Business Model vs. Culture – A paradox in M&A Integration

Business Model vs. Culture

A lot of debate is happening on the priority of Business model vs. culture in M&A integration. Not all M&A deals are successful.Infact almost 70% of the M&A deals have not generated any shareholder value and some have even destroyed value.This means that synergies benefits giving rise to 1+1=3 has resulted in 1+1=0.
Even though many of the deals may have a great strategic fit and be a natural ally, integration is when things start to get bad, resulting in erosion of value.
Many employees infact are no longer anxious during the deal announcement. In fact they are open to the acquisition decision and want to check what would be the future.When integration starts to happen, this is when employees get frustrated and start deciding to leave.This is evident from the recent study that the attrition is more after the integration starts than compared to after the deal is announced.
Culture is seen as the biggest reason for the deal failure.Many analysts attribute that as the single most reason for not able to realise synergies.The thing with Culture is that it does not pose a serious risk during due diligence and generally deal makers come to a conclusion that there is not much difference in culture between the target and acquirer. Only when the integration starts, the employees start to get irritated with the integration approach of the acquirer and starts to look for other career opportunities.

Business Model VS. Culture – Detailed overview

  1. Even though Culture is a very important factor in integration success, not all deals are a failure due to lack of cultural fitment.
  2. Many analysts have infact attributed deal failures to cultural issues where the real reason for deal failure is not culture but the differences in underlying business model.
  3. For instance, let us assume an IT outsourcing company acquires a niche digital agency.
  4. The business model of an IT company is low cost customer service based model where the differentiation is owed to the Cost leadership and its delivery excellence in executing the projects.The revenue model is based on the labour arbitrage where the IT company has huge percentage of workforce deployed in lost cost countries where a majority of delivery happens.The value proposition is based on customer responsiveness and the pricing power.
  5. For a digital agency, the business model is innovative premium pricing model where the skills required is having highly creative designers that command high compensation and who needs to work in customer locations.The revenue model is based on projects billed at high prices.
  6. The business model of these two diverging companies dictate their cultural attributes.Hence in a design agency, the work environment is informal dress code and employees work in a collaborative creative manner as against a IT company which is more driven by hierarchical and project based culture.
  7. During the integration part, the integration teams do not focus on the business model part and start integrating based on the predefined due diligence and integration checklists.Hence they start integrating processes which may work for an IT company, but completely works against the business model of a digital agency.This results in the employees not able to discharge their roles and responsibilities which inturn affects the top line and bottom line.This is the reason why synergies are not realized in the integration.

Conclusion

  1. In the debate of business model vs. culture, we need to understand the business model of a company drives its culture and not the other way round.When the two companies with different business model go for an acquisition, integration needs to focus on the business model alignment in order to realize synergies.
  2. A business model and its strategy dictates the underlying processes.So when the processes of companies with different business models are integrated and optimised for cost synergies and efficiencies, this will result in complete value destruction in the acquisition.


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