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Highlighting the importance of cultural due diligence in M&As
In a recent* report on innovation, the US branch of PWC quoted overall failure rates of 80% for mergers and acquisitions with 50% failing to reach financial targets post merger. Certainly, when mergers and acquisitions (M&A) are announced the prime rational is usually cost. The press release may use words such as synergy, vertical integration or economies of scale but the bottom line relates to cost savings.
In truth there is nothing wrong in looking for ways of reducing expenditure. This is particularly relevant when looking at M&A. It is the rare shareholder who would be happy to sign off a merger which promised increased expenditure and diminishing shareholder returns. However, given the cost of the merger process itself with due diligence, legal fees and so on the failure rate is somewhat alarming. So just why do so many mergers fail?
Many studies will point to M&A failure as due to factors such as:
However, these are often the visible signs of a hidden failure to match and merge company cultures. Organisational culture grows throughout the period of the organisation’s existence; changing with each new individual or external contact. Organisational culture is the “way we do things” and is entwined in every employee attitude and process. Often intangible, culture is not covered by most due diligence processes and herein lies the problem.
Let’s look at one simple merger example. Company A and Company B both offer written portfolio valuations to their clients in return for a monthly fee. Their directors get together and decide that if they merged they would be able to save costs by bulk buying the paper used to write to their clients. Due diligence confirms that they both issue paper valuations and that there is an economy of scale to be had. Cultural due diligence may have highlighted the fact that Company A prides itself on its ethical stance and always uses recycled paper whereas Company B writes to clients using high quality un-recycled gloss paper. The potential for cost savings on bulk buying are therefore minimal and the imposition of one type of paper over the other could result in resentment from staff and clients alike.
Whilst culture is embedded throughout an organisation, the drive to strengthen and influence the culture often comes from the top. Our blog of 11 July highlighted the importance of line managers in engaging employees thereby influencing company culture. If culture does stem from the top then the survey by Journal of Business Strategy in 2008 which revealed that M&A destroy leadership continuity in target companies for at least a decade following a deal is disturbing. Although logic dictates that following a merger you only need one head of finance, one IT director and so on; those individuals who are tasked with overseeing the merger between two disparate departments are often working blind when it comes to one set of cultures.
The answer to this dilemma is to ensure that a robust cultural due diligence review is carried out alongside the standard finance and legal due diligence. This cultural due diligence will not only lead on to integrated cultural planning it may even highlight some show stoppers in potential M&A that should never take place. Using the cultural due diligence as a base and ensuring that work is done to align heads of department, line managers and employees into the culture and values of the merged organisation will significantly increase the likelihood of a successful merger.
(*NB this post was written in 2011)