More to a merger than an agreement

Consider corporate culture

Much like a marriage, there’s more to a successful merger than simply having a few things in common and saying, “I do.” Before a deal is finalized, government regulators scrutinize every aspect of the arrangement. Lawyers and accountants for both sides wouldn’t think of going through with a merger without full financial due diligence between the two organizations. Yet, too often, executives overlook one or more steps of determining cultural compatibility.

As the competition for talent continues and workplace strategies and culture are evolving, cultural due diligence between prospective partners is going to become a key differentiator between the deals that produce a significant return on investment and those that fail to meet expectations.

Corporate culture

Corporate culture is more important to a merger or acquisition than you might think—and not just in terms of touchy-feely people issues. Numerous studies indicate at least 70% of merger deals fail to achieve their intended purpose. In those same studies, business culture clashes are named as one of the most common reasons for this failure.

Take the case of two small professional-service firms that merged and then unmerged after one month.

Company A always completes a detailed check on prospective clients to ensure that representation will not conflict with relationships to existing clients. Company A’s services are billed by the hour. On the other hand, Company B, has a much less formal relationship with its clients, and it bills on a percentage basis. Despite tremendous market synergy between these two companies, this dream deal turned into a nightmare when the leaders realized they couldn’t reach agreement on these and other critical issues.

Lesson: After the breakup, executives of both companies concluded they should have paid more attention to the corporate culture differences in working out their original deal.

As the example illustrates, differences in corporate cultures—or the formal and informal values, beliefs and practices that are part of an organization—absolutely do exist. While it is tempting to believe cultural issues and differences will go away with a change of leadership, research shows that strongly established cultures can persist despite changes in key management.

Even when there are potential cultural clashes, it doesn’t necessarily mean the merger should be halted. This is the point in the process during which you must answer one simple question: Do you want to take charge of the issues or let them take charge of you and the success of your merger?

Merger counseling

Minimizing clashes that arise during mergers starts with a strategic thinking and planning process that includes cultural due diligence—weighing the suitability of a cultural merger before the deal is finalized and using the information to plan a rapid and smooth integration.

Step No. 1: What is your business culture? To gain a clear understanding of your own organization’s business culture, use the Compatibility Checklist (found later in this article) to conduct cultural due diligence before finding a merger or acquisition target. This knowledge will help you develop the criteria for evaluating potential matches.

Make sure to look at both the formal and informal business cultures. Formal culture involves everything that’s aspirational and official. This includes the company’s mission and value statement, policies, operating procedures, performance review system, and organization chart. Informal culture involves what really happens within a company—the actual values, beliefs and practices that play out in everyday behavior and performance.

Step No. 2: Did you conduct cultural due diligence? This goes beyond the typical management interviews that take place in the initial stage of identifying a merger or acquisition target. For instance, using both a validated analytics tool and an assessment tool, combined with interviews, can provide a more objective and consistent picture of the culture. The best time to conduct this more-thorough information gathering is in conjunction with financial due diligence. Identifying potential issues in cultural match can be used as a point for negotiating price. It also can give you a head start in the integration process.

Step No. 3: Did you compare cultural profiles during the strategic thinking and planning phase? There always is more to the story behind the information you’ve collected. That’s why it’s important for you and your executive team to interpret the data carefully in an objective way that minimizes assumptions. This enables you to consider the aspects of the cultures that could support or hinder the success of the merger more thoroughly.

Step No. 4: Did you identify the clash areas as well as the synergies? Identifying and prioritizing possible clashes between the formal and informal business cultures of the merged companies can help you minimize them. Conversely, identifying the synergies can help you identify the positive aspects of the cultures, so they can be maximized once the deal becomes a reality. Some organizations use internal consultants because of their in-depth knowledge of the organization; others retain external consultants who have deep experience with cultural issues and are unencumbered by the internal politics of merging organizations. However, combining internal perspectives and external perspectives increases the likelihood of a successful outcome. Regard- less of the path you choose, the earlier the process begins, the better the results.

Recognizing and addressing the potential culture conflicts and synergies—the differences and similarities between organizations—before your agency’s marriage is finalized may at first seem like one more hoop to jump through. However, it will only make a merger or acquisition go more smoothly by enabling you to plan as early as possible for how to make the most of the synergies, and overcome the many issues that can interfere with successful integration.

Compatibility checklist

When conducting cultural due diligence, it’s important to examine each of the following eight areas of the merging organizations’ cultures. They include (but are not limited) to:

No. 1: Business philosophy. What are the organizations’ philosophies and ethics regarding employees, customers, shareholders and their respective communities? Differences here may lead to clashes over strategic direction, staffing decisions, layoffs, employee benefits and compensation, philanthropy and charitable donations, financial reporting, and environmental issues.

No. 2: Critical success factors and measurements. How do the two organizations define critical success factors such as customer service or quality? Differing answers to these issues impact what is measured. A lack of synergy regarding critical success factors can lead to what I call strategic gridlock. Endless debates about how to define excellent performance and competence stall critical decisions, and the merged organiza- tion’s competitive position grinds to a halt.

No. 3: Leadership and management styles. What are the characteristics of an ideal leader in each organization? How quickly are decisions usually made and communicated? Are management policies strictly enforced, or are they used more as guidelines? How do leaders foster cultures of trust, creativity and innovation? Contrasts here can mean the difference between engaged, committed employees, and disgruntled ones who feel their job is a job and nothing more.

No. 4: Organizational structure. How are the two organizations structured? Is one hierarchical while the other is flat or matrix? Are job descriptions written and followed, or do they bear little resemblance to what happens in reality? Incongru- ence in this area can lead to confusion and clashes about roles, accountabilities and authority. [EDITOR’S NOTE: For more information on structural hierarchy, see a related article “The organizational structure of your agency” on PIA Northeast News & Media (blog.pia.org).]

No. 5: Workflow practices. How does work flow between departments in each of the two organizations? For example, does one organization rely on regular in-person meetings while the other organization relies on ad hoc virtual meetings and hand-offs? Drastic differences in the use of technology, systems and procedures can lead to unanticipated problems, along with a slip in quality and efficiency when the two organizations merge.

No. 6: Perceptions/expectations. What is the organization’s reputation on job search sites and on social media? Merging a high-trust organization into a low-trust organization can hamper productivity dramatically as conflicts escalate between individuals and groups.

No. 7: Customs/artifacts. Every organization has its own special customs and artifacts. For example, do employees work until 4:30 p.m., on the dot Monday through Friday, or are they expected to be on call at night and on weekends? Are there special celebrations around holidays? Do you award honors and/or give bonuses? Inconsistencies in these areas indicate fundamental value differences that can impact employee morale, productivity and retention negatively. No. 8: Facilities/work environment. What messages are conveyed by your work environment? Which functions and positions are performed remotely or are home-based? If one company has elaborate offices, equipment and break