Best of CoBiz: The business value of culture in a merger

The rules of “making money and making deals” have shape-shifted in an era of greater uncertainty and transparency. There is an increasing expectation of “full disclosure” in every part of our world, customers are more savvy, and employees expect to play a part in decisions that used to be executive territory. The job of leading a company is more precarious and difficult than ever. As a result, making deals to buy and sell companies has become trickier territory as well.

For decades, research from a variety of sources has shown that approximately 65-75 percent of mergers’ long-term payoff for the buyers’ shareholders is at or below what was originally predicted or promised. Experts cite reasons such as:

• Management in acquiring firm not as strong as expected (including systems);
• A weak strategy (with no clear plan to unify the two company strategies),
• Lack of effective integration of the cultures,
• Key management leaves the acquired firm.

When you define culture properly (how we get things done that either hinders or accelerates your strategy) all of the above factors are about culture, not whether the deal makes financial or strategic sense. The central question behind cultural due diligence is “Can the business practices of these companies harmonize in a way that will increase the value of the whole entity?” (especially important if the merger will require major layoffs).

If you care about the company you are buying or selling beyond getting the deal signed, you owe it to yourself to perform cultural due diligence. Too often, the transaction is the focus because people don’t understand how to measure cultural factors and their impact. Culture relegated to the “soft and fuzzy” zone is easy to ignore until it rears its ugly head in turf wars, priority and strategy confusion, and lack of role alignment.

The good news? Assessing culture can be directly linked to the most critical business performance factors and business outcomes leaders care about:

• Return on Equity, ROA, ROI
• Sales Growth and Market Value
• Customer Satisfaction
• Innovation
• Employee satisfaction
• Quality

Daniel Denison of the University of Michigan has been studying the link between culture and performance for 25 years, and has found four significant management practices – and 60 behaviors – which reliably predict an organization’s ability to drive stronger growth and performance through culture. The data is based on 1072 benchmark companies across all sizes and industries. You can now see precisely how today’s culture profiles impacts tomorrow’s performance. Below is a sample of the return-on-assets for the top 25 percent and bottom 25 percent of benchmarked companies in Denison’s database for the culture-performance traits over a 3-year period:

Circle 1 (top): Average ROE = 6 percent
Circle 2: Average ROE = 21 percent

• Study of 161 publicly traded companies from a broad range of industries
• Contrasts the performance of the 10 percent of the organizations with the best culture scores with the 10 percent of the organization with the worst culture scores
• Average ROE for the organizations with the lowest culture scores is 6 percent, average ROE for organizations with high culture scores is 21 percent
• Highly similar results for return on total investment

The business value of culture in a sale is a proven risk factor that can be mitigated. With the help of Denison’s validated research, you can pinpoint and strengthen the areas where the two cultures will clash, as well as defining management practices that need the most attention in the aftermath. Your culture due diligence will help answer fuzzy questions such as:

• What should change and what should not change?
• What is the right level of transparency for employees and investors before the deal is done?
• What accountability and decision authorities will each side retain after the merger?
• Where do the strategies of the two companies align, and where do they diverge?

You wouldn’t fly blind on the financial due diligence of the deal. Why fly blind on culture?