Cultural due diligence

CDD aims to investigate the culture of the other party in an M&A in order ‘to gather information that will assist in decision making and risk analysis’ (Carleton and Lineberry, 2004: 51). Table 11.1 provides a few definitions from the literature.

Three basic insights emanate from these definitions: First, CDD is more than just a simple culture analysis but rather an instrument for a thorough examination and evaluation of the corporate cultures of partners engaged in a merger or an acquisition. Second, CDD serves as an early identification of potential cultural risks (Blöcher, 2004), which should decisively influence the PMI strategy (Carleton and Lineberry, 2004) or foreclose the deal in case of irreconcilable cultural differences and barriers (Schneck, 2007). Third, for these reasons, CDD should by no means play a subordinate role in comparison to the traditional due diligence areas (Schneck, 2007).

Carleton and Lineberry (2004: 69) emphasise that, as with ‘any sound organisational research, a CDD process [should] employ both qualitative and quantitative data collection’. They distinguish between ‘off-the-shelf’ and ‘customised’ CDD processes. ‘Off-the-shelf’ assessment models are generally based on quantitative data only. They do not differentiate between value-based and non-value-based differences, lack attention to detail and hence assume a ‘one size fits all’ (Carleton and Lineberry, 2004: 56). ‘Customised’ CDD processes, on the other hand, are seen to combine a qualitative research design, including interviews, focus groups and workplace observations, with a customised quantitative survey (Carleton and Lineberry, 2004).

Even though the design of a CDD is, as Blöcher (2004) maintains, little standardised (but determined by the specific needs of the involved companies), Carleton and Lineberry (2004) and Schneck (2007) provide a reasonably simplified CDD process model that draws on both qualitative and quantitative data (see Figure 11.1).

The first step in a CDD process is an acquirer self-assessment (1). This is to detect prevailing problems within the acquiring firm and to provide a solid basis for a comparison with the cultures of potential target firms (2–3). If a potential target is selected, a high-level CDD assessment of the target firm is undertaken (4). Given the access problems in the pre-deal phase, a high-level CDD assessment remains more of an estimate rather than the scientific mapping of the target culture. What follows is an assessment of the executive team’s compatibility (5) and of the ability to retain key people (6). In the ‘post-letter of intent/acceptance’ phase, steps 3–6 are typically repeated in order to prepare a detailed cultural profile of the target organisation and to identify potential cultural risks and conflict areas (Zimmer, 2001). Risks and conflict areas, in turn, indicate the cultural difficulties the sociocultural PMI process is expecting.

Sociocultural post-merger integration management

A large number of theoretical and empirical studies stress the importance an effective sociocultural PMI has for the success of M&As (Cartwright and Cooper, 1993; Pablo, 1994; Quah and Young, 2005). Building on the distinction between task and human integration, Birkinshaw et al. (2000) argue that the higher the level of human integration in the early stages of the PMI, the easier and more effective the integration of tasks later. Homing in on this finding, Stahl and Voigt (2008) argue that the impact cultural differences have on the integration process, especially on human integration, should be thoroughly analysed and used in order to realise M&A synergies successfully. Despite some slight differences in definitions, these authors all agree that the lower the level of cultural integration, the higher the likelihood of post-M&A problems due to an insufficient or slow-paced task integration.

The difficulty of integrating different corporate cultures after deal is often attributed to a strong resistance to change that organisations face in general and in particular after M&As. Kotter and Schlesinger (2008) identify four common reasons for resistance to change based on their analysis of numerous successful and unsuccessful organisational changes. Parochial self-interest relates to people’s fear that the change will cause them to lose something of value. Another extremely important reason for resistance to change is misunderstanding and lack of trust. In this case,

Figure 11.1 CDD process model

employees do not comprehend the impact of the change and think that it might cost them more than they will benefit from it. People might also resist change when they assess the situation differently from their supervisors and perceive the costs involved as higher than the benefits, not only for themselves but for the entire organisation. The fourth reason – low tolerance for change – emerges when people fear they will fail to meet new expectations in terms of skills and behaviour initiated by the change.

Given the overarching importance of overcoming such resistance to change, the last three decades have seen a growing body of research on key success factors that positively influence post-merger human integration. The majority of authors argue that the following interdependent factors require particular attention.

The link between cultural due diligence and sociocultural post-merger integration management

While a few studies focus on pre-deal CDD (Blöcher, 2004; Zimmer, 2001; Schneck, 2007), most studies that show an interest in cultural integration issues exclusively look at PMI management (Pablo, 1994; Stahl and Voigt, 2008; Quah and Young, 2005; Birkinshaw et al., 2000), essentially following Haspeslagh and Jemison’s (1991: 132) assertion that ‘all value creation takes place after the acquisition’. Thereby, these latter studies more or less all neglect to mention that value creation might start long before the merger or acquisition contract is signed. There are a few exceptions, such as Kotter and Schlesinger’s (2008) proposition that communication should start prior to the deal in order to prepare the people for the change. However, even these studies ignore the fact that this requires a solid understanding of the prevailing corporate cultures at both the target and the acquirer firms, which can be attained only through an in-depth cultural analysis before any attempt is made to combine the two organisations. Although still widely neglected in practice as well as in theory, recent findings indicate that attentively connecting pre- and post-merger phases may improve M&A performance in general (Weber et al., 2011). Gomes et al. (2013) see the source of the overall negligence of a holistic process approach (e.g. Jemison and Sitkin, 1986; Haspeslagh and Jemison, 1991) in the fact that advocates of this process approach have tended to focus on either one of the stages, rather than connecting the critical success factors of the pre- and post-merger stages.

Summing up, it turns out that the link between pre-deal CDD and PMI management has been largely ignored by researchers. Hence, it is the aim of this chapter to fill this gap by examining the value a CDD entails for sociocultural PMI management in depth.

The Clean Room

In August 2001, one month before the merger was announced, the companies’ CEOs Carly Fiorina (HP) and Michael Capellas (Compaq) decided each selected a senior executive from their respective companies to be in charge of the integration effort (Burgelman and Meza, 2004). Fiorina chose executive vice-president Webb McKinney, while Capellas appointed Jeff Clarke, Compaq’s chief financial officer (Burgelman and McKinney, 2006). Together, McKinney and Clarke headed the ‘Clean Room’, in which a Clean Team was able to concentrate exclusively on the merger integration, away from the day-to-day distractions of the still operating – and competing – companies (Burgelman and Meza, 2004). The term ‘Clean Room’ originated in the health and computer chip industry, where work is done in separate, spotlessly clean environments in order to avoid contamination. In the M&A context, ‘contamination’ means the flow of confidential information merging companies are not allowed to exchange due to competition rules (Koob, 2006). Hence Clean Room members were permitted to ask their non-Clean Room colleagues for information, but they were forbidden to discuss any integration matters with them (Allen, 2012).

The Clean Room model enabled the merging companies to work on integration plans even though the deal still lay ahead (Koob, 2006). With an initially small, dedicated thirty-person team of project managers, OD experts, consultants and analysts (Burgelman and Meza, 2004), Clarke and McKinney began the integration work (Allen, 2012). During the following six months, the Clean Team ultimately grew to about 2,500 people (Allen, 2012), who all ceased working on daily business operations and instead focused exclusively on the immense integration workload (Burgelman and Meza, 2004). The key objective of the Clean Team’s work was to enable the merged company to ‘open its doors and hit the ground running on day

Figure 11.3 HP–Compaq merger timeline

one’ (Allen, 2012: 51). By March 2002, the Clean Team had already worked an estimated 1.3 million hours on creating a road map for how to mesh the two long-term competitors into a single firm (Lohr, 2002).

Within the Clean Room environment, small, discrete post-merger integration teams were formed according to a ‘Noah’s Ark’ model – a buddy system that was designed to avoid a potential us-versus-them mentality (Burgelman and Meza, 2004). The underlying idea was to match each HP manager with a Compaq counterpart, with these pairs working under the central Post-Merger Integration Office (Central Programme Management Office; CPMO), as illustrated in Figure 11.4 (Allen, 2012). In order to discuss and review their integration plans and proceedings, the Clean Teams met every week in person. Within the Clean Room, an ‘adopt-and-go’ approach was applied. This essentially meant identifying and selecting the best practices among both firms throughout the merged company (Tam, 2002). This encompassed business models, processes, products, as well as cultural cornerstones, such as corporate values and objectives. Anything that was not identified as best practice was to be eliminated (Harvey, 2002; Allen, 2012; Burgelman and Meza, 2004). Technically, the adopt-and-go approach operated a traffic light system for the 10,000-plus adopt-and-go decisions that had to be made: completed or ahead-of-schedule projects were marked green; projects that were on track were yellow; and those that were behind schedule were red. This approach allowed the combined firms to move fast once the merger received clearance (Allen, 2012). Clarke argued that the adopt-and-go strategy later prevented ‘politicking’ among employees, as they were aware that the Clean Room decisions were not up for discussion, only for execution (Burgelman and McKinney, 2006: 24). In order to supplement the adopt-and-go approach, Susan D. Bowick, HP’s executive vice-president of human resources and workforce development, introduced the ‘launch-and-learn’ approach, which legitimised fast decision-making to achieve good – but not necessarily perfect – decisions (Burgelman and McKinney, 2006: 25). Finally, this fast decision-making was supported by the principle of ‘getting the dead moose on the table’, which entailed frank discussions among the teams in order to solve emerging conflicts before the integration of the merging firms took place (Burgelman and Meza, 2004; Burgelman and McKinney, 2006; Allen, 2012).

The Clean Team was closely linked to the Steering Committee, which consisted of a small group of high-ranking senior executives (as illustrated in Figure 11.4) who made quick decisions and had the authority to insist on their execution (without running into lengthy discussions).

Cultural integration team

Within the Clean Team and as a sub-PMI team, the Cultural Integration Team (CIT; see Figure 11.4) was established to ensure an effective and fast cultural integration of the two companies (Burgelman and Meza, 2004; Allen, 2012). The CIT, consisting of HP and Compaq employees as well as some external consultants from Mercer Delta, was introduced immediately after the merger announcement (Tam, 2002). While the Clean Room itself was developing a new corporate culture through jointly planning the ‘new HP way’, the CIT was launched solely to examine the cultural differences between the two firms. It did this by conducting an extensive CDD throughout both companies (Allen, 2012). The CDD consisted of 127 individual executive interviews and 138 focus groups that in turn assembled 1,500 managers and individual contributors in 22 countries (Stachowicz-Stanusch, 2009). A large-scale survey was rejected after due consideration as this might have confused employees and could have created uncertainty feelings among the personnel (Allen, 2012). In line with that, Elise Walton, then senior partner at Mercer Delta and a CIT consultant, explained that ‘qualitative data was much more valuable [as] we were able to do a content analysis of all comments and the output was immediately useful’ (quoted in Allen, 2012: 52).

Figure 11.4 Merger integration team organisation chart

The CDD assessment revealed many differences between the two strongly established corporate cultures. The major cultural differences are summarised in Table 11.2.

The CDD data was then included in Clean Room decisions, especially concerning human resources, organisational design and structure, staffing of key positions, reward and compensation plans, as well as executive selection (Allen, 2012). Hence, by April 2002, HP announced the names of 150 senior managers who would be in charge of key positions in the new HP’s four business lines and international corporate functions. In order to ensure a strong integration effort, pre-merger HP and Compaq both offered retention bonuses to about 8,200 key people, of which only 10 per cent were in executive positions (Burgelman and Meza, 2004). These retention bonuses amounted to 50 per cent of the recipients’ salaries plus ‘target bonuses’ and were paid in two rates, one upon deal closure and the second after the first year (Fried, 2002).

For the design and launch of the new HPQ culture, the CIT implemented a so-called ‘living systems’ approach that preferred a communicative and participative form over a top-down method of change (Maturana and Varela, 1980). In line with that, questions such as ‘Which values and objectives of the two companies should be preserved?’ and ‘What should be created?’ were asked in order to generate an evolutionary set of cultural cornerstones (Allen, 2012). Then the adopt-and-go approach was applied to pick the best of what existed between the two corporate cultures (see Figure 11.5). Paul Brandling, a long-standing HPQ employee, noted that the underlying bedrock values were teamwork, trust and respect, speed and agility. He further argued that, given that the two corporate cultures would accept those, ‘they will start to shape attitudes and behaviours which eventually flesh out into culture’ (quoted in Boyd, 2002: 2).

Once the new cultural cornerstones were agreed, the CIT started to share them in interactive sessions with the various Clean Teams (marketing, HR, etc.) (Allen, 2012). These sessions included a ‘mirror exchange’ exercise in which HP and former Compaq employees had to describe one another, for instance through the use of sports analogies (Tam, 2002). Along with this exercise, the CIT created an employee website that featured a monthly ‘culture-in-action’ story, illustrating the pre-merger cultures while at the same time highlighting the preserved cultural values. These activities were designed to foster employee engagement and create a mutual cultural awareness and understanding among the two workforces (Allen, 2012).

The Fast-Start programme

The CIT also introduced a ‘Fast-Start’ programme, an integration workshop programme that aimed to accelerate the work of the newly integrated teams. In April 2002, before the Fast-Start programme was initiated and before merger day one, HP held a two-day ‘Leadership Readiness Summit’ with 300 Compaq and HP leaders to launch the new approach (Tam, 2002). The leaders were supplied with all of the necessary material and knowledge to share within their respective offices (Allen, 2012). Fast-Start consisted of ten modules that newly assigned managers had to walk through in their teams’ kick-off meetings, which were attended by HP and former Compaq employees (Stachowicz-Stanusch, 2009). These modules could be completed either in two consecutive full days or split into two-hour sessions over one or two weeks (Allen, 2012), but they had to be completed within the teams’ first thirty days (Stachowicz-Stanusch, 2009). The completion of the Fast-Start programme was mandatory for all levels of the firm and its results were tied to the new HPQ balanced scorecard and manager compensation (Tam, 2002). The major objectives of these Fast-Start sessions were to accelerate HPQ’s cultural integration and to establish the team cohesion that would drive execution and bring forth the newly combined corporate culture (Stachowicz-Stanusch, 2009). By October 2002, more than 17,000 Fast-Start sessions had taken place (Allen, 2012).

Figure 11.5 The values and objectives of the new HP – integrating the best of both cultures

HPs cultural integration strategy

According to Nahavandi and Malekzadeh’s (1988) acculturation model, HP’s and Compaq’s acculturation mode could be identified as ‘integration’. This implies that HP as well as Compaq cherished and wished to preserve their own cultures while at the same time perceiving the other firm’s corporate culture as very attractive. In the HPQ merger this degree of congruence regarding acculturation preferences led to low acculturative stress and hence to a higher likelihood of achieving cultural synergy. The acculturation congruence in the HPQ merger was a given as both companies were willing to adopt some cultural values and objectives from the other firm while also giving up some of their own, as required by the adopt-and-go approach. Further, HP’s extensive efforts concerning its CDD activities and the associated integration mode were in line with Blöcher’s (2004) empirical study, which revealed that a CDD is typically applied by acquirers who strive for a high degree of integration.

Likewise, the type of cultural integration strategy adopted by HP and Compaq strongly matches Haspeslagh’s and Jemison’s (1991) cultural integration model. More specifically, the integration strategy can be identified as a ‘symbiosis merger’ in which the best practices of both firms are combined, leading to cultural integration. According to Haspeslagh and Jemison (1991), a truly symbiotic merger can be achieved only when both organisations adopt the original characteristics of the partner firm. The intention to achieve symbiosis is recognisable, for instance, in HP’s adopt-and-go approach and in the Noah’s Ark model. The intention was to retain an optimal interaction between the merging organisations through an evolutionary change process. The key here is that the change process was evolutionary rather than revolutionary. Following O’Toole (cited in Carleton and Lineberry, 2004: 19), ‘anthropology indicates that culture changes in one of two basic ways, revolution and evolution, and attempts at revolutionary culture change always fail; it is the shared experience and common history of a group over time that changes the culture’. In line with this, HP’s new cultural cornerstones were designed according to an evolutionary set of cultural values and objectives, also influenced by its adopt-and-go approach.

As already indicated, the remarkable effort HP put into its CDD procedure shows a high desire for cultural integration. The various CDD activities within the Clean Room laid the perfect foundation to ensure timely cultural integration, while the Clean Teams developed a new culture, particularly the CIT, which focused exclusively on examining the various cultural factors and helped to create the necessary cultural awareness and understanding between the two corporate cultures.

The link between CDD and PMI

In order to examine the actual value of the CDD for the PMI in the HP–Compaq case, we will now analyse the extent to which the CDD facilitated an enhanced fulfilment of the PMI key success factors: communication, trust, speed and retention of key people.