Businesses that overlook cultural fit when undertaking M&A activity can miss details that may lead to deals ultimately failing. However, many buyers continue to prioritise financial and legal issues over cultural integration during due diligence.
A new report has demonstrated how a lack of due diligence on cultural integration can create issues in the immediate post-deal period, particularly in terms of staff turnover, as well as highlighting how buyers often continue to prioritise financial metrics during integration.
According to The Human Value Gap in M&A report from US consulting firm RGP, organisations seeking to grow through M&A continue to prioritise legal diligence and financial modelling over cultural integration when exploring new deals.
81 per cent of respondents polled for the report said that issues such as culture, knowledge and talent were critical to deal success. However, just 18 per cent felt that their organisations were effective at protecting these things during M&A.
Reflecting the impact of this approach, 74 per cent said that they had seen moderate to high turnover of leadership or critical talent within 12 months of a deal being completed.
58 per cent of respondents said that turnover of leadership and key talent was monitored as an early indicator of value erosion, the same percentage that cited delays in synergy realisation as a sign of value erosion.
However, RPG noted that the majority of organisations continue to focus on financial metrics as the key measure of success. As a result, buyers run the risk of believing an acquisition is succeeding, while overlooking deeper signs of weakness that could ultimately erode value and even lead to integration failure.
Calling the issue a “critical blind spot” in M&A, RPG stated that businesses are consistently underinvesting and failing to focus on the human elements that are most critical to success.
RPG Senior Vice President and Head of M&A Daniel Boyer said: “For decades, M&A has been managed as a financial exercise, and the human capital aspects of M&A have been deprioritised. What this research validates is that deal value is rarely lost in the spreadsheet; it’s lost in the organisation. Leadership alignment, talent retention and cultural integration are the true drivers of sustained performance.”
Another key finding of the report was that the majority of organisations polled measure the success of their M&A deals on a two-to-three year timescale, with RPG pointing out that proper post-deal cultural and organisational integration typically takes between five and seven years.
The RPG report, which polled over 100 Chief Financial Officers and Chief Human Resources Officers at North American companies with at least $500m in annual revenue, is just the latest demonstration of how cultural issues can damage M&A deals.
A 2021 report from Mercer found that 30 per cent of deals failed to meet their financial targets as a result of cultural issues, while 67 per cent saw synergy delays.
A survey last year from WTW, meanwhile, found that more than half of 80 HR leaders involved in dealmaking across a number of regions said they felt unprepared to deal with an expected increase in M&A activity.
In order to avoid cultural issues causing transactions to underperform, damaging integration or derailing deals entirely, buyers should make HR and cultural fit a critical pillar of their M&A approach throughout deals.
Check out our recent insight for an in-depth look at how buyers can put HR at the heart of their M&A processes.
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