Cultural Due Diligence in M&A
- Due Diligence
- Ethics and Compliance Consulting
- Strategy and Deal Origination
- Deal Intelligence and Due Diligence - Target and Management
Cultural Due Diligence in M&A: Setting Up a Deal to Succeed
A new survey report announced by Mercer found that 43% of M&A transactions suffered delays, terminations or purchase price renegotiations because of serious culture issues between the parties. With the significant investment of time, money and other resources put into these transactions, this is a staggering amount of wasted investment in both opportunity cost and real dollars. One of the best tools for mitigating risk around these deal-damaging issues is appropriate cultural due diligence.
Unfortunately, the pace of M&A deals is too often rushed. Some preliminary research is conducted regarding the target company, but this is done quietly so as not to raise market interest/awareness of a potential transaction. Then the deal is broached with the target company and initial discussions are held between the relevant parties at the board and senior executive levels. Once an agreement is rolled out, more formal due diligence is conducted ahead of deal consummation. Most of this due diligence is focused on the numbers—revenues, profits, inventory, headcount, offices and any legal liabilities—and obviously some review of strategy, growth plans and the future of the merged companies.
Culture at a company is a concept, rather than a hard, measurable target. It is the shared values and beliefs that bind employees and help influence and guide their behavior. It is ingrained in the company, often to the point of being difficult to articulate. Critically, culture is also highly resilient, meaning that it does not change easily, and even less so when a new culture is imposed.
As a result, significant consideration needs to be given to the potential cultural bonds between two organizations. Senior executives are often focused on the mechanics of the due diligence and strategy about merging the physical businesses. The “people touch” is often lacking as are some very basic communications from senior leadership. This is when cultural due diligence can better inform the deal-making teams and guide their strategy to help create a stronger joined company.
Some appropriate measures that may help:
Conduct cultural due diligence. Interview key staff, including long-time employees at all levels of the organization; key decision makers and influencers; leaders in sales, operational or client-facing roles, etc. Talk to them about what they value about their company’s culture and what is successful about the culture. Ask them about the weaknesses of the culture. Learn about the structure of the organization and how decisions are made—is it formal or informal? Is it consensus-driven or top-down? What are the leadership styles of management? Does this match with the decision-making and leadership styles at the other firm?
Communicate sincerely and often. Instead of staging a takeover, with edicts from the top, drive a culture of transparency and thoughtful decision making. Evaluate, determine and then demonstrate how the strengths of each company’s cultures will be blended to develop a truly shared culture of the new firm.
Identify the key “owners” of the corporate cultures in each organization and bring them together as part of the integration team to allow all sides to have representation and input in identifying, articulating and implementing a shared culture.
Build an internal brand. As you combine and begin to share culture, draw on the strengths of both companies, building on the internal brand of the acquiring company, focusing on the reward of opportunities, personal growth and a shared commitment. Communicate the internal brand messages frequently and back them up with meaningful actions.
Culture and cultural due diligence can be hard concepts to grasp. It helps to reflect on an actual example where this form of due diligence could have smoothed a transition plan:
On a recent transaction, the buyout firm was carrying out rollups of a regional group of medical offices. While they had done some due diligence on the businesses they were acquiring, they did not conduct true cultural due diligence on the management styles of the key leaders at the acquired small businesses. As a result, when they appointed one of the doctors as the overarching head of the merged organizations, his autocratic (and somewhat mercurial) management style quickly rubbed the other leaders the wrong way, causing them to dig in their heels and complain to the buyout firm leadership. Ultimately, the buyout firm had to restructure the management all over again, including a termination which led to changing locks at multiple facilities and hiring security guards after threats were received.
Mergers and acquisitions are predicated on building stronger companies by putting them together. One of the strongest “glues” in a company is corporate culture. Understanding that and building the joined company around the shared strengths of both cultures can strongly influence the successful outcome of an M&A transaction. Cultural due diligence is an invaluable tool for understanding and incorporating those shared strengths.