Cultural Due Diligence – An Overview
As per Mercer’s current survey outcomes, approximately 43% of the Mergers and Acquisitions transactions are called-off, renegotiated concerning finches or suffer delay while being undertaken by the concerned parties. Both chance cost & financial funds are wasted due to the fact that the management of two or more different companies involved in a Mergers and Acquisitions transaction failed to address the problems relating to culture. To prevent such situations while implementing a Mergers and Acquisitions deal, the management should perform an in-depth cultural due diligence to ease the risks revolving around the deal. In this write-up, we discuss the importance of cultural due diligence, the process and its effect on Mergers and Acquisitions transactions.
Cultural Due Diligence – Meaning
The experts involved in Mergers and Acquisitions transactions are apt to move at a quick pace to get the transaction done rapidly, but this quickness could lead them into being irresponsible. Culture is one such factor of a Mergers and Acquisitions transaction, i.e. ignored by the management as they are often engaged with financial, planned and lawful due diligence processes. Shortage of cultural due diligence causes problems in the deal & ultimately blocks the transactions.
Cultural due diligence is not compulsory by any figure, unlike authorised and financial due diligence, it’s a process of investigating, defining, and assessing the cultural backgrounds of two or more unique business companies; this procedure also provides an entity in recognising and evaluating the area of differences & similarities among the parties engaged in the transactions that will affect the incorporation & achievements efforts concerning strategic objectives. Cultural diligence is a process where the purposes, values, missions, and faiths of the target company and their compatibility with those of the organisation getting it are assessed. The parts around which this due diligence type process is conducted are:
- Leadership Styles;
- Insights about the organisation, its personnel & management, and their approach towards the business;
The procedure of cultural diligence provides an entity entering into Mergers and Acquisitions deal in different ways like:
- In recognising the culture of the target company and its orientation concerning the business;
- In preventing possible red flags;
- In knowing the issues and concerns concerning their company’s culture;.’
- In arranging the management of the company for identifying and acting upon any upcoming cultural arguments post-merger or acquisition.
What is the Difference Between HR and Due Diligence?
People confuse due diligence with HR; however, they are pretty dissimilar in nature as HR due diligence aims primarily on the previous & possible headcounts of the target company, patterns of revenue by the company personnel, senior leaders’ profile, and managers & their compensation framework to resolve the unfairness occurring in the compensation strategies between the concerned companies and other same problems.
HR due diligence provides the company in recognising the dissimilarity in the decision making, and it also discovers red flags causing obstruction in the deal and such a process also decreases the risk of losing out on the talented & hardworking workers of the target company. HR due diligence examines certain working risks which significant for a smooth undertaking; such risks consist of:
- Place of work relations like disputes among employees, employee revenue, performance etc.;
- Benefits and compensation like policies of the target company concerning employee leave/vacation, compensation, etc.;
- Agreements concerning service of the people working of the target company;
- An organisational culture like leadership, values, co-operation, etc.;
- Target company’s policies and their procedure.
Such due diligence focuses on avoiding the red flags as mentioned below:
- Productivity reduces;
- Internal arguments are caused due to differences in approaches and views;
- Risk of losing talent at the time of Mergers and Acquisition transaction;
- Difference of process, communication, and culture.
Hence, certain factors of cultural due diligence are involved in the HR due diligence process, but the cultural diligence process is vast as it does not cover the target company’s personnel but their visions, mindset, and approach. Therefore, it is essential for an entity to offer a team or group accountable for caring cultural diligence as it provides the entity in identifying the possible obstacles relating to the deal.
Importance of Cultural Due Diligence
The process of due diligence vitally provides a business in the following different ways:
- It aids in meeting costs & producing higher revenue synergy if a company regulates to combine during a Mergers and Acquisitions transaction.
- Entities that obtain targets based upon the capabilities or talent of their employees then conducting cultural diligence their workers or employees then implementing cultural diligence becomes a requirement as the work culture of the target company is the primary ground as to why the acquirer aims to acquire that specific company.
- It aids in giving importance to the factors which the company desires to safeguard and cherish to accomplish its purpose. If the companies involved in a Mergers and Acquisitions deal are income-oriented rather than maintaining a client base or capturing cost synergies.
- Cultural due diligence also aids in emphasising the actual justification behind a possible business transaction because sometimes a company aims to combine with another company by just looking at their accounting books that are their profit margins, such an agreement might gradually turn into a failure if the parties engaged in the transaction fail to address the target company’s culture and in future, their concepts and visions don’t match so causing the venture to be a failure.
Structure for Conducting a Due Diligence Process
The process of cultural due diligence comprises the following steps:
- An entity should find out the cultural factors which are most vital to accomplish the objective of the deal. For example, suppose the parties involved in a Merger and Acquisition transaction are majorly focused upon cost efficiencies. In that case, they should assess the culture of each other concerning their financial management, operational discipline, and leadership.
- The team of cultural diligence should be established by the company entering into a Mergers and Acquisition transaction. This team member should be equipped with enough skills and experience relating to relationship networking & building. The central focus of this team is to ensure whether the companies involved in the Merger and Acquisition transactions share an identical set of objectives & visions and to what extent they are well-matched with each other.
- An entity should conduct a “dipstick” diligence which involves an extensive understanding of the other entity’s culture. This practice is majorly focused on gathering information regarding the target entity via public databases or sources, informal sources and other casual observations concerning their culture by different sources like chat with their employee, a rapid visit to the target entity, etc.
- Cultural assessment should be executed by setting out a list of cultural markers & complying with the same while comparing the entities’ cultures involved in the transaction.
- The information collected from different formal & informal sources should be complied with, examined, and validated by the management of the proposed company.
Cultural due diligence is a vital aspect of Mergers and Acquisitions transactions as it facilitates a company in getting knowledge regarding the work culture & discipline of the target company. The difference between a flourishing merger or acquisition transaction and a problem one is that the latter transaction failed to identify & assess the culture at the time due diligence process. At the same time, a winning one is implemented with a holistic and comprehensive approach towards culture at an initial stage. A robust focus is laid down upon the problems relating to the employee. Therefore, cultural diligence does matter in a Merger and Acquisition transaction.
Read our article:What are the Documents Required for Mergers and Acquisitions?