Before a Merger, Consider Company Cultures Along with Financials
A normal acquisition process seeks to ensure
something basic: a strategic rationale for a deal, supported by a thoughtful
selection process, with known risks identified by a short, intense due
diligence.
But what isn’t practiced, and too often ignored, is the process of
asking: “What are the likely challenges we will face as we integrate these two
complex companies over the next 1-2 years?”
My
experience, after being involved in considerable numbers of such transactions over
the past decade, is that in the majority of cases little due diligence is done
beyond the financials to investigate the challenges of having two organizations
become one.
Management is usually shocked to find the degree of differences
that exist between their two, soon to be merged, organizations — and too few
actively
consider these integration challenges before the deal.
What
this requires is doing some integration due diligence as part of the M&A
process. You can define this type of due diligence with a few key steps:
1. Assessing the institutional strengths of the
acquired company and comparing and contrasting these to the acquiring company
to map where there are welcomed overlaps and where there are redundancies.
2. Understanding the cultural dynamics of the acquired
organization, including how they operate, the manner in which they develop
their talent, how are they motivated to succeed, and their executive management
decision making style.
3. Doing a stakeholder analysis to understand the
additional challenges from political, regulatory, union, and community sources
to be expected in the wake of a merger.
While
this may sound like common sense, the reasons for ignoring this due diligence
step are numerous. CEOs often fear that such analyses require involving too
many people, when they have an understandable desire to complete deal
negotiations with only a very few trusted lieutenants and advisors involved —
and to conduct them in secrecy so as not to alert external markets. Investment
bankers resist having to consider integration challenges lest the prospects for
a deal be undermined by the realization of the all too numerous challenges that
lie beyond their valuation analyses.
Plus,
unlike financial due diligence, which can be done through data rooms and
shared financials, integration due diligence requires an examination of
another’s institutional capabilities, operating cultures, and management talent
— all of which are difficult and time consuming to investigate when in the
midst of an intense deal negotiation.
The
result of this lack of due diligence is played out all too publicly when deals
suddenly fall apart. For example, in 2014, mining giants Barrick and Newmont
had to unwind their planned transaction after only nine months due to what published reports stated were “clashes
over leadership and governance.” Barrick also claimed that the Newmont wanted
to “renegotiate foundational organizational elements of the deal.” It was reported that among the causes of the
breakup were disagreements about headquarters location, management roles, and
other strategic and structural disagreements.
Publicis and Omincom had to unwind their $35 plus billion
transaction after they were unable to agree on who would run
the combined organization and whose operating strategy would be adopted in
a newly merged agency. Now both agencies have to go back their suite of clients
and explain why the value of the merger they had been so recently touting
wasn’t needed any longer.
Office Depot and OfficeMax announced their intended
merger deal without an agreement of which (if either) CEO would run the combined retailer,
without an agreement on retail brand strategy, and without a chosen corporate
headquarters location.
Each
of these deals might have greater potential for success with due diligence,
before the deal, on the post-merger integration challenges. This kind of due
diligence, even if CEOs can get past all the reasons above why not to do it, is
hard and unglamorous work: It requires CEOs to look beyond the financials and
the strategic rationale and see the stark challenges the integration will
require.
Such
a cultural due diligence can be done by talking to past members of the target
organization, interviewing common suppliers, customers, industry observers, and
analysts. It is an “outside-in” analysis that can be undertaken in parallel to
all the financial negotiations.
Those
who conduct integration due diligences have two major advantages. First, they
can build on their knowledge of their own strengths as the acquiring entity.
Knowing these strengths means the acquirer can better focus their integration
planning, adding only at the margin from the acquired entity into those areas
of known strengths. In turn, this means one can focus the integration
activities on areas of their weakness.
Acquiring management will know at the
outset what they need to receive from the acquired entity to strengthen and
build a more collective competitive operation.
Second,
the whole integration plan is more easily designed, easier to execute, and can
be implemented at a faster pace. It’s easier to make decisions about
retaining crucial staff, forming the new leadership structure, making changes
to management systems, and segregating the integration from the base
business to protect revenues during this vulnerable period. CEOs and their
senior teams can be more confident and more directive in their communications
after the deal announcement right up to legal close.
A
prerequisite for any transaction is financial due diligence. But boards and
CEOs need to make the integration due diligence as much of a core part of their
pre-deal effort. For those that do, the benefit is faster paced, more focused
integration planning efforts. Those that don’t risk adding to the enormous
probability of failure that already surround such transactions.
David Fubini is Director Emeritus of
McKinsey & Company, Inc., where he founded and led the firm’s global
practice supporting mergers and integrations, and currently serves as senior
lecturer at Harvard Business School.
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