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Articles > Finding a fit – Why culture matters in mergers and acquisitions

Finding a fit – Why culture matters in mergers and acquisitions

Central Penn Business Journal's, M&A in the Midstate 2018 by Andy Milone

When evaluating acquisition targets, corporate buyers often focus on financial statements and court documents, which offer a window on a company’s profitability and legal liability.

But, experts said, they should also be evaluating culture, a concept that extends beyond how an office is decorated. “You should always consider the cultural fit because if you don’t consider the cultural fit, the integration process will be at a minimum more cumbersome and quite frankly, could be disastrous — and create a situation where the acquisition does not work,” said Katie Smarilli, president and CEO of a Lancaster-based business advisory firm, Smarilli Strategic Partners.

Motives affect views of culture

A former banker, Smarilli has played roles in eight mergers in the banking world, on both the buying and selling sides. As an adviser today, she often sits down with sellers and asks questions like: Why do you want to sell? What will you do when you sell your business? What is the biggest reason you would not sell? What concerns do you have about the future of the business?

Some sellers want to sell their businesses as soon as value can be maximized, and have no preference for what happens to their business after their sale. Their due diligence process moves more quickly.

Other sellers feel they have built a legacy with their teams and their employees — and recognize these stakeholders “as the life and blood of what they have been able to accomplish.” They care about the fate of their employees, and look at their businesses post-acquisition from a cultural perspective.

Buyers also vary. Private equity firms tend to search for companies they feel can be grown and eventually sold, similar to flipping a house — as opposed to a closely held business that makes acquisitions to grow either in a horizontal or vertical direction.

Horizontal growth involves acquiring a company that fills the same role in a supply chain leading up to a final product or service. Two companies may have previously competed for customers, contracts and partnerships.

If they merge and their employees begin working side-by-side, cultures could clash.

A vertical transaction may go down more smoothly.

Vertical growth entails growing through buying a company at a different spot along the supply chain, say a manufacturer acquiring a distributor. The manufacturer will no longer have to outsource distribution and can save   costs by performing the step in-house.

“(Horizontal) is always tougher, I think, than vertical,” Smarilli said. “If a distributer of a product buys the manufacturer of the product they are distributing, they are really fine-tuning their supply chain to make sure that (manufacturing) is always available to them. Generally, they build a good relationship with those people; they understand them fairly well and have a good cooperative relationship.”

Smarilli had a role in the merger of CoreStates Financial Corp. (now Wells Fargo) and Meridian — a transaction involving two banks operating in the same market.

Generally, finance personnel are driving bank mergers, Smarilli said. But they “really need to take a look at the business environment, the clients, the customers, the competition, the technology — a lot of times technology will drive bank mergers.”

Technology drove another bank acquisition between CoreStates and First Union Bank, she said. But many aspects of a business can drive a transaction.

“One bank might be consumer-oriented and the other bank might be more business oriented, and then you bring them both together and you get the power of both,” she said.

Before the deal

As a company undertakes due diligence before a merger or acquisition, early conversations are important and the whole organization — top to bottom — should be involved, said Kedren Crosby, a team member and founder of Work Wisdom LLC, a consulting firm in Lancaster.

When weighing an acquisition partner for its clients, Work Wisdom focuses on what it calls artifacts and rituals — what can be observed about the business — like how employees dress or how and when meetings are scheduled.

Work Wisdom also looks at a company’s values, or the beliefs that guide behavior, like integrity and trust. These may stand out in a company’s mission statement.

Both artifacts/rituals and values are part of the surface-level culture of a business, or the tip of the iceberg, so to speak.

Below the surface are a range of assumptions, often unspoken. These are the “invisible” aspects of culture, beliefs that people may not identify right away, like biases that may be at the roots of why a company is successful over time — and what has become the norm.

“These (assumptions) are the hardest parts of culture to change,” Crosby said.

But, she said, they can be used to positively affect a merger. If one merger partner has a culture of scrappiness and one has a culture of creativity, synergy is created when both strengths are highlighted in the newly formed company.

“What I think is really smart when going through a merger is to do what Aetna and some other companies have done really successfully, which is look with an appreciative perspective at what is really good, and strong and helpful and constructive about each of the companies’ culture,” Crosby said. “So you try and pull out these threads that are valuable for the new organization — the new identity — and you shine a light on those, and you say ‘awesome, we are really going to focus on your scrappy resiliencies, and your unbelievable creativity and speed to market and we are going to put all that together and harness this collective brilliance for the sake of the new normal’ — the new culture.”

Health insurer Aetna merged with CVS Health Corp. in a $69 billion mega- deal in December 2017.

“Scrappiness” in overcoming challenges and “creativity” in a particular market are not traits that many deem to be opposites, as are hot and cold.

If two companies are at opposite ends of the spectrum, then something called a pain point materializes, Crosby said. In manufacturing for example, one company may pay attention to detail, and be rigorous and precise, while another company may be wildly creative, loose and dependent on chaos for coming up with new products.

The two companies may never be able to integrate after a merger, but advisers with an open mind can make it work.

“Other people might come in and say if we got our eyes wide open, we could see this as constructive, and we could find a way to see this divergent way of operating, helping us be even stronger because we have skills at both ends of the spectrum — but we need to manage it,” Crosby said.

Interviews, basic observation and data collection can be used in undertaking cultural due diligence. Crosby also recommends a tool called the OCAI (organizational culture assessment instrument) developed by Kim Cameron and Robert Quinn, professors at the University of Michigan.

OCAI assesses culture and whether the firm is a clan culture, adhocracy culture, market culture or a hierarchy culture. If two different types of culture are being merged, then some aspects may need to be “shifted.”

According to OCAI Online, clan culture revolves around friendliness; adhocracy revolves around creativity; market revolves around competition; and hierarchy revolves around structure and efficiency.

After the deal

In her experience, Smarilli recognized steering committees of banks as a best practice post-M&A, but she has seen similar pratices in health care. She also was involved with a large Fortune 500 manufacturer buying a smaller distributor, a deal in which both sides set up steering committees.

These committees, along with a human resources department, can systematically address each of the areas of post-merger integration to determine if there were any negative consequences of the merge. If there is a sacrifice, what is it? They can continue to improve different areas such as IT, the sales process and employee benefits.

Some of this cultural integration can involve surveys, focus group work, interviews and open forums. Or, a consultant can be brought into the fold as a third party to evaluate the company, Smarilli said.

She believes health care companies “do a better job of assessing cultures,” but also praised private equity firms, which want to avoid complications after a deal.

“Private equity firms do a particularly good job at assessing cultures because their plan is to really maximize the value of the companies they are purchasing, so if they have not really considered cultural fit, then they are going to run into some major issues along the way,” she said.