Culture Assessment Could Prevent Merger and Acquisition Failures….Seriously!
I once heard a sage on the business book tour circuit quip:
“There are two ways to get to the top of an oak tree. One can plant a seed and sit on it while it grows, or one can grab hold of the lowest branches of an existing tree and climb.”
Yea, I thought it was corny too and I’m not sure he survived the tour. But it does point to the difference between organic growth and accelerated growth through acquisition, merger or joint venture.
Why Merge, Acquire or Joint Venture?
There are any number of reasons to entertain the alternative to organic growth. Perhaps your family business needs the larger scale to compete. Perhaps you view it as a way to acquire an extended product mix that delivers a competitive advantage. Your Family Office may have capital to deploy and acquisitions are a good way to diversify while putting that capital to work. Whatever the reasons for pursuing one of these strategies, pay attention to Shobit Seth’s article on the reasons so many of these gambits fail.
We know that despite the excitement of the process, the odds don’t favor an outcome that meets the hyperbole leading up to the deal.
In my opinion, George Bradt, in this Forbes Magazine article, goes right to the heart of the matter. Fail to integrate the cultures within each of the organizations involved in the acquisition and you fail to create the promise of intrinsic value from the combined company. His opinion is fortified by the numbers. Between 50 and 85 percent of mergers fail. KPMG found in one study that 83% of mergers fail. These are deals put together by very smart people so why don’t they measure up?
It is an interesting study. Awareness of the pitfalls is as good a place to start as any in understanding how to avoid them You can begin by reading these two articles : Why Mergers Fail and Why Mergers Succeed by Margaret Heffernan.
Due Diligence and Assessment of Culture
When I refer to different cultures within the context of successful mergers, I am not speaking of the cultural norms that reside within different countries, though this brings another level of complexity to international acquisitions. I am speaking specifically about the behaviors that stem from the beliefs that are expressed in values as practiced by people within a company. It is the aggregation of those behaviors that I am referring to when I speak about corporate culture. It is what your family business stands for. It’s “how we do things around here”and how we behave when we’re off the clock.
I have spoken several times with the head of M&A for a national law firm about the wisdom of including a cultural assessment as a formal part of the due diligence process. He shared that he’s been beating that drum for over twenty years. He will often advise against a deal that looks great on paper but sends strong signals of trouble ahead when the underlying values of the two companies are far enough apart as to raise flags. Some clients embrace the advice while others do not. Invariably, those who don’t pay a price from failed expectations, disappointed investors, and the legal consequences that often accompany unfulfilled promises.
We recommend assessing the cultural fit of a potential purchase be addressed right up front—especially where an acquisition is being made with a long-term view toward assimilation and gradual growth and not with the intention of being stripped and flipped. We use validated tools to determine the current state of each organizations’ culture. We then benchmark the current situation to determine if there’s a gap and, if so, how wide and can it be closed?
High Performing Culture’s Impact
The flip side, of course, is to have an existing framework to make the integration of a company with a good strategic fit seamless. A framework provides a basis for having a less abstract and theoretical conversation about culture. It makes it more concrete and consequential. It also provides the touchpoints for interpreting the assessment results and for identifying the areas in need of the greatest amount of work.
The thought of acquiring companies can be heady stuff, filled with excitement, adventure, and promise. Like the best adventures though, planning, preparation, and an awareness of the unseen dangers lurking around the bend are critical to your survival. Pack an assessment as part of your gear.
We can make a valuable contribution as a member of your due diligence team and would be happy to have a conversation about our capabilities. Give us a call before you make a decision. Our team has decades of experience servicing businesses in the Tampa and greater Florida area.