Worlds Apart

To foster successful cross-border mergers, try cultural due diligence.

Two Chefs on a Roll, a California-based maker of specialty foods, spent years searching for the right merger partner. The company wanted a buyer that would reward its founders without forcing the company to modify its carefully calibrated balance of professionalism and free-spiritedness. But the U.S.-based private-equity firms and large food manufacturers that came knocking all appeared to be poor fits.

The right buyer finally materialized half a world away. In late January, Bakkavör Group closed the deal for Two Chefs for an undisclosed price estimated in the tens of millions of dollars. Bakkavör, an Icelandic company with a major presence in the United Kingdom, makes similar products albeit on a different scale. In 2007, its revenues topped $3 billion compared with about $40 million at Two Chefs. But both companies share the two most important traits, says Two Chefs CFO David Trinkle: deep concern for their employees’ welfare and a passion for the foods they produce. “We spent a lot of time talking about culture,” Trinkle says, “and found we had a lot in common.”

Executives tend to be of two minds about the importance of corporate culture in a merger. Some take it very seriously; many experts, for example, insist that incompatible cultures doomed Daimler’s disastrous $36 billion merger with Chrysler. An ill-fated “merger of equals,” the argument goes, failed to combine Chrysler’s freewheeling, entrepreneurial panache with Daimler’s staid, hierarchical focus on precision.

Others regard it as a squishy term that provides a convenient excuse for failure. In casual conversations, the term “corporate culture” may be invoked to describe everything from compensation policies to Casual Friday. Often, when mergers go awry, “we blame things on culture when it was actually bad planning,” says Mark Sirower, a merger guru and a Deloitte consultant. “When you look at recipes for good deals,” he says, “there is a whole set of things you need to have in place before culture starts to matter.” The inescapable essentials: fully analyze and understand the business rationale for the deal, decide early on whether to integrate the businesses or keep them separate, develop and agree upon detailed integration plans, and settle in advance on how people will get evaluated and paid.

Yet it is clear that a purely by-the-numbers approach to due diligence might miss some vital component of a corporate marriage that can lead to failure. A robust and candid assessment of cultures during the early stages of a proposed merger may unearth intractable differences that could hobble or even scuttle deals.

Two Chefs relied mostly on instinct and common sense to vet the compatibility of its merger partner — perhaps not surprising for a company whose Website announces, “Welcome to the creamy center of the universe” — but companies that want to quantify cross-cultural fit can tap an array of more-formal options, from employee surveys to cultural-change consultants. With reputations and viability at stake, small and large companies now assign a high priority to cultural fit in a merger. And just in time. U.S.-related cross-border M&A soared to $719 billion in 2007, a 61 percent increase from 2006, according to Thomson Reuters.

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