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.


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