Over half of all mergers and acquisitions fail, and many sources put the failure rate above 80%. Over half of those failures can be attributed to corporate culture clash.* While many deals look great on paper, few organizations pay proper attention to the challenges of combining two cultures. Culture is difficult to shift; combining two organizational cultures is even more challenging.

Over the weekend Kraft Heinz, the consumer goods giant controlled by Brazilian private equity group 3G and Warren Buffett, made and withdrew a $143B takeover approach for the Dutch-Anglo consumer goods group Unilever. The deal would have been the second-largest corporate merger on record.

Though it remains to be seen whether the alluring mega-deal is dead, Kraft Heinz might have been smart to veer away from Unilever in the first place. Since 3G consolidated Kraft and Heinz in 2015, Kraft Heinz has doubled profit margins to 30% and reduced employee headcount by more than 20% (to 42,000). The combined company derives more than 75% of revenue from the US market and operates eight major brands with declining revenues. Kraft Heinz is focused on driving costs out of the business. It does not reinvest substantially in its brands and thus needs an acquisition to grow revenues.

Unilever could not be more different. Unilever’s CEO abandoned quarterly reporting to concentrate on long term-revenue growth. It operates 13 major brands with 58% of revenue coming from emerging markets. Also, it has only half the profit margin of Kraft Heinz and employs 169,000 people worldwide. Unilever’s most important shareholder is a charitable foundation; their focus is on long term sustainability and profitability, not on cost-cutting for the sake of short term profitability. Unilever believes strongly in investing in its brand to drive organic revenue growth.

To those of us with expertise in corporate culture, these facts suggest very different cultural archetypes.

So Kraft Heinz could undoubtedly improve profit margins at Unilever, but would that equal success? It is doubtful the Unilever brands would continue to flourish under a drastically different management philosophy. The Financial Times reported one Unilever executive’s summary: “The deal made perfect financial and strategic senses for them, but absolutely none for us.”

Before making an offer, Kraft Heinz should have examined culture. Evaluating cultural fit, up-front, is a great investment. It helps companies avoid the high cost of a failed deal or the embarrassment of an open rejection.

What’s a Growth-Minded Organization To Do?

  1. Assess your own cultural identity.Culture is made up of the unspoken rules by which people in an organization act, every day. A strong culture is a source of synergy and efficiency. Cultures aren’t better or worse than each other; each successful organization’s culture is, by definition, good. You shouldn’t try to change it. But you should try to figure out what it is, especially if you want to manage an acquisition effectively. Conduct an evaluation to identify your own organization’s dominant culture. Many culture assessments assign the organization an “archetype,” which captures the mind-set and behaviors of leaders and employees.
  2. Conduct a culture audit of potential partners. Assessing the culture of the target company should be part of the due diligence process. The acquiring party must look for companies that fit, add to, or extend its own culture. The acquirer might look at qualitative data like mission/purpose, culture, vision, values, goals and future aspirations, and/or quantitative data from workplace assessments. Some companies have done their own culture assessments; in that case, the acquiring company should ask for those results. If, like Kraft Heinz, your culture is consistent with financial agility and tools like cost-cutting, don’t buy an innovator that requires massive, long-term, thoughtful investment to be successful.
  3. Define the new organization with culture in mind. Even in the case of a good match, the new combined entity must redefine itself as one organization with a shared mission, values and culture. Smart leaders build plans for culture integration and include them in the approach strategy and offer. And before the organizations become one, management must be aligned around the key strategic and cultural themes for the new organization.

Consider the “Different Works” ad campaign from Alaska Airlines and Mekanism, its branding agency. Alaska Airlines and Virgin Atlantic are both great brands with a loyal consumer following, yet neither customer base was excited about the recent merger. The new ad campaign highlights the fact that while a pairing may seem strange at first, it could be a great fit. In its ads, Mekansim asks us to consider electricity and guitars, labradors and poodles, salty and sweet, comedy and romance, chocolate and bacon, and now Alaska Airlines and Virgin Atlantic.

One gets the sense that management did consider the cultural pitfalls of acquiring an iconic brand. Brad Tilden, CEO of Alaska Airlines said, “Alaska and Virgin are different airlines, but we believe different works. The two airlines may look different, but our core customer and employee focus is very much the same.” Mike Zlatoper, EVP of Mekanism, explained, “What we really wanted to do was lean in and acknowledge the truth. On the surface these airlines are different but underneath there are lots of similarities.” Alaska Airlines has tapped into a fundamental success factor in corporate mergers: once you believe you have a good partner, focus attention on the synergy.

Note that we are talking about focusing attention, not simply communicating. Bringing together two companies creates a whirlwind of information. Employees and other stakeholders will try to filter and make sense of all of it, drawing their own conclusions in the absence of clarity. Unless you focus attention on the right information, uncertainty will reign. Uncertainty is the greatest enemy of sustainable change. Employees need to feel confident and secure during a business combination. Unless leaders and managers focus on the right messages and a clear path forward, any other efforts of the leadership team will be negated.

Managing a business today is hard enough. During a merger the challenges are acute and the stakes are much higher. Culture is one key to success.

*Taken from public sources such as Bloomberg, The Financial Times and The Wall Street Journal