Despite the penalties for failure, too many
merger-bound CEOs ignore a key factor that can make or break an M&A deal:
culture clash. The solution? Cultural due diligence, a systematic method for
making rapid, cost-effective assessments of the cultures of both acquirer and
target. By Robert J. Thomas Outlook Journal, January 2000
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ike so many altar-bound executives, Quaker Oats chairman
William Smithburg and Snapple Beverage president Leonard Marsh believed that
their 1994 marriage had been made in heaven. They were confident that the $1.7
billion merger had created a mix of people and products that would yield a
fountain of profits well into the next millennium.
But the deal proved to have about as much kick as a
Gatorade-and-Mango Madness cocktail. By early 1997 Quaker was forced to unload
Snapple for $300 million, assuring for this transaction a place on the list of
the worst megadeals of the 1990s.
The reason: a clash of cultures in which Quaker grossly
underestimated the differences between its highly focused, mass-market
operating style and Snapple's quirky, entrepreneurial and distributor-oriented
style.
Unfortunately, in today's mergers and acquisitions game,
the Quaker/Snapple experience is more the rule than the exception. One reason
is that most of the big deals of the 1990s, in contrast to the conglomerate
mergers of the 1960s and 1970s and the leveraged buyouts of the 1980s, have
been strategic, or aimed at producing business synergies. Whereas most
conglomerates got into trouble because they were unfocused, and LBOs because
they borrowed too heavily, many of today's strategic deals have stumbled
because of irreconcilable differences in the way organizations get things done.
The list of recent megamergers dogged by cultural
incompatibility is a long and growing one. It now includes the mid- to
late-1990s marriages of pharmaceutical giants Pharmacia and Upjohn; automakers
Daimler-Benz and Chrysler; and financial powerhouses Citicorp and Travelers
Group. Add to that the acquisition of Capital Cities/ABC by Walt Disney Co.
So are culture clashes inevitable? Or is there some
systematic way that prospective merger partners can beat the odds that such
conflicts will undermine a promising deal? The answer is a resounding yes. It's
called cultural due diligence—a practical, step-by-step approach for making
rapid, cost-effective cultural assessments of both the acquirer and the target.
Measuring the Gap Because cultural change involves both hard and soft
issues, such due diligence necessarily requires both qualitative and
quantitative analyses of a corporate culture, including visible manifestations
such as dress codes, office layout, annual reports, recruitment brochures and
employee interaction, as well as less tangible corporate values and assumptions
about how a company does business.
These findings are then indexed to measure the cultural
gap between the prospective partners, identify the risks and costs associated
with the gap, and formulate a plan for addressing it. Finally, if the deal goes
forward, the cultural due diligence conclusions will be used in the post-merger
integration phase to make the marriage work.
To be sure, there is no database that establishes beyond
any doubt that this embryonic technique is a surefire antidote for culture
clash and deal failure. But a growing body of empirical evidence suggests that
cultural due diligence, begun in earnest in the target identification and
screening phase and continuing after the public announcement into the
post-merger integration process, can make the difference between deal success
and disappointment—as long as top managers take the findings seriously.
Given the make-or-break role that culture can play in
deal success, it's surprising that formal cultural analysis has played such a
small or even non- existent role in most mergers and acquisitions. While CEOs
have tacitly acknowledged the need for cultural analysis in doing cross-border
transactions—those involving, say, an American company on one side of the deal
and a German or Japanese company on the other—they generally have given it only
lip service when two big companies based in the same country get together. In
fact, cultural due diligence may be even more critical when the players are
headquartered in, say, New York and Pittsburgh, London and Birmingham, or Paris
and Lyons, because the cultural differences may initially be easier to ignore.
In the United States, at least, M&A due diligence has
consisted mostly of crunching numbers, examining executive compensation plans,
reviewing legal documents and the like. There are several reasons for this.
First, acquisition teams are comprised mostly of financial analysts, who
naturally focus on financial data. Top managers, too, generally are more
comfortable with "hard," easily quantifiable issues than softer ones like
culture.
Then, too, these same managers may have believed they
already understood the cultural differences between their companies and
prospective partners, particularly if they operated in the same industry and
felt that a formal analysis was superfluous. Or they may have undertaken a kind
of implicit or intuitive cultural assessment that lacked documentation and
objectivity and therefore defied replication. But for a variety of reasons,
including CEO hubris, they may simply have chosen to ignore the potential
conflicts even this superficial analysis may have revealed.
Act of Courage Cultural due diligence, in contrast, can be explicit and
measurable. It provides a discipline that compels senior managers to recognize
culture as a critical ingredient in deal success and to subject their gut
perceptions and conclusions to tough scrutiny.
Indeed, it takes a fair amount of courage for CEOs to
submit their preconceived notions of their own corporate cultures, or that of
their prospective partners, to such a test. Moreover, if conducting a rigorous
cultural assessment up front might be regarded as courageous, failing to do so
could conceivably be considered a breach of fiduciary duty down the road,
particularly if a deal turns sour.
The explosive growth of eCommerce has created still
another compelling argument for cultural due diligence. For many seasoned CEOs,
acquiring a start-up eCommerce company peopled by twentysomething software
experts will be like taking an ice bath. Merging or acquiring without cultural
due diligence when the target operates in the same industry or market is
treacherous enough. But the CEO who ventures into cyberspace without this
essential assessment is flying completely blind.
Artifacts and Values A company's culture, like an individual's personality, is
the sum of many tangible and intangible features. In a 1988 study, Edgar
Schein, a noted authority on organizational culture and leadership at the
Massachusetts Institute of Technology Sloan School of Management, observed that
organizational culture finds expression in tangible "artifacts," such as open
or closed offices, informal or formal dress and behavior, marketplace
reputation, and compensation structure and performance measures. Virtually
every artifact contains important information about company values, such as its
mission, unwritten rules of behavior and views on human motivation.
In turn, values typically reflect unwritten assumptions
about how the company and its employees operate. Though such assumptions tend
to be intangible and less obvious determinants of culture than values and
artifacts, they are sometimes even more influential drivers of corporate
behavior. For example, it may be well understood, albeit not articulated, that
a company's employees aren't team players but instead work as individuals "out
for No. 1."
In its initial phase, cultural due diligence consists of
identifying and dissecting the artifacts, values and assumptions of the
acquirer and target and, on the basis of the findings, placing the two
companies on a grid designed to measure the cultural gap between them. A
merger-minded company should seriously consider doing a cultural
self-assessment and finding its location on such a grid well before it begins
prospecting for merger and acquisition candidates. "Knowing thyself" in advance
will save considerable time when fast, decisive action becomes imperative.
  This grid was
described by organizational behaviorists Rob Goffee and Gareth Jones in their
1998 book, The Character of a Corporation. For our purposes,
the grid consists of four quadrants created by a horizontal axis and a vertical
axis. "Solidarity"—the degree to which people bond or identify with their
employer—is measured on the horizontal axis, and "sociability"—the level of
warmth and friendliness among employees—on the vertical axis. This
solidarity/sociability grid implies four principal organizational cultures (see
box, Cultural Map).
Continued
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