Cultural due diligence
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In your experience, how important has cultural due diligence been in increasing the odds of successful mergers and/or acquisitions?
My Fortune 100 company has a history of predominantly small acquisitions which are assimilated vs. left to operate standalone. Our company culture might be described as being conservative (i.e. in comparison to a Silicon Valley firm). I can’t frankly recall a situation where our company made the decision to not acquire a company because there was too big of a gap between the two cultures. There was one small highly entrepreneurial company we acquired – headed by industry thought leaders who had the egos to match. Coming into our company, they were no longer big frogs in a small pond, but now a well compensated manager working a large company and reporting to higher ups with fancier titles and compensation. As I recall, within 6 months all of their top leadership left the company. I wasn’t personally involved in the assessment or negotiations,.. but it suggests that we should have done something different. e.g. maybe kept them operating as a standalone company – insulating them from the corporate bureaucracy and red tape.
I was the change management workstream lead for the post acquisition merger integration of a startup fintech company into a Fortune 100 insurance carrier. Cultural due diligence is critically important in increasing the odds of successful mergers and acquisitions (M&A). While traditional due diligence focuses on financial, legal, and operational aspects, cultural due diligence explores the compatibility of the corporate cultures of the merging entities. This aspect is often underestimated but can determine the long-term success or failure of an M&A deal.
In my view, cultural due diligence is not just important—it’s essential for the success of mergers and acquisitions. It helps in anticipating integration challenges, planning effective strategies, and ensuring that the combined entity can thrive. Ignoring cultural aspects can lead to a rocky integration, undermining the potential benefits of the merger.I was once tasked with valuing a tech company with roughly 200 developers. These developers, however, were part of a unique “cooperative” hiring regime. This meant they weren’t traditional employees but rather belonged to a pool of developers contributing to a specific cooperative.
The acquiring company acknowledged this risk. They assessed the potential costs associated with transitioning these workers to standard employee contracts in Brazil. However, a crucial misstep occurred – none of the developers were interviewed.
Following the acquisition, the company attempted to convert these workers to a different employment regime, leading to significant layoffs. Unfortunately, the cooperative structure wasn’t designed for traditional employment. These developers preferred the flexibility of working nights and varied shifts offered by the cooperative. Faced with a forced change, they changed jobs.
This resulted in a substantial workforce loss, forcing the company to record a major impairment in the year following the acquisition.
They major error was not understanding the culture of the company before the acquisition.
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