Michael D. Moberly December 21, 2013 ‘A blog where attention span matters’.
Yes, through some practitioner’s lens, business culture due diligence is synonymous with human due diligence. Agreed the term culture is one with sociological roots, and of course, sociology is the study of ‘people’ interactions. And, understanding a company’s culture, in any type of transaction, is an important component that goes toward ensuring the desired outcome(s) will be achieved as planned.
I, on the other hand, as an intangible asset strategist and risk specialist hold the view that business culture due diligence in, let’s say, a merger – acquisition context, must go well beyond prognostications about how two distinct company cultures’ will or will not effectively merge or be receptive to being united and/or positioned to create greater efficiencies, maximize distribution channels and/or mitigate overlap, etc.
Instead, I hold the view that business culture due diligence, while being a very necessary element to any and every transaction, the term ‘business culture’ itself should be distinguished in intangible asset contexts, i.e., intellectual, structural, and relationship capital. The product of the due diligence I advocate and practice actually drills down to and distinguishes the core assets which we know underlie a transaction delivering superior vs. mediocre returns, or utterly failing.
On the downside…
As noted in previous posts regarding due diligence at this blog, an undesired outcome of engaging in a business transaction, absent the benefits and insights of a business culture due diligence action that distinguishes the intangibles in play, is that there is a significant probability a substantial loss of talent in the form of intellectual, structural, and relationship capital, will commence once rumors of a merger are uttered. Too, this downside reality will likely escalate following an official announcement of a pending (merger) transaction.
At the 30,000 foot altitudes of deal making, and deal makers who are operationally unfamiliar with or dismissive of the contributory role and value of intangible assets, the potential problems and/or challenges posed by intellectual (structural and relationship) capital attrition for both the near and long term, may initially appear as mere blips on their respective radar screen, and thus readily dismissed.
However, through countless studies, papers, and articles, a clear picture emerges which shows companies are likely to continue to lose disproportionate levels of intellectual capital, i.e., executives and management team members long after a mergers’ execution, due to, among other things, confusion over and differences in managerial styles and decision-making.
As noted in Jeffrey Krug’s piece in Harvard Business Reviews’ (February, 2003) Forethought, titled “Why Do They Keep Leaving?”, for those individuals (and their respective intellectual, structural, and relationship capital) that remain, post merger, differences in decision-making styles will inevitably produce infighting, causing decisions to be postponed or blocked altogether.
Thus, having some assurance that the effective integration of intellectual (structural, relationship) capital will neither stall nor prompt declines in productivity is essential. Krug’s research states that nearly two-thirds of companies will lose market share in the first quarter following a merger. By the third quarter that figure may climb to 90%. I suspect when such disastrous outcomes occur, if due diligence was undertaken prior to deal execution, it did not engage ‘transaction critical’ intangible assets.
On the upside…
On the upside, intangible asset focused due diligence for mergers, or most any business transaction, can help deal makers mitigate, if not avoid the above types of problems and challenges altogether. Intangible asset based due diligence will reveal and unravel these and other potential and often times unforeseen fissures and friction points in advance and make them integral to the transaction negotiations and perhaps most importantly, distinguish them in intellectual, structural, and relationship capital contexts.
The value then of conducting pre-transaction (intangible asset focused) due diligence coupled with monitoring key – contributory value intangible assets for a specified period following execution of a transaction have become imperatives which no deal/decision maker should dismiss. After all, it is an economic fact – business reality today that 80+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability globally, either lie in or evolve directly from intangible assets!
Respectfully then, excluding intangible assets, that underlie the value and rationale for most mergers, as well as many other types of transactions, from due diligence, constitutes a substantial risk which I advise my clients to avoid. And, if the targeted company expresses unwillingness, or otherwise is not receptive to intangible asset focused due diligence it may well be a harbinger or predictor of ‘on the horizon’ challenges. Thus, demanding a comprehensive intangible asset focused due diligence would be especially insightful.
This blog post has been researched and written by me with the genuine intent it serve as a useful and respectful medium to elevate awareness and appreciation for intangible assets throughout the global business community. My blog posts focus on a wide range of issues related to intangible assets and intellectual property. Respectfully, each post is not intended to be quick bites of unsubstantiated commentary or information piggy-backed to other sources.
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