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Money Left on the Table

Money Left on the Table

Investors who perform only financial and operational due diligence are leaving money on the table.

It is standard for investors and companies to perform rigorous financial and operational due diligence when preparing to invest. They spend money to hire valuation experts, lawyers, and financial experts to gather data and help them decide exactly what a company or investment is worth. Yet, most deals fail to achieve the target ROI1.

 Traditional due diligence doesn’t fully consider the leadership and culture factors that are critical to organizational growth and success. A good “gut” feeling about a leadership team or using a personality assessment will not provide insights as to whether a leader has the capabilities and behaviors necessary to grow their company and achieve the investor’s strategic objectives. Further, cultural considerations, particularly in the case of M&A deals, require a greater level of evaluation. Two executive teams getting along does not necessarily mean that their organizations’ cultures will integrate seamlessly. If leadership and cultural considerations are left unaddressed until the post-transaction stage, costly problems can arise that undermine growth and slow integration. Investors who are looking to create lasting value and achieve their strategic objectives can go beyond the numbers and leverage leadership and culture due diligence to mitigate risk up front and improve financial outcomes.

 When you dig a little deeper into the numbers, many private equity and M&A deals go wrong when the leadership or culture at the newly acquired firm isn’t prepared or capable of driving the growth and implementing the strategy desired by the investor.

Rather than writing these failed deals off as par for the course, or spending massive amounts hiring consultants to try and fix the problems, investing in leadership and culture due diligence alongside other diligence activities allows investors to evaluate and begin to address potential leadership upfront, saving money, time, and costly turnover in the long run.

 Incorporating a leadership and culture assessment as part of your due diligence process helps ensure that you can identify risks, such as leaders who lack the vision, communication, execution capabilities to drive significant growth or mismatches between a strategy that focuses on innovation and culture that maintains the status quo. Once the risks are known, investors can either plan specific ways to mitigate these risks (employee retention plans, leadership coaching, culture initiatives, or operational changes) or reconsider the investment based on the data. Quantified insights on leadership and culture within a potential investment enhance and complement the financial and operational due diligence.2

 Leadership and culture issues derailing the financial returns of M&A and PE investments are well known, and there is a simple solution: better human capital focused due diligence. Savvy and strategic investors understand that making the small investment to perform leadership and culture due diligence up front and identifying the potential risks can save money in the long run and decrease the time until they see returns on their investment.

Katherine Butler-Dines specializes in project management, strategy design, and business development. With a passion for helping companies grow efficiently and effectively, Katherine focuses on helping people and businesses put into place the structures and processes to not simply adapt to change, but embrace it. She has previously supported quantitative and qualitative research projects on entrepreneurship, particularly about women entrepreneurs, across 11 different geographies.

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Avoiding Misalignment and Maximizing ROI in Operator-Led Private Equity

Avoiding Misalignment and Maximizing ROI in Operator-Led Private Equity

Over 70% of private equity investors and their portfolio company (portco) executives agree that company culture is critical to the successful implementation of strategy, yet only 13% formally conduct an evaluation of their portco’s culture.*

What is culture and why does it matter?

Organizational culture — the assumptions, values, and behaviors underlying the statement “this is how we do things here” — influences employee engagement, strategy implementation, and operational efficiency. Leaders who understand their organization’s culture and how to intentionally align it with strategy can shape the culture to engage their employees and more quickly achieve strategic objectives.

Too often, leaders do not fully grasp or account for organizational culture when implementing a new strategy. This lack of understanding is particularly risky for Private Equity firms with an operator-led investment thesis. A mismatch between portco and the operator who will lead it can be a very expensive mistake. The success and strategy of a new leader can quickly be derailed if their leadership behaviors are misaligned or at odds with the existing portco culture.

The Operator / Leadership Misalignment

PE firms taking an operator-led investment approach, including Search Funds, often work with a roster of operators to identify a potential portco with significant opportunity for growth and where the existing ownership is seeking to exit. The firm will acquire the company and place an operator from their own team to lead the company.

The risk with this approach is that even an experienced operator with an excellent strategy may find it challenging to execute if their leadership behaviors are in conflict with the existing portco culture.

How well an operator’s character aligns with the culture of the company they join will largely determine if they gain the trust and followership of the employees. A leader without the trust and backing of their team will struggle to grow the company and execute on strategic priorities. Further, a misalignment between new leadership’s behaviors and the existing company culture can generate tensions between teams, greater leadership turnover, and operational inefficiencies. It can be difficult to grow a company when the leadership is fighting culture-related internal fires. 

A Simple Solution to Mitigate Risk

There is a simple way to mitigate this risk: assess and understand the leadership and culture dynamics at the outset of an investment. Performing a Leadership and Culture Assessment is the first step to understanding organization culture and the implications of that culture. Conscient Strategies’ PE-focused assessment measures the existing organizational culture and leadership dynamics across 10 key dimensions linked to the company’s specific strategic objectives.

This unique approach allows us to draw out and quantify where an organization falls on the spectrum of important values, such as:

  • Status-quo vs. innovation
  • Top-down vs. consensus decision making
  • Results vs. process-driven

As a result, we help investors, and their operators, identify the key leadership capabilities needed to implement changes and drive growth within the portco’s existing cultural context.

In some cases, we find that the existing portco culture does not serve the strategic objectives of the PE firm and operator. In that context, the culture assessment provides valuable insights into what is working and what should be changed to optimize ROI. Identifying the gaps between the existing and the ideal culture is key to mitigating risk and setting the portco up for growth from the outset. The PE firm, and their operator, can leverage that information to set a strategy that includes shifting the culture to better serve the strategic objectives.

Beyond just assessing the portco culture, to truly create alignment between operator and portco requires evaluating the leadership behaviors of the potential operator(s). Culture is shaped by leaders modeling behaviors and values. Leaders who understand the existing culture and recognize which behaviors will most influence growth can proactively shift the culture. Conscient Strategies’ assessments can quantify the operator’s strengths and skill gaps in terms of key leadership behaviors like:

  • Defining a vision
  • Communicating transparently
  • Building alignment
  • Acting decisively
  • Driving results

The PE firm can then ensure the operator has the leadership behaviors and skills necessary to drive forward the company and shift its culture. Culture and leadership are already recognized as key to successful PE investments and many firms are already assessing how a portco’s culture and specific leaders fit with its strategy. But, doing so in a more systematic and data-driven way will improve outcomes. Rather than relying on gut feelings, using a culture and leadership assessment at the outset of an investment enables the PE firm to more effectively align the operator and portco.

Learn more about Conscient Strategies’ Leadership & Culture Due Diligence »

 

* Source: https://www.alixpartners.com/media/14381/ap_annual_pe_leadership_survey_2020.pdf

Katherine Butler-Dines specializes in project management, strategy design, and business development. With a passion for helping companies grow efficiently and effectively, Katherine focuses on helping people and businesses put into place the structures and processes to not simply adapt to change, but embrace it. She has previously supported quantitative and qualitative research projects on entrepreneurship, particularly about women entrepreneurs, across 11 different geographies.

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Ready to grow a stronger organization? 

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The Importance of Culture to Post-Deal Integration and ROI

The Importance of Culture to Post-Deal Integration and ROI

Twenty years after the infamous America Online (AOL) – Time Warner Cable (TWC) merger, the failed transaction continues to highlight the importance of culture in successful M&A deals.

In January 2000 AOL announced it would purchase TWC for $165 billion. Billed as transformative merger that would define the future of media, the deal was the largest corporate merger to date. The vision was that the combined corporation — with vast production capabilities, new technology-enabled distribution methods, and millions of subscribers — would be valued at $350 billion. Quickly after the merger was completed in 2001, it became evident that the deal was a failure and, worse, that it had been doomed from the outset.

Culture is the set of assumptions, values, and artifacts that underlie the statement ‘this is how we do things around here.’ AOL and TWC’s company cultures were so inherently different that the post-merger integration (PMI) didn’t stand a chance.

While the deal was supported by substantial financial risk assessment, leadership put little thought into how the cultures and teams might integrate. As the merger progressed, initial optimism gave way to frustration. The AOL employees were put off by the very buttoned-up corporate culture of TWC while the TWC team was appalled by AOL’s aggressive and arrogant style. This clash led to mutual disrespect, a quick disintegration of cooperation, and stalled strategy implementation. When the dot-com bubble burst in 2001, the ensuing industry-wide economic fallout exacerbated the troubled merger and further crippled any prospects for growth.

The culture clash wasn’t merely an old media vs new media conflict: The integration triggered a conflict over values, priorities, authority, decision making, operations and, ultimately, the question of which company drove the most value for the deal. While the transaction was allegedly a merger of equals, AOL had the more valuable stock and position entering the deal.  Some leaders at AOL believed that status should ensure them a superior position in the post-deal company. On the other hand, TWC executives saw their company as driven by strong values and vision while they considered AOL opportunistic and driven by short-term profits.  Like their AOL counterparts, TWC leadership perceived their company as the superior business. As the two companies quickly realized, the best laid strategy can quickly be derailed by cultural issues.

AOL stock tumbled in the way of the 2001 dot-com bubble and cross-company management fights became public. Former TWC Chairman Gerald Levin — who became the CEO of the AOL Time Warner corporation — complained publicly that TWC was being sunk by AOL. He was shortly thereafter replaced, an act that fueled further, costly executive turn-over. The spiral continued until, by the end of 2002, AOL Time Warner announced $98 billion in annual losses.

Today, neither company exists, both having been sold for pieces to other media and tech players in the intervening 20 years. As Stephen Case, former Chairman of AOL Time Warner and the founding CEO of AOL, acknowledges the merged corporation lacked trust and a common vision on which the team was aligned. Without these essential ingredients of a high-performing culture and effective leadership, integration and growth we impossible to achieve.

While the dot-com bubble burst couldn’t have been predicted, the cultural issues which plagued the merger certainly could have. AOL was a new media technology company, TWC was part of the old media vanguard.

As Richard D. Parsons, President of TWC at the time of the merger, shared in a 2015 interview, “I remember saying at a vital board meeting where we approved [the merger], that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different.”

Culture continues to plague M&A transactions today. The 2017 Amazon acquisition of Whole Foods is another notable example. The deal was hailed with great fanfare by both companies. CEO of Whole Foods John Mackey called it “love at first sight.” But the deal hardly turned into a storybook romance for the employees of Whole Foods. The cultural differences between the two firms are vast: Amazon value tight rules, order, and strong hierarchical authority to keep the massive entity running. Whole Foods culture was one of collaboration, de-centralized, employee-driven decision making, and emphasizing the higher purpose and vision associated with their work.

During the post-acquisition business integration, conflict ensued as Amazon pressed Whole Foods to standardize the operations and customer experience in every store. Whole Foods suffered significant employee attrition and falling customer satisfaction. In 2017, Whole Foods was left off the “20 Best Places in America to Work” list, a list it had made for the prior 20 years. The promised  significant price reductions failed to result. Post-acquisition, the quality of Whole Foods yelp reviews have fallen with 20% of reviewers relating their dissatisfaction to Amazon directly. The acquisition is a prime example of how a company – Amazon – failed to account for the importance of culture to the success of the acquired company. In trying to change that culture, the value of the deal suffered.

Both the AOL-TWC merger and Amazon-Whole Foods acquisition highlight the importance of culture in successful integrations. It is not enough to evaluate the financial value or risk associated with an M&A deal. Expanding due diligence to include non-financial factors of leadership quality and effectiveness along with cultural values and behaviors can significantly reduce integration risks. This non-financial due diligence will identify gaps and differences between the two companies so executives can craft a definition of what the integrated culture will look like and a value proposition as to why that culture will benefit employees and the company growth.

To achieve outside outcomes and strategic objectives, leaders must assess, acknowledge, and work with – not against – the organizational cultures that both companies bring to the table. For assistance driving fast and actionable insights on the impact of culture on your transaction, reach out to Conscient Strategies to learn more about our non-financial due diligence product.   

Katherine Butler-Dines specializes in project management, strategy design, and business development. With a passion for helping companies grow efficiently and effectively, Katherine focuses on helping people and businesses put into place the structures and processes to not simply adapt to change, but embrace it. She has previously supported quantitative and qualitative research projects on entrepreneurship, particularly about women entrepreneurs, across 11 different geographies.

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read more

Ready to grow a stronger organization? 

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