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As I think about my experiences with M&A in the video game industry, the number one topic that comes to mind is the importance of cultural fit, and how it is likely to impact the success of a new business relationship. In almost every case that I have experienced, the impact of cultural fit was significant, in both positive and negative instances.
Culture is defined in many ways within the context of a business organization. I believe that the word value is key. Culture is the result of a shared value system that informs, inspires and reinforces a way of working. Culture guides a company’s way of conceptualizing and developing games, leading the organization, cultivating relationships with players, and most importantly, defining the relationship with the team itself - the individuals who make the organization what it actually is.
What happens when one set of shared values intersects with another set of shared values? Do they match up very closely, or do they differ in key ways? It may be that the values are shared, but the relative strengths of those values are at very different levels. When there is a disparity in the value system, relationship issues may start to occur. The question becomes: how well do the two organizations adapt to those differences? Is the resolution solved in collaboration or is it attempted by mandate?
I believe that the vast majority of leaders involved in an M&A transaction are aware of the challenges around cultural fit. But I wonder if that awareness translates to the right amount of attention to this topic before, during and after the actual transaction.
In a 2019 article from McKinsey, this perspective is highlighted:
Cultural factors and organizational alignment are critical to success (and avoiding failure) in mergers. Yet leaders often don’t give culture the attention it warrants—an oversight that can lead to poor results. Some 95 percent of executives describe cultural fit as critical to the success of integration. Yet 25 percent cite a lack of cultural cohesion and alignment as the primary reason integration efforts fail.
During a transaction, a business is typically scrutinized via financial due diligence, business due diligence, and legal due diligence; but cultural fit usually misses this formal level of scrutiny. In some cases, there may be a high level of confidence in this area after having worked together over a period of time. Considering that cultural fit is key to a successful deal, running an M&A process that includes cultural diligence alongside other diligence streams is necessary. The M&A diligence process allows both buyers and sellers to look deeper into how each company does its work; for example, how it prioritizes quality, schedule, cost and risk in developing games, how it tracks development progress, what the degree of rigor and flexibility is in that process, and who sits at the table when key decisions are being made.
Due diligence brings best practices for determining cultural fit to a transaction. I will follow up on this topic and would appreciate your ideas and comments. As an advisor to companies contemplating or initiating an acquisition at some point, I would place the utmost importance on making sure that both sides are attentive to the likelihood of success from a cultural fit perspective. Both sides need to get this right.