Does Culture Really Matter in M&A?

Mergers and acquisitions are rarely discussed without someone expounding on the importance of culture fit. In reality, though, the intricacies of assuring a good match often fall by the wayside when deals are made.

We know this because most parties to transactions tend to emphasize the economics of the deal. The postmortems reported in the trade press inevitably focus on multiples, deal terms, compensation, retention bonuses and earn-outs. Every year, the wreckage of ill-conceived transactions lays scattered across the landscape: partner break-ups, lawsuits, terminations of key partners and departures of key clients.

In addition to the oft-touted “culture fit,” dealmakers also float the concept of “synergy” when proposing transactions. The economic value of synergy is often incorporated into the price. For example, if the merger results in the elimination of redundant positions or outdated technology, this can be a net cost benefit for both the buyer and seller. Without a plan to achieve cost savings and operating leverage over time, however, it can be hard to accomplish the economic goals of the merger.

Perhaps in recognition of this challenge, some consolidators lead with the proposition that nothing about the advisor’s business will change from an operating, service or branding standpoint. They cleverly recognize that a prospective seller believes they have created something unique. Conceding this point when a seller is still a prospect gives a nod to the advisor’s desire for control. Buyers also know that forced integration is difficult to incorporate into merger agreements as negotiations usually devolve into a contest of wills.

Let’s face it. If either culture or synergy were paramount in deal-making, more time and discipline would be dedicated to sorting out the challenges to integration and any potential conflicts among people, processes and clients.

I discovered how this works when my former partners and I sold our consulting firm in the mid-1990s to Moss Adams, a West Coast accounting firm. The managing partner, Bob Bunting, explained their practice of learning about a target firm before discussing price and terms. First, they evaluate firm culture and potential synergy during a series of meetings over several months, possibly for as long as a year. This approach requires a lot of patience but the outcome is always more fulfilling. As a result of Bob’s deliberate due diligence on what made us tick, he was able to determine that the acquisition of our firm would be worth his while.

Bob made it clear that out of 10 possible mergers he considers at any one time, only one will be consummated. In those rare cases, price, terms, business model and culture have to align to create an even more dynamic business.

How is culture revealed? In advisory firms, compensation and the behavior it reinforces is a big indicator. So, too, are client acceptance, retention and billing. Policies around people development and staffing often highlight potential conflicts.

With competition rising among prospective buyers and sellers, firms have an opportunity to differentiate themselves by emphasizing the strength of their culture. Let’s break this down into four general categories:

1. The Human Capital Experience Financial services have evolved over the past couple of decades in terms of who it values. While many firms still exalt rainmakers, new business often represents a small percentage of a firm’s annual revenue — somewhere between 5 and 10%. The vast majority of revenue and profits depend on how well clients are served, how their expectations are met, how the advisory firm responds to their demands and how clients promote (or do not promote) the firm to other prospective clients. These critical responsibilities fall on non-rainmakers.

Advisory firms today must carefully match the right people to the right jobs, and deliberately train and develop their staff members to become valuable assets to the firm. A career ladder that allows employees to grow over time, to take on more responsibility and, ultimately, to become a partner in the firm illustrates a positive human capital experience.

Most small advisory practices find this challenging, but mergers allow firms to leverage the size of the combined businesses to create a dynamic human capital experience that values all employees. Mergers also enable the liberation of non-performing employees.