Why Culture Drives M&A Success

The internal audit function can be a powerful resource for creating competitive advantages and driving growth. It’s relatively intuitive to consider how identifying efficiencies and mitigating risk can aid in the sustainability of an organization. A deeper look at the internal audit (IA) process reveals that it is also incredibly effective for nurturing a strong bank culture during an M&A transaction. 

Robert G. Wilmers, Chairman and CEO of M&T Bank, defines culture as, “a set of core operating principles that can set a company apart and permeate it at all levels.” This is a somewhat rare observation in the banking world. Despite being one of the most powerful competitive advantages many community banks have in the markets they serve, culture is often overlooked in our industry.

That’s unfortunate because culture can be set and nurtured in a variety of ways, and the results have wide-reaching impact. Lending policies and procedures, strategic initiatives set by the CEO and board, or bank-wide adoption of best practices are just some of the ways to assert and assure that culture is guiding activities and strategies. Likewise, IA can have a significant impact on how culture informs the growth of a bank, particularly in an M&A scenario. 

Why Engage Internal Audit Throughout the M&A Process

For many banks, a typical M&A team consists of representatives from credit, accounting, legal, outside counsel, external auditors, and investment bankers. Only rarely is there IA representation until after the deal is closed.

That’s a mistake. There’s measurable value to having IA involved throughout the entire process. As deals are discussed, the IA representative can review and offer informed counsel on the potential risks of the deal – not least of which relates to how the acquisition will impact the culture of the organization. Some of the key insights that they can provide include:

• Integration The IA team can perform a risk assessment of the transaction to outline potential obstacles to seamless integration (e.g., differing IT systems, different risk appetites for lending, or potential new geographies or products the bank may not have seen before).
• Discovery Help ensure all major control issues or deficiencies are discovered during due diligence.
  
• Non-financial Audit Perform an audit of areas outside of credit and deposits, such as information systems and HR to safeguard against potential post-acquisition issues.
  
• Implementation Review Arguably the most important function, the IA team can conduct a post-transaction culture implementation review.

It’s after the financial transaction of the acquisition has occurred that the real work begins. The people and teams being merged must be accountable and equipped to perform in the new organization. In this capacity, IA is vital to:

• Monitoring processes at the acquiree to ensure consistent implementation
• Training and development for the acquiree’s management and personnel
• Conduct post-transaction customer satisfaction surveys
• Ensure integration is congruent with management’s business strategy and risk

It’s estimated that even while acquisition rates and values are up, the failure rate of M&A transactions is as high as 70% to 90%.[1] Some of the largest M&A mistakes have been attributed to a lack of cohesive culture.[2] By limiting IA to a compliance or rules-based function, banks risk missing a complete view of how the transaction impacts those responsible for the health of the new organization, causing time-consuming efforts later on when IA is called in to diagnose the issues within the merged company.

In subsequent blog posts, we will continue to dig into the benefits of IA. Subscribe to gain insight into ways you can build an effective IA function within your bank.

[1] The Big Idea: The New M&A Playbook, HBR, March 2011

[2] 6 Big Mergers That Were Killed By Culture (And How To Stop It From Killing Yours), Globoforce, 2012