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Dealing with Culture Risk Before and During M&A Integration

67% of merger and acquisition (M&A) transactions experience delayed synergy realization due to one factor: culture. Differences in culture between acquirer and target create complexity that often goes unaddressed because it is not seen as a financial risk — and that is a mistake. Left to chance, culture misalignments have the potential to delay or prevent the close of the deal and/or impact the purchase price in 43% of deals. Culture dis-parities can destroy value.

To mitigate that risk, acquirers must identify potentially troublesome culture issues — in their own organization and in that of their deal partner. They need to under-stand the factors that are most likely to get in the way of deal value for both the target and the buyer. They also need to focus on critical deal risks, not theoretical cultural aspirations, and create a clear action plan that will help mitigate, manage or reduce the risks.

Mercer’s perspective on culture risk in M&A is informed by its recent M&A readiness report, “Mitigating Culture Risk to Drive Deal Value.” The research received input from 1,438 business executives, human resources professionals, employees and M&A advisors from a wide variety of industries all around the globe.

The most critical driver of culture is how leaders behave, followed by governance, communication and working environment.

What Is Culture Risk?

Culture means different things to different people. At Mercer, culture is defined as the operating environment of your company. It is what you say and do every day. Your company’s culture is what helps you realize your business strategy and it is likely different from that of the company down the block or the cultures of your competitors around the globe.

Company culture can be changed, and in some cases, it must be. M&A integration is such a case. Bringing two companies together will expose cultural differences that are unique to those companies — and the deal at hand. Culture alignment is critical for effective post-close operations and seemingly small differences in culture can be enough to derail the results you are seeking.

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Some degree of culture clash is inevitable when two organizations come together. Those in the scrappy start-up that uses open-source software, text messaging and video chats for collaboration may be distressed by being told that they now have to use more established platforms. Wholesale culture change — or even the loss of some aspects of a company’s culture — has the potential to be disorienting and, if it takes employees’ focus away from developing the business as sought by their new parent, that strategy could suffer. Acquirers must look for the potential elements of culture clash in every aspect of their new operations, and leaders must address these elements before they affect the deal’s outcome.

The most critical driver of culture — singled out by 61% of respondents in Mercer’s recent M&A readiness research — is how leaders behave, followed by governance (53%), communication (46%) and working environment (also 46%).

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Understanding Culture Risk

To help leaders better understand culture and its implications, Mercer has developed a culture frame-work as part of its M&A Consulting and Advisory Services. The framework is grounded in an examination of your work environment, rewards and recognition, talent management, employee value proposition and all the other factors that will ultimately support your vision, mission and values.

We use this framework to quickly tease out the most essential aspects of the culture of both the target and the buyer — both the crucial behaviors that make each unique and the most meaningful drivers of those behaviors. With the drivers identified, we can create a practical, 100-day action plan that will address the specific risks. We no longer live in a world where companies can wait years for cultures to adjust after a merger or acquisition.

Take, for example, an issue of rewards and recognition that surfaced in a deal between a large retailer and a small software company. The acquirer had a strong tradition of pay-for-performance. The target company insisted that it also had a performance-driven culture — but that wasn’t what the data showed and the discrepancy had the potential to slow integration. Their 100-day plan started with getting both companies to acknowledge their differences and then clearly set out expectations for performance going forward.

Governance and decision-making rights, communication style and work processes also are part of the culture framework. For example, an established biopharma company ran all decision-making through a complex series of management committees. Its target company, a much younger biotech, used a streamlined process to accelerate the development of new products that resulted in decisions being made more quickly. Fast decision-making was going to be key to realizing maximum value from their deal. Mercer worked with both leadership teams to clarify product governance and decision-making rights to reduce ambiguities — and did so within weeks of the close.

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Assessing Culture Risk

Culture plays an important role in driving deal value. As a result, Mercer believes that it’s import-ant to conduct culture diligence with the same thoroughness and rigor you would use for diligence on other aspects of the deal — and to do it early. Culture diligence will enable you to identify differences between target and buyer cultures that may be red flags or deal breakers.

It is important to stress that, in and of themselves, differences in culture need not be deal breakers. But when culture diligence uncovers significant differences in leadership and management styles or major disconnects in any other aspects of the culture framework, it is important to proactively address them so the companies can work together effectively in both the short and long terms.

Culture risk can be cooled by clearly identifying the drivers that matter to deal value and then creating an action plan that specifies what can be done to optimize them in the deal’s first 100 days. Such a plan sets out actions that will be taken to drive the behaviors expected from employees going for-ward. It is an opportunity to spell out the type of management style that will best support the combined business and what needs to be done to make it happen. It will prepare leaders to lead on culture risk mitigation in every aspect of the business, as much as they lead on strategies and performance.

Culture Risk to M&A is Real — and potentially costly. But there are ways to identify and lessen those risks.

Prioritizing Culture During Diligence and Integration

Culture risk to M&A is real — and potentially costly. But there are ways to identify culture risks before a deal is closed and ways to lessen it, both when your companies first come together and later as they move forward. Mercer has seen a growing number of business leaders who are prioritizing culture during diligence and integration. They are seizing the opportunity to address cultural issues before they sap the energy needed to propel the new business forward.

Companies that clearly assess and address culture risk during diligence and integration have the ability to be well ahead in creating the culture that meets the needs and expectations of the workforce that will be key to their success in the future.

Brent Heslop Brent Heslop is the global business transformation leader in M&A at Mercer.

Carly McCoy Carly McCoy is an M&A consultant and the director of Mercer’s Mitigating Culture Risk in M&A research.


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