M&A Due Diligence: Company Culture from the Inside Looking Out

Friday, November 9, 2007


I read with interest David Harding and Ted Rouse’s guest column in the October 2 issue of the Wall Street Journal entitled “Human Due Diligence.” In it, they discuss the importance of paying attention to what they call human due diligence during the merger and acquisition (M&A) process. Under “human due diligence,” they group understanding the culture of the organization, the roles that individuals play, and the capabilities and attitudes of its people. In this article, most of their discussion focuses on the importance of identifying key employees to be retained during the due diligence process. I agree completely. The new organization will need the right talent and an integrated, consistent leadership voice to make the merger successful. But when it comes to how to factor in the two cultures into a new organization, leaders need to identify something more substantive than “decision making styles” to better understand the role of culture in making or breaking the merger.

Therefore, I would add as a critical element of the due diligence process an assessment of how well each company is doing in executing key management practices that have been proven to be linked to bottom line results. One company may be stronger in some practices than the other. When working with companies who are looking to merge or acquire the other, I would want to know how the two companies measure up individually in executing these management practices. This assessment will tell me where the gaps might be that the leaders will need to address before, during, and after the merger. Otherwise we may be looking at what we call “culture” and find out only later that it was more window dressing than substantive business concerns.

If you have read some of my earlier columns, you know I’m a fan of the Denison Culture Survey for these reasons. This instrument can give both companies a clear picture of how well each of them is doing in four critical areas that reflect both an external and internal focus:

• Adaptability
• Mission
• Consistency
• Involvement

I would be more concerned about a merger that indicates that neither organization has a particularly strong ability to adapt to market changes and customer needs (Adaptability) than how similar are the dress codes or benefits packages. Not to say that the merger should be abandoned but instead such an assessment will present the post-merger challenges and risks more clearly and concretely to the decision makers. In my mind, this makes for a more robust due diligence, focused on the key management practices that will ultimately determine the success of the merger and, more importantly, bottom line business results.

Otherwise, the two companies run the risk of falling into the trap of assuming the acquiring company or larger company’s culture will be the culture of the new company. This could end up perpetuating, or even exacerbating, the deficient management practices in the new company. Better to find out where each company stands during the due diligence process by asking up front the people who see the company’s culture from the inside looking out. No matter how challenging an M&A can be to the executives in charge, it’s that much more complicated in the trenches. All the more reason to concentrate on assessing and understanding the culture from a grass roots perspective. Otherwise, leaders retained will squander their talent by assuming culture means one thing when it really means another.