Give Culture its Due
As companies seek to grow their business, their common strategy is to merge with or acquire a new company. Given the stress and expense involved in this process, corporations understand the importance of making an informed decision. But even when financial due diligence processes are followed perfectly, a significant portion of these mergers and acquisitions fail to meet the performance expectations. Why is that?
We believe it comes down to culture: many companies fail to conduct cultural due diligence before they finalize the deal, even though they recognize culture as a key factor in the M&A’s ultimate success.
From our research, the reason for this oversight stems from the lack of a good methodology for conducting cultural due diligence. So to empower you, here are three critical steps to take during the M&A process to be sure you are giving culture its due.
1. Know Thyself
In order to merge successfully with another culture, you must first understand your own. Proper cultural due diligence begins with assessment of your own culture to gain an understanding of your strengths and weaknesses, as well as identify possible points of friction.
2. Build an understanding of the end dynamics
Mitchell Lee Marks and Philip H. Mirvis (2011) describe five different M&A end states:
- Preservation: Both companies retain their own, distinct cultures.
- Absorption: The acquired company takes on the culture of the acquirer.
- Reverse Merger: The opposite of Absorption, in that the acquiring company takes on the culture of the company it acquired.
- Transformation: Both companies transform to become something new.
- Best of Both: The companies retain the most promising elements of each culture.
Note: Adapted from Marks & Mirvis (2011)
There is no universally “best” option, but whichever solution is preferred, it can only succeed if both parties have a clear understanding of the end goal. This goal needs to be identified upfront as part of your cultural due diligence.
3. Conduct a data analysis of the target company
Not all culture data is accessible during the early stages of the due diligence process for both practical and legal reasons. We suggest collecting data as follows:
Before the merger or acquisition is announced:
- Social media data analysis: Use employer review sites, such as Glassdoor und Indeed, as they are excellent sources for gathering relevant data.
- External stakeholder interviews: Talk to former executives, customers, vendors, channel partners, and employees for their insight.
After the merger or acquisition is announced:
- HR data and document review: Use existing HR data and documents (e.g., employee surveys) to gain insight into the target company’s culture. 96% of Fortune 500 companies administer employee surveys with relevant culture questions.
- Internal stakeholder interviews: Speak with the target firm’s leadership team, a sample of the middle managers, and a sample of front-line employees.
Of course, once data is collected, it must be synthesized in order to make sense. We suggest you use a culture framework, such as the Denison Model, to assesss the two cultures and clarify what you have learned about the target firm, surface potential integration challenges, and plan how you might handle those challenges.
Keep Culture on the table
As essential as culture homework is during the due diligence process, it cannot be treated as a “once and done” deal. Culture work is ongoing, and must be part of the integration strategy from Day One and through the following months and years.
If you are interested in discussing how cultural due diligence can apply to your situation, contact us for an assessment. We’d love to hear your story.