Jay Friedman is a partner and the president of Goodway group.
It looks good on paper. Your M&A deal is OK. readiness. To check. Skills. To check. Finance. To check. But one invisible factor can still derail it. Culture, or if Gallup says:, “the way we do things here”, that’s what you need to evaluate above all else. Are the two companies you want to bring together a real match?
Not being a cultural fit may seem like a minor hiccup, something you can easily iron out once the deal is made, but it can have disastrous consequences. In reality, Harvard Business Review says 70-90% of mergers and acquisitions fail, and even big brands that make sense aren’t immune.
John Mackey, CEO of Whole Foods, said it “Love at first sightwhen Amazon took over Whole Foods, but the love didn’t last. What put the two companies at odds? Much of the reported heartbreak came down to having incompatible cultures. Where Whole Foods was more relaxed and collaborative, embracing new ideas, Amazon was rigid, precise and determined to follow the rules, leading to a spectacular culture clash.
How to determine cultural compatibility?
If culture is the criterion for a viable acquisition, how do you determine cultural alignment? Before Goodway Group was acquired tuff, a female-owned growth marketing company, we did our due diligence to determine how well the two organizations’ structure, leadership style, priorities and beliefs matched. It was the only way we could be sure that our cultures were compatible—that we were prepared for long-term success. Here are a few key elements to consider when determining cultural compatibility:
At the outset, it is critical to determine whether the acquiring and acquired companies have similar practices. Are you both completely distant? Hybrid? Only personal? Understanding a company’s work style goes a long way in determining compatibility. For example, suppose both companies are remote. In that case, there is a shared view that great work can happen anywhere, even if employees are geographically dispersed across the US and work from many different locations.
Without having to worry about where the work will be done, the leadership teams can focus on how the work will be done. Adhering to our remote working example, this includes aligning with remote working best practices and identifying the processes and tools that can be used to support team building, communication and employee recognition. Companies can also consider all potential and existing employee touchpoints to intentionally create an environment that people want and want to be in.
Leadership style can be an important determinant of the success of an acquisition. Why? Leaders play a vital role in motivating and inspiring employees and as such can make or break an M&A deal. A team that thrives under leaders who give them flexibility and autonomy will be stifled by leaders who take a more rigid approach. In your conversations with prospects, you want to assess the company’s approach to leadership and determine if it matches your style or if it can be used to add value to your business.
For example, if your company has an infinity-loop leadership approach – making sure employees are well taken care of so that they take care of customers – then a company that relies on servant leadership will easily blend in with your employees. Likewise, leaders who trust, support and motivate their employees to do their best work while encouraging them to strive and stretch to achieve their professional and personal goals are an invaluable asset to any organization.
In addition to leadership, a clear understanding of a company’s priorities is required to make an informed decision when considering an acquisition. Is the leadership team more concerned with profit or with people? Is work-life balance low on the list of concerns? These questions will give you a complete picture of how a company is run and what morale may look like internally.
Here’s an example: When the world turned upside down as a result of the pandemic, some employers went way beyond expectations by recognizing how employees felt and helping with their well-being – by offering a wide range of resources, including counseling. This gave a rare look at what really matters to businesses, but it also showed in practice how important it is to understand the priorities of a future company before signing an agreement.
Our core beliefs determine our attitude and dictate all interactions between team members and interactions on the customer side. Determining whether each company’s values are complementary is critical to ensuring that teams can build successful working relationships. Complementary is the keyword here. The businesses you acquire don’t have to be a mirror image of your business, but they need to integrate seamlessly with each other. For example, one company may value transparency, while another may value frankness. While not the same, these core beliefs are similar enough to easily combine in a way that ultimately improves internal relationships and with customers.
To increase the chances of your M&A deal succeeding, you need to look beyond the end result. Look at the people in both organizations, how they work together and how they are managed. Examine their priorities, attitudes and behaviors, and what they stand for and believe in. See how flexible and customizable they are. If both companies are a cultural match, your M&A deal is more likely to be a good one, both on paper and in real life.