Make or break: cogitating culture in M&A

May 2024  |  FEATURE | MERGERS AND ACQUISITIONS

Financier Worldwide Magazine

May 2024 Issue

Companies across the globe spend upwards of $2 trillion every year on M&A. It is one of the most powerful tools toward achieving significant growth and transformation in a fairly short period of time.

From start to finish, the M&A lifecycle consists of a series of key steps. Assessment and preliminary review through negotiation and due diligence to post-closure integration and implementation; each step has a significant role to play in melding two potentially disparate organisations into a cohesive whole.

Seldom, however, do M&A practitioners consider how culture fits into a deal – an oversight many commentators view as catastrophic. Indeed, according to a study by Avondale, over 70 percent of M&A transactions fail to deliver their expected value, and most of these failures are due to a lack of cultural fusion, not the deal structure or the value paid.

Supporting this contention is a study by Organisational Talent Consulting – ‘Mergers & Acquisitions: The Importance of Creating a Shared Culture’ – which suggests that as many as 85 percent of transactions fail to deliver on shareholder returns. Again, much of this failure is due to a lack of cultural and organisational alignment.

Thus, to avoid a clash of cultures, the challenge for leadership is to determine the best way to blend what may be widely disparate cultures into one. If no action is taken, the likelihood is that a new culture will take root, with the dominant culture assimilating or rejecting its weaker counterpart.

“Culture is the ‘thing behind everything’,” contends Karen Jaw-Madson, management consultant and executive coach at the Co-Design of Work Experience. “It is like water – it gets everywhere. It affects virtually all aspects of organisational life including what a company does to how it does it – from HR to finance to sales to business development and strategy. Whether culture gets attention or not, it still happens and is therefore unavoidable.”

Defining ‘culture’

As these studies make clear, awareness of culture is critical to the success of an M&A transaction as well as in helping to avoid its failure. However, how precisely can we define what ‘culture’ means in this context?

According to McKinsey, culture transcends national boundaries, and should be defined as the outcome of the vision or mission that drives a company, the values that guide the behaviour of its people, and the management practices, working norms and mindsets that characterise how work actually gets done.

“If we take a simple view of culture as ‘the way things are done around here’, then we can place it within the DNA of a company’s operating model,” says David Olsson, managing director at the Institute for Mergers, Acquisitions and Alliances (IMAA). “If we are talking about culture in the context of M&A, then what we are really getting at is the degree to which the acquired company’s operating model needs to change to effect change of control integration and realisation of deal benefits or synergies.”

In its analysis, Dealroom defines culture by certain metrics. To what extent do incentives, promotions, and achieving and surpassing key performance indicators motivate employees? How great is the interaction between management and staff at the target company? How much autonomy do staff have to make decisions, and how important are those decisions? Has the company always done things the same way or has there been constant evolution? How content is the workforce currently and what are their concerns about the M&A process?

Also a key definition question is whether culture is an asset or a liability. “A culture mismatch is often cited for failures in M&A, with prominent examples including Amazon and Whole Foods, AOL and Time Warner, and HP and Compaq,” notes Ms Jaw-Madson. “Given this, a potential merger or acquisition should call for a cultural review of all companies involved.

“This is to not only determine compatibility, but also risk,” she continues. “A cultural assessment should be part of the due diligence process as opposed to an afterthought or remedial intervention post-close. The less compatible the cultures are, the more likely they are to face challenges.”

Inattention

Even though a lack of cultural cohesion and alignment is often cited as the primary reason transactions fail, prominent examples strongly suggest that even the most high-profile acquirers are guilty of paying little attention to how culture may impact the success of a transaction.

While much of this inattention is due to an appreciation of cultural differences sitting outside the comfort zone of many companies and thus hard to pin down, it need not be so. A focus on culture is an opportunity – a way for acquirers to differentiate themselves from competitors and, as a result, drive better results.

“When a potential merger or acquisition becomes a possibility, there are ways to begin looking at a company’s culture in the process,” says Ms Jaw-Madson. “There are sources that are available publicly, such as news coverage, community engagement, the content and tone of annual and environmental, social and governance (ESG) reports, legal proceedings, employer review websites and social listening.

“If anything, these surface initial points of inquiry. Further in, quantitative and qualitative data from employee engagement surveys and HR analytics provide indicators and outcomes of culture. As the process continues, a full assessment of the leadership in place needs to be conducted and the results incorporated into decisions,” she adds.

Integration

To ensure a successful integration of cultures, companies must focus on their workforce and get them on board with the scope of the transaction and the future direction of the company. This means articulating a persuasive vision and then communicating that vision effectively.

“The design and planning of integration should be done as soon as is practically possible,” suggests Mr Olsson. “The thinking around the degree and depth of integration should be done at the deal screening phase, with target screening criteria that includes these topics to ensure a dose of reality is injected early in the process.

“Culture is often left to ‘someone else’ to work out or at best it is treated as a separate workstream,” he continues. “Culture and its close cousin ‘change’ should be at the heart of the M&A process and should inform not only ‘how’ to integrate but also, and more importantly, ‘why’.”

According to Organisational Talent, the why and the how of integration can be determined and actioned during the three phases of the M&A lifecycle.

In the pre-combination phase, once a company has selected a target for merger or acquisition, the target’s culture should be discussed. If not already defined, it is a good practice to assess the current state of the culture and identify the company’s strengths and weaknesses. Potential targets should be reviewed for known elements of the target’s external culture.

In the combination phase of the merger or acquisition, conducting a current state culture assessment of the newly merged or acquired company is essential. The evaluation will surface strengths and weaknesses as well as identify any possible subcultures or areas of opportunity. Taking the time to assess both cultures allows for a better definition of the culture and behaviours necessary for teamwork and optimal performance.

In the post-combination phase, sustaining the efforts to create a shared culture is crucial. A culture assessment should be repeated to measure the progress of creating a shared culture. Also, the assessment results can be used to develop new action plans to support and shift to the new shared culture and connect culture back to the economic goals of the transaction.

“Another reason why an integration team with the right skills and competencies should be involved as early as possible in the deal process is to help answer the question: ‘culture, so what?’,” suggests Mr Olsson. “Furthermore, by placing culture within a company’s operating model it becomes part of operational due diligence work, alongside financial and legal due diligence.”

Evolution of cognition

M&A history is littered with transactions that failed because of an inability or unwillingness among practitioners to grasp the importance of addressing culture from the outset. Financial and legal aspects do tend to garner the lion’s share of dealmakers’ attention, but this dynamic is shifting toward a greater appreciation of how integral culture is throughout the deal process.

“No two transactions are alike,” says Ms Jaw-Madson. “So, managing culture before, during and after the M&A process goes a long way toward understanding the unique dynamics at play and how to address them effectively. Playbooks only go so far.

“This is an opportunity to avoid the consequences of two disparate cultures clashing,” she continues. “Do companies want to ensure they complement each other or forge a new, combined culture? Like in any major change initiative where business continuity and performance are imperative, dealmakers need to set the conditions for success.”

For Mr Olsson, an important aim is to achieve a shared understanding. “A useful, and operational way of thinking about culture is in the behavioural and tangible being aligned to the stated values of a business,” he contends. This is not an easy exercise, but if a company knows what it is looking for, it can learn to see the signs and create its own baseline as part of the integration design and planning phase.

“M&A thinking has evolved greatly over the past decade and gone are the days where transactions were just about ‘price’,” he concludes. “Today’s practitioners are more rounded, better educated and cognisant of when cultural challenges have played havoc with post-deal realisation. The role of leadership in this area is of paramount importance. If leadership gives culture and its place in the M&A process due respect, then so will everyone else.”

© Financier Worldwide

BY

Fraser Tennant