Wall Street acquires culture

When the New York Stock Exchange closed its merger this week with the all-electronic exchange Archipelago, the world's largest bourse acquired more than just technology.

Sure, Archipelago (amex: AX - news - people ) will provide the NYSE with the systems it needs to boost the volume of buy and sell orders it can handle through the Internet. But even more significant, Archipelago's management team and governance structure allows the NYSE to pull itself into the 21st century, replacing the closed circle that gave Exchange seat-holders power with a company that puts its money where its mouth is and sells shares to the public.

The change is big news, of course, but it also highlights a fundamental dynamic of dealmaking that's often overlooked. In every deal, there is a financial acquirer and a cultural acquirer—and they are not always the same company.

The NYSE deliberately set in motion a kind of reverse takeover when it announced its bid for Archipelago, acting as the financial acquirer but seeking to overhaul its culture with the injection of Archipelago's business model. But many dealmakers are not so clear or deliberate: Executives wanting new capabilities and fresh talent often find that the companies they buy start taking over their old businesses—kind of an Invasion of the Body Snatchers for the mergers and acquisitions set.

It's not as though chief executives don't pay attention to people and cultural challenges when undertaking an acquisition. More than 80% of executives we surveyed recognize that "addressing culture integration early on and actively" and "selecting the best people irrespective of which company they come from" are among the most critical factors in integration success. Yet failure to manage cultural issues is among the most frequently cited causes of deal failure. Moreover, plenty of executives get the strategic part of dealmaking right, and the people part wrong.

The heart of the problem is a distinction that many corporate leaders fail to make between the cultural acquirer and the financial acquirer. Seventy-five percent of failed deals falter on an inability to assimilate culture. Meanwhile, 64% of deals that succeed tackle cultural issues early on and actively. What do the most successful leaders do to successfully manage culture?

First, they publicly recognize which entity is the cultural acquirer and let that drive their decision-making. The cultural acquirer almost always has unique capabilities and a cohesive business model. Those skills need to be managed to their full potential for the deal to be successful.

The temptation as a financial acquirer is to buy something and then make it look like the parent company, thereby undermining the fundamental reason to do the deal in the first place. Former General Electric (nyse: GE - news - people ) CEO Jack Welch often has said he learned that the hard way with GE's troubled acquisition of brokerage firm Kidder, Peabody. After imposing GE's culture on the merged company, GE watched much of Kidder's core asset—talent—ride down the elevators and out of the building.

Second, successful leaders avoid managing as if the deal is a merger of equals. Once the cultural acquirer has been established, the lion's share of the executive appointments goes to that group. It may seem equitable to try to pick the best players from both teams to staff the new organization. Tread carefully. All-star teams lose to well-disciplined, battle-tested everyday teams. Recall what happened to the U.S. Olympic basketball "Dream Team" in Greece. Teams with far less talent befuddled the gifted Americans.

Teamwork and trust combine to create a winning culture. If that is what you are buying, do not destroy it. In the Boeing (nyse: BA - news - people ) McDonnell-Douglas merger, Boeing, the financial acquirer, sensibly relied on executives from McDonnell-Douglas and other defense acquisitions to help lead the military business, while Boeing talent took over the commercial unit.

Finally, successful leaders put in place a comprehensive system to propel the new culture throughout the organization. Good culture is something that is actively managed and not left as a by-product. Executives ask, "What kind of a company do I want to have?" It begins with performing human due diligence to carefully select the right team but involves much more.

Take Cargill Crop Nutrition and IMC Global, which merged to create a new entity, Mosaic (nyse: MOS - news - people ), to compete in the fertilizer industry. The deal's success was in large part due to the CEO's commitment to create a high-integrity, results-focused culture that fostered innovation. To set the tone, he began most meetings of his leadership team with a cautionary newspaper account of who had been indicted for fraud. To drive the new way of doing business home, Mosaic developed ten operating principles, including leading and coaching others to high performance, embracing change and using a fact-based decision-making process. Mosaic evaluated employees on whether they walked the talk.

The time to start human due diligence is at the beginning of deal negotiations. The understanding of the culture, and of which entity will ultimately be the cultural acquirer, should be undertaken side by side with the more traditional forms of diligence. NYSE-Archipelago will have a cultural acquirer. Whether the deal turns into a blue chip will depend at least in part on if those leading it have done their human due diligence.