More than nine out of 10 corporate mergers and acquisitions fall short of their objectives, with failure often occurring because business leaders get too bogged down with finance and technology issues to spend enough time integrating corporate cultures and management styles.
An analysis of more than 200 major European M&As over the past three years by consultancy Hay Group has found that senior business leaders believe just 9 per cent were "completely successful" in achieving their stated objectives.
This plummeted to an alarming 3 per cent of mergers and acquisitions by British companies, said Hay.
This low success rate was all the more alarming because of the current appetite for M&As, with deals in the past year topping an eye-popping €1.35 trillion and the outlook for 2007 and beyond just as upbeat, said Hay.
"The M&A feeding frenzy over the last year has been fuelled not only by cheap debt and the rise of private equity, but also by companies' strategic focus on consolidation," said report author David Derain, European M&A director.
"However, the enormous amounts invested in M&A are not delivering their promised value," he added.
But the Hay research is at odds with a study by KPMG late last year that said it was time to stop blaming "cultural problems" for M&A failures.
Culture had simply become an easy catch-all excuse for M&A failure, with the real reason often being that management had simply failed to make the deal work properly.
As John Kelly, head of KPMG's Integration Advisory Practice, put it at the time: "It's time to stop blaming culture – it's like blaming the weather. As Billy Connolly said: there's no such thing as bad weather – only the wrong clothing."
The Hay research blamed omissions in companies' due diligence and post-merger integration strategies as the primary causes of M&A failure.
Firms, it argued, were prioritising financial and systems due diligence at the expense of the vital, intangible assets critical to a merger process – such as business culture, human capital, company structure and corporate governance.
The great majority of business leaders made traditional due diligence a high priority, with more than half focused on IT systems' integration.
Yet nearly six out of 10 confessed that over-prioritising systems' integration resulted in insufficient focus on intangible assets and cultural integration.
And more than half of the business leaders polled believed this intensified the risk of failure.
"Business leaders must recognise that the value of today's companies is primarily in their intangible assets – the strategic, people and cultural factors that don't show up on a balance sheet," added Derain.
"A strategic focus on aligning the intangible as well as tangible assets of companies is critical to the success of any merger or acquisition," he stressed.
Seven out of 10 senior executives polled believe it was also too difficult to obtain intelligence on the corporate culture and human capital of M&A target companies.
Half pointed to the need for a robust form of reporting on intangible assets, while two thirds saw internal indicators such as workforce performance as more reliable predictors of success than financial data.
"The secret of successful merger strategy lies in gaining an accurate picture of the target company's cultural, human and structural assets," said Derain.
"Our research shows that companies failing to take these factors into account when planning and implementing a merger will fail to deliver against their objectives," he added.
While business leaders paid lip service to the need to audit and integrate intangible assets, there was a worrying lack of focus on them, not only during the due diligence stage, but also as part of post-merger integration strategy, said Hay.
Just 13 per cent of business leaders felt that engaging and integrating senior management and the workforce was given high priority as part of their company's integration strategy, while seven out of 10 failed to prioritise intangible assets generally.
Little over a quarter analysed the cultural compatibility of the firms to be merged. Fewer still carried out a human capital audit, and two thirds failed to prioritise a leadership capability review.
In addition, well over a third of business leaders expressed dissatisfaction with the post-merger climate, with a fifth describing the early months as "culture shock" and a further 16 per cent going so far as to label them "trench warfare".
"Culture is not an HR issue – it is a business issue," said Derain.
"Business culture represents a class of assets which must be protected and properly aligned during the integration process if a merger is to succeed," he added.