In Change Institute's latest webinar titled 'From Discord to Harmony: Change Management’s Role in M&A Culture Clash', M&A synergies expert Adrian Waters shared his expert insights on the critical role of change management in successfully navigating cultural integration in mergers and acquisitions. Adrian, who is the CEO of Equalsten and a faculty member at the Institute for Mergers, Acquisitions, and Alliances, focused on effective strategies for post-merger cultural integration.

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What exactly is organizational culture? Organizational culture serves as the backbone of any company. It includes its values, implicit beliefs, and ideas that define what the organization stands for. This culture not only provides a sense of identity to everyone who works in the company, but also translates shared values into actionable behaviors that govern how people work, make decisions, and interact, both within and outside the organization.

Organizational culture affects individual employees, shaping team dynamics, and guiding the overarching ethos of the organization. It manifests itself through various means such as values, symbols, systems, and behaviors. The role of culture can't be overstated; it can either act as a catalyst propelling the company towards its objectives or serve as a barrier that hampers progress. Therefore, understanding and aligning organizational culture is critical for the success of any strategic initiative, including mergers and acquisitions.

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Why Culture Clash is Often the Unseen Deal Breaker in M&A

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Drawing from his experience with 59 M&A transactions, primarily focused on post-merger integration, Adrian has seen how ignoring, or not giving importance to the integration of organizational culture has resulted in prolonged closings or failed deals.

He pinpoints three key reasons for this frequent oversight:

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1. ‍Absence of adequate cultural due diligence. "Understanding the culture of the business you're acquiring is crucial," Adrian stresses, adding that a thorough assessment should reach beyond financial and operational metrics to encompass a comprehensive understanding of a company's organizational culture.‍
2. Looking at differences in culture as inherently bad. Especially when it comes to variations in cultural norms or operational processes between the merging entities. "Don't mistake different for deficient," he states emphatically. According to Adrian, what is often categorized as culture serves as a proxy for organizational processes and practices. A proper evaluation can reveal that these differences might bring added value to the table.‍
3. Misalignment between cultural elements and the strategic objectives of the transaction. "Different doesn't mean incompatible," Adrian advises. The key lies in ensuring that the differences are aligned with the overarching strategy for the merger, otherwise, companies risk focusing on the wrong objectives.

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Adrian reminds us that, "the business of business is people," and that when companies are bought, you don’t just buy the brick and mortar but the people and the processes.  He warns that overlooking culture can significantly increase attrition rates, thus compromising the very objectives the transaction aimed to achieve. "Ignoring the cultural aspect is risky business," he concludes, pressing the point that cultural considerations are not merely 'nice-to-haves' but absolute 'must-haves' for a successful merger.

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Five Essential Principles for Managing M&A Culture Clash

Adrian's session was filled with valuable lessons about mergers and acquisitions(M&A), but here is a recap, summarized into five points, for anyone navigating cultural alignment during post-merger integration:

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1. Define and Communicate Purpose Clearly‍

Lack of a well-articulated purpose can cause both the acquiring and the target companies to falter. Adrian emphasized that the "WHY" must be clearly communicated across all organizational levels to secure stakeholder buy-in. In many transactions, the purpose isn't clearly articulated, creating confusion and reducing the odds of success.

Adrian's Pro Tip: "Make it a priority to understand the strategic rationale for the transaction. If you're not in a position of authority, don't hesitate to ask for clarification. Knowing the 'why' will help get everyone on board."

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2. Achieve Alignment Across the Organization

Alignment shouldn't be a top-down affair originating solely from the CEO. Adrian recalled instances where discrepancies between the CEO's vision and those of the managers led to failed transactions.

Adrian's Pro Tip: "Sometimes the acquired company may have better processes. During your due diligence, take the time to evaluate both companies' strengths before rushing into alignment."

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3. Engage the M&A Steering Committee

Each transaction should involve a steering committee that comprises representatives from both the acquiring and the acquired companies. The committee plays a crucial role in ensuring alignment and effective communication.

Adrian's Pro Tip: "If you identify problems or resource gaps, present them to the steering committee. Use the existing governance framework to obtain the resources or approvals needed to keep the transaction on track."

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4. Pay Attention to Cultural Indices

Cultural fit is often overlooked but is key to M&A success. Adrian recommends focusing on four critical cultural indices: courage, commitment, inclusion, and shared beliefs.

Adrian's Pro Tip: "If you haven't had the opportunity for cultural due diligence before day one, make it a priority afterward. Talk to HR, general managers, and employees to get a better sense of the company culture."

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5. Focus on Target Operating Models

In M&A, there's a lot to be said for planning, particularly when it comes to integrating operational models from different companies. The goal should be to harmonize the best elements from both entities.

Adrian's Pro Tip: "The alignment should involve considering whether to adopt centralized or decentralized models, among other things. This will require detailed planning and a strong post-merger integration strategy.

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Key Takeaway

Adrian Waters offers a compelling roadmap for successfully navigating the complex landscape of culture in mergers and acquisitions. His insights serve as acritical reminder that the success of any M&A deal isn't solely determined by financial metrics or operational efficiencies. Instead, it relies heavily on a deep understanding of organizational culture, effective communication, and strategic alignment across all levels of the involved companies. By taking a comprehensive approach that includes cultural due diligence, open dialogue about differences, and alignment with strategic objectives, companies can significantly increase their chances of a successful merger or acquisition. Ignoring these factors, Adrian warns, is not just risky—it's a potential deal-breaker.

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For a deeper dive into Adrian Waters' invaluable insights on managing culture clash in M&A, we strongly recommend watching the full webinar recap. You can catch it on LinkedIn or YouTube.

Interested in having a closer look at Adrian's presentation slides? Send us an email so we can send you a copy!

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