Culture. It’s hard to define but you know a good business culture when you see it — and when it’s bad, it’s almost impossible to find a quick fix.
And while this intangible quality won’t appear on any balance sheet, cultural mismatch is often cited as the main reason mergers and acquisition deals fail.
There have been plenty of studies into why deals fall over, or if they proceed, what factors mean the outcomes are less successful than expected.
Some of those reasons for failure are a mark of the deal’s complexity — when the buyer is looking to transform an under-performing target by reinventing its business model, for example.
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It could be a sign of overreach, taking on a target that is too big for the acquirer to absorb.
Or it could be that the price paid overstates the true value and growth of the business bought, prompting a write-down.
But in as many as 70% of deal failures, compatibility issues with the management, staff and culture of the acquired business are held responsible for at least some of the pain.
Culture matters in M&A
The integration of two cultures, or a mismatch between cultural styles, can create protracted, time-consuming disputes that divert focus and can disrupt the buyer as much as the target.
So how should a buyer identify, assess and value culture, when it is so hard to describe? The first step is to recognise that culture doesn’t show up on paper.
The best pitch document in the world won’t reveal whether the sales team is at war with the marketing arm of the business, or whether the politics in the C-suite has become toxic.
That kind of intelligence can only come through careful consideration of the management team as a whole: asking the right kinds of questions and understanding the expectations and personalities involved.
It’s one of the reasons human resources consultants and advisors have become a more important part of the due diligence mix.
Prior to the pandemic, we asked dealmakers what advisors they tended to engage and while at least two thirds had financial, tax and deal strategy consultants, and 95% engaged legal consultants, only one in three engaged an expert for human resources due diligence.
Due diligence to the fore
That reluctance to engage expertise has changed, given the increased complexity of due diligence in the post-pandemic era, and the difficulty many buyers have in getting face-time with their businesses targets.
New research conducted by our global network Baker Tilly shows 93% of dealmakers now say due diligence is far more important than it was before, and they are willing to engage the right advice to conduct it properly.
The second message for those weighing up a target’s culture is to understand that ‘fixing’ it might mean breaking the business somewhere else.
Some cultural issues can be tackled at the top, so poor compliance issues or underwhelming management can be addressed by replacing a key manager or setting better KPIs for the leadership team.
But if poor culture is embedded across the workforce, you might need to weed out people at every level, stripping the asset of corporate or technical knowledge in the process.
Many new owners have had to decide what is worse: keeping toxic or non-compliant staff members or losing the know-how in the business as they walk out the door.
The third lesson, though, is that if culture can’t be fixed, it can at least be replaced — but the business should be valued accordingly.
For those cases where there are grave concerns about the ability to integrate or reform a poorly performing culture, then the focus shifts to buying the customer list, the IP and the assets.
Instead of an earn-out structure that keeps old leaders in place, structure the takeover to ease out legacy management and replace them with a team you can direct and shape.
Cultural challenges can be the single biggest hurdle to delivering on M&A goals but addressing them upfront, rather than making them an afterthought, is the key to a smoother — more successful — transition.