Posted: 04 Aug. 2020 5 min. read

Often intangible, always invaluable: Culture diligence in M&A

Posted by Ami Louise RichKatie ImpelmanStephanie Miragliotta, and Antonia Pearson on August 4, 2020.

When asked to reflect on a deal, something we often hear from clients is, “Culture is key.” If you’ve ever been involved in an M&A transaction, you’ve likely seen firsthand how critical culture is for the success of integration. And studies support this view—culture clash is the number one cause of deal failure.¹ At Deloitte, we define culture as a company’s shared system of values, beliefs, and behaviors that influence how work gets done. In the context of an M&A transaction, the need to manage culture is heightened the moment the deal is announced. Our clients that pay attention to culture are realizing more value than ever—and those that aren’t managing culture often lag behind. It isn’t enough to only manage culture post-close either. Increasingly, clients are recognizing the value of learning as much as they can about culture during diligence to avoid any missteps from the start.

Understanding the risks

Examining culture during diligence enables you to compile a holistic risk profile of the target. Alongside findings from other functional areas, such insight enables you to uncover risk that may impact whether an offer can and should be made. If you have not created a culture risk profile during previous deals, the first step should be to establish your own foundational company culture profile. This profile will provide a baseline to compare other company cultures against. Once you have a preliminary understanding of your own culture, the focus should shift to understanding the target. While you may not have extensive data on the target at your fingertips, an effective culture profile can be developed using cutting-edge analytics tools and publicly available sources that lend insight into the company cultures, such as mission, vision, values, ways of working, and employee sentiment.

Prioritizing culture during diligence

Most of us have been a part of a transaction riddled with challenges from the start because of high attrition, tension among employees, bad press, or a variety of other employee-related issues. What if there was a way to mitigate, or at least uncover, these issues from the get-go? Looking at culture before the deal is even announced enables executives and integration team members to gather insights into the foundational elements around people and talent that may impact deal success. Though often difficult to put a tangible value on culture integration, the findings uncovered during culture diligence help explain what makes an organization tick and how these factors can drive or potentially destroy value. In this post, we’ll explore the most salient elements of culture diligence—risk profiling, leadership alignment, and integration planning—any of which can make or break a deal.

In comparing cultures, you can create an analytics-based risk profile that aggregates perceptions around employee behavior and how work gets done to understand potential synergies and, perhaps most importantly, deal-breakers. This empowers leadership with details around the potential high-risk scenarios in which cultures may clash or attrition may spike. The importance of understanding and uncovering such risks during diligence was demonstrated during a recent “acquihire.” Through culture diligence, the buyer discovered the pivotal role that the target’s founder played in employee engagement and overall retention. Understanding the founder’s “figurehead” position and the potential impact of the founder’s departure enabled the buyer to thoughtfully approach negotiations. It also helped the integration team proactively create informed transition and communication plans. The founder did end up leaving the company shortly after integration efforts were complete. However, the buyer had been able to productively use that time to understand the most critical aspects of the leader’s legacy and build the team’s identity around what the founder represented. This ultimately minimized the impact of the founder’s departure on morale and retention. Using the culture risk profile to proactively plan for and mitigate potential issues can make all the difference, especially when retention is a key driver of overall deal value.

Aligning leadership

Culture diligence can also help drive leadership alignment early in the transaction. Understanding nuances in how work gets done helps to shape early interactions between leaders and integration team members. For example, in a recent strategic deal, culture diligence findings indicated opposing views on governance—the buyer exhibited a bureaucratic, slow-decision making process, while the target was more unstructured and fast-moving. While not a deal-breaker, these differences informed decisions around who should be involved and consulted during the strategy and planning process, both formally and informally. It also helped establish the appropriate level of decision-making oversight by the buyer over the target’s more autonomous product and go-to-market teams. Understanding such cultural nuances helped set expectations on rules of engagement from the very beginning.

Findings from culture diligence can also help rally leaders around the deal strategy and messaging. As highlighted in the example above, culture diligence uncovers similarities and differences between organizations. Leaders can weave these insights into announcement communications and associated engagement tactics to proactively manage the narrative of the deal. This more “tailored” communications and engagement strategy signals that leaders are thoughtfully integrating the two or more organizations, thus creating a more positive stakeholder and employee experience.

Planning for integration

The information uncovered during culture diligence becomes particularly important while planning for integration. During this time, many decisions, involving multiple groups of people, need to be made quickly to decide how two companies come together. The culture insights gleaned during these early stages help leaders and integration team members better understand each other’s preferences and motivations, allowing them to build trust and collaborate more effectively.

In a recent deal, a large software company acquired a smaller, tangentially related start-up. While conducting culture diligence, the buyer discovered that both companies shared high tendencies towards collaboration and relationship-building, yet differed greatly in their appetites for flexible and remote working. For example, the buyer had a highly collaborative, inclusive culture, in which flexible working environments and virtual collaboration were the norms. The target was the opposite—there was a nuanced difference in that they heavily emphasized in-person work, as driven by top leadership. This finding from culture diligence highlighted subtle differences in collaboration preferences, helping the buyer’s side decide how best to come together to carry out the work as a collective team. Thus, cultural insights can help team members understand how to build trust and collaborate effectively during the already high-stakes time of integration planning.

Keeping culture at the core

If there’s one critical takeaway, remember this: the sooner you focus on culture, the better. Doing your diligence on culture allows you to avoid potentially costly mistakes in terms of real deal value or employee frustration. By prioritizing culture during diligence, deal teams can talk with leadership candidly about the potential risk, even before the deal is announced. Together, these open conversations around the differences that exist allow everyone to figure out the most effective ways of working as a team. Thus, setting the tone for how the broader organization will come together. Although the true value of culture is intangible, thoughtfully managing culture—starting in diligence—is a differentiator that can have long-lasting effects on the future of the combined company. After all, you only get one chance to make a first impression.



Ami Louise Rich is a principal in the Merger, Acquisition, and Restructuring practice of Deloitte Consulting LLP with experience across human capital including strategic change, workforce transition, organization design, and training development and delivery

Katie Impelman is a manager in the M&A practice of Deloitte Consulting LLP, where she works with clients in the design and execution of their people and change strategies throughout the transaction lifecycle.

Stephanie Miragliotta is a manager in the M&A practice of Deloitte Consulting LLP specializing in organizational design, culture, and employee experience for large scale transformations to support a seamless transition for organizations during critical times of change.

Antonia Pearson is a senior consultant in Deloitte’s M&A practice, where she helps organizations create positive employee experience throughout the deal lifecycle.




Join the conversation

Get in touch

Ami Louise Rich

Ami Louise Rich

Principal, M&A Consultative Services

Ami is a principal in the Merger, Acquisition, and Restructuring practice within Deloitte Consulting LLP. She has more than twenty years of professional experience, including significant practice advising and working with senior executives to drive shareholder value through their human capital, across the lifecycle of transactions. She has successfully led efforts in operating model and organization structure design, culture transformation, strategic change, and workforce transition across multiple industries and dozens of deals. Ami has an MBA from Kenan-Flagler Business School and a BSM from Pepperdine University.