Culture issues derail M&A transactions at an alarming rate

23 November 2018

Some 43% of merger and acquisition activity is either hindered or prevented altogether by a lack of cultural cohesion, according to a new study. Of the deals which do conclude, a further third fail to realise the financial targets which investors set at the time of the transaction, for the same reason.

2017 saw a bullish year for mergers and acquisitions, and while sentiment has cooled somewhat amid the global economic uncertainty of 2018, many companies are still looking to boost their revenues and expand their capabilities via purchasing bolt-ons. A common culture is often cited by merging businesses as a key factor in successfully realising a deal, and has made or broken many a deal over the years.

However, despite the awareness of the importance of cultural synergy to making a success of a purchase, a failure to integrate culture is still cited by numerous reports as preventing companies from reaping the rewards of acquisitions. At the start of 2018, Accenture published a paper to this end, explaining that only a quarter of firms in the UK currently work to infuse the DNA of their recent purchases with their legacy business. 

Due to culture issues + Top components of culture

Now, global consulting firm Mercer has issued a further warning to prospective investors that a failure to take cultural issues into account is derailing transactions at an alarming rate. The report, titled ‘Mitigating Culture Risk to Drive Deal Value’, features survey and interview responses from more than 1,400 M&A professionals based in 54 countries, who collectively have worked on more than 4,000 deals in the past 36 months on both the buy and sell sides. The headline conclusions drawn from the data by Mercer were that as many as 43% of deals saw prices impacted, were delayed or were prevented from closing thanks to cultural issues, while some 30% of transactions which did complete failed to ever meet financial targets for the same reason.

A majority of employees in the UK told Mercer that organisational culture is extremely important, with 100% of respondents stating they would consider leaving a job, if it was not a good cultural fit for them. The top priorities when it comes to a cultural fit were a mixture of staff and management behaviours, as well as the codified corporate structure of a workplace. According to Mercer, working environment, communication and governance all polled close to 50%, but top of the list was how leaders behave, at 61%.

Deal Reality

With a high proportion of staff stating they would possibly exit a role post-merger should it prove to be a poor cultural fit, along with an intensely competitive labour market, failing to acknowledge this could see buyers losing out on the very thing they hoped to acquire from a transaction: talent. Indeed, there is clearly a major disconnect between how most investors see an investment panning out and how it actually does, with lower-than-average stock prices and much lower returns for the investor than in a typical deal.

Historically, culture has been categorised by companies as a non-financial risk during a merger, but Mercer’s research suggests otherwise. It ultimately can contribute to productivity loss, customer disruption, and delayed synergies, on top of the previously mentioned flight of key talent. This means the break-even point of a deal will be an average of 100 days later than anticipated by buyers, if it comes at all, while the actual return on a merger in terms of contribution to earnings per share is around half the level hoped for.

Risk tolerance

Ultimately, Mercer’s paper concludes that investors can run all the discounted cash flows and have the numbers come out perfectly, but it’s the human resources side of a merger which spells failure or success. This is true of both domestic and international deals, too. With fluctuations in the value of currencies making various markets attractive at the moment – and with investors leveraging the decreased worth of the pound to quickly buy a foothold in the UK market – they would do well to consider to what extent their cultures will fit with the acquired properties, no matter the price.

Jeff Cox, Mercer’s Global M&A Transaction Services Leader, said of the results, “When looking to transform the workforce for the future of a newly formed organisation, simply ignoring culture is not an option. Deal makers can mitigate M&A risk and drive deal value by putting culture at the center of business transformation. Culture is a firm’s operating environment. It defines an organisation, allows effective change of business strategy, and can provide a platform to attract and engage the right talent.”

“The research has shown that paying attention to the cultural dimension is especially important in the UK context, which is consistent with our observations on numerous M&A integrations” Phil Shirley, Mercer’s UK M&A Transaction Services Leader, added. “If we dig deeper into the data it is clear that leadership behavior is seen as a key driver of corporate culture in the UK and needs to be considered carefully on all deals where people are critical to success.”   


8 tips for successfully buying or selling a distressed business

18 April 2019

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.