Transcript
Speaker: When companies combine, cultures clash. We'll talk about the cultural perils of M &A on the next episode of The Market That Moves America. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: Today's podcast is about company culture, and in particular about what happens to the feeling of a place after a merger or acquisition. That's often a bad news story, but it doesn't have to be. I'm Tom Stewart. I'm the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business.
Speaker: We're the nation's leading research group studying mid -sized companies which account for a third of private sector employment and GDP and the lion's share of economic growth. It is indeed the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and CHUB, Grant Thornton LLP, and Cisco Systems.
Speaker: I have a special guest with me today, Jennifer Fondravet. Jennifer runs an M &A consultancy called Day One Ready out of her offices in Chicago. Jennifer, welcome to the market that moves America. Thank you, Tom. Great to be here.
Speaker: Let me begin with a little bit of data just to set the stage. A couple of points about corporate culture, which are sort of the unwritten rules that shape behavior and to a surprising degree drive performance. The National Center for the Middle Market has just completed a study of high performance culture in mid -sized companies.
Speaker: One key finding is that a strong culture matters when employees and others really get a strong sense of what it's like to work here and the kinds of expectations they have. That's associated with much stronger growth than cultures that are fragmented or cultures that are kind of a muddle and weak.
Speaker: But secondly, in addition to strength, the type of culture matters. Some companies emphasize creativity and innovation. Some emphasize being a great place to work. Some emphasize technical excellence, just great products and services. And cultures with those emphases are associated with stronger growth than cultures that are penny pinching or risk averse or even that are too customer centric.
Speaker: Jennifer, in your experience, does the impact of culture on performance surprise you? No, no, not at all. Prior to launching my M &A consultancy, I was a marketing executive with Fortune 500 companies for 25 years. So I absolutely appreciate the power of culture. It's interesting you make distinctions. I think that's so important. I think the power of culture
Speaker: It's underestimated how valuable it is, not only in how it helps motivate employees internally, but how it can galvanize employees for external benefit as well. And I've seen that. I've had a chance as a marketer to actually tap into that. So the power of culture is not to be underestimated.
Speaker: One of the things we find in the study also is that the power of culture is associated with employee engagement, employee, the ability to attract good people and to retain them. But it's also associated when customers pick up on it. And a strong, vibrant culture is one that attracts and retains customers as well, often quite directly. Absolutely. And I think more
Speaker: companies are figuring out the benefit of tapping into culture, not only to serve the customer, but how to really enhance what your employees take away and feel valued by within that sphere of culture.
Speaker: One thing that we learned in the study, and we've seen this also in another study that we did about M &A, is that a culture that might be humming along really well is often, it can often come under tremendous strain when there's a major transition. I mean, that could be a CEO transition, but the biggest transition is M &A. Sometimes
Speaker: being bought and sometimes buying something else. I mean, when, in fact, leaders tell us that culture is just about the hardest part of M &A and can really, really affect the success of a deal. You've been researching that. Yeah, you know, it's interesting. And that's why I love that your research makes a distinction between the types of cultures that there are.
Speaker: And I definitely, I can say for my research culture, it is one of the biggest struggles post -M &A deal. And I think what I've seen through the research is it tends to not be the focus in deal negotiations. It's typically an afterthought. And understandably, I mean, the fixation just becomes getting the deal done. But by not paying attention to culture and appreciating the distinction of different cultures,
Speaker: you can really, you can jeopardize the success of the deal overall. And that, you know, I experienced three multi -billion dollar acquisitions. And so I had my own theory, but the research, and I've interviewed now about 80 executives for my book, the research really proved out that if you don't pay attention to culture early on in the negotiations and appreciate the distinction of your one company's culture over another,
Speaker: You know, you do so at your own peril. One of the things that I think is interesting is I think sometimes buyers in particular underestimate how sticky and stubborn the culture of the organization that they're buying is. And they sort of often assume they'll just do it our way because we've acquired them and they may not even be aware that there are differences in culture.
Speaker: Absolutely. It's fascinating to me. And again, it just came up again and again as I was interviewing executives, what looks good on paper. So a best example I can give you is you'd have a high end product line company that merges with the company whose product line is on the lower end. And that makes absolute sense on paper. Right now we've got a broader portfolio.
Speaker: But what can happen is it creates what I call an us and them dynamic as the companies will have two very different approaches typically in how they serve their customer and that creates conflict. And so that us and them dynamic can really undermine the ability to bring two companies together.
Speaker: You just mentioned sort of two of those cultural archetypes we were talking about. One is that technical excellence, high quality, nothing but the best, Bose speakers kind of thing. And that leads to one sort of kind of decisions. Yeah, you need a little bit extra money for this? That's fine. That's no problem. Versus the kind of thing where you say, well, wait a minute. You've got to be really efficient. You've got to mind all your costs. Don't spend an extra penny.
Speaker: because our margins are thin and you can have very different informal decisions as well as the executive committee meeting figuring out you know what the budget's going to look like. Yeah and you know it was interesting that's where executives tended to highlight their greatest lessons learned the assumption that now I've got a broader portfolio my sales team will be thrilled right more to offer.
Speaker: But you're asking people to go out and sell now a broader portfolio when they've been, let's say, again, we'll talk if they've been previously playing in the high end space, but now they're equally supposed to offer low end. Traditionally, right? That sales team will have been saying, you don't need that low end product. We've got what you need. And now you're asking them to act completely differently in their customer engagement. And so that's why I love your distinction around the culture piece because
Speaker: If it's not thought through early on, it can wreak havoc on your ability to serve your customer.
Speaker: And one of the things I'm thinking about is particularly for mid -sized companies where our research suggests that often they have more intimate, close relationships with customers than perhaps larger enterprises do. Fewer customers know them better, often niche players. And if you add an adjacency to a niche, you may
Speaker: break up that dynamic that is one of the competitive advantages of being middle market. Really, again, it makes sense on paper. We've got a bigger portfolio, but now you're asking people to sell in a different way. Particularly given today, when we're talking about how important those relationships are and the authenticity and transparency
Speaker: Now you've got, and I focus on sales teams because at the end of the day, it's their ability to sell, right? Now they've got to kind of go back and say, well, maybe what I told you before wasn't so true because now I've got other products I want to offer you.
Speaker: And I think sales forces are often the canary in the coal mine when it comes to culture. One of the things that's interesting is you wrote a fabulous HBR article about how in a deal, in the process of an acquisition, tribes conform. Can you talk a little bit, you mentioned one of them, the old company versus, my old company versus your old company, us versus them as one of the tribes, but there are other tribes.
Speaker: Yeah, you didn't know what was fascinating. So culture gets a lot of attention. But what was most interesting to me during the research that I was doing is that you can have what I call an us versus them dynamic. And the obvious one is our company versus their company. We spent some time just talking about that now. But there are other ways that it manifests. The two that I found is you'll have executives versus frontline leaders.
Speaker: That's another us versus them dynamic that emerges. And then the who saved versus who goes. And all these manifest at different points and in different ways, but the tribal aspect of this, you know, people kind of just
Speaker: dig into their position and it's very hard if you haven't appreciated that this is going to happen to think through how do we better manage this so this us versus them dynamic doesn't occur. So much attention is paid on our company versus their company, but it's not on these other ways that that dynamic plays out.
Speaker: So the executive versus everybody else, I sort of think about that as like, all right, so we're the executive team, we're in the boardroom, we know what's going on, right? And everybody else is still in Dallas looking, pressing their noses to the glass saying, what are they doing to us? And they are making decisions about our lives. And in the meantime, we in that room might be indeed
Speaker: forcing ourselves to be less empathetic about those people outside because we have to make some tough decisions here. So you could get that sort of dynamic. Yeah, and my research showed that that aspect, executives versus frontline leaders, can be the most destructive. Because you can have a company where everyone was working together fabulously well.
Speaker: But then I've heard your an acquisition will take place. And suddenly you can have a frontline middle management field as a blindsided. They weren't involved in the decision making. Now suddenly they're handed a vision and a strategy to execute that they don't believe in. And our feeling is though now I've got more work while our executive leadership is making off
Speaker: better in this deal, and that can be so destructive.
Speaker: Yeah, and you could also, of course, often that's the other another piece, of course, is that in some cases, the the executive team may be standing to get a pot load of money from from a deal and the degree to which that is shared with the rest of the team might, you know, that that can create another kind of anxiety, you know, you've got an information asymmetry, a class asymmetry, a reward asymmetry, you can have all kinds of. Yeah.
Speaker: And then the survivors and those who come, those who stay and those who go, I assume, does that tribe, how long does that tribe end up disappearing? How long does the living versus the dead tribe persist? I imagine longer than we think. Yeah.
Speaker: Oh, yeah. I mean, it can last a while. And what was fascinating to me in the research is that both sides feel like the other side got the better end of the deal. Right? So they're stuck with staying, and you got to go, or vice versa. Yeah. Both sides. And that was what was probably most fascinating to me, and that you have the people who stay,
Speaker: Um, those who go either because they're forcibly pushed out or they just decide this is not for me and I'm off. But what was fascinating to me is that those who stay feel like, Oh my God, those guys are so lucky that they got out. I've now got three times as much work. I don't have as many resources. We're still trying to figure out our path. You know, there can be a number of variables that play into that mindset and those who go can often feel.
Speaker: They were robbed, robbed of the opportunity to continue growing. They had a job that they liked. Now they've got to go somewhere else and start over. So it was fascinating to me that that tribal mentality, both sides feel like they wish they were the other side. And that's working really be a problem.
Speaker: So we've got three tribes here. We've got the old company, new company, or my old company, your old company. We've got executive versus the rank and file. We've got the survivors or the stayers and the goers. How do you prevent these tribes? Can you prevent these tribes from forming? And if you can't, at least how do you make sure it doesn't turn into tribal warfare? Well,
Speaker: One thing I'd love to say, you can absolutely prevent that. But even as your research proved out, you can never anticipate human behavior. That's part of the tough part about culture. It's this squishy, I know it when I see it. So I don't think you can say you can prevent it, but I do believe that you can minimize how it manifests.
Speaker: I always counsel the business owners or private equity firms that I advise. It starts with both sides coming to the table with respect for the other. When that doesn't happen, tribal warfare can emerge very quickly, particularly when we talk about the first one, our company versus their company. If you haven't come to the negotiation with respect for what the other side brings,
Speaker: And more often than not, the tendency is that the acquiring company can have a certain level of arrogance. And so I always counsel, one, you've got to have respect and the mindset has to shift from ego -driven to humility. And really, coming to that negotiation with respect, but then having that mindset shift, this is not about
Speaker: one winning more than the other, it's about really creating what is the best vision that we can have and how do we deliver on that by taking the best of both sides. And I know you've said in the past, you know, everyone gives lip service to that, but can you really create the best, take the best from both companies and create something new together?
Speaker: I believe that you can if you come to the discussion and the negotiation with respect for the other side. Presumably, there's a reason that Company A bought Company B. Presumably, they wanted something. That reason might just have been cold -heartedly financial, but probably not. They probably wanted customers or products or people or talent, but they wanted something.
Speaker: and presumably there is a human slash cultural ingredient to that something, even if all I want is your market share. Therefore, our relationships that come with that market share. And I suspect that often in those negotiations or in those early parts of transition, I think in my own experience, people have on the acquiring side of sort of
Speaker: run a little roughshod or not listen to closely enough to the human side of what it is that they wanted to buy. They got the business side, but what is that for how people behave and what Joe and Mary and John and Susan do every day? Sometimes they sort of just think, well, yeah, and here's our process, here's our form, use that and it'll be the same. Right.
Speaker: And don't follow with that fact. The other thing, of course, is people take a little time to get used to stuff. So they may be rushing. You've got to understand the pace with which emotions change, too. Yeah. And you know what I say? So your question about, can you prevent it? I don't think you can. But those things, coming to the table with respect to the other side, that's the mentality you have to have.
Speaker: When talking specifically with leaders, it's absolutely, I say, similar to what you just shared, right? There's a mental mind shift, right? Humility replaces ego. An attitude shift that you've got to shift from directing to listening, demonstrating compassion, understanding. And again, respect for me is always the undercurrent of all of this.
Speaker: And then a behavior shift, right? Being able to walk the talk, demonstrating to commitment to the new vision both in, here's what we bring to this. What do you bring to this? And demonstrating that you truly believe that this new vision brings the best of both of you together. I think oftentimes as leaders, we might say one thing, but our actions demonstrate another. And so I'm, you know, I talk to leaders about the fact that
Speaker: It's a different set of skills that they need to demonstrate during post -M &A integration because their teams, their workforces are going to require it.
Speaker: Otherwise, you will have tribal warfare, and she's highlighted. And one of the things that we've already, the way we started this, which is interesting, is that we said that high performance is associated with a strong culture. And so almost by definition, strong cultures are hard to change, or change slowly. They evolve. It's not flipping on a switch. And so as you're thinking about the
Speaker: cultural integration, the cultural transformation in a deal, you have to recognize that that moves at a pace where you can't just push enter and suddenly the page right. And you've highlighted probably what is I think the greatest challenge because as we both know right in M &A you make
Speaker: Projections you forecast and and have to have hit certain things by year one And the unfortunate part of that is that doesn't give people time to do to make the adjustment To really understand the vision and be able to deliver on it requires people time They've got to let go the old way of doing things To adapt a new way of doing things doing things and that takes time
Speaker: And so I think that's one of the struggles that, or the greatest pain point I think post -M &A deal is you still got the sense of urgency, but you've got to give people time to adapt and adjust and be able to contribute. Which is where respect and transparency and giving people a chance and really real, real deep communication and also that shared vision come into because part of, I can change my behavior more
Speaker: happily and probably more quickly if I have a beacon toward which I'm going in rather than just being left to sort of figure it out on my own. Yeah. And I think too, obviously it's always highlighted you've got to communicate the vision. I think that's fairly obvious. What I've seen though is people understand information in different ways.
Speaker: Some people understand it better in a PowerPoint, in a memo, but you've got to communicate in all ways, repeatedly, the same thing. And it's got a cadence to it, the communication does as well. So I think equally that's something I talk about with executives is understanding what that level of communication is and the cadence of sharing it so people can really rally behind it. And again, so that the culture can adapt
Speaker: so that you can deliver on the vision. Jennifer, this has been a wonderful conversation and it's almost impossible to sum up because it's been so rich, but one of the things I think is we've talked about, and catch me if I've missed the key points, culture matters. The type of culture matters. When companies combine
Speaker: those cultures, everything gets tossed up in a way and things get confused, tribes are likely to form. And if you don't manage that process well, the very powerful forces of culture that so often drive companies forward will become your enemy and will hold you back. And so the understanding the cultural side of M &A
Speaker: is at least as critical as understanding the business plan side of M &A. Absolutely. The only thing that I would add, Tom, is while you can't always prevent those tribal culture wars, what I've seen is if you start
Speaker: understanding that culture is important and that both sides come to that discussion with respect for the other side and what their culture brings to it, you've got a better chance for success. That's got to be key. Otherwise, you're undermining the possibility of having that deal be successful.
Speaker: Well, Jennifer, I want to thank you because I think that people who listen to you would have a better chance of success in managing the cultural aspects of a deal. So I want to thank you so much. For more about the work that Jennifer Fondravais does with M &A and the cultural implications of M &A, check out her website. Her website is jenniferjfondravais .com.
Speaker: And thank you for listening to The Market That Moves America. Never miss a new episode. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts are found. Or you can subscribe and learn more about us at our website, which is middlemarketcenter .org.
