Peter Drucker famously said “culture eats strategy for breakfast”. His point – however bluntly made – was that no matter how great a business strategy is, any plan is doomed to fail in the absence of a company culture that encourages people to implement it.
The same applies to M&A deals. The due diligence may have been done, and the numbers may have been crunched, but a simple culture clash has the potential to derail even the most promising of mergers.
Research suggests between 50 and 75 per cent of all post-merger integrations fail to meet their original objectives due to cultural clashes, with some estimates suggesting this number could be north of 80 per cent. What looks good on paper may not work quite so well in practice, and this could be an expensive mistake to make. Time Warner’s failed $350 billion (€339 billion) merger with AOL is one for the history books, imploding after a failure to meld new media and old, while cultural disparity has also been blamed for ongoing teething problems in the Disney-Fox and Amazon-Whole Foods mergers.
The ultimate goal is to minimise culture clashes before the deal is ever inked, says Mark McEnroe, a partner in corporate finance at professional services firm PwC. This can be achieved, he asserts, by early cultural due diligence and alignment on core values.
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“Transparent communication and active engagement with employees from both organisations are critical to fostering trust,” McEnroe says. “Establishing integration teams and appointing cultural ambassadors can also help ensure a smooth transition.”
Stephen Quinlivan, corporate partner with A&L Goodbody agrees, noting that with any acquisition a buyer should closely diligence and get to know the senior management team of the target company.
“Senior management will largely be responsible for the culture in any company or organisation, be that good or bad,” he says. “It is not that there has to be an exact match between the culture of a strategic buyer and a target company, and often there won’t be, but a good senior management team will be able to adopt or blend new cultures and ensure a smooth transition following a sales process.”
That’s all well and good, but where alignment is minimal, these tactics may not work. In this instance, is it possible to impose a new culture on an organisation after a merger or acquisition? McEnroe says it is possible but only if kid gloves are used.
“While it is possible to shift a company’s culture over time, it is not straightforward and is fraught with risks,” he admits. “A gradual integration focused on shared values is the best approach to foster acceptance.”
According to Quinlivan, incentivisation can play a pivotal role in ensuring all parties are focused on achieving a harmonious merger from a cultural perspective. “The manner in which senior management and other employees are incentivised by buyers can be a key determinant of the post-deal culture,” he says, warning however that incentive models that reward only individual and financial performance can result in toxic and non-collaborative cultures.
“Management incentive plans, bonus schemes and similar schemes should have balanced and varied KPIs [key performance indicators] that do not only consider the bottom line,” Quinlivan states. “A motivated and incentivised workforce is key, but in the long term, a balanced and happy workforce is what will sustain the right culture and attract and retain key talent, which will ultimately result in consistent and sustainable strong financial performance. In many cases, a target company will only be as valuable as its senior management team and workforce.”
But what happens if the culture clash is severe – are there any solutions short of a demerger? In cases of severe culture clashes, McEnroe notes there is a range of possible solutions. These include re-evaluating the integration strategy or perhaps revisiting the proposed governance models to better accommodate differences. “The relative scale and materiality of the two businesses will likely influence the extent to which the group will work to accommodate the differences,” he says.
If conflicts persist, however, maintaining separate business units or adopting a hybrid model may mitigate tensions while preserving value and still potentially delivering some synergies. “Demerger should be a last resort, only considered when all other options have been exhausted.”
