Career

Is Your Organization Ready to Mitigate Culture Risk in M&A Deals?

4 April, 2019
  • Jeff Cox

    Senior Partner and Global M&A Transaction Services Leader, Mercer

article-img
“It all goes back to people and behaviors and their understanding of precisely what they’re supposed to do differently in the new organization.”

Culture matters. It is a simple, enduring message that applies to virtually everything in today’s world, but it could not be more relevant than when it comes to driving economic value for stakeholders and shareholders of merger-and-acquisition deals. When integrating the workforce of a newly formed organization and protecting reputation risk, ignoring culture is not an option.

In a workforce context, culture is about individual behaviors that deliver business outcomes and how operational drivers can be leveraged to reinforce those behaviors. Cultural alignment is critical for effective organization change in M&A. This alignment calls for a clear business strategy, an understanding of deal rationale and the requisite integration risks in order to successfully execute any transaction.

Culture establishes the foundation for the operating model, which in turn defines the requirements for the talent platform — such as the skills required, expected behaviors, and drivers like pay and rewards plans. Outcomes and results are what matter, so they must be measured to direct any actions required to mitigate integration risks.

New research from Mercer has revealed the importance of mitigating culture risk to drive M&A deal value, with key findings from 1,438 voices from 54 countries who collectively worked on 4,000+ deals on both the buy and sell sides in the past 36 months. Insights were gleaned from four stakeholder groups — M&A Advisors, Business Leaders, HR Professionals and Employees. In all, these stakeholder groups work for companies employing more than 43 million people around the world.

Mercer’s survey found that 43 percent of M&A transactions worldwide experienced serious cultural misalignment which caused deals to be delayed or terminated, or purchase prices to be negatively impacted. In addition, 67 percent experienced delayed synergy realization due to culture issues.

In addition, 61 percent of respondents selected “How leaders behave, not just what they say” as the number one driver of organizational culture. “Governance and decision-making process” (53%) and “Communication style and transparency” (46%) also ranked highly. Deal makers also said that 30 percent of deals fail to ever achieve financial targets due to problems arising from cultural misalignment, including productivity loss, flight of key talent and customer disruption.

Leadership Steps to Engage the Workforce during M&A change

Significantly, 36 percent of the participants (from 47 countries) identified the Top leadership opportunity to create stronger cultural alignment in M&A and engage the workforce. These Top 5 actions are in rank order and make up 86 percent of these responses.

Additionally, from Mercer’s work on more than 1,200 deals annually (60% cross-border), leadership’s ability to embrace change, adopt agile decision-making and prioritizing timely execution is emerging as the key organizational and cultural competency of successful acquirers.

It all goes back to people and behaviors and their understanding of precisely what they’re supposed to do differently in the new organization.

Management Pressure, National Patterns

There is significant pressure on management during M&A transactions. As a result, leaders are frequently distracted from timely follow-through on stated business strategies and goals. It is also not uncommon for leaders and senior managers to poorly communicate the deal rationale to the “rank and file” employees. These tendencies can and do negatively impact financial performance.

Key executives can collectively agree on any number of critical integration objectives, but if any one of them acts counter to the plan they settled on as a group, it can seriously derail execution.

Corporate culture is, of course, predicated on many things: a company’s nation of origin, the type of talent it calls for, the industry it is part of and so on. Mercer asked a panel of M&A advisors who collectively have over 200 years of experience working on global transactions about particular national buyer patterns and behaviors across geographies. The objective was to better understand different national characteristics to cultural behavioral patterns that would affect integrations and impact the likelihood of deal success. The focus was on four key areas that impact integration: risk tolerance, retention of management post-close, clearly assigned governance and decision-making rights, and alignment of rewards with business outcomes.

The panel identified several national characteristics that have implications for cross-border M&A. For example, Japanese and Chinese buyers display an enormous risk tolerance to put forth a winning bid. These same buyers are very reluctant to take proactive steps to create immediate post-close (operations and/or structural) change, being more comfortable with the status quo. Most buyers adopt a 100-day change plan immediately post-close, whereas Japanese buyers are more comfortable with a 1,000-day change plan.

This research -- and client experience -- reveals a proven path to mitigating culture risk in M&A. Buyers can position senior leadership and deal teams to better understand the financial risk embedded in cultural misalignment of a target by adopting the following principles:

  • Recognize cultural misalignment as an operational and reputational risk
  • Set and socialize a clear deal thesis, complete with intended operating competencies and talent gaps to be acquired from the target with all stakeholders involved in your diligence process.
  • Insist on cultural diligence when you are in exclusives with a seller, including “one on one” time with senior target management who are aware of the potential transaction.
  • Document and quantify target operating “red flags” and inconsistencies (say vs. do), pricing them into the deal.
  • Exhibit a willingness to walk away from cultural “deal breakers,” as you would financial irregularities.
     

Indeed, the evidence is strong that senior management stumbles over cultural issues in M&A. However, in today’s competitive M&A markets, select business leaders are prioritizing culture during due diligence and integration, leveraging a disciplined, analytical and practical approach. Those same leaders are better positioned to identify realistic synergies between the two companies and the best timing for integration into the acquiring company.

As a recent report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset put it, it’s vital to recognize that if culture is left to chance, it can absorb precious energy and put the brakes on the new organization’s achieving its purpose and strategic goals. But if led and managed well, culture is the rocket fuel for delivering value to stakeholders. 

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Mustafa Faizani | 30 May 2019

There is no doubt that family businesses are prominent across the Gulf Co-operation Council (GCC) in various industries. From small to renowned multinational corporations, family owned and managed companies are the foundation of the modern country. Many of these businesses have been in existence for five decades and still exist today. As the first-generation of individuals begin to step down, we're seeing a shift to second and third generation ownership. It is estimated that, in the Middle East, approximately $1 trillion in assets will be transferred to the next generation of family owned companies over the next decade.1 The transition from the first to the second generation, and increasingly, the second to third generation, will have tremendous implications on the sustainability and growth of these companies. As a result, legacy and succession planning are becoming an increasing concern for the region, as many businesses stand in a position to pass the baton over to the next generation. While existing leaders prefer to keep the business within the family, there are many challenges that can arise if there is no preparation done well in advance of the transition. This lack of preparation is common, as it's easy for leaders to be so involved in the day-to-day running of the business that they lose sight of longer-term, more strategic priorities. The penalty for failing to tackle leadership or ownership changes can be significant. Lack of a clear, strategic succession plan can cause disruption, conflict and uncertainty within the business, making it vulnerable to an acquisition or takeover. The long-term survival of a business and the preservation of the wealth that has been built, will likely depend on getting ahead of those changes through legacy and succession planning. Have a Strong Internal Talent Strategy   Planning can have many benefits. The priority is to ensure leadership continuity, which is an important factor in keeping employees engaged and ensuring retention. It also allows time to hire internal candidates for key positions, therefore avoiding the cost of external searches. Internal candidates know the organization better and tend to have a better chance of success than external hires. Additionally, promoting internally helps retain good people, because they see opportunities for growth and will stay on to pursue them. A strong talent strategy can also fill leadership positions quickly, not only avoiding the potential cost of unfilled positions and errors from a lack of leadership, but helping to circumvent legal consequences from potential missteps. Evaluate Your Operating Structure and Execute in Phases   Leaders often first look at the current reporting structure and organizational chart to evaluate who the next leader(s) may be. However, it is also important to think of an organization's operating structure and how it may change over time. Leaders must consider how functional activities will evolve as the business grows, while also looking at the experience of the shareholders during this significant change. These factors need to be reviewed before selecting the people who will take over the function. As part of this process, it's critical that succession planning is done in phases. Firstly, it is important to identify the roles critical to the business and the pool of successors that best fit the organization's requirements. Ensuring the right assessments to determine readiness levels can solidify the next generation of company leadership. Multiple assessments methods are suitable, including looking at historical measures of performance, 360 leadership behaviors tests and predictive measures of potential. Involve Executive Leadership   Lastly, executive leadership involvement is essential in the succession planning process. The organization's top leaders should be fully on board with the plan to bring in the next generation and meet frequently to discuss strategic talent management issues. The ultimate results of a business succession plan depend on the adherence and commitment to it from the organization. It requires a high level of engagement and continuous efforts to keep the succession moving forward over time, despite inevitable interruptions of operational needs and unexpected changes. To learn more about succession planning for family businesses, visit us here. 1Augustine, Babu, "Middle East's Family Businesses Get Serious on Sustainability" Gulf News, November 7, 2015,https://gulfnews.com/how-to/your-money/middle-easts-family-businesses-get-serious-on-sustainability-1.1614502.

John Benfield | 16 May 2019

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Meanwhile, in the GCC region, with efforts to diversify the economy, governments are gaining awareness around the importance of responsible investing. The GCC makes up four of the six Sovereign Wealth Funds (SWF), which founded the One Planet SWF Working Group in December 2017 at the occasion of the "One Planet Summit" in Paris. Within the UAE itself, numerous initiatives — such as The Green Economy for Sustainable Development and Green Agenda — are propelling the country into the future of responsible investing. In keeping with the diversification strategy, these initiatives support Vision 2030 by aligning with the nation's economic growth ambitions and environmental sustainability goals. 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Studies and industry evidence have shown the benefits of integrating ESG factors on the company's long-term performance. For example, Deutsche Bank reviewed more than 100 academic studies in 2012 and concluded that companies with higher ESG ratings had a lower cost of capital in terms of debt and equity. Another study in 2015 by Hsu (Professor at the National Taichung University of Science and Technology, Taiwan) and Cheng (Professor at the National Chung Hsing University, Taiwan) found that socially responsible firms perform better in terms of credit ratings and have lower credit risk.3 With companies operating against the setting of public concerns around environmental and social issues, incorporating ESG considerations is now also considered best practice. Employees increasingly want to work for and invest in companies that make a positive environmental impact. Global initiatives and bodies, such as the CFA Institute, have highlighted the financial and reputational risks of not taking ESG considerations into account. While the GCC is beginning to understand the benefits of applying ESG, the region hasn't been too far from its concept. Sharia-compliant investing has been around for the last two decades. Both frameworks apply the negative screening approach and seek investments which provide a sustainable return. With the combination of ESG factors and Sharia screening, Islamic investors can improve investment performance while meeting social and environmental goals at the same time. As the UAE is now focusing on diversifying its investments, it can highly benefit from creating a responsible investing market and culture where strategy and processes go hand-in-hand as important steps for successful integration. When seeking sustainable growth, an additional layer of insight and oversight is extremely crucial to mitigate emerging risks, like climate change. To that end, implementing ESG assessments will help set clear KPIs and identify where and how projects generate value and mitigate risks associated with them. For example, Mercer applies an Investment Framework for Sustainable Growth with its clients, which distinguishes between the financial implications (risks) associated with environmental, social and corporate governance factors and the growth opportunities in industries most directly affected by sustainability issues. Measuring impact and mitigating risks has become increasingly important and represents a strong investment governance process. The benefits of adopting ESG are numerous. While the GCC has started with the implementation of ESG principles, more work still needs to be done in making sure governments are fully engaged with stakeholders, including investors, and strategies are aligned across the region. Regulatory pressures to meet global standards of ESG integration will only increase in the coming years. Instead of hiding from it, it is time for companies, investors and governments to come together and define a way of working that moves the GCC forward in terms of responsible investing and sustainable growth. 1Carvalho, Stanley, "Abu Dhabi To Invest $15 Billion in Green Energy," Reuters, January 21, 2008, https://www.reuters.com/article/environment-emirates-energy-green-dc/abu-dhabi-to-invest-15-billion-in-green-energy-idUSL2131306920080121 2Energy and Environment Park:Setup Your Company In Enpark, UAE Freezone Setup, https://www.uaefreezonesetup.com/enpark-freezone 3Chen, Yu-Cheng and Hsu, Feng Jui, "Is a Firm's Financial Risk Associated With Corporate Social Responsibility?"Emerald City, 2015, https://www.emeraldinsight.com/doi/abs/10.1108/MD-02-2015-0047

Danielle Guzman | 16 May 2019

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To quote Pearly Siffel, Strategy and Geographic Expansion Leader, International, at Mercer, "In the future, work will be less about 'using' technology and more about 'interacting' with technology." 1. Technology Is Fungible, People Are Not   The well-worn axiom that AI will transform the future of work is more true today than ever before, but it misrepresents how the future will be transformed. What may start as a race to adopt and leverage AI in the workplace will inevitably end in a saturation of technology: As soon as one firm unlocks the full potential of automation, it'll be a matter of time before their competitors replicate the model. Who wins in a world where AI is in every office? The organizations with the best talent. Consumer and workforce demands will inevitably adapt to an AI-empowered future, and the real differentiator will be the human skills, such as critical thinking, emotional intelligence and creative problem solving, paired with technology. A recent report by the World Economic Forum outlines the 10 skills humans will need to create value in an increasingly automated world, and it's a great reminder that peoplemust remain the focus if we're to build anything that works in the future of work.1 Tamara McCleary, Founder and CEO of Thulium, summarized this point well in a recent conversation we had: "If we are distracted by all that glitters with the promise of a frictionless future with AI, then we will surely miss the mark. While technology may be an economic accelerator in the future of work, people are still the core drivers of sustained productivity." 2. When AI Is Everywhere, People Will Still Go Somewhere   Everyone's familiar with the dystopic tomorrow-lands depicted in literature and film: techno-centric, automated megacities serviced by an army of robots where people are undervalued. This is not how I envision the future of work. The proliferation of AI may mean some jobs will be automated, but those displaced workers still represent remarkable potential to cities, employers and economies. McKinsey estimates that disruption from digital transformation, automation and AI will force approximately 14% of the global workforce — 375 million workers — to find new career directions.2 However, as the economy of the future becomes less murky and reskilling/upskilling becomes a staple of every career path, there will be a massive scramble to find talent to plug newly created roles in the workforce. This new economy is why people-skills will be so sought after in the future of work, according to April Rudin, CEO and Founder of The Rudin Group. "AI will be a tool to empowerhumans instead of replace them, enabling people to spend time on the things they do best: making relationships, exercising judgment, expressing empathy and using their problem-solving skills." Those cities that remain people-focused will be the ones with talent on-hand, and they'll be the ones to succeed. 3. A Clean Start Provides a Leg Up   Think about the investment that today's economic powerhouses have made in their broader commercial infrastructure. Think about public transportation systems, electrical and IT networking, private development and public zoning districts. Billions of pounds, dollars, yen, renminbi, rupees, euros and more spent on getting those cities ready for the economy of today. How will those investments pay off in the future of work? Today's emerging megacities are "unencumbered by the legacy systems of their larger and more established brethren," according to Mercer's People-First research. While it may require massive investment to install the building blocks of a future-focused economy, there's none of the wasted expense or necessary compromise that comes with retrofitting an outmoded city for the tech-enabled future. Those cities can focus time and resources on building attractive, people-centric cities where employees will want to live, work and raise families in the future. "It's hard to fathom the competitive advantage a modern, mass transportation system gives a city," says Walter Jennings, CEO of Asia Insights Circle. "When economic reforms started in China, Shenzhen was a fishing village of 50,000 people. Today, there are estimates of 12–16 million residents." What's Next?   Let's return to the city planner. You're overlooking your parcel of land, and you're trying to envision the ideal city of the future. We may not know the street names, but we have a better sense of the guiding principles for your soon-to-be booming metropolis. I leave you with my three takeaways, just one lens through which to explore the opportunities which lay ahead with people, technology and the emerging megacities that will power global growth. 1. Build your city (or company) around people. 2. Don't discard valuable assets. There will always be a place for good talent in good places. 3. Look for what will carry you into the future, not what's carried others in the past. 1Desjardins, Jeff, "The Skills Needed to Survive the Robot Invasion of the Workplace," Visual Capitalist, June 27, 2018, https://www.visualcapitalist.com/skills-needed-survive-robot-workplace/. 2Illanes, Pablo, Lund, Susan, Mourshed, Mona, Rutherford, Scott and Tyreman, Magnus, "Retraining and Reskilling Workers in the Age of Automation," McKinsey Global Institute, January 2018, https://www.mckinsey.com/featured-insights/future-of-work/retraining-and-reskilling-workers-in-the-age-of-automation  

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