News & Events
Does the Deal Fit?
ENLIGN DEAL TEAM | 06/27/2012
"The most successful integrations were directed by people who placed the common good of the combined organization and its customers before all else." From: The Mergers & Acquisitions Handbook. By now, most business owners are familiar with the problems created by the merger of Daimler, the German automobile company, and Chrysler, the American car maker. Here is the classic case of cultural friction adversely impacting what was originally promoted as the merger of "equals." If any deal can point out the importance of a cultural fit in a merger or acquisition - this is it. The officers of Daimler took complete control and the executives of Chrysler left in droves. Not only were the management styles completely different - centralized versus decentralized, quick decisions versus decisions by committee, supplier rivalries versus supplier partnerships -- but, in addition, the American management team received huge compensation packages, while the Daimler people worked on small salaries, but huge "perks." Mergers and acquisitions are supposed to produce synergies that bring results. If they don't, the culture is too often the reason. John Chambers, the CEO of Cisco Systems, who has been involved in some seventy acquisitions, says that he will not do a deal unless there is a cultural fit. Culture according to one dictionary is defined as the "customary beliefs, social forms, and material traits of a … social group." The word "compatible" may be a better choice defined by the same dictionary as: "able to exist or act together harmoniously." Regardless of the semantics, if both companies can't work well together, the deal is a bad one. The importance of this cultural fit may be influenced by the nature of the deal and the desires of the seller. Here are some examples:
Obviously, in the first example, the question of a cultural fit, or any fit, for that matter, is moot. Assuming, however, that the prospective seller fits into one of the two latter situations, how does one determine the compatibility of the two firms? It may be a non-issue if the seller's company is going to remain autonomous. Or, the acquiring firm may have been through several similar situations and is experienced in the assimilation process. These two examples do not necessarily mean that the companies will mesh perfectly, but they do help. However, if a cultural fit is of concern, what can be done to help assure an orderly blending of the two firms? It can be as simple as the seller having a casual dinner with the owner or CEO of the acquiring or merging company. Much can be learned one-on-one about how the other company is managed and about its owner's business philosophy. Is it based on teamwork? Is it entrepreneurial or hierarchical? Is the company customer or policy driven? If the CEO of the acquiring company is reluctant to share a social occasion, then the seller may have already received the answer to the cultural fit question. Other areas that should be considered: how are the employees of the other company compensated? Or, for example, something as mundane as the company's product return policy may provide insight into the successful integration of the two businesses. How far apart are the companies' mission statements? Absorbing smaller companies can be a lot easier than two firms of approximately the same size merging. There are few companies whose cultural styles are so similar that integration is an easy matter. In many cases, where there may not be a perfect cultural fit, proper communication can resolve most of the issues. Unfortunately, there are some situations, like the Daimler Chrysler example, in which the two companies may never be integrated successfully. Sellers who are concerned about the right cultural fit should investigate this before the deal gets too far along and, obviously, prior to closing. An intermediary has the knowledge and experience to work with both buyers and sellers on this all-important issue. The right culture may be a "soft" issue when it comes to mergers and acquisitions, but just may be one of the most important.
- The seller sells the company on an all-cash basis and doesn't really care what happens to the employees, the customers or the new owners. In other words, the seller takes the money and runs.
- The seller receives sufficient cash that he or she is secure about the transaction. Despite this almost all-cash deal, or the quality of the security for the balance, there is serious concern for the employees and their future with the new ownership.
- The seller merges the company and/or receives stock in the acquiring firm. Further, the seller's compensation, to say nothing of any increase in the equity, may be determined by the success or failure of the cultural fit of the merged companies.