OthelloWhich play in Shakespeare’s cannon presents the biggest clash of cultures, which leads to the most catastrophic result? I would have to opine Othello, one of the great tragedies in all of Shakespeare. Othello, a Moor and General in the service of the Venetian republic, wins great honors on the fields of battle with the Turks. He also wins the hand of the lovely Desdemona. However, off the battlefields, Othello falls prey to the whiles of Iago, who convinces Othello of the infidelity of his bride. Othello murders his wife and then, realizing his mistake, takes his own life.

There are many culture clashes going on in the play. The military ethos vs. the deceit of civilian life, African tribal culture vs. the isolation of life in Venice, and even the warm bloodedness of a Moor vs. the chilly civilization of 16th century Venice. Yet it all leads to one thing – destruction.

One of the more difficult things to predict in a merger and acquisition (M&A) context is how the cultures of the two entities will merge. Further, while many mergers claim to be a ‘merger of equals’ the reality is far different as there is always one corporate winner that continues to exist and one corporate loser that simply ceases to exist. This is true across industries and countries; witness the debacle of DaimlerChrysler and the slow downhill slide of United after its merger with Continental.

In the Foreign Corrupt Practices Act (FCPA) space this clash of cultures is often seen. One company may have a robust compliance program, with a commitment from top management to have a best practices compliance program. The other company may put profits before compliance. Whichever company comes out the winner in the merger, it can certainly mean not only conflict but if the winning entity is not seen as valuing compliance, it may mean FCPA investigations and possibly even FCPA violations going forward.

A recent article by Andrew Hill, in the On management column in the Financial Times (FT), entitled “Dealmakers need new tools to predict M&A culture clash”, he focused on the fact that the “potential for cultural mismatch is usually one of the first red flags raised over complex deals.” He went on to state, “There is a crying need to improve the supposedly softer side of dealmaking and cut the great financial and psychological cost of finding out too late that the partners do not get on.”

Hill recognizes it is often difficult to begin such a discussion without engaging in cultural anecdotes or even cultural stereotypes, such as the French and the Americans will never get along or even appreciate how the other does business. Even such tried and tested methods based on “observation and interview can be unsystematic or prone to bias.” He also points out the problems with self-reported surveys that “go stale quickly or suffer from self-censorship.” This is even truer when one company has an ethos of punishing those who actually answer surveys honestly or report incidents. Finally, Hill notes that even questions by one group towards the other can bring a certain biting critique.

Of course all of this comes in the context of the employees from the acquired side that may be fearful for their jobs and employment prospects going forward. I once asked a friend going through a takeover what it was like and he said it was every employee for him or herself, each wondering when they would get axed. Certainly that is not positive either.

Yet even when working towards merging cultures in systematic manner, companies can make miss-steps. Hill points to the Hewlett-Packard acquisitions of Compaq as a classic example. He noted that after the two entities had “poured hours into their due diligence on their contrasting cultures before the deal was complete” which included 138 focus groups, consisting of 127 executives and 1600 staff in 22 countries, they still could not get it right. He pointed to the Compaq cultural value of keeping in touch with all employees through routine reports of what projects they were working on, clashing with the HP culture which saw this same action as “being micromanaged and not trusted.”

The quandary of how to determine cultural clashes is an ongoing problem during any acquisition. However, Hill reported that a new approach may provide some insight. A study, by University of California Professor Sameer Srivastava and Stanford University Professor Amir Goldberg, looked at it from a different angle; the email angle. They crunched “the language in 10.3m internal emails sent over five years by staff at a medium-sized technology company. Comparing the results against personnel records, they were able to map the trajectory of staff as they joined, got used to the culture and stayed, quit or were forced out. Among the findings: the reciprocal use of swear words in emails is one important clue to cultural fit; so are message exchanges about families.”

As Hill dryly noted, “Such studies are valuable not only for those building sweary or homely teams. They could tell managers more about subgroups within supposedly monolithic organisations”. I have previously written about Catelas, a software company that can review your internal emails to determine patterns that might detect nefarious conduct. If you couple the power of such software with the insights of Professors Srivastava and Goldberg, you might be able determine areas of compliance trouble in a merged entity.

This is all the more important with the compressed time frames required after an M&A to complete the acquisition integration as set out in the Ten Hallmarks of An Effective Compliance Program, as laid out in the 2012 FCPA Guidance. Coupled with the Opinion Release 08-02, involving Halliburton and two enforcement actions, Data Systems & Solutions LLC (DS&S) and Johnson and Johnson (J&J), the time frames for your post-acquisition, integration, investigation and any remediation are quite tight. The DOJ makes clear that rigor is needed throughout your entire compliance program, including M&A. This rigor should be viewed as something more than just complying with the FCPA; it should be viewed as just making good business sense.

FCPA Post-Acquisition Time Frame Summary 

Time Frames Halliburton 08-02 J&J DS&S
FCPA Audit 1.     High Risk Agents – 90 days

2.     Medium Risk Agents – 120 Days

3.     Low Risk Agents – 180 days

18 months to conduct full FCPA audit As soon “as practicable
Implement FCPA Compliance Program Immediately upon closing 12 months As soon “as practicable
Training on FCPA Compliance Program 60 days to complete training for high risk employees, 90 days for all others 12 months to complete training As soon “as practicable

Using the approach laid out by the Professors might well give you a leg up on any potential problems that need to be investigated, remediated and reported so that you can receive the benefits of meeting the post-acquisition time lines for a safe harbor. Such an analysis might also tell you if an acquired company or merger partner is as serious about compliance as your company is going forward.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

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