A ROADMAP FOR SUCCESSFUL MERGERS & ACQUISITIONS: RESEARCH, ROLES, AND RESPONSIBILITIES FOR PERFORMANCE IMPROVEMENT PRACTITIONERS

WHAT DEALMAKERS AND PERFORMANCE IMPROVEMENT PRACTITIONERS REALLY “OUGHTA WANNA” KNOW ABOUT CULTURAL DUE DILIGENCE (CDD)

Internationally, the record of accomplishment of Mergers & Acquisitions (M&A) activity results remains quite poor. Multiple studies analyzing the last 30 to 50 years of M&A activity have documented a business success rate of less than 30%. Most mergers and acquisitions failed to meet their intended business objectives and recover the documented costs of the deal, and many deals were later divested or completely shut down. Any company's own data, while maybe better than international averages, may still show a less than desirable success rate. As Kenny (2020) noted, “According to most studies, between 70 and 90 percent of acquisitions fail. Most explanations for this depressing number emphasize problems with integrating the two parties involved” (p. 2).

Deloitte's 2022 Future of M&A Trends Survey polled 1,300 executives at corporations and private equity investor (PEI) firms from August 26 through September 7, 2021, to glean insights about current deal activity and expectations for the next 12 months. Here are some key findings.

MERGER, ACQUISITION, AND DIVESTITURE ACTIVITY

There is more to today's M&A activity than just acquisitions. Divestitures are also on the rise, and more executives report that they are open to alternative strategies.

• 92% of respondents expect deal volume to increase or stay the same over the next 12 months.

• 57% of corporate respondents have engaged in a divestiture in the past 12 months.

• 32% of corporate respondents say they are considering a divestiture (Deloitte, 2022).

In the 2020 survey, Deloitte reported that “deal makers responded that fewer transactions are meeting their expectations: of all respondents surveyed, 46 percent say that less than half of their transactions over the past two years have generated the expected value or return on investment” (p. 13).

With good news that deals will pick up and become bigger, Deloitte also pointed out the “Top reasons why M&A transactions have not generated expected value.”

External factors include:

• Economic forces 32%

• Market or sector forces 30%

• Changing regulatory and legislative environment 27%

Internal factors include:

• Expected sales did not materialize 30%

• Not achieving expected revenue synergies 28%

• Execution/integration gaps 28%

• Talent issues at target company 28%

• Not a well-defined M&A strategy 26%

• Not achieving expected cost synergies 25%

• Inadequate/faulty due diligence 24%

• Not achieving cultural alignment 20% (Deloitte, 2020)

Another series of follow-on studies identified organizational culture clash as the primary reason for failure in over half of the thousands of acquisition failures studied. I define “culture clash” as disagreements between people in the merged organizations concerning how to go about engaging in and managing the business. These types of clashes consume increasing amounts of energy and time to get things done and turn the focus of significant parts of the organization from “doing” the business to arguing about how it should or should not be done. Internal issues and arguments consume ever more resources, leaving less and less focus upon the customer and performing the work. The intention of this article is to provide not only information but a also process that would allow any company to increase its merger or acquisition success rate to the 60% to 70%+ range.

In the final 3–4 years of its 35-year history, Vector Group, Inc. Principals J. Robert “Bob” Carleton and I published numerous articles and presented topics at several conferences concerning issues surrounding the success or failure of (M&A). We shared insights, experiences, and best practices on how to prevent critical deal value from being destroyed by cultural and other organizational issues. Our target audiences were “dealmakers” (owners, bankers, lawyers, key executives, and others who make the merger or acquisition deals) along with those tackling human capital challenges (performance improvement practitioners, including those from the disciplines of organization development, human resources or training and development).

The M&A Roadmap for Success evolved from an original design for a specific client to define and leverage the role of their Human Resources (HR) team in driving the success of present and future acquisitions and bringing desired results more clearly. Undoubtedly, performance improvement practitioners, including those engaged in human resources, organization development, and in training and development, are in the best position to lead aspects of the acquisition process centered on the people issues (organizational culture) that so oftentimes cause failure. They can act as advisers to those initiating the merger or acquisition (“dealmakers”), including key executives, management, and others involved in the process (Craig & Carleton, 2011/2013).

The people strategy for the Roadmap poses Objectives and Deliverables that identify and surface possible challenges with intended outcomes. HR was the identified group to lead the process for that client but, as mentioned, performance improvement practitioners from many disciplines and other functions may direct M&A activities (Craig & Carleton, 2011/2013).

The Roadmap is a guide for the merger or acquisition process beginning with Target Identification of potential new businesses to buy and ending with the successful cultural integration of the acquired or merged company. Just as a building plan would work, the Roadmap brings logic and a means to successful creation of a new entity. Be aware that the Roadmap is not prescriptive but does offer numerous tactics and tools that an integration team can use in assessing the potential risks and increasing the potential benefits of a specific acquisition. Portions of the Roadmap do provide some systematic directions but overall bring a way of thinking and doing in terms of introducing a new organization to any company.

Cultural Due Diligence (CDD) should be made part of every deal to help ensure its long-term success. The numbers remain staggering insofar as upwards of 90% of deals fail due to cultural issues (Kenney, 2020).

Our efforts continued to create dialogue between Dealmakers and performance improvement practitioners and their needs (both stated and unstated). We saw Dealmakers as wanting to make successful deals that last, but the M&A failure rate and other impediments to success get in the way of that. We made a point in one conference presentation about “heads in the sand” because many Dealmakers deny the challenges of culture and human capital issues or hope the problems just go away.

We saw this as normal but certainly fixable. There is still a great deal of misunderstanding and misconceptions about organizational culture and human capital issues in general. Usually, this is not part of a Dealmaker's repertoire. Dealmakers focus almost entirely on financial aspects and leave the “people issues” to someone else. We needed to make Dealmakers more aware of the criticality of conducting an effective CDD process to help enable their clients to avoid the biggest cause of failure. This is where performance improvement practitioners can step forward to act as advisers in this process.

We continued to promote discussion among the membership specifically for the Alliance of Mergers & Acquisitions Advisors (AM&AA) regarding the issues and challenges surrounding potential culture clash and its impact on the longevity of mergers or acquisitions. Our contention remained that in our 30+ years of dealing globally with M&As, we had yet to see two organizational cultures that could not successfully align and integrate in a relatively short period of time.

Dealmakers have many misconceptions about CDD and other human capital issues. The belief that any sort of change in the culture “is too expensive and would take years” is one of those misconceptions. Another fallacy is that culture clash applies only to the largest organizations. Not true. Culture clash occurs within medium to very small companies, including family-owned businesses. Finally, there is the belief that this is critical only on the “buy-side”; it is equally critical on the “sell-side.” It helps to “know thyself” when positioning a company for sale.

We believe that M&A failure due to “culture clash” is just a way of describing management negligence, arrogance, ignorance, or some mix of the three. Dysfunctional culture clash need never occur.

The question for Dealmakers must be: “Do you care (strategically or personally) how the deal goes after it closes?” We know that many Dealmakers care simply about closing the deal and moving on to the next deal. We also know that some Dealmakers care about ensuring successful deals that build their credibility, enhancing their reputation for being “serially successful” in putting deals together and developing more advantageous relationships with clients for repeat business.

Considering those critical trends, it is easy to make the case that Dealmakers know the risks and know what needs to happen to ensure deal success. Whether they choose to take those next steps remains the question. Part of the reluctance may be a misunderstanding of the nature of culture clash, a lack of knowledge about the CDD process, and perhaps some lack of clarity on how to plan and design an effective integration strategy.

What is culture clash anyway? Culture clash is no more than differences in opinions and assumptions as to the “proper” manner and behaviors involved in pursuing the business plan. Culture clash occurs when two (or more) groups have different beliefs about:

• Observable differences between the companies involved in a merger about: What is believed; what is important; what is valued; what should be measured; how people should be treated; how people treat one another; how decisions are made; how to manage and supervise; and how to communicate.

• The disruption that occurs when the way one company conducts its business and treats its people is folded in with another company's way of doing business.

• Differences of opinion, disagreements, arguments, and different assumptions regarding the internal process of implementing the new business plan and strategy.

• Perceived differences in organizational beliefs, values, and practices.

• Perceived differences between the two companies in degree of formality in style of dress, language, workspace, communication, and so forth.

• “Winner-Loser” language used by either organization's people (Carleton & Lineberry, 2004).

Carleton and Lineberry went on to raise the central question. “Since speed in implementing the integration and achieving post-merger effectiveness is absolutely critical, and culture clash is the biggest obstacle to achieving the clarity and focus necessary for rapid implementation, then what is generally being done to anticipate and manage culture and management style integration issues?” (p. 14)

The answer is very little or nothing at all (Carleton & Lineberry, 2004).

As part of the Roadmap, Carleton and I (2017) developed the Dealmakers' Guide: Ten Things a Dealmaker Needs to Know About Cultural Due Diligence. This provided answers to the very basic questions about human capital challenges during a merger or acquisition that Dealmakers need to know.

Ten critical elements that Dealmakers and performance improvement practitioners should know include the following:

1. Culture clash is the most common cause of eventual M&A failure, including failure to achieve financial targets or prolonged inefficiency.

2. There are no two or more corporate cultures that cannot effectively align and integrate.

3. People behave differently when in groups than they do when acting individually. Corporate culture is a group behavioral norm that is not based on individual beliefs but on organizational group norms.

4. Managing change for individuals is fundamentally different from managing change for groups. CDD is a process for gathering necessary data to design a focused group change effort in achieving overall strategic alignment.

5. Strategic alignment assures that people (and functions) in an organization are generally approaching customers and the business in a strategically consistent and cross-functionally supportive manner.

6. CDD and strategic alignment can be successfully undertaken at any point after making the acquisition decision. Even if full-blown culture clash happens postacquisition, the organization can still achieve successful alignment and integration.

7. The number of people and locations involved in implementing an alignment effort drive the costs for a CDD. Effectively, the costs for a CDD and achieving alignment are irrelevant in the overall cost of an M&A. In our experience, the combined costs have never exceeded 1% of the overall M&A costs and are often considerably less.

8. Off-the-shelf (prepackaged) culture surveys will not generate data useful for developing and implementing strategic alignment. Because every organizational situation has unique elements and ways of talking about the business, consultants must meet face-to-face with people in interviews and focus groups to capture those unique and nuanced bits of information.

9. CDDs should take no more than 30 days to complete. Change efforts should begin delivering observable and measurable results within 90 days of starting the change effort.

10. Go or no-go decisions regarding target acquisition should be based upon traditional issues of revenue generation, technology acquisition, competition, market, products or services offered, and potential synergies. Don't worry about the people. Get the rest right and the people can always be successfully aligned (Carleton & Craig, 2017).

CDD is simply a diagnostic process to ascertain the degree of alignment between two or more different groups of people and the business plan. CDD provides the base data to develop an alignment and integration plan. It is a mandatory step if anything involving the people and their behavior in the organization needs to change to achieve success.

In short, CDD provides an actionable report that would enable a Dealmaker's client to align and integrate successfully. It would also allow the Dealmaker to focus on the rest of the business and not worry about the “people issues.” Considering its relatively low cost and minimal time commitment, CDD should become a routine component of deal-making (Craig, January 2018).

What we found, however, was that many Dealmakers and intermediaries really do not appear to care or figure that the cost of dealing with human capital issues is too high, and they simply walk away from potentially lucrative deals based on that fear or concern. Maintaining that posture might be safer, but what about the potential lost benefits? Our quest here is to make Dealmakers more effective in what they do. Dealmakers and intermediaries are quite accustomed to financial due diligence, and a look at how CDD might roll out could be very beneficial.

THE ROADMAP

The Roadmap is a guide to the acquisition (or merger) process beginning with Target Identification of potential new businesses to buy and ending with the successful cultural integration of the acquired company up through the first year. Just as a building plan would work, the Roadmap brings logic and a means to successful creation of a new entity. Be aware that the Roadmap is not prescriptive but does offer numerous tactics and tools that an HR team can use in assessing the potential risks and increasing the potential benefits of a specific acquisition. Portions of the Roadmap do provide some systematic directions but overall introduce a way of thinking and doing in terms of bringing in a new organization to any company.

Undoubtedly, HR is probably in the best position to lead aspects of the acquisition process centered on the people issues (organizational culture) that so often cause failure. The people strategy for the Roadmap poses Objectives and Deliverables that will identify and surface possible challenges with intended outcomes. HR remains as an artifact in this document, but organizations may easily substitute other groups or teams from other functions who may direct M&A activities. The Roadmap identifies nine phases in the process, but this generic model can be customized for any company that has a dedicated team for mergers and acquisitions. The model follows.

In the fully detailed Roadmap (Figure 1), each phase starts with a description of the phase followed by short sections covering Business Perspective, Business Deliverables, HR Objectives, and HR Deliverables. We include a general “Hints” section that provides guidance and subtleties involved in successfully completing each phase. A descriptive listing of potential methods, processes, and tools to support the activities of the phases and bring desired results financially and of the people issues follows this list.

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Each phase also outlines roles and responsibilities. We believe the use of an identified Integration Manager (IM) is crucial for the success of the merger or acquisition. Once the company chooses the IM, HR must work in tandem with the IM (Phase III) to support and develop the IM. The IM plays a critical role in making the integration work. Each phase has deliverables, but just as importantly, each phase has references to documents and tools that will be of extreme benefit in bringing those deliverables.

THE ROLE OF THE INTEGRATION MANAGER (IM) DURING POSTMERGER OR POSTACQUISITION CULTURAL INTEGRATION

Whoever is involved on the Integration Team (which probably could or should include performance improvement practitioners, including Human Resources, Organization Development and Training, and Development practitioners), they must lead aspects of the acquisition process centered on the people issues (organizational culture) that so often cause failure. The IM works closely with the Executive and Management Groups.

The IM fills a critical role. He or she should be constantly assessing and evaluating the cultural fit between the two organizations. The IM should be sensitive to and taking note of how people verbally and physically behave in response to the following:

• Discussing and making decisions concerning business direction and results

• Discussing, responding to, and tracking “key” measures (meaning formal or informal things needing attention because of real or perceived consequences)

• Determining which business drivers (and why) are considered important enough to track and respond to in terms of daily activity

• Examining how the company is physically organized, how responsibilities and accountabilities are parceled out and structured, and how rigid is adherence

• Identifying the organizational practices: policies, procedures, processes, and authority (Who or what function must review, approve, or be advised of what. And why? And how rigid is adherence?)

• Determining how and how well are the management/leadership needs of the company are being met

• Establishing the acceptable behavior patterns in terms of doing the work

• Identifying elements of the physical environment that have a physical or emotional impact upon the work and people, including high security/low security, easy people/information flow versus restricted or controlled people/information flow, open environment or compartmentalized environment.

• Asking the following questions:

• • ○ What are the characteristics involved in supervision of the daily work?

  • ○ What is the nature or demeanor of supervision?

  • ○ How do we anticipate good, anticipate bad, look for what is wrong, look for what is right, suspicious, trusting—issues of general demeanor?

  • ○ Does staff feel that supervision is a help or a hindrance to getting the work done?

  • ○ Is supervision considered to be supportive of the work or irrelevant?

  • ○ Do technology considerations have a bearing on how things are done or how and what kind of decisions are made relating to getting the work done?

  • ○ Is it important to be “state of the art,” is it important not to be state of the art?

  • ○ When there is a trade-off between technology and personalized contact, which way does the company err?

  • ○ When staff talk about work, what are the patterns of expectations and perceptions?

  • ○ When people think of heroes or villains in the company what comes to mind, what are the stories told and what are the conclusions or morals of the stories?

  • ○ What kinds of things, or artifacts (awards, mementoes, formal acknowledgments) are treasured or honored and why?

KEY INTEGRATION MANAGER ROLE AND OTHER RESPONSIBILITIES

The IM will:

• Lead and manage the overall integration planning and implementation

• Develop his or her integration project team and mobilize other project teams as needed

• Serve onsite at the new acquisition as the “eyes and ears” to constantly monitor and evaluate the relative progress of the integration effort

• Act as the primary reporting resource for successes and potential failures

• Identify cultural challenges and provide strategies and tactics to ameliorate or mitigate them

• Be conversant and well-grounded in the acquiring company's culture while being sensitive to the new acquisition's culture in identifying and leveraging synergies and dealing with divisive situations

• Facilitate meetings, task groups, “tiger teams,” or other activities as needed to resolve conflict and/or solve problems

• Design, develop, and disseminate an ongoing communications package that is modified as needed in meeting the specific needs of the newly acquired company's employees

• Conduct management, leadership, and team assessments and provide feedback on results

• Identify key metrics for the success of the integration

• Communicate, measure, and report relative achievement

Other Responsibilities:

• Lead client engagements and work streams related to process and strategy improvement, including project management, integration assistance, and change management

• Execute process transformation, measurable improved operational performance, and organizational restructuring

• Establish client value propositions that tie financial metrics and CFO focus areas directly to business improvement

• Lead proposal development and other new business development activities by leveraging new and existing relationships with C-level executives, including the Chief Executive Officer, Chief Operating Officer, and other key executive roles.

• Provide oversight of highly skilled client and company work teams throughout the project life cycle and help ensure timely execution of project deliverables

• Provide input into engagement decisions, including work plan and timeline, project management, and resource allocation

The IM is an evolving role that must rise to the needs of the integration to ensure its success. The IM must be present. There are failures of distant IMs who did not stay on top of things daily. This can be tantamount to failure of the integration (Craig, May 2018).

THE ROLE AND CRITICAL SKILLS OF PERFORMANCE IMPROVEMENT PRACTITIONERS DURING THE INTEGRATION PROCESS

Performance improvement practitioners, as noted, could and should have a key role in moving the new organization toward a successful integration and could assume the role of the IM.

The practitioner needs some highly developed critical skills to conduct highly effective interviews and secure the necessary data to describe an organization's culture. The practice of interviewing individuals, groups, and focus groups takes years of finesse in such areas as:

• Establishment of rapport and trust quickly

• Behavioral sciences

• • ○ Organizational behavior (individual, group, intergroup)

  • ○ Psychology

  • ○ Group dynamics

  • ○ Organizational behavior

• Listening skills

• Storytelling

• Assessment of nonverbal behavior

• Systemic view (“systems thinking”)

• Business acumen and a keen sense of ethics

• Ability to change demeanor between the shop floor and the executive suite

• Adaptable language (very proper to not so proper depending on the audience)

• Unobtrusive note taking

• Air of confidence

• Sense of humor

• Rigor in asking open-ended questions

• Finely tuned ability to ask the “dumb” questions

• Ability to identify driving problems and not symptoms

• Skill in analyzing processes, tasks, procedures, and systems

• Leveling and confronting skills

• Risk taker

• Persuasive and persistent

• Relationship building skills

• Facilitation skills

• Pragmatic

• Self-aware

• Self-disciplined

• Good rational and emotional balance

• Comfort with contentious issues

• Competence in gathering data from a variety of sources (e.g., the organizational environment, documents)

• Ability in synthesizing data and report writing (Craig, 2020)

The recommended activities and tools are, in most cases, highly flexible and scalable, meaning that they can and should be easily adapted to fit the issues involved in any acquisition—be it a 15-person family-owned company highly focused upon one activity or a 2000+ person company with multiple and diverse business activities.

To paraphrase the tried-and-true idiom of “No battle plan survives contact with the enemy,” for our purposes here, the theme is, “No plan survives contact with the real world.” Remember, a plan is about anticipation and intention and will, at times, vary widely from what needs to happen as things unfold. Be prepared to deviate. This is about achieving the objective of successful integration, not simply developing and then blindly forcing through a set integration plan where you check off the activities as they are done.

Remember, too, that the CDD process is complex but not complicated and is well worth the effort to ensure deal success in the long term. (Craig, April 2018)

CONCLUSION

To reiterate Kenney's (2020) finding: “According to most studies, between 70 and 90 percent of acquisitions fail. Most explanations for this depressing number emphasize problems with integrating the two parties involved” (p. 2). This failure rate has been a constant for the past 30 to 40 years and likely could be predicted for the next several years. The harsh reality is that the number of merger or acquisition (M&A) failures can be dramatically reduced if Dealmakers and performance improvement practitioners step up and do what is necessary for M&A deal success.

The M&A Roadmap for Success was developed as a guide for the merger or acquisition process leading to the successful cultural integration of the acquired or merged company. The Roadmap brings logic and a means for successful creation of a new entity, and it also brings clarity of the roles people must assume in achieving that success. The Roadmap is not prescriptive, but it does offer numerous tactics and tools that an integration team can use in assessing the potential risks and increasing the potential benefits of a specific acquisition.

Many Dealmakers deny the challenges of culture and human capital issues or hope the problems just go away. There is still a great deal of misunderstanding and misconceptions about organizational culture and human capital issues in general, and this is where performance improvement practitioners can step forward to act as advisers and facilitators in this critical process.