It is well documented that mergers, acquisitions, and other transactions often attract a long list of complications. Due diligence processes can be extraordinarily lengthy and run in to all sorts of challenges including access to appropriate data, the right people, managing customers and contracts during transition, to name a few. Prospective acquirers are usually looking for targets to bring synergies or add value to an existing portfolio or business. But even the most thorough due diligence processes can fail to uncover all the relevant information that would impact on the future performance of the newly merged business.
Modern corporate history is littered with the remains of merger failures thanks to mismatch of culture. The big names are well documented. We know the importance of culture in affecting the performance of established organisations, so why is it that so many businesses, when looking to acquire or merge with another organisation, fail to prioritise culture in the due diligence process?
Well, there are probably several reasons for this: most notably, the intangible nature of culture means it is difficult to measure, or so people think. The absence of a hard KPI, metric or other measure means that the analysts who often perform the backbone of these types of transactions simply don’t find this a comfortable topic to work with. It isn’t one plus one, therefore we can’t “tick-and-flick”.
Cultural issues don’t have to overt for a newly merged business to be ineffective. Sometimes they are hidden in behaviour, reflecting significant differences in the values within each organisation. These create simmering tensions and key issues are unresolved. An example of this might be a merger between a mature large organisation with internal respect for systems and processes and a smaller acquired company that has strong internal values around resilience and adaptability. The larger company imposes systems and processes through the lens of its own values (and rewarded behaviours) and within a year, good people leave from the acquired business because they feel constricted and over managed. The acquirer loses significant value in that time, even though it may have followed a known process.
So, what can be done about it?
Clear, structured communication. It seems obvious, but it is no less critical.
Attention must be paid to several factors when communicating: to set the scene, to relax minds, to manage expectations. These factors should include choosing carefully who communicates the change, the language used, and the timing of communication. Of course, the channels and methods used to communicate can greatly improve comprehension (or not) of what can be a confusing episode for staff.
Providing all stakeholders with information, be it around the benefits of the merger or even just the process itself can be greatly reassuring. And nominating ‘culture’ as a consideration in a merger can itself be a very powerful acknowledgement that management is serious about the wellbeing of people in the new organisation.
Due diligence processes can uncover considerable detail about organisations. Yet the cultural integration is often one of the hardest things to understand and manage from the outset. Once the initial communication is complete, it is time to complete an Alignment Audit.
Purpose: to identify the operating values, and supporting behaviours, of both companies to ascertain a common starting point from which to build an integration plan.
Firstly, it is crucial that the right people complete this part of the process. Allowing financial analysts or unqualified personnel to conduct this part of the process is as unwise as allowing an expert in human behaviour and motivation to conduct the financial audit. Yet this is quite often what happens in due diligence processes.
Secondly, Alignment Auditing should be as comprehensive as financial due diligence. A reasonable assessment of the culture of both organisations can be obtained in a relatively short amount of time; a reasonable process will identify gaps in the way people work, similarities and a good method for resolving.
Thirdly, don’t stop managing the existing cultures while undertaking the process. The old cultures need support in transition, being visibly nurtured and respected by leaders from both old companies. Being seen to develop leadership capability and culture within the new company will be warmly received by all involved.
Lastly, an independent third party is crucial to obtaining accurate information. Trust is a major issue during a merger or acquisition, so it’s vital that all people involved in the transaction believe that the incumbent leadership has their best interests at heart. A degree of impartiality can greatly assist with this process, if it is handled delicately and constructively. It can be the equivalent of neutral ground during a negotiation.
Once an Alignment Audit is complete, you will have a strong baseline from which to form your integration plans. You will understand what the overlaps are, what gaps exist, across a range of factors including values, attitudes, ethics and possibly even skills. Without this information, organisations risk uncovering issues mid-integration, increasing their costs and of course, anxiety with the process. It is akin to buying an established house and expecting there to be polished floorboards under the carpet, only to find after moving in that no such floorboards exist, just a sub-floor that is now degrading faster without the protection of the carpet.
Cultures can be brutally stubborn. We’ve all experienced this at both the micro level and macro level. People can be slow (or sometimes unwilling) to change, particularly when they perceive that their livelihood or environment is going to change for the worse. Uncertainty breeds anxiety and even dread.
So, when it comes to mergers and acquisitions, be sure to bring everyone along on the journey: communicate promptly and in a humanistic fashion. Invest in understanding the baseline properly with an Alignment Audit, and you maximise your chance of acquiring the wonderful house you intended to purchase in all its splendor.
Jamie Crain, Enterprise Director, Dattner Group