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Culture is important in all deal types. What are the challenges in conducting a cultural due diligence?
This is a valuable topic. Utilizing a specific cultural framework consistently for analysis is helpful (Hofstede’s cultural dimensions etc).
The challenge in performing cultural due diligence in an M&A deal is that company culture is a nontangible thing, you can not model it with the mathematical model or give it value, that’s why it is challenging to easily asses it and validate the fit of the acquirer and acquiree culture.
Culture often emanates from the top-down. In general, you would hope that in any M&A deal, the organizations would have similar cultures. But if company culture is considered an asset in one firm or the other, the two parties should both try to support the values of the organization that has the superior culture. This is not always possible. Not addressing culture runs the risk of driving away valuable employees.
Cultural due diligence is complex as we are talking about humans and each make up the whole company’s culture on top of the values a company has at the start. You would need to have a large pool of employees to be able to have a relatively concrete idea of the culture of a company. This is extremely hard to factor into due diligence as it is intangible.
Company Culture and Country Culture are very separate topics. These two could differ greatly or be the same and it is important to recognize the difference. As it was said, culture due diligence is a must.
I think the issues or challenges in doing a cultural due diligence are the following:
– issues from both companies to be honest about their values and company’s culture,
– it is not something completely tangible so it is harder to have something as clear and concise as a financial analysis etc.
– It is quite informal of a discussion in some way with the leadership teams.When taking over a company, the aspect of culture is very often skipped. The biggest challenge from my experience is to convince the leading structures to devote certain resources to that aspect, and later what should be taken into account.
Culture diligence is important for several factors: (i) validate is there is an alignment between the acquirer and the target culture in order to avoid loss of value; (ii) it is important to know if there are any risks related to the way things are handle in the target culture; (iii) be able to establish an integration plan.
One major challenge in cultural due diligence (whether looking at organizational culture or local culture) is that many companies have poor self-awareness or transparency. How a company may describe their culture – and their actual culture is often different.
I just took on a client who, before they hired me, told me they had a great culture of respect and almost no turnover rate. Immediately after they hired me – the first two issues they brought to my attention were a hostile manager who chases staff out of her department and a (separate) department that has announced they are going to leave the company to start their own direct competition company.
Make sure you observe behavior and talk to people throughout the company. Ideally, stakeholders outside the company as well. (In the example above, I was hired as an advisor to the GM. Not due-diligence – but similar dynamics take place.)
Hello Boon
As the saying goes – Culture eats Strategy for breakfast!
Culture is a hugely powerful driver behind business importance, and one that is often overlooked.
One of the challenges of executing cultural DD is that it is hard to identify a common set of metrics or standards, that can be said to be a ‘good culture.’ It can radically change from organisation to organisation. Really what an experienced bidder will be looking for is a cultural fit, rather than a specific type of culture.
Cultural diligence sounds so important – yet I have never heard of this in an acquisition. If cultures don’t align, the business will not run smoothly
Hi, it is tough to get it properly implemented as it could be very challenging to get it DD as cultural is very individual and difficult to set a benchmark for reference, and very sensitive too.
Best is to consult those most senior in the concern group.
For eg, after take over, can we change the company name in China entity in red colour? We never had a correct answer though.
Culture DD is a tricky one.
I look at it from a context of Diversity, Equity and Inclusion -> Policy and actual situation & the defined behaviors of the organization.
This begs the question though, will organizational culture (consistent enforcement of behaviors) trump – geographical cultural aspects.
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