Cultural assessment in Mergers And Acquisitions

Cultural assessment in Mergers And Acquisitions

Culture eats strategy for breakfast. The above quote is viral in the M&A circles. Time and again, cultural assessment in M&A drives better integration results. In reality, most organizations fail to address culture. This failure leaves them vulnerable to dealing with value erosion. A cultural assessment can help the acquirers to identify targets more effectively. As a result, this assessment can maximize the deal value. Acquirers need to identify cultural issues early, which can impact valuation. Once they identify, the acquirers can mitigate problems by designing appropriate solutions.

Why do 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 Yet many organizations continue to neglect culture during M&A. This neglect is because organizations have outdated thinking on what culture is and why it is crucial. 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 correct 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 the buyer does not address cultural issues, it can create potential flashpoints. Cultural flashpoints can include differences in authority, working style and ways of working between the target and the acquirer.

Cultural assessment in each phase of the M&A cycle

Cultural assessment is challenging. This indifference is because of a lack of access to the correct 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. Therefore, cultural assessment should be an iterative process throughout the deal life cycle. It has to move from informal to formal assessment as one gains access to target data.

Initial strategic considerations

The cultural assessment should start when the acquirer has defined its M&A strategy. First, acquirers must assess their own organizational culture. This evaluation will serve as a baseline for evaluating potential targets and their cultural fit. Once the acquirer has identified the right target, the acquirer can determine information about the company’s culture from public data searches and initial discussions with the target’s executives. The target company’s preliminary findings need to get evaluated against the acquirer’s business that will absorb the target company after the deal closes. Cultural integration is necessary to achieve the deal objectives if there are considerable differences. This diligence 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. For example, the buyer must collect the following details: existing culture data, taking limited surveys of the target company’s employees who are aware of the deal and responses from structured interviews with target executives. These data can provide adequate information to identify red flags or potential cultural flashpoints. Then the deal team must determine 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 the 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 access allows the acquirer to expand their assessment methods. For example, they can validate the cultural data used in planning and implementation decisions. They can also do periodic surveys to measure the progress of cultural integration.

Final Takeaway

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