Soft Factors in M&A - It is More Than Just Numbers

Jun 18

Soft factors are crucial in any business relationship. They help with business development, customer and employee retention, conflict resolution, brand loyalty, and other vital business topics. Interestingly, most M&A books do not include soft factors and cover only technical and process-related aspects.

In this blog post, I'll introduce some elements that can significantly improve the M&A process. They affect all stages of an M&A process, from the first contact with the target through the due diligence to the integration after the closing. Focusing on those factors is invaluable and can make or break an M&A transaction. Let’s dive into relationship building, communication, and cultural fit.

Professional Bonding Makes a Difference: The Value of Relationship Building

Relationship building is crucial in any business area and a critical success factor in M&A. Building a connection between the parties makes things easier and more manageable throughout the early stages of the M&A process and after the close, particularly during the integration and performance improvement programs. It’s also more fun. Here are some relationship-building examples for your next M&A assignment.

Start early building a relationship. Don't wait until you've bought a company and are in the middle of the integration. I propose to begin creating a relationship already during your initial encounters. Include longer coffee breaks in the agenda, plan dinners, or start with a group breakfast. It is not just to improve the connection but also to learn more about the target company's key individuals, how they communicate with one another, and whether you can envision yourself working with them in the future. Aside from the examples given above, there are several other relationship-building activities. During a break in one of my deals, I went to Starbucks with the CEO of the target firm. Aside from improving your friendship with him, broaching complex negotiating themes in a more relaxed setting was also a good moment.

Include people who speak the local language of the other company. It is a crucial topic in international M&A. Having employees on the M&A team who speak the other company's language opens doors. I saw it firsthand when I entered meetings and began speaking Spanish with corporations in South America. It changes the conversation. Consider language when you select your external advisers and specialists if you do not have multilingual people in your organization. Aside from language skills, being interested in other cultures is vital. Hire an expert in multicultural management who provides cultural and historical information about the other country. You don't have to be an expert, but any knowledge will demonstrate your openness and curiosity. It will also help you understand the differences better.

For example, I managed one complex M&A transaction where the purchaser was from central Europe, and the target company had many subsidiaries in Latin America. One of the topics that the consultant brought up in a workshop was the different understanding and approach to time. Being on time for meetings is different in many countries. Some cultures accept that people are late; others consider it rude. We had senior management from the acquirer and the target company in those workshops, which helped during the integration and restructuring plans.

Listen and ask how they would do it. As an acquirer, you generate ideas and ways for integrating the target and improving their operational and financial performance early in the M&A process. It is part of a business case and investment thesis for an M&A transaction. Asking individuals at the target firm what they think about those ideas or how they would address a particular subject is a simple but effective method. It helps develop a better connection and team spirit and serves as a helpful check of your assumptions. Remember that you still have limited information at this point in the M&A process. Every extra piece of information and assessment is beneficial. Don’t expect them to agree with your ideas, but be receptive to feedback. How you handle disagreement early in the M&A process influences how you manage it after the closing during the integration and transition phase.

Celebrate together. There are several milestones in an M&A process that you can celebrate. It demonstrates progress to everyone and motivates your workers. Celebrate with the other firm whenever possible. The transaction's closing is one of them, but you can utilize other milestones during the integration. It will bring your teams closer together and help in developing the connection.

Relationship building is an essential managerial ability. It significantly improves the M&A success rate in the early stages and also helps you after the closing when you start working together. Communicate frankly and demonstrate an interest in the other party.

It’s All About Communication in M&A Projects

While M&A can bring exciting opportunities, it also presents significant risks. The success of M&A hinges on effective communication, and poor communication can lead to costly mistakes. In fact, according to many studies, more than half of all M&A deals fail due to cultural differences and communication breakdowns. This section will explore the critical role of communication in M&A, provide best practices for effective communication, and offer tips for ensuring a successful M&A activity. By the end of this section, you will understand why communication is the make or break in M&A and how to navigate the process successfully.

Why Communication in M&A is Critical

Communication during M&A involves exchanging information with all stakeholders, including employees, shareholders, and customers. It ensures that everyone is on the same page and understands the reasons behind the acquisition, the expected changes and benefits, and how to navigate the transition.

Effective communication is critical in minimizing resistance and maximizing stakeholder support. It helps break down cultural barriers and build trust, essential for successful M&A activity. By contrast, poor communication can lead to confusion, conflict, and a lack of alignment, derailing the deal.

Breaking down communication barriers during M&A requires a deliberate and strategic approach. It involves creating a communication plan that addresses the needs of all stakeholders, including regular updates and clear messaging. It also involves active listening, providing space for feedback and questions, and addressing concerns and misconceptions. It also consists in acknowledging and respecting cultural differences.

In summary, the successful execution of M&A deals requires effective communication, which involves conveying information, breaking down communication barriers, and building trust. A deliberate and strategic approach to communication is crucial for minimizing resistance and achieving successful outcomes.

Best Practices for Effective Communication in M&A

When two companies join forces, precise and deliberate communication strategies are essential to build trust and promote open dialogue. To ensure effective communication during M&A, here are some best practices to consider.

First, develop a communication strategy early on. Communication should be a key consideration from the beginning of the M&A process. Develop a clear communication plan that includes all stakeholders, from employees to customers to shareholders.
Secondly, assign a communication lead. It's essential to have a designated person responsible for communication during the M&A process. This person must ensure that all stakeholders stay informed and that you address concerns or issues promptly.
Be transparent. Honesty and transparency are crucial throughout the M&A process. Inform employees and stakeholders of any changes and updates.
Involve key players. Ensure all key players are involved in the communication process, including HR, legal, and financial teams. Everyone should be on the same page and clearly understand their role.
Be culturally sensitive. Cultural differences can present communication challenges during M&A. Be sensitive to cultural nuances and take steps to ensure that communication is clear and effective across all cultures involved.
Use multiple channels. Communication should not be limited to a single channel. Use various media, including email, video conferencing, and in-person meetings, to ensure everyone is on the same page.
Encouraging stakeholder feedback can help address potential issues and ensure the process runs smoothly. Creating an environment where all parties feel comfortable sharing their feedback is crucial.

By following these best practices, you can ensure effective communication throughout the M&A process, build trust, and promote open dialogue. In the next section, I'll explore the importance of continual communication throughout the M&A process.

What is Cultural Fit in M&A?

Cultural fit is one of the most important yet often overlooked elements of a successful M&A deal. But what is cultural fit? It refers to aligning values, beliefs, behaviors, and organizational norms between two companies involved in an M&A deal. It includes various elements such as leadership style, communication practices, decision-making processes, employee engagement, and overall organizational culture. Cultural fit determines how well the two entities can integrate, collaborate, and achieve synergies in a post-closing environment. It affects employee engagement and retention, conflict resolution, and how well the companies work together. Those elements don’t just stay internal; they also affect the customer experience and brand reputation.

Integrating two companies can be an almost impossible challenge without the alignment of culture. In this article, I explore why cultural fit is such a crucial factor in M&A deals, how to assess it during due diligence, and strategies for prioritizing it throughout the integration process. If you want to create a cohesive and profitable organization after an M&A deal, prioritizing cultural fit is not just a buzzword—it's essential.

How You Learn About the Target’s Company Culture: Cultural Due Diligence

Conducting a thorough assessment of each organization's culture is crucial during due diligence. The analysis involves identifying cultural similarities and differences, understanding values and norms, and evaluating potential conflict areas. A comprehensive cultural due diligence helps in developing a well-informed integration strategy.

By assessing cultural compatibility during due diligence, you can proactively address potential conflicts and set the stage for a smooth integration process. It helps ensure a successful M&A deal and creates a cohesive and profitable organization that benefits everyone involved. Similar to any other business topic, you start with the analysis, which is cultural due diligence. Look at all the soft factors and thoroughly review each organization's culture, including leadership styles, communication channels, employee engagement practices, and core values.

Based on your analysis, identify potential cultural gaps and differences that may interfere with the integration process and negatively impact business objectives. Afterward, develop a cultural integration plan that addresses identified gaps, sets goals for alignment, and outlines strategies for fostering a cohesive and shared culture.

Activities for a Successful Cultural Integration

After the closing, you can start the integration activities to foster cultural integration, such as leadership workshops, cross-functional team building, and communication initiatives that encourage collaboration and cultural alignment.

Creating a shared vision and set of values is essential. It establishes a unifying foundation and clarifies the desired cultural attributes post-closing. Communicating this common purpose to all employees promotes alignment and provides a roadmap for integration efforts. Ensure you involve critical employees from both organizations in the integration planning process to consider their perspectives.

Establish clear communication channels and encourage open dialogue to address conflicts early on. Provide training and support programs to help employees adapt to the new culture and navigate any challenges during the integration. These initiatives can include cultural awareness workshops, mentoring programs, and resources for cross-cultural communication.

Implementing these strategies increases the chances of a successful M&A deal. As you consider your next M&A deal, remember that cultural fit is not just a buzzword—it's a critical element for creating a cohesive and profitable organization.

Tip from my M&A transactions: Sometimes, you want to invest in a company unlike yours. For example, you may be an established company and want to invest in a startup. The company cultures of established and early-stage companies are often very different. Being different can add significant value to your company, and you may want to keep that target company separate after the closing.

Summary

Effective relationship management, communication, and the management of cultural topics are critical for any company’s success. Depending on how you approach them, they can provide a significant advantage. Soft factors also make a big difference in M&A projects. One of my Top 10 M&A rules is to manage people and processes, not Excel sheets. The reason is that people and processes are the leading indicators; the financial results are the lagging indicators; they are the outcome. The right people in the right role can make everything work. Ensure you have communication, relationship management, and cultural fit analysis in your M&A plans and process.

Tip from my M&A transactions: Soft factors significantly affect the success of the M&A transaction. I have been in transactions where strong relationships were the main reason the company solved significant issues after the closing. Include the topic in your regular M&A meetings and ensure your teams focus on it.