Due diligence is the pre-M&A process for gathering and verifying information about a company to enable decision-making regarding whether or not to proceed with an acquisition or a merger.
When the word “due diligence” is used, most M&A professionals, investment bankers, attorneys, and of course, accountants, think of only financial due diligence, unfortunately.
“More often than not, M&A deals destroy value; more than half of mergers and acquisitions fail or underperform. While the transactions still go through, they never unlock their full potential. That’s because the challenge of PMI—bringing together two organizations, each with its own processes, structure, culture, and management—is profoundly complex.”
Almost like insurance for an M&A deal, pre-merger due diligence in these three areas paves the way for a successful post-merger integration, according to Dr. Vic, TEP.Global:
“Through an acquisition, a company can improve its cost structures by building economies of scale that will increase its purchasing power and improve inefficiencies. This can also lead to increased cash flow and a more diversified business portfolio that will reduce risk overall. These elements together play a significant role in increasing the relative valuation of a business.” https://www.forbes.com/sites/forbestechcouncil/2023/02/21/three-questions-to-ask-yourself-during-an-acquisition/?sh=77d10e5d4e1f
Financial success is always both the driving force and the end result for an M&A. Financial due diligence provides thorough scrutiny of every detail on the financial statements of both buyer and seller, which is vital for structuring an M&A and the PMI success.
Other factors that contribute to a company’s bottom line — people, culture, and brand, and the due diligence studies thereof — cannot be ignored.
This article focuses on the non-financial aspects of pre M&A due diligence and analysis.
HUMAN capital is what makes a company go around, thus people are the most valuable assets.
However, before entering into an M&A deal, most attention is focused on the financial feasibility and if technology systems used by the two merging companies fit together.
“People due diligence” should identify, upfront, if two companies’ talent structures and teams can mesh, and the potential obstacles that can hinder two different organizations from fitting together.
Before buying and selling a company as a whole system, sidelining the human capital that made a company successful in the first place can lead to PMI challenges, even “buyer’s remorse”.
As correctly stated in this article: “If the acquired workforce is to be integrated—truly merged—then the staging for this consolidation should begin well before the deal is formally closed. Problems develop rapidly when the parent firm fails to orchestrate a prompt and systematic assimilation process.”
To merge two companies into one, to design the future state of the merged company, pre M&A “people due diligence” paints a picture to show what it looks like after merging two workforces, with constructive, strategic M&A people-solutions, from the top to the bottom: boards, C-suites, mid level management, and employees.
The key here is not only IF they can do it, but HOW they create an energized organization: Looking at where they are, what kind of energy they bring to the future, who can add value, who can team up with the “new blood”, what systems and procedures are needed to incubate new culture and welcome new people.
Assessing everyone in the organization can be done with 360 reviews of leadership teams and personel, or with populating and revising organizational charts, and using color coding to mark the mechanical structure of the future organization, says Dr. Vic of TEP.Global.
“Despite the value created by an acquisition, the road to a successful M&A strategy is littered with examples of failed attempts. Take the Daimler-Benz and Chrysler acquisition of 1998. The $36 billion deal ended just 10 years after it started as a result of cultural differences (paywall).” (supra)
Notwithstanding that all the numbers may work on paper, if the two companies have totally different values and fundamentally different cultural norms, communication barriers can render a fusion of two cultures unrealistic. It will not be the right fit for an M&A.
As the above quoted article concluded: “As we learned from the Daimler-Benz and Chrysler example above, cultural fit can make or break an M&A. If the technology fits like a glove, but there are major cultural differences, it might not be worth pursuing that acquisition.”
The pre-M&A due diligence ascertains the prospects for integrating the best of each company’s culture based on mutual compatibility, shared values, and missions. The hard work is in the post-merger unifying cultures at all levels, where the leadership sets the tone and example for the entire organization, with transparency, communication, training, problem solving, and a relentless commitment to transitioning to the new culture.
Organizations are made of PEOPLE, and these people collectively identify themselves with a company’s brand value, vision, and identity, and these people function (or dysfunction) in a company culture.
“Organizations routinely suffer a loss of identity upon being acquired and with that loss comes an erosion of employee commitment. Motivation deteriorates as people’s sense of ‘my company’ fades and blurs, making it harder for them to maintain an emotional attachment to the organization. Also, personal ties to upper-level managers or the owner may be severed as those people leave the scene, eliminating important personal loyalties that previously generated strong motivational forces.
“The widespread turmoil created by change turns people’s thoughts inward, away from their job and toward personal concerns. Self-protective thoughts swirl through their minds, leaving people to wonder about the wisdom in waiting to see what will happen to their careers.”
First and foremost, the two companies to be merged need to assess if their core values, beliefs, cultures, and ethics align, says Joanne Z. Tan, a global brand strategist and builder, brand marketer, and branding expert.
“Brand identity is the soul of a company. It encompasses culture, history, vision, brand DNA, and how its customers perceive the brand,” said Joanne Tan. “Brand identity also manifests in a brand’s symbols, messaging, slogans, look and feel — all have powerful meanings to both customers and a brand’s internal workforce.”
That’s why the pre-M&A brand audit and “brand due diligence” is in every way intertwined with “culture due diligence”. “Brand strategists can help both companies weigh their aligned areas with their cultural misalignment, and if what the two brands have in common outweighs discrepancies, PMI rebranding or brand refreshing will be needed”, said Joann Tan.
“PMI offers a window of opportunity for aligning and fusing two brands and creating a unified, refreshed, integrated, and stronger brand”, says Joanne Tan, 10 Plus Brand, Inc., who recently rebranded a Post-M&A company in the customer experience services. “It is important to carefully and timely communicate with customers of both merged companies that the brand promise to your customers is kept, your commitment to quality is elevated, the rebranded products or services will continue the legacy of previous brands, and reflect the newly added value of a synergized brand, in order to ensure customers understanding, support, and loyalty,” said Joanne Tan.
“Begin with the end in mind.” – Stephen Covey.
At the inception stage of an M&A, due diligence on talent, culture, and brand identity will avoid losing talent, incongruent cultures, confusion about brand identity and low morale — all to the detriment of a post merger company. By involving experts like TEP.Global and 10 Plus Brand, Inc., buyers, sellers, and all parties involved in an M&A transaction can identify issues and provide solutions at the onset, find the right fit, and achieve PMI success, as described:
“To succeed, a PMI must achieve four fundamentally different objectives:
TEP.Global consultants are among the top 1% globally, in employee engagement, workplace motivation, company culture, HR, executive recruiting, etc. Dr. Vic, founder and CEO of TEP, has 20+ years of experience in assessing, evaluating, testing, reviewing, and assisting the C-suite in executive recruiting, workforce assessment, talent strategies and people consulting in areas such as people management, leadership, organization, workforce engagement.
10 Plus Brand Inc. is a multiple award-winning, global brand building, brand marketing agency, with a holistic approach to decode brand DNA, culture, and brand essence. Joanne Z. Tan, the founder, CEO, brand strategist and brand coach is a recognized influencer in post M&A rebranding, brand refreshing, and brand management, leading teams in content marketing via websites, LinkedIn profiles, videos, newsletters, SEO. 10 Plus Brand’s full services also include designing logos, business names and taglines, influencer marketing, and social media marketing.