Well, it is official.....the definition of insanity really is doing the same thing over and over again      and expecting a different result. Although this may seem like a tired saying, the sad reality is that many, many situations continue to give it truth and merit. One of those is how Mergers and Acquisitions are handled.

We have been working with organizations who want to grow and the question that is often asked is 'do we grow organically or by acquisition' and the debate begins. If the decision lands on the side of acquiring a company then this is where the insanity tends to begin.

Why is it insanity? Well, of course, the first step is to try and determine who it is that you want to buy and why. This is where the money people start to get involved and many questions are asked about the amount that we want to spend on the acquisition, the value of whom we may want to buy, whether their numbers will warrant us buying them etc. Many hours will go into the 'due diligence' process which involves mostly looking at financial statements, sales numbers, market size, etc. Someone may ask about the key principal directors to assess whether or not we think they are 'competent.'

What about asking questions such as do our cultures align? do we share any core values? are our purposes aligned? How smooth or difficult might this marriage be?

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It is a very rare occurrence to hear companies pose these questions. Would you marry someone without having an idea of who they are, what they value and believe, etc? I am guessing that the answer is no. Yet, many companies go into a marriage of sorts without ever asking 'do we actually fit?'

We cannot underestimate the need to look at culture alignment between companies. If you are clear from the get-go as to what this acquisition is supposed to bring you and why you are going this route, then you now need to do some soul searching about what things may align and which will not with the other party. 

According to the McKinsey and Company report 'Perspectives on merger integration' culture clearly baffles most merger managers – which is probably the reason that virtually none of them use culture as a screening criterion. But few have had a tool for describing and analyzing carefully defined cultural characteristics for each company. 

It is known that the success rates for M&A's is dismal (study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%) and yet we seem to keep repeating same patterns and behaviours. So what is it that needs to change? Lots of theories are being posited as to the why these numbers are dismal some of which can be found in this HBR article The Big Idea: The New M&A Playbook.

The article states that there are generally two reasons for an acquisition:

The first, most common one is to boost your company’s current performance—to help you hold on to a premium position, on the one hand, or to cut costs, on the other. 

The second, less familiar reason to acquire a company is to reinvent your business model and thereby fundamentally redirect your company. Almost nobody understands how to identify the best targets to achieve that goal, how much to pay for them, and how or whether to integrate them. Yet they are the ones most likely to confound investors and pay off spectacularly.

If a company is going for a reinvention of a business model you must push this thinking by asking who are we in the first place? how do we show up in the world and what are we known for? How will we be able to assess if this company will actually help us drive our business model in the right direction (assuming we are clear on the direction that we want to head in)?

This step in your due diligence will reveal key data that can add important information to the GO/NO GO decision. I understand that it is easy to get trapped by the allure of what appears to be synergy savings that on paper always look good. The reality is that synergy savings are rarely seen and on the contrary often even actually end up costing more money than anticipated.

Although culture may not be easy to name and articulate there are strategies and assessments to use to help put words and to name what may otherwise feel elusive and vague. The process is not as daunting as it may seem. It begins with being able to facilitate dialogue between the parties to understand some deep-seated hallmarks of culture (e.g. espoused vs. lived values, behaviours and how they are reinforced and encouraged, how we measure performance, how we compensate and what we compensate for, etc). Another key conversation to have is 'what is our vision?' and 'what is our purpose?'

Why would you need to have these conversations? Company A is a company that defines its purpose as 'we exist in order to bring change to the world and we do so by bringing tools to our customers to empower them to be change makers'; Company B defines its purpose as being 'we exist to provide a tool that will always be reliable and available to our customers.' Neither is good or bad or one better than the other....they are just different.

How would these differences possibly show up in our operations and overall presence in the marketplace? For one, our raison d'être should be the north star that guides much of what we do. So, if we are deciding on where we should spend new money the answer will be driven by why we exist. If we look at how we speak to our target market our stories will be different. When looking at who and how we hire our processes will be different. One company may develop processes that are very customer centric where the other may build processes that are more network centric. Again, neither is good or bad just different. One will work to serve its purpose of being a company that helps customers to be change makers and the other serving its purpose of reliability and availability as a key driver.

Can you start to see how these two companies would need to come into a marriage with eyes wide open and fully aware of how they may compliment each other and also where they may struggle to live in harmony? It is not to say that they cannot co-exist and have a healthy and happy marriage yet it is not a given that it will be smooth sailing.

If we take this analogy and bring it into M&A's it is the same food for thought that we are suggesting. The success ratios remain dismal for successful integrations yet they do not need to. Even if you are not a culture expert you can put this on your radar and begin by asking some key questions:

      1. What is the vision of both companies and how do they align or diverge?

      2. What are the core values of each company? How do they align or diverge?

      3. What are the behaviours that we see and value within each company? How do they align or diverge?

      4. How can we co-create a new operating paradigm where we do not impose one set of values or beliefs over the other yet leverage the strengths of both?

If you are on a merger team or a business owner thinking about growing by acquisition and looking at beginning the courting process, stop the insanity and DO NOTunderestimate the need to add culture to your due diligence.


Caroline Samne

Senior Partner - The Pillars

This blog post was originally published on The Pillars blog page available via their mobile app. You can read the original post here: 

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