M&As: How to enable a healthy, aligned and high performing culture 

Culture in M&A: by Georgia Yalcin, Analyst – WhartonBC

Merger and acquisition (M&A) activity is set to increase over the next 12 months[1], however glooming figures state that between 70%-90% of deals fail, and culture is almost always cited as one of the reasons for a lack of success[2].

The nuances of different cultures may not be immediately obvious at a superficial level, but there is always work to be done to enable efficient and effective ways of working as businesses come together. The top 3 activities for Leaders to consider when bringing two organisational cultures together are:

1. Taking the time to understand the current culture of both organisations
2. Looking at the shifts between where you are today and what will enable high performance
3. Hardwiring the desired behaviours into your business activities

The influence of Leaders on their organisation’s culture is symbiotic, and it’s clear that they must lead on culture, especially during integration activities. The success of integration can be jeopardised if the acquirers cannot objectively understand their own culture, as “a C-suite that misunderstands itself will also likely misunderstand the counterparty”[3]. Focussing on the top 3 activities will build leadership alignment and engagement:

1. Taking the time to understand the current culture of both organisations

• Creating a clear view of the current culture, both the ‘espoused’ version as well as the ‘lived’ version to help inform decisions about alignment and the desired culture
• Reviewing existing data and insights whilst also taking the time to gather new information from across different levels and roles through interviews, focus groups, and employee surveys, as well as more informal interactions with employees
• Identifying the potential opportunities and challenges as the starting point for integration planning in order to build a culture that is a driving force for the business strategy and ambition

2. Looking at the shifts between where you are today and what will enable high performance

• Aligning on where the business is going – defining a guiding ‘north star’ on the ambition for the new organisation to build buy-in amongst employees
• Identifying the shifts that will drive the greatest increase in performance across the new organisation
• Codifying a set of behaviours which underpin the shifts so everyone understands the alignment and what is expected of them

3. Hardwiring the desired behaviours into your business activities

• Embedding the desired culture into all elements of the new organisation – ways of working, policies, processes, and governance models
• Supporting employees through effective communications and engagement activities – training and development opportunities, leading by example, and celebrating successes along the way
• Building affinity to the new organisation by connecting employees to the ‘why’ at a critical time when employees are most likely to be experiencing uncertainty and turbulence

The business imperative for culture alignment

Failure to successfully integrate the culture of two merging organisations is frequently cited as a top reason why deals fail. Why is it that 95% of executives[4] describe cultural fit as critical to the success of integration, yet research by EY shows that 47% of employees in key roles leave their job after a major deal with the figure rising to 75% within three years[5]? Especially when human capital is arguably what keeps the cogs of the organisational machine turning. Yet, executives seem to be overlooking the impending risk of value extinction if the human element is neglected in deals.

The disruption of key role losses is huge. The competitive edge of an organisation is inherently at risk when capacity and capabilities are reduced.  Not to mention trouble with commercial reputation and client retention. How can the momentum in quality service continue when the key employees driving it are no longer there? What’s more, these workforce impacts will have a financial cost that accumulates very quickly as organisations try to incentivise their people to stay, or accept the cost of onboarding and training replacements. Can leaders afford these distractions in a rapidly evolving market and whilst dealing with the complexities of merging two separate organisations?

These all point to the lack of due diligence given to culture before deals close.  Having a true understanding of cultural disparities is mission critical, and “companies who pass over them pay a steep price“[6]. Our experience tells us that prudent leaders are now adamant on figuring out the culture equation and mobilising their executive team in tandem to lead on diagnostic activities.

However, this is by no means easy. Culture is nebulous, complex, and often difficult to understand, and thus clashes of culture remains a likely risk unless sufficient analysis is conducted. Leadership’s capacity to find synergies between the differing values and norms of the merging organisations will have a significant effect on the ability of the newly formed organisation to provide value to customers and shareholders. This factor could ultimately determine the success or failure of the merger.

Necessity of cultural due diligence

While a thorough evaluation of the legal, commercial and financial elements of an M&A deal are accepted as paramount, the assessment of more ‘soft’ and intangible factors such as people and culture is often neglected[7].  In fact, research by suggests that more than 50 percent of M&A deals that fail do so due to insufficient consideration of ‘soft’ factors[8].

C-suite executives leading the deal should be using the assessment findings to foresee potential opportunities and difficulties, and defining the key messaging that is to be cascaded down based on the type of culture they want. Good cultural due diligence can be the difference between a successful and failed merger, the latter of which can have severe financial and reputational fallouts.

Case study example: When the $350 billion AOL/Time Warner merger failed, a clash of cultures was widely cited as a cause. The challenges caused by a lack of cultural understanding is evidenced by Dick Parsons, former CEO of Time Warner who underestimated how different the cultures of AOL and Time Warner would be: “the business model sort of collapsed under us…it was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war.”[9]

The importance of culture in integration planning

Culture should be at the centre of merger implementation planning to enable the benefits of the integration to be realised. Savvy executives look for the behaviours they want to bolster and the ones they want to remove to help achieve their fit-for-future target culture. There is not one ‘off the shelf’ approach that works for all mergers, but rather the strategy should be dependent on the type and maturity of each organisation, the long-term outcome that is desired, and the leadership team responsible for successfully executing the activities.

In pursuit of long-term value creation, leaders must be mindful not to form tunnel-vision on achieving purely financial or growth objectives. Those are just one function of an M&A deal. Just as important for sustained value generation is the consideration of the people counterpart. When culture is managed effectively during integration, “the likelihood of meeting cost and revenue synergy targets is substantially higher.”[10] Leaders must therefore be intentional in their strategy to retain and meet the needs of their employees to help safeguard the future of the combined organisation and achieve growth objectives.

Case study example: When AT&T signed a deal worth $85 billion to acquire Time Warner in 2018, the merger made sense from a financial and competitive standpoint. However, the deal soon became an example of what happens when financial drivers take precedence over proper integration planning, which frequently seems to be the norm in the high-pressure and high-stakes context of M&A deals. Just three years after the deal, AT&T relinquished its ownership of Time Warner.

When organisations are under financial pressure to deliver swift value, the importance of assessing cultural compatibility is often neglected as a priority. In other cases, the financial incentives of a deal are considered fulfilled once the deal is signed and before integration plans are developed. In a rush to return to normal service delivery as quickly as possible, the disruption caused at every level by the merger is often underestimated by deal executives.

Organisations that have embedded their culture from the bottom-up and top-down have a degree of cultural stability that enables their workforce to continue their normal service delivery regardless of disruption or changes in leadership. By investing in culture, organisations can build a stronger sense of alignment and affinity in their employees that is not reliant on the explicit steer of one leader. An organisation’s culture should be built in a way so that it can be leaned on “as a buoyant force than can rise to the challenges of external and internal pressures.”[11]

Conclusion

The fate of an M&A deal is inextricably linked to an organisation’s ability to manage culture as a fundamental component that can make or break the M&A equation. Whatever the end-goal of the merger, acquisition or takeover, the strategic initiatives necessary to fulfil the objectives of the deal will almost certainly fail to deliver value if executives do not consider cultural issues as important as strategic issues. The role of the C-suite in mitigating potential culture shock is crucial. Without clarity from the top, employees will struggle to connect to the organisational ‘why’ necessary to enable high performance and drive value to the new business. Laying the cultural groundworks as a core component of M&A deals should therefore be at the forefront of any leader wanting to put their organisation on the path to success.

[1] Global Shift: Our M&A predictions for 2023, Clifford Chance, 2023

[2] Don’t make this common M&A Mistake, HBR, 2020

[3] Cultural Issues in M&A, Financier Worldwide, 2019

[4] Organizational culture in mergers: Addressing the unseen forces, McKinsey, 2019

[5] How a new talent mindset can solve the post-merger integration puzzle, EY, 2020

[6] Culture in M&A: A source of opportunity, Accenture, 2021

[7] Preventing merger failure: hardening soft due diligence, Financier Worldwide, 2023

[8] Top Reasons Why M&A Deals Fail, Investopedia, 2021

[9] How the AOL-Time Warner Merger Went So Wrong, The New York Times, 2010

[10] Organizational culture in mergers: Addressing the unseen forces, McKinsey, 2019

[11] Culture in M&A: A source of opportunity, Accenture, 2021