As more channel partners weigh their options in a market fueled by M&A activity, some leaders may be asking what role, if any, culture plays in successful outcomes.
Cristian Anastasiu is a managing partner at Excendio Advisors, a firm dedicated to helping channel business owners secure the best future for themselves and their organizations as they pursue a new deal. The following Q&A illustrates why cultural fit is a crucial component in how he advises owners to evaluate potential targets.
This Q&A was lightly edited for grammar and style.
Priorities outside of capital are just as important to consider before a deal
Why is it so important to consider culture in addition to the “harder” financial data when looking at a potential deal?
Human capital is the most important asset of any services business. In particular, IT services companies such as MSPs are all about people and their internal and external relationships.
Corporate culture includes the shared values, beliefs, and behaviors that shape how employees interact, make decisions, and work together. It’s the “personality” of an organization — the mostly unwritten rules that shape how things get done.
Changes to culture, for instance, as a result of an acquisition, are difficult to implement. Conflicts resulting from unaligned cultures will have a direct impact on people – both employees and customers – and business results and metrics such as revenue, profitability, and brand recognition.
The success of any acquisition will be determined in the mid- to long-term by how well the two companies can integrate their cultural aspects. Employees and customers work with a company because there is a cultural fit. Minimizing changes after the acquisition is critical. Any necessary changes should be well understood and plans to address them should be drawn up in advance.
As a leader, what should you prioritize when evaluating culture?
As a leader, one must be aware of and notice different types of culture very early when evaluating a merger or an acquisition; are the two cultures relationship-driven vs. transactional? Sales driven vs technical? Innovative vs process-driven? Open/ informal vs formal/autocratic? Team-oriented vs individualistic?
Any potential misalignment must be identified early to determine if it can be addressed and corrected, and how, before proceeding with a transaction.
Here are several tells that can help in recognizing different types of corporate cultures:
- Employee tenure and customer churn: relationship or transactional culture?
- How are important decisions being made? Based on employee input? Fast/slow? Are customers being asked and included in decision-making?
- What is the founders’ background: sales/ technical/ financial? Does the company have a sales or technology-oriented culture? Is one functional area favored internally?
- Are there one or more owners? What, if any, is the impact on the culture in terms of communication style and decision-making process?
- Where is the company located: East Coast/ Midwest/ Southwest/ Mountain/ Pacific? How much of the known regional cultural differences are present in the company’s culture?
- Sales commission plan: Is it structured to reward aggressively winning new customers vs maintaining and growing the existing customer base? Is it encouraging teamwork or individual performance?
- Are new customers mainly generated from sales efforts or through referrals? It could be a sign of a transactional vs. relationship culture.
- Hiring process: Are there multiple team interviews required prior to making a new hire? How are hiring decisions made? This can indicate a team-oriented versus individualistic culture.
- Are key financial metrics like the P&L statement regularly communicated to all employees? This can indicate an open vs a more secretive or an autocratic and formal culture.
- Are the company’s customers large, global enterprises or small businesses? This can determine pace and agility, as well as a tendency towards formal or informal culture. What is the customer experience? Why are customers choosing to work with the company?
- Have either the buyer or seller made acquisitions in the past and what were the lessons learned? A successful prior acquisition can be a sign of a culture open to change and to the unknown and can positively impact post-acquisition integration ability and willingness.
- HR practices: How are some of the basic HR practices designed, such as firing/ team building/ performance reviews/ employee surveys, etc.? This can point to an open vs an autocratic culture.
What goes wrong when cultural misalignment carries through acquisition or merger
What do you risk if the cultures of the companies involved in the deal end up being misaligned once the deal goes through?
Cultural misalignment impacts employees, customers, and other stakeholders. The loss of motivation and talent leads to a loss of customers and, ultimately, to no synergies and an unsatisfactory return on investment from the acquisition.
Two classic examples of historic M&A transactions known as unsuccessful due primarily to cultural misalignment are:
AOL and Time Warner: Intended to bring together old and new media in a powerful combination, the different cultures of the two companies never gelled, and the merger was a disaster. AOL had a startup, informal, risk-taking culture in contrast to Time Warner’s old media, formal, bureaucratic, and hierarchical culture.
Hewlett Packard and Compaq: The merger of two computer companies with well-known products led to a decline in sales. The merger was said to have failed mainly due to the difficulty in integrating two markedly different cultures, with HP’s engineering-focused team conflicting with Compaq’s sales-driven culture and the contrasting leadership styles each approach generated.
M&A Advisor Craig Fulton at Evergreen also recently shared his insights into the crowded M&A channel market with us. Learn more about why he focuses on sales structure and recurring revenue in potential targets.