Before I talk about culture, I have to provide some perspective. First, my overriding goal whether I was an employee or now as a board member or as a consultant, my focus was/is always on increasing shareholder value. If you don’t have that everyone can go home. Second, I have worked in, reported too, and worked with Human Resource departments (I’m showing my age by using that title). They are very professional people BUT if they have a fault too many can’t articulate how their reason for being increases shareholder value. I could say I have many friends that are or were good HR professionals, but I won’t. Later I will be writing another blog on the subject; ‘everything is all about day-to-day execution’. It is absolutely imperative to understand ‘how’ the business ‘operates’ to increase shareholder value.
What about this culture thing, why is it so important in M&A’s and why is it the whipping posts for failed M&A’s? First, it is the whipping post leaders ‘SEE’ employee’s behavior quote “acting out” and ‘HEAR’ about their difficulties with integration. Don’t get me wrong, employee’s can sabotage an M&A but in my experience it is not intentional. The primary reason they act the way they do is because leadership screwed up in the first place. They did not do an effective job usually from the start. They didn’t spend the time on the front end to understand themselves i.e. a SWOT, and they probably didn’t develop an effective Strategic Profile and then overlook important aspects of the target during due diligence. Finally they turn to the operations people and say integrate this! How’s that for blaming someone. Culture gets in the way because the acquiring company lack the knowledge or the wherewithal to understand what information they need to evaluate and how to use that information on a go forward basis. So when operation people look to integrate they are thinking “integrate to what”? So people trend to do what they believe is the best without a clear direction. More later.
In my experience ‘smaller deals’ have the same issues as large. As I said in the beginning blog, the only difference between large and small deal problems is small companies have a shorter runway to fix it before it’s a disaster. The reason I am focusing on culture here is in my experience; it is the least understood, receives the most blame for difficulties, will kill the deal quicker than just about everything else and very few people know to deal with it effectively in an M&A. Here is how Investopedia talks about it: “However, time and again, executives face major stumbling blocks after the deal is consummated. Cultural clashes and turf wars can prevent post-integration plans from being properly executed. Different systems and processes, dilution of a company’s brand, overestimation of synergies, and a lack of understanding of the target companies business can all occur, destroying shareholder value and decreasing the company’s stock price after the transaction”. Investopedia: 4 biggest merger and acquisition disasters.
Let’s try and define culture first. On second thought, we might have a better chance of getting agreement on vaccine mandates. Do a Goggle search for a definition of company culture and the things you will notice; long descriptions, variety, and it’s like listening to a politician answer a question and afterwards you are more confused than when you started. Here’s my take on it. Company culture is HOW a company BEHAVES (internally and externally) in order to increase shareholder value. It’s how a customer, a competitor, or new employee would describe how the company behaves/operates. It drives compensation/incentive systems, employee selection, customer service, decision making, EVERYTHING.
In a Goggle search there are listed types of culture e.g., Clan Culture or Market Culture, Hierarchy Culture, etc. however they never explain how they relate too how the business operates to make/or not make money and or provide its services. If you can’t do that why spend the time defining it?
I look at culture from how the company competes in the marketplace because this is where the company thrives or dies. First, think about how you try to compete, how you market/sell (what you say about yourself) how you operate internally (everything within your walls) and how you manage your customers. Hold on I’m getting to M&A’s.
For this answer I will describe three different choices (consciously or unconsciously) companies make to compete. This competitive choice drives their culture e.g., how they behave (when these aren’t in sync, behavior and operational execution, problems arise). They organize and execute around that choice. This choice drives their behavior. Remember this is what the customer is buying or describing if asked “why do you buy this organizations products or service?”.
First choice, they can be a Leader in the market, innovative with new products or services. If this is true and they are good at it (execution) it’s because work is organized in sets of clear challenges and goals. People work well in teams and cross-functional, they are technically competent, people would describe them as non-bureaucratic, rewards are based on innovation and decisiveness, speed in execution is paramount, high tolerance for risk taking by employees. Employee selection looks for people who are creative, independent, and like challenges. Or another way is to be the best solution to their customers problems. They have a close relationship with customers, they have personalized services or customized products, customer values relationship more than price or latest innovation. If this is true and they are good at it it’s because there is a value placed on a thorough knowledge of their customers business, experts in their product/service use in customer’s business, flexible in responding to customers, internal rewards are based on customer satisfaction. The customer is at the center of how things operate in the company.
Last choice is being the best total cost deal, not the cheapest. Products/service are usually lowest price, quick, convenient/dependable offsetting a slightly higher price, cost over product life cycle is a value. If this is true and they are good at it (execution) it’s because they have highly centralized management, well established policies/procedure, processes are geared to flawless transactional flow, and rewards are based on cost, quality and following the rules.
Each of these descriptions defines how a company chooses to organize and executes its business plan to compete in the marketplace. Or said differently, HOW it BEHAVES to compete in the marketplace, IT’S CULTURE. Look at Cisco Systems; Innovative (innovative new products in a defined period of time or buy them) that fits with their growth strategy that leads to how they organize; decentralized set of business units, cross functional cooperation, high risk taking. They look for deals that ‘fit’ their acquisition strategy and will ‘fit’ with their how they operate (behave).
How does all this relate to my take on M&A’s and culture? Your SWOT should have a realistic and succinct description of how YOU ‘organize and execute to compete’. It should basically fit one of the three choices. Without clarity it becomes more difficult to integrate. If the goals for a M&A don’t look consistent with your competitive strategy, you need to look closer. The SWOT should provide the target’s competitive characteristics and culture included in you Acquisition Profile. When you are sorting through potential deals it’s another filter to sift companies through. For example, they maybe in a market with a product portfolio you want but if they compete differently than you, (cost vs customer solution) don’t get the idea their customer base or the market will look at you differently, they will just be confused. And if you think the marketplace will be confused think how the two merged workforces will work. During due diligence you will add this too your list to evaluate. How are we similar and different in our competitive choice/operational execution? What is the potential impact on our goals? How does this impact our cost to integrate? Are differences a deal killer? As good as Cisco is, they don’t look for or like complicated deals. A well defined SWOT and Acquisition Profile will make the Hunt more efficient and integration planning more focused.
Here are the keys to culture during the hunt and due diligence: first, know thy self-first on the terms I laid out above. Second, don’t be foolish and think you can make a complicated deal work. Third, define and evaluate culture in business terms.
A story or two. Both companies competed in the exact same market. One company competed as total cost deal while the other one as a solution to customer problems (which never entered both leaders thinking). The second company utilized new technology in sales and fulfillment to the max while the other relied on face-to-face people interaction. You can guess how the sales organizations operated after the ‘friendly’ merger. Not only did this drive dissention amongst the sales organization, but also the respective management and line personnel had completely different mindsets (behaviors) about how to carry out their day-to-day work. One organization (the technology company) viewed themselves as market leaders in how they utilized technology to execute their business plan and thought of the other company as ‘Neanderthals’. How the customer viewed it made a direct impact on their bottom line.
If you are thinking, “I’m not integrating the acquisition, it will be operated as a standalone business”, think again, there is no such thing. And if it is in a different country YEEKS. One day I came into the client’s CFO’s office, and he was in a very heated conversation with someone on the phone. Finally, he screamed into the phone “just send the damn money” and slammed the receiver down. I tried to lighten the mood with “times must be tuff if the CFO is trying to collect overdue invoices.” He laughed and said “not a customer” our standalone operation in France that we brought two years ago. About every two quarters I have to remind them who owns whom and send the damn money.”
So, culture is very important in an M&A, and you need to understand it and define it from a business operations perspective in order to manage it. Last, when leaders say “it’s a difficult acquisition because of culture” what they are really saying is we tried to fit two different companies together WITHOUT a plan to deal with it. They blame culture/employee behavior because they see and hear it. In other words, they didn’t have a clue from the start.
So, culture or how you behave operationally, should impact every phase of the M&A process starting with SWOT and concluding in integration management. I will talk more about how to manage ‘culture’ in due diligence, planning and management in later blogs.