Financial and Cultural Due Diligence: Two Sides of the Same Coin

January 22, 2024 – There are two ways to grow:  internally or externally.  When companies are not growing fast enough internally they look for solutions externally.  Hence the continuing popularity of M&A.

In principle, there is nothing wrong with M&A.  There are many positive reasons for a merger or acquisition:  increasing market share or market presence, securing global competitiveness, research alliances, decreasing risk through portfolion diversification.

However, many of these deals have left an indelible mark behind – the mark of failure – as seventy to ninety percent of all M&As fail.

Due Diligence

Financial Due Diligence is the traditional method of analyzing companies’ when it comes to ascertaining potential for M&A.  Central to this due diligence are the financial and legal consequences of the deal.  Sometimes – depending on the industry - environmental issues are taken into consideration as well.

However, behind the numbers and issues are people.  And people are not as easily quantifiable.

In addition, there are other less precise and quantifiable issues that should be understood before proceeding with a merger or acquisition – such as a company’s culture, values and traditions; and its place in the community.  

Which is why I always highlight to my students the importance of what I call “Cross Cultural Due Diligence“ (or CCDD for short). This is conducted alongside Financial Due Diligence, in order to understand and assess the cultural perspectives each company brings to the table. 

Understanding the Company as a Culture

The key to success for any company is its employees. Companies are defined by the people they hire. Despite the posters on the office walls and statements on websites, it is the employees of a company that dictate and live out a company’s culture. 

All changes within and concerning an organization affect the employees.  Hence ensuring the success of a merger or acquisition will be dependent on a company’s employees.

For example, you could compare two companies that have the same amount of sales, yet very different profit levels. Why?  Because the company’s culture will influence its financial decisions.  Every firm has a way of dealing with its finances that is accepted within that particular company – one company is more prone to reinvesting its profits whereas another will use it to expand and a third company would just bank the profits.  Therefore, in order to understand a company’s financial statements, one must first understand the company’s culture and how it affects their financial decision making process. 

Understanding a company’s culture is not about “right” or “wrong”. There is no universally “right” culture.  Thank goodness!  Each company has its own culture.  It’s what makes them stand out, makes them tick, makes certain people want to work with them and others decide “no, thank you”.

Let’s talk about your experiences and how I can help you and your colleagues build cultural acumen for M&A and create a company culture that puts you in the 30% of M&A’s that succeed.

Email me at drdeannedevries@icloud.com and we’ll set up a virtual coffee.