Cultural Due Diligence
Despite the penalties and consequences, too many CEO's ignore the key factors that can make or break an M&A deal. Arguably the most important factor is corporate culture and culture clashes. Yet, this factor is often overlooked or vaguely understood by executives resulting in long lasting penalties. It is not surprising to see that many of today's strategic deals have stumbled because of irreconcilable value and process differences within the merged company.
Cultural due diligence is the process by which an acquirer makes cultural assessments of both the target as well as themselves. It is an ongoing process starting at the point in time when targets are selected and ends well past the consummation of the deal. Since business culture is the sum of both tangible and intangible features, it becomes harder to evaluate than "hard" quantifiable data such as financials. Fortunately, there are some frameworks from which an acquirer can evaluate and quantify cultural differences among businesses.
Probably the most widely accepted cultural due diligence framework was developed by Rob Goffee and Gareth Jones in 1998. In this model, corporations can be placed on a grid which is divided into four quadrants. Each culture is measured in terms of sociability and solidarity. Organizations which exist in the same quadrant have the highest degree of cultural similarities while corporations existing in opposing quadrants are faced by the largest challenge. If the cultural divide is too large, CEO's are well advised to reconsider or minimize integration.
In practice, most cultural due diligence efforts involves five steps:
- Pre-acquisition screening.
- Post-announcement evaluation.
- Conflict, risk, opportunity and cost identification.
- Implementation of post-merger integration plan, and;
- Post-merger monitoring and validation.
During the first step, every possible source of information could be utilized including governmental documentations and filings, recruiters, former employees, and internet chat rooms to give the acquirer an idea of the target's culture. The second phase involves cross organizational teams assess both companies and place them on the grid. Team members should vary in age and gender as well as experience and functions. Thirdly, these teams should identify the risks and opportunities associated with a culture merge and devise action plans to counter unwanted results. In the forth stage the actual integration plan is being devised. The conclusions reached in step two and three will be used to structure the relationship between the two entities. Depending on the size of the cultural gap, the conclusion could be to completely merge the two business cultures, create a sub culture, eliminate one culture all together or leave the two corporate cultures completely intact and separated. The final step is to continuously monitor the cultural merge and take corrective actions if needed.
It is essential that management continue corporate cultural troubleshooting and validation years beyond the consummation of the deal or the cost can be substantial and even fatal. This holds particular true in the new eCommerce era where the business cultures of rapidly growing e-commerce businesses tend to be radically different from those of established corporations. Not understanding the impact of cultural differences in these situations will most surely result in disaster and company value erosion.
If you have any questions on the above material or want to know how KDS Capital can help you in your venture, feel free to call us at 602-490-0723 or toll free 800-880-0717.