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September/October 2014

Culture Matters in Mergers and Acquisitions


Culture matters in M&A

 

As mergers and acquisitions (M&A) activity continues its robust pace in 2014, both acquiring and target companies alike increasingly recognize the influence of culture on deal success. According to Mercer’s 2013 Culture and Change Intervention in M&A survey, a smooth integration and the retention of critical talent are the top culture-related concerns among M&A leaders. Karen Bundy, principal, engagement manager, and cultural integration consultant in Mercer’s M&A business, shares key insights about the role of culture throughout the deal process and discusses important strategies to consider for successful transactions.

Q: HOW WOULD YOU BEST DESCRIBE ‘ORGANIZATIONAL CULTURE’?

KAREN BUNDY: Organizational culture is multidimensional, and it is not soft. Culture goes well beyond hats with logos or even the attitudes and behaviors characteristic of the country where a company does business. It defines how an organization operates on a daily basis, how it gets work done, and how its people interact with one another. That means everything from how the organization is structured, to how the company develops, incentivizes, and rewards employees, and to the various workflow processes that are in place.

Q: WHY IS A THOROUGH ASSESSMENT OF CULTURE SO CRITICAL TO DEAL SUCCESS?

K.B.: Particularly in M&A, we are trying to understand the specific drivers of behaviors that have led to an organization’s growth (or lack thereof), so that, as a newly formed organization, the decisions about how to do business and how to manage people capture available synergies to positively impact deal success.

Assessing culture is useful throughout various deal stages — in the beginning when targets are first identified, during due diligence to help formulate a deal thesis and inform integration planning, and post-deal to determine progress toward the desired future state.

The ability to understand both companies’ cultures at the outset can help uncover any red flags that are nonnegotiable and can prohibit the deal from moving forward. For example, a particular financial institution might regard compliance to be of such utmost importance that a potential target lacking that same rigor would be eliminated from the list early on.

Understanding cultures also helps identify possible synergies between the two companies and whether a target would be better left as a standalone entity that is slowly integrated into the acquiring company or one that is brought into the fold right away.

For example, if an acquiring company has a strong succession and leadership development program, and the target company does not, it might be deemed beneficial to implement key program strategies across the new enterprise to cultivate an overall culture of strong leadership talent. On the other hand, if compared with the acquiring company, the target is a much more entrepreneurial organization that would actually stand to lose key leadership talent from what it perceives to be an overly structured or controlling program, it might be more important to leave that company as a standalone entity that is integrated over time. Conversely, if an acquiring organization happens to uncover a great workflow process on the target’s manufacturing floor, as the two come together, the acquiring company might choose to leverage that process for its own organization to create even greater profit than initially anticipated.

Q: WHY DO ORGANIZATIONS TEND TO STRUGGLE WITH CULTURE ISSUES AS PART OF A DEAL?

K.B.: Often, organizations begin to look at culture only in the aftermath of an acquisition and, when they do, mistakenly regard it as a function that is more about engagement than about how work gets done. As a result, they miss opportunities to address differences and use that information early on to inform the integration-planning process.

Employers also struggle with making a link between data and the culture of the organization. If you can draw a connection between how an organization is performing, how its people are performing, and the culture of the organization, then you can draw conclusions around how culture impacts the financial side of the equation. Sometimes the issue is a lack of data. Or it may be a lack of leadership buy-in about the relevance of culture to deal success.

Finally, organizations frequently don’t have an understanding or appreciation of the culture in their own workforce, so extending its importance as a key element of the transaction may be thwarted from the beginning.

Q: WHAT IS THE ROLE OF DATA AND HOW ARE THEY OBTAINED/USED BOTH PRE- AND POST-CLOSING?

K.B.: Employers may be surprised to find that the data they gather through the due diligence process can actually be used to begin assessing the culture of the organization.

For example, it’s possible to use the data to look at operational metrics. What does productivity look like? What is the speed to market? What do revenue targets look like? What has performance been during the past few years?

HRIS data also can illuminate true patterns of the workforce. During due diligence, at a minimum, organizations collect a census file, which can be obtained for two different periods to create basic labor flow information — when people are coming in and moving up, down, or out of the organization. Although the type and quantity of data may be limited, even a bare minimum allows inferences to be drawn.

For example, looking at clinical performance data in a health care organization, it’s possible to draw inferences about how focused the company is on processes versus outcomes. Or, looking at labor flows in a professional services organization, it’s possible to uncover whether the talent pipeline bears out the company’s claims to such cultural attributes as being high-performing or relationship-based.

As companies move through the deal, there is increasing access to data and information. On the HRIS side, it might be possible to look at specific performance management data or, on the operational side, at customer statistics. Often, there will be access to employee engagement data, which also can be very telling.

Q: WHAT ARE THE SPECIFIC STEPS AND RELATED TOOLS / TACTICS TO ENSURE EFFECTIVE CULTURE ASSESSMENT, ALIGNMENT, AND INTEGRATION?

K.B.: At the outset, we use data and analytics to determine the fit of targets to the acquiring company. Further into the transaction, executive interviews and surveys will inform the strategy, and leadership workshops also may help facilitate decision-making around the desired culture and integration planning.Once there is less confidentiality and greater access, employee focus groups may be conducted. In the post-deal phase, we might use employee-targeted tools, such as surveys that measure cultural integration and overall progress of the deal. Finally it’s important throughout the process to include a mechanism that helps ensure that decisions always relate back to the business context and deal rationale in order to achieve key objectives.

Regardless of the specific tools or tactics used, two strategies are essential for success:

  • Use the data you have available to the greatest extent possible to draw inferences and inform decisions.
  • Capitalize on opportunities provided by this “culture intelligence” to get leaders on the same page about the direction of the organization and desired outcomes of the deal.

 

Learn more about Mercer’s M&A consulting services.

 

CONTACTS

Karen Bundy (Chicago)
Principal, M&A Engagement Manager
and Cultural Integration Consultant
+1 312 917 0558
E-mail
David King (Houston)
Partner, M&A Consulting
+1 713 276 2277
E-mail
Sarah Salomon (Chicago)
Senior Associate, M&A Consulting
+1 312 917 9451
E-mail

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