With the recent worldwide economic slowdown, Mergers and Acquisitions (M&A) have become a strategic tool for many forward-looking organisations to overcome aggressive competition, speed up R&D activities, leverage innovative technologies, or simply restructure their businesses. It is also commonly used to expand operations into new markets.
Recently, MU China has seen a resurgence in cross-border M&As involving MNCs in China and Chinese companies expanding into Europe (出海 – “chuhai”). These observations have also been validated in recent reports by McKinsey1 and S&P Global2 measuring the M&A trends and number of deals. Despite recent protectionist trends, Europe, particularly Germany, the UK and France, remains an attractive market for many innovative Chinese companies. However, cross-border M&As between European MNCs and Chinese companies, and vice versa, have not always reached the desired level of success.
Business culture due diligence should evaluate whether the two business cultures and organisations, in general, are compatible, complementary, or contradictory.
Although most M&A failures occur during the post-integration period, most of the problem is often rooted at the very beginning in the pre-M&A evaluation efforts. While financial, operational, technology and data, legal and compliance due diligence are typically scrutinised rigorously, other aspects of cross-border business culture, organisational design, employee management and leadership due diligence are often grossly overlooked or, in extreme cases, omitted entirely.
These overlooked elements are frequently key success factors for the post-integration process, which, if not properly addressed, can lead to failure. Based on our extensive experience and expertise in advising on due diligence practices, we have identified several key factors that should be prioritised when evaluating your M&A target.
In the process of M&A, companies often overlook the fact that organisations are living organisms composed of individuals united under a single vision, strategic objectives, and shared values and beliefs. This cohesion drives them to achieve business results. Therefore, failing to properly evaluate leadership and management stakeholders poses a significant threat to successful integration.
To our surprise, we observe that many M&As do not prepare a strategic post-integration roadmap that takes into consideration how day-to-day business is done in advance. This entails non-tangible but important organisational traits such as strategy design, decision-making and collaboration, agility and speed, propensity for change, innovative ethos, R&D approach, focus on customer experience and employee engagement, DEI, and performance management at both the acquiring and acquired companies.
Often, traditional, and established companies acquire smaller, innovative start-ups or emerging businesses to enhance their innovative capabilities. However, they frequently find that their business culture practices are so incompatible that successful post-integration becomes almost impossible. A more effective strategy is often to allow both companies to operate in their distinctive ways, rather than imposing the larger organisation’s processes and operations on the smaller one. This imposition typically stifles the agility of the smaller organisation and destroys the creative spirit of its leaders and core staff which was the main purpose of the acquisition at the first place.
In such cases, it is recommended to start by comparison and alignment in the values of both organisations and understanding the way of working and core motivation drivers of their leaders and employees. This approach aims to preserve the key advantageous characteristics of both organisations and leverage them symbiotically.
A good approach is to conduct a pre-M&A business culture compatibility matrix, company culture flexibility, organisational capability, and leadership due diligence for both organisations in parallel.
Business culture due diligence should evaluate whether the two business cultures and organisations in general are compatible, complementary, or contradictory. If they are found to be completely contradictory, it is crucial to determine how the post-integration should be managed. Should the integration follow the classic approach, or should the newly acquired entity operate as a self-standing operation from the beginning? Most importantly, how are strategy and decisions going to be made post-merger and which party should influence and shape the speed, agility, and innovation efforts of the merged organisation?
We observed a similar case in the agricultural chemicals industry, where a large organisation acquired a smaller business with innovative product capability that operated very differently from its conventional business. The lack of a concrete integration roadmap led to many key personnel from both the acquiring and acquired organisation leaving for better opportunities. This scenario is not isolated but rather a frequent outcome. This is a typical example where efforts are focused mainly on the typical due diligence processes – operational, financial, technology, legal and compliance – while little attention is given to leadership due diligence and business culture alignment, as well as strategic and employee-engaging communication.
In another example, we observed stark differences in how a local Chinese company approaches R&D and new product development compared to German companies with their main R&D operations in their headquarters. These differences in approaches and priorities can create room for tensions and misunderstandings if not properly analysed. For instance, when developing a new product, a typical Chinese organisation often begins by rigorously studying market trends, collecting market intelligence from customers, competitors, and innovative technologies. They then focus on meeting these needs and incorporating the most recent technology into a new product that might be only 50% innovative compared to its previous generation, launching it quickly to gather customer insights while continuing to work on further improvements. By doing this, they can provide a product upgrade every 12-15 months.
In contrast, German companies often start with the product or service in mind, developing a high-value product that, while superior in quality, takes too long to develop, lacks the latest technological advancements, and is often incompatible with local market needs. When cross-border teams with such stark differences in their approaches merge, we recommend conducting cross-business culture alignment sessions as early as possible to avoid clashes in new product development priorities during and after the integration process.
Company culture due diligence is aimed to assess the organisations’ values, beliefs, and behaviours that although not tangible are commonly shared among leadership and employees at all levels, and shape the choices, interactions and broad livelihood of individuals within it. When, for example, a Chinese company with a “996” working culture acquires a European company known for its work-life values, there must be some adjustment on both sides and primarily culture agility3 to be able to make cross-border project teams works effectively and eliminate frustrations. The agility should be equal on both sides to enable shaping an adjusted culture of the merged organisation.
Organisational capability due diligence is very useful in understanding the way how the two organisations are led and managed, and how their employees engage in delivering business results. The measured factors could span from trust in leadership, employee engagement, talent management practices, response to customers, collaboration, the job itself, and management excellence among others.
In another instance, we observed a prominent local company with a strong market presence, which has already commenced operations on the European market. However, upon meeting the local management team, we were struck by the stark difference between the company's financial performance and the international business competence of some of its leadership members. Often, these are local talents who primarily communicate in Mandarin and have little to no exposure to foreign cultures, international management practices, or business ethics as it is understood in the West.
It is not surprising that their overseas operations were not growing as expected and performed poorly compared to the company’s overall performance. As it turned out, there was no clear strategy on integrating these companies into the local culture and leadership style, nor on adjusting the domestic hierarchical leadership approach to a more international model with flat hierarchies and self-motivated staff. The lack of clear communication, employee engagement strategies, and positive cultural agility from the acquiring company made it difficult to successfully manage these foreign operations. Consequently, growth stumbled, and there seemed to be no one willing to take on the challenge.
Often, these acquisitions are driven by ambitions for market and service capability growth, but they grossly overlook the human and local leadership elements. With some strategic moves, including a proper integration roadmap, strategic and engaging communication, and a more international leadership approach, these acquisitions could be steered toward success. Additionally, showing higher levels of care and concern for the employees in the acquired cross-border organisations would significantly improve their path to success and increase revenue levels.
In the process of M&A, companies often overlook the fact that organisations are living organisms composed of individuals united under a single vision, strategic objectives, and shared values and beliefs. This cohesion drives them to achieve business results. Therefore, failing to properly evaluate leadership and management stakeholders poses a significant threat to successful integration. The risks range from losing key leaders in various functions to assigning disengaged leaders to drive the vision, mission, and business goals of the newly merged organisation. Additionally, single-handed decision-making processes from the acquiring company may be despised by employees or simply ineffective in the acquired organisation. The worst scenario occurs when competent leaders are let go to avoid redundancies, even though they might be best suited to drive the vision and strategy implementation for the newly merged organisation.
But most strikingly, if there is any leadership due diligence conducted, it is often limited to the acquired organisation. It is evident that “it takes two to tango”, and thus leadership assessments should be conducted in both organisations, especially when the M&A aims to acquire key technologies, innovation expert teams, or specific employee competencies and capabilities. Leadership due diligence is a critical step in ensuring that the post-merger cross-border leadership team can work in alignment.
It is not uncommon for MNCs to acquire a local Chinese company for its market or technology capabilities, only to realize that, during integration, key leaders have left, taking with them essential personnel, proprietary business intelligence, and know-how. Therefore, meticulous leadership due diligence can yield significant benefits during the integration phase. It often necessitates a deeper examination of leaders' backgrounds, expertise, professional experiences, and business performance. In these cases, leadership due diligence should examine the relationships among various stakeholders within the organisation and identify any dependencies that may exist. Often, leaders in private Chinese companies have attained their positions through guanxi (relationships) and through sustained loyalty to the owner. It is, therefore, crucial to conduct an objective assessment of their leadership competencies and the influence they wield over middle management and key employees.
When discussing leadership, we have observed that M&A integration tends to be smoother and more effective for two main reasons: First, when key leaders and board members from both organisations share similar values and beliefs and align on a clear post-merger business strategy; second, when there is a strategic plan to cascade integration goals throughout all levels of the organisation. Therefore, it is crucial to engage senior and middle-level leaders in post-merger roadmap implementation discussions as early as possible. This can be achieved through a guided M&A leadership alignment process, strategic roadmap workshops, and pre-M&A organisational introduction sessions designed to make the process effective, efficient, and engaging for everyone involved.
Uncertainty throughout the integration phase may result in heightened employee turnover and diminished morale. Staff members might experience anxiety regarding their job stability, shifts in responsibilities, or cultural changes, thereby reducing productivity and engagement levels.
Drawing from our experience, we've noted that thorough pre-M&A due diligence, with a particular focus on business culture, company culture, organisational effectiveness and leadership, is crucial for successful post-M&A integration. Therefore, we highly recommend incorporating the following procedures into cross-border mergers:
This starts with an examination of key organisational traits within each entity and their impact on internal management and employee engagement. Identify weaknesses in both entities and assess whether these could be addressed by leveraging the strengths of the other party or if they could exacerbate integration challenges.
Follow these assessments with alignment sessions. Determine if these cultures are compatible, complementary, or contradictory. Then, conduct additional evaluation or implement alignment strategies to mitigate any identified contradictions.
Identify pivotal teams throughout the entire value chain of both organisations – encompassing both the acquiring and acquired entities. Conduct independent assessments of team effectiveness for each, and subsequently, for the merged teams. The aim of team effectiveness assessment is to gauge how efficiently teams achieve business results and to pinpoint significant obstacles in business collaboration. This approach is crucial for identifying and addressing key issues that may arise post-merger. In instances where the M&A leads to changes in the Board, conducting a Board Effectiveness Assessment can be highly beneficial.
We advocate for conducting leadership assessments on both sides to ensure alignment and complementarity of leadership competencies within the newly merged organisation. It is inadequate for only one side of the leadership team to undergo this process while the other does not. While it is common for the acquiring organisation to have confidence in its own leadership team, this may not always be the case, and there are numerous exceptions to consider.
While leadership is crucial, it is equally important to listen to employees' experiences, motivations, and morale boosters, as their engagement and motivation ultimately determine the success or failure of the integration. This is especially critical in cross-border M&As, where two distinct cultures must collaborate to achieve business objectives. Our practice has demonstrated that early detection of employees' negative sentiments can present significant opportunities to engage them and develop a post-integration plan addressing these concerns. Leadership engagement in this context must be authentic, followed by concrete actions and compelling communication to ensure effectiveness.
The article is an extract from the Ticker Business Journal summer issue 2024.
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1 “Top M&A Trends in 2024: Blueprint for Success in the Next Wave of Deals”, McKinsey, February 2024
2 “China M&A Set for 2024 Pickup on Steady Economy, Friendly Policy Environment”, S&P Global, March 2024
3 Cultural Agility - the capacity of an organization to rapidly adjust or adapt its cultural traits, facilitating the seamless integration of a newly acquired company or merging with another organization. This process results in a new cultural identity that blends elements from the original companies with newly developed features, supporting the broader objectives of the newly formed entity.