- June 21, 2021
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
Why Culture continues to be critical to the success of cross-border M&A deals
When any cross-border M&A happens, the sentiment is that cultural considerations are essential in making these deals (i.e., mergers, acquisitions, or divestments) succeed. Leading management consulting firms like Bain Capital found in their survey that cultural management is the single most important M&A success driver. Thus, dealmakers/Corporate development executives must take practical actions to address cultural issues if they want to turn their deals to success. In this piece, i present my perspective on why culture continues to be critical to the success of cross-border M&A deals. I have witnessed that in most deals, executives are not conscious that they need to build skills to deal with culture; thus, they do not have a systematic/fact-based approach to address the cultural differences.
Almost all buyers recognize the importance of cultural awareness. However, they dont have the skills due to the following:
- Unconsciously unskilled: The deal team does not understand and does not necessarily recognize that he lacks the skills. Such situations happen when managers are new to the M&A process, even though their company is a serial acquirer. Sometimes, the deal teams get blinded by deal euphoria.
- Consciously unskilled: The deal team does not have the skill and understands that it lacks the same and the value of the new skill set needed to address the deficit. I have observed transactions where seasoned deal professionals know how to get internal or external support.
- Consciously skilled: The deal team possesses the necessary skillset, applies the skill by breaking down the activity into multiple steps, and then implementing the integration. Many integration professionals actively acquire cultural skills to succeed in the transaction.
- Unconsciously skilled: The deal team has high-quality skill and talent that it is their second nature to perform the activity efficiently.
Definition of Culture
From an M&A perspective, culture combines shared local and corporate norms, behavior, symbols, values, systems, and laws. Cross-border cultural management is the systematic and fact-based management of differences between local and corporate attributes. The skill of an integration manager lies in the extent to which he can bolster the positive elements and defuse any negative biases potentially leading to volatile situations.
Culture is critical to the success of Cross-border M&A.
When a buyer makes culture a part of its acquisition strategy, they are generally a step ahead of other acquirers. Company values are part of the organizational system. These values get documented in the contract between the company and its employees. Unfortunately, I have observed many acquirers unilaterally change the target’s agreement, resulting in adverse reactions from its employees. To avoid this, the integration manager needs to know how to initiate and drive change. The integration manager needs to develop a framework to measure the employees’ personal needs, align with the organization’s culture (values alignment), and feel the organization is on the right track (mission alignment).
The cultural differences and similarities between the buyer and seller will need to get reflected in the integration strategy and execution. The integration strategy depends on the deal rationale that dictates the degree of changes in the buyer and seller. For example, when the buyer wants the target to operate standalone, both acquirer and target undergo a minimal change; however, the changes are maximum in the case of transformational M&A. In tuck-in deals, the target undergoes maximum change as the seller gets absorbed in the buyer organization. However, in reverse integration, where the acquirer’s business gets integrated into the target, the buyer must undergo maximum changes.
In most M&A integrations, the mere integration of the buyer and seller’s ICT and IS systems is challenging and arduous. The timing can vary from four months up to two years and longer before both target and acquirer are on the same digital platform. I have observed that resistance to change in the target and acquirer is the minimal post-deal announcement and increases gradually over time where a crisis is needed before issues get tackled. Thus, when ICT and IS integration gets ready, the resistance to change is at its highest. To mitigate this risk, i recommend the buyer develop interim solutions to the digital platform and involve the target business in this solution building.
Implementing Cultural Integration
I have segregated this section by M&A phases:
- Before the deal is on the table – Before the buyer initiates the deal, the deal team should undergo management training on how to approach culture in any M&A situation. The training should focus on creating cultural awareness, promoting cultural competency, and delivering workshops to integrate acquisitions.
- During the Deal Evaluation stage – The buyer should perform a preliminary cultural due diligence on the target’s country, acquirer’s experience in that country. The due diligence should focus on how the target management functions and its values. The outcome of this due diligence should guide the acquirer’s integration strategy. If the target’s culture is opposite to the buyer’s, then the acquirer should consider exiting the process and stop spending time on further diligence.
- Between Signing and Closing – After signing, the buyer gets more opportunity to engage in dialogue with the seller and can identify sensitive issues to refine its integration strategy. Therefore, the integration manager should ideally drive a workshop to encourage face-to-face conversations, discuss the combined business model and deal rationale, and promote mutual inclusiveness.
- After Closing – If cultural integration has not started during the signing, it can kickstart after closing as the buyer does not have any pre-restrictive covenants. The best approach is to do this process iteratively, gathering feedback and incorporating that into actions.
Cultural considerations are necessary for shaping cross-border deals to succeed. Cultural factors have interdependencies with all other integration workstreams. The objective of cultural integration and due diligence is straightforward. The integration needs to ensure that the combined company moves from the current state of mixed values to the desired state of shared values. Thus, the buyer should focus on culture before considering any deal and continuing throughout the complete deal life cycle.