Considering a Merger or Acquisition? Assessing Culture Is Key

​Global mergers and acquisitions (M&As) in 2015 increased 42 percent over 2014 levels, making it the strongest year for M&A deal-making on record, according to a recent report from Mercer.

Analysts pore over budgets, assets and projections prior to merging with or acquiring companies. But the cultural fit between an acquirer and the target of a merger or acquisition is one of the most neglected areas of analysis prior to the closing of a deal, said Thomas Bouchez, HR M&A leader for Mercer in Frankfurt, Germany.

It's an area, he said, where HR can have a role.

Prior to joining Mercer, Bouchez worked for Deloitte Consulting in various HR roles within multinational groups in Africa, Asia, Europe and North America, and as an international HR business partner at Lufthansa. He has worked in HR for 13 years and has supported more than 100 M&As for companies ranging in size from 50-100 employees to more than 100,000 workers.

"When we talk about culture [involving M&As], we don't talk about national culture. It will have an impact, but we're really talking about organizational culture" and whether the targeted company's culture meshes with the buyer's culture, he explained. HR leaders must take a deep dive to discover where the acquirer and target companies can be integrated, such as in how compensation and benefits are handled.

"When you have two organizations, you have two cultures. The question is not really about how different or how similar these two cultures are; it's mainly about understanding how you move toward the culture that fits with your business rationale," he told SHRM Online.

"Some companies," for example, "simply swallow a smaller acquisition and try to onboard [it] onto their culture. Some are interested in keeping the small, entrepreneurial culture" that made it successful, "... even integrating some of [that company's] cultural values."

HR teams at both the target and acquiring companies should assess the cultures, Bouchez said, such as by comparing the sales forces of the two companies to see how they behave with their clients. He advised HR to link business strategy to culture and to prioritize what's important to drive performance in the direction leaders want.

HR's Role

The way leaders behave is a key driver for culture, according to Bouchez. He recalled a scenario where the acquiring company found the leadership style of the targeted company to be so different from its own that it stopped the deal.

He advised HR practitioners to follow a methodology to assess company culture. A recent Mercer report, People Risks in M&A Transactions, recommended using skills inventories and competency assessments that evaluate the target company's leadership team and key employee capabilities.

"What's really useful is to start a discussion with the leadership" and some of the employees, Bouchez said. Then, "identify the desired culture and the kind of behavior you want to achieve. From these behaviors you define how you're going to drive [the culture]."

Rick Richter, vice president and global head of HR M&As for SAP in Canada, told SHRM Online that when SAP bought another company recently, it sent HR representatives to four different regions where the target company had offices.

The HR representatives conducted sessions with a cross-section of employees and performed a cultural scan to identify differences and similarities. Some differences might appear trivial, he said, but can have a huge impact. For example, when SAP asked the targeted company to provide certain files and HR data, it stalled. The reason: Nothing at the target company could proceed without the CEO's approval. The deal went forward, but the scan reflected a leadership style much different from that of the acquirer.

"If you don't do the cultural scan, you're not going to find that out until you've got a lot of [upset] people in a lot of different areas" of the company, Richter observed.

He found it valuable to write a paper for his company's leadership on what HR could offer in the M&A process and obtained executive-level approval for the recommendations made in the paper. He sees it as a "playbook" that includes M&A best practices HR has gathered. It also defines the roles and responsibilities for every group within HR at SAP.

"It's a very honest and forthright view ... identifying how [HR] could help and identifying our current capabilities and gaps."

It's important, too, he said, to spell out where HR has the power to stop a merger or acquisition. He pointed to one situation at SAP where HR discovered that the pension costs for a targeted company "were huge and the risks based on the tenure of individuals too large to assume [by the acquirer]. That killed that deal."

The acquiring company can gain a competitive edge if the companies work together to take the best from both and create a new culture, noted Teri Cirillo. She was director of HR for winery operations at California-based Fetzer & Sonoma-Cutrer Vineyards when its parent company, Brown-Forman, acquired Mexico-based Casa Herradura.

"We brought some of their HR leaders to [our] corporate office and shared best practices," which eased the transition of Casa Herradura's 1,800 employees, she said.

Shared values also can sway a deal. 

"When the Romo family sold their business—Casa Herradura, that they had built over generations—they didn't sell to the highest bidder. They selected Brown-Forman because they believed they had similar values and could continue to build the legacy their family had started. They were both family businesses; both were established in 1870 and had a long history of building great brands. They had almost identical values and very similar cultures, which helped employees feel more comfortable and excited about the acquisition," Cirillo said in an e-mail to SHRM Online.

And when Brown-Forman decided to sell Fetzer Vineyards and Bonterra [Vineyards], Lisa Steiner—Brown-Forman's CHRO at the time—was instrumental in helping to identify a buyer that would continue to care about the employees and want to grow the business, Cirillo said. 

"For companies [that] care about their legacy and/or their people, values and culture are very important."