Mergers & Acquisitions

The Importance of Company Culture in M&A Due Diligence

By April 14, 2022 April 18th, 2022 No Comments

Mergers & Acquisitions can be worked out in every way according to the basic metrics: profitability, hiring and product. When it comes to culture, however, potential problems are often overlooked. This can affect the organization in any number of material ways and even lead to liability exposure. Most importantly, however, it can affect the success of the merger itself. According to Harvard Business Review, between 70 and 90 percent of mergers fail. According to a 2015 study, 85 percent of companies reported that failure to address culture was a key obstacle in successful mergers and acquisitions.

Culture may be a “soft” concept, but it is clearly having an impact. So how can companies work with M&A Lawyers to address a problem that has serious impacts, but a cause that is difficult to pin down? The cultural aspects of a merger, such as imposing a code of conduct, are often implemented only after the M&A negotiations have taken place. It’s much wiser to stay ahead of the pack and do a cultural assessment of the company at an earlier stage.

There are many situations in which doing a cultural assessment addresses real risks. One of the most obvious risks is doing business internationally. With any M&A prospect where International companies are involved, the company’s culture of origin could be exerting an influence that could impact reputation, productivity and pose a risk of liability. Some questions an M&A attorney might ask when doing M&A cultural due diligence could include:

  • Where is the company located? What influence does local culture have on the company? Are there acceptable practices in the destination or origin company that could pose a risk of liability or even be illegal.
  • Does company culture (such as lack of accountability or locker room culture) influence the behavior of executives?
  • After all, you are merging your two organizations. Hiring substantial authority personnel involves an obligation of due diligence according to federal law in the US. A senior executive team with a toxic or negligent culture could impact the success of the venture and expose the company to liability or even criminal charges.
  • What about employment and hiring practices? Could clashing workplace culture lead to conflict, bad blood and employment lawsuits?
  • What is the industry in which your company works? If your company is merging with a company with a different specialty or another division, what compliance obligations come into play now you are in the same organization? For example there will be certain compliance obligations for certain consumer products that there would not be for industrial products and vice versa.
  • What is the diversity policy like? Do you need to do a diversity audit to make sure your organization is up to date on diversity practices?

When an organization is in the initial stages of embarking on an M&A venture, M&A attorneys should advise executives that culture isn’t just a soft concept but a key branch of due diligence. Simply asking for the destination company’s code of conduct can reveal a lot about the company’s culture. Asking about the company’s contingency plans can reveal the priorities of executives and the local culture the company may be embedded in, including local laws and customs that need to be investigated.

Retention after a merger can also be impacted by culture. Research shows that 75% of people in key roles quit 3 years after a merger.

If culture seems like an amorphous concept, the cultural due diligence process can start with more simple but practical questions like who, what and where, that can pin down the location of the company, what product or service the company sells, and what the cultural identity of the company is, including how they manage their reputation.

Experienced M&A lawyers will never overlook the value of powerful questions about culture that could lead to extremely specific and urgent facts that could impact liability, profitability and the success of the M&A process itself.

See articles for reference:

https://news.bloomberglaw.com/mergers-and-acquisitions/why-diversity-audits-are-essential-in-mergers-acquisitions

https://www.gallup.com/workplace/353885/organizational-culture-part-due-diligence.aspx

https://www.financierworldwide.com/cultural-integration-in-ma#.YkeLUyjMI2w

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-ma-consulting-cultural-issues-in-ma-010710.pdf

https://www.tmf-group.com/en/news-insights/articles/2018/december/cultural-compliance-risks-in-m-and-a/