In the past few years, the amount of mergers and acquisitions have dramatically increased, raising the importance of the performance of corporate cultural due diligence. Financial, operational, and technical due diligence have become routine undertakings before companies consummate a merger or acquisition. A review of the literature indicates that cultural incompatibility causes the most problems in the necessary transitions of many mergers and acquisitions. Through cultural due diligence, the human side of these transactions can be given the same scrutiny that has traditionally been applied to the more quantitative assets of companies (Iri Solutions, 2004). The purpose of due diligence is to improve the chance that the merger or acquisition will be successful, achieved through intensive searching for facts, thorough analysis, and constant reevaluation. This paper will discuss the importance and strategies of corporate cultural due diligence, and offer suggestions for transactions of the future.
The term "merger" describes the highest form of strategic partnership, in which two or more legally independent organizations merge together to one organization, both legally and economically (Recklies, 2003). The post-merger integration process is a difficult and complex task, which comes with long lists of activities and tasks that have to be fulfilled within a short time. In this phase there are many opportunities to exploit and many decisions to take. The post-merger integration phase covers the operational part of the merger project. Often this phase decides if the merger becomes a success or failure (Recklies, 2003). Most companies see compatibility, in terms of customer base, regional coverage, product portfolio, as more important than a shared vision in mergers (See Chart # 1 for more details).
The most well-known factors of due diligence include questions and analyses of financial and legal aspects, however, these questions address only two thirds of the issue. The remaining and most significant third issue is cultural due diligence. Cultural due diligence is usually not performed, in spite of the fact that the research shows it to account for better than 50% of the failure of mergers and acquisitions (Iri Solutions, 2004). According to research, "culture clash," a term that now appears with almost daily frequency in the business press, is increasingly specified as why a merger or acquisition was called off at the eleventh hour, fell far short of its intended results, or resulted in serious and continuing operational problems (Iri Solutions, 2004). Typically, when a merger or acquisition fails, the shareholders are most likely to hold the corporate board and officers liable, on account of their failure to examine organizational culture as rigorously as the legal and financial aspects (See Chart # 2 for more details).
As a result, cultural due diligence has emerged as a recently new undertaking, with little or no historical background. Cultural due diligence is a process designed to assess the operational reality of organizations involved in a merger or acquisition. It efficiently identifies and evaluates the cultural characteristics of both organizations across twelve domains of organizational culture and highlights where significant culture clash will impact organizational effectiveness (Iri Solutions, 2004). This enables the organizations to complete their merger or acquisition more effectively and efficiently, and enhance the loyalty and commitment to the new organization on the part of all employees. With one in three mergers failing for cultural reasons, professional communicators have an opportunity to counteract the trend by offering a proactive diagnostic service (Steffen, 2000). For example, cultural questions include such questions as whether the company tolerates lunch-time drinking; does it have a dress-down Friday; are employees expected to take work home over the weekend? A review of the literature reveals that these are all examples of corporate expectations, which in turn generate powerful behavioral patterns.
Such behavioral patterns assist in defining the companys' day-to-day experience of the organization, and help define the experience of the organization which is in turn conveyed to customers. A company that does not object to its' employees having a lunch -- time drink and encourages employees to take out a customer for a drink in order to explore a new business opportunity may be acquired by an organization which does not encourage lunch-time drinking. This places the supervisor, employee and customer in a difficult position -- should the employee continue taking out the customer and risk the wrath of the new regime? This raises several questions, such as whether the supervisor is supporting the rules of the previous regime, or simply should the customer be informed that following the acquisition, which now makes the company a market leader on three continents, a Friday drink is no longer tolerable. Cultural due diligence performed before the merger or acquisition answers these questions and assists in determining whether the merger is a good fit for both companies.
Non-performance of cultural due diligence results in an extreme loss of value, as the top ten merger and acquisition deals in the world from January 1 to June 19, 2000 totaled a value of $529,024.1 million (Steffen, 2000). With a third of these to fail for cultural reasons, the amount is lowered by $174,577.95 million. Moreover, recent research suggests that 47% of executives in companies which are acquired will leave within a year of the acquisition, with the figure rising to 75% after three years (Steffen, 2000). Companies make acquisitions in search of access to markets, brands, technologies, products and people (Steffen, 2000). When the key people in the company acquired, with all their knowledge, expertise, influence and connections, are lost in the transaction, it is scarcely surprising that the transaction fails to achieve its projected value (Steffen, 2000). Research indicates that productivity in companies acquired is estimated to drop by as much as 50% as talent bleeds away and the survivors channel their energies into securing their position under the new management (Steffen, 2000).
Due diligence has been defined as the independent investigation of a company, its management team and its prospects for success by an investor before funding is provided (Steffen, 2000). Due diligence is a draining process, covering typically a ninety-day period during which the parties are still negotiating even as the lawyers and auditors are gathering their information. Many of the components, such as the warranties and disclosures which have to be supplied by the legal entity being acquired, are statutory. Focus throughout is on evaluating the evidence which will allow the transaction to be concluded (Steffen, 2000). The link between orchestrating the deal and realizing the potential of the new organization is not the responsibility of lawyers and accountants, who may well have no further role to play after the agreement has been signed (Steffen, 2000). It is at this point where cultural due diligence, with its focus on the future life of the new organization, becomes of utmost importance.
Cultural due diligence differs from standard due diligence procedures in that it is not mandatory in law, it may be variously conceived and implemented, and it may be conducted by a range of parties. Many aspects of the cultural due diligence process are aimed at obtaining an objective view of the management and employees of an organization (Steffen, 2000). It is the task of cultural due diligence to investigate the values, perceptions, procedures and motivators whereby decisions are reached and collective effectiveness ensured (Steffen, 2000). This is achieved through the use of face-to-face interviews, focus groups, desk research, telephone interviews and surveys. Tools such as the Merging Cultures Evaluation Index provide a means of tracking employees' experience of change during mergers, which in turn offers management clear indicators as to the effectiveness of their own communication efforts whilst the integration continues (Steffen, 2000). Finally, the cultural due diligence report should also provide space for spontaneous insights and individual hunches (Steffen, 2000).
Cultural due diligence enables the comparability of data, allowing the owners of the new organization to identify potential points of mismatch between the two organizations and to deal with them proactively as soon as the integration commences (Steffen, 2000). This leads to enhanced operational effectiveness in the post-merger phase, reduced loss of key personnel, and lower restructuring charges. A review of the literature reveals that many mergers or acquisitions fail because they do not meet expectations and objectives. Some of the reasons for failing to meet expectations are because these were much too high, and others meet some of the initial objectives but do not achieve the same performance in terms of growth and shareholder returns as their competitors do (Recklies, 2003).
A shared vision of the future for merged companies is the central element that allows them to gain the support of all involved parties. Companies draw more or less superficial comparisons of customer segments, product portfolio or market scope in order to determine if there is a fit between them. Similarly, financial data is often used to determine the degree of fit (Recklies, 2003). However, even a perfect financial fit neglects some hard and soft factors that have a major contribution for merger success. These factors include corporate culture and existing…