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Viewpoints: Five ways to manage culture differences during an M&A deal

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Mergers and Acquisitions

By Sam Johnson | April 13, 2020

Culture incompatibility can be a fundamental reason why deals fail. We discuss five ways HR can tackle this often underestimated challenge.

Culture is often cited as one of the most common pitfalls in a merger or acquisition. For those seasoned in M&A, this is a well-trodden path; a quick internet search of why M&A deals fail will return page after page of articles about incompatible cultures. 

So when our M&A Roundtable Group, a collection of HR M&A professionals from a range of serial acquiring companies, got together to discuss the key issues that they face in deals, it was no surprise that culture was top of the agenda. Here are the main five themes that arose from their conversation.

Culture differences can be managed, but alignment on core values is imperative

Companies — and especially serial acquirers — will be likely to buy a company that has a different culture to theirs at some point. In many acquisitions, they may in fact intentionally look to acquire an organisation that has a different culture to theirs — a small, innovative start-up, for instance. And they will not want to quash the very reason that they bought them in the first place, so it’ll be important to be aware of the differences upfront and manage them carefully. However, alignment on what each organisationconsiders their core values is fundamental for a deal’s success and is a difference that cannot be compromised on.

If cultural differences do exist where they are likely to prevent the deal objectives from being realised, then these will need to be aligned in order to avoid friction further down the integration journey. There will come a point where change will need to be initiated; this is expected from an M&A transaction, so it should be addressed early in the process.

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As the burning platform disappears, the difficulty in aligning cultures increases. Having differences in core values is something that will be very difficult to align, no matter how quickly you try and achieve this.

There are culture challenges in trying to keep an organisation at “arm’s length”

The strategic intent of an acquisition should be the driver of the decision to integrate fully or otherwise. An increasing trend, particularly when acquiring smaller innovative companies, is to try and not fully integrate immediately in order to continue to foster a creative and innovative environment.

Driving the value from an acquisition like this may not be possible when integrating fully into a large global company with established and rigorous processes.

With this in mind, it may be tempting to tell the management of the acquired company that they will be kept at “arm’s length”, and will still have the freedom to operate as they did before. As one HR M&A professional put it, this is a statement that should be avoided. If an acquired company is now wholly owned, they will be held to account under the same level of scrutiny for governance and processes such as data privacy and anti-trust rules as the parent company.

Even when trying to change as little as possible about an acquired company, some fundamental elements such as governance processes will need to be aligned.

Be wary of telling an organisation that they will be managed at “arm’s length”, only to come back and tell them they need to conform to the parent’s policies and governance. Even when trying to change as little as possible about an acquired company, some fundamental elements such as governance processes will need to be aligned.

Manage the communication around culture alignment very carefully

Communication is key. This is commonly accepted in general terms when it comes to M&A, but this applies equally to communication of cultural differences, similarity and alignment. 

One of the learnings we hear often is that the communication around culture should focus on the positive messages emerging from the combination. If the core values of the acquired company and the acquirer are aligned, focus on this in the communication with leadership and employeeswhilst managing any needed culture alignment more quietly. It’s easier to accommodate change when you’re able to relate!

It can also be tempting to focus on the cultural challenges and restrictions of smaller companies being acquired into a much larger corporate machine, but there are many benefits as well and these should be emphasised. Access to more funding, technology, wider geographical scope and increased learning and development opportunities are all commonly realised benefits; they can be used to complement the acquired company culture and help it grow. Such opportunities should be the focus of communication.

Culture starts with leadership

When assessing culture (and it should start in the diligence phase), deal teams often start with the leadership of the business.

There needs to be clarity on the role of the leaders or founders of the target and what they really think makes their business tick. The target organisation may be a supplier or competitor that leadership thinks they know well, but it will be important to challenge this view and complement it with external information and leadership interviews.

This is not without its challenges — sometimes long-serving leaders (possibly the founders of the business) will think that the original culture still prevails, but employees who have joined the acquired business more recently (either as new hires or through their own acquisitions) may see this differently. It’s important to ensure that all functional leads in the due diligence phase are listening for any insight into the culture that either back up what the leadership are saying or offer an alternative perspective. Look (and listen) for observable behaviours and whether these confirm the values the company upholds — or go against it.

Coaching leaders on culture

  1. 01

    If the objective is to integrate the acquired business as soon as possible, the role of the leader and the people managers of the acquired employees will be crucial.

  2. 02

    Coach these leaders on both their role and the cultural values that your company works to. Coming from a smaller company, they may not be used to the “standard” processes that leaders at the parent company are, and it can be quite damaging to have a (people) manager telling employees they disagree with or don’t understand why a certain change is taking place.

  3. 03

    Having leaders who feel positive about the new parent company and the direction that the company is heading is not only important for retention of key talent, but will help to drive cultural change in a direction that helps you reach the objectives of the deal.

Assess culture upfront but make sure you continue to come back to it

The final key message is that culture needs to be front and centre as part of the diligence process. “Culture is a good starter for a first date”, according to one HR M&A professional. 

The acquirer must engage with the target about what is important to the acquiring organisation, where there is common ground, where each stands ethically and how each views their people — this often goes further than the mission statement, so teams will find it useful to review their own culture first before measuring it against those of an acquired company.

It is imperative that the right people are in these meetings with management during the diligence phase; the largest corporations in the world have HR present alongside Finance and Legal teams during those crucial first conversations. If nothing else, this shows the seller that you think people matter!

Culture is also important enough to be a reason to walk away from a deal but unfortunately this rarely happens. Dealmakers still often trust to their instincts without being able to verbalise objectively why cultures match (or don’t!). Some cultural differences will present challenges that are too difficult to overcome.

Culture doesn’t just come out in the diligence phase and then disappear if you are satisfied that there are no obvious barriers to success. Even in compatible cultures it is important to refer to them as the deal progresses. As one experienced M&A practitioner said — if you find out that an acquired company has a culture of only making decisions at the top level, don’t be surprised or frustrated further along in the process when nothing happens as you try and make decisions without the right people in the room. Learn from what you find and use it to make the integration planning a success.

Getting culture right

Awareness of cultural differences between acquiring organisations and their targets is something that is getting increasing attention from those organisations with the most experience doing deals. Culture now sits deservedly in the M&A playbooks of both one-time and experienced practitioners. Despite this, it remains one of the most difficult pieces of a transaction to get right.

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M&A – Human Capital and Benefits

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