The Importance of Culture to Post-Deal Integration and ROI

by | Jan 8, 2021

Twenty years after the infamous America Online (AOL) – Time Warner Cable (TWC) merger, the failed transaction continues to highlight the importance of culture in successful M&A deals.

In January 2000 AOL announced it would purchase TWC for $165 billion. Billed as transformative merger that would define the future of media, the deal was the largest corporate merger to date. The vision was that the combined corporation — with vast production capabilities, new technology-enabled distribution methods, and millions of subscribers — would be valued at $350 billion. Quickly after the merger was completed in 2001, it became evident that the deal was a failure and, worse, that it had been doomed from the outset.

Culture is the set of assumptions, values, and artifacts that underlie the statement ‘this is how we do things around here.’ AOL and TWC’s company cultures were so inherently different that the post-merger integration (PMI) didn’t stand a chance.

While the deal was supported by substantial financial risk assessment, leadership put little thought into how the cultures and teams might integrate. As the merger progressed, initial optimism gave way to frustration. The AOL employees were put off by the very buttoned-up corporate culture of TWC while the TWC team was appalled by AOL’s aggressive and arrogant style. This clash led to mutual disrespect, a quick disintegration of cooperation, and stalled strategy implementation. When the dot-com bubble burst in 2001, the ensuing industry-wide economic fallout exacerbated the troubled merger and further crippled any prospects for growth.

The culture clash wasn’t merely an old media vs new media conflict: The integration triggered a conflict over values, priorities, authority, decision making, operations and, ultimately, the question of which company drove the most value for the deal. While the transaction was allegedly a merger of equals, AOL had the more valuable stock and position entering the deal.  Some leaders at AOL believed that status should ensure them a superior position in the post-deal company. On the other hand, TWC executives saw their company as driven by strong values and vision while they considered AOL opportunistic and driven by short-term profits.  Like their AOL counterparts, TWC leadership perceived their company as the superior business. As the two companies quickly realized, the best laid strategy can quickly be derailed by cultural issues.

AOL stock tumbled in the way of the 2001 dot-com bubble and cross-company management fights became public. Former TWC Chairman Gerald Levin — who became the CEO of the AOL Time Warner corporation — complained publicly that TWC was being sunk by AOL. He was shortly thereafter replaced, an act that fueled further, costly executive turn-over. The spiral continued until, by the end of 2002, AOL Time Warner announced $98 billion in annual losses.

Today, neither company exists, both having been sold for pieces to other media and tech players in the intervening 20 years. As Stephen Case, former Chairman of AOL Time Warner and the founding CEO of AOL, acknowledges the merged corporation lacked trust and a common vision on which the team was aligned. Without these essential ingredients of a high-performing culture and effective leadership, integration and growth we impossible to achieve.

While the dot-com bubble burst couldn’t have been predicted, the cultural issues which plagued the merger certainly could have. AOL was a new media technology company, TWC was part of the old media vanguard.

As Richard D. Parsons, President of TWC at the time of the merger, shared in a 2015 interview, “I remember saying at a vital board meeting where we approved [the merger], 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.”

Culture continues to plague M&A transactions today. The 2017 Amazon acquisition of Whole Foods is another notable example. The deal was hailed with great fanfare by both companies. CEO of Whole Foods John Mackey called it “love at first sight.” But the deal hardly turned into a storybook romance for the employees of Whole Foods. The cultural differences between the two firms are vast: Amazon value tight rules, order, and strong hierarchical authority to keep the massive entity running. Whole Foods culture was one of collaboration, de-centralized, employee-driven decision making, and emphasizing the higher purpose and vision associated with their work.

During the post-acquisition business integration, conflict ensued as Amazon pressed Whole Foods to standardize the operations and customer experience in every store. Whole Foods suffered significant employee attrition and falling customer satisfaction. In 2017, Whole Foods was left off the “20 Best Places in America to Work” list, a list it had made for the prior 20 years. The promised  significant price reductions failed to result. Post-acquisition, the quality of Whole Foods yelp reviews have fallen with 20% of reviewers relating their dissatisfaction to Amazon directly. The acquisition is a prime example of how a company – Amazon – failed to account for the importance of culture to the success of the acquired company. In trying to change that culture, the value of the deal suffered.

Both the AOL-TWC merger and Amazon-Whole Foods acquisition highlight the importance of culture in successful integrations. It is not enough to evaluate the financial value or risk associated with an M&A deal. Expanding due diligence to include non-financial factors of leadership quality and effectiveness along with cultural values and behaviors can significantly reduce integration risks. This non-financial due diligence will identify gaps and differences between the two companies so executives can craft a definition of what the integrated culture will look like and a value proposition as to why that culture will benefit employees and the company growth.

To achieve outside outcomes and strategic objectives, leaders must assess, acknowledge, and work with – not against – the organizational cultures that both companies bring to the table. For assistance driving fast and actionable insights on the impact of culture on your transaction, reach out to Conscient Strategies to learn more about our non-financial due diligence product.   

Katherine Butler-Dines specializes in project management, strategy design, and business development. With a passion for helping companies grow efficiently and effectively, Katherine focuses on helping people and businesses put into place the structures and processes to not simply adapt to change, but embrace it. She has previously supported quantitative and qualitative research projects on entrepreneurship, particularly about women entrepreneurs, across 11 different geographies.

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