Beating the odds at M&A Success through Talent and Culture
More than ever, companies are turning to M&A success to fuel their growth ambitions. With relatively cheap costs of capital and markets ripe for consolidation, it is no surprise that the first half of 2018 is off to a strong start, with nearly $2.5 trillion in merger activity (ref. 1). As PwC reported in its 2017 M&A Integration survey, the largest proportion of deals being done are “transformational” in nature (ref. 2). Companies are not using acquisitions to rapidly expand existing capabilities; rather, they’re being used to quickly build strongholds in areas where they’ve never competed before—whether in new markets or product categories. In other words, deals are more complex and inherently riskier, as they come with more unknowns.
Yet, despite decades of research and analysis, organizations continue to suffer a poor track record of realizing the full ROI on their acquisition investments. Anywhere from 70 to 90% of acquisitions fail to achieve their financial performance objectives; 50% are known to destroy shareholder value (ref. 3-4). Quaker-Snapple, TimeWarner-AOL, Nokia-Microsoft represent just a few. A common theme in many these failures: surprises related to culture and talent.
Given increased velocity of M&A activity coupled with increased complexity and risk in that activity in driving growth, there are several things companies can do to increase the probability of achieving strategic M&A goals by taking a more intentional look at culture and talent issues surrounding the deals early on. These include the following.
5 Tips for M&A Success
Establish clear success criteria for acquired leadership talent. As part of due diligence, translate the business case for an acquisition target into leadership and capability requirements for new talent coming in through the deal. Specifically, deal teams should quickly understand the role acquired leaders will play in the broader business and how they must operate to be successful (i.e., is their domain expertise critical or redundant post-acquisition? Can the acquired leaders operate in significantly more complex environments? Can they pick up new cultural cues and flex their style to lead change in new settings?). Every interaction with leadership can serve as opportunities for assessment against these criteria. Because most focus at this stage is typically on the financials and market information, little if any attention is given to assessing capability requirements, until it becomes too late.
Don’t wait until after deals close to start assessing culture issues. From a seller’s vantage point, due diligence is purposely designed with a very tight time frame and with the fewest number of stakeholders involved to minimize the risk that something could arise to foil the deal, particularly if multiple suitors are involved. Historically, very little attention is paid to matters outside financial, product, and customer information. HR usually gets called in, if at all, after the deal is inked to execute stay bonus plans for key talent. Yet given that so many mergers fail as a result of poor culture fit, increased focus earlier on is key. As a result, some companies are getting more aggressive with what they ask for earlier on. For one of our clients, culture and talent information have become part of the initial data requests, including turnover data, engagement data, and stated leadership behaviors. Even without making these formal requests, there are simple things that can provide a better picture of culture issues, from asking “what’s it like to work here” to “what gets somebody promoted here?” to “how would you describe the leaders people look up to here?” Even casual observation of the work environment can reveal a lot. Open offices or closed? What is communicated on the walls? How is space used? Finally, publicly available information, including Glassdoor reviews and job openings can also provide important data points to understand cultural issues early on.
Establish a balanced scorecard for measuring acquisition success that includes talent and culture KPIs. Historically, companies focus predominantly on market share gains, EBITDA growth, cost synergies, and speed as their key metrics of success with usually a short-term (i.e., 6 month) focus in mind. Increasing the probability of success requires a more holistic view over a longer period of time. Following deal close, establish a scorecard that reflects the short-term and long-term objectives of the acquisition, incorporating financial, customer, operational, and talent KPIs. Measuring engagement, turnover and flight risk in key pools of talent is critical in the first year of integration. Longer term KPIs including talent movement across two sides of the acquisition demonstrate that true integration has occurred. Use this scorecard with the broader leadership team to communicate progress and drive alignment.
Look beyond stated values and mission/purpose statements to understand and address cultural tensions: Decision making, ways of working and organization structure say a lot more. Core values and mission statements are nice, but they don’t give the full picture of what’s going on culturally in an organization. It is important to dig deeper and find more behavioral markers of culture. Productivity predictably takes a hit following deal close, because despite similarity in values, how they make decisions, set priorities, and share information can be dramatically different. Particularly for acquisitions that are treated like mergers, it is critical to define and socialize a consistent set of go-forward ways of working that clarify decision making processes, reporting/information flows, and leadership expectations.
Don’t declare victory prematurely. Two words that should never be spoken at deal close: “Mission Accomplished.” Companies successful at acquisitions prepare for this journey through establishing a clear set of milestones that extend over at least a 1-year time frame, depending on the similarity of differences in the cultures. Establish a clear change and communications plan that encompasses all major phases of the M&A process, from (1) initial announcement; (2) deal close; (3) first 90-day integration and (4) first-year post close. Use the previously discussed balanced scorecard to demonstrate progress throughout the various phases. It is nearly impossible to over-communicate during these periods of significant change.
Companies are becoming increasingly rigorous in their approach to assessing and shaping their organization culture as well as assessing external talent, whether through rigorous executive assessments or more sophisticated pre-hire screens for key talent segments. However, there has been little progress in applying this same rigor to successful M&A ventures. Assessing talent, capability, and culture issues through the M&A processes increases the probability of successful execution post-close; Assessing them early on, however, can be even more advantageous—potentially affecting valuation or walking away from the deal before too many sunk costs arise.
Summit Leadership Partners advises Boards, Investors, CEOs, and senior leaders on strategically scaling business through talent and organization assessment and development, Executive team performance and coaching, leadership development, and organization effectiveness. Our consulting team has held top leadership roles in successful companies and have the academic credentials in addition to numerous other training, certifications and distinctions. This combination gives us insight into practical business applications. Connect with us to learn more about how we can help your business.
This post contributed by Todd Fryling.
1. Rana Forochar (July 8, 2018). Culture Clashes loom after rush of company mergers. Financial Times. https://www.ft.com/content/633dcfba-810a-11e8-bc55-50daf11b720d
2. PwC (2017). M&A Integration: Choreagraphing great performance. PwC’s 2017 M&A Integration Survey Report. https://www.pwc.com/us/en/deals/ma-integration-survey/pwc-ma-integration-survey-report-infographic.pdf
3. CBS Moneywatch (2012). Why Mergers Fail. https://www.cbsnews.com/news/why-mergers-fail/
4. HuffPost (2017) – Buyer Beware: Cultural Fit Can Make or Break a Deal. https://www.huffingtonpost.com/matt-gantz/buyer-beware-cultural-fit_b_893