How Advanced Acquirers Approach Culture in M&A

How advanced acquirers approach culture in M&A Findings from the Willis Towers Watson M&A Culture Group

How advanced acquirers approach culture in M&A Findings from the Willis Towers Watson M&A Culture Group Table of contents Introduction ............................................................................................................2 Chapter 1: Key imperatives of addressing culture in M&A transactions ..............4 Chapter 2: Cultural realities in M&A transactions ......................................................... 6 Chapter 3: ‘The culture will take care of itself’ and other M&A myths .................. 9 Chapter 4: Defining culture for the specific purpose of the M&A transaction .....10 Chapter 5: The practical application of the M&A cultural framework: Input .....13 Summary ...............................................................................................................15 Authors Jim McKay, Managing Director, North American M&A Human Capital and Benefits Leader Craig Keller, Senior Director, M&A Consulting and Head of Change Management, Asia Pacific John Bremen, Managing Director, Human Capital and Benefits, and Global Head of Thought Leadership and Innovation How advanced acquirers approach culture in M&A 1

Introduction This paper is part of a series about advanced M&A cultural The reason for this approach is that these firms concluded practices. The intent of the series is to share the current state many years ago that cultural problems are a major factor of leading practices in cultural work, specifically and only for contributing to deal failures. While they had seen all the the M&A situation. publicly available research on how cultural problems led to deal failure, it was their own specific reviews of the success It is based on the findings from a unique and highly or otherwise of their own deals, led by their corporate experienced group of M&A practitioners that meet on a development function, that gave them the reason to improve regular basis with Willis Towers Watson to share and discuss their overall approach to culture, both in the acquisition phase their views on this area. Each firm’s participants are drawn — when they are spending capital — and in the integration from its in-house M&A functions, representing corporate phases and beyond — when the return on the capital invested development, business development or corporate strategy is expected to materialize. (the term varies based on each firm’s internal definition of the role) and its Human Resources M&A group. Throughout the As a result, the group of M&A practitioners developed their series, the content reflects the discussions within the group approach to address culture in a structured way, similar to and not the sole practices of any one firm. how their firms approached any business problem (i.e., being clear on the root causes and problems, and the goals and The distinguishing feature about the group that will also risks or costs and benefits of any analysis, explained in terms help readers understand the content better is that cultural a business leader could understand). investigations are an accepted part of their M&A process. This means that the focus of the paper is on: This paper shows how they first brought that structure and discipline to cultural discussions through capturing in one ƒ What they do in culture work place the parts of culture that have the greatest impact on ƒ When and how they do it a transaction. This was accomplished by creating a cultural framework built for M&A purposes, to facilitate the structured This paper does not address why they should do the work in and organized discussions in this area taking place. This the first place, which is the subject of a separate article in the framework formed the platform for ongoing cultural series. investigations because it more precisely maps culture’s impact on deal outcomes, goals and risks. As one participant commented, “Culture is a business imperative for us; it is not investigating culture for culture’s sake.” 2 willistowerswatson.com

About the types of transactions in the group’s Finally, the issue of growth or erosion of shareholder value as discussion a specific goal, as seen through buyer stock price changes, is The discussion is centered on bigger firms buying smaller not typically a goal of talent-based deals and was not a factor firms with an emphasis on “talent-based deals,” meaning deals in our analysis. In contrast, larger deals lend themselves where the people at a target are deemed the most important better to share price comparisons with peer companies, as asset among all the other assets at a target. For most buyers, this data is publicly available and can then be analyzed by the deal strategy centers on acquiring to expand their consulting firms and academics alike. capabilities (also known as “scope deals” in M&A circles). However, the general principles reviewed here can be We did not consider any transaction that transformed a adjusted and applied in varying “doses” to most deals. company to such an extent that creating a “new” culture, or third culture, was required. While these transactions do happen, they are a very small percentage of actual deals. Likewise, large industrial deals, and mega-mergers, while discussed within the group, are not the focus of this paper. The consensus was that the size, scale and global scope of these deals made it difficult to incorporate the approaches discussed here early, and also that there were many other “assets” in the combining firms, well beyond just talent and employees. How advanced acquirers approach culture in M&A 3

Chapter 1 Key imperatives of addressing culture in M&A transactions The group highlighted nine imperatives to addressing culture in M&A, in three broad categories: ƒ Culture Successful transactions require ƒ Leadership people to change, and to do that we ƒ Developing people need to be specific on the changes, not just the what, but the why and About culture how. We need to tell them what 1. Culture and cultural integration are important in all the priorities are, and what actions transactions where people are involved, but even more they need to take, that they had not so in talent-based deals, where people are the most done before. And you can’t throw significant asset of the target. too many changes at one time and 2. Don’t leave culture to be an integration activity. Start expect anyone to work through early. Most cultural problems are entirely predictable and them effectively. That’s just not how can be traced back to decisions made — or not made — early in the deal life cycle. The consequence of leaving humans are wired to work. Nor can culture work to the post-close phase is that, by then, it’s you talk about the importance of too late to effectively resolve many of these predictable changes if those changes have a problems or issues, and the opportunity to prevent them weak line of sight to specific goals happening in the first place will have been lost. and risks.” 3. Prepare the approach before any deal surfaces. Develop the cultural approach and framework so the organization is Integration Leader, Corporate Development ready to apply it in the transaction. It’s far more difficult to create a new approach during the heat of any deal. 4. While a framework is vital, the components are what matter. Be clear what the term “culture” means in this context to better facilitate conversations about the significant components within that term and how these components directly impact deal success. 5. It is not just about behaviors. Do not get caught up thinking that culture is just about behaviors. To impact the deal, it boils down to people — specifically, what they should do differently than what they have done before. They must know what the priorities are and the actions to take more so than “behavioral changes.” Priorities and actions get to urgency and importance, while “behaviors” can fall into the category of “generalizations,” often to be addressed much later in the post-close phase. 4 willistowerswatson.com

About business leadership Developing people who can lead the cultural 6. The business leaders must take ownership of culture. assessments The key here is that the business takes ownership of 7. Educate them to ensure they understand M&A deeply. “culture as a business challenge” rather than leaving it in The lack of understanding of the M&A process and its the hands of any function or delegating it to the integration phases; all the dynamics relating to speed, confidentiality, management team. There is nothing special or unique ambiguity, lack of access to people broadly; and the about culture challenges, and this means culture needs to challenges of working with leaders who often hold take its place alongside many other competing priorities conflicting views or no views at all need to be understood and challenges. But it cannot be a stand-alone item, blind and processed before understanding where “culture” fits. to what other challenges exist in a deal. 8. Train them to prepare and educate other leaders. Help them understand the reasoning, process, issues and benefits of the work. Do this before any transaction surfaces because it is not easy to get consensus during the actual transaction, especially with leaders relatively inexperienced in either M&A or “culture.” 9. Give those running the investigation the authority to act and intervene. They are the leaders responsible for defining and controlling the culture discussion at the start. But it is nearly impossible to make an impact in this area if they do not have the authority and support to do so. How advanced acquirers approach culture in M&A 5

Chapter 2 Cultural realities in M&A transactions Definition. Just defining culture is one of the most difficult parts of the M&A process to address because there are so many definitions out there (just try an internet search of the term). Furthermore, as commented previously, definitions It is hard to solve a problem you fit for the steady state are not fit for the M&A environment. can’t define. The problem with the So, to ground the reader, we will explain what we mean by culture in an M&A context, but we will also explain why the term ‘culture’ itself is that there are constituent parts are more important than the definition. so many definitions out there. We concluded that definitions fit for the Components of culture (shown in the culture framework). ‘steady state,’ which we already have The fact is that not all components of organizational culture in our organization, were not fit for are equally important or will have a major impact on the performance of the organization during the critical acquisition the practical realities of a M&A and and integration phases that form part of the total deal life all the dynamics and constraints that cycle. The challenge is to distinguish the truly important from come with trying to do a deal. Culture the elements of lesser importance based on the type of deal change at the best of times is a slow and the phase within the deal life cycle. While, this challenge process, whereas in contrast M&A is should not be underestimated, in practice no firm tries to tackle all the parts of culture shown in the framework at the fast and chaotic.” same time, or places equal weight on the components. And Vice President, Human Resources while it is true to say that each deal is different, requiring a different emphasis, the overall process and starting point are relatively consistent from deal to deal. People and culture are interrelated. Understand the connection between people and culture. They are inseparable, interrelated and interdependent. The two must be tackled together, since, simply stated, if there are no people in a transaction, then there are no cultural problems to worry about. 6 willistowerswatson.com

As one CEO said, The need for speed in transactions prevails. If the first stages of the deal do not go well, the rest of the deal will likely follow the same path. The general rule in M&A to ensure that deals do start off well is to focus on decisions and actions that impact the short-term goals first and longer-term goals I don’t buy the cultural excuses. second. Any other activities that don’t support these goals The fact is, we did not have the right explicitly get deferred. The rule results in the principle of ruthless prioritization of initiatives and supporting actions. leaders who could lead through a transaction, or the right managers The dominance (inflexibility) of the big firm’s existing who could manage through it.” culture. The essential starting point in transactions involves two existing cultures: the buyer’s and the target’s. Big firms CEO, Fortune 500 firm have multiple business units, often hundreds of thousands of employees and well-established cultures. Even then, in today’s environment, many of these firms are in the process of changing or adapting their companywide cultures as they try to grow, innovate, transform or just survive. This quote places the responsibility for solving cultural problems firmly on the shoulders of leaders first; the group For acquisitions, the reality is that larger firms cannot change universally agreed that leaders are the people that most their structure to accommodate any one deal (and these firms influence deal success and together with managers are most may do multiple deals each year). In the vast majority of deals, likely to keep the key talent and the rest of the employee the buyer must integrate the target into its culture, even if the population motivated and productive. buyer sees elements of the target’s culture that it likes, which often happens. Everyone takes time to learn culture. This is true for the CEO down to the rank and file. The fact is that people learn HQ’s need for consistency versus preserving and growing culture over time, as they join and work in any organization. the business. From the headquarters level, the buyer wants People cannot learn culture overnight, but in a transaction, to implement many of its required policies and procedures the acquired company’s employees need to learn a lot about (often referred to as “’non-negotiables”). But from the deal the acquirer, very quickly. In the overwhelming number strategy perspective, the business doing the deal wants to of transactions, the target’s people need to adapt to the not just preserve what made the target successful but also acquirer’s way of doing things and not vice versa. grow the integrated business. There is always continued tension between this need to “integrate” and the need to preserve and grow value. How advanced acquirers approach culture in M&A 7

The people part and the learning part are culture’s essential features, and these often run at odds with the realities of M&A, where the general principle for decisions emphasize “speed over precision.” Both these principles, the need for We don’t try to push ‘cultural’ ideas up speed and prioritization, must be applied to any culture work to HQ but keep them at the acquiring in the M&A context. As one participant stated, “The whole business unit level. For example, if M&A transaction is a compromise — between rules and the seller has better ways of selling realities, perfection and time.” to customers, or keeping them, or So, to illustrate some of the misperceptions and challenges expanding them, or charging them a with this topic, let’s review what one CEO said about culture premium, then that’s the sort of stuff in a huge merger. we want to learn and adopt. But we also need to clearly identify the key employees who truly drive most of these customer relationships, and often that is not as easy as it seems on paper, and even then, we run into another problem. Often the way they are paid is not the way we pay our similarly situated employees.” Business Unit Leader 8 willistowerswatson.com

Chapter 3 ‘The culture will take care of itself’ and other M&A myths In 1998 Citicorp and Travelers announced plans to merge And one year later, a different story: to create Citigroup, a huge financial conglomerate that combined banking and insurance. While the merger was a megadeal and highly transformative, it is still notable to our analysis because it ran into many cultural problems right from the start. We are talking about putting two While this deal has been the subject of many articles, which cultures together that are quite another internet search will unearth, the issues around different, quite distinct. I am trying hard culture and cultural integration are what we are interested in to understand how to make this work. examining. In today’s deals, many of the issues repeat, and I will tell you that it is not simple, and the comments below still ring true today even 20 years later. it is not easy, and it is not clear to me John Reed, then CEO of Citicorp, was quoted as saying the that it will necessarily be successful. following: As you put two cultures together, you get all sorts of aberrant behavior. I will Shortly after announcement during an Investor Q&A tell you that the literature of putting session: two families together speaks volumes to me. The problem of stepparents, the description of some children rejecting one parent and other children rejecting The culture will take care of itself. other parents is all meaningful to me. People will ultimately learn how to work together. They may not like it. And what you really have to do in a They may complain a lot. But you merger is change. But the willingness know what? Five years from now, they of people to change is limited, and will be quite surprised at how they what you pay them seems inversely have learned to get along.” correlated to their willingness to Business Week, June 7, 1999 change.” “Is this marriage working?” Fortune, March 20, 2000 “Behind the Shootout at Citigroup” His words turned out to be prophetic, Reed left the firm in 2000 and Citi and Traveler’s “separated” in 2002. In this brief description, he has covered a broad range of issues: from the initial and all-too-common refrain of “culture is not that important” to the pain points that occur if it is left to chance — with leadership, pay and change challenges all wrapped up in a few sentences. How advanced acquirers approach culture in M&A 9

Chapter 4 Defining culture for the specific purpose of the M&A transaction As noted earlier, there is not one agreed-upon definition of culture, but we will show how these serial acquirers overcame that initial obstacle. First, you have to get the culture But, even if leaders recognize the elephant out of the room before you importance of these issues, and can move forward. In M&A circles, believe me, that’s not always the case, culture may be the most widely used they still struggle with the relevance business term without an agreed of this work early in the deal life definition. It means different things cycle while other initiatives are going to different people, even in the same on at the same time requiring their organization. That’s not good; it is time, effort and attention. They need confusing and wastes leaders’ time. to know how important, urgent and We can’t expect leaders to spend impactful any recommendations are. their time on theoretical debates or We still have the John Reeds of this trying to provide solutions to broad world to convince.” generalizations. Our leaders can Corporate Development, Participant responding to act on specifics; they can’t act on the quote above generalizations.” Corporate Development Develop a framework to control the The group developed this framework to house these conversation (refer the culture framework PDF) concepts and illustrate visually the issues and questions The first step is to define the scope of the M&A cultural leaders need to think about, but also so the group itself could investigations using a framework to initiate the conversation. dig into deeper conversations without getting stuck on each The framework helps leaders understand the cultural firm’s way of describing culture. concepts and elements and their importance to the transaction’s success in a simple yet comprehensive and However, it is important to understand that this is an visual way, but it needs to be balanced with a heavy M&A “aggregated” model, and each firm has its own variation educational element to help remove the risk of generalizations suitable for its own company-specific purposes, which is or academic debates infiltrating the discussions. This keeps adapted from how each firm currently describes its culture. the conversation focused on solving problems and issues in the business situation at hand: the deal itself. 10 willistowerswatson.com

The seven components and the questions or issues they are 5. Non-negotiables: This term is unique to M&A and answers designed to address are: what areas must change to become part of the buyer. It is closely tied with the organizational design and operating 1. Business drivers and basic facts: This answers the model, but other examples are financial reporting, business fundamental questions of what you are buying, why you are budgeting, budgeting approvals, health and safety buying it and where the value is. standards, compliance standards and training, and travel 2. Leadership and talent: This answers the question of who and expense rules. the key people are in the target. 6. Inclusion and diversity (sometimes also referred to as 3. Leadership compensation and performance: This shows diversity and inclusion): This answers what the current what is truly valued in the target and who is valued when status is and what potential changes may be needed compensation totals are compared. in integration. This is an issue of growing importance 4. Organizational design and operating model: This shows especially to large Western firms, but it is not often a what needs to change, mostly in how the target needs priority for smaller firms and not an issue at all in some to be organized and operate to be part of the larger firm. non-Western countries. This component comes up as the most common and most 7. Post-close working relationship: This answers how predictable one that requires change at the target. Also, employees at all levels from the two organizations work these predictable changes often cost a lot of time and together after close. This is what is learned, over time and effort and cause frustration for target employees as they is the most intangible of all the components. It is generally try to adapt to the bigger firm’s way of operating. thought of as the “softest” element of culture compared with those elements above. Leaders are not excluded from these issues; they face them first. How advanced acquirers approach culture in M&A 11

In reviewing just a few of these components, you can see why M&A professionals are horrified when they hear the statement “Nothing much will change” during deal discussions. But connecting and coordinating all the above pieces and When we first started, we’d get keeping them connected throughout the whole deal life cycle pushback from leaders who reckoned is a big challenge. The specific M&A challenge, as the saying that most of these things can only goes, is that “Knowing what to do, is not the same as deciding delay getting the deal consummated, what to do, and that’s also far different from actually doing it.” seeing them as problems without immediate solutions, and problems for the integration team to solve. We quickly fell back into our old ways. Issues were worked in siloes and all the interdependencies got lost. What started off as strategic became very tactical. Everyone was responsible but nobody was accountable.” Corporate Development 12 willistowerswatson.com

Chapter 5 The practical application of the M&A cultural framework: Input The cultural analysis begins for these firms as early as The practical application: Output possible, with the framework being used to capture the Once the basic information is gathered, however incomplete relevant information in one place. The process starts by — and it will be incomplete — the first pass in discussing collecting and organizing the basic facts and data for both the results forces leaders to be specific about the parts organizations, where the core elements shown reflect the they deem important. The preliminary answers give a faster building blocks of the organizations. and better understanding of both organizations and the likely integration challenges, including the complexity of the integration. These reviews serve as a catalyst to help map any one of the components to a specific goal or risk. They bring out the degree of change needed to successfully execute any At first, and like many other firms, we plans based on the integration strategy. worked on parts of the components The output helps determine exactly how the integration will in the model. But it was not very be approached as well as the funding and resources needed strategic. We needed a better starting to raise the probability of success: Any analysis can only point and for that starting point increase the probability of success but cannot guarantee to lead to a more, comprehensive, it. So begins the “ruthless prioritization” process, based on having better information at hand early enough to make better integrated, coordinated and decisions. connected approach within our organization.” Corporate Development Time is not your friend here, and as the intensity of the deal heats up, financial and legal issues dominate the due diligence stage, and then maintaining operational performance dominates the period from announce to close. And in talent deals, both periods, due diligence and announce- close can be very short. We needed an established starting point; we just don’t have time to develop new models or approaches during the heat of a deal.” Corporate Development How advanced acquirers approach culture in M&A 13

The hard data summarized by the framework responses inform leaders and direct thinking in these situations and The practical benefits: The framework move off the common problem of decisions in the cultural turns cultural generalizations into deeper space being made by anecdotes, opinion and “stories” business discussions because it: from their own beliefs or buildup in the course of target ƒ Helps leaders come to a common understanding of interactions. It is not that these stories and opinions are not the relevance and meaning of culture within the M&A important — they are — but now they can be tested against context for each specific deal the facts gathered. ƒ Breaks culture into terms and components that However, this is not a “one and done” process. Early decisions leaders can easily understand and focuses their need to be revised on a regular basis as new facts and attention on the impact of the key components on a data emerge or circumstances change, which is typical in specific goal or risk transactions. In fact, it would be atypical if circumstances did ƒ Establishes the direct dependency of the people part not change over the course of a transaction. to the broader cultural part and the people who will be responsible for executing the integration As a related by-product, this approach ensures that areas ƒ Forces early discussions about the value of the that leaders have no control or influence over in the early target — as a stand-alone firm and then in the stages do not distract from the conversation. These are potential combination mostly addressed in the post-close component and cover ƒ Necessitates further discussions about the such aspects as: people who drive that value now and in the future ƒ How will we work together? combination, and where these people are currently in ƒ What do we do about employee engagement? the organization — usually even more difficult to get to than the “value” part ƒ How do we ensure that we have the right leadership ƒ Provides better information to create or refine and behaviors? resource the integration strategy, plan and tactics It is important to highlight that these areas are not ignored, because information will be collected to understand how each firm operates. But they are not the focus of the early investigations and no decisions in these areas are made at this stage. These are typically areas that are taught, experienced and observed, which takes time to do, and they unfold mostly after the deal closes — the learning time-based part of culture, mapped to the deal phase where it rises in priority. 14 willistowerswatson.com

Summary While we know that experienced acquirers evaluate culture already, we also know that there is no “silver bullet,” no “one way” or the “best way.” Each firm does it differently, but they all share one principle in common: They all have a very organized and disciplined approach. We’ve never looked back once we The framework is the starting point — but there is nothing were able to demonstrate the value unique about the framework, and each firm has variations of this work. Now business leaders of this model for its own purposes. The important point is to reach out to make sure we’re going have a framework in the first place, prepared and ready for to do these assessments for them, use, and for it to contain the elements that support and most especially since we can have multiple impact deal goals and risks. deals going on at the same time, Most of the planning for integration and the related changes which frankly stretches our ability to first takes place at the buyer, but then in collaboration with give each deal equal attention.” the target as the deal moves through the phases. However, most of the actual changes happen at the acquired business Corporate Development, Cultural Assessment Team and are actioned by the people who work there. These are the people who must change their daily activities to make the changes “stick.” Done well, this work can have a massive impact on the success of the deal. How advanced acquirers approach culture in M&A 15

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