Cultural due diligence in mergers
In the section on Outsourcing the culture we mentioned the importance of undertaking cultural due diligence before appointing outsource partners. But cultural due diligence also has a vital role to play in mergers and acquisitions.
It is estimated that, in the commercial sector, between 50 and 75 per cent of all mergers fail outright or do not achieve the expected benefits. Successful mergers start with a clear idea of how the merger will work, followed by some extremely thorough due diligence. This should not only encompass areas such as financial, product and legal considerations, but should also delve deeply into the cultural aspects of the organisations.
The truth is that while many reasons are given for the failure of a merger, at heart it is usually the failure to merge cultures and engage employees in the values of the new organisation which leads to the downfall of a merger. Even something as simple as the merging of two accounting systems can be doomed to failure if employees continually put up barriers to transfer. Cultural due diligence will not only highlight the potential discontinuities, but will also suggest ways in which the formation of a new culture can take place.
Of course, cultural due diligence may highlight some areas in which there is a complete conflict of culture. For example, businesses which have devolved from the public sector may be strongly process-driven, while entrepreneurial private companies might lack process but be highly creative. This cultural mismatch can be strongest when working across international boundaries. Whatever the disconnect, unless a robust cultural due diligence process is completed in advance of any final merger decision, the leadership is laying itself open to merger failure.
Steps to avoid failure
The cultural due diligence exercise should largely follow the cultural assessment with a mix of qualitative and quantitative measures, building up a complete picture of the values, behaviours and attitudes of the two organisations.
This then forms the basis of a culture setting exercise, which plots the pathways required to merge the organisations. In essence, the pathways will follow the first steps to culture change and managing, and leading and embedding culture change set out elsewhere in this document. The only difference is that rather than resetting the culture of one organisation, the exercise will determine the cultural destiny of the new group.
A blend of strengths
Whatever the cultural differences, whether process versus innovation or taking ownership of a problem versus passing it through a hierarchy, the key to a successful merger is the identification of these differences and the utilisation of them to enhance the strength of the new organisation. Process, innovation, hierarchy and flexibility all have their place in an organisation. Creating a culture which is a blend of strengths will help to ensure the success of the merger, as will engaging the hearts and minds of the employees in the new venture.
Cultural due diligence will form an essential part of this exercise as will plotting the new shape of the combined culture going forwards. But there is one caveat and that is not to lose sight of the reason why the merger or acquisition was seen as being beneficial in the first instance. Sometimes mergers and acquisitions are a pure meeting of minds and there is no reason why the combined group should not move forward under a single culture. But there are instances, particularly when acquisitions take place, that demand caution when looking to merge cultures.
Take the case of a large corporation acquiring a much smaller business. The chances are that the smaller business is either being acquired because it provides a product or service which the acquiring organisation can use or because it has an entrepreneurial ethos which is lacking in the larger organisation. Whatever the reason, any move to integrate it within the acquiring organisation or to blend the cultures should be treated with great caution. There is a great danger that
> Employees at the acquired business will not fit within the new culture and will leave, thus negating any potential long-term advantage
> The culture of the larger organisation will steamroller over the acquisition and quash that entrepreneurial spirit which made it attractive in the first place
> Because it provides a necessary product, the smaller organisation will attempt to impose its culture on the larger organisation, leading to a breakdown in culture across the board.
While there is no one answer, leaders may do well to consider the potential outcomes following the due diligence exercise. In some cases, this may result in leaders either settling on a main culture/subculture scenario or treating the acquisition as an outsourced partner, taking the product, but allowing the acquired entity to run as a quasi-separate entity. Whatever the outcome, the importance of regularly checking and resetting the culture(s) cannot be over-emphasised. As the Law Society Gazette said in an article on mergers in 2012:
- Take your people with you or you’ll get nowhere
- Don’t relax once you have done the deal – remember the hardest bit is still to come.