Microsoft, Activision Blizzard, and importance of cultural due diligence in M&A

Rarely do cultural considerations play a role in the dealmaking process itself, often overshadowed by financial and legal ramifications. Yet, culture often plays a critical role in whether a merger or acquisition ultimately succeeds or fails.

“We’ve all heard the adage ‘culture eats strategy for breakfast.’ That implies culture plays a pivotal role in the success or failure of a transaction, and it does,” said Angie Gorman, managing director in the strategic communications segment at FTI Consulting.

Culture defines a company’s values and principles; how senior leaders communicate and walk the talk; how managers manage; how employees are treated, awarded, and disciplined; what employee benefits are provided; how people bring their whole selves to work every day; how businesses process ebb and flow together; and the skill sets required to achieve business objectives.

Gorman put it succinctly: “Culture means ‘the way we do things around here.’”

No two companies define culture the exact same way, which is why cultural considerations in a merger and acquisition (M&A) deal are so important. “When you negate the culture, it takes a lot longer to create synergies,” said Jennifer Busse, M&A integration and separation leader with RSM US.

Case studies. A company deeply rooted in efficiency and technology is culturally very different from a brick-and-mortar business driven by values and personalization. Consider, for example, Amazon’s acquisition of Whole Foods in 2017.

Cultural incompatibility also can potentially arise if the deal brings with it an overall lack of trust among employees in the leadership of the newly merged or acquired company. Such situations should be handled delicately.

A recent high-profile example is Microsoft’s planned acquisition of Activision Blizzard, a video game developer marred by a rash of sexual harassment and discrimination allegations. On a Jan. 18 investor call discussing the acquisition, Microsoft Chairman and Chief Executive Satya Nadella explicitly stated culture is his “No. 1 priority” and that “the success of this acquisition will depend on it.”

“This means we must continuously improve the lived experience of our employees and create an environment that allows us to constantly drive everyday improvement in our culture,” Nadella said. “This is hard work. It requires consistency, commitment, and leadership that not only talks the talk, but walks the walk. That’s why we believe it’s critical for Activision Blizzard to drive forward on its renewed cultural commitments.”

Nadella said he is “supportive of the goal and the work Activision Blizzard is doing,” but also recognized “that after close, we will have significant work to do in order to continue to build a culture where everyone can do their best work.”

The departure of Activision Blizzard CEO Bobby Kotick, who reportedly ignored sexual misconduct allegations for years, might be part of that cultural overhaul. “Post-close, I will be available as needed,” Kotick cryptically told a New York Times reporter.

Both the boards of directors of Microsoft and Activision Blizzard have approved the transaction, which is subject to customary closing conditions and completion of regulatory review and Activision Blizzard’s shareholder approval. The deal is expected to close in fiscal year 2023.

Due diligence. Given how different two companies’ cultures can be, like the examples mentioned above, many executives struggle with how to align culture in practical terms.

“Aligning and integrating two cultures requires ongoing work, including communication and engagement, leadership development, and reinforcing the processes that support ‘the way we do things around here.’”

Angie Gorman, Managing Director, FTI Consulting

“We don’t recommend doing a full deep dive culture assessment pre-close,” Gorman said. Rather, it’s more practical to start by doing a “shallow dive,” she said, looking for cultural gaps that might create stumbling blocks right away and slow progress at a time when the new company needs to capture the value it promised.

One way to achieve that: Engage a third-party consultant to conduct an independent cultural assessment of both companies, which will be especially helpful for gauging each other’s perceived culture. “You get interesting insights about how you perceive not only yourself and the other party, but also how the other party perceives you,” said Gabe Langerak, Western Europe leader for M&A consulting at Willis Towers Watson.

Ensure communications, ethics and compliance, and human resources have a seat at the table at this stage. They’re going to be able to understand a lot about the two cultures just by being a part of that process, Gorman said, which will help them be more effective in the integration process later.

Cultural integration. “After the first 100 days or so is when you want to do the deep dive,” Gorman said. “Take the time to, at a minimum, do some in-depth leadership interviews.”

“This is the time to involve leaders below the C-suite to help define culture and identify changes that need to be made to achieve the new vision,” Gorman added. Practically speaking, that means holding a series of leadership workshops, for example, to discuss what needs to change about the culture and what should stay the same.

Analyzing publicly available data, conducting employee engagement or pulse surveys, and focus groups also can provide further context and details about culture. Gorman said employee engagement and pulse surveys should include questions that seek to determine how well employees understand the company’s vision and values and how strongly they buy into them; how they view leadership behavior in keeping with stated values; whether they believe they can do their jobs effectively in the new environment; and whether they intend to stay.

“One thing you want to do is build into these surveys enough demographic questions so that you can identify where you may still have conflict in the organization between the legacy cultures,” Gorman said. “It may be doing well in some parts of the company. It may be lagging in other parts.”

Communication, engagement, and change leadership. “Aligning and integrating two cultures requires ongoing work, including communication and engagement, leadership development, and reinforcing the processes that support ‘the way we do things around here,’” Gorman said. From a communication standpoint, that means ongoing reinforcement about the progress being made, which can be issued in many forms, including newsletters, town halls, or emails directly from the CEO, she said.

Engagement is also important for building employee confidence and trust, including conversations in staff meetings and workshops about progress being made during the implementation stage. Part and parcel with that step is leadership training on change leadership.

Change leadership is all about understanding and supporting employees from an emotional standpoint during times of change, helping them see and understand the vision of the new company and empowering and encouraging them to contribute in a positive way to that vision. “Leaders don’t need to be change managers, but they do need to be change leaders,” Gorman said.

Key performance indicators. Not properly taking the time to ensure the newly merged cultures align with one another can lead to lost productivity, low employee morale and engagement, and high employee turnover—all key cultural metrics to be audited and monitored. “If you suddenly see your turnover increase, that’s a red flag,” Langerak said.

Busse recommended not only monitoring and measuring turnover, but also the reason behind it: “Where is the turnover occurring? By location? By manager? By team? You have to view those metrics together.”

Exit interviews can be another valuable performance indicator. Understanding an employee’s motivation for taking an interview with another company can tell you a lot about the culture, Busse said.

Loss of productivity is another red flag, Langerak said. Productivity loss could be indicative of a lack of clarity among employees on how to get things done or low employee morale.

In any merger or acquisition, “it is not necessary to bridge all the gaps,” Langerak said. “Sometimes, it’s just being aware of the gaps.” Like a marriage, he said, it’s not about taking on all the values of your partner, but rather acknowledging how each complements the other and makes the other better and stronger.