Why Cultural Misalignment is a Critical Risk in M&A
Author: Joe Salvucci Jr.
Anywhere from 60 to 70% of mergers and acquisitions fail to meet their stated goals. This is despite extra scrutiny of financials, operations, and legal frameworks. So why the large failure rate? One potential explanation is often overlooked during the M&A process: cultural misalignment.
Failure to account for cultural misalignment before, during, and after the M&A process can expose the newly formed organization to serious risk. Here are some tips to proactively identify and address these issues and avoid employee disengagement, turnover, and revenue loss.
Why cultural misalignment hurts M&A efforts
When evaluating a target company, the focus is often on concrete, quantifiable elements—financials, materials, equipment, contracts, etc. While yes, those are important, equally valuable are non-quantifiable elements: brand, personality, and culture.
According to Ragan Decker, manager of Executive Network/SHRM Business research at SHRM, “Workplace culture isn’t just a buzzword; it’s a critical business asset.” Recent data bears out that assessment. Companies with a strong culture experience as high as 400% revenue growth. Likewise, 83% of employees in positive cultures are motivated to produce high-quality work, compared to just 45% in poor cultures.
But as much as a strong workplace culture can be a critical business asset, a weak culture can be a liability. The same SHRM report shows that 57% of employees in poor or terrible cultures are actively or soon-to-be actively looking for another job.
Not only that, but the damage of a poor culture to a company’s public image can seriously hurt recruitment and sales. 86% of prospective workers won’t apply to a company with a bad public image, and 65% would likely leave if their company received negative publicity due to poor culture.
When a potential acquirer and target company have incompatible cultures, it can lead to confusion, friction, and lack of synergy among the two teams. This can expose the business to several risks, including the following.
Employee disengagement
Clashing corporate cultures will make employees on both sides resistant to future change. Given that only a third of all change management initiatives are successful, this can be a brutal blow to the newly formed organization. Not only that, but disengaged employees are less likely to be productive, which can impact future revenue goals.
Communication misunderstandings
Organizations with different communication styles, decision-making approaches, and expectations around collaboration create ripe ground for misunderstandings. For example, Company A may have a culture of independence and default to functional silos. They’ll understandably struggle to work with Company B, which emphasizes interdependence and collaboration. Failure to understand and address these issues can lead to a loss of trust, rise in conflicts, and formation of cliques.
Turnover and talent loss
Companies that don’t address cultural misalignment are likely to lose a third of their employees within the first year of the merger. This can cripple an organization’s ability to meet its goals, due to institutional brain drain, loss of productivity, and difficulty attracting new talent to replace the old.
Extended integration timelines
The longer an M&A integration takes, the greater the latency in capturing value and acting on the synergies that will, ultimately, lead to revenue growth. Overlooking cultural misalignment can cause friction and delays in the integration process, limiting the organization’s growth potential.
How to identify cultural misalignment in the M&A process
As you perform due diligence on new acquisitions, it’s important to evaluate the acquired company’s culture. The sooner you can identify cultural fit (or lack thereof), the sooner you can decide whether it’s worth it to pursue the deal in the first place.
Here are some steps we recommend to identify cultural fit:
- Perform a structured cultural evaluation early in the M&A process—looking for differences in core values, communication styles, decision-making processes, and more
- Use surveys, interviews, and focus groups to collect data from employees at all levels and uncover input into actual behaviors and unwritten rules
- Compare the cultures of both organizations to determine areas of alignment and potential conflict, and look for ways these differences could impact the integration
- Engage all stakeholders in the process to gain a comprehensive, unbiased perspective
How HR leaders can bridge cultural gaps during integration
In many cases, the cultural differences between the two organizations may not be extreme enough to push off the sale. However, that doesn’t mean you should ignore those differences. In fact, by proactively addressing them at the onset, you can increase the odds of a smoother, more successful integration.
1. Conduct a comprehensive cultural assessment
If you didn’t perform a cultural assessment before the merger, do it as soon as possible afterwards. Follow the same steps listed in the previous section.
2. Create culture-based objectives for the integration plan
Once you’ve identified the differences in the two cultures, create specific objectives to include in the integration plan that address those differences. For example, if there are differences in core values, part of the integration should be training and education around the acquiring company’s core values for the new employees.
3. Establish clear, open communication channels
Although it may seem chaotic in the beginning, clear and open communication among all parties is critical to ensure that everyone understands the objectives, priorities, and non-negotiables during the integration. Additionally, open communication can be a valuable feedback tool for leaders as they tailor and tweak the plan to ensure faster, more comprehensive adoption.
4. Ensure key stakeholders are involved
So much of company culture involves those informal interactions that often go unnoticed by leadership. By engaging key stakeholders—department heads, team leaders, critical employees, etc.—in the process, you can help to ensure top-down adoption of new cultural values. If leaders aren’t aligned on values, the rest of the teams won’t be either.
5. Positively reinforce culture adoption
When new employees adopt the acquiring company’s values, celebrate it. Create both formal and informal incentive programs to encourage cultural alignment and make this change stick.
6. Continually assess and adjust
Integration isn’t a one-time event—it’s an ongoing process. HR teams should continually assess, communicate, and reinforce the new values, adjusting strategies as the organization evolves.
How workforce solutions can help improve cultural alignment during M&As
Workforce solutions, including managed staffing and MSP services like PEAK, can play a critical role in post-merger cultural alignment. Our expertise, tools, and structured approaches can help organizations navigate even the most complex of integrations:
- Tailored integration programs based on specific organizational needs and differences—including talent engagement
- Smart workforce planning, driven by both internal and external analytics to align integration strategies with your business goals
If you want smoother cultural integration for your new acquisitions, contact PEAK to get in touch with one of our workforce planning specialists.