Assessing Corporate Culture Compatibility in M&A

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Assessing Corporate Culture Compatibility in M&A

By Walter Rach - 03/27/2012

The food and beverage industry has historically been very active in terms of the number of mergers and acquisitions taking place and all signs point to this trend continuing into the future.

Whether the acquirer is a strategic or financial buyer, thorough due diligence is typically done on the prospective acquisition. Many factors are extensively analyzed, including product line and customer compatibility, supply chain similarities and financials such as past performance, growth projections and asset evaluation. An underperforming acquisition can be extremely harmful to the future performance of a company or private equity firm, so thorough due diligence is essential to heighten the chances that the transaction will be successful.

But what about the assessment of corporate culture compatibility of the buying and selling companies? Is this done with the same rigor as other aspects of due diligence? In my 25-plus years of executive search experience for the food and beverage industry and closely observing the “people” aspects of many of these M&A deals, my answer is, unfortunately, “not enough.”

David McNeff, a principal at Peak Consulting Group, a behavioral management consulting firm, agrees. He says that companies often speak of identifying and integrating executive cultural fits but, in the past, this talk “has been mostly lip service.”

McNeff is encouraged by seeing a greater commitment in more recent times on the part of financial or strategic acquirers towards understanding the importance of culture fit compatibility with executives. Firms like Peak Consulting can be brought in to assess the acquiring company’s culture, evaluate the new executives coming in against that assessment and then coach them to adapt to the new culture. He says that “if the CEO really buys into this idea, it can be very successful.” McNeff adds that if the CEO is too busy in leading the company to personally oversee the execution of this initiative, this responsibility must be given to a very influential company executive with a true “seat at the table” in order for it to completely succeed.

A member of the executive leadership team for a top food ingredient manufacturer says that the identification of the company culture post merger must be defined by senior management before deciding which executives fit best in the new organizational culture. This executive saw the company that he worked for be acquired twice within the span of a few years. He notes that, in each instance, the treatment of cultural due diligence and integration was unique, and furthermore it was handled differently at the various company international locations. Once the new organizational culture has been determined, the executive stressed the importance of having an honest assessment of the prospective leaders’ capability to adapt, change and ultimately operate productively in the new culture.

When conducting due diligence on potential key employees prior to an M&A deal, the acquirer must look beyond the pure numbers of an executive’s performance record and analyze them within the context of the environment in which those results were achieved. For example, how much of that executive’s success was dependent on the culture under which he or she operated: fast paced vs. consensus driven; short term results focused vs. a concentration on long term growth strategies; getting things done with small groups or even by yourself vs. working with large, specialized teams; risk acceptance vs. avoidance?

If it is determined that the cultural environment was a large contributor to an executive’s success, the next thing a company must evaluate is, can that executive be successful working in our culture? Avoid the general, wishful thinking, attitude that he or she “will be able to adjust to us.” Sometimes they can, but more often they can’t. McNeff adds that “most people intellectually ‘get it’, but emotionally, it’s hard” for them to adjust. After the initial three- to six-month “honeymoon period” ends, McNeff says, the reality of a poor culture fit sets in for the company, the executive or both and frustration, diminished performance or possibly even an exit from the company are the likely results.

Just as important as having companies incorporate cultural due diligence and integration practices at the time of acquisition is the need for executives to also thoroughly investigate the company they will be joining. Executives need to ask: Is this a company culture that I will be happy and productive working under? It has been my experience that oftentimes executives will allow an offer with a fancy-sounding title, expanded responsibilities or compensation to prevent them from truly identifying the culture of the organization that they will be joining. I am not surprised to hear from those same executives six months to a year post-acquisition to let me know that they are interested in exploring other career opportunities because “the fit is just not there” with the company that acquired them.

Granted, there are times when cultural fit due diligence during acquisition evaluation is simply not essential. This is typically true when the primary reasons for the acquisition are other than to obtain the prospective company’s leadership team (e.g. obtain a brand, remove a competitor from the market, distribution opportunities, etc.). The acquirer could also see potential in the prospective target company but views the management team as weak or in duplication to the acquirer’s existing structure, and therefore the team will not be acquired.

However, when the acquirer truly values members of the executive team and desires them to be important, long-term contributors to the new, combined entity, cultural-fit due diligence is absolutely essential. An independent assessment of the new executives’ willingness and ability to adapt to the new company culture is necessary. Those acquired leaders that join the new company should be then coached and mentored during the adjustment period and it is important that this initiative be treated as a priority and systematically reviewed.

Cultural fit due diligence and integration is, in many instances, just as important as any other aspect of M&A evaluation. The process must be thorough and honest and may require some time and expense but, in the long run, the results will be well worth it for both the organization and the executives.

Walter Rach is a managing director for Chicago-based Cook Associates with a particular focus on the food and beverage industry.