Important takeouts:
- The cultural alignment of M&AS is often underestimated. It is important to deal with it early and proactively in order to achieve successful integration and unlock the full value of the transaction.
- Misconceptions such as assuming culture can derail integration efforts without the active involvement of leadership so that they can align naturally.
- A comprehensive cultural diagnosis reveals deep operational differences and enables leaders to deal with them early.
- Effective integration requires leaders to define specific behaviors that set the organization's tone, define role models, role models, and commit.
- Companies that prioritize cultural integrity, utilize simulations and measure cultural progress will gain strategic advantages.
In the high-stakes merger and acquisition landscape, companies invest enormous amounts of time and resources to set up a financial and operating value creation plan. However, cultural integrity (an important factor that can lead to or break successful integration) is often relegated to a lower priority. This means that it is more difficult and costly to address at that point until a major problem arises. The 2023 Bain Report highlighted that, while culture is the 80% focus area of integration, 75% of acquirers still encounter important cultural obstacles, causing confusion and even failure to achieve the intended synergy. This gap underscores that simply acknowledging that culture is not important is not enough. Organizations need a proactive and well-planned approach to achieving successful cultural mergers that serve as a mechanism to accelerate contractual realism.
The problem is that most companies fundamentally underestimate the difficulty of cultural integration. Many believe that similar sounding values and practices can be “careful of yourself” once they are naturally aligned or have structural and operational synergies. However, cultural integrity is not an organic process, and superficial efforts often fail to uncover fundamental differences that can derail collaboration and existing ways of working. Without a deliberate approach to addressing these differences, even small cultural inconsistencies can snowball into major problems, create inefficiencies and undermine strategic goals. Leaders who prioritize cultures early can accelerate integration processes, promote mutual understanding, reduce friction, and ultimately unlock the full value of the acquisition.
Misconceptions about cultural integration in M&A
Cultural integrity is often misunderstood in the context of M&A, and how some misconceptions are formed? Companies approach or can't approach it – one of the most common things is that they believe they can address cultural issues later. Once financial and operational priorities are implemented, it is to “reach culture.” However, cultural differences that are not addressed early can cause difficult rifts to bridge after the merger, which can slow progress towards target values. One of the CEOs of the FTSE 250 company worked with us and said, “If we hadn't spent time in advance understanding how we worked, unlike the cultural similarities of the combined organizations, we would not have reached a level of clarity in business priorities and strategic goals.”
Another misconception is that cultural integration is simply HR responsibility. Although the HR team plays an important role, relying on them solely to promote culture can signal that cultural alignment is the periphery rather than the center of the success of the merger. At a recent PLC board meeting, Chro presented an ambitious culture and values for collecting board inputs. Effective cultural integration requires buy-in and active involvement from the combined organizations of CEOs and senior leaders. Champion of the cultural integrity of top leadership champions makes it a collective responsibility and employees across the organization are more likely to see their value.
Companies often fall into the trap of using superficial indicators to measure cultural fit. Relying on sources like Glassdoor engagement research and simple advanced level interactions can provide limited insights, but you don't get the big picture of “actually the work is done.” Without subtly understanding these deeper aspects of how work is done, organizations may misinterpret or overlook significant differences that can lead to false differences and friction.
6 Strategies for Proactive Cultural Integration
For businesses navigating the complex terrain of M&A, a strategic and proactive approach to cultural integration can be the difference between successful mergers and missed opportunities. Here are some key strategies to effectively align cultures from the start:
1. Perform a thorough cultural diagnosis of both organizations.
A comprehensive cultural diagnosis goes beyond basic engagement research and delves into how real work can be completed across teams and departments. Unlike annual engagement surveys that usually capture high levels of emotions, cultural diagnosis reveals deeper operational aspects, such as decision-making processes, collaboration styles, and attitudes towards risk. This diagnostic process must combine research, focus groups, and interviews to obtain a comprehensive parallel comparison of the merged organization. Covering “diagonal” representations across different levels and sectors or labor forces ensures that insights are drawn from all areas of the organization, capturing the nuances missed at surface-level assessments.
Beyond valuable insights that help you understand the current state of both company cultures, the diagnosis sends a very strong message to employees. One company made the conscious decision to deploy the cultural survey as a signal of inclusiveness to 5,500 employees, entitled everyone to leave a mark on ambitious culture and values. The business leader later told our team: “I can't believe they released high-level findings to both organizations to see places we are similar and different. My team said this was one of the brave actions that the leadership team can do and that it has become a powerful tool to integrate into the new company.”
2. Not only similarities, but differences are recognized and addressed.
Focusing on cultural similarities can help build early common ground, but emphasising them can lead to “false positives.” Here, shared values such as “customer-first” and “innovation” mask deeper differences in how those values are enacted. Most organizations overindex similarities, even when they take steps to understand them, at the expense of dealing with cultural differences. Companies are naturally drawn to what looks and is familiar, but they are unable to confront the unpleasant differences in how things are done.
For example, both companies may emphasize “performance,” but one may define it through individual accountability, while the other prioritizes performance through team collaboration. The real differences, such as hierarchy and various attitudes towards risk, remain hidden unless explored in detail. Recognizing these nuances from the start will help prevent conflicts that could later derail integration efforts.
3. Set the tone with culture and follow the strategy.
As businesses prepare their integration roadmap, leadership teams often feel a pull to jump straight in to set strategic priorities and operational plans. However, our experience shows that teams take the time to focus on culture and leadership first and get great benefits. Initiating an agenda with these factors serves as a springboard for a more productive and meaningful integration discussion.
Leadership team invests in understanding “insider guides” one another – creating a foundation that shares history, moments of peak performance, moments of greatest challenges, and how they make decisions and implement their plans. This deeper understanding goes beyond surface level integrity and encourages more brave and effective conversations that are important for successful integration.
4. Creating leadership behaviors and integrating role models.
How executive leaders' actions set the tone of a broader organization. It is essential that the leadership team define and own a set of actions, particularly during the integration process. These actions are co-created by leaders of both organizations and outline how they must act to effectively lead and deliver the integration plan. In cultural change, the broader organizations are closely observing how executive teams will manifest during the integration process.
Modeling these behaviors that are critical to being successful in a new company sends powerful signals and sets the organization-wide tone. The most effective leadership teams not only define these behaviors, but also commit to them and take accountability to each other, personally and collectively, to ensure success. Several leadership teams launch major integration meetings by reviewing new leadership behaviors and discussing how effectively these actions are reflected in the way they are tailored to integration goals as needed.
5. Use business simulation to model your future organization.
Simulation is a powerful tool for identifying potential cultural friction points and promoting alignment in real contexts. By creating a high-touch simulation experience, leaders from both companies can practice decision-making and conflict resolution in a controlled environment, providing a first-hand experience of how cultural dynamics unfold in an organization's organization. This not only brings cultural differences to the light, but also allows leaders to actively deal with them.
By simulating new organizations, leaders gain insight into the values and processes that move forward, and experience the best practices and experiences that new colleagues are most proud of, and clarify their vision for their culture. Simulation creates a “laborator” for alignment, navigates challenges together with leaders, and solidifies approaches to a broader organization. This allows them to practice new companies and better understand the dynamics of combined business value creation and operationality while experiencing new cultures, values and behaviors.
6. Measure success and assess whether your strategy works.
Measuring the success of cultural integration is essential to ensuring that alignment efforts truly benefit the organization. Establishing key metrics that reflect cultural and business outcomes, such as cost reductions, decision speeds, and employee engagement, advance concrete insights. Behavioral changes, such as collaboration and improved trust, can be enhanced by incorporating these insights into performance management processes such as promotions and bonus decisions, to further demonstrate successful integration.
Additionally, tracking cultural evolution through sentiment analysis, pulse surveys, focus groups and leadership feedback sessions helps organizations monitor progress and address emerging issues. Consistent follow-up is important. The most toxic outcome is to make a diagnosis and not act on it. By continuing to engage with employees and acting on feedback, organizations can ensure that cultural integration remains a dynamic and adaptive process in perfect alignment with business goals.
Active cultural adjustment is not just an enabler of smooth integration, but a strategic lever for success. If failure is not an option, businesses thriving in M&AS will take deliberate steps to center their culture early and often in the integration process. They challenge assumptions about cultural similarity, address potential differences, and prioritize culture as the basis for better strategic and operational decisions.
These companies design leadership behaviors for executives to live, and ensure that others do the same while role modeling new cultures. Use simulations to go further by understanding how leaders practice new cultures and values and drive these business outcomes. Finally, they achieve performance premiums by continuing to measure, track and commit to these practices. By addressing culture with this level of rigor and intentionality, organizations can turn cultural friction into strategic advantages, accelerate the realization of financial synergies, and achieve the fullest possible M&A efforts.
