Roughly 70 percent of all corporate mergers fail, according to the Boston-based consulting firm Bain & Company. Although mergers can head south for many reasons, difficulties created by cultural differences at merged companies seem to play a significant role. In a 2009 McKinsey survey on postmerger integration, 92 percent of respondents said their companies would have benefited substantially from better cultural understanding prior to the merger. And 70 percent stated that too little effort went into resolving cultural issues during the integration period.
"In a small company, you have to look at a merger as you would a marriage, in that you're going to spend so much time together," says William Lawrence, a professor of economics and entrepreneurship at the New York Institute of Technology.
Micah Paldino understands these challenges better than most. PB&J, his Cincinnati-based public relations and branding firm, has merged with two other companies in the past 19 months. In October 2011, PB&J combined with a three-person design firm called Syntax, headed by Emmit Jones. Last January, the new PB&J joined forces with Such & Such, an industrial design company owned by Zach Darmanian-Harris.
Both times, Paldino and his prospective partner spent a full year testing the relationship by having their teams work together before they made the union official. "I would suggest anybody do a trial period before you merge," says Paldino. "You really get to see how the other guy works and gauge your respective strengths and weaknesses."
That's not to say they didn't make any mistakes along the way. "When Emmit and I first merged, we were very categorical about how we viewed people's roles and departments," Paldino says. "In the beginning, we kept everyone separate." That meant collaboration between the company's divisions was rare. "We realized that our employees were beginning to feel left out," he says. To counter that, PB&J now holds regular State of the Union meetings, in which the full team gathers for the day and everyone is encouraged to share ideas and personal goals. And all hands gather for Thursday-afternoon cocktails, where colleagues can chat informally about how the week is going.
"Just because your role is senior director of public relations, that doesn't mean you shouldn't be able to contribute ideas for a new pop-up shop that's unveiling in a day," Paldino says. "Good ideas come from everywhere, and everyone has some role to play in each project."
Sometimes, merging even very similar companies can cause surprises. A culture clash was the last thing Atlanta tech entrepreneurs Aaron Hillegass and Charles Brian Quinn expected when they combined their two tech companies.
Hillegass's Big Nerd Ranch, with 54 employees, developed mobile apps and trained coders for Facebook and other corporate clients. Quinn's 26-employee Highgroove Studios focused on website development. The two businesses had often collaborated on projects. Hillegass and Quinn were friends who had met at a programming meetup.
In November, the two companies merged under the name Big Nerd Ranch. On paper, the merger seemed like a natural step. Hillegass had grown tired of being a CEO and was eager to return to his roots of coding and mentoring new employees. Merging with Highgroove would allow him to remain with the company he had founded, albeit in the newly created role of chief learning officer. Quinn would take over as CEO. In addition, the two companies complemented each other well. Together, they could provide a wider range of services to clients. The idea that two teams of computer programmers might not get along didn't even enter into the equation.
"We thought our leadership styles and cultures were exactly the same," says Hillegass. "But everything that was a little bit different rubbed people the wrong way."
For Highgroove's employees, discomfort started with the new company name--Big Nerd Ranch. "At the Ranch, we used nerd in a positive way," says Hillegass. "People from Highgroove bristled at the word."
To smooth things over, Hillegass called a meeting with the former Highgroove employees to explain what the word nerd meant at Big Nerd Ranch. "Once they understood the history behind the term, it got a little bit easier," says Quinn, known universally as CBQ.
For their part, Hillegass's employees didn't like the way their new colleagues talked. "They used awesome an awful lot, and my people thought that was juvenile," Hillegass recalls.
The differences weren't just semantic. "My people were used to dealing with me and my style of making decisions and delegating," says Hillegass. "CBQ's style is different. He makes decisions more slowly and doesn't delegate as quickly."
Compensation was another sticking point. On merger day, the two owners announced a new plan that moved some coders from hourly pay to a fixed salary. To Hillegass's and Quinn's surprise, many of their employees reacted with dismay.
"We thought they'd be excited, but they weren't," Hillegass concedes. "They found it scary to have their compensation changed in addition to the merger."
The disgruntled employees felt they were losing the flexibility to work more hours to boost their salaries. Moreover, they didn't understand what opportunities they might have for advancement in the new company. In response, Quinn formed a team that included some of the unhappy programmers to discuss compensation and career paths.
"I think people just wanted to be heard," says Quinn. In the end, not one of the coders chose to leave.
Hillegass now realizes just how frightening mergers can be for employees. In his effort to step back and let Quinn take the lead, he says, he failed to reassure his staff members that their lives would not change radically as a result of the union. "I think I needed to be a more comforting presence in all of this," he says.
Overall, the partners say, the merger has been a success. All the employees have stayed on, and they all now mingle at "baconfest" breakfasts held every other Tuesday morning. To further encourage collaboration, the company's annual Clash of the Coders contest to create the best new app awards extra points to teams that include employees from both companies.
At the end of 2012, the combined companies had racked up $8.9 million in revenue. They are on track to reach $16 million in 2013. "It's still scary giving control of your company to someone else," says Hillegass, "but so far, so good."
The merger process can be traumatic for owners and employees. Here are tips to help smooth the transition.
1. Examine your motives.
Ask why you want to merge and what you expect to get out of the union, suggests William Lawrence, professor of economics and entrepreneurship at the New York Institute of Technology. "You have to understand the sensitivity of turning something you've built from the bottom up into a different animal."
2. Prepare your employees for change.
"There are probably more differences between the two cultures than you might expect," says Aaron Hillegass, chief learning officer at Big Nerd Ranch. "Be ready to take cultural concerns seriously."
3. Set common goals.
"Everyone has to be on the same page and share similar business goals," says Micah Paldino, CEO at PB&J.
4. Define new roles.
Clearly delineate responsibilities and the chain of command. "If there's a problem, you'll know exactly what to do to solve it," says Lawrence.