Organizational, people and cultural issues in cross-border M&A

1. Organizational, people and cultural issues in cross-border M&A Brigid Sutcliffe Siddall & Company World Services Group 11 April 2008 E-mail: brigid.sutcliffe@siddall.co.uk Website: www.siddall.co.uk Tel: +44 20 8392 5900

2. About Siddall & Company Founded in 1979 Making cross-border mergers & acquisitions work Specialist management consultancy Engagements in Europe, US, China, India & Africa Member of Institute of Business Consultancy

3. 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?

4. 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

5. 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'

6. Focusing on ‘soft’ factors improves chances of success Focus of effort: % improvement in chances of success relative to average M&A deal ‘Soft’ factors Source: KPMG report on M&A

7. 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?

8. The M&A Process: What can go wrong Strategy Transaction Integration Evaluation • Unclear strategy • Wrong target • Overpaid for target • Excessive focus on financial and legal due diligence • Incomplete due diligence esp. people & cultural • Planning doesn’t start early enough • 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 Typical issues

9. 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

10. 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

11. Management capability Differences in national cultures Culture M&A Integration Diagnostic Tool Differences in business cultures HR processes Leadership & People Language problems Importance of people Extent of integration Governance and decision making Organisational structure & processes Structure and processes

12. 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

13. 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?

14. Framework for success Leadership & People Culture Integration Plan Communication & engagement Strategy & Context Organisational structure & processes

15. Framework for success • Management capability • HR processes (remuneration, performance bonuses, induction/recruitment, career development) • Key characters/ stakeholders (influencers, unions) • Power map of key stakeholders Leadership & People Culture Organisational structure & processes

16. Power map A B High C Power level E D G Low F Decreasing Increasing Trend

17. Framework for success • 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 Leadership & People Culture Organisational structure & processes

18. Culture gaps Cultural dimensions rating Acquirer Target

19. Framework for success Leadership & People Culture Organisational structure & processes • Organisational structure • Processes • Governance • Customer relationships • Communications

20. Alternative organisational structures Independent finance reporting line Reporting to local CEO Board Audit committee Board Audit committee Board CEO CEO CFO Group Executive CFO CEO CEO CEO CFO CEO CFO Divisions CFO CFO • Finance function reports through the business line • Network of finance and control relationships to Group CFO • Local CFOs report directly to Group CFO • Solid reporting lines • Business units unable to exert undue influence on BU level CFOs

21. We help to manage the ‘soft’ factors Strategy Transaction Integration Evaluation Evaluation Integration planning & implementation Organisational and cultural due diligence Pre-deal • ‘Soft’ factors: • Leadership & people • Culture • Organisational structure & processes Post merger health check Post-deal

22. Organisational and cultural due diligence Process (depending on access to target’s management and employees) Data room / desk research Focus groups Face to face interviews Surveys Telephone 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 Benefits Identification of key ‘soft factors’ in the deal Planning of immediate post-acquisition actions (communication, retention etc) Plan communications programme to manage expectations and contain anxiety

23. Success factors for integration planning and implementation General • Cross-party integration teams (from acquirer and target) • Communicate, communicate, communicate Leadership & people • Selection of top management team (new teams are more successful) • Leadership team communicates the strategy and demonstrates the behaviours for the new entity • Reduce uncertainty, explain the logic for the acquisition • Listen, listen, listen Culture • Celebrate the past • Recognise cultural differences, don’t over-integrate Organisation structure & processes • Clarify roles and responsibilities • Adapt or adopt governance

24. We help to manage the ‘soft’ factors Strategy Transaction Integration Evaluation Evaluation Integration planning & implementation Organisational and cultural due diligence Pre-deal • ‘Soft’ factors: • Leadership & people • Culture • Organisational structure & processes Post merger health check Post-deal

25. Post-merger health check Process Desk research Focus groups Face to face interviews Surveys Telephone interviews Output Written 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 actions Recommendations for implementation Benefits Identification of persistent underlying people and cultural issues and differences Planning of remedial actions (communication, management actions etc)

26. 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

27. 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

28. 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 Integration Plan Communication & engagement Culture Leadership & People Strategy & Context Organisational structure & processes

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