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This study and paper examines the literature for current conclusions regarding cultural/social/human issues in M&A, and merges them with the current M&A management best practices. It sets the background for potentially developing a course in mergers and acquisitions that combines the typical “hard” and “soft” issues, resulting in a course that is typical of many of the courses in progressive liberal arts MBA programs today.

This study tries to answer the following questions:

• Can a cultural/human focus be justified in the M&A discipline? (business justification, humanity justification)?
• What is the current thinking about the effects of the soft issues in the success or failure of mergers and acquisitions?
• What cultural and human factors should be considered and added into best practices for evaluating potential acquisitions?
• What cultural and human issues are, or should be, a factor in the pre-merger negotiation and deal making processes?
• What do current acculturation and transformational/servant leadership theories offer toward potentially improving post-merger restructuring/divestiture planning and execution?
• What are the implications of cultural alignment on initial and eventual shareholder value?
• What does an M&A business process that includes current best leadership, cultural, and human development practices look like?

The global history of mergers and acquisitions (M&A) is one of ups and downs.  Martin Lipton, a famous and very experienced M&A lawyer, has integrated this history into five waves, or periods of time of increased M&A, as tabled below (Lipton, 2006):





1st Wave

Horizontal mergers (killed by interpretation of antitrust law)


2nd Wave

Vertical mergers (killed by the Great Depression)


3rd Wave

Diversified major conglomerates (killed by lack of real value)


4th Wave

Hostile takeovers; junk bond LBO (killed by poison pills, ’87 crash, S&L/junk bond crash of ’89-’90)


5th Wave

Mega-deals (size matters mentality), cross-border mergers (killed by burst of Millennium Bubble and Enron scandal)


6th Wave

Shareholder activism, private equity, LBO (killed by Great Recession of 2009)

The last 25 years of M&A history can be seen below in Figure 1, as provided by the Institute of Mergers, Acquisitions, and Alliances (IMAA, 2011).  This depicts the 5th and 6th Waves.

Figure 1 – M&A Activity of Last 25 Years

Especially during the last two decades or so, as can be seen in the data above, mergers and acquisitions have become a popular tool in the business strategist’s toolbox.  Although everyone has an opinion of why this is happening, there is general agreement that reasons include increased competition, many new financing opportunities, reduction of global trade barriers to entry, and various national governments encouraging creation of global champions.

All these causes of ups and downs epitomize the typical business/financial perspectives on mergers and acquisitions (M&A), as they focus on the “hard” aspects of management.  For example, a typical graduate level M&A course has the following curriculum:

  • Evaluating and pricing acquisitions
  • Identifying and implementing operational and control synergies
  • Creating shareholder value through rigorous pre-merger analysis
  • Negotiating the terms of the deal
  • Financing the acquisition
  • Post-merger restructuring and divestitures

But, although Martin Lipton doesn’t agree (2006), it is widely believed amongst academics that the vast majority of mergers and acquisitions are unsuccessful, or at least not as successful as they were predicted to be or could have been.  Common opinions are that 70% of mergers and acquisitions do not reach their potential and that about 50% of them are outright failures.  In the late ‘80s academic researchers began to believe the difficulties had been primarily cultural, or the “soft” issues of management.  As a result, in the ‘90s and ‘00s much was written about research undertaken to identify exactly what cultural/social and human issues are at play and so frequently cause sub-standard business results.

Unfortunately, however, the practical implications of these findings have not yet been integrated into the current management practices for mergers and acquisitions.  This may be partly because corporate leaders agree with Lipton!  But, it is more likely because there are few if any, MBA mergers and acquisitions courses that are exploring and teaching these cultural aspects of M&A and providing practical countermeasures to the business community.

Therefore, this study and paper examines the literature for current conclusions regarding cultural/social/human issues in M&A, and merges them with the current M&A management best practices.  It sets the background for potentially developing a course in mergers and acquisitions that combines the typical “hard” and “soft” issues, resulting in a course that is typical of many of the courses in progressive liberal arts MBA programs today.

This study tries to answer the following questions:

  • Can a cultural/human focus be justified in the M&A discipline? (business justification, humanity justification)
  • What is the current thinking about the effects of the soft issues in the success or failure of mergers and acquisitions?
  • What cultural and human factors should be considered and added into best practices for evaluating potential acquisitions?
  • What cultural and human issues are, or should be, a factor in the pre-merger negotiation and deal making processes?
  • What do current acculturation and transformational/servant leadership theories offer toward potentially improving post-merger restructuring/divestiture planning and execution?
  • What are the implications of cultural alignment on initial and eventual shareholder value?
  • What does an M&A business process that includes current best leadership, cultural, and human development practices look like?



Mergers and Acquisitions as a Growth Strategy

Organic growth was a dominant corporate strategy until the last quarter of the 20th century.  However, a combination of factors has tended to increase the use of acquisitions to fuel growth over the last few decades.  As mentioned above, several scholars have pointed to increased globalization and the resulting changes in investment markets as the fundamental pressure to use acquisitions to achieve radical and rapid growth in modern organizations (Lodorfos & Boateng, 2006). 

It is possibly oxymoronic that the global forces that are encouraging outsourcing and joint venturing may also be encouraging acquisitions.  Obviously, there should be a vision of some activity that is better done inside the corporation, or it would be hard to make the case that bringing it inside is better than partnering with an external company.  Perhaps there is a heightened sense of urgency and impatience today that may be related to leadership generational effects.  Another possibility is that the M&A approach is simply an extension of humanity’s historical natural tendency for groups to want to own and dominate other groups of people.  Perhaps we are experiencing some kind of accentuation of public corporation agency disconnection, causing the shareholder to expect rapid growth as an indication of corporate investment worthiness.  Bigger is better, right?  But, building lasting market value is harder than building up size.  Whatever the cause of M&A popularity today, a company should not rush into the M&A growth solution without first being clear on the corporation’s mission and strategy.

If M&A makes sense as a method to achieve a well thought out growth strategy, then this business activity can become part of the tactical plan.  Some corporations appear to be simply focused on growth at almost any cost and they see M&A as a way to accomplish this quickly.  The problem with this approach is that merging organizational cultures is very risky.  The reality is that two thirds of M&A fail to produce the desired results and many of them take down the acquiring company in the process (Mohibullah, 2009).  Using the war analogy, if one culture dominates another culture, unless that culture is highly skilled in the art of war itself, there is a high probability that it will do harm to itself.  And, even if the culture is skilled in the art, there is always a risk that it will lose.

The Basic M&A Business Process as a Study Guideline

In the overall M&A process, the definitions of business strategies for the acquiring company are the jumping off point, being well-engrained into the company’s culture.  The M&A business process (as diagrammed in Figure 2 below) then enters a nested loop of identifying opportunities and implementing M&A projects.  This is an iterative/cyclic process of opportunity identification, data gathering, and due diligence.  The next step, which is also part of the inner loop just mentioned, is standalone valuation and post-merger valuation of the target.  There is the negotiating and structuring of the deal.  Once the deal is agreed in concept, the financing itself must be considered and decided (key financial terms and conditions, covenants and pricing, of different sources of acquisition finance, including subordinated notes, mezzanine finance and high yield bonds).  Incidentally, this part is covered in a typical MBA M&A curriculum, and of course cannot be omitted in a holistic study of M&A.  After the close of the deal, post-merger integration and structuring must be planned and implemented.  The restructuring may include divestiture, either because the acquisition contained non-synergistic business segments or resultant firm efficiency needs tuning.

This study and paper basically follows the M&A business process as outlined above, and merges the leadership, cultural, and human resources improvements from best practices observed during the study.  Addressed first is strategic, tactical business, and acquisition search planning.  Following is the negotiation and due diligence sub-process loop.  Then, estimating the value of the M&A target is examined, followed by structuring the deal and negotiation.  Financing is covered next, followed finally by post-merger restructuring/divestiture planning and execution.

Figure 2 - Typical M&A Process


Leadership, Cultural, and Human Resource Aspects of the M&A Business Process in General

Many researchers believe that the vast majority of M&A failures are caused by cultural or human reasons.  It was surprising to learn that most companies do not concern themselves with these all too common failures in their M&A processes.  Today, almost all the steps diagrammed above in Figure 2 seldom include adequate cultural and human perspectives, as will be discussed throughout this paper.

Despite the fact that researchers have repeatedly shown that cultural aspects are at the root of high failure rates, most companies do not include cultural valuation and due diligence in their M&A process.  I believe this is because knowing that culture clash is at the root of the failures is not specific enough to suggest solutions for companies to consider integrating into their M&S processes.  Identifying these specific problems and some potential practical solutions is the main goal of this course.

One overriding omission in typical M&A processes is the involvement of the Human Resources (HR) people.  Historically, HR people have been involved in M&A only during divestiture and people crisis times created by poorly conceived strategy (Johnson, 2003).  Tower Perrin is a management consulting firm that is involved in around 400 acquisitions a year. In a 2003 survey, they concluded that only 21% of the HR departments felt like they had the resources to effectively participate in the cultural and human facets of acquisitions.  These companies are probably either hiring outside experts or building this capability into the “corporate development” or finance departments.

However, the HR people are much better suited champions of the importance of the human issues that are so key to the M&A process (Beatty & Schneier, 1997).  If M&A continues to be a popular tactical solution to a growth strategy, it is going to be important for those companies taking this route to build the expertise within the HR function.  And, improvements in the HR function to support M&A might best be amortized into the valuation of each acquisition.

Beatty and Schneier (1997) promote the general idea of shifting HR’s focus toward delivering economic value for which company stakeholders are willing pay.  They consider the traditional employee advocate role of HR as “more a partner than a player” (p. 30).  The tendency is for today’s partner role functions to be downsized, outsourced, or shifted to line/functional managers in order to reduce costs.  So, HR must add bottom line value in order to continue as an important part of strategic management.  Beatty and Schneier see the player/strategic role for HR as:

  • Helping insure that employees are engaging in the right behaviors to result in operational and financial outcomes.
  • Facilitating the maintenance and growth of the core competency workforce.
  • Acquiring, developing, and retaining essential talent.
  • Lead organizational structure design.
  • Align the HR toolkit (designing work and organizations, measuring performance and culture change, selecting, developing, and rewarding the workforce, communicating and clarifying strategic goals, etc.) to help deliver behaviors necessary to realize the business goals.
  • More involvement change management, M&A, learning organization dimensions, cultural change, etc.

Beatty and Schneier produced a table showing elements of the HR toolkit aligned with three basic business strategies (operational excellence, product excellence, customer intimacy).  This is a bit off the M&A topic, but it was an extremely interesting paper.

Strategic, Tactical Business and Acquisition Planning:  The Crucial Organizational Culture

As said above, a company must first determine their business strategy and see where acquisition fits.  This understanding also drives the definition of the type of company to be acquired.  The larger a company, the greater the tendency to shotgun singularly purposed growth with totally unrelated businesses.  If an acquisition candidate does not further the acquirer’s mission and strategy beyond growth, it is worse than useless.

The goals of acquisition can be as varied as a company strategy: increased revenue, lower cost, increased innovation, increased market power, to gain a particular discipline, tax reasons, financing reasons, etc.  Once the goals of an acquisition plan are established in some detail, evaluating synergy between the acquiring company and a specific acquisition candidate can safely proceed.

Changes in corporate control tend to increase the combined market value of assets of the bidding and target firms.  At least for a while.  Again, about two thirds of acquisitions in the long term result in lowered combined market value.  Typically, the target firm’s initial shareholders, the banks, and the lawyers (like Lipton!) are the only winners.  Nevertheless, recent M&A transactions show an increase in value retained by the acquiring company, especially if they are cash deals (Dobbs et al, 2006).  But, if cultural issues become part of the strategy (i.e. diversification and organizational learning as corporate strategies) and cultural focus becomes central in the M&A business process, a company can continue to enjoy increased combined market value indefinitely.

How can one assess the potential gains from an acquisition?  The gains can be identified and quantified (even ahead of time) if they are derived from the strategic goals of the corporation.  Gains can come from asset management through operational restructuring, fundamental values-based management of the new situation, business portfolio restructuring, financial restructuring, consolidation of production and distribution, and/or increased market share.  Operational restructuring can be successful because of economies of scale, increased cash resources from larger revenues, etc.  Financial restructuring can provide gains by reducing taxes, increasing debt capacity, lowering WACC, and/or better use of idle cash.  Portfolio restructuring can provide gains by divesting businesses or products that are less profitable than the newly acquired ones.

These operational, financial, and portfolio restructuring gains are what are envisioned by leadership focusing on acquisition to fuel growth.  But, how dependable are these projections, from the viewpoint of the shareholders or a team trying to determine a realistic value of a target acquisition?  Actually realized gains are moderated by the many possible problems in the implementation of the M&A process: overestimating synergy, slow pace of integration, over valuation, deal valuation not based on cash flow value, post-merger communication/integration, conflicting corporate cultures, poor assessment of technology, and/or generally poor due diligence. Alas, there are more possible problems than potential motivations for M&A.  But, as mentioned above, most scholars think that the root cause of most of the failures and, therefore, the highest valuation risks, are not poor estimates of the “hard” aspects of business, but the cultural, human, or “soft” aspects of business.  So, improved consideration of these cultural factors and pitfalls should dramatically improve the dependability of the value projections.  And, developing a core competency in systems and leadership skills that support the integration of cultural and HR considerations should raise the likelihood of merger cultural success, thereby raising economic value of mergers.

Cultural Aspects of Acquisition Valuation and Performance Prediction

The late Ian Giddy, Adjunct Associate Professor of Finance at New York University’s Stern School of Business contends that there are only a few overall rules guiding the valuation of an acquisition target (2007m).  Value of a target consists of the value of the target itself, plus any synergies.  And, like any capital investment, the transaction should yield a return on assets that is at least the acquiring company’s WACC.  Finally, a target business should be merged into the company only if it is worth more merged than left external.  The thing that most often makes a target worth more as a merge is the synergies.

There are a variety of methods in common use to value an acquisition based on financial information (Giddy, 2007l).  Asset-based (balance sheet) methods are common in financial companies, where the book value is extremely relevant.  Measures like cash and/or working capital relative to market capitalization, book value, return on assets, and return on equity fit this category.  However, this method category is not so good at valuing intangible assets (i.e. brand value).  Another method category is to use comparables based on earnings, such as earnings per share, price/earnings ratio, and price to sales ratio.  However, these measures require application of a multiple, which to some degree appears to be an arbitrary estimate of risk.  Another downside is they are based on rear-facing data.  The third commonly used method category is based on cash flow (EBITDA).  For most situations this is the best method, because it attempts to quantify cash from future operations.  Free cash flow is probably the best measure.  It adds back non-cash current assets and subtracts out likely new capital expenditures and additions to working capital in an attempt to model the future.  It is even better if a terminal value is included and future years’ free cash flow is discounted to obtain net present value.

All these methods result in an estimate of the value of the target standing on its own.  For mergers, it is necessary to add the value of synergies of combination.  According to The McKinsey Quarterly (Christofferson et al., 2004), the most prevalent non-cultural reason for failure to increase the buyer’s shareholder value in M&A is that acquiring companies too often overestimate the synergies of their M&A transactions. In Christofferson’s study of 160 mergers, he concluded that poor estimates of revenue synergy are the most common discrepancy. In addition, acquiring companies often fail to identify and include revenue dis-synergies (i.e. cannibalism, disruption of production, etc.).  Another source of problems is failure to anticipate one-time costs, particularly if the success of the merger is contingent upon cost reduction synergies, which often require capital investment to fully realize.  Many acquiring companies fail to use industry benchmarks, leading them to project unreasonable levels of synergy which are actually constrained by realities of the market, available technologies, etc.  And, finally, acquiring companies are often wrong about how long it takes to complete the integration phase.  All these shortcomings result in acquiring companies over valuing the target company.

There have been many studies reporting the negative effects on synergy from cultural differences, ranging from lowered employee commitment and cooperation, increased employee turnover, and even lowered financial success (Datta, 1991;Chatterjee et al., 1992).  There have even been a few studies that correlated cultural compatibility and acquisition outcomes (e.g. Hambrick & Cannella, 1993), but these were all centered on USA companies.  Also, many researchers have agreed that culture clashes are likely more pronounced in cross-national mergers.  So, awareness of the cultural differences between acquiring and target companies should be factored into the valuation and the planning/execution of the M&A process.  However, until a couple of University of Connecticut professors teamed up with a couple of French professors, a viable Perceived Cultural Compatibility (PCC) index was unavailable (Veiga et al., 2000).

Although it appears that few companies are actually bothering to apply the PCC index, this research has fueled some awareness of concrete cultural integration practices that probably have contributed to the slowly improving M&A success rate in the first decade of the 21st century (Able, 2007).  Dobbs et al. (2007) also measured a “deal value added” (DVA) improvement in the first decade of 2000 compared to the M&A boom of 1998-2000.  They attributed part of this improvement to the greater percentage of cash deals in M&A during 2000-2007. In addition, Dobbs identified a recent trend of reducing the proportion of overpayments (POP) as perceived by the market.  Able attributes the improvement to better leadership skills, but he is combining better transformational leadership with culturally focused improvements in the M&A process in his definition of leadership.  At any rate, several improvement trends here add up to better results.

Kilmann et al. (1985) suggested that the M&A process should first assess each company’s culture during the pre-merger phase, identify areas of misalignment, and use this information in the subsequent phases of the merger to improve the likelihood of success.  Using the flowchart in Figure 2, the valuation step would be the natural place to do this.  Even better results can be realized if the PCC is used more often in initial assessments of compatibility as well as in measurements of progress during the post-merger integration phase.  It would allow Six Sigma and other continuous improvement methodologies to be applied toward building a corporation’s core competency of merging acquisitions.

Able (2007) said that leadership is important in executing the M&A process well, especially because people tend to look to leadership more during times of change and stress.  But, it is more likely the feathering of Kilmann’s suggestions of cultural consideration into the M&A process that has fueled the improvements noted by Able.  The measurement tool given by Viaga et al. (2000) could help managers execute Kilmann’s ideas with objectivity.

Measuring culture is more complicated than would seem necessary, until correlating the perception of two cultures relative to what ought to be, what was in place in the acquired culture, and what is in the acquiring culture is considered (Viaga et al, 2000).

This single cultural compatibility index can be obtained by interviewing an equal-sized group of executives of the business operating sections (not the corporate executives, who know less about the rank and file) from each company, asking them to provide a value from 1-5 on how the company performs the following 23 behaviors/values (cited directly from Viaga et al, 2000):

1   Encourages creativity and innovation.

2     Cares about health and welfare of employees.

3     Is receptive to new ways of doing things.

4     People can identify with the organization and its mission.

5     Stresses team work among all departments.

6     Measures individual performance in a clear, understandable manner.

7     Bases promotion primarily on performance.

8     Gives high responsibilities to managers.

9     Acts in responsible manner towards environment, discrimination, etc.

10 Explains reasons for decisions to subordinates.

11 Has managers who give attention to individual's personal problems.

12 Allows individuals to adopt their own approach to job.

13 Is always ready to take risks.

14 Tries to improve communication between departments.

15 Delegates decision-making to lowest possible level.

16 Encourages competition among members as a way to advance.

17 Gives recognition when deserved.

18   Encourages cooperation more than competition.

19 Takes a long-term view even at expense of short-term performance.

20   Challenges persons to give their best effort.

21 Communicates how each person's work contributes to firm's 'big picture'.

22   Values effectiveness more than adherence to rules and procedures.

23   Provides life-time job security.

However, the key is that each manager is asked to rank each of the 23 questions above on a scale of 1-5 in each of the following 3 contexts:

  • Rank each of the 23 values 1-5 as to how you feel should be emphasized at a company, whether or not they appear at your present company? (what ought to be)
  • How were things at your firm before the merger? (what was)
  • How do things appear now at the acquiring firm? (what is)

The answers were then used in the following formula to obtain the Perceived Culture Compatibility (PCC) index (Veiga et al, 2000):


PCC = S OTBi [(OTBi - WASi) - (OTBi - ISi)] / 23

           i = 1


Each manager would have his own PCC index and they could be averaged or combined into whatever groupings are needed to identify the compatibility issues.  For example, the results could be grouped by company to determine if the executives of one company think differently about the cultural compatibility than the other.

In addition to Killman (1985), BearingPoint Management & Technology Consultants also proposed using a culture compatibility analysis early in the pre-merger phases (Spilling & Hoien, 2007).  However, they proposed a simpler focus on five key areas that are the most likely to be a challenge for smooth transitions: leadership, governance, communication, business processes, and the performance/rewards system.  Although some might say that Viaga’s 23 issues can be grouped into these 5 categories of issues, Viaga touches more on important human/people issues than Spilling and Hoien.  It is the specificity and concreteness given by Viaga’s 23 values that are the strength of the PCC index.

The bottom line is that cultural issues affect integration costs and risks.  So, it is important to have an understanding of these issues for a potential merger before the valuation is finalized.  The type of integration needed is potentially different for each project.  So, the earlier the cultural compatibility analysis begins the better (Spilling & Hoien, 2007).  This data should be factored into the valuation of the acquisition, should be weaved into the due diligence, and finally, becomes crucial to the pre-merger integration planning and post-merger integration, in increasing layers of detail.

Furthermore, in order to encourage earlier application of the cultural compatibility analysis, an acquiring company should not start shopping for a target until it has evaluated its own culture.  The results of this analysis, and the identification of the “ought to be’s” (Viega et al, 2000) that are lacking in the acquiring company should be factored into the search and initial filtering of potential targets.  In other words, if the company knows the real situation with its own culture and wants to change it in a particular way, acquiring a company that behaves as it ought to makes it easier to change the acquiring company’s culture for the better and more in line with what the management wants for the company.  In this way, M&A can actually help a company achieve cultural improvements.

Prescience of cultural incompatibilities and costly problems is one way in which M&A valuation can be improved with a cultural analysis.  However, cultural investigations of the target can also reveal cultural advantages that can produce quantifiable synergy when merged into the acquiring company.  I will give two examples of culture that is economically beneficial to the merged organization.

One example of this is cultural diversity; not just numerical diversity, but even distribution of cultural diversity amongst management levels and functional areas of the company.  Cox and Blake (1991) have linked real competitive advantage with this type of fully integrated diversity, pointing out these quantifiable advantages:

  • An increase in minority composition of the workforce gives companies with cultural diversity an advantage in hiring and retaining employees, because they are perceived as more accepting of those groups of people.
  • A diverse workforce contains better knowledge of more markets.
  • Work team heterogeneity promotes better problem solving, better decisions, and increased innovation and creativity.
  • Minority traits can be used to strategic advantage. For example, it has been proven that women have a higher tolerance for ambiguity; bilinguals exhibit more divergent thinking and cognitive flexibility, etc.
  • A greater tolerance of different cultural viewpoints should encourage openness of new ideas in general.

Another example of economically beneficial culture is the learning organization concept.  In 1997, Marsick and Watkins developed a learning organization cultural measurement called the Dimensions of the Learning Organization Questionnaire (DLOQ).  In 2003, a group of researchers showed a positive correlation between these dimensions and the financial performance of a corporation (Ellinger et al., 2003).  So, if the target company has engrained these concepts (continuous learning, dialogue and inquiry, team learning, embedded system, system connection, empowerment, and provide leadership) and the acquiring company wishes to grow in this area, the target brings a quantifiable synergy that should affect the value of the target to the acquiring company.

Cultural and Human Factors are Long Overdue in Due Diligence

The initial evaluation occurs when the acquisition opportunity arises.  Due diligence usually starts after an agreement in principle is established.  It is the process of evaluating the synergy/fit of the potentially acquired company to the goals of the acquisition plan.  So, what are the key features of due diligence?

The mechanics of the due diligence phase are aided by the free exchange of information between the acquiring company and the target.  Initially, this is started with a confidentiality agreement and the establishment of a real or virtual “data room”.  These days, the data room is almost always virtual, although it is common for at least the acquiring company to maintain a “war room” where the virtual data room is accessed and research, discussions, and meetings occur.  This physical space is usually held confidential and made available only on a “need to know” basis, because the leadership of the acquiring company doesn’t want to inadvertently create rumors, which can create unnecessary stress in the organization(s).  Protecting corporate document privacy is serious business in M&A, as any breach of confidentiality can leave everyone legally exposed.  In some cases, the buyers need to remain anonymous.  In all cases, the companies involved have to be segregated in their access to information.  For an example of a virtual data room environment, check out Merrill’s DataSite (Merrill, 2011).

In a typical (i.e. non-culturally centered) due diligence, both the target and acquiring companies provide financial statements, business plans, legal documents, etc.  Interviews and site visits are scheduled and conducted in order to share information.  Then, the acquiring company does research on customers, suppliers, industry experts, regulators, trade organizations, market research firms, etc.  The goal of all of this is to further ideate synergies and validate provided information.

There is typically a checklist to follow, since there are many facets in this investigation.  The checklist produced by Ian Giddy (2007), for example, is a good start, but it doesn’t have a culture section.  Appendix 2 starts with this checklist and adds a section on the cultural aspects of due diligence indicated by this study.

What cultural and human factors should be considered and added into best practices for the acquisition due diligence process?  Most due diligence checklists don’t include a consideration or review of cultural aspects.  The same is true of the strategic goals of the acquiring company.  First, it is important for an acquiring company to understand itself culturally (in detail).  With this information, the due diligence process should evaluate whether these cultural dimensions are present in or compatible with the target acquisition.  It is something like “flow”, in other words if an acquirer wants to change its culture, it should prioritize its potential targets that are a little toward the resultant culture the acquirer wants, but not too far from where it is currently (Csikszentmihalyi, 2004).

Typical cultural touch points are management styles and trust level, communication styles, power structure, key employees, innovation levels, current stress level, management’s skill with acculturation, social controls (team focus, transition teams, orientation programs, mentoring, etc.), HR turnover, level of ethnocentrism, diversity tolerance, tolerance of ambiguity, tolerance of change, median age and educational level of employees, etc.  As Moran and Panasian said, “culture is as fundamental for organizations as personality is for individuals” (2005, pp. 9-10).  Imagine not considering the personality of a potential new hire!

Salama et al (2003) believes that finding acquisition targets that are a perfect cultural fit is less likely than planning to manage the cultural differences that are uncovered.  Lack of awareness of the extent of the cultural work that will be needed to realize synergy is at the root of the high failure rate.  To this end, a more thorough culturally focused evaluation and due diligence can help, as long as the superset of people during integration have the management skills to effect the needed cultural change.

Cultural Aspects of Deal Structure and Negotiation

This phase of an M&A process starts with the completion of the due diligence phase before it.  Previous steps provide a price range (collar) and list of negotiation issues to consider.  Many decisions need to be made in this structuring/negotiating phase, such as possible alternatives to M&A for the buyer and the seller, the price, the form of payment, the form of acquisition, and other terms, such as employment of target management, board membership, and the details in the purchase contracts.  This is easily the most complex phase of the M&A process.  And, there are many decisions made in this phase that impact the cultural and human aspects of the M&A, which, as mentioned before, are crucial for M&A success.

This phase of the process can take anywhere from one month to upwards of a year.  A KPMG survey of M&A determined that 22% of completed acquisitions took 1-4 months for this phase, and 40% of them took 4-8 months.  So, a rule of thumb appears to be about six months.

It is during this time (and before) that executives are reluctant to make public or corporate announcements about the M&A.  They are concerned about unexpected changes in value due to market reaction while valuation and negotiation are still going on.  Since the terms have not been finalized, they think they will do more harm by involving more employees in the deal.  In addition, as mentioned above, there are often legal requirements for secrecy.

Unfortunately, this approach results in increased centralization and decreased management communication with employees.  The consequence is an increase in rumors and increased uncertainty-based stress in the organizations, because employees are becoming less trusting in their secretive leadership and start to think the worst about how such a major change will affect their particular situation.  There has been at least one empirical study (Leana & Feldman, 1989) that suggests that advance notices of M&A to staff cause no significant reduction in productivity or increase in absenteeism and turnover.  On the contrary, if people are not brought in the loop soon, reduced productivity and increased absenteeism and turnover will set in and become difficult to displace later (Appelbaum et al., 2000a).

In addition, when leaders become isolated they can make poor decisions.  A strong desire to “make it happen” can create blindness especially to cultural clash, since this is a qualitative judgment with no numbers staring in the leader’s face.  The culture must be examined at many levels to get a complete picture.  It is very easy to underestimate cultural differences and their impact (Sidorov, 2003).  Also, it is easy for leaders with little experience in implementing mergers to oversimplify the management skills needed to pull it off.  Often, the skills for putting together the deal are very different from those required to handle the acculturation issues (Sidorov, 2003).

It is extremely unhealthy and counterproductive for leaders to ignore the very real turmoil in the rank-and-file (Appelbaum et al., 2000a).  During this time, it is productive that employees know the financial and strategic situations that are driving the search for this kind of growth.  Change required of people during the merge phase will go smoother if more people truly understand the reason behind the change (Bridges, 1991).  If more people are involved in the search for culturally compatible targets, deal structuring and research, there can be more thoroughness, rigor, and innovation in the deal.

Katty Marmenout studied employee sensemaking in the M&A environment for her PhD dissertation (2010).  The article cited is based on her research on the effects of the deal characteristics (culture clash potential, degree of planned integration, position in the deal structure) on employee sensemaking (perceived cultural similarity, perceived power, and perceived uncertainty) and on the resultant employee reactions (intention to leave, willingness to collaborate, anticipating conflict, anticipation of satisfaction).  Although I have some issues with the method of using students to role play after being stimulated with designed typical corporate communications, there were some interesting findings that can be used to suggest characteristics of an effective M&A communication program.

One of the things learned in Marmenout’s study (2010) is that the ability of leadership to communicate the anticipated potential for culture clash and the planned level of integration is strongly mediated by the employees’ previous direct or indirect experience.  In other words, it did not matter that announcements said that the cultures were similar and/or the plan was to independently maintain the acquired company (not merge them); the employees didn’t believe them.  On average, one fifth of them had been personally involved in a merger, half of them knew someone who had been involved in a merger, and virtually everyone had been exposed to negative aspects of mergers through the press.  Apparently a history of failed trust and changes in the integration plan made it harder for leaders to mediate these uncertainties.  This implies that these two aspects of the deal structure will take extra effort in the communication program.

In deciding on price, a range of valuations from the previous phase are considered.  Ian Giddy (2007n) says that 80% of buyers put a high relevance on the discounted cash flow method of valuation, followed distantly by earnings based multiples, adjusted present value, and expected value/scenario analysis.  The buyer must decide between a fixed or adjustable price, such as that facilitated by a fixed share-exchange ratio, floating share-exchange ratio, or a price within a range (a collar).  Another pricing-related issue is making sure that the purchase agreement includes provisions for adjusting the price based on any pre-closing changes in working capital.

As mentioned in the valuation section of this paper, the Perceived Culture Compatibility index should be known for the acquiring company, along with a clear understanding of the “ought to be” cultural characterizations that the M&A is targeted to help achieve.  According to Schein (1990), culture operates on the levels of observable artifacts, values, and basic underlying assumptions.  Yet, influencing culture is much more involved than poster artifacts, overlooked values articulated in the mission statement, and process rules that are not universally followed.  The comparison of the actual cultures at play in the target company will take many resources to uncover and it is probably best if several acquiring company employees are involved in the analysis.  Included in the price collar for the deal must be a plan identifying which culture is to survive or which aspects of one culture will be combined with those of another.  This must be deliberate, not freely evolving, and implies that the acquiring company’s leadership is culturally evolved and is deliberate about its cultural trajectory.

There are several alternatives to M&A that should be considered by both parties.  On the target side, it may have to select between more than one strategic buyer, or maybe even a financial buyer.  In addition, it may be able to consider an IPO, LBO, leveraged recapitalization, or its own restructuring plan.  On the buyer’s side, obviously it could (and probably will) consider multiple targets.  Or, it could decide to negotiate a deal with key target shareholders, tender an offer directly to the target shareholders (with cash or stock exchange, unrestricted or limited ownership, single or multi-tiered), or gradually accumulate stock (called a toehold) and change the target’s board.

Especially if the employees of either side have ownership in the company, any of these alternatives mentioned above will have major cultural and organizational behavior implications that could and probably should affect deal structure, as well as the likelihood of implementation success and therefore the realistic valuation of synergies.  The disposition of the target company executives in the deal structure is particularly critical.  These are usually the most productive and innovative employees and are likely to be affected most by a merger.  Marmenout’s study (2010) suggests that it is important to structure the deal such that key employees of the acquired company are allowed to maintain high perceived power in the consolidated company.

Basically, the name of the game in M&A is control of the target by the buyer and this is often perceived by the acquired as a hostile act.  As indicated above, the buyer has many options on which way to proceed to obtain control of the target.  Since this is a common environment that especially public companies face, the business/legal world has evolved many takeover defenses, such as poison pills, shark repellants, golden parachutes for board members and other senior managers, etc..  This is the mine field that acquirers must tread carefully.

A poison pill is the term given to a variety of rights written into the bylaws of corporations, such as preferred flip-over stock, flip-over rights, flip-in rights, and poison put bonds.  Shark repellant is the term given to various provisions, such as limitations on board changes, limitations of shareholder actions, supermajority rules, anti-greenmail limits on share repurchases, fair price provisions, supervoting stock exchange rights, reincorporation, etc.

If the takeover defenses don’t work, a target has additional options, such as finding another buyer that is willing to pay more and control less (called a “white knight”), buying back its own shares from the buyer at a higher price (greenmailing), buying the buyer (called a “Pac-Man Defense”), an employee share ownership plan (ESOP), divesting a part of the business to make the target a less attractive takeover, going private, or liquidating.  All’s fair in love and war!  However, all of these responses are typically aired in the public light, so they serve also to increase cultural/human stress in both companies. 

It should be noted that sometimes the boards of targets are at odds with the shareholders in these takeover scenarios.  This could be exacerbated by significant ownership by senior management and board members.  This is one advantage of board members not owning substantial amounts of stock; that they are fully independent and can fully represent the shareholders as a group. Matthias Brauer (2006), who is cited in more detail in the Post-merger Integration, Restructuring, and Divestiture section of this paper, has some interesting things to say about agency issues in divestiture that probably apply here as well.  He determined that shareholding Directors that were more involved in the operation of the company were more likely to encourage divestiture, and weak internal governance or agency problems are positively correlated to divestiture versus dissolution as a solution to poorly performing business units.  So, especially in the deal structuring and negotiation phase, the M&A team need to pay attention to the possibility of agency issues, even all the way to the top.

Even the form of payment can have a significant impact on the M&A.  The one choice that is often preferred by the target’s shareholders is a cash offer.  However, it is not uncommon for the buyer to offer stock in their own company (options here are voting, non-voting, or convertible preferred with or without mandatory dividends).  In addition, a buyer can obtain control of the target by giving the target a secured, unsecured, or convertible note (a loan).  Payment in kind (i.e. barter or delayed interest or stock) is also common, such as the exchange of real or intellectual property, royalties, or a fee for service contract.  In the case of future performance risk, buyers can negotiate a deferred earnout, contingent upon the target attaining certain milestones/benchmarks during a specified period after the closing (i.e. net revenues, net sales, net income or some other formula).  There are many ways to skin a cat.

The form or structure of the acquisition is another dimensional variable.  It can be a stock acquisition, an asset-only acquisition, or a statutory merger (two corporations with all assets and liabilities are combined; then one disappears).  It is even possible that the structure can be deferred, based on target performance.  For example, the structure could initially be a standalone acquisition but become a merger if certain performance milestones/benchmarks are not reached by a certain time.  This has significant cultural/human aspects, as it is essentially a human and organizational performance “carrot”.

The structure affects the ability of the transaction to support minority shareholders (purchase of stock, yes; merger, no) and the tax implications of the deal.  As a general rule, a transaction is taxable if the target’s shareholders receive something other than buyer’s stock.  Since many key employees of public companies may own stock, the deal structure choice will impact them and, therefore, may influence their opinion of the transaction.  Not only is this a potential agency conflict, but it may impact deal culturally.

The actual negotiations between the buyer and seller are typically (75%) company-to-company (KPMG survey).  Sometimes (25%) there is a limited auction between buying bidders.  Of the typical transactions, 70% did not involve a third-party corporate finance advisor during the negotiation.  The purchase agreement contains all the deal implementation details and is typically drafted after basics of the deal have been negotiated.  However, common features of purchase agreements include conditional renegotiation of price/terms and a break-up fee (now commonly around 3.5% of the deal.

Show Me the Money:

Financing (Skip if Bored With Typical MBA Stuff)

What are the essential features of leveraged buyouts (LBO)?  How can one structure the financing of an LBO to raise the funds needed in an acquisition without losing control?  Are there any cultural and human resource aspects of M&A financing?

The amount of money the acquirer needs to make the deal happen is usually more than the acquisition price (the total consideration; including cash, stock, receivable notes, and assets).  If any debt is assumed in the deal, it must be added to the total consideration to establish total purchase price, or enterprise value (don’t confuse this with acquisition price or total consideration).  Actually, the purchased price (or enterprise value) is the total consideration plus any other assumed liabilities and less the after tax value of the proceeds of selling redundant assets (divestitures).  But, the amount to be financed is only the cash portion of the purchase price, plus any debt that will be immediately repaid and any restructuring costs.  So, the amount to be financed is quite different than the amount the seller considers to be the total consideration.

Once the acquiring company knows the amount it will need, how does it typically finance the M&A?  Basically, in very general terms, the choices are simply: debt, equity, or mezzanine/hybrid financing.

Loans and/or bonds are almost always at least part of the financing source for acquisitions.  If the debt raises the debt-to-equity ratio far above normal for that industry, the term “leveraged financing” is used to describe the debt.  Because such debt is risky for the loaner, the interest rate is higher than normal debt.  Traditionally, if the interest rate is 150 points or more above the London Interbank Offer Rate (LIBOR), it is considered a highly leveraged loan.  If bonds are issued and they are independently rated below BBB, they are considered below investment grade and the company is therefore highly leveraged.  Another source of debt financing is the seller itself, usually through a performance-related earnout (i.e. if synergies are actually realized), or a warrant convertible to stock in the acquiring company.

Second lien asset-backed loans are becoming a popular way to finance M&A.  They are more senior than unsecured loans and have a better default standing than equity.  These typically use an auction process, so the recipient usually gets a better deal than most of types of mezzanine financing.  The best candidates are companies that have defensible market positions and are focused on repaying debt instead of high growth and/or capital expenditures that have a need of $20-$150M.

Mezzanine financing is listed between senior debt and equity on the balance sheet.  It is typically a combination of subordinated debt and equity components to sweeten the deal for the longer term.  Because it shares characteristics of both debt and equity, these instruments are often called hybrid securities.  Mezzanine financing allows companies to secure more capital than with a pure equity or debt investment approach.  One example of mezzanine financing is high-yield private bonds with sweeteners.  High-yield bonds (non-investment-grade bonds, speculative-grade bonds, or “junk” bonds) are bonds that are rated below investment grade at the time of purchase.  These bonds have a higher risk of default, but typically pay higher yields than better quality bonds in order to make them attractive to investors.  As additional sweetener issuers sometimes offer warrants and rights, which allow the holder to either convert securities into stock at a later date or purchase shares at below-market prices.  Another type of security issue useful in obtaining financing for M&A is the warrant security, which entitles the holder to buy underlying stock of the issuing company at a fixed exercise price until the expiry date.   Another is participation financing, where a loan is shared by a group of banks that join to make a loan that is too big for any one of them alone.  However, these are tricky for both the group of banks and the loanee because there is often not a clear single decision maker on the bank group’s side.

Another hybrid financing mechanism for M&A is highly subordinated pay-in-kind (PIK) high yield medium-term notes, often issued by holding companies of leveraged issuers.  A PIK loan is a type of loan which typically does not provide for any cash flows (including interest) from the borrower to the lender between the drawdown date and the maturity or refinancing date.  One characteristic of this type of financing is that it typically does not lower the rating of the issuing holding company because the recipient does not have an obligation to pay cash interest during the life of the loan.  PIK loans are typically unsecured (i.e. not backed by a pledging of assets) or have a deeply subordinated security structure (e.g., third lien).  Maturities usually exceed five years and in a standard offer, the loan carries a detachable warrant (the right to purchase a certain number of shares of stock or bonds at a given price for a certain period of time) or a similar sweetening mechanism to allow the lender to share in the future success of the business, making it a hybrid security.

A leveraged buyout (LBO) is another hybrid financing scheme that involves an acquiring firm buying some stock of a target, plus loaning it money in exchange for a controlling interest via new issues of preferred stock, sometimes with mandatory dividends.  The purchased company is expected to pay the loan interest and principle over a 3-7 year time frame.  Typically, the existing managers of the target company are encouraged to invest in the common stock of the target, resulting in 10-30% ownership in the company, so as to align the operational management with the LBO firm’s interests.

This type of financing can create a vibrant startup type of culture within the target company.  Initial debt-to-equity will be high, but an aggressive payoff schedule results in a much lower debt-to-equity ratio over a 3-5 year period.  The free cash flow of the target is used to pay off the interest plus buy down the principal.  The LBO firm’s loan can be used by the target to buy back the common stock outstanding, less that purchased by the managers.

One of the advantages of being highly leveraged is that it forces the managers to improve performance and operating efficiency in order to make the loan payments.  It encourages the management team to divest itself of non-core and/or underperforming businesses, invest in capital improvements to improve efficiency, cost cutting, etc.  However, this financing approach can have unforeseen cultural impacts, leadership dependencies, etc.  Typically, an LBO firm can gain control of a target by putting up only 20-40% of the total purchase price if it brokers the loaned amount.  This, in itself, can create some resentment in the employees of the acquired company, especially those that are shareholders.

Pure equity financing is used when shares of stock or ownership in the acquiring company are issued to public or private investors in exchange for cash or ownership in the acquired company.  Either common or preferred stock can be issued.  The issue can be made to the public, to a private equity fund, or to venture capitalists.  Often, venture capitalists will favor convertible preferred equity.  This allows the investors to participate in the growth of the company, but maintains liquidity in case the venture fails.  An added benefit for the investor is that the share value can be hidden from taxes.  Financing M&A with equity typically lowers the leverage of the company, i.e. lowers the debt-to-equity ratio, which tends to help prop up the share market value.

It is difficult to recognize any specific cultural issues that are related to just the financing aspects of M&A.  The deal structure has many more cultural overtones than how the money is obtained.  On the other hand, whether an acquisition is friendly or not has a large impact on the overall flavor of the deal and the cultural tone during the integration.  An LBO has the potential to change a low-energy status quo culture to a survivor start-up culture, which can be an improvement, depending on the leadership skills of the invested managers.  On the other hand, if some of the managers resent the lenders because they have influenced other shareholders and taken control of a company that was previously at least partially in their control, the financing could be said to negatively influence the culture (i.e. employee turnover could increase).

Pre-Merger Integration Planning, Post-merger Integration, Restructuring, and Divestiture

During pre-merger integration planning, it is vitally important the executive staff establish the communication program up front.  This is not the time to let it evolve.  Management should initiate a communications program and start to put transition and human support systems into place (Burke, 1987) during the pre-merger stages.  These should be in progress before the public or corporate announcement of the deal.  And, as mentioned before, these activities should be the normal function and strategic value of the Human Resources people in the company.  Lengle and Daft suggested (1988) that richer communication media is needed for less routine and less trusted messages.  Accordingly, these two aspects of the deal should be reinforced with face time with the leadership, time for questions and answers, etc. rather than being addressed in a distributed announcement.

Another thing Katty Marmenout learned while studying employee sensemaking in the M&A environment for her PhD dissertation (2010) was that the acquiring company’s employees are likely to expect the acquired company’s employees to be resistant to assimilation.  People seem to project their own feelings about how they themselves would react in the other person’s shoes without believing someone who asked the other people how they were viewing the merger.  So, this issue should also be addressed in high bandwidth communication media.

Finally, Marmenout’s data highlighted the fact that higher perceived power does not directly reduce perceived uncertainty, and the stress that goes with it (2010), even though it did reduce the intention to leave the company and increase the anticipated satisfaction.  This means leadership should not assume that the group of people who will have higher power in the merger will be less affected by uncertainty stress.  It also implies that an effective communication program will tailor messages to particular groups of people segregated according to sensemaking conclusions.

The post-merger integration is where the cultural “rubber meets the road” in M&A.  Sadly, many acquiring companies don’t communicate to and involve the middle managers and other key employees until the deal hits this phase.  This is the main reason for the failure of so many mergers.  In an enlightened company, most of the key employees of both the acquirer and acquired are in the loop, know why this is happening, and have bought into the strategy, overall terms of the deal, and the integration and divestiture plans (i.e. there are no surprises).  In such companies, the employees become an evangelistic asset toward realizing the company’s goals, versus being a liability stressed to the point of ineffectiveness, resignation, or worse (an overall “fun sucker” or troublemaker).

Fulmer and Gilkey (1988) make an interesting observation that pre-merger language within the acquiring firm tended toward romantic notions of winning and conquest, fueled by the excited use of this language by the media.  However, post-merger language became a language of commitment and hard work (i.e. the “honeymoon was over” and the family was the most important concept).  They think the language metaphors are not coincidental; that they reflect the true beliefs of the leaders of the affected organizations.  In fact, the Fulmer and Gilkey paper continued in the analogy by equating a merged acquisition to a teenager in a re-blended family!  The merged company’s (and the teenager’s) reactions typically include:

  • Anxiety and uncertainty
  • Helplessness and rejection
  • Divided loyalties
  • Withdrawal and avoidance
  • Conflicts over new values

Almost all of the literature regarding the cultural aspects of M&A stresses the importance of early, frequent, detailed, and accurate communication from the senior leadership to the employees.  In the negotiation and deal structure section of this paper, the importance of a communication strategy and plan being in place prior to entering this integration and restructuring phase of the M&A process is emphasized.  Every aspect of the M&A deal potentially impacts the culture and individuals in both companies.  Perceptions of uncertainty are the enemy.  Early, deliberately planned, and skillfully delivered communications are the key weapons.

Anyone who has raised a teenager can relate to this analogy and the need for superior and frequent communication to realize success.  Fulmer and Gilkey (1988) recommend the following interventions taken from a book entitled Structural Enrichment Programs for Couples and Families (L’Abate & Weinstein, 1987):



New structure and systems

Active communication from CEO and other leaders to reaffirm basic structure and clarify controls and reporting relationships.

The power of outsiders

Have inside transition team in place, involve all managers, consider acquired company a merger, clarify mission, strategy, and role of external players.

Territorial battles

Use transitional rites events as social mechanisms that reinforce acceptance of the new order.

The question of who fits in

Communication to clarify individual job status, role, and reporting relationships.  Use reassurance and feedback mechanism to communicate.

Start-up problems

Use key leadership figures, the media, and all communication mediums to build a new culture.  Use leadership skills to acculturate.

Davy et al (1988) surveyed employees at two separate time frames of a firm experiencing a merger integration.  What they found is that the initial expectation of layoffs was very high (82%), that they might experience a change in pay and benefits (58%), and that there would be a reorganization (58%).  Later surveys indicated a lowering of job security and organization commitment, coupled with a rising of feelings of lack of control, distraction, competitive behavior amongst employees, guilt, and intent to be absent.

Their recommendation for leadership during this phase of the M&A is to:

  • Communicate with employees early and often.
  • Find out what employees expect to occur and synchronize with leadership’s plans.
  • Reduce uncertainty and ambiguity through communicate. This includes telling employees when actions are uncertain or undecided.
  • Address the issue if layoffs. It is better to speak the truth and tell people what is known, when it is known.

Of critical importance to at least the integration phase of M&A are the development, selection, and application of leadership throughout the acquiring firm and especially the integrated business unit.  As mentioned before, Able (2007) said that leadership is important in executing the M&A process well, especially because people tend to look to leadership more during times of change and stress.

A group of researchers from Kennesaw State College in Georgia (Covin et al, 1997) completed a very thorough study of leadership style and abilities on overall employee satisfaction with the merger.  They verified that:

  • reward, referent, expert, and legitimate power (in that order) were positively associated with post-merger employee satisfaction,
  • coercive power was negatively and strongly associated with satisfaction,
  • an appropriate balance of consideration and structure initiating were positively associated with satisfaction,
  • charismatic and inspirational leadership approaches were positively and strongly associated with satisfaction,

While this should be no surprise, since the findings are similar to most studies of normal management situations and companies, they (Covin et al, 1997) go on to verify that the weight of these leadership attributes differ for the acquiring company employees versus the acquired company employees.  Interesting, they found that the acquiring firm’s employee satisfaction strongest predictor was reward power, followed by coercive (negatively), legitimate, and referent power.  However, the acquired firm’s employee satisfaction strongest predictor was charismatic/inspirational leadership, followed by reward power and coercive power (negatively).

Covin et al (1997) also verified that the weights differed with pay classes.  Managerial employees were most strongly influenced negatively by coercive power and positively by charismatic/inspirational leadership and consideration.  Union clerical employees were strongly influenced only by legitimate power.  Union hourly employees were most strongly influenced negatively by coercive power and positively by referent power. Salaried non-exempt employees (for example, clerks and secretarial employees) did not prefer any particular power or leadership trait in the study.

These two differences in leadership preferences are important verifications that M&A integration strategy, type of communication, and leadership abilities needs to be tailored to the different groups, employee classes, and probably even individuals (Covin et al, 1997).  It also suggests that companies wanting to establish an M&A core competency should focus its leadership development on expert, referent, and legitimate power bases, as well as transformational leadership (e.g. charismatic, inspirational, and individual consideration) traits/skills.  Mergers require significant structure initiating skills, but also require a tempering of consideration to deal with the acute feelings of loss, especially in the acquired company.

Another aspect of leadership skill that is crucial for all members of the M&A team, is decision making.  Marks and Mirvis (2011) note that acquisition decisions are made under pressure of time and vast details.  The M&A team and its leader must recognize common decision making biases and apply proven decision making tools to insure that the various go-no go decisions are consistently made well.

In addition to human-centric leadership skills development needed for M&A, Ashkenas and Francis (2000) argue that companies wanting to establish a core competency in M&A need to seriously consider having a person specifically assigned to the task of integration management.  They acknowledge that no one person is usually responsible for managing the integration process.  As an example, despite the immensity of the cultural and operational restructuring of the Bell System breakup in the ‘80s, no one was specifically charged with managing the cultural integration and divestiture (Tunstall, 1986).  Starting in the last quarter of the ‘90s, a small number of companies bent on developing M&A core competency began assigning (and even recruiting) managers to handle this portion of M&A (Ashkenas & Francis, 2000).  Since a cross-functional team is needed to focus on the entire M&A process, this integration manager is a key member (perhaps also representing the HR function), or maybe even the leader, of this team.  A good candidate for this type of position:

  • has a deep knowledge of the acquiring company,
  • has a deep confidence, yet little ego (no need for credit),
  • thrives in a chaotic environment,
  • exhibits a “responsible independence” (Ashkenas & Francis, 2000, p.115), and
  • has strong emotional, social, and cultural intelligence.

Sometimes the merger is complicated by a planned divestiture of an existing business unit or a portion of the newly merged company.  Deciding to divest an existing business unit at the same time should be avoided if possible, due to the double layer of stress on employees.  Divesting, however, can be a positive experience for some or all employees of that business unit if handled properly.

Matthias Brauer (2006) has produced an exceptional review of the existing research and literature dealing with divestiture, or the practice of companies exchanging assets for other resources, generally referring to business units.  He has noted a parallel increase in the number of divestitures with the increase in M&A since the 1980s.  However, he is quick to point out that one should not be quick to consider divestitures as “anti mergers” or “reverse mergers”, which are a method that private companies may become a public company without going through an IPO (i.e. by being acquired through a public holding company that can change its name to the acquired company’s name).  The fact is that there are many types of divestiture that are not typically associated with M&A.

Because of his broader definition of divestiture, Brauer (2006) asserts that divestiture is actually not as predominantly associated with general company losses as it is with failed mergers.  In fact, he basically believes that divestitures are getting a bad reputation because they are being used to correct poorly conceived and/or executed M&A.

Although Brauer (2006) has many conclusions on the inadequacy of current divestiture research, he has noted several conclusions from existing investigations that are applicable to this study.  In typical Swiss fashion, he lists the divestiture research in chronological order and categorizes them according to research focus (research on antecedents, outcomes, and the actual process of divesting), the theoretical lens (portfolio theory, agency theory, and transaction economics), sample size, and time period.

Brauer’s realizations include the following points (2006):

  • Financial restructuring (LBO, management buyouts, share buybacks, and recapitalizations) typically improve firm performance, whereas portfolio restructuring has only low impact on firm performance.
  • Even though the business unit leader is typically not involved in the decision to divest, successful divestitures have early involvement of divisional managers after the decision. Especially if the firm can encourage the existing manager of the divested business unit to be the leader for the new company, divestiture can be perceived as a positive change by most of the employees in the business unit.  A “spin-off” is more positively viewed than a “sell-off” or a dissolution.
  • Divestiture motivation and success are dependent on the life cycle stage of the firm. More mature firms benefit the most from divestiture strategies.
  • When firms are spun-off, they maintain more efficient internal controls and processes than their mature parents.
  • If the business unit shares less commonality with the parent is more often sold than dissolved.
  • If a firm is already highly diversified, they are more likely to divest when the economic environment becomes more volatile, whereas they are more likely to acquire when the economic environment becomes more stable.
  • When the business environment is more uncertain, firms that consolidate via divestitures outperform firms that continue to diversify through acquisitions.
  • Communication explaining the business reason for the divestiture to its employees, tend to raise perceptions of procedural justice, which encourages trust and post-divestiture commitment.
  • A large sample of public companies showed a positive correlation between the tendency to sell business units of misaligned strategy, as perceived by market analysts.
  • Firms that entered an industry by acquisition were more likely to divest compared to firms that entered the industry by other means.
  • Shareholding Directors that were more involved in the operation of the company were more likely to encourage divestiture.
  • Poor performance of the firm is the most reliable indicator of likely divestiture, as is poor performance of the business unit.
  • Debt intensity has a positive correlation to divestiture versus dissolution.
  • Weak internal governance or agency problems are positively correlated to divestiture versus dissolution.
  • Divestitures are stressful for both the parent form and the business unit managers and employees. Some managers have defined feelings similar to marital divorce.

However, Bauer (2006) points out the following flaws or omissions in the research to date:

  1. Most of the research was done in the 1980s, and based on large public Western companies.
  2. There is very limited research in the area of linkages between divestitures and joint ventures and alliances.  Bauer (2006) says that short-lived joint adventures and alliances are essentially “disguised divestitures” (p.779).
  3. There is virtually no research on divestiture of governmental segments (i.e. privatization).
  4. Few scholars have explored the relationship between divestiture theories and US anti-trust policy.

Study Conclusion

Guided by the general flow of typical M&A processes themselves, this independent study examined the literature for cultural/social/human issues in M&A.  The cultural and human focus on M&A was clearly justified for both business and humanity reasons.  A full examination of the prevalence and causes of the high incidence of cultural reasons for failed mergers was presented, along with suggestions for associated corrections for process and best practices.

A case was made for establishing the following cultural infrastructures to support M&A:

  • Mission, vision, and strategy plans, including an acquisition plan.
  • Human Resources functional department being a partner throughout the M&A business process
  • An acquisition funneling process following the M&A business process
  • Use of a Perceived Cultural Compatibility (PCC) index to measure perceptions of both the acquiring and acquired companies.
  • Use of an assessment of learning characteristics, such as the Dimensions of the Learning Organization Questionnaire (DLOQ), for both the acquiring and acquired companies.
  • Use of an assessment of diversity and tolerance of diversity for both the acquiring and acquired companies.

Infrastructure and checklist items for each step in the M&A business process flowchart in Figure 2 were summarized in Appendix 1.  A detailed due diligence checklist that includes cultural considerations was included in Appendix 2.

Leadership traits and their effects on M&A success were examined.  A case was made for leadership development focusing on expert, referent, and legitimate power bases, as well as transformational leadership (e.g. charismatic, inspirational, and individual consideration) traits/skills, decision making expertise, and possibly even a dedicated integration manager position.

In conclusion, a vision of M&A core competency that includes the important cultural and human resources has been discussed and depicted.  If M&A makes sense as a method to achieve a well thought out growth strategy, then the study presented here at least points the reader in several directions worthy of future study.  Just in time, as KPMG (2011) states that 2010 M&As are up 23% from 2009 levels, and represents the first positive gain since 2007.  It appears as if we are starting another wave…..



Appendix 1


Summary of Cultural Infrastructure and Best Practices for the M&A Business Process

M&A Business Process Step

Cultural Infrastructure Requirements

Checklist Items

Strategic Planning

Mission, vision, and strategy creation and maintenance framework that involves HR people.  Periodic updates of strategic and tactical plans.

Determine whether M&A can help achieve strategy.

Tactical Business Planning

Specify acquisition goals (i.e. diversification, innovation, revenue growth, margin improvements, etc.)

Acquisition Planning

Acquisition plans are part of strategic plan and involve HR people.  Periodic updates of acquisition plan by cross-functional team.  An acquisition funnel process is in place.

Portfolio, asset management, market value (i.e. stock price, PE ratio, etc.), margin goals, tax reduction, market share, production capacity, supply chain, product line breadth, innovation, technology, and global access goals.  Cultural change goals (diversity, learning, leadership, etc.).

Search for Targets

Employee acquisition target suggestion system is in place.

Candidates for the acquisition funnel.


An acquisition funnel process is in place with cross-functional screening process.  Pallet of screening measures with limits maintained by cross-functional team.  .  Core competency of decision making expertise in screening team members.

List of candidates in the funnel.  Grades(contribution to M&A goals) of each target.

Initial Interest Discussions with Targets

Acquisition leadership in place.  Clear responsibility.

Interest level of each target.  Agreement of targets to provide info and personnel access to consider valuation and structure.

Due Diligence

M&A communication program (M&ACP) is in place.  Due diligence checklist that includes cultural considerations.  HR involved in due diligence.  As many employees as possible should be included to help ascertain real culture of target.

See “cultural” section of due diligence checklist in Appendix 2.


M&A Business Process Step

Cultural Infrastructure Requirements

Checklist Items


Cross-functional teams and processes to review valuation, including HR.  System of creating and maintaining valuation methods that include cultural considerations, industry benchmarks, acquiring firm WACC, etc.  PCC index of acquiring firm have (including list of “ought to be”) and periodic update process. M&ACP is created and maintained.

List of special culturally related needs for due diligence and integration.  Diversity measure of targets (DLOQ).  Cultural compatibility (PCC) measure of targets.  Cultural advantages of target are evaluated.  List of cultural valuation assumptions.

Financing Considerations

Core competency of decision making expertise in M&A team members.  Access to suitable data room.

Leadership ownership and it cultural impact.

Organizational Structure Considerations

HR people involved in, maybe even leading, organizational structure.

Organizational structure of new business unit.  Changes in acquiring firm’s org structure.

Negotiation and Deal Structure

M&ACP is in place.  Core competency of decision making expertise in M&A team members. HR is included in discussions/decisions about deal structure.

Acquiring firm position in the deal.  Price collar determined.  Payment preferences, employment of target managers, board member consideration, all reviewed cross-functionally.  Alternatives to M&A for both firms have been considered.


M&ACP is in place.  Core competency of decision making expertise in M&A team members.


Integration Planning

M&ACP is in place.  Change management core competency in place within at least the HR group and integrated into the operations of the acquiring firm. As many employees as possible should be included to help identify cultural touch points and plan the integration.

Communication points requiring rich/high bandwidth channels identified.  Determine what the acquired company’s employees actually think about the M&A.  Measure uncertainty.  Determine who will be “in power”.  Action plan for all key acquired employees.


M&ACP is in place. 




M&A Business Process Step

Cultural Infrastructure Requirements

Checklist Items

Integration Implementation

M&ACP is in place. Cultural leadership development in place (i.e. transformational leadership).  Cross-functional transition team is in place, with dedicated transition manager.  Transition team is trained in change management and decision making.  Have business unit managers in place with skills suitable to the group they manage.

Periodically measure/survey employee uncertainty and stress.  Periodically measure/survey employee concerns and what they think the next steps are.  Use appropriate richness of communication (i.e. may require face time between employees and senior leaders).  Clarify mission, strategy, and roles of external players with transition team.  Periodically host transition rites events as social mechanisms that reinforce acceptance of the new order.  Use key leadership figures, the media, and all communication mediums to build a new culture.  Use leadership skills to acculturate.  Tell people what is known, when it is known.


M&ACP is in place.  Clear strategy and acquisition goals in place.

Involve target unit manager as soon as possible after decision to divest.  Determine if it is possible for target unit manager to lead the new venture.  Communicate to employees the business reason for any divestitures.  Evaluate all business units for strategy alignment.





Appendix 2

A Due Diligence Checklist (Giddy, 2007) Including Cultural and Human Resource Improvements

  1. Organization of the Company
  2. Describe the corporate or other structure of the legal entities that comprise the Company. Include any helpful diagrams or charts. Provide a list of the officers and directors of the Company and a brief description of their duties.
  3. Long-form certificate of good standing and articles or certificate of incorporation from Secretary of State or other appropriate official in the Company's jurisdiction of incorporation, listing all documents on file with respect to the Company, and a copy of all documents listed therein.
  4. Current by-laws of the Company.
  5. List of all jurisdictions in which the Company is qualified to do business and list of all other jurisdictions in which the Company owns or leases real property or maintains an office and a description of business in each such jurisdiction. Copies of the certificate of authority, good standing certificates and tax status certificates from all jurisdictions in which the Company is qualified to do business.
  6. All minutes for meetings of the Company's board of directors, board committees and stockholders for the last five years, and all written actions or consents in lieu of meetings thereof.
  7. List of all subsidiaries and other entities (including partnerships) in which the Company has an equity interest; organizational chart showing ownership of such entities; and any agreements relating to the Company's interest in any such entity.
  8. Ownership and Control of the Company
  9. Capitalization of the Company, including all outstanding capital stock, convertible securities, options, warrants and similar instruments.
  10. List of security holders of the Company (including option and warrant holders), setting forth class and number of securities held.
  11. Copies of any voting agreements, stockholder agreements, proxies, transfer restriction agreements, rights of first offer or refusal, preemptive rights, registration agreements or other agreements regarding the ownership or control of the Company.
  12. Assets and Operations
  13. Annual financial statements with notes thereto for the past three fiscal years of the Company, and the latest interim financial statements since the end of the last fiscal year and product sales and cost of sales (including royalties) analysis for each product which is part of assets to be sold.
  14. All current budgets and projections including projections for product sales and cost of sales.
  15. Any auditors (internal and external) letters and reports to management for the past five years (and management's responses thereto).
  16. Provide a detailed breakdown of the basis for the allowance for doubtful accounts.
  17. Inventory valuation, including turnover rates and statistics, gross profit percentages and obsolescence analyses including inventory of each product which is part of assets to be sold.
  18. Letters to auditors from outside counsel.
  19. Description of any real estate owned by the Company and copies of related deeds, surveys, title insurance policies (and all documents referred to therein), title opinions, certificates of occupancy, easements, zoning variances, condemnation or eminent domain orders or proceedings, deeds of trust, mortgages and fixture lien filings.
  20. Schedule of significant fixed assets, owned or used by the Company, including the identification of the person holding title to such assets and any material liens or restrictions on such assets.
  21. Without duplication from Section D below, or separate intellectual property due diligence checklist, schedule of all intangible assets (including customer lists and goodwill) and proprietary or intellectual properties owned or used in the Company, including a statement as to the entity holding title or right to such assets and any material liens or restrictions on such assets. Include on and off balance sheet items.
  22. Intellectual Property

List of all patents, trademarks, tradenames, service marks and copyrights owned or used by the Company, all applications therefore and copies thereof, search reports related thereto and information about any liens or other restrictions and agreements on or related to any of the foregoing.

  1. Reports
  2. Copies of any studies, appraisals, reports, analyses or memoranda within the last three years relating to the Company (i.e., competition, products, pricing, technological developments, software developments, etc.).
  3. Current descriptions of the Company that may have been prepared for any purpose, including any brochures used in soliciting or advertising.
  4. Descriptions of any customer quality awards, plant qualification/certification distinctions, ISO certifications or other awards or certificates viewed by the Company as significant or reflective of superior performance.
  5. Copies of any analyst or other market reports concerning the Company known to have been issued within the last three years.
  6. Copies of any studies prepared by the Company regarding the Company's insurance currently in effect and self-insurance program (if any), together with information on the claim and loss experience thereunder.
  7. Any of the following documents filed by the Company or affiliates of the Company and which contain information concerning the Company: annual reports on SEC Form 10-K; quarterly reports on SEC Form 10-Q; current reports on SEC Form 8-K.
  8. Compliance with Laws
  9. Copies of all licenses, permits, certificates, authorizations, registrations, concessions, approvals, exemptions and other operating authorities from all governmental authorities and any applications therefore, and a description of any pending contemplated or threatened hanges in the foregoing.
  10. A description of any pending or threatened proceedings or investigations before any court or any regulatory authority.
  11. Describe any circumstance where the Company has been or may be accused of violating any law or failing to possess any material license, permit or other authorization. List all citations and notices from governmental or regulatory authorities.
  12. Schedule of the latest dates of inspection of the Company's facilities by each regulatory authority that has inspected such facilities.
  13. Description of the potential effect on the Company of any pending or proposed regulatory changes of which the Company is aware.
  14. Copies of any information requests from, correspondence with, reports of or to, filings with or other material information with respect to any regulatory bodies which regulate a material portion of the Company's business. Limit response to the last five years unless an older document has a continuing impact on the Company.
  15. Copies of all other studies, surveys, memoranda or other data on regulatory compliance including: spill control, environmental clean-up or environmental preventive or remedial matters, employee safety compliance, import or export licenses, common carrier licenses, problems, potential violations, expenditures, etc.
  16. State whether any consent is necessary from any governmental authority to embark upon or consummate the proposed transaction.
  17. Schedule of any significant U.S. import or export restrictions that relate to the Company's operations.
  18. List of any export, import or customs permits or authorizations, certificates, registrations, concessions, exemptions, etc., that are required in order for the Company to conduct its business and copies of all approvals, etc. granted to the Company that are currently in effect or pending renewal.
  19. Any correspondence with or complaints from third parties relating to the marketing, sales or promotion practices of the Company.
  20. Environmental Matters
  21. A list of facilities or other properties currently or formerly owned, leased, or operated by the Company and its predecessors, if any.
  22. Reports of environmental audits or site assessments in the possession of the Company, including any Phase I or Phase II assessments or asbestos surveys, relating to any such facilities or properties.
  23. Copies of any inspection reports prepared by any governmental agency or insurance carrier in connection with environmental or workplace safety and health regulations relating to any such facilities or properties.
  24. Copies of all environmental and workplace safety and health notices of violations, complaints, consent decrees, and other documents indicating noncompliance with environmental or workplace safety and health laws or regulations, received by the Company from local, state, or federal governmental authorities. If available, include documentation indicating how such situations were resolved.
  25. Copies of any private party complaints, claims, lawsuits or other documents relating to potential environmental liability of the Company to private parties.
  26. Listing of underground storage tanks currently or previously present at the properties and facilities listed in response to Item 1 above, copies of permits, licenses or registrations relating to such tanks, and documentation of underground storage tank removals and any associated remediation work.
  27. Descriptions of any release of hazardous substances or petroleum known by the Company to have occurred at the properties and facilities listed in response to Item 1, if such release has not otherwise been described in the documents provided in response to Items 1-6 above.
  28. Copies of any information requests, PRP notices, "106 orders," or other notices received by the Company pursuant to CERCLA or similar state or foreign laws relating to liability for hazardous substance releases at off-site facilities.
  29. Copies of any notices or requests described in Item 8 above, relating to potential liability for hazardous substance releases at any properties or facilities described in response to Item 1.
  30. Copies of material correspondence or other documents (including any relating to the Company's share of liability) with respect to any matters identified in response to Items 8 and 9.
  31. Copies of any written analyses conducted by the Company or an outside consultant relating to future environmental activities (i.e., upgrades to control equipment, improvements in waste disposal practices, materials substitution) for which expenditure of funds greater than $10,000 is either certain or reasonably anticipated within the next five years and an estimate of the costs associated with such activities.
  32. Description of the workplace safety and health programs currently in place for the Company's business, with particular emphasis on chemical handling practices.
  33. Litigation
  34. List of all litigation, arbitration and governmental proceedings relating to the Company to which the Company or any of its directors, officers or employees is or has been a party, or which is threatened against any of them, indicating the name of the court, agency or other body before whom pending, date instituted, amount involved, insurance coverage and current status. Also describe any similar matters which were material to the Company and which were adjudicated or settled in the last ten years.
  35. Information as to any past or present governmental investigation of or proceeding involving the Company or the Company's directors, officers or employees.
  36. Copies of all attorneys' responses to audit inquiries.
  37. Copies of any consent decrees, orders (including applicable injunctions) or similar documents to which the Company is a party, and a brief description of the circumstances surrounding such document.
  38. Copies of all letters of counsel to independent public accountants concerning pending or threatened litigation.
  39. Any reports or correspondence related to the infringement by the Company or a third party of intellectual property rights.
  40. Significant Contracts and Commitments
  41. Contracts relating to any completed (during the past 10 years) or proposed reorganization, acquisition, merger, or purchase or sale of substantial assets (including all agreements relating to the sale, proposed acquisition or disposition of any and all divisions, subsidiaries or businesses) of or with respect to the Company.
  42. All joint venture and partnership agreements to which the Company is a party.
  43. All material agreements encumbering real or personal property owned by the Company including mortgages, pledges, security agreements or financing statements.
  44. Copies of all real property leases relating to the Company (whether the Company is lessor or lessee), and all leasehold title insurance policies (if any).
  45. Copies of all leases of personal property and fixtures relating to the Company (whether the Company is lessor or lessee), including, without limitation, all equipment rental agreements.
  46. Guarantees or similar commitments by or on behalf of the Company, other than endorsements for collection in the ordinary course and consistent with past practice.
  47. Indemnification contracts or arrangements insuring or indemnifying any director, officer, employee or agent against any liability incurred in such capacity.
  48. Loan agreements, notes, industrial revenue bonds, compensating balance arrangements, lines of credit, lease financing arrangements, installment purchases, etc. relating to the Company or its assets and copies of any security interests or other liens securing such obligations.
  49. No-default certificates and similar documents delivered to lenders for the last five (or shorter period, if applicable) years evidencing compliance with financing agreements.
  50. Documentation used internally for the last five years (or shorter time period, if applicable) to monitor compliance with financial covenants contained in financing agreements.
  51. Any correspondence or documentation for the last five years (or shorter period, if applicable) relating to any defaults or potential defaults under financing agreements.
  52. Contracts involving cooperation with other companies or restricting competition.
  53. Contracts relating to other material business relationships, including:
  54. any current service, operation or maintenance contracts;
  55. any current contracts with customers;
  56. any current contracts for the purchase of fixed assets; and
  57. any franchise, distributor or agency contracts.
  58. Without duplicating Section D above, contracts involving licensing, knowhow or technical assistance arrangements including contracts relating to any patent, trademark, service mark and copyright registrations or other proprietary rights used by the Company and any other agreement under which royalties are to be paid or received.
  59. Description of any circumstances under which the Company may be required to repurchase or repossess assets or properties previously sold.
  60. Data processing agreements relating to the Company.
  61. Copies of any contract by which any broker or finder is entitled to a fee for facilitating the proposed transaction or any other transactions involving the Company or its properties or assets.
  62. Management, service or support agreements relating to the Company, or any power of attorney with respect to any material assets or aspects of the Company.
  63. List of significant vendor and service providers (if any) who, for whatever reason, expressly decline to do business with the Company.
  64. Samples of all forms, including purchase orders, invoices, supply agreements, etc.
  65. Any agreements or arrangements relating to any other transactions between the Company and any director, officer, stockholder or affiliate of the Company (collectively, "Related Persons"), including but not limited to:
  66. Contracts or understandings between the Company and any Related Person regarding the sharing of assets, liabilities, services, employee benefits, insurance, data processing, third-party consulting, professional services or intellectual property.
  67. Contracts or understandings between Related Persons and third parties who supply inventory or services through Related Persons to the Company.
  68. Contracts or understandings between the Company and any Related Person that contemplate favorable pricing or terms to such parties.
  69. Contracts or understandings between the Company and any Related Person regarding the use of hardware or software.
  70. Contracts or understandings regarding the maintenance of equipment of any Related Person that is either sold, rented, leased or used by the Company.
  71. Description of the percentage of business done by the Company with Related Persons.
  72. Covenants not to compete and confidentiality agreements between the Company and a Related Person.
  73. List of all accounts receivable, loans and other obligations owing to or by the Company from or to a Related Person, together with any agreements relating thereto.
  74. Copies of all insurance and indemnity policies and coverages carried by the Company including policies or coverages for products, properties, business risk, casualty and workers compensation. A description of any self-insurance or retro-premium plan or policy, together with the costs thereof for the last five years. A summary of all material claims for the last five years as well as aggregate claims experience data and studies.
  75. List of any other agreements or group of related agreements with the same party or group of affiliated parties continuing over a period of more than six months from the date or dates thereof, not terminable by the Company on 30 days' notice.
  76. Copies of all supply agreements relating to the Company and a description of any supply arrangements.
  77. Copies of all contracts relating to marketing and advertising.
  78. Copies of all construction agreements and performance guarantees.
  79. Copies of all secrecy, confidentiality and nondisclosure agreements.
  80. Copies of all agreements related to the development or acquisition of technology.
  81. Copies of all agreements outside the ordinary course of business.
  82. Copies of all warranties offered by the Company with respect to its product or services.
  83. List of all major contracts or understandings not otherwise previously disclosed under this section, indicating the material terms and parties.
  84. For any contract listed in this Section I, state whether any party is in default or claimed to be in default.
  85. For any contract listed in this Section I, state whether the contract requires the consent of any person to assign such contract or collaterally assign such contract to any lender. NOTE: Remember to include all amendments, schedules, exhibits and side letters. Also include brief description of any oral contract listed in this Section I.
  86. Employees, Benefits, and Contracts
  87. Copies of the Company's employee benefit plans as most recently amended, including all pension, profit sharing, thrift, stock bonus, ESOPs, health and welfare plans (including retiree health), bonus, stock option plans, direct or deferred compensation plans and severance plans, together with the following documents:
  88. all applicable trust agreements for the foregoing plans;
  89. copies of all IRS determination letters for the foregoing qualified plans;
  90. latest IRS forms for the foregoing qualified plans, including all annual reports, schedules and attachments;
  91. latest copies of all summary plan descriptions, including modifications, for the foregoing plans;
  92. latest actuarial evaluations with respect to the foregoing defined benefit plans; and
  93. schedule of fund assets and unfunded liabilities under applicable plans.
  94. Copies of all employment contracts, consulting agreements, severance agreements, independent contractor agreements, nondisclosure agreements and non-compete agreements relating to any employees of the Company.
  95. Copies of any collective bargaining agreements and related plans and trusts relating to the Company (if any). Description of labor disputes relating to the Company within the last three years. List of current organizational efforts and projected schedule of future collective bargaining negotiations (if any).
  96. Copies of all employee handbooks and policy manuals (including affirmative action plans).
  97. Copies of all OSHA examinations, reports or complaints.
  98. Company Culture and Social Assessments
  99. List of all managers of people, assets, or projects, including;
  100. description of employee types they manage;
  101. management style and/or description of strengths and power structures used;
  102. trust level from subordinates and peers;
  103. communication style;
  104. skill with guiding acculturation;
  105. skill with decision making;
  106. skill with change/transition management;
  107. entrepreneurial level/skills; and
  108. education level, including college degrees and majors/minors, significant certifications.
  109. List of all key employees, along with the reason they are key and their positions and compensation.
  110. An assessment of the innovation level throughout the company, especially in marketing and product development.
  111. An assessment of the current stress level among the employees.
  112. List of all social controls (e.g. teams, transition teams, orientation and mentoring programs, OJT programs, etc.).
  113. Human resource turnover for each company department.
  114. An assessment of the level of ethnocentrism and diversity tolerance (i.e. DLOQ, etc.), by business unit.
  115. An assessment of tolerance of ambiguity and change, by business unit.
  116. Median age and educational level of employees, by business unit.
  117. Results of any formal employee surveys.
  118. Copy of any strategy or tactical planning documents.
  119. An assessment of the role played by the Human Resources department (i.e. are they a partner or a player?).
  120. An assessment of learning culture.


  1. Tax Matters
  2. Copies of returns for the three prior closed tax years and all open tax years for the Company (including all federal and state consolidated returns) together with a work paper therefor wherein each item is detailed and documented that reconciles net income as specified in the applicable financial statement with taxable income for the related period.
  3. Audit and revenue agents reports for the Company; audit adjustments proposed by the Internal Revenue Service for any audited tax year of the Company or by any other taxing authority; or protests filed by the Company.
  4. Settlement documents and correspondence for last six years involving the Company.
  5. Agreements waiving statute of limitations or extending time involving the Company.
  6. Description of accrued federal, state and local withholding taxes and FICA for the Company.
  7. List of all state, local and foreign jurisdictions in which the Company pays taxes or collects sales taxes from its retail customers (specifying which taxes are paid or collected in each jurisdiction).
  8. Miscellaneous
  9. Information regarding any material contingent liabilities and material unasserted claims and information regarding any asserted or unasserted violation of any employee safety and environmental laws and any asserted or unasserted pollution clean-up liability.
  10. List of the ten largest customers and suppliers for each product or service of the Company.
  11. List of major competitors for each business segment or product line.
  12. Any plan or arrangement filed or confirmed under the federal bankruptcy laws, if any.
  13. A list of all officers, directors and stockholders of the Company.
  14. All annual and interim reports to stockholders and any other communications with securityholders.
  15. Description of principal banking and credit relationships (excluding payroll matters), including the names of each bank or other financial institution, the nature, limit and current status of any outstanding indebtedness, loan or credit commitment and other financing arrangements.
  16. Summary and description of all product, property, business risk, employee health, group life and key-man insurance.
  17. Copies of any UCC or other lien, judgment or suit searches or filings related to the Company in relevant states conducted in the past three years.
  18. Copies of all filings with the Securities and Exchange Commission, state blue sky authorities or foreign security regulators or exchanges.
  19. All other information material to the financial condition, businesses, assets, prospects or commercial relations of the Company.





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Giddy, I. (2007f).  The LBO of ISS.  Case study from NYU M&A class, by Ian Giddy, professor. Retrieved 11-5-11 from URL: http://people.stern.nyu.edu/igiddy/cases/iss_lbo.htm

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