What role does “cultural fit” play in M&A?

Cadbury Plc, Kraft Foods, and Hershey Company example

It’s not personal, it’s business. The rationale for most mergers is based on classic business theory of strategic fit, discounted cash flow models, earnings multiples, and projected growth. As most deal development, analysis, and negotiation strategy is outsourced to investment banks, it makes sense that there is a very clinical approach to arranging corporate marriages. However, most mergers fail to live up to their potential because of a critical but difficult-to-define intangible — cultural fit.

This may be a key factor in the 3-way love triangle that is now being played out between Cadbury Plc, Kraft Foods, and the Hershey Company. Cadbury, spurning Kraft Foods merger overture (either because of genuine dislike or angling for a better offer), is wooing Hershey into making a merger offer. And a key driver of this Cadbury-Hershey overture is cultural fit.

A recent article by Tim Richardson in The Guardian highlights how cultural fit may portend the future of any Cadbury merger almost as much as financial justification.

“In fact, insiders know that Hershey is still a strong contender for a future merger with Cadbury, because the ethos and history of the two bear remarkable similarities. The town of Hershey in Pennsylvania was to an extent modelled on the Cadbury brothers’ successful Bournville experiment (and both places provided inspiration for Willy Wonka’s creator, Roald Dahl, being an official Cadbury chocolate taster as a schoolboy). Hershey came from a Mennonite background (a sect similar to the Amish) while the Cadbury ethos was founded on the Quakerism of the founding family, an intensely paternalistic but overall humane management style (its works councils predated trade unions) which tangibly enhanced production.”

And what does the author think about Kraft as a cultural fit?

“Kraft Foods, a rather faceless conglomerate, has no such ethos or history, and UK sweets fans will be hoping that Cadbury’s shareholders do the decent thing and preserve its independent spirit – and by doing so, its Curly Wurlys.”

Cadbury’s vigorous attack on any Cadbury-Kraft merger (and the surrounding publicity) is surely going to leave some bad blood between the affected parties, especially if Kraft is indeed victorious in securing Cadbury as an acquisition.

Merger integrations are notoriously difficult and that difficulty is significantly exacerbated when there is animosity fostered by negative pre-deal publicity, as it is in this case. It is facile to assume that once a merger deal is done, a post-deal “kiss and make up” effort will effectively soothe ruffled feathers to pave the way for an optimal merger integration. And this is especially true when the corporate cultures in the merging parties are perceived to be starkly different (whether this is the truly the case or not).

We can only wonder if Kraft is factoring this into their acquisition models (as the potential merits of the deal may take longer to realize in a Cadbury-Kraft merger), and continue to wonder whether Kraft will step up in effectively presenting their case to Cadbury shareholders, employees, and other key constituents. Or will Hershey be victorious? We will continue to watch as this M&A drama unfolds.

- A.B.