Why Culture Matters in Mergers and Acquisitions
29th March 2019
There is the saying, “before you presume to manage others, know yourself”. The same may be said of assessing business culture. If you know your people, their values, beliefs and how these combine with decision-making, and therefore how things get done in an organisation, you may understand the culture that binds the business.
Culture is particularly relevant, from my experience, in mergers and acquisitions. Everyone thinks transactions are all about the deal structure, risk and financials. However, failed cultural fusion is the graveyard of many mergers, as successful cultural fusion is often the glue that secures value.
Change management of people is notoriously difficult and poor awareness of different cultures and how best to fuse can often lead to distraction, frustration and brain drain. Over 70% of acquisitions fail to deliver the expected value and most of these failures are due to a lack of cultural fusion, not the deal structure or the value paid.
Whether looking at a business for strategy or an acquisition, understanding the culture of the business, or conducting due diligence to do so, is critical. At this point, we tend to reach for the mission statement and/or the ‘values’ page on the company website. This will tell us how the organisation perceives itself, but will not reveal the reality. Only the team and their customers can talk about the real culture of the business on a day-to-day basis and this means we have to ask lots of questions and listen carefully to the responses.
These questions might include:
- Where does the business fit both culturally and commercially? By this we are identifying if people work to a loose script, nurture each other and perhaps cover each other’s backs. Or is it highly commercial? Think of Jack Welsh’s General Electric - 360-degree appraisals, a process for everything and bottom 10% of the team out every year to make way for new talent. Cultural may be highly successful outside the City, but commercial is the City’s mindset and structure.
- What are the beliefs and values of a business? We are not looking for the surface traits here, such as open-necked and beanbags versus ties. We are looking at the deep-rooted thinking and common background of all the key people. They may not be motivated by the commercial culture of the business, but more so to the calling or sense of purpose. Or, indeed, they may be motivated by a deep loyalty to the shareholders built over years of mentoring and support.
- How are decisions made and what is the reporting process? A culture is often defined for its speed and style in decision-making. Is it empirical that reports are generated for everything and decisions are only made after thorough research, or should such a process be intuitive? Research may take place, but gut instinct then takes-over? Is there a democratic or autocratic style? Is it fast-paced, or measured?
- How accurate is the organisation chart? It is best to assume that it is an ideal, not an absolute. The influencers or knowledge nodes in an organisation may actually be more important than the person with the high-level job title. The PA, who brilliantly organises the annual ski trip and has the boss’s ear will not show up as a key person, but will be a key influencer. This is like a game of hide and seek, some personnel will not be obvious but are critical to the smooth running of the business.
- How trusting is the organisation? Roles and responsibilities will exist, but whether they are held to or overlooked will be a critical point of the review. A further assessment might be to see if personnel are tracked and watched or empowered and trusted. There is no judgement on approach, but more of an assessment on the method used and where it works.
- Are there sub-cultures? Larger companies have sub-cultures, which add to the structural complexity. Geography plays a part, as well as operational divisions. A process or rule that works at head office may fail when applied on a regional basis.
- What is the context of the answers to our review? The response may be, “I see they make decisions by consensus rather than line management”, but the context is why the organisation does this and how has it defined this process historically?
If the assessment is being used for acquisitions, we can use the results to aid a smooth integration or merger.
During the deal stage, particularly in the early stages, everybody tries to get on. However, think about the scenario of new friends that go travelling together for the first time. By the second week, the differences of outlook start to show. This tests the friendship and, at this point in time, an awareness of these different views is critical to success, combined with flexibility and the ability of each party to compromise. Failure to do so will result in a trip that is fractious and potentially a disaster.
The reality is that, initially, managers are blinded by the friendship, without looking at the key behavioural drivers, history and values. They see the surface traits and not the underlying characteristics and assume that HR will bring cohesion, rather than trying to understand and work with the underlying character of the organisation. Differences can be mapped, assessed, discussed and tackled, but time needs to be invested in the overall vision. People need to see that the leaders care, are empathetic and clearly prioritise the soft elements of a deal.
We recently managed a transaction, where the buyers initially focused heavily on reporting, but did not really get to grips with how the second-tier management of the business thought or worked. This has caused tension, but if the primary leaders leave the business, there will almost certainly be significant disruption.
Best practice on cultural integration can include:
- The creation of an unbiased culture map of each company;
- Identify both the joint approaches and the differences within each business;
- Grade and prioritise the importance of change in culture against the map;
- On a joint basis, workshop which values and beliefs best help to merge and create value;
- Involve all levels of personnel beyond the leaders;
- Agree initiatives jointly to tackle any differences in a beneficial manner;
- Include ‘why’ and ‘how’ to look at culture;
- Create champions and track and sponsor the initiative; and
- Sell the combined vision on a regular basis. Discuss the ‘why’ not just the ‘how’.
To explore the subject of culture and how you can cultivate it in your family business in more detail, join the upcoming IFB National Conference on 6-7 June.
Avondale is a multi-disciplinary corporate advisor. We specialise in providing unrivalled expertise in business sales, acquisitions, strategic advice and corporate finance for ambitious businesses in the UK and internationally. It is family owned and understands well both the challenges and ambitions of family and owner driven enterprises.Avondale has been established 27 years. Our success – and that of our clients – is founded on a bespoke, in-depth approach that delivers creative, intelligent solutions and outstanding results.
About Kevin Uphill
Kevin enables business owners to enhance equity value, maximise business sales and acquisitions via mentoring. Working with his team he is also a successful lead dealmaker through his professional practice Avondale and has facilitated the sale and purchase of over 400 companies.
He combines experience, vision and the ability to simplify business complexities with an infectious energy to make him the most regarded and sought out business value growth, business sales, mergers and acquisitions expert.