High Stakes of Culture in M&A: Common Mistakes and the Silver Lining
In the world of mergers and acquisitions (M&A), culture is often overlooked, leading to disastrous consequences. Companies must navigate the intricacies of culture to successfully integrate and achieve their strategic objectives. This article discusses the common cultural mistakes made during M&A processes, their catastrophic consequences, and how a comprehensive framework can serve as a silver lining in the otherwise tumultuous M&A landscape.
The Perils of Ignoring Culture in M&A
Companies that underestimate the importance of culture in M&A often face a myriad of issues, including poor integration, employee disengagement, and even the collapse of the deal. These mistakes typically stem from:
- Underestimating culture: Many business leaders either dismiss culture as intangible or prioritize financial engineering over it, leading to poor integration and collaboration.
- Focusing on symptoms, not causes: Companies often attempt to address culture directly without addressing the underlying structures, practices, and rituals that drive it. As a result, in spite of all the relevant effort and intention, culture does not change. After a brief period of change, people fall back to their previously held beliefs and go back to the old ways of doing things.
- Misalignment with business objectives: M&A deals should be guided by a strategic rationale that takes into account the unique cultural aspects of the acquired company. Culture often gets handled in isolation and without the right link with a specific business objective, culture does not get the right attention. As culture is not easy to handle, without the right attention, it falls off the attention grid.
- Delegating responsibility for culture: Culture is the responsibility of the entire leadership team, not just HR. Delegating this critical aspect can result in insufficient attention and resources dedicated to cultural integration.
- Failing to engage experts: Not all people managers are experts in cultural integration. Involving the right experts in the process is essential for success.
The consequences of these mistakes can be catastrophic, leading to the loss of key talent, decreased morale, diminished productivity, and even the failure of the M&A deal.
The Changing Landscape of M&A
In the 21st century, M&A has shifted from asset-based to people and culture-centric deals. The rise of knowledge-based companies and the pursuit of strategic capabilities through acquisitions have made culture increasingly crucial. Moreover, the era of specialization has placed talent at the center of many M&A transactions, making the stakes even higher for companies navigating the complexities of culture.
Addressing the Roots of Culture
To effectively tackle culture in M&A, one must address the structures, practices, rituals, and artifacts that underlie values, beliefs, and behaviors. Only by dealing with these root causes can sustainable cultural change be achieved.
The Role of Culture in Acquiring Capabilities
Typically, companies pursue M&A to acquire four main types of capabilities:
- Consolidation Capabilities: Acquiring competitors to achieve cost synergies and stable operations.
- Market Capabilities: Acquiring customer-focused capabilities to address specific market needs.
- Innovation Capabilities: Pursuing startups and scale-ups to incorporate innovative solutions into their portfolios.
- Collaborative Functional Capabilities: Forming joint ventures or key supplier relationships to enhance either specific functional capabilities e.g. through business process outsourcing, market intelligence, legal support, or using your partner’s product or services in your solution and offering it as a new solution package.
Developing Capabilities Through Culture
Different capabilities require different cultural approaches. To enhance or create new capabilities, a new culture needs to be created to support the new capabilities. And you cannot create culture by trying to change beliefs and behaviors, you must address the underlying causes. By changing the underlying practices, structures and management systems, it is possible to develop the necessary cultures to support each capability type. Addressing culture effectively in M&A is essential for the success of the deal and the combined entity’s future growth.
Silver Lining: PROMISE Framework
Amidst the challenges of M&A, a comprehensive framework called PROMISE emerges as a solution for effectively addressing culture in M&A deals. By focusing on the underlying structures and practices that drive values, beliefs, and behaviors, this framework enables companies to facilitate integration and achieve desired strategic capabilities.
The PROMISE framework encompasses the following aspects:
- People and Professional Development (P): When a smaller company is acquired, employees may need to adapt to the more formal corporate culture of the acquiring company. Providing opportunities for professional development can help bridge the gap between the two environments.
- Rewards and Recognition (R): Different companies have varying approaches to rewards and recognition. For example, large companies may offer rewards sparsely, while startups or scale-ups might emphasize employee engagement through more frequent recognition.
- Organization Hierarchy and Leadership Styles (O): Acquired companies often need to adapt to the hierarchy and leadership styles of the acquiring company. Similarly, employees of acquiring company may not understand or respect the level of informality that exists in the acquiring company. These differences can easily flare up and create massive issues. On top of that, leadership styles can greatly influence how organizational culture evolves.
- Management System (M): The management system encompasses policies, procedures, communication governance, and performance measurements. Aligning these aspects is crucial for successful integration.
- Innovation and Critical Thinking (I): Encourage employees to critically think about processes and foster a culture of continuous learning, improvement, and innovation.
- Strategic Future (S): Consider the strategic future of the combined organization and the necessary culture to support the desired capabilities.
- Employee Experience (E): Focus on employee engagement, career development opportunities, working conditions, trust, transparency, and integrity to create a positive employee experience.
The world of M&A is fraught with challenges, and the stakes have never been higher for companies navigating the complexities of culture. Ignoring or underestimating the importance of culture can lead to catastrophic consequences, such as poor integration, loss of key talent, and even deal failure. However, the PROMISE framework emerges as a silver lining, offering a comprehensive approach to address cultural issues effectively.
By adopting the PROMISE framework, companies can ensure a smoother integration process that accounts for the unique cultural aspects of both organizations. This not only supports the strategic objectives of the M&A deal but also fosters a positive employee experience, which is vital for long-term success. By recognizing the importance of culture in M&A and embracing the PROMISE framework, businesses can successfully navigate cultural integration challenges and pave the way for a prosperous future for the combined organization.