The Role of HR in M&A
If you think about M&A as the process of buying a house, like when we watch the show on HGTV and we've got the real estate agent out there, they never pop back in and say, "Hey, how do you like living where you lived?".
When we focus on the front end of a deal, we focus on the real estate part of a transaction, where it is just about closing the house. But on the HR side, we have to work both on the diligence side.
We have to uncover all the issues that come up with people. But then we've got a long tail on the integration side. In most transactions, people are involved, and that people integration, in my experience, is really what makes or breaks most M&As.
Statistics say we don't do as good a job of that as we could. And I think the more time and attention we pay to doing that well, we'll see those numbers of failed integrations start to go down, and we'll see more and more deal value realized.
You'll hear a bunch of different concepts about what culture is and what it looks like. I'm a pragmatist. I want to know what's the definition of culture that works when we're doing deals.
At the end of the day, how I define culture is how people get things done in an organization. So it is about how work gets done by and through people, individually or in groups. That's where a lot of the culture clash comes up.
We think culture is a soft thing where it's all about people's feelings. And certainly, there's a part of it there, but then there's also these big parts of culture about work processes and how people get everything done, from closing out the books at the end of the year to something as simple as booking travel for your sales team.
That can create its own drama and challenges beyond simply doing things differently than we used to do it and therefore hurting feelings. We tend to shut the conversation down at how people feel about things and not necessarily look at how people act and do things, especially those business-critical processes.
We did some research. We had a gentleman named Brendan McElroy who interned for me a few years ago, and he asked around the pieces of culture that tend to trip people up when we do deals. So he interviewed several practitioners and we came down to a list that we call the five key drivers of culture clash.
And so when we look at the universe of culture, when we define it as the way people get things done, that's everything that happens in a company. We can't tackle that from a cultural integration perspective. We have to get to those things that are the highest leverage for us, where we can spend our time, spend our money, and start to tackle the problems of failed cultural integration.
We came up with five key areas we discovered that end up creating most of the drama.
- Decision making
- Team collaboration
- Operational expectations
- Communication styles
- Organizational self-concept
In addition to those five key drivers of culture clash that we find in most deals, some deal specific things could affect culture.
When we think about cultural integration, we must consider those deal specifics. And in this case, I think about these as the three S's:
- The synergies. What will we do when we try to realize the synergies on the deal?
- The secret sauce. Why are we buying this company? What's their unique capability?
- The sacred cows. The part where we start to get into the feelings piece. What are those things that will hurt people's feelings so badly that it will be disruptive to the workforce?
Importance of identifying potential culture clash
Identifying these areas of potential culture clash as early as possible is important because they should shape your integration plan.
Let's say you're doing a full integration versus a standalone, and you know that significant differences in communication styles could potentially create problems on the deal. You would want to know about that as early as possible because that's going to affect how you handle your employee announcement meetings.
Most of these issues will become evident as you work through diligence. A lot of organizations really don't have a tool for tracking any part of culture. It's kind of a gut feel thing where they feel good about the company that they're buying, so they call it cultural compatibility.
And then all of a sudden, you start to execute on your integration plan, communications plan, your change management plan. Then you find out it isn't going to land with this audience at all. So now you need to make these changes. You will have to respond on the fly. So to the extent that you can get in front of these cultural issues early on, it really does make a huge difference.
Many folks will go through an intuitive process at the front end of a deal. But without being able to codify it, without being able to provide some structure to it, my experience is you still end up groping around trying to find the light culture switch to turn on so that you can see what you need to see to sort your way through the challenges that are coming forward.
Cultural due diligence
Like every other part of the due diligence process, it's an uncovering. We get to one layer; then we peel it back. We find another layer, we peel that back. We find a third layer, and so on. And we do that in other parts of the diligence process.
For example, we might have a screening questionnaire that goes out before LOI, before the formal diligence checklist goes out. And then with your formal due diligence checklist, you're still going to ask more and more questions, and that's typical for pretty much every function working through the diligence process.
With cultural diligence, it's no different. I recommend starting the cultural diligence process before LOI. There's a lot of just publicly available information that one can go out and find on companies, on their founders, their key personnel.
For example, I worked a deal at a prior company where we went out and looked for publicly available information on the company and the leaders just to see what was out there. We stumbled across one of the social media sites for the CEO, who was the founder's son.
I found that he didn't want to run that company. He wanted to be a DJ at these nightclubs in Europe. His social media panel showed him on the beach and spinning tunes. And then his other passion was coffee.
So we had a guy running a company, but he really wanted to have a coffee roaster and be a DJ, evenings and weekends. Well, that was important for us both from a leadership integration perspective and from a cultural perspective to uncover.
Because once I realized what was going on, I could tell that he wasn't giving his full time and attention to actually running the target company, even though he was the person who was out front in all of the negotiations. And when we started to dig into that, we found out that the operations leader was really driving the bus for the company. All of that was from really simple social media searches that we took the time to do on that target company.
That's an example of just that pre-LOI publicly available information. There are interviews, press releases, and all sorts of information that's just out there floating around and doesn't take much time to uncover.
Once we get to a point where we can get to the target with the formal diligence process, we tend to learn more information. And as an HR practitioner, this is where I'll tend to dig into some of the documents that I've been provided, like the employee handbook. The tone of the employee handbook can tell me a whole lot about how the company views its employees.
Several years ago, we had a company where we heard their theme was that they have a lot of respect for everybody that works there, and they've got a culture that gives a lot of autonomy. When I got into the employee handbook, it was a whole list of reasons why people could get fired.
Well, that doesn't sound like a very open company to me. That sounds like a disciplinary handbook. And when we dug into that, we learned that it's a very open culture if you work in the office and we're part of the merchandising or IT teams.
But if you worked in the warehouse, you were seen very differently. The warehouse workers were seen as pretty fungible. So we then had to think about how we will integrate the office people and the warehouse people on this deal. We learned that by looking at the items coming up during the due diligence process.
After the announcement, that's when we can do what a lot of companies think about as a cultural assessment. What they're often thinking with a cultural review is a survey that can go out to everybody. You really can't do that survey until you get access to everybody and everybody knows about the deal.
So, we're already three steps into what a cultural diligence project should look like when we're getting to where many people want to start, which is the big survey. There was so much information available before getting to the survey that it's a shame not to take advantage of it when we're working through the process. So, just like the rest of diligence, it is an uncovering, it is an exploration, it is a learning process and it does have to come in phases.
Pre-LOI cultural diligence
Getting to know the management team is where cultural assessment often begins and ends with most dealmakers. Where largely culturally compatible is based on that cultural assessment you're talking about. If I like their management team, therefore, we're culturally compatible.
It's a way of doing cultural assessment–probably not the strongest way of doing that. Because if you think about it, if we go back to our definition of culture, it's how people get things done in the organization. It's not just how the management team gets things done. So we must start thinking about the people doing the bulk of the work.
- How is the sales team selling?
- How is your R&D team developing the products or services you will be selling?
It's not just about the management layer, where we get tripped up a lot. In many cases, I've seen a lot of money spent retaining leaders at the top, and when they don't integrate, it's very expensive. So a lot of times, you end up losing a lot of value. Sometimes you end up paying retentions anyway because it's not worth fighting. Or if there are earnouts or that sort of thing, those will often end up getting paid, or you end up in a fight over them.
We pay a lot of attention at the top, but in those middle layers where the actual work is getting done, we also have to assess those. We can't have that top level being the "be all, end all" of our cultural assessment. That's one of the big mistakes that we tend to make as we just look at that top layer.
My career has mostly been very large acquirers buying smaller targets, usually under a hundred people. So let's take something basic like accounts payable. When you think about how a big company versus a small company does accounts payable, they're two very different things.
You will have different charts of accounts, probably different software, and different things that get done. That's perhaps not critical to your deal being successful. But when you start to get into other functions like your sales function, R&D, and other big functions, understanding those differences can be the difference between deal success and failure.
But back to the question that you asked about some places to look pre-LOI. We'd already talked about the traditional media, social media, those interviews out there, customer review sites, Glassdoor, real interesting, Yelp can be helpful. The target company website is probably the lowest-hanging fruit out there. I've been very surprised that people don't even look at their website.
If you haven't looked at the website of the company that you're buying, you're missing a great source of information. So the website, social media, and other places that one can look at pre-LOI are expert opinions.
Many industries have industry reports out there, and many times in the deal funnels, those types of reports will be made available. I try to get my hands on those when I can because there can be some really interesting information in those industry reports looking at unique capabilities of the target. Those expert opinions can be really helpful. A lot of times, they're in-house experts.
I worked for a company that was embedded in the industry for a while. And so they would bring people under the tent with expertise working with a target company, whether that target was a vendor, a customer, or another type of relationship with that company. So we would rely on those in-house experts.
We would make the tent big enough to fit another expert underneath it. Or, if we didn't want to disclose the potential transaction, a small group of in-house experts might be surveyed about many targets so it sort of obscured the specific target and they would talk about a particular market segment with those in-house experts. There is a lot of expertise that does get ignored on culture in those pre-LOI stages and it's great when we can bring more people under the tent.
Another thing, and depending on how the company is being marketed, is just the CIM. I've been really surprised at the amount of cultural information that can be found in some CIMs. Some are weak on it; some are pretty strong on it. But looking at how the company brags about:
- getting certain key capabilities done
- how they go out to market
- how they work their employee morale.
A lot of the information in the CIM can also be helpful for high-level cultural intelligence in that pre-LOI stage.
Finding culture fit
That's where those in-house or outside experts can be really helpful pre-LOI. But, again, those are like backdoor references, those are individuals who know the target company, the industry and can give some insight. And if they've worked with that target and the acquirer and can provide some insight into how the ways of working are different, that can be a pretty powerful tool.
You may not choose to do that. It depends on the maturity of the practice, and it depends on whether the emphasis is on getting the deal closed or the emphasis is returning value to the deal. Simply closing the deal, just like when I bought my house, it's not the full value realized at the moment of close. It's that integration for a company, the remodeling of the house.
And so, if LOI is not the right time for your practice to get that done, you can always do it later, though. However, doing it after something has broken is usually much more expensive than doing it upfront.
That's why we're starting to see that integration leaders are often being pulled up closer and closer to LOI. Maybe as a deal maker, you don't want to do that. But suppose you've got an integration capability brought in at the time of LOI. In that case, that person can start thinking about those things and looking at how you shape integration, which might potentially shape your definitive agreement.
I've worked on several deals just this year where our integration model affected what we put into some of the employees matters parts of the definitive agreement. Had we not started doing our cultural integration or at least some essential integration planning, we would not have known to make some changes to the definitive agreement. And we would've had some additional work to try and comply with what we had agreed to do in that agreement. We would've done it, and we would've come out okay, but it does make it a little easier when we have some of this information upfront.
Five areas of culture clash
This is probably where I have heard about the most actual challenges in a deal. By actual challenges, I mean when we move past the hurt feelings part of cultural integration. This is everything from:
- Who gets to make decisions?
- Who is delegated authority to make what decisions at what level?
To everybody listening to this, if they've done more than a couple of deals, has probably heard or seen a situation where the company founder, who had all of the power in the world to do whatever they wanted to with their company, suddenly sells to a big organization. Now they don't even have checkbook authority. They can't even allocate money, even though they've been made a vice president or director in this larger organization. It's a whiplash for that person, so they can no longer make decisions.
- They don't necessarily know how the buyer wants decisions made.
- They don't know how much debate is permitted.
- They don't know whether they need to be proactive or reactive.
- They don't know how much data is required to get decisions through the people who are now authorized to make the decisions.
- They may not even have a sense of the organization's risk tolerance.
There are a lot of pieces that go into how decisions are made. And if you can imagine, when you've closed your deal, you've started doing integration, and the person you're relying on to deliver whatever capability you did that acquisition for is stuck because they can't get approval for very basic decisions. So that's going to end up causing problems, and you're likely to end up with some pretty significant culture clash there while that executive figures out their new normal or doesn't adapt to it.
I've seen many very bitter people come in, get frustrated by the lack of decision-making ability, and it can all go downhill very quickly.
Big companies are looking for stability, and so you've got very different decision-making styles based on where the emphasis is.
Are we "move fast and break things" versus "we're way too big to start breaking things" because then it gets expensive. That is one of the areas where the organization is in its own life cycle can make a huge difference there.
And it all comes down to just asking how you make decisions. It's really just asking the questions and I don't know that that comes up a lot. I haven't seen that on a standard diligence checklist anywhere. How do you know it's okay to spend X amount of dollars?
This is where sometimes the risk is that you're asking the management team many of these questions. And in some cases, like a customer success function, how much power are you giving to your customer success reps to make decisions?
- Are they allowed to waive fees?
- Are they allowed to do refunds for people who don't want things?
So I'm just thinking through some of those decisions that would happen at a level lower than the management level. You can bring an organization to a screeching halt if your customer-facing employees don't know what they're allowed and not allowed to do. It frustrates your customers; it frustrates the employees; it can stunt growth.
So this is why I try to emphasize that it's not just the management layer that you need to understand how they do things, but that next layer or two down. And sometimes it's as simple as asking the question and I don't think we're always there.
Team collaboration is another one that gets really interesting. Where this shows up, and just like the podcast episodes I've listened to, where like the meals come up. It's all about the free food. It's easy for us to sit here and think free food is a perk. But when you look at why many small companies do the free lunches, it's how their team collaborates. Everybody gets together, sits down, and breaks bread, and that's where different parts of the organization come together and collaborate.
It's helpful to do one click down from some of what we call cultural artifacts, traditions and understand why they do them. Other places that this might show up are not just the lunches but when you look at things like:
- collaboration software
- leadership training
- leadership expectations for people in the organization
Some of the things where we can see how teams collaborate, we look at things like how clearly defined our job descriptions are.
- Are people looking at just the work in their job jar, or do they cross silos pretty frequently to get work done in other places?
- Is it an organization that values specialization and stability versus flexibility and partnering?
- Are there structured opportunities for employees to bond?
The lunches are an example. Some companies only get together once a year during the holidays, which tells you the relative value of larger team bonding between those organizations.
How do they handle conflict? This is a question that I'm not sure we ask enough because integration is rife with conflict and understanding how an organization tends to deal with interpersonal or interdepartmental conflict can be really helpful during that integration phase.
And then finally, how is the organization allocating limited resources? Not everybody gets everything that they want. Understanding how different teams get resourced can be really helpful in understanding how teams are expected to work together for the common good of the organization.
That can be important for integration as well–a click down beyond the management layer. If I understand how this team at the target works together and how the team at the acquirer works together. If there are two very different ways of working together, then I've got a little more work to do to bridge that gap, especially if it's a critical driver of deal value.
I think about the phrase operational excellence when I think about operational expectations. That means different things to different organizations. For some, that means sticking to their processes and practices. Their operational excellence means that they do the same thing the same way every other time.
For others, it means thinking outside the box and breaking a few eggs to make that omelet, as the old expression goes. So when you think about how that plays out in a workforce, it really is about what are employees' expectations when they integrate.
So if you think about how we might uncover some of this information, how do we treat people who aren't doing their jobs? If somebody's failing in their job, what will we do?
- Do they get termed?
- Do they get ignored?
- Do they get coached?
- Do you just put up with it?
- How much emphasis is there on things like process compliance or improvement if somebody isn't doing their job well?
On a more positive side, this might come up with things like:
- How are people given their promotions, their raises, and their bonuses?
In some companies, that's based solely on tenure. So you've been around for X amount of time, therefore, your share of the bonus pool is going to be Y.
In other cases, it's based on individual performance. And that tells me quite a bit about how this organization looks at operational excellence. Well, tenure is king; great performance is king. But if I've got that two different ways in two different organizations, I have to figure out how to bridge that.
In some places, it's "move fast and break things," and in others, it's "slow and steady wins the race."
If you have a non-hourly population, a salaried population where you don't have to monitor the clock as well:
- Are people expected to be present for their entire work shift?
- Or if they're done in six hours, do they get to go away?
- Do they stick around when they need to be around for 10 and 12?
- Is it more important that employees be present, or is it more important that they get their work done?
- How often do changes happen in the organization? Are process changes and process improvements just a way of life?
- Is there a way that the company is locked into that tradition and history versus a move-forward approach?
- How do we view change and updating the way that the organization operates?
Most organizations don't have a monoculture unless they're a very small company. When we do the diligence, we just don't have time to dive into a bunch of different microcultures.
We barely have time to get people to pay attention to culture on the front end as is. So, I don't want to make this so complicated in terms of a practical tool that you're looking at department by department or group by group.
You have to look organization by organization, at least to the extent you can. And maybe it's looking at the catching organization. If it's a large company, maybe there's a division doing the bulk of the acquisition, and that's where you have to go.
And maybe there's a part of the target company where the secret sauce lies. So it's probably one or two functions that the acquisition is really being focused on. So you can compare those two smaller parts of the culture to one another.
That's probably getting into our 301-401 levels of cultural assessment. Suppose it's a firm that's just starting out, just assessing to start with. Even if you don't like my five areas and you just want to focus on one or two, great. Just do something looking at the whole company and then you'll refine that as you go along.
Communication style is the one that most integration leaders tend to pay the most attention to. This is simply a matter of understanding how the organization talks to itself.
- Do we have a situation where leaders openly share their decision-making process?
- Or do they only provide outcomes and direction?
And I recall seeing a situation where we had an acquired company leader who every email started off with five or six paragraphs about how the decision was wrestled with the logical steps that were taken to reach a conclusion, being pulled into a very top-down command and control type of organization where the messaging was what we've thought about it, and here's what we want you to do.
That difference in explaining versus not explaining can create a culture clash when the organization seeks to come together.
We also see things like preferences for formal versus informal messaging.
- Is everything happening via email or town halls versus Slack messages?
- Does information cascade informally? You don't find the real scoop unless you know the right person.
- How frequent are broad-based employee communications?
You'll see some organizations that have a very specific cadence. They're going to meet as a whole company once a month or once a quarter, whatever that cadence is versus, companies that pull people together ad hoc, and then it might only be fragmented groups.
- How tolerant is the organization of criticism or bad news?
- Do you have a culture where everything always has to be positive?
- Do you have a culture where everybody complains all the time, and it shapes how those messages go out?
- How are we communicating a positive versus a not-so-positive message?
- Does the messaging focus on the employee, on the customer, on the organization, on the leadership? Analyzing messages, you can see right away who the focus of the messaging is.
Somewhere in there is the challenge of the talented jerk. I've heard about this often, where some organizations will tolerate anti-social behavior if the person brings enough value to the organization.
That is also a way that the organization communicates. Do you tolerate bad behavior or counterproductive behavior by leaders or strong technicians that you wouldn't necessarily accept from other people?
A lot of different ways to look at how the organization communicates. In my experience, this is one of those areas where just having a conversation and looking at the actual communications that have been sent out and some of that cadence can be really helpful in understanding how to talk with the folks that you're acquiring in a way that they can hear what you're saying.
To get this information to make the assessment, some of it is just asking questions. Some of it is looking at the artifacts that you have. Like I said earlier, if you are to a point where you now have access to the employee base, you can ask these in a survey.
In the book, they're a set of survey questions and you can directly ask people what those look like. Getting into the survey analysis is probably a whole different kettle of fish. But in general, you're looking for those areas where there's the most distance between what the target does and what the acquirer does.
I do that in as judgment-free a way as possible. I have my work preferences. I recognize that other people have work preferences, but it's hard to say what's good and bad or right and wrong. So I really want to look more at the degree of a difference than at my judgment about how a particular organization chooses to communicate.
We all have a self-concept about who we are as we operate through the world. There's a reason I stick my degrees and initials at the end of my name.
We all have a self-concept, and organizations also have a self-concept. How does the organization see itself? One of the places where we're seeing this revealed in really exquisite detail for all of us to watch is Twitter.
Before Elon Musk took over Twitter, it had a particular view of itself as an organization, mission, and value statement that it wanted to live up to. Whether or not it did is a very different conversation that I won't dive into right now, but it saw itself in a particular way.
And then we have the Elon Musk takeover, and now Twitter has view of itself is very different under the new ownership. And so the self-concept, the way the organization sees itself, has shifted with the new ownership.
And I would say that every acquisition has part of that. It's why we see massive arguments over swag, branding, email addresses, and business cards. It's not just about how we go to market and communicate to the market, but it's also about who the organization is now that it has a new owner. What is the soul of that organization? So we can see how these things play out when we poke on a few different things.
First off, we can look at how the organization's purpose inspires the employees and how that's going to change.
I worked on the periphery of a deal a couple of years ago that the target was about green energy. They really saw themselves as these environmental leaders, but the company that bought them was not an environmental leader.
There were just some very big political differences between the employees at this green energy company and the primary stakeholder of the acquirer that were in diametric opposition to one another.
Employees started to freak out because they could no longer see themselves as part of this green initiative–this going concern that would make the planet a better place. They felt quite betrayed actually.
So, understanding that those employees were very closely associated with the mission versus being there to get a paycheck, could have helped how some of the messaging was shaped going in and keeping some of the really rare skills they had coming into the acquisition.
Looking at things like:
- How often is the organization going to bring in new ideas?
- Is it locked into a particular view of itself, or is it a view of itself that's growing and evolving?
- How are leaders developing and mentoring employees?
- Who's responsible for the person's career growth?
- Do employees feel respected and empowered in the work environment, and how will that change during integration?
We're starting to see corporate social responsibility come to the forefront of how companies view themselves. So going back to that example with Green Energy, that's a big CSR issue, but so is DEI—diversity, equity and inclusion—along with other ways an organization might see itself.
Finally, other parts of social and environmental awareness go along with that. There's a way that the company has branded itself to go to market for talent. If that's going to change significantly, you will end up with a culture clash.
I suppose one of the other things that I should probably talk about in this section is that a lot of this is where I talk about hurt feelings. And I don't mean that to be dismissive. When people get their feelings hurt, they stop working, or they stop working as hard. Those hurt feelings have a real financial impact, and companies that dismiss it are missing the boat.
So what? Maybe the target company is a bunch of crybabies. How will you get value in dealing with people who don't necessarily agree with the direction that this is going? You can either fire them all and start all over, in which case you've lost significant value from the acquisition. Or you can recognize that this culture clash is happening and allocate some resources to manage that.
By the time you lose employees through attrition, layoff, or however, that is. If you can't get the integration working and you need to bring a fresh back to people in, you can spend a lot of money making that happen.
Depending on the size of the deal, you have a lot of institutional knowledge to walk out the door. A lot of customer relationships go away. It's not as simple as dismissing; there are a bunch of crybabies and their feelings are hurt. There are dollar signs attached to each of those individuals.
If they're having a rough time crossing the bridge between their legacy company and their new company, we can't simply dismiss that. We need to get in and help people through that transition. The best way to do that is listening and reacting. It's amazing what just a little listening to people's concerns can do and help them feel better.
The book has a whole section on how to listen to employees. Part six of the book talks about focus groups, different kinds of surveys, and stay interviews. There are ways that we can listen to people, and then we have to respond. So when we hear people talk about survey fatigue, for example, it's not that people get tired of filling out surveys; it's that they get tired of wasting their time filling out surveys.
So if I fill out a survey and I don't feel like I'm being listened to, I'm not motivated to go fill out another one. But if I fill it out and I'm actually getting that feedback loop closed, then people will respond to the next ones. So it's not just about the listening; it's also about hearing what was said, that active part of the hearing, not just the input into my ears, processing that and respond.
Sometimes the response is, "Hey, we heard what you want, but we can't do that." Or responding differently to find another way to do that can make an enormous difference in people feeling like their input's been valued and it can make a huge difference in smoothing out integration.
It's fantastic when leaders take a little of this and incrementally build on it. It doesn't have to be perfect, but just try something and maybe try something a bit more of the time after that, and then maybe a little more after that.
All this has to go somewhere. If you're doing this to gather information and you're not going to do anything with it, honestly, don't waste the time. Only gather this information and invest the time in collecting it if you're going to be able to do something with it.
There's so much to do during an acquisition that there's a whole book with a lot of suggestions. But at the end of the day, if you can only implement one thing, then implement that one thing and do it well. And then you'll free up some time to do the next thing.
In my mind, coming from a relatively simplistic point of view as an HR guy, when I see a list of synergies that comes down to me in a deal, they usually fall into a couple of buckets. They're either revenue synergies or cost synergies.
What I've seen, for the most part is revenue synergies almost always mean that there's some sort of cross-selling. I know there are other ways to get there, but when they fall onto my desk as an HR leader, I'm almost always worried about training people on how to do things.
To cross-train salespeople, we have to stop pretending that salespeople are coin-operated. We can't just throw quarters at them and ask them to dance the right kind of dance. It doesn't work that way. We have to understand what's going on culturally with that go-to-market organization if we integrate it successfully to meet the synergies.
The other synergies that I often see are cost synergies. That usually means that I'm either laying people off or moving them to another facility because we've got locations that are close to each other.
Other ways to realize cost synergies, maybe some cost-cutting initiatives or economies of scale, which might change procurement processes. But we need to understand where those synergies will affect how work gets done and start planning around them in a way that's separate and distinct from those five key drivers of culture clash, which affect the entire organization.
So it really is understanding what it means for me to realize this particular synergy. When it comes to the people, how will I make this synergy come true? What will I run into when I try to execute that synergy plan?
To me, the secret sauce is about:
- Why are we buying this company?
- What unique capability does this organization bring that we don't have?
I shared this last time I was on the podcast where a company I was with purchased an organization that was writing manuals. That was the unique capability they brought–the ability to write training manuals–small acquisition, capability that we didn't have that was cheaper to buy and bring in.
Their secret sauce and how they could turn those instruction manuals around so quickly is that their talent sourcing happened at a local community college. Their time to hire at this company was half a day.
Well, the secret sauce again was getting people out of the community college to write these manuals, and when we bought them, we changed how they hired people. So it went from a half day to fill to somewhere in the neighborhood of 87 days, which is a heck of a lot longer than one day for any hiring manager that has sat there.
We went from a day to three months because of the change in how that acquirer does business, which almost broke the deal. That secret sauce of being able to keep a pipeline of talent shoved into that company completely dissolved during integration.
Even though it was called out on the HR diligence report, nobody really stopped to think about what the business implications were because it didn't affect any of the numbers that went into the deal model. Nobody was paying attention to it until they tried to hire somebody. They were 50 days into the cycle.
I got a very angry email from an executive and I already told him this was going to be a problem. I even offered to intervene by getting a couple of requisitions created for him to get in front of this pipeline. But he told me no and he's not worried about it so I assumed he had it handled.
That's an example of a secret sauce that broke during cultural integration because the way that the target and the way that the acquirer filled that critical talent pipeline were just so dramatically different.
Sacred cows are like organizational self-concept. This is where feelings start to get involved. Almost everybody who's done an international deal can tell you a story of getting the tea service stopped in the UK.
I've been through that talk at a number of conferences where tea service or free coffee or whatever went away and you almost had an employee rebellion over it. People stopped working, they left, they threatened to quit all over something that, to an outsider's just goofy.
So, this is where you really kind of have to look at what's the thing that's going to cause the biggest challenge if you take it away?
I did an acquisition right before the pandemic, and the thing that almost caused the biggest challenge was the pet-friendly workplace policy. So, the target had to bring their dog to work as part of the culture, and the acquirer that I was with at the time did not, there were no dogs allowed in the facilities.
People were literally leaving their jobs to either work from home or to find something where they could either work from home or have their dog in the office with them. That sacred cow of having a pet-friendly workplace was just so important to a bunch of them that people were willing to leave their jobs.
Had we realized that further upfront, we might have tried to prolong their lease in their current space a little longer and run that out or we would've done a broad-based comp increase. We've thought about covering the cost of doggy daycare or something to help folks through that. But we lost a lot of good talent over being able to bring the dogs to work.
We usually find out about those things through the leadership team. So if you think about it, during the diligence process, on the HR front, we usually have a very limited number of conversations.
Our conversations on the average deal are usually limited to whatever we can get an invitation to that's a leadership-level meeting. But it's usually not the dinners; it's usually not the negotiation conversations. It's usually not those early trips out. So we tend to be shut out of the process on the front end like that. So we're relying on our friends in the corporate development function to do a lot of this intelligence gathering.
Some of the best corp dev partners I've ever worked with are those who are just naturally curious beyond the numbers and try to understand how the company works. There have been times that I've just sat down with a notebook and listened as I got a data dump from a dealmaker who was paying a lot of attention to the surroundings. And that is a powerful partnership, having that corp dev person pay attention. They're the ones that give me an early warning about potential issues and new trends. It's just so helpful on our end.
I do try to make sure that at the end of every diligence process, I have two questions that I ask of the internal team: What are we going to break when we buy this company? Those are usually cultural issues. Their business processes that are key and critical to the organization working.
Again, I used this example in the past of a procurement process where a company was making drones. They had a rapid prototyping capability where their procurement process was to walk down to Napa Auto Parts, use their individual credit card to get whatever pieces they needed, and then they'd have a prototype out the door the next day, or the next week.
All of a sudden a giant defense contractor buys them. And when that happens, you must go through a formal procurement process. So no longer are you going to NAPA to get the parts you need. You need to get a contract put in place, and then it has to go through supplier quality, where somebody else will look at them to make sure that they're good enough to go in your prototype. And then six weeks later, you've now got your parts to make your drone.
At six weeks, it's no longer a rapid prototype. So we're way past the point of rapidity after a six-week delay, and that's where stuff just starts to break. And if that's a key capability in this case, that's a secret sauce; then you have to do some work around that.
That's all a function of observing and understanding what's happening at the organization. This is why we need to start seeing more integration conversations happening earlier on. When we look at the deal failure rates at that 70 to 90%, Harvard talks about, almost all of them are integration challenges.
They don't show up on that deal model, and so the corp dev team on the front end of that are the ones who know. They're the ones who have access to find out these answers, whether it's just through observation, through questions, or getting your integration leader in a little bit earlier.
Taking findings that impact the deal terms
There are a couple of ways to impact the deal based on findings from any diligence. Not just your cultural diligence, but your people diligence, legal, financial diligence and so on.
Obviously, the nuclear option is to kill the deal, and I have not seen that come up around culture. I've seen it happen twice on what I'd consider people issues in a deal.
One is that the founder we picked up was just a jerk. Nobody wanted to work with him. That's not truly a cultural issue, it's a people issue.
The second was a bunch of underfunded pension liabilities we didn't want to pick up as a buyer. Those are the two deals that I've seen die based on people's situations.
Taking "kill the deal" off the table because that happens so seldom due to people issues, we can adjust the agreement. That's certainly one option that we've used a few times. I've seen purchase price adjustments because there may be some things happening where the talent isn't worth what you thought they were worth, or they weren't going to be able to deliver things.
We can do it, but now we will have to throw a bunch of extra heads at this, and therefore, we will do a purchase price adjustment to make up for that.
I've seen retention commitments change in the deal. I've seen ancillary agreements like holdbacks and earnouts changed as a result of things that we would find in some of the diligence.
That tends to be a less frequent option, but it is one that I see used quite a bit of the time–making that change to the agreement much more often on cultural diligence items. In effect, in most people's diligence, it does come down to how we're going to do the integration plan?
That integration plan really starts when the employees find out about the deals on that employee announcement day all the way through that initial hundred-day plan and beyond. That's really where you change things.
But the challenge is that usually, when the deal is signed, there's a very rapid turn, especially if you're publicly traded between getting signed and announcing. So you don't have the luxury of delaying announcements another couple of weeks so you can get it right because of your cultural diligence work. So it really has to be run in parallel with the rest of your diligence so that you can shape that integration plan and really start to extract the value.
Assessing the level of cultural diligence
If you're going to make a fully standalone acquisition, I don't think your level of cultural diligence needs to be nearly as deep as when you're fully integrating an organization. However, you need to look at some of those places where you're looking at extracting some of the deal drivers.
For example, if you think you're going to get synergy from economies of scale on the procurement side. Maybe your company makes some consumer packaged goods, you know what their cost to buy packaging is, and you're going to give them some of your packaging vendors.
That's a simple way of looking a little bit at the way they do some of their procurement. If we make them use our vendors, RTs and Cs, will we be able to bridge that gap? I don't know if I would do full cultural diligence on something like that.
I spent a bit of time working for a company that only did standalone, and didn't do any full integrations. Where it's worthwhile to do some diligence on those standalone, what I found I needed to work on most was understanding the leadership team and what was going on with them.
That's where I found some of those pre-LOI steps of really looking at:
- Who are they?
- What are they saying out to the market?
- What are they saying to the media? What do they have going on there?
- What's their history?
Those were the most helpful because at the end of the day, I was not worried about how they'd react to news of the acquisition because nothing in their world's really changing.
If you can show me an acquirer who's able to stay hands off of a standalone, I'd love to talk to them because I have yet to see an acquirer who wants to leave his company standalone and actually means it. Because there almost always is somebody in a function that wants to get in and figure out how they do things.
That is where I tend to find the biggest derailers occur–it's when you tell an organization you're going to leave them alone, and then suddenly start carving things out.
Those are the ones where it gets even more complicated to do cultural assessment. If you are looking at changing the way that the acquirer does business through the acquisition, not only do you have to get your arms wrapped around the way that the target does things, but you need to understand how the acquirer does things.
And many organizational leaders don't know the culture in their organization as a click or two down. It's just absolutely stunning to me the number of times that I've seen leaders who don't realize even some of their directs and how they do business.
Frequently I see this with hired gun CEOs that come in, and their mandate is just to sell the organization, like get it off the books, where they're so busy working on revenue. Getting the revenue up so that the multiple goes up, but they really don't understand how the organization works because they were brought in with a very different mandate than that understanding.
I also see that inside organizations where you get a very large acquirer. It's hard to understand what all of the microcultures will look like when you make that change as well. Anyway, my bigger point is that you need to get some folks who understand:
- How both organizations work
- What do you want that final organization to look like
- How that group is going to do its work.
You've increased the complexity of the cultural assessment, and cultural integration work a great deal just by deciding to change how everybody does everything at the end of that transformational acquisition.
I was part of a company for many years where there were a lot of different smaller companies brought in to help shore up capabilities.
As the market shifted, there was a desire to consolidate that capability into a new division in the company. That went really well. But it was more of what I've heard called merger repair by some folks where there were many partially integrated or standalone organizations floating around out there that had their own unique identities. They were on different payroll systems, different HR systems; they were filing various types of financials across them, and pulling them together into a new entity for go-to-market purposes, a new line of business.
That was done really well at an old company, but it took time. There was easily a six month discovery period where we were looking at:
- all of those holdings and what we wanted to do with them
- internal capabilities
- what the market was going to demand a few years out
And it was with an organization that had done a number of large scale transformation attempts in the past. So it doesn't surprise me that it went particularly well there.
Usually, I don't know that the organizations always have the agility–that muscle memory to do transformation well if they've not done it before. So my best recommendation in that kind of situation is to give yourself twice as much time as you think it will need, because you will run into some roadblocks along the way. Be gentle with yourself because it won't be perfect, but what you come out with should be better than what you started.
You need prolific leaders to be able to do that. If you don't have a leader who's capable of driving change, it's probably not a great idea to drive change with that leader. So that, to me, is probably your first question:
- Where are we now?
- Where are we going?
- How are we going to get there?
- Who's going to get us there?
If you don't have all of those pieces in place, it's probably not going to work out as well as we'd all hope.
The secret sauce to overcoming culture clash
I've talked with several other HR practitioners about this. The biggest secret for leaders is acting like you give a damn. So if the leader of the acquisition, and usually this is the buy-side leader, can take a few minutes to, and I think most do give a damn, they care a great deal.
But sometimes leaders struggle to convey that to the employees who are coming over. And if there were one thing that I could tell you that would make a difference in almost every acquisition, it would be leaders acting like they care– not just about the deal, the financial model, the go-to-market strategy.
But the fact that every person sitting in one of those chairs has to feed themselves, figure out how to get a roof over their head, figure out how they're going to take care of their kids or their folks, or whoever the important people in their life is–act like for just a moment that you care about that individual and their individual circumstance.
Most leaders do, but they don't convey that very well. That goes the longest way in getting some level of grace from employees and bringing them onto your side as they work through what's a big change for them.
We're reciprocal animals, it's wired into our mirror neurons. We like to do things for people that we like. And we will like them more if we think they care about us. You don't even have to read the book to pull that off. The biggest thing is empathy, understanding, and getting in there.
Once we've established that you care, the second thing is having a plan. One of the things I provide is a hundred-day plan. It's a very generic plan. It's not going to work for every acquisition, but it's a good enough starting point for most deals that you can look at some time facing on when to do things, starting with that employee announcement–letting everybody know that their company has just been acquired.
But having some kind of plan about when things will change, how they will change and how you will communicate that change can make an enormous difference. So if I had to teach you two things, that would be the big two. Act like you care and have a plan.