Corporate culture issues can derail successful M&A integrations, says Mercer

27 September 2018 4 min. read

A recent report from HR consultancy Mercer finds that mismatched cultures can lead to non-optimal post-merger results, including failure to meet financial targets and delays in expected synergies. The firm recommends making cultural diligence a central part of the mergers and acquisitions process.

Making sure that company is financially solid is an important part of the mergers and acquisitions process, but ensuring well-aligned corporate culture is a sometimes underemphasized, yet critical part of the M&A due diligence process. Indeed, HR consultancy Mercer argues that culture misalignment derails M&A operations at alarming rates in its recent survey “Mitigating Culture Risk to Drive Deal Value.”

The report surveyed more than 1,400 M&A professionals across 54 countries who had worked on over 4,000 deals in the past three years. According to the survey, 30% of transactions fail to ever meet financial targets due to culture issues, while 67% of respondents experienced synergy delays because of culture mismatch.

Culture, in short, is how businesses operate, and how they treat their employees and customers. It develops over time from the cumulative traits of the company’s people, and can encompass dress code, office setup, benefits, employee turnover, and client satisfaction.

The top culture components identified by the Mercer survey respondents include: ‘How leaders behave’ (61%), referring to the extent to which company leaders actually do what they say; ‘Governance’ (53%), which refers to the company’s structure, management roles, and what is tolerated; ‘Communication style’ (46%), which can be friendly, infrequent, top-down, etc.; and ‘Working environment’ (46%), which means the nature of the physical workspace as well as the overall feeling of the workplace, be it collegial or formal.Corporate culture issues can derail successful M&A integrations, says MercerAccording to Mercer, culture is one of the greatest determinants of post-merger integration and success, since it so centrally defines the business. It can also be more difficult to parse, as sellers remain in control of the deal process, share less information, and demand abbreviated diligence in a brutally competitive M&A market.

Culture mismatch is traditionally categorized as a non-financial risk, but the report relates that it has the ability to impart significant financial risk through productivity loss, customer disruption, talent flight, and delayed synergies. Mercer illustrates the risks through an example of a sales leader at a target organization, who currently has the autonomy to negotiate terms and close deals. She hears that the buyer has a more rigid process that requires multiple approvals.

The anxiety from the deal announcement causes the sales leader to lose productivity. She is not sure whether to push ahead on her leads and whether she can still make pricing decisions, leading to delay and a lost customer to competitors. Finally, the sales leader eventually leaves the company because she can’t sort out her role, and isn’t sure if she wants to work at a place with a less empowered role for the sales department.

The mismatched governance and decision making processes of the merger parties, in the sales team example, lead to productivity loss, customer disruption, and talent flight. Culture alignment matters, and should be a big part of the diligence process, according to Mercer.

If a company takes a disciplined approach to cultural diligence, they can uncover the difference between how organizations actually operate, rather than how leaders present the company during M&A talks (i.e. ‘How leaders behave’, the most-identified part of corporate culture). Uncovering the realities can materially impact sale price and synergy realization projections.

In one example, Mercer dug into whether a target firm actually had the ‘performance-driven culture’ it purported to have. When investigating the firm’s stated performance-pay principles vs its pay data history, Mercer found major discrepancies. Top performers were not awarded according to their higher rating, while bottom performers were not penalized accordingly. The target’s pay-for-performance culture, which was important to the potential buyer, turned out to be window dressing.

The report recommends that firms recognize the operational risks inherent in cultural misalignment, and insist on cultural diligence in the transaction process. Firms should likewise be willing to walk away from cultural ‘deal breakers,’ as they would from financial irregularities.

“If the global deal making community intends to drive economic value for shareholders in M&A transactions, our research is crystal clear; culture matters,” said Jeff Cox, Mercer’s Global M&A Transaction Services Leader. “When looking to transform the workforce for the future of a newly formed organization, simply ignoring culture is not an option.”