10 culture-focused ‘musts’ in M&A deals, from experienced acquirers

Business is rife with tales of mergers and acquisition (M&A) deals gone wrong because the cultures of the two organizations clashed, and the leaders of the merging companies didn’t sufficiently anticipate the issues and problems and marshal the resources to avert disaster. But not all firms fall into this trap. What do they do differently in M&A, and what advice would they give to less-experienced firms?

Since 2005, WTW has run quarterly roundtables, enabling the world’s most experienced acquirers to network and share current and emerging M&A practices. The issue of cultural integration is the most frequently discussed subject. While it’s widely known that culture problems can lead to deal failure, it was the roundtable executives’ own specific experiences and analysis of their own deals that motivated them to improve their approach to culture management throughout the M&A process ─ from beginning to end. From these roundtables, whose members top the Fortune 100, 10 key cultural-focused imperatives emerged.

1. Prepare the culture approach before any deal surfaces. Develop the strategy and culture framework so the organization is ready to apply it in the transaction. It’s far more difficult to create a new approach during the heat of a deal when multiple other business issues are vying for leadership attention.
2. Clarify what culture means and what is important when in the context of a deal. While a framework is vital to set the larger context, the components are what matter. Be clear as to what the term culture means in this context to better facilitate conversations about the significant elements within that term and how these components directly impact deal success. As one executive commented, “You cannot solve a problem that you can’t define, and you can’t ‘boil the ocean.’ You must focus on the few and know that these few change as you move through the deal life cycle.”
3. Begin cultural conversations in the very first conversations with the target. Most cultural problems are entirely predictable and can be traced back to decisions made — or not made — early in the deal life cycle. The consequence of leaving culture work to the post-close phase is that it’s too late to effectively resolve many of these predictable problems or issues, and the opportunity to prevent them will have been lost.
4. Address people and cultural issues as one. The integration between people and culture seems obvious. But, apparently, not always. Former Citicorp CEO John Reed learned this to his detriment. After Citicorp and Travelers announced plans to merge, Reed was quoted in Business Week as saying, “The culture will take care of itself. People will ultimately learn how to work together. They may not like it. They may complain a lot. But you know what? Five years from now, they will be quite surprised at how they learned to get along.”

   One year later he was singing a different tune: “We are talking about putting two cultures together that are quite different, quite distinct. I am trying hard to understand how to make this work. I will tell you that it is not simple, and it is not easy, and it is not clear to me that it will necessarily be successful. As you put two cultures together, you get all sorts of aberrant behavior. I will tell you that the literature of putting two families together speaks volumes to me. The problem of stepparents, the description of some children rejecting one parent and other children rejecting other parents is all meaningful to me.

5. Prioritize action, not just behavior. M&A is all about prioritization, ruthless and forced prioritization. Too many get caught up thinking that culture is just about behavior. To impact the deal, it boils down to people — specifically, what they should do differently compared to what they’ve done before. They must know the priorities and the actions to take to reach pre-set goals. Priorities and actions get to urgency and importance, while behaviors can fall into something more amorphous (generalizations) often to be addressed much later in the post-close phase.
6. Educate leaders so they thoroughly understand M&A and where culture fits within the overall deal life cycle. The lack of understanding of the M&A process and its phases, the dynamics relating to speed, confidentiality and ambiguity, the lack of access to people broadly, and the challenges of working with leaders who often hold conflicting views or no views at all need to be understood and processed before understanding where “culture” fits. Help them understand the reasoning, process, issues and benefits of the work. Do this before any transaction surfaces because it is not easy to get consensus during the actual transaction, especially with leaders relatively inexperienced in either M&A or culture.
7. Ensure business leaders take ownership of culture. No small feat, but essential. The key here is that the leader of the business doing the deal takes ownership of culture, rather than leaving it in the hands of any function or delegating it to the integration management team. There is nothing special or unique about culture challenges. This means culture needs to take its place alongside many other competing priorities and challenges. But it cannot be a stand-alone item, blind to other challenges in a deal.
8. Form a specific team to work on culture and let them take the work all the way from start to finish.
9. Give those running the investigation the authority to act and intervene. They are the leaders responsible for defining and controlling the culture discussion at the start. But it is nearly impossible to make an impact in this area if they do not have the authority and support to do so.
10. Pay attention to employee engagement and measure diversity, equity and inclusion (DEI) stats. Culture and cultural integration are critical in all transactions, but even more so in talent-based deals, where employees and their skills are often the primary reason for the acquisition. This issue has become increasingly pronounced on the heels of the Great Resignation and ongoing low unemployment rates, putting additional stress on HR teams.

Our roundtable members tell us that, when adhered to, these imperatives yield remarkable success. There will naturally be hiccoughs when two different cultures are brought together, but mitigation of problems is within reach for all (okay, most) M&A deals with proper planning and action.

Author

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Jim McKay

Managing Director, Global M&A Client Experience Leader

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