Why Company Culture is Critical to M&A Success

company culture mergers and acquisitions success

The actual results of mergers and acquisitions don’t always live up to expectations.

M&A growth strategies promise a multitude of strategic opportunities; from rapid growth, to elimination of competition, to access to new markets. And many organizations are currently, or have, embarked on merger and acquisition growth strategies to varying effect.

When asked about the primary causes of these mixed results, most leaders cite a misalignment between the two organizations’ cultures. This friction can wreak havoc as the members of different groups assimilate to drive the performance gains that M&A strategies forecast.

Read More…

M&A Integration Drama? Don’t Start With Culture!

M&A integration culture

We’ve heard it dozens of times: Not focusing on culture in M&A integration will lead to immanent deal failure. That can’t be good, especially considering the amount of M&A activity happening these days. According to Deloitte’s M&A Activity Index, there were $1.8 Trillion USD worth of deals in the first half of 2015. Yet, most studies say that only about half of mergers and acquisitions exceed shareholder expectations.

We’ve all heard the stats on M&A, and they only serve to reinforce the idea that deals are destined for failure. So, forcibly combining two corporate cultures into one feels a lot like a mad social science experiment.

Why Not Start With Culture?

mergers-integrationThe truth is, it’s far too simplistic to say that culture is the only driver of M&A performance during integration.

Culture is defined by the organization’s values and how employees behave. But strategy defines the future direction, which in turn defines how the organization expects employees to behave. By focusing on strategy first, your organization is able to guide the new way employees are expected to behave in the post-acquisition culture.

In my doctoral dissertation, I investigated whether a similarity between strategy, technology and culture was better or worse for M&A earnings, stock price, and P/E-ratio post acquisition. What I found was surprising. Companies had higher stock prices when they acquired companies with a different strategy, and a different culture.

With this in mind, here are some ideas for companies that are looking to tie “the corporate knot”:

  1. Different business-level strategies between the parent and target = better results. Yes, it turns out that birds of a feather do not flock together. It’s critical to start with strategy because that defines what direction you want to go in. Second, the evidence suggests that if you, the parent company, gets value by always building new products, your best bet is to acquire a company that is the complete opposite of you; one who creates value by keeping costs down, scaling, and building efficiency.
  2. Solving the culture conundrum starts when opposites attract. It is critical to align the organization around one single dominant culture. Remember, my research showed that companies had higher stock prices when they had acquired companies with different cultures.

Why Different Is So Much Better

Different is better because it’s easier to force the acquired company to let go of their culture through restructuring and organization redesign. When a clear choice has to be made, the parent organization can easily dominate the target company. A clear path forward is then set.

Additionally, different organizations showed improved financial performance when aligning strategy and culture starting one-year post acquisition. Strategy first, culture second.

Final Thoughts

Strategy sets the direction of where the newly acquired company needs to go. The structure defines what the organization looks like. And culture defines expected employee behaviors. Culture is critical, there’s no doubt about that. However, until you define where you want to go, and how you’ll operate, you can’t define how you expect your employees to behave.

M&A Failures…Oh, When Will They Ever Learn

A recent Google search titled

“merger and acquisition failure reasons” resulted in an estimated 242,000 hits. There is a mix of academic research, specific industry experts and consultants within the first fifty postings, with what appears to be “violent agreement” that somewhere between 50% and 75% of M&A’s are judged to be failures. Lack of attention to organization culture alignment is a likely culprit.

In fact, within those previously mentioned articles, lack of alignment of cultures is identified from the #1 to #17 rationale explicitly. Particular elements of the integration or lack of integration suggest that not enough attention was paid to “the way things are done around here” as opposed to “the way things are done around there.” In fact the “lack of due diligence” is cited frequently. Unfortunately, markets, competition, economy of scale, share price etc., etc, etc. is what is called out…little to nothing is said about the likelihood our people will get along, or whether our processes are different or if we value the same thing.

In my fifteen years plus in culture integration work; I can recall only three clients who were bold enough to do “pre-marital” counseling. Taking that analogy a bit further, typical M&A due diligence might be compared to a couple getting married after “speed dating.” We all know the advice to put our best foot forward during the courting stage. The push-back on due diligence at the front end, particularly public companies, is that transparency is dangerous. But lack of transparency can certainly be more hazardous.

So, back to the three clients who “peeled back the onion” before their union. Two of the three decided NOT to move forward. An excellent case was a financial institution considering acquiring a competitor. We started by gathering quantitative data, employing the Denison Organizational Culture Survey (DOCS). Interestingly enough, both institutions had very strong and similar profiles. In particular, both scored high in “values.” On the surface it seemed like a great fit. Yet there was more of the onion to be peeled.

After doing one-on-one confidential interviews and focus groups, we learned that yes, both institutions had strong values; however, they valued very different things. My client valued entrepreneurial behavior, going the extra mile for their customer and pitching in to help their team mates. The other group saw themselves as a family (some even described themselves as dysfunctional), with members who valued working apart from each other in silos and valued the “rules,” as it related to interacting with their customers. The C.E.O. recommended to her board that they continue to look elsewhere.

In closing, there was an anti-war song in the 60’s by the folk group Peter, Paul and Mary titled “Where have All the Flowers Gone.” The key repetitive lyric… “Oh, when will they ever learn?” seems to apply here. When will companies learn that sometimes it makes sense to go a little slower at the front-end so you can go fast when it really counts? Perform the “cultural” due diligence…it pays dividends in multiple perspectives.

*To date DOCS appears to be the only survey instrument that makes the connection between the strength of an organization’s culture and performance measures such as market share, ROI, customer satisfaction, employee satisfaction and quality.

The Culture Grinder in Mergers and Acquisitions

I recently posted a blog entry discussing the concept of the Culture Grinder, our term for organizations that attempt to drive strategies that are in conflict with the culture despite countless examples of how this just doesn’t work. Having recently supported a client with a culture integration of a recently acquisition it reminded me of how the Grinder can rear it’s ugly head no matter what the strategy.

In this case it was a growth strategy through acquisition. The purchasing company sought to expand its reach and to expand its service offerings with current clients by acquiring a small organization that had expertise in a particular area. The strategy was sound and people approached the situation from a positive perspective of mutual gain through working together.

Through facilitated conversations with the senior leaders of both the acquiring and the acquired company, we were able to make explicit the underlying values and “keystone habits” of each organization. By doing this, the team was able to discuss the role of culture as an enabler or detractor in their collection ability to drive the strategy that they envisioned. Continued dialogue helped the leadership team identify areas in which the culture of the integrated organization may need to evolve in order to reduce risk and increase the likelihood of continued success and growth.

Only time will tell.