The culture blind spot: Why mergers fail

Leaders often claim that people are a company’s biggest asset. Yet, during a merger, they frequently fail to consider how they will integrate cultures and handle employee expectations after a deal closes. This is a critical oversight: research shows that mismanaging people and cultures is the reason for two-thirds of failed transactions.¹

While not a figure on a balance sheet, culture can impact deal value. By engaging employees early in the merger process and implementing a comprehensive integration plan, leaders can mitigate operational disruptions, retain talent, and win over new employees.

Angela Sanghera

Partner, Operations Mergers and Acquisitions

KPMG in Canada

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Understand culture before closing

No two organizations are the same. Each will have its values and unique way of operating, both company-wide and within individual departments. At a minimum, the acquisition team should talk to leaders from the target organization about what makes its culture special and unique and identify what differences and similarities exist between the two businesses, whilst understanding non-negotiable aspects that should not change.

Buyers should conduct a rapid cultural assessment during the pre-deal due diligence to get a clear picture of the organization they plan on purchasing. This can be done in multiple ways:

Diagnostic tools: With its clients, KPMG uses a rapid culture diagnostic questionnaire to capture a snapshot of the target’s culture, including decision making, engagement with employees, task focus and how the acquisition target prioritizes innovation. This tool also considers how cultural characteristics vary between headquarters and satellite locations.
Focus groups: Also consider setting up sessions with key members of the selling organization to get a good understanding of employee sentiment.
Publicly available information: Review comments on online platforms which can provide a window into former employees’ unvarnished thoughts.
Data analysis: The right internal information, overlaid with external data scraped from external platforms and other sources, can help connect the dots between possible performance issues, high turnover, talent retention or patterns of voluntary and involuntary exits.

In most cases, cultural differences aren’t deal breakers – and there are often more similarities than people think—but things can go awry if these issues are ignored.

Embrace the secret sauce

When assessing culture in the due-diligence phase, it’s vital to examine the “non-negotiables.” These make up the secret sauce of the selling company that employees feel are important to their success. Ignoring or removing these can create a tense “us and them” environment, resulting in talent retention or productivity issues impacting employee experiences.

These days, work-from-home versus in-office work is a common example of a non-negotiable. Another might be the amount of face time staff get with leadership, say, through monthly Q&A sessions. A sudden change to practices that might make employees feel less connected or valued in their work could cause trouble.

While non-negotiables can shift over time, embracing these issues provides the kind of quick wins a buyer needs to get incoming employees on board with the new company.

Find purpose through shared values

The buyer should also consider how well the two organization’s visions, missions and values match up. Even if they appear similar, aligning these ideas could take more than tweaking a few words on paper. Use employee surveys, staff meetings and past job descriptions to find out how the seller’s team embodies the ideals of their business in their daily work. These signals can help companies integrate an updated set of statements and make them relevant to new teams, which can provide them with a renewed sense of purpose.

Lead by example

While human resources are vital for cultural integration by managing changes in processes, monitoring employee engagement and running surveys, they can’t drive change alone. Members of the leadership team need to champion the messaging by delivering a consistent rationale for the merger and lay out its benefits for the organization and staff. If people don’t understand the changes underway, they will fill that void with their own conclusions.

Prevent talent exodus

Disruption and uncertainty can drive employees out the door, often straight to competitors, who tend to show up right around a deal with lucrative offers. With them, they take valuable knowledge and experience, creating costly gaps to fill. The cost of hiring new people far exceeds retaining and retraining current employees. Focusing on retention and investing in existing talent is not only a strategy for continuity but also a smart financial move.

During the pre-deal phase, identify critical talent and put mechanisms in place to keep them. That might include offering financial benefits, like retention bonuses paid in installments or giving key personnel roles in the integration project itself being pivotal to driving integration, which gives them direct exposure to leadership and new skills.

Give organizational influencers – often trusted managers – the tools and talking points they need to help new teams get to know more about the company, whilst continuing to engage with existing employees. They can also be leadership’s ears on the ground.

Support employees through change

Successful cultural integration hinges on clear communication and change management, especially during the onboarding process. Providing similar compensation and benefits and laying out potential career pathways with options for education and skills training can help ensure employees stay committed.

If layoffs are unavoidable, sharing the rationale behind them can help soften the blow and avoid embittering remaining employees. Taking a human-centred approach to severance can also foster a stronger culture for those staying on. Some organizations provide placement support, connect people with others in the industry who are hiring or provide time off to look for new roles.

Embrace culture to unlock growth

A lot of careful strategic thinking and financial planning goes into an M&A deal, but success ultimately comes down to whether your new employees perform at the high level you expect. Prioritizing culture gives employees the best chance at ensuring they enthusiastically embrace their new organization and deliver integration goals and ambitions.

^{1. "The Big Idea: The New M&A Playbook", Harvard Business Review, March 2011}

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