The Surprising “Most Frequent” Reason for a Failed Acquisition

MRA recently helped a PE firm on an acquisition through due diligence and post-acquisition strategic advisory. Regrettably this acquisition is not working out well. Simply stated, the PE firm that acquired the Company ignored some of the “softer” issues needed for success. Most notably the PE firm allowed the acquired company’s brand equity to atrophy and it fought the existing company management’s very unique, yet very pronounced cultural norms.

PurchaseThere has been much written over the past few years about the new model for PE Industry success. In this new model success (as defined by the maximization of PE firm IRR) is much more driven by operational improvements at portfolio companies than it is by financial/transactional realizations.

A recent Bain study surprisingly claimed that: the most important element to ensure operational improvements at an acquired company was the successful integration and management of cultural norms at the acquired company.

The Bain study is titled “Integrating cultures after a merger” and can be found at  Perhaps the most striking lines in the study are: “In a Bain survey of executives who have managed through mergers, [clash of cultures] was the No. 1 reason for a deal’s failure to achieve the promised value”. Yet, despite this fantastic claim, Bain goes on to say that while the issue of cultures clashing is paramount, “Integrating two disparate cultures, by contrast, typically seems “soft”— both difficult to measure and almost impossible to manage directly. As a result, few organizations apply the same rigor to managing and steering cultural integration.”

The Bain study is not too long and it does provide a road map of solutions for managing and steering cultural integration. It is a highly recommended read. The Bain road map for cultural integration success comes in 4 parts:

1. Set the cultural integration agenda

2. Diagnose the differences that matter

3. Define the culture you’re trying to build

4. Develop a culture-change plan— then sustain and measure progress

In the recent MRA case, the PE firm from the Northeast US, focused entirely on financial returns. It neglected to invest in employee, customer and vendor relationships and it failed to appreciate the powerful Southern Baptist/religious ethic of key managers. The result is a potentially irrevocably severed trust between the PE firm and the managers, customers and vendors of the Company.

It is a failure that could have been avoided had the lessons from Bain been understood beforehand.