Friday, June 30, 2006

Cultural Assessment - Prerequisite for successful Mergers

"Tata Tea acquires Jemca, A Czechoslovakia based company"
"Dishan Pharmaceuticals & Chemicals acquires Solutia Inc. USA for $76 Million"
"Wipro Technologies acquires Quantech Global Services USA for $10 Million"
"BILT acquires Malaysian Pulp & Paper for $230 Million"
"Jindal Steel & Power acquires a Iron Ore mine in Bolivia"

All these acquisitions happened in month of May 2006. These were not the only acquisitions in that month - there were 26 other multi-million dollar acquisitions done by Indian companies in the month of May 2006.

Indian firms have now got the taste for foreign acquisitions - may be this is because Indians in general have a craze for foreign goods. So when companies go shopping - they buy overseas companies. For example, in the month of May 2006, Indian business saw more of overseas acquisitions than local acquisitions. The same can be observed for the year 2005 also. All these M&A activity made me write this article on the need for cultural assessment prior to M&A.
In many of my previous articles, I had written about the importance of cultural diversity within an organization. But in a merger or acquisition, cultural differences can wreak both the companies. A whopping 53% of acquisitions fail - and this is mostly due to cultural differences. In this article is on cultural assessment which is the necessary first step for cultural integration.

M&A Realities

M&A activities are nothing new. Mergers & Acquisitions have been happening ever since humans started doing business. Companies merge or acquire when they see a new business opportunity or to realize synergy between two firms. Managers/Owners always perform a due diligence in finance, market opportunity and operations before any merger. But most companies fail to do a basic inquiry on skills & talent of the people in the acquired company. This does not mean that companies do not value human skills & talent, it implies that companies often tend to take the human talent & skills for granted and assume that the same skill sets will be available to the enlarged firm even after the acquisition.

In today’s business world where knowledge is the key, companies cannot be complacent on human skills & talent. This has led to a new awareness of the need for cultural integration as a mandatory process in any M&A activity. The process of cultural integration begins with doing a cultural audit or a cultural assessment of both the organizations before the merger/acquisition.

Importance of Organizational Culture

Organizational culture can be defined as the "Basic assumptions and beliefs that are shared by members of an organization, that operate unconsciously, and that define in a basic 'take it for granted' fashion an organization's view of itself and its environment."

Organizational culture is important because it has a significant impact on organizational performance. It is this culture that supports the mission, goals, strategy of an organization, ease communication and coordination and provide a means for dealing with change and conflict when they arise.

Organizational culture has four important traits. These traits can have a significant impact on organization performance:
  1. Involvement: Building human capability, ownership and responsibility.
  2. Consistency: Defining the values and the organization’ systems that are the basis of a strong culture.
  3. Adaptability: Translating the demands of the business environment into action.
  4. Mission: Defining a meaningful long-term direction for the organization.

Culture represents shared beliefs, assumptions, and values. All these are not readily observable. An organization's culture becomes obvious only when contrasted with the culture of another organization - say a merger of two firms. When two organizations unite, the combination inevitably results in some form of culture shock. The extent of culture shock can range from
slightly unpleasant to exceptionally distressing, depending on how employees in each organization evaluate the attractiveness of the other culture in regard to their own. Generally, the greater the cultural dissimilarity, the greater the culture shock. The impact of culture shock can be seen in the extent of employee attrition after the merger.

A culture shock results in cultural clash. These clashes can be the result of several factors, including ignorance (i.e., lack of understanding of other's culture), disrespect for another company's norms, and arrogance (i.e., a belief that one culture is superior). Consider the case of a partnership between Canadian and Brazilian chemical manufacturers. American executives insisted that the meetings commence with a working breakfast session. The Brazilians, who are unaccustomed to discussing business over a meal, found this practice objectionable and were deeply offended by the idea. This had a negative impact on the negotiations.

Though a seemingly innocent misunderstanding, such occurrences frequently result in failed mergers. Consequently, companies have begun to acknowledge the existence of divergent cultures, identify cultural components that potentially hinder successful combination, and prioritize the cultural dimensions believed to be most important for a successful combination. This process of analyzing the fit between two independent organizations is known as " due diligence or Cultural Assessment"

Why is cultural integration so important?

A survey on M&A by Mercer, a business consulting firm found some interesting results. Of the 700 international M&A between 1996 & 1998:

  • 53% of the M&A activity destroyed share holder value.
  • 30% of the mergers/acquisitions did not create any additional shareholder value.
  • Only 17% of M&A resulted in increasing shareholder value.

Harvard business school survey conducted in 1995-1996 also found a similar results.
While there can be infinite reasons why the merger/acquisition did not create additional shareholder value. But one thing is clear - to create additional shareholder value, people from the merged company must perform - i.e., "soft issues" must be addressed. A successful cultural integration creates an environment for employee performance, reduces infighting, organizational friction and raises employee morale.

In an another survey conducted by KPMG on M&A in 1999 brought out the factors that were essential in a successful merger:

  • Synergy Evaluation
  • Selecting the management team
  • Resolving cultural issues
  • Internal & External Communications
  • Integration planning

Note that all the above factors are based on people skills & people issues. These independent surveys give a clear indication that cultural integration is very important.

Cultural Assessment

Until very recently, there was no systematic model for performing cultural due diligence. There was no overall conceptual model, let alone a defined process and analytical tools.
Now after learning from several successful mergers, new techniques are available that can be applied at any stage of a merger or acquisition. This provides the data to help managers decide how to move forward with a merger, anticipate significant problems as the merger is completed, and deal effectively with these problems in the post-merger phase.
Cultural Assessment starts with asking the right questions. I have listed most of these questions, but they can be tailored for a particular industry/company.

  • How does cultural integration planning fit into acquisition strategic planning, negotiation, and due diligence processes?
  • How can executives identify critical implementation issues during the planning and negotiation stages?
  • What integration tools are useful for functional departments? For merged cross-functional projects? For individuals and small task groups who must work together for the first time?
    What are the roles of top and mid-level management (on both sides) during implementation?
  • Who are the stakeholders in a merger/acquisition? What are their concerns and interests?
  • How should management communicate with stakeholders? What are common pitfalls and how can they be avoided?
  • How does the organization reward, communicate and celebrate the success of its employees?
  • Are there special privileges for executives (e.g., reserved parking spaces)?
  • Are these offerings incompatible with the culture of the acquiring organization?
  • How long have these practices been in place?
  • What is the plan, if any, for dismantling after the acquisition?

Answers to these questions will help leaders/managers get an idea of what to expect during the merger and how do deal with the specific issues.

Cultural assessment must address the following issues for both the companies separately and for the combined firm:

  • Strategic Intent & direction
  • Vision & Mission Statement
  • Goal & Objectives
  • Core Values
  • Team agreement, coordination & Integration policies
  • Culture of learning in the organization
  • Employee capability development
  • Customer focus & employee empowerment
  • Ability to change & adapt to new environment
Closing Thoughts

Organizational culture issues are responsible for a significant amount of failures in merger and acquisition transactions. It is extremely difficult to gain synergy when two organizations have conflicting operating styles. When faced with this scenario, some organizations have had to rebuild themselves at great sacrifice to customers and employees. Cultural assessment tools are now available - and this provides a framework to manage cultural differences and identify resources needed for successful integration. Understanding cultural synergy and differences before the merger can make a vast difference in the success or failure of the merger.


Line said...

I enjoyed reading your essay on "Cultural Assessment - Prerequisite for Suceesful mergers". Thanks for sharing your insights.

I am trying to find some examples where merging companies have been successful in implementing cultural elements from both the companies. I am especially interested in finding data on where large companies have absorbed cultural elements of the smaller company (during a merger).

Thanks a lot!

You can contact me at:

My email address is

manasi said...

i really like ur article on cultural assessment.. i received lots of info about the subject. im looking for details of company merger which have failed due to culture difference.
you can mail me at:
thank you!!

seeking said...

Most literature seems to refer to failed M&A effort due to neglect of cultural due diligence. What about success stories? What are some of the M&A stories that became on account of the lessons learned? Is this awareness of cultural issues in M&A growing?

Please share your thoughts.


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Sam Maron said...

Until very recently, there was no systematic model for performing cultural due diligence. There was no overall conceptual model, let alone a defined process and analytical tools