Business Purchase and Sales – Compatibility Assessments are an Essential Part of the Due Diligence Process
After 37 years as a corporate lawyer, I still marvel at the beginning of each negotiation of an acquisition or merger with which I am involved at how much lip service is given to the issue of whether the two organizations’ cultures are compatible and will create an effective business alliance. Ultimately, such lip service subsides and every form of due diligence (primarily financial) is performed, without determining whether the two organizations will be able to work well together.
While financial due diligence in such transactions is of fundamental importance in allowing the purchaser and seller to preview the potential financial outcome from the new alliance, ultimately the success of the deal is most often determined by how compatible the management and employee base of each company end up being, i.e., whether their corporate cultures when merged, can produce the desired financial outcome.
Research studies (including a 2003 Harvard Business Review Study entitled “A More Measured Approach to Cultural Analysis,” a 2005 study by Deloitte, as well as a 2010 report by McKinsey & Co.) have determined that corporate culture issues cause approximately 30 percent of failed acquisitions and mergers. Studies suggest that turnover rates of executives at these companies is almost twice as high as those for executives at companies that had never gone through a merger or acquisition. The Harvard Business Review study further determined that the high turnover trend can continue for almost a decade after the acquisition or merger.
My corporate law and neutral mediation skills have resulted in my taking an active role, in purchase and sale transactions, in performing the compatibility due diligence assessment process, in addition to other corporate legal services that I render. This process involves:
(a) assessing the characteristics of each corporate culture (e.g., does one company favor decision making by only a few senior executives at the top of the pyramid, and does the other favor a more collaborative, team-oriented approach to decision making);
(b) making sure that the above assessment is performed at all levels of the employee “chain” (i.e., not just senior management);
(c) working with each company to put together a combined integration team to come to a consensus about what the desired culture ought to look like, based on the type of information gathered in (a) and (b) above;
(d) coming up with a written corporate culture integration plan; and
(e) using that plan at regular intervals going forward to assess whether the combined (or new) culture is creating the desired operating result, and, if not, making appropriate adjustments and realignments as are required to avoid compatibility problems from slowing down the newly integrated company.
Performing a compatibility assessment, before, during and after the acquisition or merger transaction can influence the outcome of such a transaction, i.e., whether the “combined company” results in a successful new operation or a failed one. As one commentator points out, the impact of a bad cultural fit can literally destroy the added value that the purchasing and selling companies hoped to realize through their “combination” (see “How to Assess the Cultural Fit Between Organizations,” by Lou Hirsch, Demand Media).
We perform compatibility assessments on behalf of the acquirer and acquired companies, investment banks, private equity firms, valuation specialists, as well as executive search firms (looking to assist with the creation and enhancement of the management team(s).) Compatibility assessments are important for all companies (large to small), allowing those companies to truly complete all necessary elements of their due diligence processes, and head toward what all sides hope will be a more effective business combination.
By Joel Fishman