The merger integration process is often a manic period where the buyer and seller are frantically focused on agreeing to a deal, including various due diligence workstreams, negotiations on the Sale and Purchase Agreement, and planning for deal close. A common afterthought relates to addressing cultural aspects, which can be the single most influential factor in determining the long-term success or failure of an M&A deal. We previously outlined case study examples of two extreme cases where cultural integration was not prioritized, in our discussion of revenue synergies; focusing on the failed Time Warner – AOL merger and Disney’s successful acquisition of Pixar.
Some of the risks involved with a poorly managed integration of cultures include:
- Key personnel loss and overall attrition
- Below-par performance of the acquired business
- Uncertainty of the individual’s roles and responsibilities, inhibiting their ability to make decisions and therefore taking ownership
- A general feeling of not belonging by the acquired organization
At IPC, we often help Private Equity portfolio companies with M&A deals and integrations. Many acquired companies originally started as small owner operated businesses and are not used to adopting to a structured process. Long term employees may be accustomed to doing things how they have always done it, without oversight, processes, or procedures. If this is not addressed or well managed, a negative impact on performance can occur, resulting from the acquired management team’s sentiment towards the deal and new ownership. This could also be indirectly passed down to the broader team.
We recommend establishing a process to evaluate the cultural differences and implement a change management program to address challenges or concerns. The process entails three components:
- Define how the combined company should operate in the future
a. Define the core values of the combined company.
b. Consider the behavioral norms which employees should exhibit.
c. Define the Target Operating Model (TOM) of the company, including governance, organization, reporting lines, locations, and overall service delivery.
2. Review key cultural differences
a. Consider how each organization is presently operating and the key differences.
b. A framework to evaluate differences should be leveraged, and staff across all levels should be interviewed to benchmark each of the two businesses (see IPC’s framework below).
c. Identify the key differences and consider initiatives to address and assimilate the organizations.
The below framework is used to evaluate key cultural differences:
|Category||Potential Impacts of Cultural Mismatch|
|Hierarchy / Control Culture: The degree to which power is distributed with people at all levels||Directives can be given from the top down; information may be hoarded by key leaders; fewer leaders expected to require retention payments.||Resentment may occur from those not “under the tent” or directly included in integration activities; higher number of employees may require retention schemes.|
|Autonomy and assertiveness: The degree to which people are able and expected to advocate their personal goals||Middle-management may develop roadblocks to achieving integration requirements (e.g. meeting timelines and objectives).||Organization leaders may circumvent organization wide policies, especially those accustomed to a “Clan Culture”. Resistance against the deal may be voiced (potential toxic personalities) requiring direct action from integration leaders.|
|Risk Appetite: An organization’s tolerance for ambiguity and uncertainty||Comfort with ambiguity may lack urgency for action; leaders may underestimate the resources required for successful integration.||Employees may require a complete vision for the future, which is typically not possible in the early stages of integration.|
|Empowerment and Performance Culture: The degree to which people are rewarded for and expected to be innovative and the level of performance and continuous improvement expected||Integration objectives may be deemed less important than organizational harmony.||Accountability may be difficult to instill. People avoid accountability for any issues which may arise.|
|Individualism vs. Collectivism Culture: The degree to which the team functions as individuals or a collective||Individualism: Difficult integration topics and targets may be met with resistance, as leaders consider personal impact.||Collectivism: Achieving integration objectives may be challenging as decision-making requires a committee or consensus.|
|Expression of emotion: The degree to which people are expected to express emotions||Feedback must be actively solicited; increased turnover possible.||Communications about the transaction may elicit an emotional response, causing morale issues and lost productivity in the organization; questions must be answered promptly to avoid miscommunication.|
3. Setup a program to address cultural difference, including change management and a communications plan
a. Setup a culture plan; what core initiatives need to be completed, by who and when.
b. Develop the communications approach over the first six months post-close.
c. Establish the KPIs to measure success (e.g., through employee engagement surveys).
Point of View:
When integrating companies, IPC considers protecting the existing operations of each business as the #1 priority. This includes making sure that any changes consider the cultural impact on both organizations, and that a cultural change plan is established as part of the integration.