Culture clashes in M&A: new perspectives

July 2022  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2022 Issue

Culture clashes in business usually result in little more than temporary discord between parties. But when translated to an M&A setting, such a clash is eminently more troublesome, given the high-stakes nature of merging two entities.

The history of M&A is in fact littered with transactions that failed because of an inability or unwillingness to grasp the importance of addressing culture. According to a number of surveys, between 50 and 75 percent of all post-merger integrations fail to meet their original objectives due to cultural clashes. Some sources put the failure rate above 80 percent.

Among the more high-profile examples of the impact of cultural misalignment on M&A success are deals such as Sprint-Nextel, MCI-WorldCom, AOL-Time Warner, Quaker-Snapple and Daimler-Chrysler. Cultural disparity has also been quoted as a potential difficulty in completed and proposed transactions, including Broadcom-Qualcomm, Amazon-Whole Foods, Disney-Fox and CVS-Aetna.

“The reason why many M&A transactions fail is predominantly because there is no or very little interest in the process,” contends Finn Majlergaard, chief executive of Gugin. “Key stakeholders are only interested in cashing in after the transaction, while the desire to secure long-term success is often small.

“But companies can pay a high price if they ignore cultural integration,” he continues. “Key people leave, customers flee and employee satisfaction plummets. The sad thing is that all this can be avoided if, from the beginning, companies acknowledge the need for cultural integration and realise that it is not their core competence to facilitate such an integration.”

Interestingly, this apparent disinterest flies in the face of a recent survey of top executives conducted by Deloitte, in which 76 percent of respondents stated that cultural compatibility is a key determinant of post-merger integration success.

So, why does culture matter? According to the Gallup report ‘Building a Culture That Drives Performance’, a company’s culture is key to unlocking its greatest potential. To help facilitate the unlocking of this potential, Gallup urges senior leaders to consider the items listed below to help them identify and leverage the functional aspects of their company’s culture, so its power can enhance their brand, improve business results and fulfil their organisation’s purpose.

First, culture is unique to every company. Every company has a unique purpose and brand. Companies that want to create or sustain a strong culture can only do so by understanding the ways in which purpose, brand and culture interact.

Second, culture attracts world-class talent to a company. The world’s most successful companies clearly define, consistently execute and effectively align their culture throughout their organisation, inspiring high commitment from employees. This approach to culture attracts talented employees and inspires them to consistently deliver on the company’s brand promise to its customers.

Third, culture creates alignment. Culture makes the difference between engaged teams moving in different directions and engaged, aligned teams working toward a common goal.

Fourth, culture affects performance. Companies with a well-defined culture have a competitive advantage in the marketplace and are proven to improve performance outcomes across many measures.

“Corporate culture plays a key role in the success of an M&A deal,” says Zhenyi Huang, a Bayes Business School research fellow at City, University of London. “Cultural compatibility between the acquirer and target company contributes significantly to the likelihood of deal success and the extent to which the expected synergy value can be materialised in the post-deal stage.”

It is also important to note that the context of the deal drives the importance of addressing culture. “It becomes critical in a scenario where two large global companies with dissimilar cultures wish to quickly and completely integrate all aspects of their business,” explains Jim Plomer, transaction advisory services managing director at BDO. “Here, if culture differences are not addressed, the risk to the integration and realising deal value is extremely high.

“It becomes less critical in a simple bolt-on acquisition scenario in which the target of the acquisition remains autonomous,” he continues. “In between these end-member scenarios are numerous variations, but the impact of culture should always be considered.”

And yet, with global M&A hitting new highs, more companies are pursuing deals, thus more will likely fail because their leaders either make cursory attempts at cultural integration or do not address the requirement at all. Such ill-considered strategies appear all the more inadequate as we move further toward a post-pandemic environment.

Uncovering culture

Although culture is often hard to define, there are a variety of cultural models available to assist acquirers and targets in finding an effective way of uncovering their actual culture, as well as setting a baseline that serves as a starting point to plan for a successful integration.

According to the Society for Human Resource Management (SHRM), acquiring companies need to take the three key steps outlined below to ensure a transaction does not go awry.

First, have a clear understanding of operational culture. Operational culture includes the values and norms of the company – how people think, act and make decisions. It is also important to know whether or not culture is consistent throughout the organisation: at all levels, all departments and all locations.

Second, determine the culture of the target company. The outcome is a clear understanding of the similarities and differences between the two companies, which, in turn, will inform the strategy for integrating the cultures, as well as the level of difficulty it will entail. Moreover, if several acquisition candidates are being considered, an important factor is the degree of difficulty involved in integrating all cultures.

Finally, create an integration plan. The key elements of such a plan are a dedicated integration team (including people from all levels and all critical departments of the two companies), a team leader whose sole responsibility is the success of the integration effort, and constant communication of the goals of the new company. It is also important to be aware of, and address, the fear and confusion that is often a by-product of M&A.

As might be supposed, the best time for a company to take the steps recommended by the SHRM is before a transaction is undertaken or as soon as possible thereafter.

“Know your own cultures beforehand,” echoes Russell Clarkson, management advisory services managing director at BDO. “There are a variety of cultural models available, including a combination of surveys, interviews and focus groups, to pull data from. Moreover, incorporate understanding the target’s culture as part of normal due diligence. It may be based on more anecdotal evidence due to limited access to individuals, but a preliminary assessment can usually be made.”

Incorporating CSR

An important dimension of a company’s culture (and one that has become increasingly important in recent decades) is its corporate social responsibility (CSR) performance. These practices are frequently communicated with key stakeholders and thus reflect the shared values within a company.

“CSR encapsulates many crucial aspects of corporate culture – from employee relations to stakeholder management and from environmental corporate practices to boardroom decision making,” affirms Dr Huang. “A company’s CSR policies are largely driven by stakeholders’ preferences, as they regularly communicate their business vision and values to their stakeholders by disclosing their CSR practices.

“As a company’s CSR behaviour is embedded in its corporate culture, which drives its business value, differences in companies’ CSR policies can reflect the differences in their stakeholders’ demands,” she continues. “Hence, companies with better cultural similarity with respect to their CSR standards are likely to have reduced integration cost when merging different stakeholders in the post-deal stage.”

Boiled down, a company’s CSR attitudes and behaviours reflect its shared beliefs and values and represent a crucial part of its wider corporate culture.

Digital solutions

Increasingly, deal makers are utilising artificial intelligence (AI) technologies, such as natural language processing (NLP), to identify culture and specify areas for improvement in preparation for integration. Indeed, according to PwC’s ‘2020 M&A Integration Survey’, nearly nine out of 10 companies now use digital tools during the post-merger integration process.

“There are opportunities to leverage AI linked to human language throughout the M&A process,” asserts Elizabeth M. Mack, workforce in transactions leader at BDO. “AI can be used to run big-data diagnostics of information on the internet, with word clouds among the outputs.

“NLP can also be applied to quickly summarise legal contracts, such as employment agreements, software licences or building leases and pull out relevant information,” she continues. “The full impact of NLP to the deal process is still an evolving science, and data can easily be skewed to validate a hypothesis, so care must be taken to keep data and findings unbiased.”

Another approach is to utilise the word embedding model (a semi-supervised machine learning (ML) technique), to capture culture-related phrases from corporate earning call transcripts and measure multiple corporate culture dimensions, such as innovation, integrity and teamwork, among others.

“Such techniques could help acquirers to identify targets which closely match their corporate culture and can also help to identify gaps in their respective cultures and hence make a dedicated effort to improve cultural coherence in the post-deal integration stage,” adds Dr Huang.

Future-casting culture

As M&A due diligence continues to mature, the gap of cultural alignment and assessment is likely to close further. This evolving perspective lends increasing weight to cultural integration issues and their importance alongside the financial and legal aspects of a transaction.

“Culture is already beginning to play a larger role in the diligence phase,” observes Mr Plomer. “In one of the more obvious ways, environmental, social and governance (ESG), as well as diversity, equity and inclusion (DE&I) policies, are driving companies to understand core aspects of their organisation and how values influence their place in the market.

“Effective leadership acknowledges that to influence culture you need to understand your starting point,” he continues. “Culture does not reveal itself easily, but knowledge of differences and the assumptions upon which they are based can be gathered during diligence and used to move forward post-close.”

For her part, Dr Huang has also observed a shift in attitudes toward cultural alignment in M&A. “There has been a significant rise in the awareness of taking culture into the deal evaluation and planning process,” she concludes. “Hence, I believe companies will dedicate more weight to culture investigation and management, starting from the early planning stage to the post-deal integration process – improving value creation and the likelihood of deal success.”

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Fraser Tennant