The Importance of Cultural Integration in Mergers and Acquisitions

Mergers and acquisitions may evoke thoughts of change, due diligence, legal documents, multiple Excel spreadsheets, and integration. During the M&A process it is no doubt that all of these will play a critical role. While it is understandable that buyers will want to dissect the target in every way possible, one particular area of importance is culture. In both the due diligence phase and integration, culture should be a point of focus. In many transactions the people who will soon transition to the buyer’s company are just as important, if not more so, than the actual product or service offered. If Buyer Co and Seller Co have drastically different cultures it may result in an exodus of Seller Co talent once the deal is complete. Obviously, this doesn’t bode well for the buyer. Focusing on culture and developing a cultural integration plan can help facilitate a smooth transition for all involved. Below we look at challenges, a cultural integration roadmap, and key areas to consider when conducting cultural due diligence.

Challenges in Cultural Integration

Merging two entities is similar to a marriage. Both parties know some changes will need to take place and that a period for adapting to the change will be needed. Above the surface, obvious issues during integration may include policies & procedures, job descriptions, and compensation and benefit plans. If you are in the process of buying a company these are (hopefully) areas you have already considered.

It is the below the surface issues that management needs to think about early in the process. For example, what types of cultural norms are present in both companies? Is their an informal leadership hierarchy and/or any unwritten rules? What about relationships between the departments and individual employees? These are all important areas that aren’t easy to see by looking at a spreadsheet. However, they have the potential to cause heartburn if they aren’t considered prior to integrating the two companies.

Formal systems, such as payroll and IT, will typically come to mind as integration challenges. Time and money will be spent on these and other “above the surface” topics. When it comes to changing culture, however, management must realize that memos and a new slogan aren’t going to cut it. The saying “perception is reality” quickly comes to mind when I think about cultural integration. Management may believe that a memo, workshop, or catchy new slogan will help create a unified team. They may think that everyone knows that they want the combined entity to succeed. However, if employees perceive an “us vs. them” environment or that management doesn’t truly care about their needs, that will become their reality. It will then be an uphill battle to peacefully and productively bring the two organizations together.

Thankfully, understanding the importance of cultural due diligence and integration can help ensure you don’t inadvertently destroy the synergies that justified the deal. Addressing the human element of a deal can take time. For smaller deals it may be a matter of a few months. Larger transactions may require years. The following cultural integration timeline should be considered a solid starting point for many companies.

Cultural Integration Timeline

During the information gathering stage the buyer should collect key information from the various business units. Specific topics to review are covered below. An announcement should be made that includes all the team members, if possible. As planning and design gets underway management should be identifying how the business is today, where they want it to be in the future, gaps between the two states, and action plans to fill the gaps. Possibly the most important part of planning and design is the communication. Answer who, what, when, where, and how cultural communication will take place.

Prior to the actual deal closing, a pre-close integration phase takes place. Action plans developed in the prior stage should be rolled out, another announcement should be made to all employees on both teams, and commitment from management on both sides of the deal should be reinforced. If you think at any point throughout the integration process that you are over-communicating to the employees, you aren’t. With the exception of details that cannot be widely disseminated due to regulatory requirements, your employees will welcome a steady stream of information. This is likely a high stress time for them as well and no news isn’t necessarily good, or reassuring, news. Finally, it is time for the post-close integration. Those plans you developed in the planning and design phase should be in full motion. Cross training and team-building activities should be taking place. Management should continue frequent communications relaying back progress and lessons learned thus far.

The above items take careful planning, which in turn takes time. Don’t treat cultural integration like a high-school assignment that can be started the night before it is due. This is a thesis that requires the time and attention of senior leadership.

Areas to Consider in Cultural Due Diligence

The following are specific areas I’d recommend every buyer review when conducting their cultural due diligence.

1. Mission, Vision, and Values: How does the company express this today to customers and employees? Will these stay the same post-integration? If not, how will they change and how will that change be communicated to customers and employees?

2. Employee Engagement: How do employees interact with one another? Is performance measured the same way across the organization or does it vary by department? How are teams organized and how do they work with other teams? Who is accountable for work: the team or an individual? How is great work recognized and poor work corrected?

3. Leadership Style: How are managers currently selected? Does the company have a promote from within policy or seek managers from outside the organization? What are the normal relationships between managers and subordinates? Are managers used for coaching employees or does the organization have a micro-management style?

4. Human Capital: How does the company convey that employees are valued resources? What type of benefits are provided? What role does the HR department play in the day-to-day operations of the business?

5. Communication and Knowledge Transfer: How is information shared between employees? Departments? How is access to information determined (i.e. location, seniority, position). What communications are routinely sent from leadership and the various departments and how are these communications sent?

If this seems like a lot of work “just” to be sure you have a cultural fit, it is. However, the time and effort spent on ensuring a good cultural fit post-acquisition isn’t wasted. The human element is one of the most important aspects of a business. Bringing two companies together successfully from a cultural perspective is part art, part skill.

How have you addressed cultural issues in prior M&A transactions? Have you experienced a poorly planned cultural integration and what was the result?

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
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