Even though companies recognise culture as a key factor in the M&A’s ultimate success, most of them fail to conduct cultural due diligence before they finalise the deal.

Why many MA deals fail by not taking organisational culture into accountImage for representation
Money M&A Monday, April 13, 2020 - 18:17

A great way to grow your business is Mergers and Acquisitions (M&A), without having to wait years for your marketing and sales strategy to pay off. Over the past few years, the mergers and acquisitions (M&A) space in India has seen robust traction and steady growth, notwithstanding the uncertainty and headwinds globally. While we have witnessed announcements of numerous M&A deals on a regular basis, in reality, a large number of these acquisitions fail to deliver shareholder value. In spite of undertaking detailed pre-deal diligence and assessments, numerous studies globally have shown that about 70 to 80% deals do not deliver their intended objectives. Even though companies recognise culture as a key factor in the M&A’s ultimate success, most of them fail to conduct cultural due diligence before they finalise the deal. One of the main causes, for deals not delivering value to their full potential post-merger, is failure to realise significant synergies.

Industry insights

> Most companies have no clear approach to addressing culture integration. According to Aon Hewitt, 58% of companies reported they did not have a specific approach to assessing and integrating culture in a deal.

> While deal activity continues to increase, the rate of deal failure is alarming – over 50% of mergers fail to meet their targets and culture issues have been reported as a primary factor in deal failure.

> A study by Aon Hewitt Associates that surveyed executives in 162 organisations who had been involved in at least one merger, found that 69% of the respondents reported the top challenge they faced was integrating two organisational cultures.

Although most failed deals are attributable to culture issues, the due diligence phase of M&A transactions still focuses primarily on financial and legal aspects of the deal, and not culture. The difference between a successful merger and acquisition (M&A) deal and a troubled one often hinges on whether culture is assessed in the due diligence phase of a transaction. Too often, culture is treated simply as a buzzword and remains unaddressed until after a deal is closed. Successful transactions require a holistic view of culture at an early stage, and a strong focus on people-related issues.

We’ve seen it play out time and time again as leaders convince themselves that the integration is a marriage made in heaven when, in fact, they have no real understanding or data with which to base that claim. With many millions (or billions) of dollars on the line, it seems ludicrous that companies would roll the dice with something so critical. And with 70-90% of M&A transactions failing to increase value, the biggest challenge isn’t getting approved; it’s integrating cultures after the deal closes. 

Major transactions seem to hit the headlines on a weekly basis, with no end in sight. Amazon’s recent acquisition of Whole Foods for $13.7 billion is just one example. Purpose of paying attention to important and delicate issues like organisational culture is to determine the company’s compatibility level and identify where the gaps are. This is a combination of the values, beliefs, interpersonal relationships and focus that drive people and make them want to come into work every day. Combining two companies with different values can not only create conflict but could reduce value if not handled properly.

Some examples of M&A deal disasters

> A classic example was the failure of the US’ Walmart when it attempted to enter Germany by acquiring two German companies – Wertkauf and Interspar – in 1997 and 1998, respectively. The Germans questioned the leadership of the American managers, because they simply did not understand that it is how the Americans do it.

> Zynga, creator of Facebook games Farmville, Mafia Wars, and about a dozen different types of online slot machine games, paid $210 million in 2012 for OMGPOP, creators of DrawSomething!, a viral gaming hit for iOS and Android. But the game suffered an almost-immediate drop-off in popularity, going from 15 million daily active users to 10 million in the first month alone. Plus, it seems Zynga didn’t really have a plan for the acquisition. Only months later, after the acquisition, Zynga laid off 18% of their total workforce, including many from OMGPOP, and closed down three of OMGPOP’s offices. Zynga phased out four of OMGPOP’s remaining games that year.

Every organisation has a culture, a set of values and assumptions that control how its people act on a daily basis. By understanding their culture, a company will be in a better position to figure out whether the two companies will be compatible, and also get an indication on the level of success of the M&A.

The case for India 

In the name of getting big quick, it seems like some of the most valuable private tech companies are turning to mergers and acquisitions (M&A) as a way to accelerate business growth. So-called “unicorns”—privately-held technology companies, which achieve billion-dollar valuations sometime before going public or exiting via M&A—are chomping at the bit to make their first acquisitions, suggesting a mounting pressure on companies to grow even quicker.

M&A growth strategies promise a multitude of strategic opportunities; from rapid growth, to eliminating competition, to access to new markets. And many organisations in India, are currently, or have, embarked on merger and acquisition growth strategies to varying effect.

Given the increasing global significance of Indian markets, multinational corporations (MNCs) are keen to do business in India; however, cross-cultural issues can be barriers in managing human resources in international businesses. In order to be successful, it is important to understand India culturally and geographically, build trusting relationships, partner with local players who are familiar with domestic challenges and localise the best practices of the west. Attrition and retention being the major challenges in India, compensation alone is not enough to attract and retain talent. Understanding Indian psyche and offering individuals a unique value proposition such as challenging roles and professional growth is imperative for creating an attractive employer brand in order to win the war for talent.

Culture – The big gamechanger

An organisation’s building block of business systems, processes and people practices is Culture. In an acquisition, all the aspects form the basis of assessment – that is from brand, innovation, client service, the quality, performance, governance and risk are shaped by organisational culture. In spite of this realisation, the due diligence phase of M&A transactions still focuses primarily on financial and legal aspects of the deal but research shows that the most frequently cited reason for the departure of managers and talented staff are related to the new organisational culture, together with discomfort and dissatisfaction about their new roles and the strategic direction of the company.

If a deal is struck without a review of corporate culture, many of the expected synergies (achieving deal value and stimulating growth for the future) often do not materialise or end up costing much more financially or in employees. 

Understanding behavioural norms and underlying assumptions about how an organisation works is crucial to identify potential risks and to ensure that the two organisations entering into a deal can determine how to work together in the future. A review of the two cultures during the due diligence phase creates transparency and clarity. 

There is no “one-size fits all” approach

The “perfect” culture formula to achieve an optimal working environment does not exist. For an organisation to effectively implement its strategic priorities, it must first: 

> Reach agreement on priorities amongst its directors 

> Reach agreement with senior leaders about critical cultural traits 

> Create a corporate culture that supports these priorities and cultural traits 

> Align the "people strategy", employee value proposition and compensation policy with strategic priorities

> The culture of the target company is also indicative of the culture of the market being entered. If there is anyone who knows the market best, it is the company that actually operates in it. Therefore, one way to gain an understanding of the market is by looking at the culture of the company being acquired or merged with.

Measuring cultural integration

Once a transaction has closed and the integration process is underway, it is vital that the newly combined organisation is able to track progress. This requires companies to establish solid communication channels with employees and seek regular feedback on the success of the integration plan. Benchmarking can help companies demonstrate successes and report on progress. This should be done regularly to assist executives and integration teams with gauging the level of buy-in at all levels of the company’s structure. It also enables organisations to tweak their integration plan accordingly. One of the most important mechanisms is a questionnaire or survey, for example, questionnaires where you just have to answer one single question a day. Through a randomised sample across the organisation, you have the full survey done within a few days, and thus, can measure the trajectory of cultural development on a weekly basis with the help of AI enabled chatbots.

Conclusion

There is no perfect culture but companies can avoid the M&A risks and drive deal value by putting culture at the centre of their businesses. Culture is a firm’s operating environment and it defines an organisation.

Views expressed are personal. 

Yeshasvini Ramaswamy is a serial entrepreneur and founder of Culturelytics.

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