How Culture Affects Mergers and Acquisitions

Article excerpt

Executive Summary

Even companies that appear to be very similar can have different corporate cultures and those cultures can be hard to integrate when companies merge or are acquired. Managing cultural change, the author argues, is critical to the success of a merger or acquisition. He discusses what culture is, how to assess it, and how to integrate two different corporate cultures.

Make no mistake about it: These are the go-go years for mergers and acquisitions. But however adept top executives have been in working the art of the deal, many are now singing the post-M&A blues. Merging balance sheets, it turns out, is far easier than merging cultures. By some estimates, 85 percent of failed acquisitions are attributable to mismanagement of cultural issues.

Smart companies know that cultural due diligence is every bit as important as careful financial analysis. They know that the values an organization holds are imbedded in organizational strategy, exercising a kind of gravitational pull on decision-making. Without understanding the often hidden and implied values that drive decision-making at every level, the chances are great that a merger or acquisition will quickly be awash in misunderstanding, confusion, and conflict.

The good news is that while culture is usually not changed quickly, there are ways to understand the legacy cultures of merged and acquired organizations and to create a new culture for supporting the new enterprises' strategies.

Clarifying culture

Culture is the pattern of norms, values, beliefs, and attitudes that influence individual and group behavior within an organization. Originating with the founders of the organization, these norms, values, and beliefs are shaped and honed over time by senior executives and other stakeholders. These values filter down through the organization, further refined and modified in the day-to-day priorities and actions of all the managers and employees in the business. They then circle back up the organization, reinforcing and refining the thinking of senior managers.

In short, culture is "the way we do things" and includes factors such as:

* How we treat our customers, suppliers, and each other

* The type and level of participation in decision-making * The level, speed, and process of decision-maling

* The level of formality and controls

* Performance rewards

* Risk tolerance

* Quality and cost orientation

Corporate culture is not an independent variable in the business equation. Rather, culture exists, or should exist, to support the business strategy. If culture is how we get things done, strategy shows us what needs to be done.

Culture, to borrow Obi Wong description of "the force," is the power that binds us together. Organizationally, it provides a common thread for day-to-day activities and offers consistency in a turbulent environment.

Assessing the ced!hm

While organizational culture is unquestionably the soft side of business reality, we know it can be a real M&A buster. To ensure that the force is always with you in your MBA efforts, it is critical to understand and assess the current culture of both companies involved in the M&A process.

Yet too often the issues of culture take a back seat to financial issues as accountants and lawyers do their jobs. In many cases, cultural due diligence is virtually ignored - but ignorance is perilous. The answers to the following questions will help to create a cultural valuation:

* What is the corporate history? How far is the company removed from its founder? How skilled is the organization at change? How well does the organization adapt to and adopt new processes? When was the last time the company was involved in M&A activity and what lessons were learned?

* What is the company's management style: centralized or decentralized? Entrepreneurial, authoritative, or management by objective? …