W W W . W A T S O N W Y A T T . C O M14 March 2002, ShanghaiKwan Chee Wei Director Human Capital Group Watson Wyatt SingaporeThe Importance of Cultural Integration in Mergers and Acquisitions Agenda M 75% within the first three yearsn“People problems” are cited as the top integration failure factor by a sample of 45 CFOs from Fortune 500 companies who have recently merged/acquirednOnly 23% of all acquisitions earn their cost of capitalnOn average, management grade the financial performance of their alliances as a “C minus” (on a scale of A to E)5Corporate culture is identified as one of the most important integration issues Source: Watson Wyatt Worldwide M&A Survey, November 1998Activities required for “successful” integrationDownsizingRedeployment of workersRecruitment of new staffRetraining workforceAlignment of comp & ben progLabor relationsManaging resistanceIntegration of corporate culturesRetention of key managersRetention of key talentCommunication37%40%59%57%36%63%78%88%91%90%0102030405060708090 10036%6Cultural incompatibility is the biggest problem, yet results indicate that it is the area least likely researched during due diligence.46%47%54%56%72%72%82%86%01020304050607080Organizational culture and dynamics of changeWorkforce potentialHR policy mattersMajor shareholdersManagement capabilities andwillingness to cooperateFinancial aspects of HR functionMarket share, distributionHard assets90 100Technological and business competencies75%Percentage of companies citing the type of information gathered during due diligenceSource: Watson Wyatt Worldwide M&A Survey, November 19987Reasons for successful integrationSource: Watson Wyatt Worldwide M&A Survey, November 1998Percentage of companies citing reason for success8%41%31%37%52%70%Shared responsibility of costs involvedEarly mgt of “What will happento me?” employee issuesCultural compatibilityMutual agreement of road map by partnersExpedient integrationWell planned communication throughout the deal processLeadership0102030405060708090 10035%8Additional M & A Statistics n1992 (Coopers & Lybrand) :- In 100 failed or troubled mergers, 85% of executives who were surveyed said the major problem was differences in management style and practices.n1996 (British Institute of Management) :- reported the difficulties involved in merging two cultures to be a major factor in M & A failures.n1997 (A.T Kearney) :- reviewed 155 M & A deals and determined most failures to be people-related.nHewitt Associates - 69% of respondents in 162 organizations involved in M & A reported the top challenge to be integrating two organizational cultures. 9How integration is handled will make the difference between success or failure .nEarlier realization of financial “deal” goals (e.g. cost synergy, strategic initiatives)nProtect productivitynMaintain customer focusnSmoother transitionnEmployees are focused on their jobs and not on personal issues10Organizational Effectiveness Levers CareerCareer DevelopmentDevelopmentPerformancePerformance ManagementManagementStaffingStaffingCompensation,Compensation, Benefits &Benefits & RewardsRewardsEmployeeEmployee CommunicationCommunicationOrganizationOrganization DesignDesign& Structure & StructureBusinessBusiness Strategy & Strategy & AlignedAligned CultureCultureLeadershipLeadership EffectivenessEffectiveness11AgendaM & A Statistics A Case Study WWs Approach to Cultural IntegrationWhat is Culture?Q & A 12What is culture?Definition of Culture:8The attitudes and benefits about something that areshared by a particular group of a people or in aparticular organization (Longman)8The set of important assumptions that members of acommunity share in common (e.g Schein)Simply put :Simply put :“ “ Corporate Culture is the way you Corporate Culture is the way you do things in your organization”do things in your organization”13Reflects “What is tangible”, e.g. Organisational structure & processes Policies & procedures Physical environmentReflects the “Way we do things”, e.g. Degrees of collaboration Decision-making patterns Approaches to process improvementComponents of CultureValues have little meaning unless they bring about specific behaviors .VISIBLECore ValuesBehaviourINVISIBLEattitude14Implementation Implementation PlanPlanImplementation Implementation PlanPlanImplementation Implementation PlanPlanThe implementation plan will encompass initiatives to create and support these behaviors.Core ValuesBehaviourThe best way to achieve culture change is to focus on desired behaviors .15AgendaM & A Statistics A Case Study WWs Approach to Cultural IntegrationWhat is Culture?Q & A 16Our Approach to Cultural IntegrationPerform Gap AnalysisDesign Desired Culture - Top Team Workshop Validation/ OwnershipCustomer StrategyAssess Current Culture - Interviews Focus Groups Culture AuditBusiness ObjectivesDISCOVER Defining Organizational CultureImplement Culture Change Progra