Chapter 1
Unpicking the relationship between culture and M&A activity
To unlock performance, leaders must tune into the dynamic relationship between culture and M&A activity.
People’s attitudes and openness to cultural change will result in different M&A outcomes. Organisational culture can be defined as the values, behaviours, beliefs and environments that shape people’s experience within an organisation.16 It is also socially dependent, in that groups of people create a culture as a way to navigate and adapt to changes in their external environment.17,18 Culture is therefore created and sustained by groups of people in response to their environment and, when changes occur during a transaction, a cultural response is likely to be triggered.
M&As therefore present a unique cultural challenge for organisations. A transaction catalyses a shift within the environment where two or more groups of people with their own well-established cultures come into contact and interact with each other. This intercultural contact is known as acculturation. Research shows that acculturation can result in harmony or stress between cultural groups.19 The process of acculturation highlights that the relationship between culture and M&A is dynamic; M&A activity can impact culture, whilst culture will influence integration.
People’s attitudes and openness will impact the M&A outcome
When two well-established cultures collide, employees’ perceptions of the attractiveness of the other organisation’s culture, as well as their openness to cultural change, greatly impacts the integration outcome.20
Before a transaction is agreed, it is therefore important to consider the following:
1) How attached are employees to their respective cultures?
2) What do employees view as the non-negotiable aspects of their culture?
3) What are employee attitudes to cultural change?
As Figure 1 illustrates, various cultural outcomes can arise when M&A activity is initiated, depending on people’s attitudes and openness to change.20 For example, when employees are less open to cultural change, they can display avoidant behaviours to preserve their original culture. Moreover, employees' perceptions of the attractiveness of another organisation's culture can also impact their motivation for change. Both of these dimensions can make or break the experience of integration and consequently the overall M&A success.
Why cultural similarity may not be a good thing
Given that employee perceptions about the attractiveness of the other organisation will influence the overall outcome, many leaders might believe that cultural similarity in M&As is always desirable. However, research shows that this is not the case.21,22 Cultural similarities can create blind spots and hinder the process of understanding the cultural nuances that will inevitably exist. This can lead to an oversimplified assumption and pitch to employees that the cultures are ‘both the same’ or at least ‘very similar’.
Cultural similarity also restricts diversity of thought, meaning the new venture won’t benefit from the opportunity to develop an inclusive environment and harness the power of a more diverse workforce.
Transactions involving similar cultures should therefore dive deeper into how they are different. Similarly, when cultures are not as alike or aligned, these differences should not necessarily be seen as a negative within an M&A. Cultural difference may require a slower pace of integration, but long-term, if embraced effectively these differences can create increased value and enhanced performance.
Chapter 2
Appreciating and managing cultural differences effectively
Leaders must welcome and value cultural differences in M&A to allow for recognition and mitigation of a culture shock, clash or conflict.
It is the highly talented employees who are not engaged that will be the first to leave during a M&A transaction, with the mismanagement of cultural differences likely to hamper key talent metrics, such as engagement and turnover. As one EY US study found, 47% of employees tend to leave within one year after an M&A and 75% leave within three years.23 Addressing cultural differences in a way that promotes ‘synergies’ between firms is essential to safeguarding human capital and strengthening value.
The prominent culture researcher Hofstede suggests that every organisational culture is unique, much like an individual’s personality: “Culture is to humans collectively what personality is to an individual.”24 Consider meeting someone for the first time. If you understand, respect, and admire their differences, and they do the same with you, you are likely to build a positive relationship. If you feel threatened, anxious or don’t value your difference, you are more likely to reject each other. The same foundations are important when multiple organisational cultures come together. Handled poorly, these differences can result in culture clash, culture shock, or culture conflict. Handled well, there could be cultural synergies that the new organisation can benefit from.3
Chapter 3
Creating your ideal post-deal culture
It is fundamental that leaders of M&A plan for their post-deal culture.
Planning for post-deal culture ensures cultural differences are harnessed to create synergies that positively impact people experience and performance. Cultural synergy is the harmonious integration between merging or acquired and acquiring firms to enable the retention of skills, capabilities, products and talent that will deliver long-term M&A value creation.
What is important here is for leaders not to make an assumption about what ‘cultural synergy’ looks like. The desired cultural end state must be explicitly decided on and clearly defined.
As each M&A transaction is unique, there is no “one size fits all” methodology for attaining cultural synergy. To cut through this complexity, leaders can use cultural synergy archetypes to help align the post-deal culture with the strategy and objectives.24,26,27 For example, when two organisations meet, they may wish to retain separate cultures and preserve the culture that was an attractive asset in the deal (preservation archetype). Alternatively, there may be the desire to disband from the old ways and formulate an entirely new and improved culture (transformed archetype). It is also possible to meld cultures in a way that takes the best from both entities (best of both archetype) and the aim may be to assimilate one culture to conform to the other (absorption archetype).
Chapter 4
Culture-focussed interventions to enhance M&A performance
To unlock enhanced performance, culture must be considered throughout the entire M&A process.
Culture cannot be an afterthought for leaders or a bolt-on consideration. A multitude of culture-based interventions need to be deployed at different stages of the M&A life cycle to help people sustain engagement and deliver high performance. The model illustrated in Figure 2, which was created by the EY Lane4 research team, shows there are five timely culture interventions that will help enhance M&A performance.
Pre-deal: Before the decision is made
It is important to conduct assessments into the culture of both organisations as early as possible. These assessments offer valuable insight into the risks that could lead to a culture clash, the opportunities that can be leveraged for cultural synergy and the timing, pace and design of subsequent cultural integration strategies.
To enhance M&A performance, make culture assessments part of your due-diligence before the transaction is agreed. At this early stage, data can be gathered by reviewing the articulated culture of each organisation (i.e., the espoused values and behaviours), performance measures relating to employee experience (e.g., engagement and retention data) and interviews with decision makers. Organisations that are frequently involved in transactions where acquisitions are part of their strategy should build regular culture assessments in their own organisation, so they are ready for this comparison analysis.
Day 1 readiness: Before the announcement is made
Senior team alignment on cultural end-state: Based on the M&A objectives and cultural characteristics of both organisations, executive teams should align on the cultural archetype that will maximise deal value. As discussed in the previous section, this archetype could be cultural absorption, transformation, a ‘best of both blend’, or a separate and distinctive preservation. By aligning on the desired end state from the outset, senior leaders can anticipate cultural challenges and apply consistent leadership strategies to encourage the synergy required and drive positive performance.
As leaders, it might be tempting to tightly define exactly what the new culture will look and feel like. However, this is likely to broaden the gap between the articulated and deeply ingrained cultures that are experienced by employees, in turn creating resistance.28 Instead, top teams should align to a cultural archetype, and then create space for organisational members to co-create the culture change accordingly. Even if the decision is to opt for preservation (i.e., keeping the cultures separate and distinct), the M&A will impact both cultures in some way and leaders shouldn’t underestimate this disruption. As with every change, co-creation of the desired future end state is important. Individuals shouldn’t feel like a change is being ‘done to them’, but that there are multiple opportunities for them to add in ideas, thoughts and perspectives. Whilst leaders need to avoid co-creation descending into chaos or unrealistic expectations, by offering everyone a chance to proactively shape the future, you are far more likely to keep people engaged and motivated in the change occurring.
Every organisation has a unique culture and there will be varying degrees of cultural difference in every M&A transaction. Adapting the degree and speed of integration to match the level of cultural difference is of paramount importance to mitigate culture shock, clash, or conflict. Research suggests that when the cultures are similar, the merging organisations are able to integrate quicker and to a greater extent.15,26 In contrast, when the cultures are very different, findings showed the integration was more successful when it was slower and integrated to a lesser extent.
Consider the extent of cultural difference identified in your early assessments. If there are big differences, you may find the integration is smoother when you allow more time for people to familiarise themselves and make sense of their future cultures together. Adapting your integration approach based on culture is an essential part to realising the full performance potential of the M&A.
Day 1 readiness: After the announcement is made
M&As are a form of transformation and the EY study with Oxford Saïd Business School highlighted how transformation success or failure can often be rooted in human emotions. For any transformation initiative to perform well, leaders must invest in building the conditions for success at both a rational and emotional level – otherwise, it leaves the M&A vulnerable to the impact of a negative spiral of emotions.13 Anticipating the emotional journey of change is therefore critical to success, with leaders taking time to support people proactively, patiently and empathetically as they navigate the change. It is also important for leaders to understand the level of attractiveness of the merging organisations and people’s degree of openness to cultural change, as this will help them anticipate challenges and gauge the type of emotional support different groups may require.
Create opportunities to showcase the culture of the merging organisations and celebrate their unique heritage and characteristics. Even if the desired end state is for one culture to be absorbed, it is important to honour the past, what it meant to people and the value it contributed. Senior teams must also be conscious of the fact that, whilst they have been involved in the M&A decision from the start and have had months or years to come to terms with the change that’s happening, for employees, the M&A will be a shock, sparking raw emotions that take time to process. It’s therefore vital that, throughout the integration, leaders patiently support people as they work through the change, rather than imposing their own perceived deadlines on how they expect people to be feeling.
It will inevitably take time for people to explore and understand the full implications of what the M&A means for them, their work, their role and their team. At this very early stage, leaders must also prioritise helping people understand ‘the why’ of the change: why the change was necessary and what’s required from them. Only when people understand the need for change, care about it and know what actions are required from them will the transformation be realised.
Post-deal integration: Continued process of optimising M&A performance
Create opportunity for informal social contact: Research shows how informal socialisation (i.e., the spontaneous and unstructured communication and sense making that occurs between employees) is the strongest cultural enabler during M&A.28 This makes sense, as culture is socially constructed and cultural transformations are enabled by social connection.15,16,22 Informal forms of interaction are highlighted by research as particularly important during M&A, as they help people feel a sense of autonomy, control and community, despite the high degree of central control of the core transaction.20
If senior leaders ignore, fear or downplay the power of informal conversations during an M&A, there is a risk they will inadvertently perpetuate a culture clash and hamper the transaction performance. By deliberately engaging in informal communication, leaders can be part of this influential communication channel.
As Chris Rodger’s ‘Leadership Communication Grid’ (Figure 3) highlights, there are a number of communication channels available to leaders and, to optimise M&A performance, they shouldn’t only engage in formal forums, role modelling and structured workshops.29 In the wake of an announcement, as uncomfortable as it may feel, senior leaders must lean into the informal, unstructured interactions to help gradually shape and influence the informal conversations occurring. Furthermore, leaders will need to proactively invest in helping different groups of employees meet and interact informally – otherwise, if left to happen organically, all these informal conversations will only be occurring within pre-existing groups and networks, creating an ‘echo-chamber’ of assumptions, beliefs, views and exacerbating an ‘us-them’ dynamic.
The post-deal culture(s) will be heavily influenced by social interaction. Opportunities for informal social interaction should be created both between and within groups:
- Between organisations: Organisations should prioritise creating opportunities for this socialisation to happen as it is the foundation for the development of the desired culture(s). For example, creating opportunities during company events, or through buddy systems, mentoring, and peer learning groups.
- Within the pre-M&A organisations: Socialisation within the pre-M&A organisations also plays an important role. This type socialising encourages the sensemaking, emotional support and shared learning required for people to navigate change in a trusted safe space.
There will also be a number of key cultural influencers within each organisation, who have the power to negatively impact or positively champion the desired change. In some organisations these key influencers will be well-known, but leaders can also use social network analysis to identify who the key influencers are within certain groups. It’s important leaders engage with and listen carefully to what key influencers are noticing, paying attention to the feedback, challenges, concerns, questions, and ideas that are being raised. Both informal and formal channels can be used keep these key influencers hyper-connected to senior leaders, creating a mechanism for two-way communication and way of ensuring influencers become well-informed and engaged change champions.
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Summary
M&As have the capability for immense value creation. Culture must act as a cornerstone of transactions, alongside operational and strategic initiatives, for maximum value. Understanding the differing organisational cultures is vital, as it influences decisions and integration strategies throughout the process. Leaders need to align on the desired cultural end state, influence perceptions, drive emotional readiness for change and support informal social connection. Getting the culture-side of M&A right is the careful process of putting humans at the centre of transactions and leaders helping people let go of the past and feel equipped and energised about co-creating a future.
