Embedding culture at the forefront of M&A transactions accelerates the potential for value creation.
Unpacking the Cultural Impact in M&A Transactions
Corporate culture becomes a focal point in the realm of mergers and acquisitions because it can significantly affect financial outcomes.
70% of business transformation plans and 50% of global acquisitions fail to create value due to an underestimation of cultural factors.
David Tournadre, HR Director of Thales
Various studies highlight the substantial impact of culture on M&A deal failures. Mercer’s survey on M&A failure factors pinpoints cultural differences as the main hurdle in 85% of cases. Moreover, more than 40% of deals are delayed or abandoned due to cultural issues.
Although M&A transactions are guided by numerous evaluations and expert consultations, the human and cultural aspects, which can be key risk indicators or predictors of future success, are often overlooked. However, reliable tools and methods for cultural analysis and evaluation are available, helping to identify risk areas and levers of convergence.
Culture: A New Asset?
For most Executive Committees, investing in the intangible and human capital that is culture is not instinctive. Generally, such investment is viewed as an expense rather than an asset. However, tools like the Barrett Center’s “Cultural Assessment” provide a “Culture Score” and an evaluation of the organization’s cultural entropy rate. This entropy rate allows the assessment of revenue growth over three years and the financial cost of a corporate culture with limiting values. Thus, culture could meet the criteria to be considered as an asset on the balance sheet: the generation of future cash flows and the reliability of its value (bolstered by the benchmark performed by the Barrett Center).
Defining an Organization’s Culture
An organization’s culture is defined by the “lived values” manifested in daily interactions among leaders, executives, managers, and employees.
“Two companies can follow the same strategy, have the same structures, use the same management techniques, but they will still have unique cultures.”
Eric Delavalée
Often dubbed as the “Secret Sauce” of an organization, a company’s culture is dynamic, just like the individuals who constitute it. It is inspired by displayed values, driven by the leader, and solidified by behaviors, rituals, experiences, and symbols that are unique to the company.
The management culture reflects the legacy of past and present leaders. Likewise, the company’s structure mirrors its culture and values. Therefore, analyzing the culture and values of an organization requires studying its structures, procedures, and compensation system. All these elements constitute the codified or “constitutive” values of the organization.
Conducting Cultural Due Diligence
Cultural diagnostic tools help to map, measure, and monitor an organization’s values before and after operations. They can be utilized to decrease cultural entropy and increase the alignment of culture with strategy, thus reducing the failure rate of operations and enhancing the performance of the new structure.
Main phases of the operation
1- Aligning Human & Business Issues of the Operation
Objectives:
- Integrate the intangible and human aspects of the operation by assembling a dedicated team.
- Determine the most effective communication methods to establish a unified vision.
Steps:
- Definition of tangible and intangible objectives of the operation
- Assessment of non-financial risks
- Definition of operation’s objectives in terms of “Process, People and Mission-Purpose”
- Training of the “Cultural Due Diligence” project team
2 – Cultural Diagnosis
Objectives:
- Identify cross-cultural gaps during the due diligence phase and the cultural entropy of organizations.
- Define the primary characteristics of the two organizational cultures (individual, relational, organizational, and societal values).
- Identify values of convergence and levers to envisage the new “Desired Culture” most appropriate for the future from a strategic standpoint.
- Strengthen the structure of the new organization by implementing the values of the “Desired Culture” in the organizational and management model.
Steps:
- Creation of a diagnostic report, customized according to the specifics of the organizations and the nature of the proposed operation.
- Identification of alignment factors, points of vigilance, and transformation levers.
- Publication of a report including a strategic action plan based on the following themes: Process, People, Mission-Purpose.
3 – Consolidation
“From Business Plan to Cultural Plan”: Implementing the Strategic Plan towards the “Desired Culture”
Objectives: Support interim managers in the post-acquisition period to establish a common culture in alignment with the strategy.
Steps:
- Formation of an inter-organizational and cross-functional project team
- Training of leaders & workshops to co-create the new cultural identity and associated values.
- Implementation of the communication plan aiming to involve the teams of the new organization.
Participation in the consolidation phase is a guarantee of the success of investments made.
In Summary
Managers would benefit from investing in tools that make intangible elements like culture tangible, in order to minimize the risks of M&A operations. Indeed, many transactions have ended in failure due to underestimation of human and cultural aspects.
The resources devoted to “Cultural Due Diligence” are negligible when it comes to securing the viability of a value creation operation.
“Cultural Capital is the new frontier of competitive advantage”; for those who have not yet grasped it, we are entering the Era of Intangible Assets with the human element remaining central to successful transactions.
Cultural capital can be identified through cultural due diligence in our M&A transactions. It involves a “Cultural Score” which measures the vitality and robustness of a company’s culture. A Cultural Entropy® report, along with the set of key values of the current and desired organization, is also included.
The Actoria Group, as a strategic partner of SMEs, provides innovative and pioneering tools to managers in the field of intangible capital valuation and cultural due diligence.
Isabelle Bonnal
Actoria