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Blog Post

Successful M&A requires cultural due diligence

Mergers and Acquisitions|Talent
Mergers and Acquisitions

By Gabe Langerak and Yvette Biharie | October 29, 2019

Although most failed deals are attributable to culture issues, the due diligence phase of M&A transactions still focuses primarily on financial and legal aspects of the deal, and not culture.

The difference between a successful merger and acquisition (M&A) deal and a troubled one often hinges on whether culture is assessed in the due diligence phase of a transaction. Too often, culture is treated simply as a buzzword and remains unaddressed until after a deal is closed. Successful transactions require a holistic view of culture at an early stage, and a strong focus on people-related issues.

However, the due diligence phase of M&A transactions still focuses primarily on financial and legal aspects of the deal. If a deal is struck without a review of corporate culture, many of the expected synergies (achieving deal value and stimulating growth for the future) often do not materialize or end up costing much more financially or in employees.

Understanding behavioral norms and underlying assumptions about how an organization works is crucial to identify potential risks and to ensure that the two organizations entering into a deal can determine how to work together in the future. A review of the two cultures during the due diligence phase creates transparency and clarity.

The challenges of cultural considerations

The most immediate and important challenge of a potential M&A transaction is the retention of leadership and talent. A common misconception is that this is a financial issue, but research shows that the most frequently cited reason for the departure of managers and talented staff are related to the new organizational culture, together with discomfort and dissatisfaction about their new roles and the strategic direction of the company. Indeed, our 2017 Global M&A Retention Study identified that even a higher retention award does not improve retention.

To improve retention of managers and key talent:

  • Involve staff from an early stage in shaping the new corporate culture.
  • Set clear expectations.
  • Ensure all employees understand how their roles contribute to the success of the new organization.

To reflect on the consequences of an HR mismatch, consider the following questions:

  • What are the current and desired qualities of managers at the top of the organization?
  • What are the most important characteristics of both organizational cultures and which culture is strategically most appropriate in the future?
  • Which company’s HR is strategically most appropriate to the combined organization?
  • Is the merger or acquisition well supported within each organization, and how can we increase support?

How deal-makers can approach culture

During the due diligence phase, a culture evaluation is first carried out to evaluate the behavioral norms and values of both companies. The evaluation is done on the basis of existing information, personal observations from the deal team and in-depth interviews with managers and directors. In addition, the current compensation structure and the future expectations for the merger or acquisition are considered to align the joint corporate culture with the new corporate strategy.

There is no “one-size fits all” approach. The “perfect” culture formula to achieve an optimal working environment does not exist. For an organization to effectively implement its strategic priorities, it must first:

  • Reach agreement on priorities amongst its directors
  • Reach agreement with senior leaders about critical cultural traits
  • Create a corporate culture that supports these priorities and cultural traits
  • Align the "people strategy", employee value proposition and compensation policy with strategic priorities

Although the outcome of a cultural review during due diligence is rarely a deal breaker, it is of great value for:

  • Understanding the most effective means of communication
  • Creating an aligned vision
  • Establishing effective leadership teams
  • Fostering an integrated culture that supports business strategy

The ultimate goal is to match business and human-centered goals. The ambitions of organizations are inextricably linked to those of their teams. Therefore, keep an eye on the ultimate goal of the deal: take a step back, avoid the urge to act hurriedly under pressure from the deal team, and focus on bringing together a joint plan prior to the integration phase.

The sad fact is most mergers or acquisitions fall short of expectations. But by understanding — and dealing with — cultural differences between the two organizations can help increase the chances of success.

Contacts

Gabe Langerak
Western Europe M&A Leader

Yvette Biharie
Director of Talent Consulting

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