Cultural issues in a merger

Corporate culture is the manner in which a company does its business. It begins with the general concept of how the senior management team wants to operate the business, and percolates down through the organization in the form of management structure, how decisions are made, policies and procedures, the types of people hired, and even its marketing efforts. Examples of the opposite extremes of corporate culture are:

  • Command-and-control. Senior management makes all key decisions, and restricts the flow of information to people lower in the organization. The organizational structure is strongly hierarchical. This culture typically uses close adherence to the annual budget as a “carrot and stick” method for rewarding managers.

  • Localized responsibility. The senior management team is in charge of strategy, and shifts all tactical decision-making lower in the organization. There is broad distribution of information throughout the organization. There tends to be more emphasis on an upgraded work environment, in order to spur productivity and reduce employee turnover.

There can be serious problems with an acquisition if the corporate culture of the acquirer is of the command-and-control variety and the target company practices localized responsibility. The typical result is a large initial surge in employee turnover. If the reverse situation arises, employees of the target company will not be used to having responsibility thrust upon them, which can result in a prolonged period of confusion, reduced operating results, and employee turnover. In short, it is difficult to mix these two extreme forms of corporate culture, and so the due diligence team should estimate the impact of the acquirer’s culture on the target company.

The dichotomy just noted was for the two extreme forms of corporate culture. In reality, most organizations fall somewhere between these extremes, so the amount of cultural conflict is likely to be reduced. Nonetheless, there will be conflicts, which the due diligence team should highlight in its report to senior management. Seemingly trivial issues that the team should take note of include any differences from the acquirer’s culture in regard to such issues as:

Another culture issue that is potentially serious is the presence of any illegal activities. They could take the form of misstatement of the financial statements, outright theft of assets, the routine circumvention of accounting policies, and so forth. If there is evidence of such activities, it is entirely possible that the attitude of the management team is allowing it to occur throughout the business. For example, they may be ignoring the theft of assets by the family of the owner, or have imposed such difficult goals that employees can only achieve them by committing fraud. This type of environment is usually a clear indicator to an acquirer to terminate its pursuit of the business and go elsewhere.

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