A Roll of the Dice

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During a recent networking session with small and mid-sized business-owners discussion inevitably turned to how entrepreneurial enterprises could ‘pivot’ into new opportunities to help counter the Covid impact. What was more surprising – astonishing might be the better word – was the process being used to take both strategic and tactical decisions on the future of the business.

Everyone agreed that companies had to move fast. That decisions had to be taken without over-the-top levels of due diligence. That the risks of doing little or nothing far outweighed at least doing ‘something’, particularly if the market space was a well-known one.
What was less well appreciated was that Data was needed to validate not only the market opportunity, but the readiness of the team to deliver the new approach.

One company had decided to use their Covid Business Interruption Loan (CBIL) to make a small acquisition of a competitor going under. Their plan was, as quickly as possible, to “tidy up” a fragmented market with a series of small acquisitions, to merge all the new entities into a ‘Super Agency’ and to cope with the fall out later on in the process. Legal and financial due diligence had thrown up no horror stories, so the acquiring company management pushed the ‘green’ go-button to sign the first contract and get the process started.

I certainly didn’t want to spoil the party, but I just had to ask the questions:
“What did your people make of teaming with a former competitor? How did the different Cultures of the two companies fit? Were they compatible? Did each side really look forward to working with the other, rather than against each other? What was the Culture fit like?”

My interlocutor and I didn’t know each other although he realised I was a ‘coach’, possibly chasing a new client. He covered his tracks pretty quickly. “Speed is better than caution just at this time,” he told me, which didn’t really answer the questions at all. He was confident all the difficulties could be squared off in time, even though he had a plan to impose standard operational processes onto the acquired companies. He wanted to move on.

I would have loved to have told him that 60% to 70% of all mergers and acquisitions fall short of expectations. That over the past 25 years, research by our partners, Denison Consulting, has categorically shown that where Mission, Purpose, Goals & Objectives and, above all Core Values are not aligned and clear to everyone, then profits suffer – or even go backwards.

My new ‘friend’ had taken the ‘Roll the Dice’ approach in the belief that immediate access to new talent, new technologies and new customers would see him through the shrapnel that always falls out from mergers and acquisitions, especially where the groundwork in the acquiring company is not properly laid down. And where little or no consideration is given to the impact of Culture on the companies being acquired.

Denison, whose Organisational Culture Survey forms the bedrock of their work, recently helped a Private Equity firm understand Culture’s impact on performance in their portfolio companies. The results speak for themselves. The bottom 30 companies, where the Culture Survey indicated poor alignment and clarity of purpose, lack of engagement and involvement by teams and poor responsiveness to core values, saw EBITDA fall by 1% and sales fall by 4%. Not a total disaster, you might think, although the Private Equity firm would not have expected that.

Contrast that, however, with the top 30 companies in the same survey. These companies could show high levels of alignment and clarity across all measurable ‘Traits’ – Mission, Adaptability, Involvement, Consistency. Their EBITDA grew +17% and sales +6%.

It raises the question: why isn’t ‘Culture Analysis’ as critical a part of the due diligence process as financial and legal? After all, financial and legal due diligence can only look back – Cultural Due Diligence is a predictor of the future.

Some Private Equity companies are beginning to realise that they can get a really clear idea how the company to be acquired is going to perform – before they buy it – through careful analysis of the target company’s Culture.

Personally, I like rolling the dice – but only after hours or when watching the Grand National! We can so easily be pushed by “timing” into less than well thought-through strategies. But why gamble when there is a tool which helps you to bet with far greater confidence on certain winners? And they are the ones where positive Culture is at the heart of the enterprise, and everyone is aware of it and aligned to it.

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