Blog: Don't ignore cultural due diligence in M&A

Culture

Don't ignore cultural due diligence in M&A

Most M&As fall through due to sloppy integration of different company cultures, something that is ignored by most firms
Don't ignore cultural due diligence in M&A

In this fast moving corporate world, where bigger is better, organizations are constantly on the lookout to acquire other companies in order to consolidate their position in the marketplace. Executives involved in mergers & acquisitions have to decide faster in order to beat the competition and speed becomes the essence of M&As. Every M&A is preceded by a due diligence process – whether it is a detailed one or a quick one depends upon the company. Most M&As fall through due to sloppy integration of different company cultures, something that is ignored by most companies.

Detailed diligence requires a huge commitment of time, energy and resources. It is possible only if the target company allows the team from acquiring firm the physical access to talk to employees, conduct surveys or read and analyze organizational documents.

Rarely, the target entity provides “full access” to the team from the acquiring organization. With partial access, the acquiring organization may not be able to do a detailed due dilligence. The choice is further constrained by how quickly one has to finish the due diligence. Depending on the extent of access, the acquiring organization may rely on one of or multiple of the following approaches:

  1. SEARCH for information in the public domain
  2. OBSERVE behaviour of employees
  3. ASK employees how they feel and think about the way organization does things
  4. READ and analyze internal documents

 

The team from acquiring organization opts for one of the sources depending on two criteria: What kind of access the target organization provides and how much time the team has. Mostly, target companies give partial access to its premises and internal documents, which are considered safe and less sensitive. Acquiring organization relies mostly on secondary sources, consultants, recruiters, ex-employees to gather cultural information on the target organization.

Searching information available in the public domain requires no consent from the target organization and takes little time. It is the least intrusive approach to collect cultural data, whereas observing behaviour of employees at the workplace requires some sort of consent from the target organization and time. The other areas that will require consent and cooperation of the target organization are: Listening to employees through interviews, informal or formal discussions and focus group discussions; reading and analysing internal documents of the organization.

SOLAR approach to cultural due diligence

Depending on the nature of access (no, partial or full) and the kind of time available with the team to carry out the due diligence, one may opt for one or more approaches to collect culture data. It would be one of the five options namely

  1. Searching secondary sources only (S);
  2. Searching secondary sources and observing how employees behave at workplace (S/O);
  3. Searching secondary sources, observing how employees behave at workplace and listening to employees through interviews and discussions (S/O/L);
  4. Searching secondary sources, observing how employees behave at workplace, listening to employees through interviews and discussions, and asking employees how do they feel and think about the way things are done in the organization (S/O/L/A) or
  5. Using all five sources including reading and analyzing organizational documents (S/O/L/A/R).

 

It may range in between “quick and dirty” (relying on secondary sources only) and comprehensive and detailed (relying on all possible sources- primary and secondary). The former would provide a “sense and feel” about the culture, whereas the detailed one would provide “hard” evidences of the nature of organizational culture.

The acquiring organization uses different sources based on its judgment and understanding with the target organization. This may vary from case to case. For instance, acquiring organizations may rely on S, O, and L for gathering cultural data, if the target organization has allowed for casual one on one conversation with some of the key employees, and not beyond that.

If the target organization allows the members of the acquiring organization to run a survey, the fourth source “A” may be included. This would become S/O/L/A, instead of S/O/L.

Whatever the case, organizations have to make sure that they do carry out cultural due diligence. There is many an M&A that has broken up because of not doing the homework properly.

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Topics: Culture, Leadership

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