived inability to adapt to the new corporate environment. It’s clear that employees deter change because it means moving from a known and safe environment to one they have no knowledge about. Due to this, it’s crucial that the management takes their time to explain how the upcoming change will benefit the employee.
In many cases, words alone are not enough. Top-level executives must take the necessary steps to reconcile the two sides of the aisle and incentivize employees. Unfortunately, sometimes these efforts aren’t enough which brings us to the final key problem.
3. High Employee Turnover
In essence, after a merger or acquisition, voluntary turnover can increase dramatically due to issues like role conflicts, increased stress, uncertainty, anxiety, and overall decreased job satisfaction. Volunteer turnover is also something many executives don’t take into consideration when working out a deal because theoretically, a merger or acquisition is a good thing — why would anyone leave a company during a phase of expansion?
Generally, two factors decide whether an employee is likely to leave their organization or not — commitment and satisfaction. These factors are in turn influenced by a myriad of other factors like stress, freedom, growth opportunities, recognition, work culture, and support systems.
An example of this would be a non-tech employee getting ready to abandon ship after a tech merger as he/she worries that his job will be automated or just be made redundant due to changing business models.
What exacerbates these problems is the fact that in most cases, they don’t surface until much later in the post-deal phase. On top of this, many companies are more focused on getting the quantitative aspects of the deal right than they are on the qualitative aspects and will often put potential culture conflicts on the backburner.
Key Points of Successful Integration
Countless transactions have failed because the cultures could not be integrated seamlessly which means the successful integration of employees is extremely important. This can be done by focusing on solving the three main cultural integration issues mentioned above. This is how:
- Overcoming the “Alien” Culture
It’s easy to predict that in non-tech and tech mergers a culture shock is imminent. Yet, during the due diligence phase, companies often put off assessing the scale of this culture shock and how much it is likely to affect core business operations. Due to the lack of a proper culture assessment, merger partners do not have enough information or time to deal with the integration issues that come up later down the line. In fact, if the culture shock is expected to be severe enough and the merger or transaction is guaranteed to fail, a culture assessment might even help call off the deal before it’s too late.
Another reason to do a culture assessment is that it helps companies understand their own cultures as well. This is true for both established non-tech companies to believe they understand their work climate better than they actually do and for new tech startups who might not know for their employees actually want.
It is generally hard for employees of one company to accept the culture of another company but with non-tech and tech companies, this integration can be especially hard which means executives need to understand the importance of cultural integration and what’s at stake long before a deal is signed.
2. Rewarding Employees
Hiring new employees is almost always more expensive than retaining existing ones and in the case of a non-tech and tech merger or acquisition, losing technical talent can be even more expensive and destroy deal value. However, the universal principle of rewards and incentives apply to every organization, tech or non-tech — the challenge is figuring out those incentives. For instance, employees in tech startups tend to be younger, require more autonomy, and may even be starting a family which means adhering to strict scheduling might not work for them. Conversely, employees in non-tech companies care more about job security and are accustomed to the more “traditional” work schedules.
The parent company cannot expect the target company to simply conform to the new rules and regulations which may be completely foreign concepts while still being just as productive as they were before the deal. This means a stakeholder analysis must be done. The analysis will reveal new information that can be used to develop new policies, incentives, reward systems, and fine-tune existing salaries, bonuses, and communication channels.
3. Transition Takes Time
Developing new payroll systems and structuring the hierarchy is just the beginning of the transition stage. It creates the foundation for new relationships to grow and for employees to find their place but neither of these things will happen on their own. It will require time and money to help employees adjust to the new environment but if done right, everyone can enjoy the tremendous benefits of a successful merger or acquisition. The key takeaway here is that integration is just the first part of a merger or acquisition that is followed by the transformation phase where employees of a different company become valuable assets of yours.
Case Study of Time and AOL: New Media vs. Old Media
The biggest merger in the history of mergers is today being used as an example of a failure of epic proportions. But of course, it wasn’t always seen this way. In fact, people believed that new media was going to swallow the traditional media overnight — one of the biggest tech companies of the time decided to capitalize on this opportunity.
“I remember saying at a vital board meeting where we approved this, that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different.” — Richard Parsons, CEO of Time Warner
In 2000, AOL and Time Warner merged to form AOL Time Warner, the largest media and entertainment conglomerate in the world and bringing companies like CNN, TBS, HBO, Time, Sports Illustrated and Warner Bros all under one roof. When the merger happened, the stock price of AOL was more than twice that of Time Warner, signaling the start of a new era. But in just three years the Dot Com bubble collapsed and so did AOL’s stock price. However, a conglomerate this diverse should’ve survived that crash. It didn’t, because of an underlying fault that made this merger ill-fated from the start — the culture clash.
According to AOL’s CEO, Steve Case, the dot-com crash was devastating for internet companies but that a “bigger problem was the culture clash between the two companies where AOL’s side found Time Warner to be too old-fashioned, essentially, and Time Warner’s side found AOL to be a threat to their businesses.”
Even after the merger, the two formerly separate entities still saw each other as competitors and tried to look after their own interests rather than focus on what they could build together. This kind of hostility can be expected in non-tech and tech mergers where one side might feel the other side is trying to make them obsolete when in reality both sides were actually merged to work together.
After 18 years, the CEOs and executives of both AOL and Time Warner as well as the industry largely realizes and accepts that there was a serious culture clash going on but the company just didn’t realize how much of the deal value was being eroded away by the internal politics and fighting.
The key takeaway here is that AOL didn’t realize how big of a challenge integrating the new with the old would become and thus failed to create policies and take action that would’ve curbed internal clashes. While AOL Time Warner may be the biggest case of this, it is certainly not an isolated incident. Thousands of mergers and acquisitions face this problem each year and the only way out of this situation is to plan ahead and overinvest in your human capital because will still cost less than a failed merger or acquisition.
