Considering Culture in M&A
One of the most important factors in any deal is culture.
Culture affects everything from leadership style to an organization’s adaptability and ability to collaborate. You can put together two financially strong companies with geographic synergies or complementary product mixes, but if the organizations and their personnel don’t gel then the combination is not likely to live up to expectations. In fact, an estimated 30% of transactions fail to meet their financial targets due to culture issues.
Knowing what’s at stake, how do we harness culture in navigating M&A transactions? Well, it begins with taking the time to understand each company’s history, mission, vision, leadership and personnel. We have to consider how each organization defines success—for both employees and customers.
It’s reported that 58% of companies involved in deals do not have a specific approach to assessing and integrating culture, so if you take the time to consider these factors then you’ll be ahead of the game and positioned to succeed.
Accounting for Culture
Culture can be accounted for through surveys and audits involving interviews and document reviews, among other efforts.
The combined organization’s desired cultural attributes should be defined ahead of time, and culture can actually be negotiated in the same way that financial terms are.
Deal participants should develop an integration strategy. It’s possible to keep cultures separate, develop an entirely new one or combine existing cultures, and the best strategy often depends on the specifics of a deal. In a bolt-on deal, for instance, it may be appropriate to maintain distinct cultures after the deal closes. On the other hand, if a combination creates economies of scale then a unified culture could make more sense. Whatever the case, buy-in is critical: The top reason for unsuccessful cultural integration is a lack of agreement among leadership on a desired culture.
Construct a “prenup,” lay out terms for employees and get buy-in from them. Transparency is critical, so make sure employees are informed and participating in open communication. The most successful dealmakers rank communication and change management as key priorities during a deal.
Buy-in from leaders is also critical, as leadership shapes the decision-making process from who has authority to how final decisions are made. Most dealmakers believe that leadership is a top concern for organizational culture.
Finally, be patient because integration may take some time. And embrace trial and error—you should expect to reevaluate the integration strategy as time goes by.
A deal is not likely to be called off due to mismatched cultures. Instead, it’s incumbent on deal participants and their advisors to take steps to ensure cultures are integrated as best as possible.
We’ve seen the best deals are ones in which participants have thought critically about culture before heading into a deal and then execute on it after completion.
Deal participants should emerge from the integration with a robust and sustainable culture. Culture may not always sink a deal but there’s no way to maximize value without a strong one.
Matthew Roberts is Vice President at Copper Run. He specializes in the business services, distribution and manufacturing sectors.