When a large private equity fund looked at buying a New Delhi based healthcare provider, the fund manager felt something was not right. Although the exclusivity agreement had been signed and the deal was in advanced stages, red flags in the due diligence on “cultural integration” and senior management led the PE fund to pull the plug.
Financial and strategic investors are increasingly laying more stress on cultural and people integration in a deal because a significant amount of value erosion takes place if the people fit isn’t right.
Jaidev Murti, lead for Aon’s M&A solutions practice, said culture is an important factor in the success or failure of a deal but it also depends on the nature of the transaction. If a multinational is making a hostile bid for a local promoter-led company, then the way it will be run will be fundamentally different.
“If you don’t address that, it could derail the synergy,” said Murti. Cultural integration could sometimes be a challenge because people find it to be a fluffy, ambiguous topic, he said.
For PE funds, the initial few meetings with promoters and senior management of a company are enough to indicate whether to pursue the deal. In a buyout, the investor has significantly more influence and control in bringing about cultural change. In minority deals, control rests entirely with the entrepreneur. The key lies in tying up with an entrepreneur committed to building the right culture in the organisation.
“We do a background and cultural check on the entrepreneur/leadership team and the company very early in our assessment. This is followed by a detailed talent and cultural diligence at a later stage,” said Vishal Nevatia, managing partner of TrueNorth, a domestic PE fund. “For us, in any minority deal, 80% of the underwriting is about the entrepreneur/leadership team.”
According to a 2018 study by global HR consulting firm Mercer on “Mitigating Culture Risk to Drive Deal Value,” 30% of transactions fail to meet financial targets due to cultural issues; 67% experience synergy delays, and 43% face delayed close, no close or an impact on the purchase price.
The survey of over 1,400 stakeholders involved in transactions showed that left to chance, culture has significant potential to derail operational performance after a deal closes.
While historically, culture was categorised as a non-financial risk, the study showed that it can cause significant financial risk in four primary ways: productivity loss, customer disruption, flight of key talent and delayed synergies.
One of the biggest people and culture-related factors that companies grapple with is employee retention, including roles, pay packages and continuity between announcing and closing a deal, said Sukhmeet Singh, senior principal, career (talent) and M&A consulting leader India at Mercer. Other factors include leadership fitment – quality of leadership and the position in the new set-up. There are also issues of compensation, benefits and harmonisation, said Singh.
In case of a large company buying out a small, nimble, new-age company, culture is usually left as it is because that’s what defines the business. In other cases, it is easier to roll a smaller one into the fold.
A large, Mumbai-based conglomerate had to back out and sell its stake in a Chennai-based financial services group because their cultures were diametrically opposite.
Source: Economic Times