Strategy Execution Viewpoint: Effective M&A is about More Than the Numbers

In today’s relatively benign credit environment, poor merger integration often leads to transactions failing to meet strategic and financial goals. The breakdown typically occurs in the middle of the M&A cycle − in due diligence and closing stages − where management’s focus on financial metrics overshadows strategic and operating challenges that need to be reconciled for the newly-combined entity to succeed. Identifying business cost synergies, projecting business productivity gains and establishing the fair value on the acquired portfolio provide the quantitative basis for deal negotiation. However, identifying and effectively addressing cultural and human capital issues early on is fundamental to achieving above market returns.

M&A Life Cycle Graphic

Perform a robust apples-to-apples comparison of culture during due diligence

Most banks do a decent job of traditional financial duediligence; many perform a dismal job of non-traditional human capital or cultural due diligence. Non-traditional due diligence – addressing how organizations align on ways of doing business – can help mitigate one of the biggest obstacles to successful integration. Ultimately, the biggest asset you are buying is the human talent to successfully build and service customer relationships.

Various qualitative techniques, ranging from structured diagnostics to observations, can be used to assess a target’s culture and identify areas of alignment or significant differences to reconcile.

  • Leadership Profiling. Culture emanates from the top. Through a combination of one-on-one interviews, selective testing and documentation reviews, a subject matter professional creates leadership team profiles for both banks. The specialist assesses similarities and differences, providing an independent perspective on competencies, traits, motivations and values of leaders in the target organization and how well they might fit within the acquiring bank’s operations.
  • Management Practice Comparisons. Culture results from management practices − for planning, organizing, leading and controlling operations. Based on a review of the target’s documentation, discussions with target management and some external data, the due diligence team compares management practices of their bank versus those of the target and creates a gap analysis where the impact of differences can be visualized and described1.
  • Interviews and Observations. The acquiring bank’s leaders form opinions on the target bank leadership – based on formal and informal interactions. This includes information gained from interviews to understand current roles and responsibilities, and to reveal people and performance management approaches, as well as insights from discussions over coffee or meals, about their interests outside of banking, or in their community. Leadership’s opinions on the target bank executives’ competencies, experiences and management styles are summarized and documented.

Varied inputs in hand, bank executives can have a robust discussion of cultural differences. The deal and integration can be structured to reduce the risk of cultural clashes. Executives with incompatible leadership values or styles are not invited to join the combined entity; key talent is identified, slotted in attractive roles, and incented to stay. Emphasis is placed on communicating and training acquired bank personnel on operating philosophies or management practices, which will be significantly different post-merger, ensuring everyone is in sync on Day 1.