Culture issues derail M&A transactions at an alarming rate

23 November 2018 5 min. read

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.”