According to the Harvard Business Review, mergers and acquisitions fail at a rate between 70 and 90 percent.
In the past few years, I've witnessed a number of acquisitions that were severely troubled or had already failed, even if the principles hadn't quite admitted it. The failures I've witnessed are never caused by due diligence mistakes with numbers; they were all caused by due diligence mistakes with people or culture.
It isn't hard to find experts when acquiring a business. Lawyers and accountants who really know what they are doing abound. But mostly, lawyers concentrate on contracts and legal risk, while accountants concentrate on numbers and financial risk. It is usually up to the buyer to look after the risks introduced by people and culture. A seller who doesn't want his or her baby destroyed should do the same.
What I call "people risk" occurs in very small acquisitions, the kind where the buyer picks up a product or brand or intellectual property and one or two knowledgeable people. Their know-how may be in sales, engineering or manufacturing, but the common denominator is that success depends on them.
In addition to unique product or customer knowledge, they may be the only ones who can locate and interpret anything in the acquired databases and files. This gives them power.
That is fine if the people involved are good, solid-citizen employees. But I've witnessed more than one case where one or two people with unique know-how have literally held an employer hostage, behaving pretty much any way they wanted. While doing their own thing, they avoided transferring knowledge to the buyer's employees and made it as difficult as possible for anyone else to understand what they were doing. Power can corrupt.
Avoiding this kind of risk isn't easy, but it can be mitigated.
The first step is for buyers to avoid buying products or services without having people on staff who have the education and experience necessary to come up to speed quickly.
The second is to make a formal process of information transfer part of the sale and to hold back some of the purchase price until it is completed. The seller isn't off the hook until the buyer's people have a working knowledge of the product, service or market and can locate and interpret whatever information is being handed over to them.
The third step is to quickly integrate the new product or service and the people who come with it into the business, rather than letting them exist as a standalone island. That means integration of computer records, filing systems and customer information and integration of the people into existing department structures.
Cultural risk comes when two organizations are joined. Everyone is all smiles at the closing, and news releases are all about synergy and a common vision. Before long, instead of being integrated, the two businesses become divided into two camps: the unhappy campers and the really unhappy campers.
The buyers are unhappy because they now see all manner of faults in the organization they've purchased, and the seller's people are really unhappy because they feel unappreciated and micromanaged.
Before long, the organization begins to unravel, with seller's brightest people leaving in droves, voluntarily or under the ax. Synergy goes out the door with them.
Cultural problems in acquisitions can be avoided by careful due diligence on a personal level between buyers and sellers. It is not the kind of due diligence that can be done by swapping financial statements, because it isn't about numbers. It is about values, attitudes and behaviors.
An easy way to compare cultures is to rank them along several dimensions using something like a one-to-five scale. Here are some dimensions I suggest:
Values and develops people: Is this a culture that values its people and spends time and money developing them, or one that is focused on tasks and results, where people are seen as a means to an end?
Vision and strategy: Is there a vision and strategy to get there, or is everything focused on the here-and-now with little thought of the future?
Hierarchy and control: Are ideas encouraged at all levels of the organization, or does everything flow down from the top?
Customer driven: Does the company actively seek customer input and listen to it, or does management think it knows more about what customers want than customers do?
Drive and competitiveness: Is the culture laid back and relaxed, or hard-charging and aggressive?
Bureaucracy: Is the company formal or rigid, with many rules and policies, or informal and loose?
Risk aversion: Is the taking of reasonable risks encouraged and is occasional failure allowed, or is risk avoided and failure punished?
Big mismatches on these dimensions will lead to trouble. Numbers and contracts are important, but culture rules.
Richard Randall is founder and president of management-consulting firm New Level Advisors in Springettsbury Township, York County. Email him at email@example.com.