It may seem the obvious thing to do, but many organisations undertaking M&A do not effectively articulate and communicate the business case that underpins their decision to merge or acquire. Often this results in unexpected business and cultural outcomes.

Only by understanding overall business context and deal rationale is it possible to develop and execute a coherent culture strategy aligned to realizing value from a deal, as well as enabling future business outcomes for a combined organization.

Deal rationale

McKinsey takes a view that the strategic rationale for acquisitions that create value typically conform to one of the following

5 archetypes:

• Improve target company performance
• Consolidate to remove excess capacity from industry
• Accelerate market access for the target’s (or buyer’s) products
• Acquire skills or technologies faster, or at lower cost, than they can be built
• Pick winners early and help them develop their businesses.

Other (typically less successful) reasons for acquisitions include:

• Roll-ups
• Consolidating to improve competitive behavior
• Transformational mergers
• Buying a bargain.

Whatever the rationale, it is critical that it be translated from a vague concept like “growth” or “strategic positioning” into something more tangible so that it makes sense in the context of an organization’s overall business strategy.[1]

In a recent Harvard Business Review article[2], Roger Martin begins with the well worn premise that, “M&A is a mug’s game in which typically 70%–90% of acquisitions are abysmal failures”, and then asks why this is so. Roger’s hypothesis is surprisingly simple: organizations that focus on what they are going to get from an acquisition are less likely to realize expected benefits than those that focus on what they have to give.

How’s that for a mindset shift?!! Something for dealmakers everywhere to contemplate in a quiet moment.

He goes on to outline how an acquirer can improve its target’s competitiveness in four ways. Specifically, by:

• Being a smarter provider of growth capital
• Providing better managerial oversight
• Transferring valuable skills
• Sharing valuable capabilities.

Communicating context

Working through the deal rationale, in context, and communicating this clearly to the core deal team aligns expectations, drives decision criteria and establishes important messages right from the beginning.

Over time as the team expands to support the transaction, it is important to orient new members with full disclosure of deal rationale, strategy and structure so that the broader team remains aligned.

In practice, this same discipline that sets up extended deal teams to work effectively can become the basis for future market and employee communication, as and when a deal is announced.

So what about culture strategy?

Here are some other things you should ask about before developing a culture strategy to support an upcoming merger or acquisition:

• Deal structure (e.g. What is being purchased/sold – is this a share or asset deal?)
• Business design (e.g. How will the new business be set up? Customer impact? Changes to products, manufacturing, distribution, sales force, etc.? Head office location? Other locations? How will top executives be appointed? Potential impact on workforce?)
• Implementation strategy (e.g. Will businesses be run separately or be integrated? If integrated, which parts and at what pace?)
• Culture (e.g. How far are we from our own aspirational culture? What features about our own culture would we not want to lose? What might a partner bring to our culture that we need more of? What cultural attributes of a potential partner could stop this deal from going ahead?)

Whilst information may not be complete at this early stage, discovering what is known and making good assumptions about the rest will allow for a practical start.

In summary

Culture strategy is best determined as early as feasible and baked into the deal strategy. Early is important, mainly because key decisions that will drive employee behaviour, deal outcomes and (ultimately) business results are taken very early in the deal cycle. And these decisions often are made without appreciation of the long run impact.

Remember:

• Context is critical
• All decisions made in the heat of a deal contribute to create your new culture
• If you don’t actively create your culture, you will have one anyway!!
• Get on the front foot – it can become very expensive when culture is an afterthought.

Want to know more? Get in touch.

[1] Marc Goedhart, Tim Koller and David Wessels, “The five types of successful acquisitions”, McKinsey on Finance Number 36, Summer 2010.

[2] Roger L Martin, “M&A: The One Thing You Need to Get Right”, Harvard Business Review (pp.42–48), June 2016.