M&A Risk: Culture Misfits and Virtual Due Diligence

The pandemic changed M&A due diligence. Some hope the shifts will bring more focus to culture.

Donna Wells
5 min readSep 2, 2023

Somewhere between 70% and 90% of merger and acquisition transactions fail, studies show, and in a year that has seen record-breaking deal activity, that adds up to a lot of potential terminations. Board members and corporate advisors attribute a number of these failures to a poor culture fit between two companies, a reality that should be — but often is not — identified during due diligence.

With the pandemic, cultural due diligence has taken on new importance, sources say.

In part, the risk of a cultural misfit is higher, as attempting to assess culture via Zoom is not always ideal. At the same time, the growing importance of corporate culture among employees, investors and other stakeholders may bring about a due diligence shift that some have long hoped for, in which culture is central to the assessment.

“We’ve clearly not been successful at doing cultural due diligence in person,” said board member Donna Wells. “It’s a difficult thing to do through any channel, but I do think the challenge has been, in my opinion, that the way that we were doing it in walking the office is we almost believed we had superpowers or a shortcut in assessing the culture in seeing it firsthand. But I think obviously, given the failure rate in M&A deals, what we thought we were observing was not the reality.

“This is a great opportunity to shake things up,” said Wells, a director on the boards of Walker & Dunlop, Mitek Systems and Betterment.

Shaking It Up

Misfires in due diligence have long been the cause of deal headaches. In the ongoing trial involving Elizabeth Holmes, the former CEO of blood-testing-device company Theranos, testimony has exposed how executives from large companies ended up in partnership with the start-up without spending significant time with the company’s blood-testing product. Indeed, executives from Walgreens and Safeway testified in October that, despite considerable due diligence, both retail giants struck deals years ago with Theranos without testing its device for accuracy.

“Our common understanding was the technology worked as we were told,” former Walgreens Chief Financial Officer Wade Miquelon reportedly testified last month. Holmes is on trial for multiple counts of wire fraud and conspiracy to commit wire fraud.

The pandemic and shift to the hybrid work environment has only added to the due diligence challenges, particularly when it comes to evaluating a culture match, sources say.

Financial and legal due diligence have been and will likely continue to be successfully done remotely. The emotional wellness of a business, on the other hand, is a less tangible metric that can be difficult to gauge through a virtual tour or meeting, according to Bob Bartell, managing director and president of Duff & Phelps Corporate Finance. Assessing the morale within a company, considering if a business presents well on first impression and whether employees like and respect a CEO are aspects of a company that tie into culture and may only present themselves in person, Bartell said.

“Some of these people elements are, I think, what have fallen through the cracks,” he noted.

Indeed, executives overwhelmingly (95%) indicate that cultural fit is key to the success of an M&A deal, according to a blog post from management consulting firm McKinsey & Company. A quarter of the executives cited by McKinsey identified a mismatched culture as the top reason that integration efforts fail, the post reads. In fact, sources tell Agenda that this aspect of due diligence has been long overlooked.

Falling short on this front is one of the “biggest risks” that a buyer can take during due diligence, Bartell said. “We live in a world where a company’s behaviors and communication styles and culture either can be competitive advantages or great impediments to making a company great,” he said.

But the necessity to conduct due diligence remotely has exacerbated the issues, said Michael Siebecker, professor at the Sturm College of Law. “You just can’t visit people, and people are no longer working in one place. These kinds of cultural issues perhaps are just increasingly more difficult to ascertain via the traditional due diligence methods,” he said. “So I think we’re going to see folks perhaps taking on risk that they shouldn’t because they don’t have a grip on whether cultures will match.”

Sheila Hooda, an independent director on multiple public and private boards, agreed. In her view, virtual due diligence has made it “more difficult for buyers to get a real sense of culture” at another company and to determine whether the chemistry is right between the two organizations.

Despite any shortcomings, Wells predicts that companies will continue to lean on virtual options to conduct cultural due diligence. Indeed, for many employees, returning to the office five days a week is unlikely, she explained. “So by definition, expecting 100% of cultural due diligence to occur in the office — I mean, you can walk the office, but if no one is there, it’s going to be even less effective in assessing cultural fit.”

For a couple of reasons, though, Wells sees an opportunity. Shifting from face-to-face to digital mediums to assess culture, for one, has naturally spurred a “forced reevaluation” of the due diligence process, she said, and has raised questions about how to get a sense of sometimes very subjective issues without the benefit of walking the office or the factory floor, she said.

“By the nature of changing the channel, there had to be a rethinking that occurred.”

For Wells, virtual due diligence can assess culture just as well as observing a company in person. One way to do that, she offered, is by simply changing the questions that are asked of target companies. Take a question about corporate values, she suggested. Asking what those values are is not going to generate the same useful information as questions about what makes an employee feel good about working at a company or how an executive disciplined a high performer who violated one of the company’s values.

“If they can’t tell you about a person who violated the values and was held accountable, that’s a red flag,” Wells said.

Secondly, the importance of culture has increased in the last 18 months, Wells said. “You see that in the boardroom discussions,” she noted, offering as examples the prominence of director discussions about such topics as racial and social justice concerns, workplace safety and environmental, social and governance issues.

“All of those factors make culture even more important than before right at the time that we’re rethinking assessing culture,” according to Wells. “I think that’s going to increase the prominence and cause people to really think about how to do cultural due diligence effectively.”

Siebecker, too, is optimistic that the pandemic may have a silver lining for due diligence. Already, he said, artificial intelligence technology is used to get a sense for whether analysts on large investor calls are feeling concerned and what their mood is. Leveraging that same technology to conduct cultural due diligence may allow for more sensitivity to personnel issues, even when the assessment is not done in person, he noted.

“I don’t think we’re there yet; I don’t think we’re even close,” Siebecker added. “But the technology is developing, and I think the pandemic may be an accelerant.”

November 8, 2021 interview by Jennifer Williams Alvarez



Donna Wells

Board Director, Tech CEO, F500 and Mint.com CMO. Working with companies solving interesting problems. Teaching the next generation of entrepreneurs at Stanford.