Culture Due Diligence in M&A


Culture Due Diligence in M&A

The cookbook for due diligence during an M&A transaction is pretty well known.  The seller is checking facts that the target provided in the sale memorandum document, checking to see if the data points hold true on financials, customers, market and talent.  And then, based on this due diligence, the price could go up or down, and the synergy case associated with the acquisition could get better or worse.  KPMG completed a study last year that estimated that over 80% of mergers fail.  And if this is true then what is going wrong with the due diligence process?

I think that the lack of strong HR leadership and involvement in the M&A transactions could be one of the reasons.  This is not true for all organisations and all deals, but my experience has shown that HR tends to get involved in areas such as the ease (or difficulty) of changing employment contracts, how easy (or not) is it to make people redundant and potentially pay and reward schemes.  For some transactions, they might be involved in talent assessment or even creating “golden handcuff” schemes to retain the critical staff within the acquired company.  But the role of HR in M&A is pretty much around operational areas.  I don’t know of any HR leader that has been asked: “based on the human capital, talent, the culture of this company do you think we should buy?” Or even “if we do buy this company what needs to be done from a people and talent perspective to help ensure a successful acquisition”?

The HR leader on the “buy side” of the deal I believe needs to own the due diligence around cultural fit.  Basically creating a point of view in areas such as: -

How aligned are the mission, vision and values?
 What is the delegation and authority style in the organisation – command and control?  Delegate with authority? Every decision goes to the boss?
 Data drive or gut driven decision making?
How innovative, emotional, due date driven is the culture?

And one of the most critical questions to answer: -

If we buy them what work has to be done to get to the level of cultural alignment we want to achieve out of the acquisition?”  

Not every acquisition needs to be fully culturally integrated into the parent company.  The best strategy could be to keep the acquired company wholly independent of the parent and therefore there is no need for cultural integration. But if the plan is to integrate the acquired organisation what is the strategy for cultural?  There are choices: -

The “parent” strategically wants the new company to align with their culture
    The buyer intends to use the culture of the company acquired as a catalyst for change inside the company – sort of a reverse cultural takeover
    There is a desire to take the best parts of both cultures and to create a new merged culture

It is crucial that the leadership of the company doing the buying knows what strategy they want to have regarding culture.  And the role of HR is to articulate how that strategy could be accomplished and what that means to the overall business case for the acquisition.

At a recent INSEAD event, one of the partners from EurAsia Competence AG presented their research on cultural due diligence, and how to build a post-acquisition culture integration programme.  While the steps are not that unique from any other transformation program what was unique was the concept of thinking about what has to get done, in respect to culture, before the transaction is completed.  This way the organisation knows the cost and effort required to achieve the desired outcome.  The steps outlined were: -

Identify individual cultures
  Identify the similarities and difference.  How significant are the gaps?
    Create awareness of the differences and gaps
  Design a roadmap to bridge the gaps
   Align teams to common goals and implementations
    Measure progress

Not unique but not that often thought through during an M&A transaction.  HR should take the lead in this area to first drive the strategy on what level of cultural integration the organisation wishes to achieve and then what is the programme to meet the agreed integration.  

Posted on : 2018/09/06