In the ever-evolving landscape of mergers and acquisitions (M&A), understanding the significance of organisational identity and culture is vital. The pre-merger and pre-acquisition phases are critical junctures where the alignment or divergence of identity between two firms, the acquiring and the acquired, can significantly impact the integration success and the profitability of the combined entity.
According to Bain’s M&A Report 2023, 75% of acquirers struggle with cultural issues that require serious interventions. Luckily, a growing number of companies and M&A teams have started to act on this and are now working on developing frameworks for addressing culture and identity in M&As. This article delves into the role of organisational identity in M&A processes and provides insights to enhance the chances of M&A success, thereby minimising the risk of overpaying.
For successful M&As, identity is the key
Company culture is complex, powerful and, at the same time, vulnerable. It is based on the actual people interacting with each other in the context of their work environment. We understand culture as the behaviour inside your organisation in the present. Culture can be formed and influenced – for the better or worse – by the people present today in the company.
Organisational identity, on the other hand, is based on the past, the company’s origin and history. You cannot change a company’s identity that easily, as it has existed for many years. And it will still exist long after many current employees leave the company. Organisational identity encompasses a company’s self-perception, its purpose, goals, and what sets it apart from the competition. To be considered part of organisational identity, attributes must be either central, enduring, or distinguishing.
As identity is a company’s self-perception, it is the element that makes people inside and outside the company relate and identify with the company, believe in its purpose, value its way of acting and show loyalty; hence, the company’s identity is deeply connected to its commercial performance. When acquiring another company with the plan to integrate, we suggest you start by first looking at the organisational identity. When two separate entities share a common understanding of their identities, the integration process becomes more manageable, and the likelihood of a successful assimilation increases. Clients, partners, and employees can more easily connect with the new or merged entity when they resonate with its identity.
However, the real world often presents scenarios where companies seek to merge with or acquire organisations with dissimilar organisational identities. This situation introduces complexities and challenges that can appear undefeatable. So, what can you do prior to a merger or acquisition to improve the success rate of the following integration process?
Strategies for M&A success through Identity – pre-closing
Select a fitting company
When the acquisition strategy builds on add-on acquisitions, evaluating the similarity or dissimilarity of organisational identities should become a pivotal factor in the selection process, just as any other financial or business-related key point. This is particularly relevant when acquiring new technologies, innovation capabilities or crucial knowledge to the mother company via acquisitions, as the success of this strategy depends on the target company’s employees and on your ability to retain them after the acquisition is completed. Having the choice between different targets, organisational identity should be the weighting factor, as companies with matching identities are more likely to achieve integrations with a successful outcome.
Organisational identity should be assessed already in the screening process but no later than in the Due Diligence as you need to understand whether your business case is feasible or not.
If the organisational identity is first assessed via DNA Due Diligence, the evaluation of the similarity or dissimilarity can be used to re-evaluate the integration strategy. Studies show that you will gain a negative performance by integrating an acquired company with a dissimilar identity. If the DNA Due Diligence shows significant concerns, a stand-alone approach must be considered, and the business case must be revisited.
Prepare for integration and manage expectations
Any comparative analysis of organisational identity will show differences, as no two companies can have the exact same identity. However, understanding the depth and areas of dissimilarities enables proactive preparation. If the organisational identity assessment shows that an integration strategy is possible, a deeper cultural analysis is recommended. Management and decision-makers must be aware of the differences in organisational identity and cultures (behaviours, norms, languages and rituals) and get equipped with tools to navigate them effectively. Understanding the possibilities and trade-offs associated with integration can help set realistic expectations for the timeframe and the outcome of the future entity.
Not considering the potential obstacles of differing identities can lead managers and shareholders to form overly optimistic expectations and agree to inflated prices. This often results in disappointment once the merger is completed and the challenges become evident. Conversely, a well-defined integration strategy can significantly ease the transition process and offer valuable opportunities to communicate a compelling message both within and outside the organisation, underscoring the combined entity’s value.
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