The Key Step That Makes a Merger Successful
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Knowledge Wharton
Knowledge@Wharton
March 12, 2012

When trying to pull off a successful deal, however, many senior executives focus their attention on the financial aspects of a merger and fail to consider their psychological implications, Wharton management professor John Kimberly says. In a new paper, "Making 1+1=1: The Central Role of Identity in Merger Math," Kimberly and co-author Hamid Bouchikhi, a professor at ESSEC Business School in France, discuss the common mistakes firms make in their efforts at identity integration and offer four approaches for ensuring that deals work on an emotional level.

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According to Kimberly, the traditional "merger math" is that one plus one will be greater than two, that merging two companies will create an entity that is greater than the sum of its parts financially. Executives tend to pay the most attention to that principle, he says, focusing on the financial architecture of the deal. But he notes that the "new" merger math has two pieces to it – economic synergy and psychological synergy.

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In addition, says Kimberly, firms should not confuse identity with culture. "Culture has to do with 'the way we do things around here.' Culture is very powerful and very important, and the cultural differences between one organization and another need to be taken into account in any sort of effort to combine operations." But identity issues are more deeply embedded in the fabric of organizations as a whole, and in how individual employees see themselves. 'It's the areas of agreement around 'who we are' that are the basis of the identity of any company."

Merging two or more firms "seriously disrupts the identities of the two involved organizations, generates fear of identity loss on one or both sides, and raises questions about the identity of the new combination, which may hinder trust in and identification with it," the authors note. Integration "cannot succeed before employees of the merged entity feel a sense of belonging to a single enterprise with which they can identify and to which they are motivated to contribute."

In some cases, the identities of players in a potential merger may be so at odds that "no matter what you do in the post-merger integration phase, it's just not going to work," Kimberly says, noting that this is particularly true, for example, when the two organizations contemplating a merger have been fierce competitors for decades. "To expect that the employees of the two will suddenly become willing and enthusiastic collaborators is a stretch, to say the least."