While buyers and sellers may differ in their motivations for pursuing the purchase and sale of a company, it is in the best interest of both parties that an acquisition succeeds.
From the perspective of the buyer, you’re making a big investment and you need the investment to return at least a minimum threshold return. Your decision reflects on you; your skill, your expertise, and the quality of your judgment. Not only are shareholders watching, but so are your employees, your lenders, and your competitors. A failed acquisition can impact your ability to lead, manage and maintain effective relationships with these constituencies.
From the perspective of the seller, even though you are selling and most likely receiving the majority of your total compensation at closing, continued post-transaction success of the business may impact future earn-out payments to you. In addition, there’s an emotional element. You built the business, you hired your employees and trade partners who have worked with you day-in and day-out, building deep and lasting relationships. If the acquisition stumbles, the impact of a failed acquisition will be significant on the people who were by your side as you built the business. And if you are staying on after the closing, it won’t be a great deal of fun if the acquisition goes awry.
Clearly, failure isn’t an option, yet why are the majority of acquisitions deemed failures? While there is significant complexity to this question, one often-cited reason is a lack of fit between the organizations’ cultures.
Everyone has heard of organizational culture, but what does this term really mean? Schein (2010) asserts “Culture is to a group what personality or character is to an individual.Just as personality and character guide and constrain our behavior, so does culture guide and constrain the behavior of members of a group.”
Leaders have the ability to shape an organization’s culture, as such “leveraging culture is but one of a number of key leadership tools" (Chatman & Cha, 2003) for improving organizational performance. “Strong cultures enhance organizational performance in two ways. First, they improve performance by energizing employees. ... Second, strong cultures boost performance by shaping and coordinating employees’ behaviors” (Chatman & Cha, 2003).
Poor organizational culture fit is a result of combining two organizations whose cultures are significantly different. One culture may be autocratic, with top down decision-making. Meanwhile, the other may empower individuals to make decisions at the lowest possible level. Or, one culture may be outward-focused on the changing needs of customers, coupled with the desire to innovate to stay ahead of competitors, while the other culture might be inward-focused on process control, error detection and measuring everything.
To combine such different organizations creates significant friction among all parties. Resistance and ambivalence threaten the ability to effectively and efficiently integrate the two companies. Ineffective integration following an acquisition is one of the major threats to an acquisition’s success.
A key component of the due diligence process is to assess each other’s organizational culture and the risks associated with an effort to integrate the two cultures. If the risk of integration is high, the probability of failure is high; therefore the risk adjusted return threshold should be high, reflecting the higher risk of failure.
During due diligence and after the organizational culture is assessed, the buyer and seller should develop a detailed plan to integrate the organization’s cultures. It's a mistake to assume this occurs organically or automatically. The integration of two cultures takes forethought, time, money, and significant effort.
So how do you assess an organization’s culture? I recommend one of a number of assessment tools. I have used the Denison Organizational Culture Survey developed by Denison and the Organizational Culture Assessment Index developed by Cameron and Quinn. As a part of our due diligence process at American New Homes Group, we currently use Cameron and Quinn’s Organizational Culture Assessment Index.
Acquisition success is critically important to all parties. Yet, too often buyers and sellers ignore the difficulty of integrating the two organizational cultures into one effective culture. If you do so, you do so at the risk of the high cost of failure.
Please comment on your experience with organizational culture in general and specifically with the integration of cultures as part of an acquisition in home building.