Mergers & Acquisitions : Why Cultural Audit is the Key to Success

Why is it that up to 90% of M&A operations end in failure? Mergers, acquisitions, carve-outs, divestitures or the creation of consortiums... Whether you're an investment banker, a M&A specialist or a partner in an investment fund, these terms often bring us back to financial concepts. However, there is one aspect that is often underestimated, and which can make or break the success of a transaction: the cultural audit. 

Today, many companies, from SMEs to digital giants such as Amazon and Google, still neglect this aspect in some of their transactions and thus face the challenges of post-acquisition integration, whereas others, like Disney or Mars Confectionary, excel in mastering these issues. These differences highlight the strategic value of conducting a cultural audit, as well as the methodical approach required to transform it into a competitive advantage. 

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Performing a cultural audit in the pre-integration phase is of vital importance

From the 1980s to today: cultural due diligence is still on the road to maturity

However, this practice is not new. As early as the early 1980s, in response to the increasing number of M&A transactions, cultural due diligence began to gain attention for its importance in the success or failure of transactions. The spotlight was particularly focused on high-profile failures, such as Wells Fargo's merger with Crocker National Bank in 1986, which led to colossal financial losses for the bank in the great American West. However, this awareness was gradual, and for a long time, valuation techniques remained incomplete and/or based solely on observation techniques, which were not always effective, thus maintaining the ambiguity surrounding expected profits. 

The very concept of corporate culture, often perceived as intangible, encompasses the values, beliefs, practices and behaviors that characterize an organization. As a result, although its value is increasingly recognized, methodologies for effectively assessing the cultural compatibility of two companies are still under development. The changing nature of markets and working environments, particularly with the acceleration of globalization and the widespread adoption of teleworking, adds further layers of complexity requiring adaptive approaches to remain relevant and effective.

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Cultural clashes cost companies dearly

However diverse assessment practices may be, they are above all aimed at taking stock of the cultures involved and guarding against cultural clashes. When two companies with divergent cultures attempt to merge without a proper understanding and, above all, integration of these differences, the result can be chaotic. These include substantial financial losses, a sometimes massive departure of talent to competitors, and a deterioration in relations with various stakeholders (customers, suppliers, etc.). 

Notable cases are often cited as examples in MBA programs, such as Daimler-Benz's merger with Chrysler in 1998. The wave of departures of key Chrysler executives to competitors like GM and Ford not only contributed to the transfer of valuable knowledge, but also undermined internal team morale, contributing to instability and a negative perception by the general public, the media, and hence investors. This hemorrhaging of talent, combined with broader challenges in the automotive market, severely damaged shareholder value and ultimately led to the costly failure of the merger with Daimler resulting in a massive loss of over $20 billion.

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Between culture and strategy

On the other hand, some companies have learned to successfully grasp the advantages of successful cultural integration, such as Disney's $7.4 billion acquisition of Pixar in 2006, which proved to be a successful strategy despite the initial cultural and structural differences. This merger succeeded in maintaining Pixar's corporate identity and brand recognition, while preserving its practices and habits.

Cultural due diligence plays a key role right from the start of the transaction process, helping to identify potential red flags and, above all, to prepare an action plan for the integration. This plan aims to facilitate the emergence of operational synergies. Although not a decisive factor in closing a deal, this approach offers an essential perspective that goes beyond financial and strategic analysis, by getting right to the heart of what makes or breaks a successful merger. By integrating human capital assessment from the earliest stages of the M&A process, companies are able to avoid the pitfalls that usually lead to failed deals, and ultimately optimize post-acquisition value creation.

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Methodology for a successful cultural audit 

Cultural auditing is an inherently complicated exercise  

An effective cultural audit begins with a methodical and strategic approach. As previously mentioned, it is crucial to carry out this exercise as early as possible in the transactional process. This enables the detection of cultural incompatibilities likely to compromise post-merger integration. However, this approach is rarely put into practice. Firstly, because it requires time and considerable commitment on the part of the various stakeholders, which legitimately generates fears of delays. Delays at this stage can expose the deal to market risks that could lead to its failure. What's more, access to relevant information is often restricted by the high level of confidentiality attached to agreements. Finally, the information available is often superficial, based on public data, observations and suppositions, without any real involvement of the target company's personnel.

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Two crucial steps: defining the audit objectives upstream and gathering the relevant information

However, there are ways of mitigating or even circumventing these limitations. The first step is to define the objectives of the cultural audit, so as to target precisely the aspects of organizational culture to be examined, such as shared values, work practices, and attitudes to change and innovation. These criteria vary according to the purpose of the transaction, the entity financing it, and the sector of activity concerned. Activities at this stage focus on identifying potential synergies and conflicts between the cultures of the two entities. For this purpose, it is advisable to put together an audit team comprising members with expertise in human resources, management and, ideally, cultural consultancy, to ensure a comprehensive and impartial assessment.

The second stage is information gathering. It involves the use of various sources, from public data available on platforms such as LinkedIn or Glassdoor, to annual reports, internal satisfaction surveys and HR documents, most often partially present in the data room created to feed transactional discussions. This phase must also include the development of detailed questionnaires, as well as semi-structured interviews with employees and managers. These mixed methods provide a rich basis for data interpretation. Using analytical tools and theoretical models, often proprietary, it is then possible to identify trends, divergences and risks of cultural conflict. A cultural risk report is then drawn up, highlighting critical differences and proposing recommendations for cultural alignment and integration.

Based on the risks identified, it is then necessary to develop cultural integration strategies. This planning must include the organization of training sessions, workshops on shared corporate values, and exchange programs to facilitate mutual understanding and cultural assimilation. Communication also plays a key role in this stage, not only to disseminate the results of the audit, but also to ensure a smooth and transparent transition for all employees concerned.

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Finally, the cultural audit does not end with the closing of the transaction; regular follow-up is crucial to successful integration. This involves conducting periodic surveys, actively listening to employee feedback, and adapting integration strategies according to identified needs. This ongoing process is vital to maintaining cultural alignment and addressing any issues that may emerge, ensuring that cultural integration contributes positively to the overall success of the merger.

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