Culture: The Critical M&A Element

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As we make our way to the other side of the economic downturn and confidence in the future increases, M&A activity will most likely return as a common fixture in the world of business. As this occurs, people involved in the process will make decisions like they always have, by evaluating deals in terms of market capitalization, cash flow, EBITDA, goodwill, etc. Unfortunately, many will ignore a critical element that can ultimately make or break the merger: culture.

Studies continue to show that a vast majority of mergers fail to ever achieve intended results. The intensity associated with the traditional due diligence process pretty well assures that the reason for failure does not lie in the financial analysis. Since culture is considered a subjective element, many people think it can't be effectively assessed. Whether assessed or not, though, cultural issues will appear after the deal is done, often resulting in excessive costs and stress that can greatly lengthen the time it takes for the merger to produce results - if not kill it altogether.

In my experience, I have found the cultural elements that interfere with a successful merger consist of the following:

• Misaligned values between the acquirer and acquiree;
• Misunderstood purpose of the new/larger enterprise;
• Poor communication with team members of the acquired company;
• Fear throughout the organization.
  

As a consultant, I spend a lot of time with companies helping to sort out problems encountered after an acquisition occurs. Too often, investors discover well after the merger takes place that there is ab enormous mismatch in culture between the acquiring company and the acquired company. And the longer these problems are allowed to continue, the more damage that is done to the organization as a whole.

What to Do

An organization, by definition, is a group of people who work together for a shared purpose in a continuing way. Along this line, a due diligence process is not diligent if it does not include a cultural assessment. Although there will never be a perfect match, an upfront cultural assessment will at least provide a picture of the issues to be faced after the merger takes place.

A cultural assessment consists of observation and a series of interviews with people at all levels of the organization to address the following topics:

• Values: Determine the values that exist within the target company (or whether a consistent set of values actually does exist). The objective is to understand how aligned the values are with the acquiring company and where problems may occur;
  
  
• Fear: Assess the level and causes of fear within the company. Fear will obviously exist in any organization that is being acquired, but the key is to discover whether it is a fundamental part of the organization's culture;
  
  
• Leadership Style: Ascertain whether the target company's leaders use a command and control or participative style of management. This will be important after the acquisition to give an idea of how much work will need to be done at the supervisor and management level;
  
  
• Teamwork: Understand the level of teamwork between people, departments, and facilities. If there are problems, it is important to understand what is interfering with people working together. Teamwork needs to be assessed at all levels within the organization;

As part of the cultural assessment process, it is also important to develop a plan to address the issues as quickly as possible after the acquisition. Cultural problems tend to grow exponentially - especially after a merger - and the longer the issues are allowed to continue, the greater the chance they will interfere with the performance of the new organization.

If a cultural assessment had not been performed before the merger, it is important to do one as quickly as possible afterward. Acquisitions generally consume an enormous amount of time and money, and the quicker the new organization begins performing as expected, the better for everyone involved. Unless the cultural issues are understood and corrected, however, the merger has no chance of living up to its potential.