Company Culture in M&A

Company culture is often seen as a "soft" topic, when in fact, culture are the behavioral norms and artifacts existing within an organization.  Culture can actually have a huge impact on an organization's success. In some cases, company culture can add value by promoting creativity and productivity. In other cases, it can subtract value by leading to infighting and low morale.  

When investors are looking at potential acquisition targets, one of the things they should be paying attention to is the target's company culture, for example, how ready or capable is the business to address the challenges of further acquisition, accelerated organic growth or other aspects of the deal thesis. This will give them a better idea of how the target functions and whether or not it would be a good fit for their own company culture and investment strategy. ‍

What is company culture? ‍

A company's culture is its unique set of values, traditions, behaviors and ways of working that define how it functions and interacts with its employees, customers and other stakeholders. When two companies merge, their cultures will clash unless they are able to integrate them successfully. This can be a difficult task, and in some cases, it may not be possible at all.  

Company culture is important for every organization.  A strong company culture can help businesses attract and retain top talent, stay focused in times of crisis, and directly contributes to financial outcomes.  For example, employee turnover alone, which averaged 47.4% between 2017 and 2021 – cost U.S. companies over $1 trillion annually (The Atlantic, November 2022). The Great ‘Resignation’, ‘Reset’ or ‘Reinvention’ was fueled by issues of worker dissatisfaction, largely informed by issues of organizational culture.  Researchers estimate that employee turnover triggered by toxic work environments cost U.S. employers nearly $50 billion per year, even before the Great Resignation (MIT Sloan Review, 2022).

Most often these cultural concerns included leadership and management, pay equity, safety and security including psychological safety and mental health, personal and professional development, remote and hybrid work, and career advancement opportunities.  ‍

Why company culture is important in M&A ‍

A bad company culture merger can be disastrous for both the acquiring and the acquired company. In some cases, the merged company may struggle to integrate the two cultures successfully, leading to low morale and infighting. In other cases, the acquiring company may simply absorb the target company's culture, which may not be a good fit for them. Either way, a bad company culture merger can be extremely costly for both companies involved. ‍

What are the consequences of a bad company culture merger? ‍

If the target company's culture is dysfunctional, it could lead to disaster for the acquiring company. Just ask Theranos... company culture is one of the most important factors to consider when merging or acquiring another company.

In order for a merger or acquisition to be successful, both companies need to have similar (or at least compatible) company cultures.  Bringing two organizations together can be difficult in the best of circumstances.  When there are culture clashes the promise of true synergies and growth potential may never materialize.  In fact, conventional wisdom (and a lot of research) tells us that 70-90% of all deals fail to realize their targeted objectives, due in large part to issues of leadership and culture.

‍How to assess company culture during due diligence ‍

There are several ways to assess company culture during due diligence. One way is to look at the company's values and how they compare to your own company's values.  Beware!  You must look deeply at the language used to describe these values.  .Just the words or phrases alone are not enough to understand how these values are defined and more importantly, what acceptable and unacceptable behavior relative to these values looks like.

You can also look at the company's history and how it has dealt with adversity or celebrated success. Another important factor is communication: how open and honest are employees about their work? And finally, you can observe the company's behavior, both in times of crisis and in everyday situations. Company culture is one of the most important factors to consider when merging or acquiring another company.  

The most effective methods for understanding company culture are those focused on capturing and understanding stakeholders’ lived experiences – capturing their voices – What does a day-in-the-life of the employees look and feel like?  What stories do clients and customers share about the services or products from your intended acquisition target?  Are vendors and suppliers eager to negotiate terms or provide products or are they grumbling about aging accounts receivables and constantly renegotiated terms?  Can you find the raving fans?  If not, take heed.

How much of those annual $1 trillion losses could have been avoided if the right attention had been paid to culture.  And these costs are only related to actual turnover.  For every employee who left, there are more who are dissatisfied, or worse, disengaged costing trillions of dollars more in lost productivity, lack of innovation and creativity, neglect or deliberate acts of destruction.

Need help assessing culture during diligence, in a portfolio company or as a business leader?  Call on an expert, like the team at 29Bison – we’d be glad to help.