Cultural Due Diligence: How to Avoid Some of the Biggest, Most Costly Mistakes in M&A
In an M&A deal companies put a huge amount of energy into building an operating model that shows what the combined business will look like in a few years. But, as Pcubed expert Ben de Haldevang explains, what they should be spending just as much time on is cultural due diligence – creating a “behavioral operating model” to understand the cultural aspects of the merger or acquisition. With more than 14 years of experience helping Fortune 500 firms navigate M&A opportunities, de Haldevang employs a tested method of performing “cultural due diligence” in order to provide essential insights on how a deal is likely to unfold – and how two very different organizations can work out how to approach working together.
New York, NY (PRWEB) October 11, 2012
In 1998, when Daimler-Benz combined with Chrysler and exchanged shares, DB Chairman Jürgen E. Schrempp famously called the deal a “merger of equals.” Within nine years, a union valued at $36 billion split at the seams when DB re-gifted most of the control of the Michigan-based Chrysler operation to an American private equity firm for just $7.4 billion.
“We obviously overestimated the potential of synergies,” explained Dieter Zetsche, chief executive of DaimlerChrysler, while announcing the split. “I don’t know if any amount of due diligence could have given us a better estimation.”
For de Haldevang, this is a classic example of failure in cultural due diligence. “Underestimating how to find success is a common theme in failed M&A deals,” he says.
“Not taking the time to perform cultural due diligence comes at a high risk that whatever you’re trying to generate from a synergy or integration perspective will take longer and cost more. More critically, you may find one function simply refusing to work with the other.”
Whilst many tracts have been written to dissect failed M&A stories, the focus in business circles has always been on financial and legal due diligence. For de Haldevang, two key cultural factors — internal integration and autonomy — give much clearer indications of a merger´s likely progression.
“Internal integration at its core is dependent on relationships among different functions,” de Haldevang explains. “You don’t communicate with HR; you communicate with Megan in HR. You don’t communicate with marketing; you communicate with Joe, whom you’ve known for years.
“When you do a deal, those relationships are potentially changed or threatened. Suddenly there’s a degree of doubt about the existing power of those different functions. The level of internal integration starts to dip, which hits productivity, customer relationships, innovation, and even product reputation.”
Organizational autonomy considers where power sits within the company. “Organizations with autonomy at the right levels are typically efficient, well-tuned businesses,” de Haldevang says. “But when an acquisition comes along, suddenly, you as that middle manager will become insecure about whether you will have a job going forward. That will start to affect your willingness to make decisions.
“As a result, decisions get pushed up from the level where they should be made to a level where two things happen. One is that the person now charged with making that decision may have no skill-set to do so. Second, the whole process of getting those decisions made and the clunky nature of those decisions getting handed down, possibly to be challenged, means the business stops operating effectively.”
When Pcubed is brought in during an M&A deal, the integration teams themselves are used as a way of understanding the cultural practices of each company. “We carry out upfront diagnostics, using questionnaires and other tools to bring numbers to the diagnosis and understand the skills gaps”, de Haldevang explains. “We also do it through interviews, conversations that lead to stories that act as the ℠tell´. In poker, the ℠tell´ is the clue that allows you to read how another player feels about his or her hand – a trembling hand, a check of the chips, or some other unconscious behavior.
“In an organization, the ℠tell´ provides clues to help us interpret the cultural dynamics of the business: ℠For example, Team A, come from a highly integrated business, where they spend all day on the phone and walking around the office, and see each other physically. Team B operates entirely on email. So if Team B sends an email to Company A, it’s likely they’re not going to take that as seriously as if they go and see them.´ Having those understandings takes the heat out of the emotion and starts to create a willingness to move to a middle ground where the differences become acceptable.”
For de Haldevang, after talking through cultural differences in key areas such as responsibility and leadership, people begin to understand how they can get decisions made and projects pushed through.
“Companies aren’t shy about talking about or displaying their culture,” he says. “They do it all the time. If you’re immersed in M&A activity, use every interaction you have with the target as clues about how it truly operates from a cultural perspective, and capture those interactions to use as guidance to understand how the other party really operates.
“Doing your cultural due diligence will give you a view of what you need to do to achieve the best result for the deal.”
Pcubed, established in 1994, brings a unique, pragmatic brand of consulting to its clients, helping them tackle their business transformation and organizational change issues with deep complex project expertise, an agile, flexible approach, and the ability to engage and focus people on delivering sustainable results. Pcubed now serves more than half of the Fortune 500 with regional headquarters in New York, Ann Arbor, London, Singapore and Sydney.
Ben de Haldevang leads Pcubed´s Asia operations and can be reached at ben.dehaldevang(at)pcubed.co(dot)uk. To read Ben´s article or subscribe to Pcubed´s Insight newsletter, please subscribe online at http://www.pcubed.com.
For more information, please contact Linda Lavine at linda.lavine(at)pcubed(dot)com, or call +1 646 652-7951.
For the original version on PRWeb visit: http://www.prweb.com/releases/prweb2012/10/prweb9970798.htm