We have previously reported on human capital considerations in M&A transactions; in this post we consider how corporate culture affects a deal’s possibility of success. While qualitative considerations often sit on the backburner in the lead up to a deal, compatibility of corporate cultures can be an important factor in determining whether a merger or acquisition will be successful. According to a survey by Bain & Co., executives have indicated that the number one cause for a deal’s failure to achieve promised value is due to clashes in corporate culture.
Corporate culture is multifaceted and can include behavioural norms and characteristics, the operating model of the company, including the organization’s structure and governance mechanism, the method by which employees are incentivized and rewarded, and the workflow process.
A proper, in-depth assessment of the compatibility of the corporate cultures should be conducted before an M&A deal is finalized. Depending on the stage of the transaction, different methods can be used to assess the corporate culture of the two businesses. At early stages, public information may provide a general overview of a potential target’s business strategy and business model. At more advanced stages, methods for obtaining the required information can include interviews with management, customer and employee interviews and surveys regarding behaviours, attitudes, and priorities.
Depending on differences in corporate culture, a transaction can be structured in a way to take advantage of differences and maximize synergies. Perhaps complete assimilation in an acquisition is not the best approach; a better approach may be to allow the target company to operate independently. Each transaction will be unique, in some cases implementing structured strategies across both companies will drive growth; in other cases, structure may actually hinder growth by limiting the entrepreneurial spirit of one company.
While traditional considerations in an M&A deal are important, another factor companies need to consider when structuring a transaction is cultural compatibility. In some cases culture may trump strategy.
The author would like to thank Rayomond Dinshaw, articling student, for his assistance in preparing this legal update.
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