Cultural Assessment in M&A

Cultural assessment in M&A

Culture eats strategy for breakfast. The above quote is very popular in the M&A circles. Time and again it is proven that cultural assessment in M&A drive better integration results. In reality, most organizations fail to address culture. This leaves them vulnerable to deal value erosion. A cultural assessment can help the acquirers to identify targets more effectively. This can maximize the deal value. Acquirers need to identify cultural issues early which can impact valuation. Once they identify, the acquirers can mitigate issues by designing appropriate solutions.

Why companies fail at assessing culture in M&A?

Everyone understands the significance of culture. Yet many organizations continue to neglect culture during M&A. This is because organizations have an outdated thinking on what culture is and why it is important. Many organizations omit culture from their M&A playbooks. The deal team do not have people with skillset to measure culture. Companies also do not have the right supporting systems and processes for cultural assessments. These processes are not aligned to drive the business outcomes.
The inability to address culture can significantly undermine deal value. When cultural issues are not addressed, it can give rise to potential flashpoints. Cultural flashpoints can include difference in authority, working style and ways of working between the target and the acquirer.

Cultural assessment in each phase of M&A cycle

Cultural assessment is challenging. This is because of lack of access to the right data and stakeholders. In the early phases of the M&A transactions there may be no access to any data that can provide deep cultural insights. Cultural assessment should be treated as an iterative process throughout the deal life cycle. It has to move from informal to formal assessment as one gains more access to target data.

Initial strategic considerations

The cultural assessment should start at the time when the acquirer has defined its M&A strategy. Acquirers must assess their own organization culture. This will serve as a baseline for evaluating potential targets and assessing their cultural fit. Once the acquirer has identified a right target then the information about the target company’s culture can be determined from public data search and from initial discussions with target’s executives. The preliminary findings of the target company needs to be evaluated against the acquirer’s business that will absorb the target company post deal closure. If there are considerable differences, then cultural integration is necessary to achieve the deal objectives. This will impact the integration cost, strategy and timeline.

M&A Due Diligence

During the due diligence phase, the acquirer will have limited access to the target. Here the deal team can collect quantitative and qualitative information about the target. The following information like existing culture data, taking limited surveys of target company’s employees who are aware about the deal and responses from structured interviews with target executives can be collected. These data can provide adequate information to identify red flags or potential cultural flashpoints. Then the deal team need to identify how these cultural issues can impact the integration.

M&A Integration planning

The deal team can collect more information about the target during the integration planning. The acquirer should take advantage of this situation and collect more data. They can use quantitative cultural assessment tools and validation sessions with executives and task force. They can also hold strategic definition sessions with the combined executive teams. The acquirer can use third party consultants to assess the target company’s culture. These assessments can only happen after the deal is closed.

Implementation and Follow up

The cultural assessment needs to continue even during the integration. During the integration the acquirer will have unrestricted access to the target organization. This allows the acquirer to expand their assessment methods. They can validate the cultural data used in planning and implementation decisions. They can also do a periodic surveys to measure the progress on cultural integration.

Final Takeaway

Acquirers need to treat culture assessment in M&A as an ongoing activity throughout the M&A deal cycle. This can allow the M&A team to optimize results and avoid cultural pitfalls that plague so many transactions.