Why Culture Counts for Successful M&A
Workplace culture largely impacts the overall success of M&A transactions. Learn how employees may influence mergers and acquisitions with Fifth Third Bank.
Mergers and acquisitions have historically represented a major business driver in the U.S. economy. While much has changed in the environment of virtually every business sector, that pivotal role remains consistent. And the management consultants agree: "Despite this challenging environment, analyses of past crises have shown that there is still potential for value creation through M&A across industries," say experts at McKinsey. "Amid unprecedented upheaval, companies that quickly move to identify good values and reshape their businesses will emerge stronger out of the downturn," advises Bain & Co.
With what for many is now increased attention to due diligence required to close those deals—the prospects for success should be high. But data show the majority of deals do not achieve their return expectations. An often-cited reason for those disappointing returns on investment? According to the International Journal of Innovation and Applied Studies: A clash of cultures.
Implementing strategies to recognize and accommodate cultural differences can benefit the workforce, shareholders, the customer base and corporate reputation.
What Due Diligence Misses and Why It Matters
When a merger is on the horizon, due diligence is guided by the strategists, financial analysts, investment bankers and C-suite decision-makers—all of whom come from disciplines that focus on quantifiable data embedded in financial forecasting, valuation analysis, tax history, environmental and other regulatory and compliance issues.
But cultural due diligence takes into account human factors that are far less quantifiable. This usually means that missing from the analysis are forecasts of how the two companies’ workforces will work in tandem—a must-have for continued growth and increased market share. Without that understanding for what it will take to integrate teams and sustain employee engagement on both sides of the deal—particularly with many of those teams now working remotely—this evaluation takes on new importance. Harvard Business Review advises that neglecting to thoroughly evaluate “cultural compatibility” is the root cause of a difficult merger, resulting in disappointment to shareholders and customers.
The growth and financial success of a newly merged organization can be torpedoed by losses—both quantity and quality—in the workforce. The reason? Glassdoor points out that, among employees of the company being acquired—or both teams in a merger—many experience anxiety and stress, worried about maintaining their livelihood.
This loss of workforce talent is underscored by research at MIT Sloan School of Management that shows a significant difference between the 12 percent of regular hires who leave during the first year post-acquisition, compared to 33 percent of acquired workers who leave in the same period.
4 Strategies for a Successful Culture Mesh
Mergers and acquisitions are often key to growth plans for companies in virtually every sector. But success can be hampered when cultures don't mesh. The first step: developing emotional intelligence—the ability to respect the unique decision-making process of each person at the table, says M & A consultant Frank Williamson. This can help bridge varying personality types, interests and behaviors. With this skill developed, companies on both sides of the transaction—both acquirer and acquired—can avoid the pitfalls of culture clashes and move on to crafting strategic priorities to support a successful merger.
Culture-protecting tactics to support those priorities include:
1. Expand Data-Driven Due Diligence to Include Culture Audits
Consulting firm McKinsey advises that a variety of diagnostic approaches can be used, ranging from management interviews to employee focus groups to surveys. Whichever methodology is used, by assessing the culture of both companies as they come together, leaders can determine similarities and opportunities, as well as differences with the potential to erode employee engagement.
Issues to be addressed to deliver a useful culture assessment can include:
- What is the “secret sauce” of the target company, and where are its “pearls,” or the factors that must be preserved because they are intrinsic to its value for the acquirer?
- How can the acquirer benefit culturally from the target?
- How can the target benefit culturally from the acquirer?
To get the most out of the assessment, there's often an advantage to be gained by enlisting the help of an outside professional who specializes in this form of research. That can help encourage candor from the interviewees and you can leverage the insights not hampered by cultural bias.
2. Use Culture Audit Results to Define Corporate Cultures
Harvard Business Review authors point to the effect on both sides of a merger when culture styles differ, “They now stand on a fault line where tensions often erupt in mergers.” This fault line is what the authors refer to as tightness versus looseness. When tight and loose cultures merge, there is a good chance that they will clash.
What do those cultures look like? In a tight culture, there is little tolerance for rebellious behaviors. Contrast this with a loose culture that is open and creative, with little value for rules.
When a culture audit reveals diverging cultures, the next step is to negotiate: the tighter organization can find domains to embrace greater looseness and vice versa.
3. Emphasize Transparency and Communication
Advisers agree that strong, inclusive communication is the bedrock for success. Build a communication plan with consideration for channels and methods preferred by both cultures, and audiences within each. That may be anything from one-on-one or team meetings to video chats to online newsletters, or all of these.
Transparency is critical, because providing employees with accurate information builds trust from the start. And Michele Gelfand, a Distinguished University Professor at the University of Maryland, writing in the Harvard Business Review advises taking a step beyond explaining not only what changes are coming, but why.
4. Craft Strategies for Retaining Key Employees
Glassdoor for Employers points out the importance of retaining high-value employees; they are critical to success of the newly merged company, but competitors on the hunt for talent likely see their value too. Taking steps to retain employees can include simple things such as new business cards or updated workstations that are ready and waiting for them immediately. Also recommended: a formal onboarding program for employees of the acquired company, with an emphasis on how they can add value to their new team.
Advisers also note that some organizations cut costs of critical employee engagement programs, such as curtailing training and professional development initiatives. The value of rethinking this practice lies in the high cost of attrition, which can outweigh providing employee resources.
Employee recognition specialists at Achievers suggest that after a merger, incentives and rewards are a must-have to keeping employee engagement strong, morale high and to ensure new employees feel part of the team.
Before Your Company’s Next Merger or Acquisition
Successful culture mesh is important to both sides of a deal—acquired and acquirer—if the goals of the union are to be realized. By expanding due diligence to include culture assessments, then making culture mesh a change management priority from day one, companies can help ensure that employee engagement is strong and that mergers and acquisitions deliver on their potential. And for leaders of companies whose growth plan is to be a serial acquirer, a focus on culture fit and integration may be even more important. Leveraging best practice culture strategies and tools can not only boost performance, but provide continuous learning that can be efficiently and effectively applied to the next deal.
The views expressed by the authors are not necessarily those of Fifth Third Bank, National Association and are solely the opinions of the authors. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC.