What these blowups have in common, Fubini believes, is ignoring critical due diligence in advance of agreeing to combine. Specifically, he describes two key pre-agreement steps that attempt to help forge an understanding of what will need to be addressed as part of the (still hypothetical) combination apart from the obvious legal, operational, and financial metrics (I quote):
- Understanding the cultural dynamics of the acquired organization, including how they operate, the manner in which they develop their talent, how are they motivated to succeed, and their executive management decision making style.
- Doing a stakeholder analysis to understand the additional challenges from political, regulatory, union, and community sources to be expected in the wake of a merger.
The first—”cultural dynamics”—is a topic we’re all familiar with, or we think we are. Yet in my experience there’s frequently an attitude of comfortable oblivion towards how the other firm really operates on a day to day basis. What types of behavior are rewarded and which go unappreciated or even penalized?
Is being a good social citizen valued or is it all about origination, billing, and collection? How much of a voice does or doesn’t the rank and file partnership have in firm-wide decisions?
Both “a lot” and “next to none” are perfectly fine, by the way; but whichever it is better match up pretty closely with the answer you’d give at your own firm.
The second—”stakeholder analysis”—is corporate world speak, but don’t dismiss it too glibly. We may not have “political, regulatory, [or] union” onlookers to worry about, but we have associates, C-suite executives, professional staff, and of course you can rest assured that headhunters will have their antennae acutely tuned to real and imaginary rumors of dissatisfaction in the ranks. Then there’s that unusual special-interest group called clients: Will they be pleased? Are you sure?
This all takes time and requires bringing more people into the pre-agreement discussions, as Fubini readily points out. That’s a major reason corporate boards and their investment banker advisors can choose to overlook this aspect of due diligence. But they do so at the deal’s peril: According to The New York Times’ “DealBook,” 19% of all announced deal activity in 2014 (by dollar value) collapsed before closing.
Let’s assume at least some of you are saying at this point, “I believe! Now what?”
Some powerful sources of intelligence, overlooked with nearly universal regularity, are people outside the counter-party firm, but who are in a position to know something about it. Such as:
- Former partners, associates, and professional staff from the firm.
- Headhunters, if and only if you can find an honest, discreet, and judicious one. I leave that challenge to you.
- Journalists and industry commentators and analysts.
- And, again, that special special-interest group, clients.
A final thought.
The acid test of the long-term value of a combination, I have long believed, is not knowable when it closes or even within a year or two after that. It’s only after all guarantees and promises have expired, and people have lived through the honeymoon and shakedown cruise, that you’ll be able to reach an honest assessment of the deal’s lasting impact. And what makes or breaks it?
Not resolving conflicts, not harmonizing office footprint or practice area mix, not integrating finance, IT, and HR (these are all the things that can be planned for in advance, recall). No: What makes or breaks it is cultural integration. The organ transplant can be a success and the patient can resume daily life for a period of time, but the body can still ultimately reject the graft. Only time will tell.
And only “cultural due diligence” will give you a prayer of predicting.
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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