Time and again, research demonstrates that effective culture assessment and management drive better integration results. Yet most organizations fail to sufficiently address culture, leaving them vulnerable to deal value erosion. By incorporating culture assessment into every phase of the M&A deal cycle, your organization can maximize deal value by choosing Targets more effectively. The earlier companies identify cultural issues that might impact valuation, the earlier they can mitigate or eliminate issues and design appropriate solutions.
Why Do Companies Fail at Addressing Culture?
Given that we understand the significance of culture, why do so many organizations continue to neglect culture during mergers and acquisitions?
- Outdated thinking: Organizations may still rely on an antiquated definition of what culture is and why it is important.
- Lack of methodology and expertise: It's not uncommon for organizations to omit culture from their M&A playbooks. Furthermore, the deal team may lack someone with the requisite skill set to measure culture.
- Poorly designed change interventions: We frequently find that the supporting systems and processes for culture assessment are not properly aligned to drive the desired business outcomes.
- Avoidance: Assessing culture can be messy and complicated, not to mention difficult to quantify. Thus many companies steer clear of culture altogether.
All of these can significantly undermine deal value. The greatest danger in failing to address culture is overlooking potential cultural flashpoints, that is, emotionally significant historical traditions that carry disproportionate risk and very little potential gain. Cultural flashpoints may include spending habits and signing authorities; what creates and who bestows power and authority; work habits like schedule, dress and location; and performance management metrics.
Culture Assessment in Each Phase of the M&A Deal Cycle
Perhaps the most common challenge in assessing culture is a lack of access to the right data and stakeholders. In the early phases of a deal, there may be little to no access to anyone or anything that would provide deep cultural insights. The best way to overcome this hurdle is to treat culture assessment as an iterative process throughout the deal life cycle, moving from informal to formal assessments as you gain increased access to the Target.
Initial Strategic Considerations
Your culture assessment should begin as early as possible, ideally as your organization defines its M&A strategy. The first step is to assess your own organization's culture, which will serve as a baseline as you evaluate potential Targets and their cultural fit. When you have identified a potential target, you can rely on the following sources for information about the company's culture:
- Public data search
- Inside trade knowledge of the target
- Third-party strategic due diligence
- Initial discussions with the Target's executives and deal team
Compare these preliminary findings about the Target's culture to what you know about your own organization and the part of your organization that will absorb or be reverse integrated into the Target. If the two are obviously quite different, consider how much cultural integration will really be necessary to achieve your deal objectives, and how that might impact the integration strategy, cost and timeline.
Due Diligence
Moving into the due diligence phase generally includes at least limited access to the Target, and you can start collecting both quantitative and qualitative information. During due diligence, aim to gather the following:
- Existing culture data
- Responses from structured interviews with target executives, the deal team, managers and others
- Initial limited surveys of individuals who are already "in the know" about the deal, or others as access permits
Although these sources are still not exhaustive, they should yield sufficient information for your due diligence team to identify any red flags or potential cultural flashpoints. Just as you did during the initial strategy phase, consider how these cultural issues will impact integration.
Pre-Integration Planning
As you move into integration planning, it is important to continue collecting as much data as possible. Take advantage of expanded access to the organization and collect a wider variety of information:
- Quantitative culture assessment tools
- Validation sessions with executives and task forces
- Census or sampling surveys, reporting and analysis
- Strategic definition sessions with the combined executive team
- Task force analysis and planning
During this phase there may be an opportunity to administer validated third-party culture assessment tools like Human Synergistics or Denison. Most times the use of third-party assessments occur post-close. Keep in mind, however, that these assessments get at cultural attributes and values, but they usually do not address most work practices that tend to cause cultural flashpoints.
Implementation and Follow-Up
Once integration is underway, it's important to continue assessing and addressing culture. At this point, your team will probably have unfettered access to the Target organization, allowing you to expand your activities and assessment methods:
- Communication and follow-up
- Culture data used in planning and implementation decisions
- Additional group and sub-unit activities
- Periodic resurveys for progress measurement
By treating culture assessment as an ongoing activity throughout the M&A deal cycle, your M&A team will optimize results and avoid many of the culture-related pitfalls that plague so many transactions.
For more tips and best practices on culture in M&A , please join us for The Art of M&A for HR Leaders, a unique executive training program designed especially for executive leaders and the HR professionals who advise them. Space is limited, so register today.