CULTURE ALIGNMENT: The Hidden Killer of M&A Success: The success of a merger depends on identifying cultural differences at the outset and developing a strategy to manage them.

• Author: O'Reilly, Anthony
• Position: Mergers and acquisitions

There is no shortage of priorities seeking a director's time and attention today. Among the many topics ranking highly on the Gartner 2023 Board of Directors Survey are sustainability digital transformation, DEI, and fiscal and monetary policy. Culture does not make it onto this list.

One issue is that culture is not what directors and C-suite executives believe it to be, but instead is the instinctive collective priorities of managers throughout a business. As such, it is both deep-seated within an organization and sometimes different from the posture we think we know. This leads to culture surprises that in recent years have had to be faced by the boards of Rio Tinto, Activision Blizzard and Wells Fargo, among others.

THE INVISIBLE IMPACT OF CULTURE

Like any intangible asset, culture can lie hidden until a transaction forces it into the open. I was a partner candidate at one of the firms that merged to become what we now know as PwC, and I still remember the press that soon-to-be chair Nick Moore got when he described the combination as the "starched underwear" firm merging with the "no underwear" firm. The fact is that he was right to put this front and center. Having a front-row seat in the group that tried to knit things together so the new firm could act as one, I saw first-hand what Moore was stressing: The business combination made complete commercial sense, but failing to pay attention to the differences in culture could upend it. On reflection, it remains one of the most successful business combinations in part because the firm identified cultural differences and addressed them head-on at the outset.

We often hear early on in a transaction that "the cultures align" only to find out later that there is some delay in making the acquisition work and capturing the value. What goes wrong is often the result of failing to understand or manage the differences in culture. For this reason, it is becoming increasingly common to activate a culture work stream in either or both of the due diligence and the integration teams. Boards should take a keen interest in the approach.

THE CHOICES FOR BOARDS

There are three choices that boards should assess when dealing with culture in a business combination: ignore, impose or change. Boards need to make sure the approach fits with the strategy of the combination. Ignoring the culture is a choice that makes sense only when we don't intend the businesses to combine. Perhaps we do not want to disturb...