As companies grow, mature, and change shape, inorganic growth is always on the Strat Plan as a possibility. Buying a company that scales your business, complements your business, or serves your business by bringing something new, is often a great option. But a merger or acquisition is not always the easiest option.
Deciding to acquire or merge takes a little time.
Announcing it takes just a minute.
Making it successful can take years.
Traditional Due Diligence
Traditionally, Due Diligence has been mostly financial, and that’s super important. Of course. Checking they’re not broken from a revenue, cost, margin, and cashflow perspective is a good place to start.
Alongside the financials, add some customer/client data (e.g., pipeline, new industry, new geography), some unique IP (in the form of licenses, products, or technology), and a scan of the competitor landscape, and you can see how you might merge to add value.
But ‘how’ a company works is just as important in your assessment, and too often that is left to a couple of odd – and very unreliable – assessments.
The Cultural Elevator Test
When we talk with companies about acquisitions that shipwrecked on culture, the four most common forms of assessment of culture and leadership were these:
- A presentation on their company
- Dinner (or lunch)
- Talking with people who know them
- A moment in (recent) time cultural data point
All four have the same shortfalls. All four fall in the ‘not nearly enough’ category.
Any confident articulate person can present well, especially with preparation.
Most people can carefully behave properly for dinner or lunch, even a long one.
Most people have some mates who love them dearly, more often than not without deeply understanding their capacity to lead a business.
Most companies measure culture with non-standardised assessments that arbitrarily seek to look at things they’re relatively comfortable with. As they prepare for sale or merge, everyone approaches these surveys with full knowledge of just how important ‘scoring well’ is. By the way, we know it takes about three years for employees to deliver the ‘scores’ the leader expects, so self-reporting culture is also self-perpetuating.
We call all four the cultural equivalent of an elevator test. Ride a few floors. Smile nicely. Know nothing much about each other, but its pleasant enough.
Culture on the other hand has strengths, weaknesses, challenges, core propositions, history baked in, trends over time, and a whole lot more to be understood.
Meeting someone over coffee does not constitute ‘knowing the culture they lead’.
Data, Data and more Data
When you’re looking properly at culture as an important element of your decision to acquire or merge, you need to fully appreciate the core elements of culture. At a minimum these are:
- Basic human capital data – coming, going, staying, wellbeing, and safety
- Demographics of their team, in all its diversity or homogeneity
- The fundamentals of culture – purpose people are working for, the relationships they have between each other, their decision-making expectations (agency or permission) and hierarchy, and the levels of accountability
- How they come together to collaborate, create, innovate, and connect
All of these things are independently measurable. And, if possible, as many of these as feasible all should be measured over time, so you can spot those trends.
Sense Checking with Humans
Looking at the acquisitions or mergers that work best, there are two things that are added to data.
One of those is that some ‘merger’ experts build long relationships over multiple years, even a decade or more. By the time they’re signing the paperwork, they’ve known the other business long enough to drop the pretence and show their true selves. When you know each other warts and all, you know exactly what you’re getting.
The second alternative, if you don’t want to wait a decade, is a series of interviews with key leaders and team members. From these, you can check the nuances of odd data points (that may have a good explanation behind them), alignment, and new plans and ideas.
Where do the cracks first appear?
Our experience as we look at mergers from a cultural perspective is that they usually ‘crack’ at one of four critical points.
i) Battling CEO or Senior Teams
Strangely, this one is about an alignment to the idea that the merger will work and how it will work. You need agreement on who will be the leader, and how everyone will play into that.
As soon as either CEO, let alone both, or both Senior Teams, believe that they can ‘win’ the merger by battling or being smarter, or worse still, undermining everyone or anyone else, the whole merged organisation, is in trouble.
Really this comes back to a simple principal – the CEO’s role is not about them, it’s about the impact on/for everyone else. Good CEOs know that.
ii) Traditional hierarchical cultures versus future-facing agile cultures
The second major fault line is on the hierarchy. Traditional hierarchies are permission-based cultures. Policies hold lines, guardrails are super clear, and no one dares step around them. Communication cascades from the top.
Future-facing agile cultures are more democratic, with the expectation that everyone is involved and can speak their mind. People challenge, and expect to come up with new ideas.
Traditional hierarchies see agile structures as chaotic, disrespectful, or undisciplined.
Agile cultures see traditional hierarchies as entitled, bureaucratic, and slow.
Merging them is one monster sized task and the damage en route can be significant, and unrecoverable.
iii) Competing architecture – Rewards and all that gumph.
This crack usually occurs because instead of trying to discuss and decide on one way forward, organisations think they can ‘ring fence’ or ‘grandfather’ the special conditions in the acquired company. Special bonuses, special pay, special conditions. Anything described as ‘special’ for that group of acquired people, will pretty quickly be viewed as unfair by everyone else.
iv) The hastily quilted together leadership team
Often when companies merge, to keep everyone happy, acquired leaders are quilted onto the existing Executive Team. That can work, but be sure that the purpose of the team and every role is clear. When people look up – to the existing team or newly merged-in team – they need to see the tone of the organisation, consistent expectations, and common optimism for the future. A person with handcuffs attaching them to the new business, or a leader still hankering for what used to be, will undermine any chance of creating/sustaining something special.
Can ‘The Transformation Team’ Save the Day?
Is a plan for merging a good idea? Yes! Definitely.
Is support for a merger a good idea? Yes! Absolutely.
But who wants to be a special project for long?
In the 1990s, there was a “Change Manager”. In 2000 it was the ‘Transformation Team’. Today it often has a quirky name based on some random code name used during due diligence. Either way, they’re a short-term option.
Plan, support, settle people in and get them mainstreamed into the business as soon as possible.
Just repeating that no one really wants to be a special project, especially one run by a team of side bar ‘experts’ rather than the real CEO or Leaders they just joined.
Acquired teams want to be close to the real leaders, with actual skin in the game, as soon as possible.
So, a T Team if you must, but not for long.
Finally, some points to keep an eye out for as you decide on whether an organisation is a good merger option:
i) Misalignment on Purpose
Look for the culture data on what matters most. People sign up for purposeful work. If your two purposes are contradictory, there will be a clash at the most fundamental point – the ‘why’ of your business.
ii) Patriotism versus Arrogance
All good companies attract some pride and patriotism. All good companies also know they’re not perfect and can get better. If you’re being acquired or merged, chances are someone is seeing growth you cannot achieve. Be open to that possibility.
iii) “Specialness’ that cannot be learned
Most good companies have something cool, and ‘it is almost always learnable, or needs to be, by every new recruit that joins. When you find a company that cannot describe their ‘special cultural elements’, nor has sought to teach them, it will be hard to understand their impact or how they can be shared.
iv) A lack of respect
Merging requires respect for the team and organisation you’re joining, or that’s joining you. Look for the culture data on respect.
v) A lack of openness and curiosity
Mergers and acquisitions do not always go to the original plan, but if are open and curious, you can find new and interesting ways to make it work differently that can be surprisingly effective. Look for the culture data on curiosity.
vi) Low appetite for growth
Merging is a growth strategy. Look for the culture and leadership data on growth and appetite for learning.
And finally, the most important thing! HONESTY!
The most critical element of a successful and sustainable merger is honesty.
- Of intent. What you’re trying to create.
- Of plans. On how you’re going to work together to get there.
- Of impact. On every single person going through the merger.
Every person will be responding to the decisions you make, by either continuing to give their energy, incremental effort, and momentum to what you’re doing, …or not. If they do, you’ll have a successful merger and sustainable growth. If not, you’ll have a distraction that may years to fix, or worse still, the painful lessons of a merger that shipwrecked on culture.