Is culture more than just a talking point in M&A deals?
In the midst of the announcement of the deal between Connecticut-based Liberty Bank and Naugatuck Valley Financial Corp., Liberty Bank President and CEO Chandler Howard said the organizational philosophies and cultures of the two companies were "very similar." Naugatuck Valley President and CEO William Calderara echoed that sentiment in an interview with SNL saying "I think it's a very good match."
Press releases and executive-speak in conjunction with bank M&A deal announcements feature similar language so frequently that it seems getting that point across must be in Chapter 1 of the public relations M&A playbook. But although they often talk the talk, banks more times than not fail to act on their words.
"You have to have something in (the press release) about culture, Steve Sapletal, an M&A executive and director at West Monroe Partners in Minneapolis, told SNL. "But probably less than 25% of deals that I've seen — and I've been involved in 200-plus deals — actually do something with culture in the transaction."
And a new study by West Monroe Partners and Mergermarket seems to bear that out. The survey found that 67% of executives believe that cultural integration is vital to deal success, but more than half of respondents reported doing a deal in which value was left on the table due to lack of attention to cultural differences. The study surveyed M&A executives from a handful of industries, including banking.
Sapletal, who specializes in complex integration solutions for M&A deals, said the most surprising aspect of the study was that executives continue to talk about people as an important aspect of a transaction but fail to put their money where their mouths are.
"It's still a financial transaction at the end of the day," Sapletal said. "Dealing with the people-side is still a little bit of an afterthought." That is in part because that aspect is difficult to measure, he noted. And executives are often not as comfortable with the "softer side" of transactions.
Cultural harmony is extremely important today because squeezing dollars out of deals through simple efficiencies is more challenging than it was 10 or 15 years ago. That is because the industry is now more focused on expense control, Michael Jamesson, head of Jamesson Associates, a consulting firm in Scottsville, N.Y., told SNL. He said that if people do not work together, it is difficult to realize the benefits of a merger on either the cost-cutting or revenue side. The biggest upside to deals in the current environment is the revenue enhancements found through new products or sales techniques, so "everyone needs to be on the same page," he remarked.
Jamesson agreed that there is more talk about culture than there is actual action along those lines. That may be just the nature of the business, he said. "People in the banking business are very numbers oriented, and they may not be as good at understanding how to bring people together to form a more effective team," he remarked. And he agreed with the West Monroe Partners survey that it likely leads to banks leaving money on the table. "It may be the old 'if I can't measure it, I can't manage it,'" he said.
When conflicts between the new and old employees do crop up, the human tendency is to ignore the grumbling and focus more on the measurables. "Typically folks don't like confrontation, so if they find that there's an internal war going on sometimes they're reluctant to go in and fix it," Jamesson said.
The West Monroe Partners survey also found that many buyers did not involve the seller in the integration process. Only 50% of executives said they placed the acquired company's management on the integration team.
Sapletal said there are two schools of thought on using the sellers in the integration process. Some buyers feel that they need to have a show of force, while others feel that both sides should be represented equally.
According to Sapletal, it is important to mix representatives from both companies in the steering committee but to worry less about finding an even balance than to choose the people who represent the strengths of each company. "So it's a mixed team, but it's not one where you say it has to be 50-50," he said.
But pride and other emotions sometimes get in the way.
Jamesson said banks are hierarchical organizations and typically want it known who is buying whom. The buyer might say "we're a billion dollars so we've figured out how to do things better than you did because you're only $200 million," he said. Also, banking at its core is "pretty plain vanilla," so involving the seller in all aspects is not always necessary. Unless an institution was acquired for a very specific, non-balance sheet reason, the buyer will usually stick with the processes that it knows, he noted.
Buyers often work hard to understand the seller's culture but do not know their own as well as they think they do and therefore cannot fully grasp what the differences are, according to Sapletal. "It's a lack of understanding your own culture before you actually go out there and pursue a target," he said.
Banks can look at customer attrition in the first six to nine months after a deal is completed to get a sense of how well the integration worked, Sapletal said. Oftentimes a new bank name or culture is irrelevant to customers that are only making basic transactions. But when the two banks have different products — especially in terms of technology — customers tend to take notice, he said.
Sapletal said the size of the acquirer typically does not play a huge role in how well a deal is integrated, although it is critical that banks dedicate personnel to dealing solely with the transaction. Sometimes smaller banks have fewer people assigned to work exclusively on the deal, he noted. Employees working their "day job" in addition to helping with the merger know that they are measured on things like P&L and not on the success of the deal. "So that's where some of these smaller deals tend to not be as successful sometimes, because they don't have the right dedicated attention," he remarked.
Click here to view this article as it originally appeared on SNLFinancial.