Culture Culture Blah Blah - So What?

Everyone understands that aligning organisational cultures is critical to successful M&A. Surveys and studies confirm executives’ views on the subject, and stories of merger disasters driven by cultural differences abound. Perhaps you have seen your own examples of the draining impact when cultures clash post-close. My team and I certainly have.

But let’s face it: Every day, acquisitions proceed in spite of major cultural differences, even when these are blatantly apparent pre-close. Most acquisition leaders give passing consideration to culture, then move boldly forward even when someone flags a cultural mismatch. The assumption seems to be that “these will iron themselves out over time. The deal is too good to delay.” Yet the evidence overwhelmingly tells us that pushing through and hoping for the best doesn’t solve the problem. Contrary to conventional wisdom, entrenched cultures are just that and often widen, not narrow, over time. And so, every day, businesses suffer from ‘cultural indigestion’, underperforming as they haemorrhage staff and customers.

So are CEOs blind, stupid, pragmatic? Rash, bold? No acquisition proceeds without a certain amount of faith, optimism and steely determination to ‘do whatever it takes’ to make it work, so this mindset is understandable, and over-analysis can lead to lost opportunity. As the man said, “I’m here to lead, not to read¹.”

Culture matters, but the real prizes are the ‘synergies’. With this perspective, the question really becomes:

• How much effort do I need to put into understanding cultures before approving the deal?
• How much time should I spend aligning them post-close?
• Where should I focus this effort?”

To answer these, you need to have a real-world understanding of the sensitivity each ‘synergy’ might have to culturally-caused issues. Easily said, but how do you measure the financial impact of cultural integration? Can you?

Yes, provided you cut to the chase: Over and above the distraction, frayed relationships and stress, the ultimate result of poorly aligned cultures in M&A is that people leave. Middle managers first, then general staff, then your customers.

Putting a number of studies and benchmarks together², the total one-off cost of replacing a typical level of unintended staff post-close where cultures are significantly different equates to ~2% of target company revenue³. This figure is similar to that discussed in my last post⁴ – and that’s no coincidence. People really do matter. Their attitudes – positive and negative – have disproportionate impact on achieving synergies. And not all people are created equal. Witness the current turmoil at Open AI where the departure of one man has led 700 of 770 employees to follow him out; or the loss of almost 75% of Cadbury’s senior staff six months after its takeover by Kraft.

And it doesn’t stop there: Customer loss, even if fully replaced a few months later, can quickly eat away at significant portions of your revenue. (Question: how long does it typically take for your business to replace a lost customer, and how much lost revenue does that represent?) Not to mention major business disruption and damage to your business reputation.

Done well, cultural integration can energise your leadership, focus the team and excite your customers. Programme plans and good governance are important enablers, but this is what delivers synergies and creates value.

Turning cultural value-eroders into value-enhancers relies on a few key principles:

1. Avoid the accuracy delusion – no cultural survey or tool provides a definitive answer. Understanding cultural difference is possible, but requires triangulation between multiple approaches and sources. Formal surveys, observations in management meetings, focus groups, even reviews of company documentation and other ‘cultural artefacts’ all play a part. Most of this can – should – be conducted as part of due diligence. How much effort to put into this effort depends on how important retention of acquired leadership will be to delivery of your deal goals, and what decisions you may need to make to confirm price and other deal terms.
2. Start from what you need the combined business to look like to achieve your synergies. What must happen? What must people do – the same or differently? Posters, workshops, meetings can all help, but in themselves are nowhere near sufficient. In the end, what will matter is what people do when left by themselves to make decisions and take actions. Pay attention to your entire operating model, not simply incentives or ‘messaging’. Processes, policies, IT systems, and  structure all matter. Hard-wire your desired culture into your recruitment, assessment and promotion processes.
3. Staff and customer departure can be culturally-driven, but not always. Many other factors that have nothing (directly) to do with culture may be in play: Poor communications, confusion about post-close objectives and business vision, integration burnout, or the basic need to rebuild teams. While the symptoms appear similar, misdiagnosing the root cause can make the problem worse.

So as you approach your next acquisition, ask yourself a few basic questions:

• How important is retention to the success of the deal?
• Are there 2-3 linchpin players? What would happen if any of them left six months after closing?
• How will these leaders fit within your own management team?
• How will news of this acquisition land with their employees and customers? What might they do when they hear?
• How will your own employees and customers react to the news?
• What will you (and their) competitors do to capitalise on the disruption of the deal?

Understanding where cultural differences will matter in value creation will help you invest the right amount of time and effort to protect and accelerate benefits in your next acquisition. It can also help you negotiate a better deal, allowing you to invest properly in integration while still delivering top-tier returns on your M&A.

BTD is hosting a free virtual round table on this topic at 3pm UK time on Wednesday, February 21^st. Click here to register your interest.

¹ The Simpsons Movie, 2007; https://www.youtube.com/watch?v=s99ZeamF7J0&ab_channel=AreaEightyNine

² e.g. Your acquired hires are leaving. Here’s why. – MIT Sloan School of Management, 2023; https://mitsloan.mit.edu/ideas-made-to-matter/your-acquired-hires-are-leaving-heres-why

³ Assuming recruitment costs of 20% of annual salary, and wage bills equalling 60% of revenue. Perhaps not a scientifically-rigorous analysis, but certainly stands up as a rough indicator. We absolutely recommend you calculate the financial size of this risk based on your own firm’s salary and recruitment experience.

⁴ Good integration delivers real M&A value…Or does it? – BTD, 2023; https://btd.consulting/good-integration-delivers-real-ma-value-or-does-it/