In conversation: Culture in M&A

Why assessing the cultural fit cannot be an afterthought in deal making

Among the many factors companies weigh when embarking on mergers and acquisitions, culture is one that often gets short shrift. Yet it often plays a crucial role in a deal’s success or failure. In this episode of the Inside the Strategy Room podcast, Becky Kaetzler, a leader in McKinsey’s M&A practice, explains how to conduct cultural due diligence to help ensure a deal fulfills its goals. This is an edited transcript. For more conversations on the strategy issues that matter, subscribe to the series on Apple Podcasts or Google Play.

Sean Brown: Let’s start with what might sound like an obvious question. Why should we care about culture in M&A?

Becky Kaetzler: If you look back 15 years or so, people were not very aware of culture’s role in M&A but in fact history is littered with examples of deals that either succeeded or failed primarily because of culture. Our data also shows that your likelihood of meeting cost and revenue synergy targets is substantially higher if you effectively manage culture during integration.

Sean Brown: Does the importance of culture vary with the type of deal?

Becky Kaetzler: Culture is important in all deal types but particularly when you bring two large groups of people together. Then, the potential friction would be much more visible. And you need to understand the culture of both companies. It is not enough to say, is the target company compatible with us? You need to understand it in a more nuanced way. What are their ways of working? What makes them successful? You need to do the same for the acquiring company. One-sided data is not so useful; you do a like-to-like comparison.

Based on that, you can then determine which elements you want to protect and nurture from either company. What is the deal rationale and which are the cultural elements [that] are most important to achieving it? If you are in a revenue-focused deal and don’t care about capturing cost synergies, for example, then trying to improve operational discipline may not be as important as the customer focus.

Sean Brown: You mentioned compatibility in cultures, but have you seen situations where opposites attract?

Becky Kaetzler: We often see companies come together that are complementary but different in their cultures, and this can be a good thing or a bad thing depending on how you manage it. Let’s go back to the operational discipline point: when you have one company that has strong discipline and another that wants it, that can be a great union. But if you don’t do it right, you could find the workforce of the company that has poor discipline getting frustrated with the one that has strong discipline, and vice versa.

Sean Brown: In that example, how did those cultural differences manifest themselves?

Becky Kaetzler: That was quite a difficult dynamic. The two groups would sit in the integration-planning meetings and one would measure everything—what percentage of data have you delivered to us? Where are you in your processes? In terms of progress, is it a red light or a green light or a yellow light? The other company’s team got frustrated and insulted that they were being measured and given traffic lights.

That was a situation where the acquirer wanted to maintain the innovation capabilities of the target company and use them to grow, but it also had high synergy targets. So the two companies put these issues on the table and agreed on a compromise set of metrics and a process that was palatable to both sides. Addressing these conflicts directly helped the teams work better together, as did relaxing some of the acquiring company’s metrics.

Sean Brown: Does the dynamic change with the respective size of each company?

Becky Kaetzler: In that situation, the two companies were of similar size, which made those differences much more critical to address because they would be felt everywhere in the organization. When a larger company is acquiring a smaller one to gain talent, skills, or capabilities, sometimes it may not want to touch that part of the target organization. Maybe the R&D group is incredibly innovative and you want to protect that area and ensure good interfaces to the rest of the company but you opt to integrate other functions where the culture is less important. You need to pick the areas you want to protect, because when it is big and small coming together, things can get a little lost.

Sean Brown: What are the typical assessments that one might use to analyze the cultures of two organizations?

Becky Kaetzler: We use our Organizational Health Index framework, which has a lot of data points. In merger situations, when there is time pressure, we tend to use interviews, surveys, and focus groups to assess the different management practices and ways of working. Comparing the practices each company uses to a higher or lower degree is much more important than concluding that they are good or bad, because if you say, “Our decision making is better than your decision making,” it can create a bad dynamic. Instead, you can say, “One of us is more top-down in our decision making and the other is more bottom-up. We are both successful, but this is a difference that we need to address.”

Sean Brown: If a company is thinking about embarking on a series of M&A deals, should it do a cultural self-assessment first?

Becky Kaetzler: We think that is the right thing to do. Our research shows that an acquirer with a healthy culture is far more successful in meeting its deal goals than an unhealthy acquirer. Usually a company does not have time to do a full assessment when it embarks on an acquisition, but even during the diligence process they can assess their own culture and compare it, outside in, with the target company’s. The comparison won’t be perfect because you will not have full access to the target company before the deal closes, but you can get a sense of the potential sources of friction or value from a cultural perspective. You can build a bit of a picture based on advanced analytics, publicly available data, LinkedIn, Glassdoor… those types of sources.

Sean Brown: Is a cultural assessment during M&A more important in some industries than others?

Becky Kaetzler: Companies acquiring targets where the talent and capabilities are a large driver of the deal’s value proposition tend to put more focus on understanding the culture. They want to understand how to retain the employees and signal that they care and are willing to integrate them into the new company rather than just assimilate them.

Sean Brown: When acquirers look at the culture of a potential target, are they looking at it with the same kind of lens as they might use to assess underutilized assets, for example?

Becky Kaetzler: We believe companies should apply the same rigor to thinking about culture as they do to the financials when they are planning a deal and doing the integration. But we don’t yet see this done to that level yet. When we asked the audience during an M&A conference how they rate the rigor with which they do cultural diligence, only 10 or 20 percent said they used a similar level that they apply to financials.

We believe companies should apply the same rigor to thinking about culture as they do to the financials when they are planning a deal and doing the integration.

Becky Kaetzler

Sean Brown: What, then, are the steps a company should take to do a proper cultural diligence?

Becky Kaetzler: The first step is to figure out the cultural elements most important to reaching that deal rationale. It could be, “This deal is all about cost efficiencies so we need rigorous financial management and operational discipline.” It could also be, “This acquisition is all about innovation. We are acquiring a company that has heavy-duty but totally different innovation processes and we need to bring it into our company without destroying it, and instead use it to spark better innovation in our R&D organization.” Those types of questions help prioritize what you are looking for.

When you start having interactions with the target company’s staff, you can pick up a lot about the culture based on short discussions. Do they often say they need to talk to the boss or are they empowered to make decisions? Are they mentioning customers more often than any other stakeholder? Are they mentioning shareholders or employees as their key stakeholders? What topics do they worry about most? Are they asking about the process for running the diligence or are they more focused on the opportunity? You can get some of those answers before having full access to the organization.

Sean Brown: As a firm, we talk about the importance of having an M&A blueprint—a rationale and approach to the M&A program. What role does culture play in such a blueprint?

Becky Kaetzler: Culture should be as much a part of the M&A blueprint as the financials, the operating model, anything else you go after with acquisitions. And the cultural assessment should start early. Do it in the diligence phase or at the start of integration planning. Don’t wait until after close because you will lose the opportunity to set your cultural priorities.

Download a full AI-generated transcript of the Inside the Strategy Room podcast episode here.

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