Organizational, people
and cultural issues in cross-border M&A
Brigid SutcliffeSiddall & Company
World Services Group11 April 2008
E-mail: [email protected]: www.siddall.co.uk
Tel: +44 20 8392 5900
2World Services Group, 11 April 2008
About Siddall & Company
Founded in 1979Founded in 1979
Specialist management consultancy
Specialist management consultancy
Engagements in Europe, US, China, India & Africa
Engagements in Europe, US, China, India & Africa
Member of Institute of Business Consultancy
Member of Institute of Business Consultancy
Making cross-border mergers & acquisitions work
Making cross-border mergers & acquisitions work
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Structure
Context: The M&A landscape
M&A deals: Organizational, people and cultural problems
How can acquirers avoid the problems and increase the chances of success?
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M&A is still an essential part of corporate strategy
Huge M&A volumes: Value of global M&A in 2006 was $3.5 trillion 50% is cross-border M&A
Possible impact of the “credit crunch”?
M&A is an important tool in corporate strategy to achieve Growth Geographic expansion / presence in emerging markets Expansion into adjacent or upstream/downstream product markets Access to new technologies Cost reduction/efficiencies
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M&A: “A triumph of hope over experience”
M&A activity is growing fast but the success rate continues to be low
Fewer than 25% increase shareholder value
More than 90% of mergers are not fully successful
Over 70% of managers believe that cross-border deals are harder than domestic transactions
Source: Hay Group Report ‘Dangerous Liaisons'
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-15% -15%
6%
13% 13%
26% 26%28%
Financingissues
Legal issues Due diligence Integrationplanning
Communication& engagement
Selection ofmgt team
Cultural issues Pre-dealsynergiesevaluation
‘Soft’ factors
Focus of effort: % improvement in chances of success relative to average M&A deal
Source: KPMG report on M&A
Focusing on ‘soft’ factors improves chances of success
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Structure
Context: The M&A landscape
M&A deals: Organizational, people and cultural problems
How can acquirers avoid the problems and increase the chances of success?
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The M&A Process: What can go wrong
StrategyStrategy TransactionTransaction IntegrationIntegration EvaluationEvaluation
Typ
ical is
su
es
•Unclear strategy
•Wrong target
•Insufficient focus on people and cultural issues
•Inadequate communication/ engagement
•Integration plan too “top down” and insufficiently flexible
•Lack of prioritisation & clear milestones
•Victory declared too early, leaving underlying problems unresolved
•No systematic evaluation of how integration is working on the ground
•Overpaid for target
•Excessive focus on financial and legal due diligence
•Incomplete due diligence esp. people & cultural
•Planning doesn’t start early enough
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Reasons for M&A failure
Critical omissions in due diligence and post-merger integration strategies
Firms prioritise financial and systems due diligence and not ‘intangibles’
Insufficient focus on ‘intangibles’ (business culture, human capital, organisational structure and corporate governance) makes failure more likely
Result: Lack of engagement and commitment Over 75% of acquired company employees opposed their mergers, and
half of them did so actively 30%+ of business leaders were dissatisfied with the post-merger climate
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How culture clashes scupper M&A deals: Examples
Some high profile examples: Wal-Mart in Germany, Daimler/Chrysler
Acquisitions of founder-managed businesses: Existing culture may be deeply embedded, idiosyncratic and personality-
based
Acquisitions by low-margin, volume businesses of high-margin, customised businesses:
Very different people, focus, KPIs etc (Ford/Jaguar, Ford/Volvo)
Acquisitions of marketing-led businesses by engineering-led businesses (BP/Burmah Castrol)
Apparently similar businesses with very different and embedded national or other cultures
Insufficient effort put into understanding differences Insufficient effort put into integrating the businesses Deutsche Bank/Morgan Grenfell
Differences in national cultures
Differences in business cultures
Language problems
Extent of integration
Structure and processes
Governance and decision making
Importance of people
HR processes
Management capability
M&A Integration Diagnostic Tool
Organisational structure & processes
Leadership & People
Culture
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Good management of soft factors builds value
Cisco:
Pro-active employee retention, including top management and buddy system
Communicate a vision of the merged entity and role for the target’s employees
Communicate the advantages: resources, autonomy, part of a ‘winning team’
Result: Most acquisitions have added value to Cisco
Renault-Nissan:
Obstacles to success: language, decision-making processes, communications patterns, accountability systems and labour/management relations
Integration plan aimed at mitigating the cultural backlash and planning recovery
Result: Nissan business was returned to profit
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Structure
Context: The M&A landscape
M&A deals: Organizational, people and cultural problems
How can acquirers avoid the problems and increase the chances of success?
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Framework for success
Culture
Organisational structure & processes
Leadership & People
Strategy & Context
Integration Plan
Communication & engagement
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Framework for success
Culture
Organisational structure & processes
Leadership & People
• Management capability • HR processes
(remuneration, performance bonuses, induction/recruitment, career development)
• Key characters/ stakeholders (influencers, unions)
• Power map of key stakeholders
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Power map
Power level
High
Low
TrendDecreasing Increasing
A
B
C
D
E
F
G
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Framework for success
Culture
Organisational structure & processes
Leadership & People
• Values and how they are lived
• Corporate ethics• Interpersonal relationships
(individuals/meetings)• Languages• Decision making process• Conflict resolution• Taboo subjects/ no
go areas• Resistance to change
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Culture gaps
Cultural dimensions rating
0
1
2
3
4
5
6
7
8Consensus
Fast decisions
Focus on results
Entrepreneurial
Long time horizon
Team orientation
Willingness to accept conflict
High risk appetiteOpen to change
High levels of accountability
Horizontal cooperation
High levels of trust
Open and honest communications
Fast communications
Face to face communications
Acquirer
Target
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Framework for success
Culture
Organisational structure & processes
Leadership & People
• Organisational structure• Processes• Governance• Customer relationships• Communications
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Alternative organisational structures
Finance function reports through the business line
Network of finance and control relationships to Group CFO
Reporting to local CEO
Local CFOs report directly to Group CFO
Solid reporting lines
Business units unable to exert undue influence on BU level CFOs
Group Executive
Divisions
CEO
CFO
CEO
CFO
CEO
CFO
Independent finance reporting line
CEO CFO
CEO CFO CEO CFO
BoardAudit
committeeBoard
Audit committee
Board
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We help to manage the ‘soft’ factors
StrategyStrategy TransactionTransaction IntegrationIntegration EvaluationEvaluation
Post merger health check
Post merger health check
Pre-deal Integration planning &
implementation
Integration planning &
implementationEvaluationEvaluation
Post-deal
Organisational and cultural due
diligence
Organisational and cultural due
diligence
‘Soft’ factors:
•Leadership & people
•Culture
•Organisational structure & processes
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Organisational and cultural due diligence
Process (depending on access to target’s management and employees)Data room / desk research Focus groupsFace to face interviews SurveysTelephone interviews
Output (based on available information)Written report providing objective review of
• Important people issues• Cultural fit of acquirer and target• Gap analysis• Issues that may create conflict in the new organisation• Key areas to focus on during integration process• Proposed outline organisational structure for the new organisation• Communication priorities
BenefitsIdentification of key ‘soft factors’ in the dealPlanning of immediate post-acquisition actions (communication, retention etc)Plan communications programme to manage expectations and contain anxiety
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Success factors for integration planning and implementation
GeneralCross-party integration teams (from acquirer and target)Communicate, communicate, communicate
Leadership & peopleSelection of top management team (new teams are more successful)Leadership team communicates the strategy and demonstrates the
behaviours for the new entityReduce uncertainty, explain the logic for the acquisitionListen, listen, listen
CultureCelebrate the past Recognise cultural differences, don’t over-integrate
Organisation structure & processesClarify roles and responsibilitiesAdapt or adopt governance
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We help to manage the ‘soft’ factors
StrategyStrategy TransactionTransaction IntegrationIntegration EvaluationEvaluation
Post merger health check
Post merger health check
Pre-deal Integration planning &
implementation
Integration planning &
implementationEvaluationEvaluation
Post-deal
Organisational and cultural due
diligence
Organisational and cultural due
diligence
‘Soft’ factors:
•Leadership & people
•Culture
•Organisational structure & processes
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Post-merger health check
ProcessDesk research Focus groupsFace to face interviews SurveysTelephone interviews
OutputWritten report providing objective review of:
• Current state of cultural fit between acquirer and target• Unresolved issues, misunderstandings and cultural differences that are
preventing successful integration• Key areas of conflict and their underlying sources• Lessons learned (successes and failures)
Priorities for future actionsRecommendations for implementation
BenefitsIdentification of persistent underlying people and cultural issues and differencesPlanning of remedial actions (communication, management actions etc)
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Case study: Post-merger health check
The client
International chemical specialities manufacturer with a turnover of €500m operating in over 30 countries
The problem
They had recently acquired a US-based global company, which would enable them to strengthen their presence in a different market segment. The integration of the two companies was well planned and seemed to have been well executed. However, after some months, it became clear that there were serious tensions over the ‘soft’ factors
• Persistence of “them” and “us” culture• Poor communication across the two companies• Confusion over roles and responsibilities • Each organisation felt that its way was superior, both were unwilling to change• Poor morale which could have resulted in some key senior people leaving
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Case study: Post-merger health check continued
The health check process
We conducted confidential interviews with the senior management team from both companies. This process allowed us to gain valuable insights into their concerns about the unresolved issues, misunderstandings and cultural differences which were getting in the way of a successful integration. These issues were analysed and an objective report was presented, highlighting people’s experiences of the integration process between the two companies, clearly identifying the specific difficulties and problem areas behind the tensions.
The outcome
• Underlying problems identified and objectively articulated early• Platform created to enable both parties to address the problems• Clear process developed to resolve them• With one exception, the original management team stayed on• The acquisition is now a successful autonomous division within the Chemical
specialities group
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Conclusions
M&A is an essential tool of corporate strategy
Focus on soft factors gives a better chance of success
Every deal is different – the best acquirers have a flexible approach
Culture
Organisational structure & processes
Leadership & PeopleStrategy &
Context
Integration Plan
Communication & engagement
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