Why Is Cultural Integration Important in Mergers?

Cultural Integration and organizational alignment are critical to success (and avoiding failure) in mergers. Mergers & Acquisitions (M&A) are deals where two (or more) companies join together as one. Mergers can generate value by (1) acquiring technologies, products, and market access, (2) creating economies of scale, and (3) establishing a global brand presence. While acquisitions can benefit the companies involved, many deals have resulted in lost value for shareholders. According to a McKinsey report, 95 percent of executives describe the cultural fit is essential to the success of integration. Yet, according to Mercer’s report, 30% of transactions fail ever to meet financial targets, and 67% of companies have experienced synergy delays due to cultural issues. For instance, Amazon’s 2017 acquisition of Whole Foods met with much fanfare, but a year later, the optimism became a big disappointment at Whole Foods.

Acquisitions can leave employees feeling isolated, unsupported, and unsure about what the future holds. This uncertainty can undercut the anticipated synergies of any deal and even derail the transaction. To avoid this, acquirers must prioritize cultural considerations from the outset. They should identify and describe the ideal culture. After that, they need to put in place organizational structures to support it.

Flashpoints in cultural integration

Social flashpoints may arise when the merging parties either fail to recognize each other’s cultures or take small steps to enable their lifestyles to complement one another. Hence even before a deal strikes, companies should assess the learning of each business. A significant part of cultural due diligence during the M&A process should focus on looking for signs of how people on the other side of the table act, how they arrive at decisions, how they negotiate, and if there is any aggressive or disrespectful behavior. This assessment helps the leaders of each to better understand their own culture and that of the other organization.

When companies compare the two cultural DNAs, they can identify the areas where the leadership needs to focus its attention and areas where there is a big gap between two elements in the cultural DNAs. Thus, if the two companies that are involved in the deal have similar cultures, that is a good sign that the cultural fit between the two firms will be okay. Similarly, if the cultures are different, then it is likely that the companies as a whole are also different. In the case of a big gap when comparing cultural DNAs, the top executives must set the tone and outline the consequences of not following the rules. Companies can hire an external firm facilitating the integration process so that everyone involved has a neutral facilitator who is not a part of the political or strategic agenda.

Integration planning in cultural integration

In addition to cultural due diligence, companies should have a clear merger integration plan. Developing an integration agenda early on, often in parallel with early-stage due diligence, allows the acquirer to understand the culture of the other organization and plan accordingly.

Continuing to evaluate the cultural fit of the two organizations, post-deal closure is another crucial step. Acquirers need to continually adjust their culture so that they are attractive to employees, customers, and all the other internal and external stakeholders. They need to make an intensive effort to have people from both the organizations work together daily as joint teams in driving value for the combined enterprise. This approach helps develop bonding among employees of both organizations.

Cultural integration processes must drive value creation. Companies should identify and alter specific behaviors where necessary to ensure that culture can help them achieve their integration and value creation objectives.