Culture, M&As and hedge funds: where does the real value lie?

Culture, M&As and hedge funds: where does the real value lie?

Those seeking true organisational improvements and turnarounds need to become skillful in the shaping of mindsets and behaviours in addition to focusing on a culture that helps deliver results, writes Dave Hanna

I recently came across a hedge fund company’s in-depth analysis of a corporation. It was a lengthy document filled with numbers, percentages and intercompany comparisons. The analysts admitted they had only an “outside view” and needed more clarity from inside the company, but that didn’t prevent them from listing many very specific things they believed the company needed to do to improve market share, profitability, and return to shareholders.

Once again I was reminded how often we rely on numbers alone to explain organisational performance.

Hedge fund lifecycles
Writer John Lanchester summarised his research on hedge funds in the 4 August 2014 issue of the New Yorker: “Most hedge funds fail: their average lifespan is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The overall number did not decrease, however, because hope springs eternal, and new funds are constantly being launched.”

As Lanchester has found, many hedge funds focus their attention on getting the numbers up. They may improve results for a few years, but then start to fade, and finally are closed. All too often the organisations’ results fall from their short-lived peaks.

“Most hedge funds fail: their average lifespan is about five years”

What about mergers & acquisitions?
On another front, two large competitors “merged” to form the company we’ll call “Adams, Inc.” Analysts believed this was an ideal match; both companies had strong growth patterns and their products complemented each other very well. The share price for the new company rose dramatically based on this optimism. However, by the end of the first year together, the revenues of both segments had decreased sharply. The share price tumbled and has not yet returned to its pre-merger level after 20 years.

What happened to this ideal match? Despite all the financial and statistical strengths each brought to the table, there was an undercurrent of hostile competition between the two partner organisations.

“Beware of any acquisition in which the partners refer to it as a ‘merger,” a veteran of many mergers once told us in a seminar. “This is a signal there are strong egos on both sides that will not easily be appeased.”

This is precisely what strangled Adams, Inc.’s performance. One competitor acquired the other, but they simply called it a “merger.”

Adams, Inc. is not an isolated case. One KPMG study found that 83 per cent of M&As didn’t boost shareholder returns, while a separate study by A.T. Kearney concluded that total returns on all M&As were negative1.

How culture drives results
As research and experience with hedge funds and M&As demonstrate, business growth does not follow from one’s attention to the numbers alone. Organisational results come from what people do or don’t do every day. In other words, results come from the organisation’s culture. Culture has two components: (1) the dominant mindsets people have in their heads and (2) the collective habits that demonstrate “how we really work around here.” It is culture that drives results as this diagram illustrates:

Culture and collective habits




Bottom line: those seeking true organisational improvements and turnarounds need to become skillful in the shaping of mindsets and behaviours in addition to focusing on other factors that help deliver results.

Having worked in corporations and with clients that have gone through M&As, and having witnessed hedge fund dynamics with many companies, I would fill in the diagram with the typical elements outlined below.

Typical cultural patterns in hedge fund management and mergers & acquisitions

Financial DealCultural MindsetsBehavioursResults
Acquisitions and acquisitions labeled “mergers”83 percent don’t boost shareholder return (KPMG)1

Total returns on all M&As are negative

(A.T. Kearney)1

Acquirer“We own you.”Say “nothing will change,” then force the acquired to “do it our way.”


Acquired“We are partners.”Say “nothing will change,” then resist the changes.
Both“We know what’s best for our business.”Use Force/Resistance to wear down the “opposition.”
Hedge fund investmentsAverage lifespan five years

One third folded in three years, but the total number stayed the same (new start ups)3


Hedge Fund Manager2“Win or lose I still get my annual fee.”Attract more and more assets (even when corporate results are soft)
Company“We know what’s best for our business.”Stick to the plan (even if outsiders don’t like it)
1. Heffernan, Margaret.“Why Mergers Fail.” MoneyWatch. 24 April 2012
2. Buffett, Warren. “Why Hedge Funds Fail.MarketWatch. 17 October 2015
3. Lanchester, John. “Money Talks.”New Yorker. 4 August 2014

Image source: iStock