Cultural integration in M&A
October 2017 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
October 2017 Issue
Organisations pursue mergers and acquisitions (M&As) for a variety of reasons, including growth, to access intellectual property or to gain market access, among others. Properly executed, an M&A deal can generate significant value for an organisation; however, there are also challenges to overcome in any deal. While traditional due diligence will highlight financial or legal issues, for example, a larger problem is often overlooked – cultural integration.
Every organisation has a culture – a set of values and assumptions that govern how its people act on a daily basis. These cultural norms may spread across jurisdictional boundaries and help inform how that company interacts with stakeholders and competitors alike.
When pursuing a deal, cultural integration should be a core focus, given its ability to disrupt or damage the future viability of a merger post-close. Cultural integration, or a lack thereof, however, will not stop a proposed transaction from taking place. Indeed, according to Joe Aberger, executive vice president at Pritchett, LP, culture is often incorrectly named as a catalyst for an unsuccessful merger. “Culture is often cited as the number one reason mergers fail,” says Mr Aberger. “However, in the same way irreconcilable differences do not adequately explain why a marriage fails, cultural differences do not fully explain why a merger fails. Cultural conflict can be shorthand for all sorts of dysfunctional behavior. Culture can also be a convenient alibi. You cannot prove or disprove its actual influence and its impact cannot be quantified. It appears easier to point a finger at culture than at a person, or a team, or admit to poor due diligence, overpayment, inept execution, or slow decision making. I am not saying culture cannot be a very negative factor, however it often is, especially when little or poor culture due diligence is performed.”
Yet, cultural integration is one of the main factors that can destroy value once a deal has been completed. Mergers, such as those between AOL and Time Warner and Sprint and Nextel, for example, collapsed in part due to significant cultural differences between the parties which emerged post-close. According to a 2015 Mercer study, 85 percent of companies believe that failure to address culture is a key barrier in failed M&A transactions. Frequently, both parties will be keen to retain and maintain their own culture.
Many failures can be traced to a lack of preparation. For a deal to be successful post-close, companies must apply the same rigour to managing and steering cultural integration as they would to any other aspect, and this starts with due diligence. Buyers can easily spend many millions on due diligence, including financial due diligence, but often neglect to do appropriate analysis around one of the most important aspects of any merger – the people involved.
Cultural due diligence
Companies that carry out cultural due diligence are able to investigate, assess and understand the culture of the other party to the deal, and begin to establish a way of assimilating the target, its people and its practice into their own. A cultural assessment will uncover similarities, as well as differences, that will impact integration efforts and strategic objectives. Achieving cultural integration is imperative to the success of transactions and is often the reason why some deals fail to live up to expectations, according to Fabian Billing, a senior partner and leader of EMEA merger management at McKinsey & Company, Inc. “At the beginning of the integration planning process everyone agrees that culture is an important topic. However, once the integration is in full swing, everyone is extremely busy with all the decisions to be taken and operational topics to be prepared – while keeping the business running – and cultural integration is given less attention. This is a mistake.”
Retaining focus on cultural integration is essential. Senior management might be tempted to take their eye off the ball, given the amount of work required to make any deal successful and the time pressures applied to any post-merger integration period. As such, integration teams should be deployed early in the acquisition process. Having the right team in place will ensure the company’s execution plan and strategic objectives are clearly established and maintained throughout the merger process.
“The first thing companies should do is treat cultural integration seriously. It should be part of the core work of the integration team, with senior leaders from both businesses involved,” says Marc Berman, a partner at Bain & Company. “Ideally all integration teams will be staffed with employees from both businesses, who are open to and actively looking for best practices to take into the new company, as well as for areas where neither company has a winning formula and there is an opportunity to start fresh. The lens for what cultural aspects remain should be results. For example, what values, behaviours and processes are most likely to achieve both top and bottom line growth, and which decision-making style leads to faster, better outcomes.”
Long-term planning is key to the newly merged company’s cultural journey. First and foremost, it is important for the company to have a defined direction and purpose, in order for integration to be successful, says Dr Finn Majlergaard, a post-merger integration expert at Gugin. “They must have a clear vision for where they see the company in three to 10 years, depending on the industry. Then they must think through, which values are going to get us there? Such a process usually takes several iterations because there are so many parameters in play. And getting real values and not just buzz words is hard work. You have to fight for values and be willing to sacrifice other values for the core values. Getting that commitment from an executive team usually takes time. But when done, everything goes much easier.”
A well-defined leadership structure, post-merger, is an important step that allows companies to identify a clear integration timeline and demonstrate unity and agreement on key topics and issues. Communication also plays an integral role. Employees must know what is changing within their organisation. They must also be told why the change is occurring, when it is happening and what will happen, both in the long term, as well as day-to-day. It is as important for employees to understand what any changes mean for them, as it is for them to learn what the newly promoted behaviours are. Experienced communications or change management professionals can also help establish the dominant culture in the new organisation.
Culture is not a static concept. Times change and technology shifts. Organisations should not be afraid to embrace new concepts and establish new cultural norms. Relying solely on a company’s ‘old’ values can be counterproductive. Merging companies should look to create something new and exciting with which employees can actively and enthusiastically engage. “Cultures change all the time,” explains Dr Majlergaard. “We dress differently than we did 10 years ago, we behave differently, we have different values. Companies have to adapt to the world around them. So cultural change is permanent. When external changes happen, for example when a new generation of customers and employees emerges, the company has to change. By assessing the external cultural drivers and their associated values they can change internally by changing the cultural DNA of the organisation. You change the cultural DNA by changing behaviour, motivation and reward systems, physical environment, decision models and priorities.”
Instead of insisting that new workers conform, merged companies should take the time to focus on the ‘new’ culture. Both sides should be educated to overcome the ‘us and them’ mentality that will likely exist but is no longer relevant. Parties should look instead to create a culture of ‘we’, and while this may be hard to achieve in larger firms, every effort should be made to establish a cultural common ground.
For some, however, it is not practical or realistic for companies to try to develop a common culture during the integration period following a merger, as culture is often deeply ingrained within a company’s DNA. “It is better to address cultural differences in a narrow, targeted way,” suggests Mr Aberger. “When acquirers attack cultural issues on a broad front, they tend to get bogged down, and fail to accomplish the most important cultural shifts. Only a few cultural issues matter. The rest is cultural noise. The best use of management’s time is to focus on the cultural traits that impact operating performance. Only a few cultural differences usually carry enough voltage to impact the bottom line. These ‘mission-critical’ traits usually fall into one or more of these categories such as communication, decision making, work habits, spending habits and power.”
Measuring cultural integration
Once a transaction has closed and the integration process is underway, it is vital that the newly combined organisation is able to track progress. This requires companies to establish solid communication channels with employees and seek regular feedback on the success of the integration plan.
Benchmarking can help companies demonstrate successes and report on progress. This should be done regularly to assist executives and integration teams with gauging the level of buy-in at all levels of the company’s structure. It also enables organisations to tweak their integration plan accordingly.
One of the most important mechanisms is a questionnaire or survey, notes Mr Billing, adding that the nature of modern surveys is quite different from previous years. “Some time ago it was necessary to conduct huge surveys once a year as a ‘barometer’ for culture. Nowadays there are much easier ways to do this, for example through leveraging questionnaires where you just have to answer one single question a day. Through a randomised sample across the organisation, you have the full survey done within a few days, and thus, can measure the trajectory of cultural development on a weekly basis.”
According to Mr Berman, long term, cultural transition can be measured through employee engagement surveys, potentially by asking some of the same questions used to diagnose corporate cultures in the first place. “Sustaining culture change usually requires creating incentives for desired behaviours in performance reviews, compensation structures and even job descriptions, as well as celebrating success. For example, if a company wants to encourage entrepreneurship in its new culture, it needs to ensure that an employee is rewarded for this behaviour, whether successful or not,” he adds.
Do the homework
M&A transactions are complex and time consuming. They require considerable resources on both sides. Though many factors can ultimately derail a deal, achieving a cultural transformation and integration is among the most difficult tasks and can have one of the most significant impacts. As such, this aspect should not be taken for granted. Acquiring companies and their targets must do their homework: cultural integration requires organisations to take a holistic view and take decisive, early steps to define the culture they want. With adequate leadership and the requisite resources, there should be no reason for cultural integration to fail.
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