A top M&A challenge: Culture integration

The challenge of integrating the cultures of merging companies is one of the most common factors contributing to failed mergers and acquisitions (M&A), according to Bain & Company's Global M&A Report 2023.

While about 80% of integrations address culture at or before the start of the diligence process, about 75% of integrations still struggle with cultural issues that lead to programme delays, personnel changes, or even reduced value or failure of the deal, according to Bain.

Differences in value and purpose, decision-making, and ways of working are the main reasons integrations are often so difficult.

The report recommends three steps that companies can take to meet these challenges:

• Diagnose which challenges are active and a threat to the integration.
• Make intentional choices about which approach to follow while working together.
• Use the integration management office, commonly set up for the purpose of M&A, as a test-and-learn laboratory to see what needs adjustment.

Other trending topics in the report:

M&A in turbulent times. Many companies are wary about acquiring during the current downturn, but companies that acquired during the recession in 2008–2009 outperformed their less-active competitors over the long term.

Companies that made one or more acquisitions during that period experienced an average shareholder return of 5.9%. Companies that made no acquisitions had a return of 4.7%.

But, the report cautions, being an active acquirer is not "an end in itself". The most important objective of M&A is to help execute a company's strategy. That could mean strengthening the core business and increasing scale or creating strategic options.

The role of due diligence. The best way to succeed, according to the report, is with proprietary insights from a diligence that is "faster, deeper, and more focused than your competitors".

Due diligence is an important part of structuring M&A transactions. It analyses many datapoints, and as FM contributor David A.J. Axson, a consultant and author, wrote in the linked article, "All of these datapoints feed into a financial model that develops valuations, establishes potential acquisition prices, and forecasts future financial returns."

The best companies use due diligence to:

• Be proactive.
• Amplify value through proprietary insights.
• Plan for successful integration during diligence, not afterward.

According to Bain, a clear deal thesis is the top contributor to successful acquisitions, followed by a clear alignment on strategy, and conducting high-quality due diligence. But the most inaccurate areas of diligence are integration road maps, revenue synergies, and people issues.

The report also identifies five M&A themes to watch for this year.

Cash-rich companies make bold, strategic moves. Strong companies with an experienced track record of M&A will be the best positioned to do the largest transformational deals.

A continued prevalence of small to midsize deals. Thousands of deals valued at less than $500 million make up most of the M&A activity each year.

A balance of scale and scope deals. A high-interest-rate environment and weak economy put a premium on assets with cash flow and a line of sight to rapid synergies.

Valuations coming under further pressure. Uncertainty regarding cost and availability of capital will likely cause dealmakers to be more conservative in valuations.

Companies reshaping portfolios through separations and divestitures. Economic downturns and uncertainty force companies to reevaluate their portfolios under new scenarios.

— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.