Management due diligence in M&A transactions – is it taken seriously enough?

Mergers & Acquisitions are a very interesting animal. Done right they can be a big benefit to everyone. Done wrong and everyone involved gets egg on their face.

Essentially, merging companies and cultures are opposite activities. M&A is a secretive activity which deals with strictly with what is material, measureable or codified within a company. In short, the accountants, lawyers and managers silently try to add 2 companies together to get a larger, more profitable whole.

Merging cultures is an "open communication" activity which deals with "winning the hearts and minds of the employees". Many executives and M&A professionals are ill trained and prepared to examine the cultural mores of companies, find the synergies and communicate them clearly to the employees.

The biggest challenge when two companies merge is that they must integrate the best parts of both companies into the new company's culture to achieve the goal. And no two companies have the exact same culture. Therefore, the new company's management must consciously (I hope) select the best aspects from both parent companies. Given that the two companies have both made poor decisions that have resulted in success and great decisions that resulted in failure, neither company truly knows what the best aspects of the combined company would be.

Louis K. Geller's experience of merging his group into a large corporate agency made a pertinent comment in this regard.  "I was amazed that the very qualities that they liked about us (creative, nimble, interesting, big thinkers) were the ones that they wanted to eliminate once we moved into their offices. They immediately gave us the corporate rules…and how "they did business"…unsuccessfully I might add".

The M&A team is often made up of the CEO, CFO, and legal counsel who are typically only interested in financial, tax, and legal due diligence i.e. discovering legal, tax, and financial risks and liabilities. It is rare that IT, sales, HR, marketing etc are represented on the M&A team although it will often fall on their heads to make the actual merger or acquisition work in practice after the deal is consummated. Where subject matter experts are called on to say evaluate HR systems and policies they are often not given the time and budget to do the job adequately.  And the findings are not integrated into the overall due diligence and more often appear as an appendix that doesn't always get looked at or understood.

Due diligence should be undertaken by the subject-matter experts in the various 'functional' areas (such as operations, sales, finance, HR etc) and managed by someone who can take a strategic view.  In my opinion merger & acquisition failures are caused for the same reason large scale change fails – because the wrong perspective is applied which in turn leads to the wrong activities done only at the surface level and executed with the wrong expectations.  Few business programmes give enough credence or emphasis to this fact because it appears "too soft".

Recrion is a People Management Specialist that has often been called in to pick up the pieces when the merger starts to fail.  So why not get it right first time?  In our experience, getting the People Due Diligence part of the puzzle in place only works if it is given the highest priority and performed with full access to management.

For more information on Recrion's approach to M & A related People Due Diligence, contact Katherine Wiid on 01780 484910 or www.recrion.co.uk