The Critical Role of Culture in Mergers and Acquisitions: Navigating the Iceberg of Organizational Integration
Robin Benoit
March 15, 2024
In the dynamic landscape of mergers and acquisitions (M&A), the significance of culture is often likened to an iceberg - much of its bulk, its potential to either support or sink an integration, remains unseen beneath the surface. While financial and strategic aspects typically dominate the M&A process, neglecting the cultural component can be a recipe for disaster.
Corporate culture is a complex interplay of values, behaviors, norms, and practices that define an organization. It's essentially about 'how things are done here.' When two companies merge, their independent cultures must be carefully woven together, a process often underestimated in its complexity.
The Result of Ignoring Culture: The Facts
The stakes of underestimating cultural integration in M&As are high. According to McKinsey & Company, almost 50% of mergers fail to meet expectations due to organizational issues like cultural differences and changed operating models. Further, Aon Hewitt reported that 58% of companies lack a specific approach to assessing and integrating culture in a deal.
According to Deloitte’s 2016 Global Human Capital Trends report, 87% of leaders believe culture is vital for business success, yet only a third truly understand their company culture. Multiply this disconnect by two (or more!), and it’s clear why 70-80% of deals do not deliver their intended objectives. There are some prominent examples of sub-optimal mergers largely driven by ignoring cultural compatibility. Consider the Sprint-Nextel merger or the AOL-Time Warner deal. Both were exceptional business propositions on paper, but floundered largely due to cultural misalignments.
Aligning Culture with Strategy: How to Create a Successful “New” Entity
The key to successful business results lies in aligning culture with business strategy. Add in the complexity of combining two distinctive firms, with two unique cultures, and this alignment becomes both more challenging and more important.
This begins with a thorough cultural assessment during the due diligence phase, a step often skipped in favor of financial and legal evaluations. But this can’t just be a surface level evaluation where you tell yourself everything will be fine – you want to minimize the risk of failure, not reinforce what you want to believe. It’s crucial to understand both the cultural compatibilities and the gaps that could present roadblocks. For instance, the cultural disparities between Amazon and Whole Foods are often blamed for the significant integration challenges they faced, highlighting the importance of such assessments.
Key Steps: Strategies for Successful Cultural Integration
1. Assess and Diagnose: Companies need to take the time to understand the existing culture of both entities. This includes underlying behaviors and traits, management practices, current engagement levels, and the 'unwritten rules' that govern everyday work. This requires significant effort, to not only hear the feedback of senior leaders, but of your broader employee base, ranging from middle managers to frontline staff.
2. Set Clear Cultural Integration Goals: Based on the understanding of the existing cultures, define what the merged organizational culture could look like, and what it should look like. This vision should align with the overall strategic objectives of the merger. Further, it’s important to remember that neither company’s culture is likely 100% optimal. However, the goal is to leverage the best of both.
3. Engage Leadership: Leadership commitment is non-negotiable. Leaders must not only endorse, but actively participate in cultural integration efforts. They must be willing to look in the proverbial mirror to understand what the culture truly is, not just the aspirational culture they’d like to believe they have in either - or both - independent organizations. They set the tone for the merger and play a critical role in aligning the merged entity’s culture with its strategic direction.
4. Communicate and Engage: Transparent and continuous communication is vital. Employees at all levels should be kept informed and involved throughout the process. They know that “something” is happening, and rumors are certain to be disruptive. Without their clear involvement in the process, any top-down communications will fall flat. Transparency helps manage the ‘organizational emotions’ that naturally emerge during mergers.
5. Monitor and Adapt: Post-merger, it's imperative to continually assess the cultural integration process and be ready to make adjustments as needed. This doesn’t happen overnight and the work is not done when the deal closes. Rather, you need to apply a structured approach, with defined metrics and feedback mechanisms.
It’s important to remember that this list is not exhaustive and there will be nuances with different organizations. These differences can derive not only from the corporate culture, but from a range of issues that can include local/national culture to a company’s post-COVID operating model (are they more remote, hybrid, or in-office). This list goes on and on and requires an open mind and willingness to approach with nuance.
Culture in M&A: The Make-or-Break Factor
The role of culture in M&A cannot be overstated. It's an unseen force that can either drive success or lead to costly failures. By placing organizational culture at the heart of your M&A strategy, companies can significantly increase their chances of realizing the full potential of their merger/acquisition. As you navigate the complexities of the M&A world, remember that understanding and aligning culture is not just an optional exercise; it's a fundamental component of creating sustainable value from any deal.
Robin Benoit is the President, CEO and Co-founder of Benoit Global, a global consulting firm focused on maximizing business performance through optimization of corporate culture.