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

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?

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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