Corporate Cultural Due Diligence in Mergers and Acquisitions

Introduction: The Rise of Cultural Due Diligence

In the past few years, the number of mergers and acquisitions has dramatically increased, raising the importance of performing 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.

The term "merger" describes the highest form of strategic partnership, in which two or more legally independent organizations combine into one organization, both legally and economically (Recklies, 2003). The post-merger integration process is a difficult and complex task that comes with long lists of activities that must be fulfilled within a short time. In this phase there are many opportunities to exploit and many decisions to make. The post-merger integration phase covers the operational part of the merger project and often determines whether the merger becomes a success or a failure (Recklies, 2003). Most companies see compatibility — in terms of customer base, regional coverage, and 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 is cultural due diligence. Cultural due diligence is usually not performed, despite the fact that research shows it accounts for more than 50% of the failure of mergers and acquisitions (IRI Solutions, 2004). According to the research, "culture clash" — a term that now appears with almost daily frequency in the business press — is increasingly cited as the reason 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, shareholders are most likely to hold the corporate board and officers liable for 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 relatively new undertaking, with little or no historical precedent. It 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 enhances 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 whether the company tolerates lunchtime drinking, whether it has a dress-down Friday, and whether employees are expected to take work home over the weekend. A review of the literature reveals that these are all examples of corporate expectations that generate powerful behavioral patterns.

Such behavioral patterns help define the company's day-to-day experience and are in turn conveyed to customers. A company that does not object to its employees having a lunchtime drink — and even encourages employees to take a customer out for a drink to explore a new business opportunity — may be acquired by an organization that does not permit lunchtime drinking. This places the supervisor, employee, and customer in a difficult position: should the employee continue taking out the customer and risk the displeasure of the new management? Should the supervisor simply enforce the rules of the previous regime? Or should the customer be informed that, following the acquisition that made the company a market leader on three continents, a Friday drink is no longer acceptable? Cultural due diligence performed before the merger or acquisition answers these questions and helps determine whether the merger is a good fit for both companies.