1 © BTD International Ltd., 2017. All rights reserved.

Smoke and mirrors A different perspective on how to reduce the impact of post-deal cultural differences before closing the deal

InassociationwiththeM&AResearchCentre,CassBusinessSchool,

London

2 © BTD International Ltd., 2017. All rights reserved.

1ReducingPostMergerIntegrationCoststhroughCulturalDueDiligence:DoingM&ARightforPost-MergerSuccess;M.Whitmore,CassBusinessSchool,2009

WANTED:ACEOwhohasn’tbeentoldthatculturalalignmentwillmakeorbreaktheiracquisitionpost-close.Theimportanceofculturalintegrationtolong-termacquisitionsuccesshasbeensothoroughlypromoted,discussedandexploredovertheyearsthatit’ssurprisingthatacquisitionsareconductedatallwithoutadepthofculturalanalysisthatwouldmakelegalduediligenceappearsuperficial.Andyetthat’sjustthepoint:DespitetheacceptancebymostexecutivesthatculturaldifferencesremaintheleadingcauseofM&Afailure;andirrespectiveofalltheresearch,articles,bestpractices,servicesandtoolsthatfirmlyplaceculturalassessmentandalignmentattheheartofsuccessfulacquisitionandintegration,afactremainscleartoanyoneworkinginthefieldofM&A:Culturaldifferencesidentifiedpre-dealrarelypreventthatdealfromcompleting,evenwhenthosedifferencesareacknowledgedtobesignificant.Recentresearch1supportsthisview,inwhich76%ofexecutivessurveyedbelievedtheirdealswouldgoaheadregardlessofthedegreeofculturalfit.Sowhythedisconnect?Doesitmeanthatalargemajorityofexecutivesacrosstheworldareregularlyfooledintobelievingthattheacademicsandconsultantshaveitallwrong,onlytopaythepricelater?Ordoesitmeanthatwe,asintegrationexpertsandprofessionalserviceproviders,stillhaven’tfoundtherightapproaches,servicesandtoolstohelpleaderswho–rightlyorwrongly–willcontinuetoviewculturaldifferencesasimportantenoughtokeepinmindduringintegration,butnotimportantenoughtoinfluencethedeal?AtBeyondtheDeal,webelievethat,despite(orindeedasaresultof)thebreadthofculturalassessmentofferingsinthemarket,mostbusinessesstilleithermaketoomuchortoolittleofculture.Wealsobelievethat–onewayoranother–itstillhelpstohavesomelevelofawarenessofthedifferencesinbusinesspractices,assumptionsandbeliefsbetweenorganisationsbeforeembarkingonintegration.Inthisarticle,BeyondtheDeal,incollaborationwithMichaelWhitmore,anexecutiveMBAgraduateofCASSBusinessSchool,explorespractical,perhapslessambitiousbutmoreusable,waysofconsideringorganisationalculturepre-close,waysthatarenotspecificallydesignedtohelpdeterminethefateofthedealitself,but

insteadtohelpimproveplanningandcommunications,sosmoothingthejourneythroughyourfirstdaystogetheroncethedealisdone.Businessesarelikeonions:TheyhavelayersAcoreproblemstemsfromtheambiguityandcomplexityinherentintheconceptofcultureitself.Isculturesomethingabusinessis,orsomethingabusinesshas?Ofcourse,theanswerliessomewherebetweenthetwo,andunderstandingthedifference–whatcanbechanged,andwhatcannot–canbekeytogettingusefulresultsfromanyculturalassessmentwork.Theconceptofamulti-layeredculturehasbeenthesubjectofmanystudiesinthepast,andisnottheprimaryfocusofthisarticle;howeverashortsummarymaybeusefulhere.Putintopracticalterms,organisationalculturecanbedescribedasasetofcharacteristicsfallingintooneoffourlayers:Thedeeperandmoreunconsciousanyelementofcultureis,themoreeffortisgenerallyrequiredtoaccuratelyuncoverit,butthemoresignificantitmaybeinexplainingorunderpinningthemorevisibleculturaltraitsseen‘abovethewaterline’.Beingphysical,artefactscanbeobserved

Cultural differences identified pre-deal rarely prevent that deal from completing, even when differences are acknowledged to be significant. When surveyed, most executives believed their deals would go ahead regardless of the degree of cultural fit.

Does this mean that we, as integration experts and service providers, still haven’t found the right approaches and tools to help business leaders who see cultural difference as something to keep in mind during integration, but not important enough to influence the deal itself?

ARTEFACTS

Materialobjectsthatreflectthephysical,observablemanifestationsofculture(e.g.

buildings,branding,forms,documentation).

BEHAVIOURSWidely-heldbeliefsregardingacceptable

andunacceptablebehaviour;cansometimesbeembeddedorinferredin

anorganisation’scoreprocesses.

VALUESThepriorities(formalorinformal)

adoptedforspecificactionsoroutcomes(e.g.risktaking,communication,opendissent/disagreement,useofpersonal

initiative).

ASSUMPTIONSUnconsciousbeliefs‘takenforgrantedas

self-evident’–thedeepestlevelofculture,typicallynotmanifestoreven

recognisedundernormalcircumstances.

3 © BTD International Ltd., 2017. All rights reserved.

2InternationalBusinessPartnership;T.Thorsdottir,Palgrave,2001

relativelyeasilybyanyoneinsideoroutsidethebusiness,althoughtheymayneedadegreeofinterpretationfrominsiderstounderstand.However,theseartefactsarelikelytoonlygiveanindicationofdeeperlayersofculture,andcouldbemisleading,especiallyassomeorganisationsuseartefactstoreflectadesiredculturalimagethatmaybedifferenttocurrentrealityinsidethebusiness.Behaviouralnormsandritualscansometimesbeobserved,butarelikelytorequireconsiderableinterpretationto‘linkup’tomoreobviousartefacts,or‘linkdown’tocorevaluesandassumptions.Assumptionsontheotherhandareusuallysoingrainedwithinthebusinessthatemployees(especiallythosewhohavebeenwithintheorganisationformanyyears)aretypicallyunawareofthem,despitetheirroleindrivingtheveryessenceofthecompany’sculture.This‘invisibleinstinct’becomesespeciallyimportantwhenthebusinessundergoessignificantchange,suchasduringpost-dealintegration:Placedinneworthreateningsituations,individualswillinstinctivelyandautomaticallyactaccordingtotheseassumptionsinwaystheybelieveareinthebestinterestsofthebusiness.Whensuchbasicyetunrecognisedassumptionsdifferbetweengroups,theresultscanbeproblematicattheveryleast.ConsideranexamplebasedonresearchconductedbyDr.ThoraThorsdottirwhichconsideredculturalchangesduringacquisitionandintegration2.Twosuccessfulorganisationsoperatingwithinthesamesectordemonstratedculturalartefactsthat,while

appearingsufficientlysimilarduringearlystagesofthedealtosuggestgoodculturalalignment,actuallyreflectedsignificantculturaldifferencesatlowerlevels(seetableatthebottomofthepage).Thisperspectivehelpstoexplaintheparadoxoutlinedintheopeningparagraphsofthisarticle:§ Pre-dealculturalassessments–evenwhenconductedco-operativelywiththetarget–usuallyonlyidentifyhigherlevelsofculturaltraits,andareunlikelytodeliveranaccurateunderstandingofunderlyingvaluesandassumptions;

§ Anysuchhigh-leveldifferencesdiscoveredareusuallyconsideredchangeableandthereforenotdeal-breakers.Theirroleaspossibleindicatorsoffundamentaldifferenceslowerdownisrarelyrecognisedortrustedasaccurate.

§ Mosttraditionalculturalassessmentsaresurvey-based,andrequireco-operationfromthetarget,whichisoftendifficultorimpracticaltoconductpre-close;

§ Evenwhentheyareconducted(pre-orpost-close),theytypicallyassessbehavioursandvalues;onlywhensuchsurveysaresupplementedwithpost-surveyinterviews,groupworkshopsandassessmentofartefactscana‘wholepicture’culturalprofilebeaccuratelygenerated.

Cultural assumptions are usually so ingrained within the business that employees (especially those who have been within the organisation for many years) are typically unaware of them, despite their role in driving the very essence of the company’s culture.

CULTURALLEVEL

ACQUIRER TARGET

Artefacts Symbolsofprestige:Offices,dresscode,positiontitles

High-qualitycustomeraccountlist,companycars,highly-rewardedemployees

Behaviours Structuredprocedures,industry-drivenregulations,predominantlywrittencommunications,tightcontrolsonspending–“Wearestrict,professionalandcompetitive”

Informal,openandlargelyverbalcommunications,smallergroupdecision-making,co-operative,notstrictonspending–“Everyonemakestheirowncoffeearoundhere”

Values “Wearemoreprofessionalthanothers,andourprestigiousimageconfirmsthistothemarket.Lessprestigiousfirmsarethereforelessprofessionalandprovidepoorerqualityandservice.”

“Weareonefamily,andareallinthistogether.Wearelaidbackaroundhere,butworkingasateam,wecanbeatupthearrogantbigguysinthemarket”

Assumptions “Wearethebestinthebusiness.Disciplineisnecessary,bothinternallyandinourchoiceofclients,notallofwhomwillbeacceptabletous.Allspendingmustbeaccountedfor.Thewidermarketisanundisciplinedplace,sobybeingdisciplined,wewillremainontop.”

“Wearebigfishinasmallpondandpunchaboveourweight.Ourclientscometousthroughfriendsandfamily,andprovidedtheyarerecommendedtous,we’rerelaxedaboutwhotheyare.Wetrusteachothersothingsdon’thavetobewrittendown.“

4 © BTD International Ltd., 2017. All rights reserved.

3ReducingPostMergerIntegrationCoststhroughCulturalDueDiligence:DoingM&ARightforPost-MergerSuccess;M.Whitmore,CassBusinessSchool,2009

Thisdoesnotmeanthatnothingcanorshouldbedonepre-deal;thekeyisinunderstandingthepurpose,scopeandapproach,ofanyculturalassessmentworkyouundertake.Ifweacceptthatinthe‘realworld’,mostbusinesseswillbeneitherwillingnorabletoplacecultureattheheartofhowtheyassessorapproveatargetacquisition,thenweneedtolookatpre-dealculturalassessmentashavingadifferentpurpose,onethatfocusesonsupportingtheearlystagesofintegrationandworkingtogether:§ Understandingdifferencesincommunicationstylesandassumptions;

§ Understandinganypotentialdifferencesinapproachestostrategy,organisationaldesign,planning,andrisk;

§ Identifyingkeysimilaritiesordifferencestoleadershipstylesandexpectations;

§ Identifyingkeyitems(artefacts)thatarelikelytobehighlyvaluedduetotheirconnectiontounderlyingbeliefsorassumptions,andthereforepassionatelydefendedinthefaceofpost-closechangeorintegration.

Whilenoneoftheseobjectivesaredirectlyaimedattraditionalculturalchangeorintegration,itiseasytoseehowanimprovedknowledgeineachoftheseareascanhaveimmediatebenefit(andreducedcost)toearly-stageintegration.Moresignificantly,pre-dealculturalreviewsguidedbythesemoremodest,tacticalgoalshaveamuchgreaterchanceofsuccess.Thisviewcoincideswiththatofmanyexecutives.Whensurveyedbyoneoftheauthorsearlierthisyear3,mostexpectedthatgoodpre-dealculturalassessmentswould:§ Increaseintegratedworking§ Reduceconfusedlinesofmanagement§ Reduceroleuncertainty§ RetainrequiredtalentForthesegoalstobeachieved,theresultsofsuchpre-dealassessmentsalsoneedtobepassedintactacrossthepre/post-dealdivide,somethingthatunfortunatelyremainsuncommoninmanyfirms.

LookinginthemirrorSowhatdoesthismeaninpractice?Agood,andconsiderablyeasier,firststepistoensurethatyou‘knowthyself’aswellasyoucanbeforeassessingthetarget;afterall(andthisisoftenoverlooked),targetculturesneedtobeassessedaspartofanexerciseintriangulation:Whoyouare,howthisdiffersfromthetarget,andhowbothculturesdifferfromwherethecombinedorganisationneedstobeinfuturetosupportstrategicgoals.Infactagreaterorganisationalself-awarenessinitselfoftenbringsnumeroussidebenefitstothebusiness,e.g.byhelpingtoidentifyorunderstandlong-standingroadblockstochange,orinbreakingdownfunctionalsilos(sometimesbroughtaboutthroughpreviousacquisitions).Howthisisdonedependsonthelevelofculturaldetailandaccuracydesired,andcanrangefromasingleshortexecutivemeetingexploringbehaviours,valuesandassumptions,throughtoamulti-stepexerciseinvolvingmultiplesurveys,assessmentsandworkshops.Regardlessofscale,webelievethatanyassessmentmustincludeareviewanddiscussionofalllevelsofculture,applyingtherighttoolstoaddresseachlevel:Assessmentsof‘artefacts’suchasmanagementreports,businessescases,coreprocessescanbeagreatstart,butmayleadyouastrayifconductedinisolation;similarly,assessmentsurveysthatclaimtoaccuratelyunearthcoreassumptionswithoutfollow-updiscussionswithmanagementshouldalsobechallengedrigorouslybeforeuse.Giventhefullaccesstomanagementandstaffpossibleinaself-assessment,wesuggestaprocessthatconsiderseachculturallayerinturn,usinganunderstandingofeachtohelpvalidateitsneighbours:

A good first step is to ensure that you ‘know thyself’ as well as you can before assessing the target; after all, target cultures need to be assessed as part of an exercise in triangulation: Who you are, how this differs from the target, and how both differ from where the combined organisation needs to be in future.

A greater organisational self-awareness in itself often brings numerous side benefits to the business irrespective of any deal on the table.

REVIEWARTEFACTSCorebusinessdocumentation,

physicalcomponents,

branding&logo,internal&external

communications

ASSESSBEHAVIOURS&

VALUESSurveyand/or

workshopbased,includingreviewofthebusiness’

‘signature’processes

REVEALUNDERLYINGASSUMPTIONSWorkshopbased,presentingresultsof

surveysandreviews,discussingdrivers&rootcauses;identify‘non-negotiables’and

potentialobstaclestochange

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Whileweacknowledgethatculturalchangeisdrivenfromthetop(bychangestoincentives,processesandotheraspectsoftheOperatingModel,andthroughclearleadershipexample),understandingprevalentculturetypicallyrequiressomeinvolvementofothersbeyondtheexecutiveteam.Wherepossible,involveawideandvariedarangeofgroupstohighlightinternaldifferencesinvaluesandbehaviours,andtoconfirmexecutiveassumptions–theviewfromthetopisnotalwaysaccurateorcomplete.Withinthisoverallstructureforself-assessment,wedonotbelievethatanyspecificmodelofcultureisinherentlybetterorworsethananother.Theirqualitystemsfromtheirapplicationandfitnessforpurpose–muchbetterinourviewtohaveasimple,targetedsurveyrigorouslysupportedbydocumentreviewsandworkshopsthanamulti-dimensionalsurveythatclaimstocoverallthebases.Experiencealsoleadsusnottosupportmodelsthatclaimtohavediscoveredthebasisofauniversally‘good’or‘highperforming’culture–extensiveworkwithmultipleorganisationswithinavarietyofsectorstellsusthat,whiletherearecertainlybusinessesinwhichtheirownvaluesandbehavioursthatarenotalignedtotheirstrategicgoals,orthatconflictwithotheraspectsoftheirOperatingModel(egorganisationalstructure,systems),wehaveyettoseea‘bestpractice’culturethatfitsallbusinessesinallsituations.Finally,itisvitalthatanyself-assessmentresultsandconclusionsareformallydocumentedandtakenforwardintothenextdeal:Businessesareunlikelytofinditeasytorepeattheexerciseintheclosingstagesofanacquisition,andmostofthevalueoftheconclusionsreachedwillbelostunlesstheyareconsciouslyincorporatedintobasicoperatingmodeldesignandintegrationplanning,bothofwhichshouldbeconductedpre-close.

SeeingthroughthesmokeAssessingyourownculturebasedonfullandunrestrictedaccessanddiscussionisstraightforward.Effectivelyassessinganotherorganisation’scultureonthebasisofwhatyoucangetyourhandsonisconsiderablytrickier.Thevalueofmeaningfuldataaboutthetargetrestsonyourabilitytoaccuratelyinterpretit,andoftenthepublicly-availableculturalartefacts,whileencouragingintheirquantity,canbelesshelpfulwhentryingtodigdeeperintounderlyingbeliefsandassumptions.Companywebsites,marketingmaterialandfinancialreportsareasgoodastartingpointasany,butmustbesupplementedbyamoresophisticatedapproachthattapsintoindustryandcustomerknowledge.Ex-staffmembersandthosewhodobusinesswiththetargetarekeysources,andcanproviderealinsightswithoutneedingtoknowthepurposeofyourreview.(Arguablysuchinformationshouldberegularlygatheredanywayaspartofgeneralmarketandcompetitoranalysisexercises.)Gatheringviewsfromoldemployeesandcustomersmaysoundobvious,howeverourresearchsuggeststhatthisbynomeanscommonplace.Accordingtostaffandmanagementsurveyed3,anunderstandingofthemarket,theproductandthecustomersrepresentthetopthreethingsdealmakersneedtoknowabouttoensuresuccess;thesewererankedabovefinancialdataandlegalduediligence.Webelievethatonereasoncultureisn'thigheronthislististhedifficultyingatheringinformationthatprovidesthatdeeperunderstandingofthelowerlevelsofculturedescribedearlierinthisarticle.However,practicalapproachesandexercisesinpre-dealculturalduediligencedoexist,andcanbeusefulwhentheconditionsareright.Culturalassessmentmethodsarenowemergingthathelpdeliverinsightsintohowtargetorganisationsplan,manage,assessperformance,andcommunicate–allkeyaspectsofintegration,andofyourlifetogetherbeyondthedeal,especiallyoncecomparedtoyourownculture(bothcurrentanddesired).Anexampleofwaysinwhichtargetculturecanbeassessedpre-close,evenwithouttheinvolvementofthetargetorganisation,isshownonthefollowingpage:

While we acknowledge that cultural change is driven from the top, understanding prevalent culture typically requires some involvement of others beyond the executive team.

Involve as wide and varied a range of groups as possible to highlight internal differences in values and behaviours, and to confirm executive assumptions – the view from the top is not always accurate or complete.

6 © BTD International Ltd., 2017. All rights reserved.

Whileconductingpre-dealculturalassessmentisdifficult,andisultimatelyunlikelytoderailanacquisition,itremainsaworthwhileexercise.Partofmakingitworkliesinrecognisingthe‘layered’aspectofculture,andusingittounderstandthedifferencebetweenthingsthatarerelativelyeasytochange,butmayonlybereflectionsofdeeper-seatedbeliefsandassumptionswhichwillrequireadifferentapproach.Providedyouhavearealunderstandingofyourownculture(toptobottom),andareclearaboutwhatyouaretryingtoachieve,astructuredreviewofinformationinthepublicdomain,theduediligencecleanroom,orevenwithinyourownorganisationcanmakepre-closeplanningandtheintegrationthatfollowssmoother,lessrisky,andmoreeffective.

ABOUTTHEAUTHORS

Dr.ThoraThorsdottirholdsaPhDinBusinessOrganisation,specialisingintheimpactofcorporatecultureandcommunicationsduringacquisitions,andexploringwaysinwhichsuccessofanacquisitionwasdrivenbypost-acquisitionintegrationmanagement.Thorahasseveralyears'experienceasanindependentresearchertoHRandmanagementconsultancies,specialisinginculturalchange.Shealsohasseveralyears'experienceworkingintheITmarketresearchandstatisticalsoftwaresector,mostrecentlywithSPSSInc.Previously,Thoraworkedinrecruitment,banking,andthepublichealthsector,wheresheperformedavarietyofresearchroles.

MichaelWhitmoreisarecentexecutiveMBAgraduatewithdistinctionfromCassBusinessSchool,CityUniversity,London.AtCASS,heinvestigatedtheculturalduediligencepracticesoforganisations,consultantsandadvisoryfirms,developingaculturalduediligencetoolkitbasedonhisfindings.Workinginoraroundthisfieldformostofhiscareer,MichaelhasaBAHonsinPsychologyandLawandanMAinAppliedSocialScience.Michaelhasworkedinbanking,socialwork,publicsectorimprovementandisnowamanagingconsultant.Michaelcanbecontactedatmp.whitmore@gmail.com.

BTDisanindependentspecialistfirmprovidingmergerandacquisitionintegrationsupporttobusinessesintheUKandaroundtheworld.

CULTURALLEVEL

CULTURALASSESSMENTSOURCES(EARLY-STAGE

PRE-DEAL)

CULTURALASSESSMENTSOURCES(LATE-STAGE

PRE-DEAL)

USEDTO...

Artefacts&Behaviours

Websites,marketingreports,publicreports,newsitems,pressreleases,analystreports

Strategy&budgetdocuments,businesscases,personnelreports,internalpolicies&procedures,organisationalstructures,staffprofiles,absenteeismpolicies&levels,projectplans&reports

§ Developinitialhypothesesaboutbeliefs&assumptions

§ Identifypotentialdifferences/hotspots;compare‘non-negotiables’

§ Developlistof‘culturalconsiderations’foruseindesign,communications&planning

Values&Assumptions

Ex-staff,customers,suppliers,industrypeers(whereknown&contactable)

Alloftheaboveplus:Existingin-companysurveys,informaldiscussionswithexecutives,site/officetours

§ Developinitialthinkingontoptalent&managementretention(overallapproachtotheissue&individuals)

§ Buildfindingsintopost-closeculturalchange&communicationsplan

§ Conductcross-managementrelationship-andteam-buildinginitiatives