Culture audit in the time of M&A

This article first appeared in DNA India on October 19, 2017.

Mergers and acquisitions (M&A) are fraught with a great deal of excitement and risk, smiles and tears. Unfortunately, tears do tend to predominate since data shows that anywhere between 70-90% of all M&As fail and fail miserably at that. Corporate history is strewn with examples of companies that came together with stars in their eyes only to part ways under less happy circumstances.

There are obviously multiple reasons for M&As to actually bring down the worth of the companies including a lack of strategic direction, focus and the expected benefits from potential synergies not materialising. However, one of the main, albeit unspoken reasons for M&As to fail is culture mismatch between the merging organisations. The Society for Human Resource Management (SHRM) says that over 30% of all mergers fail due to cultural incompatibilities between merging organisations.

There have been some high profile mergers that have failed spectacularly for cultural reasons including Daimler/Chrysler, Sprint/Nextel and HP/Compact to name a few. The Daimler/Chrysler is a classic case and is taught in strategy courses in every B-school worth its name.

The Daimler/Chrysler merger failed precisely because of the cultural differences between the European and the American arms of the combined entity, their differences in processes and work ethic. A similar example in India would be the merge of Kingfisher Airlines and Air Deccan, which apart from the obvious strategic mismatch of merging together a high-end and a low-cost carrier, suffered from distinctly different working cultures.

Given the numerous examples of M&As failing because of cultural incompatibilities, very few business leaders look at running culture audits and cultural due diligence before an M&A. Only a little over a quarter (27%) of business leaders surveyed indicated that cultural compatibility was analysed before a merger.

What is even more damning is that only 13% of business leaders have indicated that engaging and integrating senior management as part of the M&A process was given high priority.

This makes absolutely no sense. It is imperative that business leaders make a pre-merger culture audit a high priority. A Deloitte report lists six different steps that leaders can take to ensure cultural due-diligence during and after M&As.

These include making culture a major component of the change management process, identifying someone who “owns” corporate culture and have them report to senior management, insisting that cultural work focuses on the tangible and measurable by having systems in place to measure different cultural aspects, identifying both the strengths and weaknesses of the two cultures, implementing a decision-making process unencumbered by cultural differences and finally building an employer brand that is easy to understand by all employees.

While this does not in itself guarantee the success of the M&A, I am willing to bet that it could bring down the probability of failure significantly. Isn’t that something to shoot for?

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