In corporate mergers, when problems arise it’s usually not that the pieces don’t fit together, it’s that the people don’t fit together.
The list of high-profile mergers that have faltered or failed due to a clash of cultures is long. It’s a serious and common problem — and largely avoidable. When it comes to integration, as one of our clients likes to say, “culture trumps strategy.”
In our research we have found material cultural differences in every one of the mergers and acquisitions we’ve analyzed. That’s 100%. Yet, very few companies perform the same level of due diligence on corporate culture as they do on the more-tangible assets that need to be brought together during the post-merger integration: facilities and capabilities; talent; products in the R&D pipeline; customer, sales and market data; and finances.
Even companies of the approximate same size in the same industry can be polar opposites when it comes to culture. One company’s culture may be informal, entrepreneurial, flexible. Another company’s may be hierarchal, risk-averse, highly structured.
Tackling culture during the post-merger integration period is challenging, but an absolute necessity. In fact, in the ideal world the process would begin during the due diligence period and ramp up in a systematic way after an agreement is reached, but before it’s signed. This would be done in order to build bridges between the two companies and begin aligning them based on a robust and actionable plan.
It’s as important — if not more important — than any of the other merger integration issues and can help capture the value of the deal, retain top talent, and avoid having the company get mired in “perpetual integration” mode.
In fact, the characteristics that make a company an attractive merger partner are often related to the way people work: how the company gets the job done. In other words, culture is often one of the underlying reasons for the deal. Ignoring or changing that culture can destroy the target’s value. Preserving desirable elements of the target company’s culture requires deliberate and thoughtful effort. If you don’t make such an effort, employees will get frustrated; some will head for the exits.
Professionals at an entrepreneurial biotech company we worked with, for example, struggled with how they would fit in when their company was acquired by a prominent chemical company. The target biotech company embraced the typical West Coast culture — casual dress, flexible hours, and compensation with a high equity component — and tended to compete against other entrepreneurial companies for talent. Respectful of this ethos, the acquiring company showed great flexibility by prioritizing the most critical procedures and allowing the unit to forgo many of those deemed not critical in order to preserve the biotech company’s traditionally light-on-process work environment.
As complex as culture may be, aligning culture during the post-merger integration is certainly possible. To make the alignment as smooth as possible, start with what we call a “cultural beliefs” audit. This is done by surveying and interviewing executives, senior managers, and select middle managers to understand how work gets done at each organization. Efforts should be made to preserve and reinforce common values and behaviors, while resolving potential conflicts.
For example, if the acquiring company conducts more analysis than the target company before taking action, leaders will need to establish a threshold for decision making. During the merger, when speed can be critical, that might mean suggesting a straightforward process whereby executives at the two companies confer before decisions become final. This will set a good precedent for collaboration that will serve the company well after the integration is completed.
When identifying cultural differences, executives should not shy away from identifying non-negotiable items. For example, a large, established pharmaceutical company produced a 100-page sales report each month. The target company did not document monthly sales. Though detailed analytics were important to the acquirer, it didn’t insist that the target company — which valued speed and agility over process — conform with its procedures. Instead, it established a new, streamlined monthly report, just 10 pages, rather than 100.
Given the potential for big differences in how work is accomplished, it’s important to understand the “context levers” that shape a company’s culture. These include the style and actions of the company’s leaders, organization design, talent recruitment and development, and the incentive and rewards system, among other factors. Understand these and you will understand what drives the company’s culture.
Few companies currently tackle issues related to corporate culture early or methodically enough during the merger process, but they should. The success of the integration and the future performance of the company could depend on it.
Daniel Friedman is a Los Angeles-based senior partner of The Boston Consulting Group (BCG) and North America leader of its postmerger integration and corporate development practices. Chris Barrett is a Dallas-based director in the postmerger practice. Julie Kilmann is a Los Angeles-based senior knowledge expert in the organization practice. The authors gratefully acknowledge the contribution of BCG Senior Partner Jim Hemerling to this article.
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