Place culture upstream of M&A transactions to accelerate the value creation potential of the transaction.
Understanding the cultural impact in M&A transactions
If there is one area where corporate culture is the talk of the town, it is in the field of mergers and acquisitions. The reason? We are interested in the corporate culture when it makes us lose money, even a lot of money….
70% of business transformation plans and 50% of acquisitions worldwide do not create value because they underestimate the cultural dimensions.
David Tournadre, HR Director of Thales
Numerous studies have been echoing for some time the impact of culture on M&A deal failures. According to Mercer’s survey on M&A failure factors, cultural differences are the main obstacle in 85% of cases. In fact, more than 4 out of 10 deals are abandoned or delayed due to cultural issues.
M&A operations are framed by numerous expertises, evaluations and diagnoses. Nevertheless, the human aspects and more specifically the cultural aspects are often the great forgotten risk indicators or witnesses of a future success.
However, tools for cultural analysis and evaluation do exist. Methods that are often complementary allow for an evaluation of risk areas and levers of convergence.
Culture, a new asset?
Investing in the intangible and human capital that is culture is rarely a matter of course for an Executive Committee. Generally speaking, this investment is seen as an expense and not as an asset. However, with certain tools such as the Barrett Center’s “Cultural Assessment”, we can obtain “Culture Score” and the evaluation of the organization’s cultural entropy rate. This entropy rate makes it possible to evaluate, among other things, the revenue growth over 3 years as well as the financial cost of a corporate culture with limiting values. In this case, the culture asset could meet the two conditions that would allow it to appear on the balance sheet: the generation of future cash flows and the reliability of the value (thanks to the benchmark performed by the Barrett Center).
Defining the culture of an organization
The culture of an organization is defined by the “values lived” in daily interactions by leaders, executives, managers and all employees.
“Two companies can follow the same strategy, have the same structures, use the same management techniques, they still have their own culture.“
Identified as the “Secret sauce” of the organization, the culture of a company is not something stable, defined by posted values. It is in motion, just like the individuals who make it up. Inspired by the values displayed, often driven by the leader, and fortified by behaviors, rituals, experiences and symbols specific to the company’s uniqueness.
As the management culture reflects the institutional legacy of past and present leaders. The company’s structure reflects its culture and values. This is why the analysis of the organization’s culture and values involves the analysis of its structures, procedures and compensation system. All these elements constitute the codified or “constitutive” values of the organization.
Performing a cultural due diligence
Cultural diagnostic tools allow to map, measure and monitor the values of an organization before and after operations.
They allow the results to be used to decrease cultural entropy and increase the level of alignment of the culture with the strategy, thus decreasing the failure rate of operations and increasing the performance of the new structure.
Main phases of the operation
1- Alignment of human & business issues of the operation
- Include the intangible and human aspects of the operation by setting up a dedicated team.
- Understand which means of communication will be the most effective, to establish a harmonized vision.
1 – Definition of the material and immaterial objectives of the operation
2 – Non-financial risk assessment.
3 – Definition of the objectives of the operation in terms of : “Process, People and Mission- Purpose”.
4 – Training of the “Cultural Due Diligence” project team
2 – Cultural diagnosis
- Identification of cross-cultural gaps in the due diligence phase as well as the cultural entropy of organizations.
- Define the main characteristics of the two organizational cultures. (Individual, relational, organizational and societal values)
- To define the values of convergence and the levers to consider the new “Desired Culture” most appropriate for the future from a strategic point of view.
- Consolidate the structure of the new organization by declining the values of the “Desired Culture” in organizational and management model.
1 – Realization of a diagnostic report parameterized according to the specificities of the organizations and the nature of the envisaged operation.
2 – Identification of alignment factors, points of vigilance and transformation levers.
3 – Edition of a report including a strategic action plan according to the following themes: Process, People, Mission -Finality.
3 – Consolidation
“From Business Plan to Cultural Plan: Implementing the Strategic Plan towards the “Desired Culture
Objectives: Accompany interim managers in the post-acquisition period in the implementation of a common culture in line with the strategy.
1 – Setting up an inter-organizational and transversal project team
2 – Training of leaders & workshops to co-create the new cultural identity and associated values.
3- Implementation of the communication plan with the objective of involving the teams of the new organization.
Involvement in the consolidation phase is the guarantee of the success of the investments made.
Managers would benefit from investing in tools that allow them to make intangible elements such as culture tangible in order to minimize the risks of M&A operations. Indeed, many transactions have ended in abject failure due to an underestimation of the human and cultural aspects.
The resources invested in “Cultural Due Diligence” are negligible when it comes to ensuring the viability of one’s value creation operation.
“Cultural Capital is the new frontier of competitive advantage”; for those who have not yet understood, we are entering the Era of Intangible Assets and the human being remains at the heart of successful transactions.
Cultural capital can be identified through cultural due diligence in our M&A transactions. It includes a “Cultural Score” which measures the health and strength of a company’s culture. A Cultural Entropy ® report as well as the set of key values of the current and desired organization.
The Actoria Group, strategic partner of SMEs, offers innovative and pioneering tools to managers in the field of intangible capital valuation and cultural due diligence.