Integrating Kalashnikov; “Lock-and-Load”

Integrating Kalashnikov; “Lock-and-Load”

It’s Friday; indulge me. I recently read in Acquisitions Daily of the Russian government’s decision to sell 49% of its stake in Kalashnikov, maker of the famous AK-47. This assault rifle has a proud history (bear with me on the ethics here) stretching back to 1945 and has an enviable record for low-cost production, durability and ease of use. These characteristics have contributed to more AK-47 sales that all other assault rifles combined. So given unrestricted choice, who would buy it? One might think, for instance that Colt might be an obvious choice. Colt makes the ArmaLite M-16 under licence, itself an assault rifle stretching back to 1963 with over 8 million having been sold but with (slightly) more questions raised concerning its reliability and usability.

Here’s the imaginary bit (I told you it was Friday). One could imagine an imaginary board-level discussion at Colt extoling the virtues of the M-16 but seeing real value in adding Kalashnikov’s production capability, usability experience and, not least, its market penetration. What a combination – Colt’s undoubted marketing prowess and financial muscle combined with Kalashnikov’s technical capability. Colt has the money so there is an overwhelming reason to complete the deal.Look more closely; both companies have a proud history but are they really the same? Colt, a public company embedded in a western capitalist market and Kalashnikov – a Russian government defence group in a highly regulated ‘market’. Even though they may share many common technical capabilities, insights, interests etc. I imagine practically all else will be different. In effect, they may be poles apart when their respective cultures are considered.

When considering any acquisition, one all-too-often only hears about the ‘easy’ (i.e. measurable) aspects; having the ability to fund the acquisition, benefits of ownership, synergies that could be realised and so on. No doubt in the imaginary scenario above all of these will have been examined pre-deal in minute detail as part of the acquisition due diligence process and integration planning. But is this really enough? What about respective decision making style, hierarchy, budgeting processes, attitude to risk, investment horizon, communication styles etc. How will Kalashnikov react to the cold winds of capitalism? All these point to the cultural profiles of the respective parties and sometimes these are so far apart that attempting to merge the two may be doomed to failure. In fact cultural alignment is generally recognised as the most important factor in delivering and sustaining long-term value –especially post-merger in order to achieve deal benefits but also during transformation processes following growth.
So what can you do? Firstly, and arguably the most important element is to recognise the importance of cultural alignment. End-to-end cultural change post-deal is rarely achievable, and rarely necessary. On the other hand, targeted adjustment of specific cultural traits that will hamper efficient integration is a more effective and realistic approach. Cultural assessment is a necessary first step because it provides an objective insight into those key differences in how the organisations operate, an understanding of root causes/drivers, and how these traits might be different to what the combined business will require in the future. Use a cultural Snapshot Survey across wide employee base to generate a baseline understanding of potential ‘hot spot’ differences. Review existing processes, environment and documentation to supplement/validate understanding of current cultures.

Further a clearly described vision on how the future culture should be is imperative for orientation. Executive Leadership should agree a clear vision statement of how the desired culture should look like in line with strategic objectives. Ask yourselves: How do we want to be? How do we want the market to see us?
Get employee Focus Groups to explore existing cultural differences and their root causes and have executive Leadership workshops to review results, agree future cultural traits, and confirm actions to align plan and agree tactical actions based on desired culture and survey results. Agreed actions should then become part of integration plan. Once the organisation understands which cultural traits should be adjusted (and which can/should be left alone), actions can be defined to perform ‘keyhole’ cultural change, not open-heart surgery. This approach also helps ensure that cultural definitions, issues and changes are hard and specific, so that they can be proactively addressed and shaped.
If you think this doesn’t apply to you or my imaginary tale is too fanciful, look back at the importance of other acquisitions in which cultural differences played a key part in subsequent integration failure or downstream difficulties; and in this case size really doesn’t matter – think HP and Autonomy, Daimler-Chrysler, Kraft-Cadbury and Glencore-Xstrata.  When you set your sights on whatever target you aim at, cultural alignment effects all acquisition types irrespective of size, geography or, indeed, sector. In any case, my imaginary case is over; I understand today that the 49% stake in Kalashnikov has fallen into private hands.