As often happens post-merger or acquisition, when people try to prove their value, they can be tempted to make decisions differently. Their motivations shift from being “what’s best for the business?” to “what do I need to do to keep my job?” There is a perceptible transition from being business-focused to self-preservation-focused.
As an ethics or compliance leader engaged in merger and acquisition (M&A) due diligence, you may feel your primary responsibility is to ensure you don’t “buy into” another company’s mistakes. Your energy is focused on rooting out legacy problems. Comprehensive due diligence, however, equally needs to consider the post-deal environment from a culture standpoint. Will the company leaders and the workforce of your acquisition make decisions that reflect your values? Are the forecasted valuation targets reasonable (that is, rooted in reality), or could they force otherwise honest leaders to cut corners or make decisions differently for fear of losing their job?
The question to ask yourself during M&A due diligence is: “Will the post-deal expectations allow leaders to make the right decisions for the business?”
Here are three critical realities to keep in mind as you pursue your M&A due diligence:
Don’t underestimate the effect of a merger or an acquisition on people’s decision-making process. Every merger and acquisition deal results in a new set of bosses and work colleagues and a new set of expectations. Even former co-workers who may have worked alongside each other for years can change their behavior to accommodate new leadership expectations. Everyone is wondering what their future role will be. This can create a “survival of the fittest” environment, which in turn can influence people’s decision-making, and not always for the better.
After an M&A deal, people have two jobs: the one they were hired for and the second job of ensuring post-deal integration success. Managing both jobs can lead to cutting corners. When new growth strategies are defined during deal due diligence, determining what resources will be required isn’t straightforward. Particularly if frontline leaders’ input isn’t solicited due to confidentiality constraints, frontline leaders can subsequently find themselves under-resourced for what they expect to deliver post-deal. The burden of doing two jobs can be overwhelming and further complicated when the second job has unreasonable expectations attached to it. This, in turn, can lead to cutting corners and compromising in areas that might typically see more rigor.
Trust can erode when frontline leaders feel blind-sided by the deal announcement. One of the great ironies of M&A deal activity is that trust, a key ingredient for business success, often quickly dissolves as M&A due diligence is typically cloaked in secrecy. Frontline leaders, in particular, can feel blind-sided when a deal is announced, and they didn’t see it coming. As I shared in my HBR article, this can create an “us vs. them” dynamic between executives and the frontline leadership. A perception that senior management is making money off of midlevel leaders and teams’ hard work can emerge. Such erosion of trust can lead to unexpected, sometimes vengeful behavior by frontline leaders or teams.
With these realities in mind, ethics and compliance leaders might not recognize that their role in M&A due diligence is far more important than initially considered. No other executive in the due diligence process will have the insights and expertise to highlight the possibility for compromised behavior when the defined growth strategies are unrealistic. E&C leaders, therefore, need to play a critical role in voicing the post-deal behaviors that can emerge due to hard to attain business valuations before the “deal is done.”