In the face of falling origination volume, increased compliance costs and challenging long-term demographic trends, a growing number of mortgage companies are looking for an exit strategy. Many are considering selling themselves to an industry competitor — a trend likely to accelerate in 2015.
There is no doubt that the right acquisition can be a strategic advantage if it is implemented correctly. Banks and mortgage companies can increase originations, profits and market share by taking on entire firms as well as talented individuals, teams and branches. But mergers and acquisitions are unlikely to succeed if there is a mismatch of corporate cultures.
Toxic cultures can offset any expected benefits from a merger. The mortgage industry need to look no further than the ill-fated merger between Countrywide Financial and Bank of America merger for an example of what can happen when two mismatched companies combine for the wrong reasons.
Trying to merge disparate cultures can negatively impact the combined company in many ways. Planned collaborations never materialize; talented professionals get frustrated and leave. Overall morale declines and begins to affect the company's relationship with its customers — the foundation of the business.
These kinds of clashes occur when the companies involved in a deal perform inadequate due diligence about the corporate cultures of both parties. It's easy for firms to hire consultants and investment bankers to look over the balance sheets and financial statements of targeted companies and quantify the economics involved in a deal. But measuring how two different corporate cultures will blend and perform together is difficult to measure empirically, and even tougher to manage.
While executives pay lip service to the importance of culture in mergers, they focus limited resources on actually addressing potential clashes, according to Pritchett LP, a firm that studies change management. In a survey of 133 executives across a number of industries including financial services, the firm found that only 5% or less of respondents included culture-specific questions in their merger and acquisition due-diligence checklist or conducted a systematic study to determine cultural fit. And when culture assessment efforts were conducted, they usually occurred too late in the process to add much value and were typically improvised, unstructured, imprecise and haphazard, according to Pritchett.
Yet due diligence is possible. The starting place for evaluating the compatibility of two organization’s cultures is a comparison of their leadership dynamics. How do they approach their vision, and how do they give voice to and empower their employees?
Beyond this comparison, companies can undertake a systematic review of two different cultures by examining the values as expressed in five categories: compensation, benefits and recognition; development and growth for all employees; job characteristics (including autonomy, leadership opportunities and work/life balance); organizational character and reputation; and relationships among co-workers.
Cultural integration is also a process that cannot wait until a deal is finalized. The time to address cultural issues is before, not afterward, when the damage is done and becomes embedded into the new operation. Then companies can devise and implement successful integration strategies to ensure that new employees are able to
While the lawyers and accountants are doing their job, assign a team to carefully examine the target company’s ethical standards and management style. Make sure they align with, if not exceed, your own.
In the end, no acquisition is better than a bad acquisition if the cultural fit is off or it will take too long to make it work. Companies should be prepared to walk away from a deal with promising financial prospects if there is any concern about a cultural mismatch.
Paul Anastos is president of Walpole, Mass.-based Mortgage Master, one of the country's largest privately owned mortgage companies. He can be reached at email@example.com.