TOM STEWART: When companies combine, cultures clash. We'll talk about the cultural perils of M&A on the next episode of The Market that Moves America.

INTERVIEWER: Welcome to The Market that Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities

TOM STEWART: Today's podcast is about company culture, and in particular, about what happens to the feeling of a place after a merger or acquisition. That's often a bad news story. But it doesn't have to be.

I'm Tom Stewart. I'm the Executive Director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research group studying mid-sized companies, which account for a third of private sector employment and GDP and the lion's share of economic growth. It is indeed the market moves America. The National Center for the Middle Market is a partnership between Ohio State and Chubb, Grant Thornton LLP, and Cisco Systems.

I have a special guest with me today, Jennifer Fondrevay. Jennifer runs an M&A consultancy called Day One Ready out of her offices in Chicago. Jennifer, welcome to The Market that Moves America.

JENNIFER FONDREVAY: Thank you, Tom. Great to be here.

TOM STEWART: Let me begin with a little bit of data just to set the stage, a couple of points about corporate culture, which are sort of the unwritten rules that shape behavior and, to a surprising degree, drive performance. The National Center for the Middle Market has just completed a study of high-performance culture in mid-sized companies. One key finding is that a strong culture matters. When employees and others really get a strong sense of what it's like to work here and the kinds of expectations they have, that's associated with much stronger growth than cultures that are fragmented or cultures that are kind of a muddle and weak.

But secondly, in addition to strength, the type of culture matters. And some companies emphasize creativity and innovation. Some emphasize being a great place to work. Some emphasize technical excellence, just great products and services. And cultures with those emphases are associated with stronger growth than cultures that are penny pinching or risk averse, or even that are too customer centric. Jennifer, in your experience, does the impact of culture on performance surprise you?

JENNIFER FONDREVAY: No. No, not at all. Prior to launching my M&A consultancy, I was a marketing executive with a Fortune 500 company for 25 years. So I absolutely appreciate the power of culture. It's interesting you make distinctions. I think that's so important. I think the power of culture-- it's underestimated how valuable it is, not only in how it helps motivate employees internally, but how it can galvanize employees for external benefit, as well. And I've seen that. I've had a chance, as a marketer, to actually tap into that. So the power of culture is not to be underestimated.

TOM STEWART: Yeah, one of the things we find in the study, also, is that the power of culture is associated with employee engagement, employee-- the ability to attract good people and to retain them.


TOM STEWART: But it's also associated-- I mean, customers pick up on it. And a strong, vibrant culture is one that attracts and retains customers as well, often quite directly.

JENNIFER FONDREVAY: Absolutely. And I think more companies are figuring out the benefit of tapping into culture, not only to serve the customer, but how to really enhance what your employees take away and feel valued by, within that sphere of culture.

TOM STEWART: One thing that we learned in the study-- and we've seen this also in another study that we did about M&A-- is that a culture that might be humming along really well, it can often come under tremendous strain when there's a major transition. I mean, that could be a CEO transition. But the biggest transition is M&A, sometimes being bought, and sometimes buying something else. In fact, leaders tell us that culture is just about the hardest part of M&A, and can really, really affect the success of the deal. You've been researching that.

JENNIFER FONDREVAY: Yeah. You know, it's interesting. And it's why I love that your research makes a distinction between the types of cultures that there are. And I definitely-- I can say from my research, culture is one of the biggest struggles post-M&A deal. And I think what I've seen through the research is it tends to not be the focus in deal negotiations. It's typically an afterthought. And understandably-- I mean, the fixation just becomes getting the deal done.

But by not paying attention to culture and appreciating the distinctions of different cultures, you can really-- you can jeopardize the success of the deal overall. And that, you know, I've experienced three multi-billion dollar acquisitions. And so I had my own theories. But the research-- and I've interviewed, now, about 80 executives for my book-- the research really proved out that if you don't pay attention to culture early on in the negotiations and appreciate the distinction of your one company's culture over another, you do so at your own peril.

TOM STEWART: One of the things that I think is interesting is I think sometimes buyers, in particular, underestimate how sticky and stubborn the culture of the organization that they're buying is. They often assume they'll just do it our way because we've acquired them. And they may not even be aware that there are differences in culture.

JENNIFER FONDREVAY: Absolutely. You know, it's fascinating to me. And again, it just came up again and again as I was interviewing executives. What looks good on paper-- so the best example I can give you is you'd have a high-end product line company that merges with a company whose product line is on the lower end. And that makes absolute sense on paper. Right now, we've got a broader portfolio.

But what can happen is it creates what I call us and them dynamic. It's that companies will have two very different approaches, typically, in how they serve their customer. And that creates conflict. And so that us and them dynamic can really underline the ability to bring two companies together.

TOM STEWART: You just mentioned sort of two of those cultural archetypes we're talking about. One is that technical excellence, high quality, nothing but the best-- you know, Bose speakers kind of thing. And that leads to one sort of kind of decisions. Yeah, you need a little bit extra money for this? That's fine. That's no problem.

Versus the kind of thing where you say, well, wait a minute. This is a-- you've got to be really efficient. You've got to mind all your costs. You know, don't spend an extra penny because our margins are thin. And you can have very different informal decisions as well as the executive committee meeting, figuring out what the budget's going to look like.

JENNIFER FONDREVAY: Yeah. And you know, it was interesting. That's where executives tended to highlight their greatest lessons learned, the assumption that now I've got a broader portfolio, my sales team will be thrilled, right? More to offer!

But you're asking people to go out and sell, now, a broader portfolio when they've been-- let's say, again, we'll talk if they'd been previously playing in the high-end space, but now they're equally supposed to offer low-end, traditionally that sales team will have been saying, you don't need that low-end product. We've got what you need. And now you're asking them to act completely different in their customer engagement. And so that's why I love your distinction around the culture piece, because if it's not thought through early on, it can wreak havoc on your ability to serve your customer.

TOM STEWART: And one of the things I'm thinking about is particularly for mid-sized companies, where our research suggests that often, they have more intimate, close relationships with customers than, perhaps, large enterprises do, fewer customers know them better-- often niche players. And if you add an adjacency to a niche, you may break up that dynamic that is one of the competitive advantages of being middle market.

JENNIFER FONDREVAY: Yeah. And you're really, again, it makes sense on paper, right? We've got a bigger portfolio. But now you're asking people to sell in a different way. And particularly given today, right, when we're talking about how important those relationships are and the authenticity and transparency, now you've got-- and I focus on sales teams because at the end of the day, it's their ability to sell, right? Now they've got to kind of go back and say, well maybe what I told you before wasn't so true, because now I've got other products I want to offer you.

TOM STEWART: Yep. And I think sales forces are often the canary in the coal mine when it comes to culture. One of the things that's interesting is you wrote a fabulous HBR article about how in a deal, in the process of an acquisition, tribes can form. Can you talk a little bit-- you mentioned one of them, the old company, my old company versus your old company, us versus them, as one right tribes. But there are other tribes.

JENNIFER FONDREVAY: Yeah, do you know what was fascinating? So, culture gets a lot of attention. But what was most interesting to me during the research that I was doing is that you can have what I call an us versus them dynamic. And the obvious one is our company versus their company, right? We just spent some time just talking about that now.

But there are other ways that it manifests. The two that I found is you'll have executives versus front-line leaders. That's another us versus them dynamic that emerges. And then the who stays versus who goes.

And all of these manifest at different points and in different ways. But the tribal aspect of this, you know, people kind of just dig into their position. And it's very hard, if you haven't appreciated that this is going to happen, to think through how do we better manage this so this us versus them dynamic doesn't occur. So much attention is paid on our company versus their company, but it's not on these other ways that that dynamic plays out.

TOM STEWART: So the executive versus everybody else, I sort of think about that as like, all right. So we're the executive team. We're in the boardroom. We know what's going on, right?


TOM STEWART: And everybody else is still [INAUDIBLE] looking, pressing their noses to the glass, saying what are they doing to us? And they are making decisions about our lives. And in the meantime, we in that room might be, indeed, forcing ourselves to be less empathetic about those people outside, because we have to make some tough decisions here. So you could get that sort of dynamic.

JENNIFER FONDREVAY: Yeah, and my research showed that that aspect-- executives versus front-line leaders-- can be the most destructive, because you can have a company where everyone was working together fabulously well. But then a merger and acquisition will take place. And suddenly, you can have front-line middle management feel like they're blindsided. They weren't involved in the decision-making. Now suddenly they're handed a vision and a strategy to execute that they don't believe in, are feeling as though now I've got more work, while our executive leadership is making off better in this deal. And that can be so destructive.

TOM STEWART: Yeah. And you could also, of course, often-- that's the another piece, of course, is that in some cases, the executive team may be standing to get a pot-load of money from a deal. And the degree to which that is shared with the rest of the team might-- that can create another kind of anxiety. You know, you've got an information asymmetry, a class asymmetry, of reward asymmetry. You can have all kinds of asymmetries.

JENNIFER FONDREVAY: Yeah. You know, it's--

TOM STEWART: And then the second one-- you said the survivors and those who stay and those who go. I assume-- does that tribe, how long? Does that tribe end up disappearing? How long does that, you know, the living versus the dead tribe persist? I imagine longer than we think.

JENNIFER FONDREVAY: Yeah. Oh, yeah. I mean, it can last a while. And what was fascinating to me in the research is that both sides feel like the other side got the better end of the deal. Right?

TOM STEWART: I'm stuck with staying and you got to go, and vice versa?

JENNIFER FONDREVAY: Right! Yeah, both sides-- and that was what was probably most fascinating to me, in that you have the people who stay. Those who go-- either because they're forcibly pushed out or they just decide this is not for me, and I'm off-- but what was fascinating to me is that those who stay feel like, oh my god, those guys are so lucky that they got out. I've now got three times as much work. I don't have as many resources. We're still trying to figure out our path. You know, there can be a number of variables that play into that mindset.

And those who go can often feel they were robbed, robbed of the opportunity to continue growing. They had a job that they liked. Now they've got to go somewhere else and start over. So it was fascinating to me that that tribal mentality-- and both sides feel like they wish they were the other side. And that's where it can really be a problem.

TOM STEWART: So we've got three tribes here. We've got the old company new company, or my old company, your old company, we've got executive versus the rank and file, we've got the survivors or the stayers and the goers. How do you prevent these tribes? Can you prevent these tribes from forming? And if you can't, at least, how do you make sure it doesn't turn into tribal warfare?

JENNIFER FONDREVAY: Well you know, one thing-- I'd love to say you can absolutely prevent this. But even as your research proves out, right, you can never anticipate human behavior, right? That's part of the tough part about culture. It's this squishy-- you know, it's just, I know it when I see it.

So I don't think you can say you can prevent it. But what I-- I do believe that you can minimize how it manifests. And I always counsel the business owners or private equity firms that I advise, it starts with both sides coming to the table with respect for the other. When that doesn't happen, tribal warfare can emerge very quickly, particularly when talking about the first one, our company versus their company.

If you haven't come to even the negotiation with respect for what the other side brings-- and more often than not, the tendency is that the acquiring company can have a certain level of arrogance. And so I always counsel, one, you've got to have respect. And the mindset has to shift from ego-driven to humility. And really, coming to that negotiation with respect, but then having that mindset shift-- this is not about one winning more than the other, it's about really creating what is the best vision that we can have? And how do we deliver on that by taking the best of both sides?

And I know you've said in the past, everyone gives lip service to that. But can you really create the best, pick the best from both companies and create something new together? I believe that you can, if you come to the discussion and negotiation with respect for the other side.

TOM STEWART: You know, presumably there's a reason that company A bought company B. Presumably they wanted something. And that reason might just have been cold-heartedly financial, but probably not. They probably wanted customers or products or people or talent. But they wanted something. And presumably, there is a human slash cultural ingredient to that something, even if it's all I want is your market share, right? There are relationships that come with that market share.

And I suspect that often in those negotiations, or in those early parts of transition-- I think in my own experience, people have, on the acquiring side, have sort of run a little roughshod or not listened closely enough to the human side of what it is that they wanted to buy. They got the business side.

But what does that mean for how people behave, and what Joe and Mary and John and Susan do every day? Sometimes they sort of just think, well, yeah. Here's our process. Here's our form. Use that, and it'll be the same. And don't follow with that fact-- the other thing, of course, is people take a little time to get used to stuff. So they may be rushing. You've got to understand the pace with which emotions change, too.

JENNIFER FONDREVAY: Yeah, and you know what I say? And your question about can you prevent it? I don't think you can. But those things, coming to the table with respect to the other side, that's the mentality you have to have.

But then, when talking specifically with leaders, it's absolutely-- I say similar to what you just shared, right? There's a mental mind shift, right? Humility replaces ego. And attitude shift-- that you've got to shift from directing to listening, demonstrating compassion, understanding. And again, respect, for me, is always the undercurrent of all of this.

And then a behavior shift, right, being able to walk the talk, demonstrating the commitment to the new vision, both in here's what we bring to this, what do you bring to this? And demonstrating that you truly believe that this new vision brings the best of both of you together-- I think oftentimes as leaders, we might say one thing, but our actions demonstrate another. And so I talk to leaders about the fact that it's a different set of skills that they need to demonstrate during a post-M&A integration, because their teams and their workforces are going to require it. Otherwise, you will have tribal warfare, as you highlighted.

TOM STEWART: And one of the things that we've already-- the way we started this, which is interesting, was we said that high performance is associated with a strong culture. And so almost by definition, strong cultures are hard to change. Or change-- but change slowly. They evolve. It's not flipping on a switch. And so as you're thinking about the cultural integration, the cultural transformation in a deal, you have to recognize that that moves at a pace where you can't just push enter, and suddenly the page moves, right?

JENNIFER FONDREVAY: Right. And you've highlighted probably what is, I think, the greatest challenge, because as we both know, right, in M&A, you make projections. You forecast. And you have to hit certain things by year one. And the unfortunate part of that is that doesn't give people time to make the adjustment. To really understand the vision and be able to deliver on it requires people time. They've got to let go of the old way of doing things to adapt to a new way of doing things. And that takes time.

And so I think that's one of the struggles, or the greatest pain point, I think-- post-M&A deal is, you've still got this sense of urgency. But you've got to give people time to adapt and adjust and be able to contribute.

TOM STEWART: Which is where respect and transparency and giving people a chance and real, deep, communication, and also, that shared vision come into, because of course, I can change my behavior more happily, and probably more quickly, if I have a beacon toward which I'm going, rather than just being left to sort of figure it out on my own.

JENNIFER FONDREVAY: Yeah. And I think, too, obviously, it's always highlighted. You've got to communicate the vision. I think that's fairly obvious. What I've seen, though, is people understand information in different ways. Some people understand it better in a PowerPoint, some in a memo. But you've got to communicate in all ways, repeatedly, the same thing. And it's got a cadence to it, the communication does, as well. So I think equally, that's something I talk about with executives, is understanding what that level of communication is and the cadence of sharing it so people can really rally behind it, and again, so that the culture can adapt so that you can deliver on the vision.

TOM STEWART: Yeah. Jennifer, this has been a wonderful conversation. And it's almost impossible to sum up because it's been so rich. But one of the things I think is, we've talked about-- and catch me if I've missed the key points-- culture matters. The type of culture matters.

When companies combine, those cultures, everything gets tossed up in a way. And things get confused. Tribes are likely to form. And if you don't manage that process well, the very powerful forces of culture that so often drive companies forward will become your enemy and will hold you back. And so, understanding the cultural side of M&A is at least as critical as understanding the business plan side of M&A.

JENNIFER FONDREVAY: Absolutely. The only thing that I would add, Tom, is while you can't always prevent those tribal culture wars, what I've seen is if you start understanding that culture is important and that both sides come to that discussion with respect for the other side and what their culture brings to it, you've got a better chance for success. That's got to be key, otherwise you're undermining the possibility of having that deal be successful.

TOM STEWART: Well Jennifer, I want to thank you, because I think that people who listen to you would have a better chance of success in managing the cultural aspects of a deal. So I want to thank you so much. For more about the work that Jennifer Fondrevay does with M&A and the cultural implications of M&A, check out her website. Her website is jenniferjfondrevay.com.

And thank you for listening to The Market that Moves America. Never miss a new episode. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts are found. Or you can subscribe and learn more about us at our website, which is middlemarketcenter.org.