Culture Merge in M&A: A Powerful Approach (Strategies & Examples)

History is littered with mergers and acquisitions that failed because of an inability or unwillingness to grasp the importance of addressing culture.

Academic research conducted across different timelines, industries, and geographies shows that the synergy targets set out at the beginning of a transaction are far more consistently achieved when culture is managed effectively.

Culture is therefore far less of a ‘soft issue’ than some M&A practitioners believe. 

DealRoom helped dozens of companies organize their M&A process and in this article, we look at the impact of culture on M&A, and how it can be effectively managed to maximize value from every transaction. 

Determining organizational culture

The idea of culture causes a lot of problems because companies find it hard to pin down. How can they detect something which they believe to be in the ether?

This is erroneous. Culture is not in the ether.

It’s an unwritten set of standard operating procedures that a company has. It’s how the company behaves when people aren’t looking.

The good news is that all of these things can be defined by asking the right questions.

Culture can be determined through a cultural assessment - or cultural due diligence. Like any other kind of due diligence, this requires that a company audit a culture, asking the right questions of the right people is paramount.

Identifying organizational culture is the first step of successful cultural due diligence. If this sounds difficult, think of all the people that your company hires on an ongoing basis. Think of good people that weren’t a good fit. Cultural due diligence is basically doing this en masse.

The earlier this starts, the better. Issues to assess include the following (be mindful of the fact that all of the assessments need to be made relative to an honest self-assessment of the buyer’s firm):

1. Defining ‘success’: Perhaps the most important question of all - what motivates employees (incentives, promotions, achieving and surpassing KPIs, lifestyle, etc.).
2. Management approach: How big is the distance between management and staff at the target company? Is there constant interaction between them?
3. Decision-making approach: How much autonomy does the staff have to make decisions, and how important are those decisions? 
4. Willingness to change: How open does the team appear to change? Have things always been done the way they’re done now or has there been constant evolution?
5. Current workforce attitudes: How content are the workforce currently and what are their concerns about the takeover? (conduct a confidential survey if you deem it suitable).

What part does culture play in M&A?

Unsurprisingly, ‘how we get things done around here’ can have a major bearing on how transactions fare.

The consolidation of the income statements of two companies is a relatively straightforward exercise that investment bankers like to undertake to show the post-merger earning power of the two companies.

But exactly how were the incomes earned?

There’s a strong chance that even companies that seem closely related generate income slightly differently - that’s culture.

Examples abound. When Amazon acquired Whole Foods in 2017, to many on the outside, it looked like a match made in heaven.

Amazon would gain a foothold in the groceries industry, and Whole Foods would become the most technologically capable of all of its competitors.

But the cultures were miles apart. Amazon is about speed and efficiency. Whole Foods is about ethics and personal service. If cultural differences had been acknowledged, the deal may have even happened. 

Of course, understanding this culture demands that companies undertaking mergers and acquisitions are completely honest with themselves about their own culture.

They need to ask hard questions about how their suppliers, employees, customers, and other external stakeholders.

• Are they as innovative as they like to think they are? (and if so, what have they innovated in the past five years?).
• How ethical are they, really? (Greenwashing is still remarkably common).

Thus, it's important to understand the culture on both sides of the transaction. 

Merging two different organizational cultures

As with any other stage of due diligence, cultural due diligence is best conducted using a project management tool like DealRoom.

This should be seen as the very first step in the process.

Cultural due diligence is rarely the most challenging part of the due diligence puzzle, but it is usually the most unwieldy, demanding that the buyer creates an organized process, and makes answers about employee motivations and emotions as measurable as possible.

A good process is:

1. Identify cultural differences (see section above).
2. Establish what can be changed without destroying value. For example, if personal relationships are what drive most of the value, don’t simply believe that the client relationship can be transferred to an automated CRM system.
3. Understand the target’s ‘hygiene factors’ and ‘motivators’ - what do they need at a minimum to be happy in their positions, and what would make them work even harder? This could be something simple like dressing down in the office or working from home twice a week, but it’s important to have a good understanding of it.
4. Be fast: Nobody likes the idea of being a company in constant flux. The longer it takes to ask everybody questions, the more likely you’re going to run into trouble. Ensure that everybody is contacted about their opinion, and let them know (or preferably show them) that their voice matters as soon as they’ve been heard.
5. Create a roadmap for cultural success. This means collating the findings from sections 1 and 2 and comparing them to your own company and how the target fits culturally. Which aspects are going to require the most attention? Employee incentives? Bonus packages? Control systems? Take a systematic approach and go through every detail one by one, ensuring not to take any shortcuts (a sure way to destroy value in the deal).

Read also:

How to Assimilate Unique Cultures in Mergers and Acquisitions (insights from Microsoft)

Tone At the Top: Intersection of Leadership & Culture in M&A

Staying True to Culture in M&A

How does national culture affect global company mergers?

Talking about national cultures these days is a minefield but let’s be honest - every country has its positives and negatives.

It’s important when acquiring a company in another country that cultural due diligence is approached with that mindset:

Your culture isn’t better than the other side, it’s just different.

When acquiring a foreign company, take all of the same steps - just more tentatively. It’s still just a company - it’s probably just even more different to your company than one in your own country.