Company Culture: M&A Asset or Liability?
By Derek Bishop, Co-founder & Director at Culture Consultancy
Our financial services clients are under pressure amid increasing regulatory expectations, economic uncertainties and geopolitical tensions. Mergers and acquisitions are one way to secure market share, protect profits, drive diversification and ensure sustainability – but they also come with some risks.
In this article we consider those risks, harnessing our many years of experience working with FS firms on transforming organisational culture. We make some suggestions:
Size isn’t everything – but it does matter
Many of our clients have grown successfully by being savvy in spotting and seizing M&A opportunities. Whatever the potential size of the prize, though, the pace and scale of the growth plans and their implications need careful consideration.
Smaller transactions typically bring less risk than mega-deals and can be equally as effective at accelerating transformation to satisfy markets and regulators. Volume M&A activity, however, can be disruptive in a range of ways – taking time and focus away from BAU and contributing to a sense of destabilising and relentless change. The crashing of potentially disparate company cultures together can weaken even the strongest FS firm’s sense of identity and create conflicting and confusing messaging around acceptable norms, beliefs and underlying assumptions. This is why we recommend doing cultural due diligence as well as the usual financial and legal DD.
Culture as a driver of value in M&A
For business owners, shareholders and PE houses looking to secure an exit, doing some pre-emptive DD on culture (and addressing any gaps and issues) can deliver real value and help maximise multiples. A strong culture will typically show up not only in bottom line performance but also in brand advocacy, employer reputation and attraction and retention of key talent and these are quantifiable metrics that a potential acquirer will pay attention to and can be leveraged in negotiations.
On the flip side, if the target company has attrition issues, high sickness absences rates, loads of ER problems, employment tribunal claims, poor reviews on sites like Glassdoor or is carrying a high level of unfilled vacancies, the likelihood is that a potential purchaser will seek to price chip.
Whose culture: buyer or seller?
An important question for both acquirer and acquired to consider is: ‘Which firm’s culture should we take into the future?’ Broadly, four options exist:
- the seller takes on the culture of the buyer;
- the culture of the seller prevails across the combined organisation;
- a blend of the two evolves over time; or
- the new business may aim for designing something completely new.
Acquirers might operate on the assumption that their culture should prevail, but we recommend adopting an evidence-based approach, through which the right answer for the enlarged group can be uncovered. We explain how we do this in more detail below.
To combine cultures, or not?
Leadership teams often ask us ‘Should we bring the cultures together – and if so, how?’. The answer depends on the unique circumstances of the business, which is why at Culture Consultancy we lead with our Insight stage.
We take time to understand the current states of play as well as the future intended strategic direction and seek to shape an optimised shared culture for the long term. Our proven methodology is responsive to the context and personalities of both entities, to discover what might work for everyone. For example, an acquired tech start-up may bring agile ways of working that would benefit equity analysts within the parent. Robust compliance processes on the other hand may bring risk management to a newly acquired firm that has yet to mature in these areas.
In other words, before we determine whether, and how, to bring two cultures together, we must learn what each offers. In the case above, it would make sense to amplify the compliance practices of the parent, and promote the tech methods of the acquired business. Such ‘cross-pollination’ allows the combined entity to take the ‘best of both’. This approach also brings people together across the silos that tend to emerge from day one of a transaction: cooperation thrives, and outcomes benefit from the knowledge of both groups.
Leave well enough alone
It may at times make sense to ‘leave well enough alone’. Perhaps a firm was acquired for its experience in AI. Here, expert teams may operate in a separate ‘micro’ culture, at least for a while, so people are not distracted by the shift in ownership. If desirable, cross-pollination then occurs at a pace that allows everyone, not least the tech team of the acquirer, to settle into a new rhythm. Our Insight phase identifies such opportunities.
Describing culture, for real
In exploring possible configurations of culture for the near and long term, our Design stage clarifies what matters as the new business readies itself for the future.
An organisation can describe the foundations of its culture using the basic trio of purpose, vision and values. Purpose may not mean saving the planet, and may simply be a good, well-articulated reason for the business to exist. The vision describes the future teams are striving for. Values are the principles that guide how people work.
Purpose, vision and values that are owned by both managers and their team members, and embedded properly, used as an anchor for daily ways of working, are invaluable. They are operate as a “true north”, guiding what gets done, and how. These potentially powerful artefacts are useless, however, when they are mere management slogans on the walls of head office, as we discovered during the financial crisis of 2008.
Involve everyone in the future
Clients are keen to understand: ‘How do we create a culture that is not just words on a page?’ Our experience of M&A transactions in financial services shows the merit of combining top-down, bottom-up and middle-out methods to agree and embed desirable ways of working.
This approach means we can combine the senior team’s insight into the purpose of a merger or acquisition, and their knowledge of market opportunities, with the richness of understanding situated elsewhere in the organisation: of client needs, processes and operational demands.
The result is a culture framework that is more flexible than bureaucratic rules, which motivates more than it pushes, and which gives permission to innovate as new problems come along. The third stage is to bring this culture alive within teams, for which we use the Embed stage of our proven, award-winning methodology.
In conclusion
Experience shows that, with the right structuring and guidance, teams across a merged business can discover practical ways to build a high performing culture where the whole is more than the sum of the parts, and everyone joins forces to fulfil the promises of an M&A transaction.
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