M&A: The hidden cost of culture
Culture represents the established and implicit shared beliefs and values of the individuals that are part of an organisation. It is what makes a team become more than a group of individuals. Their beliefs and values influence the way the organisation behaves and operates, how it responds to situations, and the way it performs. As a result, culture must be as front and centre in an organisation’s M&A journey as the more tangible commercial factors have always been. Without appropriate focus, challenges around culture will come to the fore and complicate integration or divestment activities. Value expected from a deal will be diluted by the hidden cost of culture.
"Without appropriate focus, challenges around culture will come to the fore and complicate integration or divestment activities."
Calculating the cost of culture
Cultural awareness should be a guiding principle in early-stage M&A conversations. This means understanding both organisations’ culture and thinking carefully about potential opportunities and likely challenges. If culture is ignored or downplayed, M&A journeys can result in significant value loss. This was demonstrated by eBay with their 2005 acquisition of Skype; only to lose $1.4 billion in market value 2 years later. As such, the following should be considered to minimise the risk of similar costly scenarios.
Understand the cultures and the people;
Organisations should look honestly at their own culture and the culture of potential targets. Even similar companies with similar employee demographics can have vastly different cultural approaches to day-to-day work, problem solving, and innovation. The obvious place to start is with an organisation’s declared core values. Open sources such as Glassdoor, LinkedIn, and the target’s website, can help build an independent view of how the organisation truly lives those values. These sources can supplement conclusions drawn from meaningful interactions and relationships on the ground, inferences from policy/process diligence that is done, and how that diligence is supported. For example, when asked for additional context or data, does the employee look to confirm with a governance structure or their manager?
The end state must be empirical clarity over the nature and style of the organisation and how this informs integration work. This will give the best chance possible of realising the hoped-for value from a deal, by informing the approach and timeline for integration and injecting realism about the likely challenges to be faced. As acquisition conversations progress, organisations should look to continuously retest their assumptions on culture and not be afraid to change direction or approach when more is learnt.
"As acquisition conversations progress, organisations should look to continuously retest their assumptions on culture and not be afraid to change direction or approach when more is learnt."
Realising the expected value of an M&A transaction requires thoughtful navigation of the cultural and people impacts of the transaction, 95% of executives agree and unanimously state that cultural integration should start early on. Yet studies find that the cultural integration phase is still neglected in a substantial percentage of deals. Cultural integration must be holistic, comprehensive, and sensitive. But what does this mean in practice? And how should organisations approach this?
- Create a realistic integration plan; The acquiring organisation should have a strong cultural integration plan in place to unlock value from the deal across geographies, products, and competencies. The cultural integration plan should focus on where the purchased firm will fit within the new operating model of the acquiring firm, how this change will be agreed and communicated, and what preparation is needed ahead of the deal to smooth the journey. The scope of the plan is broad, covering not just organisation design but also governance and processes. Sensitively understanding and managing the impact on behaviours that will come from a myriad of changes from the deal is subtle but critical.
- Secure the value; Protecting the proposed value is crucial – hypotheses that appear solid in theory need to translate into reality and be tested. Individuals who share the vision of integration should be champions of change and be empowered to own ambitious plans for harnessing the value being unlocked by the deal. Representatives need to be balanced between the two organisations to ensure that the cultural opportunities and challenges are represented appropriately.
- Prepare for a “Clash of Cultures”; Transition strategies take many forms, but all require a consistent commitment from the change team, a consistent rhythm, and the presence of expert change management professionals. No matter how solid and thoughtful the foundations, cultural challenges will likely still occur. A professional change team can build on the cultural analysis and integration planning and work systemically towards winning the hearts and minds of both organisations. This allows not just the expected value to be realised, but, perhaps more importantly, allows operational performance during the transition to be maintained. Skilled change management professionals will navigate these challenges and ensure that any “clash of culture” is both limited and measured.
"Cultural integration must be holistic, comprehensive, and sensitive."
The importance of understanding culture throughout the entirety of an M&A process should not be understated. Cultural challenges have been found to be a big contributor of up to 30% of failed integrations, many of them high-profile and public, such as AOL–Time Warner and Daimler–Chrysler. Without cultural consideration, small missteps can evolve into costly errors during the M&A process. At Oaklin we believe that robust and thoughtful analysis and planning can minimise the hidden cost of culture.
Joe is a management consultant with a proven record delivering digital transformation alongside clients in the private and public sector.
He is passionate about leveraging innovate solutions to generate growth, weather uncertainty and solve business challenges. Joe enjoys writing thought leadership papers, looking to explore sustainable business solutions via new technologies.
-  https://www.bloomberg.com/news/articles/2021-10-25/m-a-deals-head-to-record-5-trillion-year-on-executive-optimism
-  https://www.refinitiv.com/perspectives/market-insights/global-ma-soars-as-acquirers-make-up-for-lost-time/
-  https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right
-  https://www.bcg.com/publications/2021/beware-of-separation-costs-compromise-value-creation
-  https://www.willistowerswatson.com/en-GB/News/2020/03/companies-divesting-assets-in-2019-post-second-worst-performance-on-record
-  https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/10/dissecting-public-carve-outs.pdf