Integration starts with cultural due diligence

KPMG reports that nearly 70 percent of acquisitions failed when measured by the acquirer’s shareholder returns relative to the market. EY says that only 50 percent of acquiring companies achieve their stated synergies objective post-acquisition. In a market with high multiples and rising deal costs, acquiring companies need to understand the inherent risk of integration, as managing integration post-acquisition involves a host of challenging issues.

Typically, companies group synergies into cost or revenue buckets, overlooking the impact of focusing on numbers rather than process and people. For example, redundant headcount between the companies is a common synergy. Pre-acquisition, the acquirer might assume shared resources will lead to a headcount reduction of 15 percent in salary expense. However, there is seldom a sensitivity or understanding about how headcount reduction might impact the value of the acquisition.

While cost and revenue synergies are important elements of justifying an acquisition, companies must consider the third component of integration — culture. Company culture is nearly always unique, but culture is often overlooked in due diligence and throughout integration. If culture clash is too high, synergies may never be realized.

The most successful acquisitions consider culture in the pre-acquisition work. In the process of due diligence, to improve the post-acquisition integration, you should:

1. Understand how things get done and who drives execution in the organization.

2. Identify potential cultural tensions that might exist between companies.

3. Communicate with clarity; speak openly and honestly about your expectations and plans.

How things get done

Historically, acquirers spend the majority of their time talking with executives and owners, but this can be misleading. Owners and the executive team are working to drive a successful transaction. Often, they aren’t considering a long-term relationship after the acquisition.

Acquirers should understand how work gets done, where and how decisions get made, and the strength of middle and frontline management.

Identify potential cultural tensions

Understanding culture is more than comparing mission, vision and value statements. The due diligence process must push through superficial comments and engage with employees.

Historical behavior is an excellent measure of future expectations. How has the company handled challenging economic situations? Did it lay off people or retain them? How does the company communicate expectations? What does a typical workweek look like for most employees? How does the company manage success and failure?

Understanding how people think and what they expect provides a roadmap for the impact the synergy plan will have on the company’s performance.

Communicate with clarity

Don’t assume the existing leadership is on board, only to discover post-acquisition they can’t or aren’t willing to meet your expectations. Conflict between existing leadership and the acquiring company is cancer in the integration process. Resolving these conflicts generally involves separation and emotional turmoil, which has a lasting cultural impact.

If the existing management isn’t on board, address it early and plan for new leadership in the integration process.
The success of any acquisition is pinned on execution post-acquisition. By adding a focus on culture in your pre-acquisition due diligence, your probability for success dramatically improves.

 

Gregory D. Cessna is the CEO of Consumer Fresh Produce. An innovative distributor of fresh, high-quality produce, Consumer Fresh Produce is a leader in produce supply chain management. Greg has led publicly traded and privately held companies for 30 years, including successfully completing 15 strategic acquisitions and mergers. In 2005, he founded Northbound Consulting to coach and mentor family business leaders in succession planning, strategy and business analytics.