(Ed’s note: Jack and Suzy Welch are on vacation for the month of August. During this time, we will be running a series of guest columns. This one is written by David Harding and Ted Rouse, partners of Bain & Company Inc., a global business consulting firm, and together lead the firm’s mergers and acquisitions practice.)

By David Harding & Ted Rouse

Bain & Company 

When the New York Stock Exchange (NYSE) merged in 2006 with the electronic-trading operator Archipelago Holdings, the world’s largest bourse acquired more than just technology.

Sure, Archipelago provided the 215-year-old NYSE with the systems it needed to boost the volume of buy-and-sell orders it could handle through the Internet. But even more significant, Archipelago’s management team and governance structure allowed the NYSE to pull itself into the 21st century, replacing the closed circle that gave Exchange seat holders power with a company that puts its money where its mouth is and sells shares to the public.

The change was significant, of course. But it also highlights a fundamental dynamic of deal-making that’s often overlooked. In every deal there is a financial acquirer and a cultural acquirer—and they are not always the same company.

The NYSE deliberately set in motion a kind of reverse takeover when it announced its bid for Archipelago. Acting as the financial acquirer, the NYSE also sought to overhaul its culture with the injection of Archipelago’s business model.

But many deal-makers are not so clear or deliberate: executives wanting new capabilities and fresh talent often find that the companies they buy start taking over their old businesses—kind of an Invasion of the Body Snatchers for the mergers-and-acquisitions set.

It’s not as though CEOs don’t pay attention to people and cultural challenges when undertaking an acquisition. More than 80 percent of executives surveyed by Bain & Company, the global business consulting firm where we work, recognize that “addressing culture integration early on and actively” and “selecting the best people irrespective of which company they come from” are among the most critical factors in integration success.

Plenty of executives get the strategic part of deal-making right: they look for an opportunity to make the fundamental core of the acquirer stronger and more valuable. But they often get the people part wrong.

The heart of the problem is a distinction that many corporate leaders fail to make between the cultural acquirer and the financial acquirer. About 75 percent of failed deals falter on an inability to assimilate culture. Meanwhile, 64 percent of deals that succeed tackle cultural issues early on and actively.

What do the most successful leaders do to successfully manage culture?

First, they publicly recognize which entity is the cultural acquirer and let that drive their decision-making. The cultural acquirer almost always has unique capabilities and a cohesive business model. Those skills need to be managed to their full potential for the deal to be successful. The temptation as a financial acquirer is to buy something and then make it look like the parent company, thereby undermining the fundamental reason to do the deal in the first place.

Jack Welch, the former CEO of General Electric, has often said he learned that lesson the hard way with GE’s troubled acquisition of brokerage firm Kidder, Peabody & Co. After imposing GE’s culture on the merged company, GE watched much of Kidder’s core asset—talent—ride down the elevators and out of the building.

Second, they avoid managing as if the deal is a merger of equals. Once the cultural acquirer has been established, the lion’s share of the executive appointments goes to that group. It may seem equitable to try to pick the best players from both teams to staff the new organization. Tread carefully. All-star teams lose to well-disciplined, battle-tested everyday teams.

Consider what happened to the US Olympic Basketball Dream Team in Greece back in 2004. Teams with far less talent befuddled the gifted Americans. Teamwork and trust combine to create a winning culture. If that is what you are buying, do not destroy it.

In the Boeing/McDonnell Douglas merger 10 years ago, Boeing, the financial acquirer, sensibly relied on executives from McDonnell Douglas and other defense acquisitions to help lead the military business, while Boeing talent took over the commercial unit. Finally, they put in place a comprehensive system to propel the new culture throughout the organization.

Good culture is something that is actively managed and not left as a byproduct. Executives ask, “What kind of a company do I want to have?” It begins with performing human due diligence to carefully select the right team, but involves much more.

Take Cargill Crop Nutrition and IMC Global, which merged in 2004 to create a new entity, the Mosaic Company, to compete in the fertilizer industry. The deal’s success was in large part due to the CEO’s commitment to create a high-integrity, results-focused culture that fostered innovation.

To set the tone, he began most meetings of his leadership team with a cautionary newspaper account of who had been indicted for fraud. To drive the new way of doing business home, Mosaic developed 10 operating principles, including leading and coaching others to high performance, embracing change and using a fact-based decision-making process. Mosaic evaluated employees on whether they walked the talk.

The time to start human due diligence is at the beginning of deal negotiations. The understanding of the culture—and of which entity will ultimately be the cultural acquirer—should be undertaken side-by-side with the more traditional forms of diligence. n

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