Buyer Beware: Cultural Fit Can Make or Break a Deal

#, 07 January 2016

The announced $160 billion merger between Pfizer and Allergan in November was a fitting cap to a year of frenzied deal-making in pharmaceuticals and life sciences. According to a PwC report, the value of completed industry deals in the first half of 2015 was $190 billion -- more than double the $80 billion completed in 2014.

High hopes abound for all these deals, but you know what they say about the best laid plans.

Although companies spend more than $2 trillion on acquisitions every year, study after study puts the failure rate of mergers and acquisitions (M&A) somewhere between 70 percent and 90 percent. According to a McKinsey survey, 25 percent of executives said that the absence of "cultural fit" was a key reason why so many mergers fail.

Our company, the specialist healthcare business BTG, has defied these odds, making four successful acquisitions since 2011. Our own culture of shared values, what we call our DNA, has played an important role before, during and after all our acquisitions.

A company's culture may be the most overlooked and undervalued aspect of M&A due diligence and post-acquisition integration planning. Most executives are much more comfortable dealing with costs and synergies than culture, despite the potential for culture to enhance or destroy merger value.

Of course, value creation and strategic fit are BTG's primary considerations for any acquisition. But as a fast-growing company with an entrepreneurial mindset, we also pay a lot of attention to cultural fit and the integration process, and invest the time needed to assess a company's culture.

Here are some of the key learnings from our experiences.

We Don't Have All the Answers

Successful acquisitions are not always about forcing a company to fit the acquiring company's mold -- it's a mutual learning opportunity. We aim to answer the question: How do we take the best of both worlds and create something even better? Teamwork, openness and continuous learning are essential for making accurate cultural evaluations and developing the right strategies for integration. As a fast growing company eager to stay nimble and entrepreneurial, we can often preserve and leverage the culture of smaller, companies we acquire to help "keep us young."

One-Size-Fits-All Doesn't Work 

Each company has unique cultural and operational nuances that require different integration approaches. For example, in July 2013 we announced the acquisition of TheraSphere®, a radio-embolization business in Ottawa, Canada, and EKOS, an ultrasonic catheter business in Seattle on the same day. For TheraSphere®, we took control to quickly blend and assimilate our two cultures without forcing them into our "mold." But with EKOS, we were more hands-off, especially with regard to its excellent sales organization. Our experience with these acquisitions have helped inform the way we've integrated the commercial team at our most recent acquisition, PneumRx, a San Francisco-based interventional pulmonology business currently preparing for an upcoming U.S. product launch.

Listen and Communicate in "Surround Sound" 

Get to know the people who work at the company, not just the leaders. I take mid-level managers from different departments out to lunch to find out what makes them tick. You can also learn a lot about a company's culture by talking to their customers. When several physicians told us without prompting that the PneumRx people were helpful, knowledgeable and great to work with, we knew they were a good match. These discussions also showed us that PneumRx shared our belief that it's important to stay close to customers.

It's OK to be Human

In fact, being human is a strength, not a weakness. By being real and authentic, we show the people we talk to what our culture is all about. That it's OK to say you don't know or to speak out openly if you have different opinions. We find they welcome this authenticity and are more likely to give us honest feedback in return. Human interactions also help alleviate the fears and anxiety people often feel after their company has been acquired.

Negotiations Can Reveal What People Really Believe 

A person's true character and beliefs come to the surface when they are under pressure. In negotiations for one of our acquisitions, the leaders pushed hard for retention bonuses, which showed us they truly cared about their people. In another, however, we walked away from the deal after seeing that a person who would play a key role in the business was behaving in a way that was contrary to our values.

You Have to Be Ready on Day One Post-Acquisition 

To set the right tone and get buy-in, company leadership needs to immediately model and reinforce the behaviors reflective of their values and tackle head-on those that are counterproductive. At BTG, the CEO and I make Q&A site visits to explain the rationale for our acquisition, our values, and our expectations. We let the new employees know they are now part of something bigger, and that our strength comes from everyone pulling together to make us successful.

We reiterate these messages through continually role modeling behaviors and a constant drumbeat of communications, usually through storytelling, not posters or training manuals. Our approach is to get well-connected individuals at the acquired company to organically share our values and desired behaviors.

At the End of the Day

Everyone reacts differently to change, which is unavoidable in business as in life. Some view it as an opportunity; others fear its unforeseen consequences. Treating people as people, communicating with them early and along the way -- even hand-holding as appropriate during a period of transition -- demonstrates our culture at BTG. It has proven to be a critical component of our success in acquiring, integrating and growing companies.