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The Power of Culture Compatibility: How to Drive Successful Mergers and Acquisitions

Don't underestimate culture compatibility in M&A

By Gustavo Razzetti

February 23, 2023

Avoid this common mistake: neglecting the role of culture integration across steps of M&A process

An organization is only as extraordinary as its people. This adage is even more valid during a merger or acquisition. Most M&A fail not for a lack of proper financial and operational due diligence, but by overlooking the culture compatibility between the two organizations. A culture clash can quickly turn a match made in heaven into hell, leaving both sides to wonder what they’ve gotten themselves into.

A PwC study shows that 65% of acquirers say cultural issues hindered value creation in their last deal. A significant majority of those acknowledge losing more than 10% of critical employees during the transaction.

Culture integration is vital for the combined future company to be successful. 75% of C-suite executives agree that getting the talent and cultural aspects right has increased in importance.

In this post, I’ll address how to evaluate culture compatibility across the M&A process.

Done Deal? Culture Clashes in Mergers and Acquisitions

According to McKinsey, a vast majority of mergers fail – roughly 70%.

However, there’s no end in sight for M&A. There are many reasons they will continue to increase, including ridiculous rewards for executives and advisers even if deals result in zero or negative operating gains. Short-term wins drive most M&A – they’re a band-aid, not a root-cause solution.

Journalist Adam Davidson wrote: “When you see a merger between two giants in a declining industry, it can look like the financial version of a couple having a baby to save a marriage.”

While many reasons can derail M&A, culture is an unseen, critical force for successful integration.

Never has the “way we do things here” become so visible – and vital – as when integrating two organizations.

Unfortunately, culture gets too little attention. According to the M&A integration survey by PwC, only half of the executives surveyed said that culture was a key element of their change management programs.

Take the Daimler-Benz and Chrysler merger fiasco – a textbook example of how a culture clash often ends in a failed deal.

Decision-making at Daimler-Benz was methodical, while Chrysler’s was creative and unstructured. Salaries at Daimler-Benz were conservative, much less so at Chrysler. Both companies were organized differently, too. Chrysler had a flatter structure compared to Daimler-Benz’s hierarchical, top-down one.

A joke circulated at Chrysler at the time as a sad metaphor for how people felt: “How do you pronounce DaimlerChrysler? ‘Daimler’– the ‘Chrysler’ is silent.”

Daimler spent about $60 billion acquiring, restructuring, and investing in Chrysler over nine years. In 2007, it sold Chrysler to Cerberus Capital Management for $7 billion – a huge price to pay for underestimating the value of culture.

Culture integration is as vital as business integration: it’s the cause of 30 percent of failed integrations.

Amazon’s acquisition of Whole Foods seemed (another) Wall Street dream come true. But the clash between a Fearless and an Aggressive culture quickly became a nightmare.

Amazon’s success has been driven by an aggressive culture that rewards processes, data-driven standardization, and speed. On the other hand, Whole Foods encouraged autonomy, close relationships with customers, and creative solutions.

Employees crying on the job, feeling stressed out, and focusing on performance metrics over helping the customer became the new norm. Not surprisingly, Whole Foods dropped from Fortune’s best companies to work for list for the first time in two decades.

Harvard professor Dennis Campbel sums up the culture clash: “Whole Foods has a very high-empowerment kind of culture, so these draconian standards, telling people where to put things on the shelves and the loss of autonomy, employees were feeling angry from that.”

A cultural due diligence can anticipate irreparable gaps before it’s too late.

What Is Culture Compatibility? (And Why it Matters)

Culture compatibility refers to the degree to which the cultures of the two merging companies can live together. It’s a critical factor in the success of mergers and acquisitions. A lack of culture compatibility can lead to conflicts, low morale, and decreased productivity.

There’s no such thing as a perfect match. Aim for culture fitness rather than culture fit, as I explain in my book Stretch for Change. Both cultures should complement each other – the sum of both should create a healthier and stronger organization.

Some differences will require work; others could be a deal-breaker.

Start with the type of culture

There are four types of company cultures; each has a specific leadership style, sense of belonging, norms, and ways of working. A massive gap in this area is often a deal breaker.

Going back to the Amazon and Whole Foods deal, the former has an Aggressive Culture (predictable, goals and data-driven, more structured). In contrast, the latter had a Fearless Culture (autonomous, purpose-driven, and fluid).

This red flag could have helped anticipate the clash.

Is alignment possible?

Why does each organization exist? I’ve helped integrate the culture of two companies in the same business space and had a similar purpose. However, I’ve also experienced how hard it is – sometimes impossible – to align companies that stand for different things.

The AOL and Time Warner merger is a great example – a match made in hell, not heaven.

AOL was very aggressive and opportunistic – usually described as cut-throat – and prioritized short-term wins over long-term value. Time Warner saw AOL as a new way to distribute existing content, which AOL resisted. They failed to align.

Former CEO Dick Parsons told the New York Times: “It was beyond certainly my abilities to figure out how to blend the old media and the new media culture. They were like different species, and in fact, they were species that were inherently at war.”

What’s the shared narrative?

Mergers create massive anxiety – on both sides of the aisle – about the new company's future. Don’t fall into this trap. The narrative is too often neglected.

How the story is told – from why it’s driving M&A to the benefits it will generate – should be relevant to both organizations.

Deals usually establish a hierarchy; few M&A are mergers of equals.

If one company “continues to accelerate its growth” then that means that the other is just a means to that end. Similarly, a name change is not a mere formality – it affects identity. Furthermore, what happens when the company that was your enemy becomes your partner or owner?

Are both emotional cultures compatible?

Every organization has an emotional culture, even if it’s one of suppression, as professor Sigal Barsade wrote.

Understanding what each side brings to the M&A is not a minor thing. Psychological safety, feedback, and team rituals shape the emotional culture of every organization. I remember doing culture due diligence in which the gaps couldn’t be wider.

Company L encouraged (and people were expected) to speak up and challenge everyone’s ideas. Senior executives promoted healthy debates with questions rather than bringing up solutions.

Company M was completely the opposite: a low level of psychological safety in which people waited for the leader to speak so they could adapt their views to show ‘alignment.’ Unlike company L which had rituals to welcome new members and celebrate successes, company M didn’t welcome ‘emotions’ – check-in rounds were explicitly banned.

Can your functional cultures co-exist?

Your company norms, how people meet and collaborate, and decision-making processes often drive culture clashes.

In another experience, we worked on the cultural integration of two companies that were black and white.

One was highly tribal, with people-oriented, informal, and long meetings– usually with 20 or more participants. It aimed for consensus among too many people, slowing down decision-making. The other company prioritized speed and effectiveness. Collaboration mostly happened asynchronously with a few short, well-run meetings. Authority was distributed and followed the “disagree and commit” decision-making principle.

Though some of these ways of working can be tweaked, in most cases they’re ingrained in the culture. They’re not just behaviors but essential to the “way we do things here.”

Culture compatibility is more than ensuring that both sides will get along. It’s about avoiding unnecessary clashes. Are both leadership, communication, and decision-making styles compatible?

The Role of Culture Compatibility across the M&A Integration

At Fearless Culture, we use the Culture Design Canvas as a framework to assess compatibility and facilitate culture integration.

Here are the key things to watch out for across the multiple M&A stages.

1. During Due Diligence

Too little attention is paid to culture compatibility during due diligence. Even though access can be limited, assessment should start here.

Social listening techniques can help you learn about positive and negative sentiments. By interviewing former executives, you can clarify leadership styles and decision-making approaches. Glassdoor reviews can give you an inside look at the culture without setting foot in the company.

Conduct stakeholder interviews to learn more about what drives senior executives – and how people work, communicate, and collaborate. Probing how the organization deals with mistakes sheds light on its culture of innovation.

2. Before Deal Closing

A thorough assessment – both qualitative and quantitative – can deepen the findings.

We use the Culture Design Canvas to facilitate culture mapping sessions, codifying the real culture across various groups in both organizations and then comparing commonalities and gaps. Most importantly, we try to address how compatible both cultures are.

The Culture Identity Assessment is a quantitative tool to assess the dominant and secondary types of culture. For example, one company is Tribal and the other is Aggressive. Comparing both organizations raises red flags of a potential mismatch.

Leaders must address culture compatibility before closing the deal. Most importantly, a team should create a plan before the business integration starts. Identify risks, quick wins, and areas that will require major transformations.

Negotiate the desired culture from the start. The idea is neither to have a culture takeover nor to blend both cultures. In the same ways business models, products, and technology complement each other, so should cultures.

Define the future state and the path to get there.

3. After the Deal Closes

Following the previous step above, you don’t have to wait until the deal is announced to clarify what the future culture should look like.

Start by building a compelling, honest narrative about why the merger is happening and the benefits it will deliver to both sides. Leverage the insights gathered during the interviews or culture mapping sessions to anchor the narrative to what people, not Wall Street, want to hear.

Share bad news upfront. People are already worried about the company's future –and their jobs. Sugarcoating the announcement will build distrust and fear. Integrations often involve efficiencies; the sooner people have the facts, the better.

Kick off the culture integration program:

  1. Define the future (integrated) culture: Clarity is vital to retain critical talent during change
  2. Acknowledge the gaps: Emphasize the positive within each company that will prevail
  3. Prioritize crucial, immediate action (quick wins): Clarify expected behaviors – both what’s rewarded and punished
  4. Encourage and address employee feedback: People will go through anxiety, fear, anger, and disagreement. Giving people space won’t dissipate all issues, but it will at least show that you care. Monitor confusion and alignment. Communication in M&A is never enough; aim for overcommunication.
  5. Embrace trial and error: Evolving culture is a rollercoaster, not a swift drive, especially in M&A

Managing Culture Change in Mergers

Don’t underestimate the power of culture compatibility in the success of mergers and acquisitions.

Integrating two businesses means integrating their cultures, too.

Culture compatibility alone doesn’t guarantee a successful business integration, but it will save you a lot of time – and headaches. Uncover commonalities, gaps, and surprises. Ensure a smooth and successful integration by beginning the process early without underestimating red flags.

Assessing culture compatibility begins with due diligence. Don’t wait until the other party says “I do” to realize your marriage was made in hell, not heaven.

Article by Gustavo Razzetti, CEO of Fearless Culture

Gustavo facilitates courageous conversations that drive culture transformation. He is a sought-after speaker, culture consultant, and best-selling author of the book Remote, Not Distant.

Razzetti is also the creator of the Culture Design Canvas – a visual and practical method for intentionally designing workplace culture. His insights were featured in Psychology Today, The New York Times, Forbes, and BBC.

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