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Culture is the key to the success of M&A

For any companies that see mergers & acquisitions (M&A) on the horizon - and we can expect many in the coming months - having employees who don’t value or understand the culture of their employer is a sure road to failure.  

Recent reports indicate that 65% of deals are adversely affected by culture issues (source: PWC). That's bad news on its own, but in a landscape where 42% of the 2018-2019 deals worth over $100 million failed to add shareholder value (Source: Willis Towers Watson and Cass Business School), failing to have a strong culture is a potential disaster.  

What is culture anyway? 

Culture has been defined by some academics and management consultants as the set of values, behaviours and norms that a group of people have in common to better achieve their objectives and vision. It’s about more than that. Culture is in the corporate blood, it’s ‘the way we do things around here’. Instead of relying on guidelines and protocols, it’s about building a sense of how things are done that is led by an organisation’s people. This is important, not only because we should want our workplaces to be positive places for employees but because building a strong company culture will increase the value of your business. To put it in other words, “when people are financially invested, they want a return. When they are emotionally invested, they want to contribute” (Source: Start With Why).  

Herb Kelleher, the late CEO of Southwest Airlines, defined culture as ‘the glue that holds our organization together’. Words to live by, as Southwest Airlines enters its 44th year of consecutive profitability – albeit declined in 2020 – driven by a clear vision to become ‘the world’s most loved, most flown and most profitable airline’.  

 

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Do the clothes fit? 

Patagonia is one of the most commercially successful outdoor clothing companies in the world, driven by a strong culture and inspired people. As founder Yvon Chouinard put it “We can hardly continue to make the best outdoor clothing if we become primarily an ‘indoor’ culture. So, we seek out ‘dirtbags’ who feel more at home in a base camp or on the river than they do in the office. All the better if they have excellent qualifications for whatever job we hire them for, but we’ll often take a risk on an itinerant rock climber that we wouldn’t on a run-of-the-mill MBA.” (Source: Patagonia) 

Compare this with another successful outdoor clothing brand, North Face, with its mantra to “maintain an unwavering commitment to pushing the limits of innovation and design, so that you can push your limits outdoors. Never Stop Exploring.” (Source: North Face) More of a performance culture than a ‘dirtbag’ culture.  

Patagonia and North Face are both strong brands attracting a range of loyal customers. While they operate in the same sector and could, in theory, be ripe for M&A, how can they come together when the two cultures appear to be so incompatible? 

Symbiosis of brand and culture 

The answer partly relies on the individual brands and the experiences they bring to their customers. Brand and culture are symbiotic. A strong brand equals a strong culture and vice versa. In order to continually and consistently aim towards a north star, organisations must have both. Various recent studies show that brands with strong reputations deliver 30% higher shareholder return and much of this enhanced reputation is directly associated with higher levels of employee engagement who can help their companies grow profits 3 times faster than competitors (Source: Clutch).  

Numerous other studies have demonstrated the power of culture as a key driver of performance. A survey of CEOs and CFOs by the Bureau of Economic Research in the US found that 9 out of 10 believe that improving corporate culture would increase their company’s value, and nearly 80% ranked culture among the five most important factors driving their company’s valuation (Source: Glassdoor).  

Assessing the fit 

A recent McKinsey article on cultural integration noted that some 95 percent of executives describe cultural fit as critical to the success of integration. Yet 25% indicated that a lack of cultural cohesion and alignment as the primary reason integration efforts fail. (Source: McKinsey) 

Time and again cultural and brand alignment just isn’t a focus of the M&A diagnostic process. If this is addressed early enough, the chances of failure are dramatically reduced. A well proven assessment process will help eliminate anecdotes or beliefs and misperceptions that can easily arise and establish an objective set of criteria around which management and advisors can have conversations based on facts rather than solely the commercial attractions of the deal. 

This begs the question, if stronger brand and culture leadership is a critical component through M&A, why isn’t it embedded in every process? The answer is, unfortunately, a high rate of dismissiveness, despondency and scepticism; it is believed to be too difficult, or simply not important enough.  

Culture Shock 

Bringing organisations together often results in people having to operate in an entirely different cultural environment. Feelings of surprise, disorientation and confusion grow out of the difficulties in assimilating different cultures. Often this is combined with a negative reaction to certain aspects of the new or different culture. Understanding these differences and how to align the organisation around a shared vision is critical for success. Because, as we know, this is about people. Forcing change in integration processes will never result in successful alignment. And successful alignment comes down to people too. It is vital to bring the people with you and that’s what leadership is all about 

Leadership must lead 

There is no guaranteed formula for success but there are clearly defined considerations to take into account in order to increase the chances of it. The first of these is recognition of the importance of strong brand and cultural leadership through the M&A process. Viewed through the lenses of brand & cultural leadership, the steps that follow will be all the more compelling. 

Vision is vital and it must come from a unified leadership team that sets the ambition for the future. The keys to success lie in: 

  • Creating a compelling vision. The senior leadership team needs to communicate where the merger fits in with the business vision. 
  • Matching the pace of cultural change. Ensure it is in step with the integration process. 
  • Integrating talent as a matter of priority. If talented people feel undervalued or not engaged, they are more likely to leave a business quickly. 
  • Clear, consistent communications. Where there is a vacuum of information, rumour will soon fill the void. People are highly sensitised to the content of all communications during an M&A and they often interpret more from what is not said than what is said. They are adept at noticing mixed messages and incongruous leadership behaviours.  
  • Measuring the change. With recent advancements in technology, business practice, regulation and consumer behaviour, brand and culture are becoming more visible and measurable, more manageable, and consequently, more valuable. Technology helps the leadership team to assess, plan and act across all areas of the business. Crucially, the enhanced role of brand offers talented employees the purpose and passion they look for to help drive profit 
  • Build cultural unity. Ensure you build unity on three principles: Inspire, Enable and Empower”. It is important to inspire people so they are excited by the brand, enabling people gives them the tools to contribute to it, and empowering gives people the authority to take part. Of these three, empowerment is vital. If employees dont feel a sense of control and ownership, they are unlikely to feel that the merged entity and its brand identity is their company. 

Great brands need great brand champions 

The good news is, that companies with a strong culture are ahead of the game right now, because they will have already well-embedded habits and rituals that help unify employees, even when they are apart. The key is to continue to replicate these rituals and behaviours virtually - from moving work and social events online to dialling up internal communications and finding innovative ways to support customers in a meaningful way. 

The people inside your organisation and its cultural DNA ultimately shape the customer brand experience. They can influence the products or services that are offered to customers and how they are presented. They can establish a dialogue with customers that locks in loyalty or drives them to a competitor. They can help recruit the best quality talent or convince the elite to look elsewhere. 

Great brands need great brand champions, emotionally connected, driving change and leading others. Dont let an M&A fall at the first, very human, hurdle by overlooking this simple fact. 

Image source: The Drum