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Addressing Culture Issues in Buy-Side M&A

There are numerous factors that determine the success or failure of M&A. However, when the expected synergies do not materialize as expected after completion of the deal, the first culprit mentioned is usually culture clash. Culture clash occurs when the values, habits, philosophies and styles of two companies are in conflict. Even in situations where a culture gap is not discovered, there are several ways in which companies can deal with cultural differences to ensure that the deal’s synergies are fully extracted.

The biggest mistake made by merging companies is when the two companies focus more on the financials rather than their different corporate cultures. It is vital to take advantage of the time before the acquisition to familiarize yourself with the cultural gaps and fits between the two companies. It could already be too late when this is done after completion of the transaction.

The Daimler-Benz and Chrysler merger is frequently cited as a classic example. While Chrysler was an entrepreneurial American company, Daimler-Benz was hierarchical and German. The backseat position in leadership that Chrysler eventually took caused a lot of uncertainty among its employees. Daimler never went out of its way to dispel the notion that a company as proud and American as Chrysler had become weak under German pressure. The merger was dissolved in 2007, just five years after the merger was consummated.

Soft cultural factors such as the physical environment, how meetings are conducted and how decisions are made, dress code, working hours, communication style and average age of employees should be assessed prior to the signing of the letter of intent.

This can be done in the form of interviews across the two companies. Interviews on managers can help in identifying managerial style contrasts and priorities while employee surveys will help in understanding what attitudes, priorities and behaviors the employees hold dear.

There are strategies that can be put in place to enable acquirers get the target company’s customer point of view even before the deal has gone through.

Once the deal closes, senior managers from both sides should come together and establish a common ground with shared values that are beneficial to long-term growth. In cases of acquisition, it is essential for the acquiring company to have a well-defined set of values as well as a process for the orientation of employees. If these things are not clear or established early on, it can bring about a lot of disruption and confusion. Off-site sessions with top management from both sides, working hand-in-hand with a consultant, can help bring about a common culture that is beneficial for the company.

Both companies have the duty of highlighting to their respective employees the reasons and benefits of the merger. Cultural ambassadors may be appointed by the CEO to align the two teams. The cultural ambassador may also have the additional task of empowering employees who may be feeling sidelined by the new changes. Dissenters can be won over by a strong business case and this will help in diluting cultural differences.

This is the right time to bring about any organizational goals and steer forward positive behaviors. Engaged employees can be nurtured by factors such as benefits, rewards, incentives and compensations.

Whether you are directly acquiring a company or want to merge the cultures of two companies, alignment is driven by cultural intervention. There are two main methods for this:

The top-down approach is led by the senior management of the acquiring team. It imposes its management style on the acquired team with little input from others. This is the preferred approach by most CEOs. Decision lines, reporting lines, processes and IT systems are adjusted from the get-go and employees are expected to adjust to the new standards. The main disadvantage of this comes in neglecting the emotional aspects of deal making, especially how it connects to its peers.

The second approach is the targeted approach. This approach is more inclusive and gets input from many people from both sides. For instance, if increase in sales is the main goal, management can get feedback from sales teams of both sides and determine which is the best combined process to achieve the set targets. The main disadvantage of this is a much slower cultural overhaul.

Cultures vary and changing them can be rather difficult. These differences, however, need not derail you from your goal. Put more emphasis on aligning your mission, having good communication channels and intervening if necessary to achieve the goals set prior to the merger.

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Alexander Gutner
Alexander Gutner studies Finance and Law at Boston University in addition to working as a writer and associate for Investmentbank.com and Deal Capital Partners, LLC. He has experience in wealth management, investment banking, and private equity. Alexander is a rising senior with a sizeable network working towards building a powerful career.