To paraphrase the gone-but-not-forgotten E.F. Hutton campaign (I did work on Wall Street—I’m allowed these memories), when a Director Emeritus of McKinsey, who founded and led the firm’s global practice supporting mergers and acquisitions, speaks about “culture” in the M&A context, people listen.
The fellow is David Fubini, and he recently published Before a merger, consider company cultures along with financials over at HBR.org.
Here’s how he begins:
My experience, after being involved in considerable numbers of such transactions over the past decade, is that in the majority of cases little due diligence is done beyond the financials to investigate the challenges of having two organizations become one. Management is usually shocked to find the degree of differences that exist between their two, soon to be merged, organizations — and too few actively consider these integration challenges before the deal.
This inattentiveness, stemming from a rush to close, cowardice at the prospect of “breaking off the engagement,” sheer wilfulness, or an unjustified and arrogant confidence in one’s ability to sort it all out later, has lately led to some fairly high-profile train wrecks, just this year:
- Barrick and Newman, the world’s two largest gold producers, were forced to unwind their contemplated combination after only a matter of months as a result of a litany of disagreements, charges, and counter-charges, including accusations of the other side trying to renege on critical elements of the deal after signing a term sheet, the structure of and assets to be included in a proposed spinoff of some mines, and backing out of an agreement on the roles of the chairman, CEO, and lead director.
“Our efforts to find consensus have been rejected out of hand repeatedly,” was but one published quote (from a letter to Barrick’s board from the Newmont chairman) and other inflammatory language was also widely aired, including calling the other side “not shareholder-friendly,” accusations of an unconstructive and unprofessional approach to discussions on fundamental strategic issues, and more.The bottom line: “None of this suggests that we have the mutual respect or shared values today that we believe are necessary for the enterprise that would result from the combination of our companies to realize its full potential,” [Newmont Chairman Vince] Calarco said.
- Then there was the even more widely reported blowup of the putative deal between Omnicom and Publicis, which would have created the world’s largest advertising company. Here the publicly aired dirty laundry list included:
“We were not totally in agreement, to put it mildly, on how to share the responsibility [of CEO],” said Publicis Chairman and CEO Maurice Levy.“We underestimated the cultural differences, and if I had the answer I would have brought it up,” Omnicom CEO John Wren said. “It will be a very long time before I try to do a merger of equals again.”In the process of the talks, Omnicom also began losing creative employees (does this sound familiar?), and shares of both firms dropped about 12%.
How do things go so wrong?
Merging Barrick and Newmont has features that, for those not familiar with mining, can perhaps be analogized to merging the Red Sox and Yankees. (Except that, given the state of gold prices, it’s perhaps more like merging two MLS teams that don’t care for each other). Imagine the team you could field! Now imagine how you would deal with the conflicts for the roster spots, for the regular positions, for the starting rotation. What happens to the 50% who don’t make it, players, coaches, ball boys and cracker-jack salesmen? Where do you play ball? What sort of uniform will you have? What happens to the fans?
One of the factors that is essential to understanding corporate culture – and I am sure this is true in Law, too – is that the culture develops over long periods, sometimes over the full history of a firm. Changing something that has grown organically over decades is never going to be easy, and estimating how that relaxation to a new culture will occur – at what rate and how you will address the problems that arise – is hard, uncertain work. It will be hardest for those who believed that the culture was important. Now maybe that is old, dead wood, or maybe it is your most committed partners, the ones who have been stewards of the firm for a generation and tie the culture back to the mentors from whom they learned it.
It’s not just about the numbers, the “synergies”, the savings in redundancies, or even enhancing the top line. How will the combined product provide more value to your clients?
When deals only make sense financially you have to be, or have a VC mentality to make them work. Most PLCs don’t. And laments over limited financial due diligence are simply over powerful CFOs refusing to permit second guessing they can’t control. ‘Twill ever be thus. M&A exposes any power imbalances or frailties in the buyer – so especially when they are trying to buy a get out of jail card it can easily end in tears. Keeping the finance team and especially their advisers here under control is both hard and essential.
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