Four Key Performance Drivers in an M&A Transaction

Are you developing a growth strategy for your purpose-driven business in preparation for a sale or merger? If so, do you know what questions to ask when your company is being acquired? Or perhaps you’re considering growth through acquisition? What are the questions to ask when buying a business? Whatever the case, you must create a solid M&A integration playbook to ensure you maximize value and maintain your organization’s mission.

A cultural assessment should be one of the factors involved when conducting due diligence to determine how your businesses will align or mesh with the prospective buyer and/or investor(s). The world is filled with stories of companies clashing with with financial and strategic buyers due to incompatible cultures, differing on values-based decisions, people philosophy and important measurements. Epoch Pi’s principals have been trained to use the Denison Culture Survey as well as Barrett Values Compatibility Assessment as part of due diligence and integration planning in order to help our clients determine the right buyer, implement successful integration and create long-term value for stakeholders .

Epoch Pi has developed a Culture Change Readiness Scorecard to help our clients analyze compatibility around themes like organizational purpose, core values, leadership style, people philosophy, decision making protocol, priority metrics and organizational transparency. This helps prevent a common post M&A complication, the culture clash. 

In a previous blog post, Quantifying and Assessing Culture is the Key to Successful M&A, discussing how to assess and measure company culture and the role it plays in successful mergers and acquisitions. We indicated Denison’s four key performance drivers – mission, adaptability, involvement, and consistency as areas to evaluate when assessing potential buyers and/or investors. High performing organizations often have higher levels of clarity and alignment in what they do and how they do it. The enemy of clarity and alignment is uncertainty and confusion. The world is filled with countless stories of companies clashing with financial or strategic buyers due to incompatible outlooks, cultures, and differing perspectives on values-based decisions, people philosophies and key measurements.

In today’s quickly evolving business climate, some of the key drivers have evolved as well, and this type of information is becoming increasingly valuable to business owners and leaders. For this blog, we consulted with Andy Powell, founder and chief firestarter of Rule 6 Consulting, to bring you an up-to-date roadmap on key drivers to help you to establish where you can improve. Here is what you need to know.

Four Key Drivers

I. Vision and Purpose

Originally strategy was seen as the key to business success. More recently, purpose has become an essential element of doing business - the north star and inspiration meant to orient and focus a company's activities. Sometimes there is a gap between a company’s purpose and its strategy. But something else is critical to this equation: culture, or what are the values, beliefs, behaviors and underlying mindset that collectively define the organization? And yet, culture often receives less attention. When working with companies around culture, one way to start is with strategy.

Ask yourself the following:

·        What are the goals of the organization?

·        What are you trying to achieve in the next three to five years?

·        What are the organizational capabilities, behaviors, and culture required to deliver on that?

Maybe you want to prioritize being innovative and creative, because it will allow you to form strategic partnerships to enter new markets. When you connect a business rationale to the culture, it's a much more compelling message and new insights may arise that you wouldn't have otherwise uncovered.

Depending on which side of the transaction you're on, you have certain strategies you are working to execute, so understanding those cultural markers in your own company as well as potential counterparties is critical. Consider a merger between two companies and one is in a holding and maintaining protection mode. They want to maintain their base and focus on high quality and customer service while the other is more growth-oriented. Once you peel back the onion – there is your strategy as well as culture. In that example, you may initially believe this combination is a mismatch, or it may spark new ideas for growth that you had not originally considered. How do you manage that polarity?

Many business leaders fall into a trap of thinking of polarity as a problem to be solved, bringing forth a need to decide it one way or another. Either you focus on growth or on maintaining your client base, viewing the two as competing forces. Rather, you may consider embracing that dynamic tension, as opposed to seeing it as a conflict. Think about it as an opportunity to leverage common areas of strength while addressing potential areas of conflict moving forward. If you have two companies at similar stages with different strategies in place, you may need to consider how you leverage both. Say you have a culture that's traditionally fairly conservative but wants to shift to a high-growth mode. In this instance, you may wish to partner with an organization that provides these qualities and has a track record you can learn from, as opposed to simply saying you need to be more risk-taking and creative.

One way to think about it is to imagine a lighthouse as the beacon on the horizon your business is trying to reach. Other organizations have different strategies and cultures so they may be in row boats, kayaks, paddle boats, or speedboats and coming from different environments, but they are often navigating to a similar destination.

Between 60-70% of M&A deals fall short of expectations. When discussions turn to what went wrong with the M&A process, more often than not, “culture incompatibility” is defined as a key culprit. Culture often takes a back seat in the process and execution of a transaction. Experience tells us that understanding culture from the start helps both seller and buyer avoid mismatches and the pitfalls often associated with M&A. Even as a company identifies potential buyers or investors, you should consider cultural compatibility and where gaps between organizations may exist and whether they are additive or unbridgeable.

This is why utilizing due diligence tools like our Culture Change Readiness Scorecard is helpful in identifying aligned parties and understanding culture which can lead to a more successful M&A deal.

II. Adaptability

Adaptability has proven to be a consistent factor in the improvement of company culture. This goes back to adaptive leadership, a strategy that has been around for quite some time. In the past, many of the challenges organizations faced were technical challenges that could be solved by one person. If you brought in the right expert, they could figure out how to get the job done. Most of the challenges organizations face are adaptive challenges, where no one expert knows enough about all the different factors that are impacting the situation. As a result, you need to have an organization where you're able to leverage the interconnected pieces and continually adapt to any given circumstances.

The business world is interconnected and complex, and there are many things at play, both internal and external to the organization. There is also increased transparency and scrutiny with social media. There are many things that can impact a business, the marketplace, and industry, so business must be very adaptable. Sustainable competitive advantage and high-performing cultures stem from companies being able to read and act on signals of change - not only with products and services but also business models, processes and strategies. This includes effectively challenging business practices, promoting continuous improvement, understanding customer expectations and creating a safe environment to learn and adapt.

Adaptability is a key trait that impacts business performance. As part of the M&A process, it means probing and understanding core values and philosophical differences between parties. Understanding how the organization [buyer/investor] cooperates to create new and improved ways to work or address pressing needs. 

III. Empowerment

While in the past we have seen the importance of involvement, this concept has elevated to a greater sense of empowerment. Empowerment logically follows with this conversation in that one of the things you need to do to adapt is to push the ability to make decisions and operate into the outer reaches of the system where it's in direct contact with other external stakeholders. This is basically the notion of building human capabilities, ownership and responsibility. At its core, empowerment is about giving employees the freedom and authority to adapt and respond in real-time with solutions that help the customer. It requires leadership to share information and establish clear boundaries so employees know when and how to take action and make decisions. 

Employee empowerment can help organizations motivate employees, retain top talent and achieve a high-performing culture. Every organization has its own unique people, context and culture. Understanding differences in employee engagement and empowerment between two organizations is critical to reducing transaction risk, maintaining organizational effectiveness, and reducing employee turnover.

IV. Experimental

Further impressing the need to be agile, the final driver has evolved from consistency to experimental. Defining the values and systems that are the basis of a strong culture. Many of the problems businesses face don’t have textbook solutions. In these cases, you are creating solutions without a roadmap and need to be open to new solutions. You may try something only to find it doesn’t work. Rather than giving up, it’s helpful to have the ability to bounce back and experiment with alternative, creative solutions. This sense of frontline learning and experimenting should be implemented to empower those employees closest to the situation to step in and find the best solution for the business.

Understanding how your counterparty builds relationships with key stakeholders, promotes coordination across groups/functions, and engages in problem-solving allows you to understand “how” the organization works and identifies potential barriers or opportunities for successful integration and high-performance post-close

Conclusion

An acquisition or merger can be stressful for both organizations. In the process, culture often takes a back seat. Taking a proactive approach and evaluating the intangibles (core values,  leadership style, people philosophy, communication, collaboration) of a prospective partner will help you avoid the common culture clash and realize the desired objectives an acquisition can offer. And don’t misunderstand, two organizations don't need to have the same cultures and values. But it is important to be aware of them, embrace the differences and bring the best of both worlds together, identifying strengths and weaknesses of each organization to shape the culture of the new organization. Culture awareness, understanding and management can be done with the same discipline that is applied to the financial, operational, and legal due diligence.

Whether you are seeking a partner for growth or planning to maximize value in a sale, culture will weigh heavily in the overall, long-term success of the transaction. Protecting your business with a sense of legacy leadership will help attract the best employees, clients, and stakeholders and preserve your business’s value, mission, and culture for many years to come.

If you would like to have a confidential conversation and explore the options for your business call us at (216) 472-6645.