Unveiling M&A: More than numbers, it’s about shared culture

There comes a point in many businesses when expansion alone is no longer possible – the only way to achieve more is through a merger, or an acquisition (M&A).

In such cases, certain themes recur, including the hope to increase market share, business growth, cost reduction and risk diversification, among others.

Dains, an accountancy firm based in the Midlands, was keen to offer its clients more – and once it had achieved all it could alone, it looked to M&A as a means for growth.

In 2022, Dains completed three acquisitions. The first was of Barringtons Accountancy Practice, in a bid to consolidate its position in the North Midlands.

Dains then acquired Isosceles Finance, a firm that works with the UK’s most successful technology companies. Then just a few weeks later, it bought out William Duncan + Co, which has enabled Dains to add insolvency to its growing list of services and establish a substantial presence in Scotland.

The importance of culture

The Dains Group quickly realised the secret to a successful M&A transaction: enjoying a shared culture and ethos. For the fast-growing firm, a central pillar of their success and an absolute commitment from the Board is to focus on their employees.

This is apparent in the motivation of the firm to create environments in which the teams can develop, benefit from market-leading benefits packages, and where they do not just work, they thrive.

Not only does this mindset have a clear moral stance, but it is also good business practice, too. Indeed, according to a recent study by Warwick University, happy employees are around 12% more productive than their counterparts.

As such, for Dains, finding like-minded executives is essential in the M&A process. And, as Dains CEO, Richard McNeilly, explains, a shared culture must be apparent prior to negotiations.

“We spend some time looking at a firm’s culture from a distance before we even approach them,” says McNeilly. “You can find out quite a lot about a target business from what they say about themselves on their website and the way they communicate.”

“It’s about getting the sense that the target company cares about its own people. There are times when we have a conversation with a practice and that doesn’t come across – it’s all about the money. For us, that’s a business that we’re not interested in acquiring,” McNeilly tells Accountancy Age.

“We share our aims and objectives, and why we want to build a business, and if that doesn’t resonate with the target, we shake hands and walk away.”

Defining factor

In the event that merging businesses have a different philosophy regarding customers, clashes between employees can lead to disaster.

Lloyds TSB, a traditionally conservative bank with a strong risk management culture, merged with HBOS, a bank known for its aggressive growth strategy, with a cultural focus on sales and market share in 2009.

When the financial crisis hit in 2008, the riskier loans and investments that HBOS had taken on became a serious problem, leading to substantial losses. The UK government had to intervene to save the bank from collapsing, which led to the merger with Lloyds TSB. After the merger, cultural differences between the two banks exacerbated the financial problems.

Lloyds TSB had a culture of cautious lending, with strict risk management policies. On the other hand, HBOS’s culture of aggressive lending and focus on sales and market share was deeply ingrained in their business. The clash in cultures and business practices led to a loss of key staff, operational challenges, and substantial financial losses.

In 2013, the Parliamentary Commission on Banking Standards released a report that heavily criticised the merger and the cultural clash it revealed. The report mentioned that the sales culture at HBOS was deeply flawed, but Lloyds failed to manage these risks and continued the aggressive sales culture post-merger, leading to massive misconduct costs.

It is for such reasons that during negotiations Dains carries out detailed and comprehensive due diligence and spends a great deal of time between the two businesses, ascertaining whether they share values.

McNeilly sees this as hugely important, as culture can be the defining factor in the success or failure of an M&A. In fact, according to McKinsey and Co, around 95% of executives see “cultural fit as critical to the success of integration”.

“By getting the culture right, you can de-risk M&A significantly,” McNeilly adds.

Knock-on effect

When a culture of support exists in both businesses, once merged, they can begin benefitting from one another immediately.

For instance, when William Duncan + Co hosted a large-scale event in July, the type of which Dains is experienced in, Dains employees were ready and waiting to help their new colleagues, providing advice in the run-up and support on the day.

Not only was the event a success, but it also helped create an invaluable sense of teamwork between both entities.

In an organisation in which employees have a strong sense of support, and feel they are treated fairly and valued, the employee retention rate is high. According to a 2021 survey by Gartner, those that work in a “high fairness environment” are 27% less likely to quit.

“It’s self-perpetuating when you get it right; life gets easier in terms of not having to refresh the team all the time,” McNeilly tells Accountancy Age.

This perception of value filters from the inside out to customers, meaning they also gain from employee satisfaction. What’s more, clients benefit from continuity; they get to work with a team that they know and understand, and over time that builds trust.

“The deeper we can build the relationship with the client, the more we can do for them. They grow stronger as a business, but we grow alongside them as well, because over time we can deliver more services. In turn, we hold on to those clients for longer than the market average and our business prospers,” McNeilly explains.

Through Dains’s experience, a new paradigm for M&A has emerged. One in which culture is a significant – if not defining – factor in future M&A decisions. When properly considered, not only do the employees of both entities benefit, but their customers do, too.