Building the Business Case for Culture in M&A

Building the business case for culture in M&A Findings from the Willis Towers Watson M&A Culture Group

Building the business case for culture in M&A Findings from the Willis Towers Watson M&A Culture Group Table of contents Introduction ............................................................................................................2 Chapter 1 The deal life cycle and typical goals .............................................................3 Chapter 2 How these acquirers built their business case and the ROI question 4 Chapter 3 Eight key steps in building the business case ...........................................5 Chapter 4 Who uses the output of this work? ................................................................7 Summary ...............................................................................................................10 Authors Jim McKay, Managing Director, North American M&A Human Capital and Benefits Leader Steve Allan, M&A Global Leader, Human Capital and Benefits Building the business case for culture in M&A 1

Introduction This paper is the second of a series about advanced M&A Our first paper in the “M&A cultural practices of advanced cultural practices. The intent of the series is to share the acquirers” series showed how M&A practitioners brought current state of leading practices in cultural work, specifically structure and discipline to cultural discussions through and only for the M&A situation. capturing in one place the parts of culture that have the greatest impact on a transaction. This paper focuses on It is based on the findings from a unique and highly how they created the business rationale for incorporating experienced group of M&A practitioners that meet on a culture as part of their M&A process in the first instance. regular basis with Willis Towers Watson to share and discuss Each firm has different ways of describing the work they do their views on this area. Each firm’s participants are drawn in “culture” and so the terms “cultural work,” “assessments,” from its in-house M&A functions, representing corporate “investigations” and “organizational assessments” (the term development, business development or corporate strategy several use for their cultural work) are used interchangeably. (the term varies based on each firm’s internal definition of the The important point being that each firm has an organized role) and its Human Resources M&A group. Throughout the and disciplined approach to the work and a clear rationale for series, the content reflects the discussions within the group what they do and why they do it. and not the sole practices of any one firm. As in any approach to complex problems, the first step is to The distinguishing feature about the group that will also understand the specifics of the business situation. For M&A help readers understand the content better is that cultural deals this means understanding how a transaction is put investigations are an accepted part of their M&A process. together, from beginning to end, and what happens, and what is important, throughout this journey. To achieve this means understanding, the deal life cycle, the phases within this cycle and the goals within each phase before determining where “culture” fits. Commentary on studies on culture in M&A The research shows that cultural issues consistently The group reviewed the vast amount of external research in rate as a key source of deal failure. Generally, though, this area to consider what could be learned from what others studies did not have a consistent definition of culture and outside the group were doing. The comments below reflect definitions were either based on author’s definition, not the summary of several of the group’s discussions in this defined at all or often applied with the benefit of hindsight area but are not specific to any research paper or article. to a deal already classified as a “failure.” Therefore, there is no certainty in reviewing the studies that respondents were Generally, the research confirms that, by any measure, thinking about the same issues and terms when responding M&A is a complex, high risk venture. Based on the source to their views on the role of culture in deal failures. But this of the research material, between 50% and 70% of deals is not an uncommon finding, in that when respondents are fail to meet their intended goals. This statistic does need asked about their definition of culture, answers can vary, more explanation. It relates to whether the deals reached even for respondents within the same organization. or exceeded the goals on which the decision to invest was But no matter what the definition, culture is clearly one made. But it does not mean these are necessarily bad or of the most complex areas for organizations to address; poorly performing deals; they may well be profitable in partly because these organizations find it hard to express their own right, but they have not reached the profit and the compelling business reasons to conduct cultural work performance measures on which the deal investment was in M&A in the first place and partly because they don’t based, or for a deal built upon multiple goals, only some of have the knowledge, skills or experience to do anything which have been fully met. meaningful about it. 2 willistowerswatson.com

Chapter 1 The deal life cycle and typical goals The deal life cycle is the essential starting point because, in framing the work in business terms, this is the M&A situation culture work is designed to address. But the deal life cycle is difficult to understand in its entirety, and barely understood by those not deeply ingrained in M&A. We use the deal life cycle table To address this issue the group developed the deal life to orientate our leaders. While in cycle to help leaders understand the transaction in a corporate development, it’s ‘M&A 101 comprehensive and visual way. (The deal life cycle table is stuff,’ for others it’s ‘rocket science.’ available as an attachment.) For the purposes of this paper, We have to manage our own leaders at the deal life cycle is defined as consisting of five phases times and the fact that many outside along with an explanation of what happens at each phase, commentators have their ‘ear.’ I’m the typical goals for each phase and the corporate decisions and legal milestones that signify the progression of the amazed at the ‘commentators’ who transaction and the movement from one phase to the next. speak about how culture work can However, note that this is an “aggregated” model, and each impact our deal success, and our firm has its own variation suitable for its own company- deal goals. We know that. What they specific purposes, based on how they describe the deal life struggle to define is what success cycle and how they position the deal goals. means in the context of any of the It is also important to point out that it is not a clean, linear phases within the overall transaction. process, as the deal life cycle table may imply. The phases On top of that many just don’t seem and goals are not separate and distinct and can and do to understand how a deal unfolds and overlap in many areas. The key is that each deal phase is built how decisions must be made within on the previous one, and deal goals are adapted, refined or added as more information becomes available. each phase to ensure the deal keeps moving forward. They often miss This “build” is critical to understand for transactions and this fact, and are blind to how these further that the “quality” of the build is based on the decisions decisions, however imperfect, impact made, or not made, or deferred, from the previous phase, what happens in the next phase. And which itself depends on the deal situation, the information gathered at any one phase and the time constraints and each phase does not start off with a typical limitations in each deal. ‘blank sheet of paper’ as some seem The business case is then developed around the life cycle to think. At times, I’m not even sure and goals. these people know what the corporate development function even does.” Corporate development leader in responding to the prolific amount of outside advice their leaders get about the place of culture in M&A. Building the business case for culture in M&A 3

Chapter 2 How these acquirers built their business case and the ROI question As noted, cultural investigations are now an accepted part But first, let’s get to the “elephant in the room” — and the of the M&A process, but it was not always so. These serial first question that finance professionals raise in reviewing acquirers had to build a business case to incorporate cultural any business case: “What is the direct return on investment work into their process, given the comprehensiveness of (ROI) from cultural work?” However none of these leading the proposed undertaking and the impact the work would companies could show a return in terms of pure numbers. have across the entire organization. It was not introducing a They could not find a direct mathematical line of sight superficial cultural conversation, supplementary to what other between culture work and financial returns, either within work was going on, but planting the culture as a central part the group’s review of their vast database of deals, or from of the process, and a priority discussion topic on any deal external research. Absent any ROI, the focus of the business agenda meetings. case must be grounded on the benefits of this work, over and above the cost of doing it, by showing how the output of the And they did this by: work supports specific transaction goals or mitigates risks. ƒ Doing the research to understand root problems and opportunities. ƒ Being clear on the goals and risks that the work would support and the costs and benefits of any analysis. Yes, this ROI question comes up, ƒ Presenting the case in terms their business leaders more than we’d like it to, and we’d like could relate to by using the company’s internal style and to have a good clean answer. But we terminology. don’t. Invariably it’s asked by leaders new to M&A and continuously by our finance function. It’s not a measure that can be meaningfully attributed It’s not working on culture, for culture’s to culture in deals. It’s the wrong sake. Some of our first attempts at question, the wrong road to go down. this business case took this rather It’s a bit like asking what the ROI is naïve approach. We knew culture was on one component that goes into our important, but we did not have much airplanes. We have to stay true to the substance behind the statement. We business case we have developed, but ‘crashed and burned’ in front of some the ROI question will never go away.” our leaders, when it was not explicitly Corporate development leader clear to them what this work would lead to, what it would impact.” Corporate development leader 4 willistowerswatson.com

Chapter 3 Eight key steps in building the business case Successfully navigating the challenges that come up in a corporate environment 1. Start with the root causes and opportunities and use 3. Prepare a deal life cycle framework showing typical facts to support the case. The most powerful fact is that goals. The starting point being the deal life cycle table managing culture leads to more successful outcomes, and to ground leaders on the complete transaction process, not managing culture poses a higher risk of deal failure. beginning to end, “what happens, when and why it’s The facts that support this statement are drawn from both important and the specific goals culture can support publicly available research on how cultural problems lead to within each phase of the process. Also, the deal limitations deal failure (refer to the commentary on studies on culture commentary reinforces the fact that decisions are often in M&A) coupled with each firm’s own specific experiences made with incomplete information. and reviews of the success or otherwise of their own deals. 4. Describe the output of cultural work in terms of 2. Have a cultural framework built for M&A purposes. This potential deal impact, by stakeholder group. The shows the components of culture that are relevant to the business case needs to go further than the “reasoning” M&A situation and is the subject of our first paper. The and into showing how the results of the work can be framework presents one of the first challenges. used. There are many users of this work but structure any presentation on the value of culture work based on the parts of most interest to each group. The key here is that the information gathered on culture, needs to be broken up and prioritized based on the needs and interests of the different stakeholders at each phase of the deal, with each cultural component mapping or supporting a very specific Make sure that leaders understand transaction goal or risk (the next section shows how the that the framework is for M&A output is used). purposes only; otherwise you will lose 5. Identify the role of the key people that are responsible the argument. If you don’t link this for driving changes. In parallel and equally important is directly with M&A, many will think you the process to identify the people or groups of people, charged with driving the changes throughout the are trying to change the entire culture organization to achieve these goals. Changes depends of your company, which others view on these specific people and the role they will play in the as their remit. We had several battles integration and the changes they will need to make to their internally in this respect, until we own business priorities and actions. understood what the M&A team were trying to accomplish in incorporating culture in their M&A process, and equally what they were not trying to do, they were not trying to change how we defined culture as a firm.” Chief Human Resource Officer, responding to the cultural framework not being the same as their existing definition of culture and the related components Building the business case for culture in M&A 5

7. Be aware of the need to assist leaders answering questions from other stakeholders. There are numerous potential stakeholders, dependent on the size of the deal. More stakeholders get involved the larger the deal, and this We have slipped up in the past by is especially true in talent-based deals with a high price not putting enough attention on tag, a relatively low employee headcount and with the high risk of the key employees walking out the door. the people part, particularly what priorities and actions we wanted Examples of other stakeholders are the board, but also them to change. We used to speak investment firms or fund managers covering the company about changing behaviors in the and potentially activist investors. These stakeholders are past, but that was too vague and not asking deeper questions about leadership, talent, culture and cultural integration once news of a deal is announced. time dependent or urgent enough Answers such as: “We met with them and they are a for many to make changes a priority. great cultural fit” or “Our cultures are very similar” may We had to be explicit. We found that be truisms but are not good enough answers for these without the people changing, our stakeholders. The work will prepare leaders better to brilliant strategies, tactics, plans and address the cultural questions and stating that there is a team working on the cultural integration challenges is a checklists were not nearly enough.” very powerful answer by itself and often enough to avoid Integration leader, Human Resources further external questions in this area. 8. Prepare a checklist of common challenge questions. The best of business case explanations can be derailed if the difficult cultural questions are not anticipated ahead of time. The two most common are the ROI question, and the question about how the M&A approach aligns with existing 6. Present the business case to the top stakeholders internal cultural initiatives. Added to this there is also first. Typically the top stakeholders are the leadership the need to keep up to speed on the latest research and requesting the funds to pursue the deal and any deal developments in the broader area of “culture” in a business committee overseeing the deal (those approving the context. Culture is one of the most written about topics funds). With their approval, culture becomes part of the and many outside commentators constantly feed ideas process, and not an “initiative” to be debated separately to leadership so there is a need to understand current within each deal. thinking and then explain what’s relevant in this thinking and what’s not for M&A work. None of these issues should be a threat, given the explicit and therefore narrow M&A focus of the business case but it does continue to show the need to keep abreast of developments. 6 willistowerswatson.com

Chapter 4 Who uses the output of this work? Some examples of how the results of the culture work can be used by the typical stakeholder groups in M&A are: Corporate development and the business unit leading the acquisition: The stakeholder group that initiates culture This was a problem in one of our work. The work provides the needed information for three bigger deals. We had so many key purposes: people involved in the integration 1. To present to the board or deal committee for ongoing process, from both sides. We review. collaborated exceptionally well, and 2. To gain a better understanding of the deal as a whole and the integration management and the complexities of the acquisition integration. process itself was flawless from 3. To ensure the focus on business stabilization is a priority. that perspective. But our business The focus on business stabilization warrants some further performance was not, and it took us explanation. This goal is particular to M&A situations where some time to figure out why. productivity drops are a real feature of transactions, and typically surface once a deal is announced. This can impact Our business began slowly to show buyer and seller pre-close and then the combined business a downward trend as we realized post-close. that our pipeline was not as strong The first impact is typically on the target as their workforce as before, the number of proposals becomes aware that their future is about to change. But there showed a decline and our success can also be an impact on the buyer’s workforce if significant rate in sales pitches dropped, all changes are expected to their business as part of the adding up to less business. We could integration strategy too. It’s difficult to achieve any other goal not understand why, until we started if the base business starts to decline. Some examples where looking at how some of our key this shows through is in revenue declining, more clients or consultant talent was spending their customers than normal leaving, new clients not coming in or key people leaving, or all the above. time. Too much of the key talent that we should have had focused on the market, on selling and delivering, were instead involved in integration planning and other meetings. We lost focus, but our competitors did not. In fact, I believe they ramped up their attention on our clients and prospects.” Chief Executive Officer of a consulting firm Building the business case for culture in M&A 7

Board or deal committee team: The top decision-making Negotiation team: These companies use negotiations as an group that approves the progress of the transaction or makes opportunity to go beyond “getting the deal done” and delve the decision to pull out of the deal (in the earlier phases), this deeper into the integration issues with the target’s leadership. group will focus on top priority goals and the people who will Information here will help both the buyer and seller teams be responsible for these goals. Examples are: prepare better for integration. ƒ Leadership goals: The process of determining and There is often an added twist here that relates to transactions selecting the right leaders and talent not just to run and and that is that concessions are often made just to get the deal grow the business, but also to lead the formal integration done. Deal negotiations here take a feel more akin to political team and efforts. give and take. Some of the seller’s leadership and talent may ƒ Synergy goals: Validating the synergies and identifying the be selected for future roles even if the initial thinking was that group of talent responsible for achieving these targets. they were not the best people for those roles. ƒ Value goals: Understanding the value of the business as a standalone entity and in the combination. And once recognized, identifying the group of talent responsible for achieving these goals in the combination. This is a real issue that we’ve had to deal with on more than one occasion. But in these cases, we have a strategy We have to focus on the business in place, in conjunction with our impact and address culture using the corporate HR colleagues. We have a terminology that we use across the heightened focus on the post-close business in deals for this group. This working relationship issues and on means showing how results from any coaching those leaders that are analysis directly supports a deal goal, deemed a concern.” issue or risk. It’s that simple. Our deal Integration leader, Human Resources committee (group that oversees all transactions) won’t entertain any work that does not meet these standards. ‘Nice to do’s’ can come later.” Corporate development leader, explaining how they work with their deal committee 8 willistowerswatson.com

Integration management and functional integration teams: Human resource function: This function is at the heart of These stakeholder teams manage the formal integration the people part, which impacts not just their function, but process, building on the preliminary and business wide any other area where people are a factor — which is nearly integration strategy. They typically use culture work to help everything. For their own role, assessments create the develop an accurate understanding of the complexity of the input for people decisions and change plans, not just for integration and therefore better estimate the costs of the their function, but how they can help other functions and integration, resources needed, changes needed and how workstreams in their people and change work (HR’s role will to best time or phase the changes. However, integration be the subject of a future article). strategies are complex and can vary enormously. The magnitude of change expected Just a review of the goals in one deal on the leaders, talent and employees surfaced the tension that may occur is directly related to the integration in allocating and prioritizing resources strategy. Our integration strategies and the talent needed to achieve these have evolved over the years. It used to goals. For example, the talent needed be that we fully integrated them into to stabilize the business was much the us. But we realized that was more of same pool as we identified to achieve a ‘convenience’ for our organization, the value goals, and achieve the and less about growing and synergy goals, and be heavily involved developing what we bought. Now our in the formal integration process. strategies are deal specific, and can We had many of the same people on vary enormously, from one extreme multiple parallel initiatives, sometimes where the seller is assimilated into the requiring them to be in different time acquired business unit to the other zones at the same time. This was just end of the spectrum where we keep not feasible. We just did not have those it stand-alone as a new business unit planning the separate goal initiatives, with most of its existing identity and talk this through with each other. The way of doing business kept intact. In same ‘stars’ were being picked for these cases, integration is limited to multiple teams.” our ‘non-negotiables,’ such as areas Corporate development leader and HR Integration of financial reporting, back office leader during a review of “who does what” infrastructure, legal requirements and executive incentive plans.” Corporate development Building the business case for culture in M&A 9

Summary While we know that experienced acquirers evaluate culture. We also know that there is no “silver bullet,” no one way or the best way. Each firm in the group does it differently, but they all share one common principle: they all have an organized and disciplined approach and built their business cases to embed Meeting any goals in our firm is culture in their M&A processes. expected and that gets an ‘average’ They know the high-risk nature of transactions and know rating, no matter what the project or that success means that they must work through all parts of initiative. But we strive to go above the deal cycle successfully: buy well, integrate flawlessly and expectations, and this means blowing ensure the business operations run successfully all the way through the deal goals and that means through to the “business as usual” phase, and beyond. Culture using every strategy and tactic at work is necessary part to improve the odds that their deals our disposal — and culture work has, meet or exceed the performance expected. without doubt, helped us do better.” Corporate development leader 10 willistowerswatson.com

These leading firms have strategies in place and leaders do not have to be convinced of the need for this work but are About the types of transactions in the focused on the extent and timing of the initiatives, depending group’s discussion on the deal. However, less experienced acquirers find that The discussion is centered on bigger firms buying smaller they need to build a solid business case for this work. firms with an emphasis on “talent” based deals, meaning The principles to follow are to develop strong business deals where the people at a target are deemed the most reasons for working on culture, grounded in the phases important asset, among all the other assets at a target. within the deal life cycle and supported by the facts and data For most buyers, the deal strategy centers on acquiring that can stand up to any challenges or questions. Develop a to expand their capabilities (also known as “scope deals” framework that captures the essential features of culture that in M&A circles). can be understood by leaders, and mapped to a specific goal We did not consider any transaction that transformed a or risk, and focus on the benefits of the work but avoid the company to such an extent that creating a “new” culture, pitfall of hunting for a specific financial ROI. 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 is that the size, scale, and global scope of these deals made it difficult to incorporate the We needed an ‘end-to-end’ cultural approaches discussed here early, and that there were approach. An approach which many other “assets” in the combining firms, well beyond connects all the phases and where the just talent and employees. decisions and output from one phase Finally, the issue of growth or erosion of shareholder forms the input for the next phase. value as a specific goal, as seen through buyer stock Truly anchoring the work around the price changes, is not typically a goal of talent-based practical realities and constraints of deals and was not a factor in our analysis. In contrast, putting a deal together, using the total larger deals lend themselves better to share price deal life cycle and the specific phases, comparisons with peer companies, since this data is and the issues and risks appropriate to publicly available and can then be analyzed by consulting firms and academics alike. each phase of this cycle. And starting this at the beginning, deal origination.” However, the general principles reviewed here can be adjusted and applied in varying “doses” to most deals. Corporate development leader Building the business case for culture in M&A 11

About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com. willistowerswatson.com/social-media Copyright © 2020 Willis Towers Watson. All rights reserved. WTW487900/09/2020 willistowerswatson.com