W W W . W A T S O N W Y A T T . C O M

14 March 2002, Shanghai

Kwan Chee WeiDirector Human Capital GroupWatson Wyatt Singapore

The Importance of Cultural Integration in Mergers and Acquisitions

2

Agenda

M & A Statistics M & A Statistics

A Case Study A Case Study

WW’s Approach to Cultural IntegrationWW’s Approach to Cultural Integration

What is Culture?What is Culture?

Q & A Q & A

3

Agenda

M & A Statistics M & A Statistics

A Case Study A Case Study

WW’s Approach to Cultural IntegrationWW’s Approach to Cultural Integration

What is Culture?What is Culture?

Q & A Q & A

4

‘Cultural & People’ Issues Often Present the Biggest Challenges

““The hard stuff is easy - it’s the soft The hard stuff is easy - it’s the soft stuff that’s so hard to change.”stuff that’s so hard to change.”

-- Frederick SmithFrederick SmithCEO, Federal ExpressCEO, Federal Express

5

Watson Wyatt M & A Survey 1998(190 CEOs, CFO, Top Executives)

75% are clearly disappointing or outright failures

Source: Watson Wyatt Worldwide M&A Survey, November 1998

50% suffer an overall drop-off in productivity in first 4-8 months

47% of acquired company executives leave within the first year; 75% within the first three years

“People problems” are cited as the top integration failure factor by a sample of 45 CFOs from Fortune 500 companies who have recently merged/acquired

Only 23% of all acquisitions earn their cost of capital

On average, management grade the financial performance of their alliances as a “C minus” (on a scale of A to E)

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Corporate culture is identified as one of the most important integration issues

Source: Watson Wyatt Worldwide M&A Survey, November 1998

Activities required for

“successful” integration

Downsizing

Redeployment of workers

Recruitment of new staff

Retraining workforce

Alignment of comp & ben prog

Labor relations

Managing resistance

Integration of corporate cultures

Retention of key managers

Retention of key talent

Communication

37%

40%

59%

57%

36%

63%

78%

88%

91%

90%

0 10 20 30 40 50 60 70 80 90 100

36%

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Cultural 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%

0 10 20 30 40 50 60 70 80

Organizational culture and dynamics of change

Workforce potential

HR policy matters

Major shareholders

Management capabilities and willingness to cooperate

Financial aspects of HR function

Market share, distribution

Hard assets

90 100

Technological and business competencies

75%Percentage of companies

citing the type of information

gathered during due

diligence

Source: Watson Wyatt Worldwide M&A Survey, November 1998

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Reasons for successful integration

Source: Watson Wyatt Worldwide M&A Survey, November 1998

Percentage of companies

citing reason for success

8%

41%

31%

37%

52%

70%

Shared responsibility of costs involved

Early mgt of “What will happen to me?” employee issues

Cultural compatibility

Mutual agreement of road map by partners

Expedient integration

Well planned communication throughout the deal process

Leadership

0 10 20 30 40 50 60 70 80 90 100

35%

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Additional M & A Statistics

1992 (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.

1996 (British Institute of Management) :- reported the difficulties involved in merging two cultures to be a major factor in M & A failures.

1997 (A.T Kearney) :- reviewed 155 M & A deals and determined most failures to be people-related.

Hewitt Associates - 69% of respondents in 162 organizations involved in M & A reported the top challenge to be integrating two organizational cultures.

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How integration is handled will make the difference between success or failure ...

Earlier realization of financial “deal” goals (e.g. cost synergy, strategic initiatives)

Protect productivity

Maintain customer focus

Smoother transition

Employees are focused on their jobs and not on personal issues

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Organizational Effectiveness Levers

CareerCareerDevelopmentDevelopment

CareerCareerDevelopmentDevelopment

PerformancePerformanceManagementManagement

PerformancePerformanceManagementManagement StaffingStaffingStaffingStaffing

Compensation,Compensation,Benefits &Benefits &RewardsRewards

Compensation,Compensation,Benefits &Benefits &RewardsRewards

EmployeeEmployeeCommunicationCommunication

EmployeeEmployeeCommunicationCommunication

OrganizationOrganizationDesignDesign

& Structure & Structure

OrganizationOrganizationDesignDesign

& Structure & Structure

BusinessBusinessStrategy & Strategy &

AlignedAlignedCultureCulture

LeadershipLeadershipEffectivenessEffectiveness LeadershipLeadership

EffectivenessEffectiveness

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Agenda

M & A Statistics M & A Statistics

A Case Study A Case Study

WW’s Approach to Cultural IntegrationWW’s Approach to Cultural Integration

What is Culture?What is Culture?

Q & A Q & A

13

What is culture?

Definition of Culture:

The attitudes and benefits about something that are shared by a particular group of a people or in a particular organization (Longman)

The set of important assumptions that members of a community 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”

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Reflects “What is tangible”, e.g.

• Organisational structure & processes

• Policies & procedures

• Physical environment

Reflects the “Way we do things”, e.g.

• Degrees of collaboration

• Decision-making patterns

• Approaches to process improvement

Components of Culture

Values have little meaning unless they bring about specific behaviors ...

VISIBLE

Core Values

Behaviour

INVISIBLE

attitude

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Implementation

Implementation

PlanPlan

Implementatio

Implementatio

n n PlanPlan

Imp

lemen

tation

Im

plem

entatio

n

Plan

Plan

The implementation plan will encompass initiatives

to create and support these behaviors.

Core Values

Behaviour

The best way to achieve culture change is to focus on desired behaviors ...

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Agenda

M & A Statistics M & A Statistics

A Case Study A Case Study

WW’s Approach to Cultural IntegrationWW’s Approach to Cultural Integration

What is Culture?What is Culture?

Q & A Q & A

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Our Approach to Cultural Integration

PerformGap

Analysis

PerformGap

AnalysisDesign Desired

Culture------------

Top Team WorkshopValidation/ Ownership

Design DesiredCulture------------

Top Team WorkshopValidation/ Ownership

Customer Strategy

Customer Strategy

Assess Current

Culture------------

Interviews Focus GroupsCulture Audit

Assess Current

Culture------------

Interviews Focus GroupsCulture Audit

Business ObjectivesBusiness

Objectives

DISCOVERDefiningOrganizationalCulture

Implement Culture Change

Programs-----------Training

Org. Dev. CommunicationMeasurement

Implement Culture Change

Programs-----------Training

Org. Dev. CommunicationMeasurement

DELIVERReinforcingOrganizationalCulture

Knowledge sharing, involvement, and communications

Develop Culture Change

Programs-------------

Leadership Development,

Culture Change Teams &

Learning & Development

Develop Culture Change

Programs-------------

Leadership Development,

Culture Change Teams &

Learning & Development

INVENTDevelopingOrganizationalCulture

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Agenda

M & A Statistics M & A Statistics

A Case Study A Case Study

WW’s Approach to Cultural IntegrationWW’s Approach to Cultural Integration

What is Culture?What is Culture?

Q & A Q & A

19

A Case Study: Background Information

Two organizations merged to form a new entity

Both organizations existed as government statutory boards with regulatory functions

New company got listed on the local stock exchange with a clear bottom-line objective

New company aims to be performance-driven, improve competitiveness and grow through strategic partnerships

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• Interviews • Focus Groups• Management Workshop

Best Practice Best Practice ResearchResearch

Best Practice Best Practice ResearchResearch

• Interviews• Focus Groups• Corporate Culture Audit

Current Culture Current Culture Current Culture Current Culture

• List of Desired ValuesList of Desired Values• Behaviour IndicatorsBehaviour Indicators• List of Desired ValuesList of Desired Values• Behaviour IndicatorsBehaviour Indicators

Culture Development Culture Development Programs Programs

Culture Development Culture Development Programs Programs

Desired CultureDesired CultureDesired CultureDesired Culture

The Process of Culture Development

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Mission # 1 in the region Customer Focused Profit Driven

Mission # 1 in the region Customer Focused Profit Driven

Internal Environment

Professional and flexible Better decision making process Clear Performance - based

rewards More Inter-department

collaboration Tailored employee

communication

Internal Environment

Professional and flexible Better decision making process Clear Performance - based

rewards More Inter-department

collaboration Tailored employee

communication

Strategy Bottom-Line orientation Profitable products and

services Cost efficiency Market confidence Expansion into other markets Strategic alliances Service efficiency Technology is important

Strategy Bottom-Line orientation Profitable products and

services Cost efficiency Market confidence Expansion into other markets Strategic alliances Service efficiency Technology is important External Environment

Intense competition

Increasing customer

demands and sophistication

Leveraging leading-edge

technology

External Environment

Intense competition

Increasing customer

demands and sophistication

Leveraging leading-edge

technology

Core Values?

?

Core Values?

?

What is the Current Culture?

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Defining the new Core Values

StrategyStrategy

MissionMission

Internal Environment

Internal Environment

External Environment

External Environment

Core Values??

Core Values??

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Core Values:

• Customer service quality

• Bottom-line driven

Defining the Core Values

# 1 in the region

Customer focused

Profit driven

# 1 in the region

Customer focused

Profit driven

MissionMission

Core Values

Mission

Strategy

External Environment

Internal Environment

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Core Values:• Bottom-line driven• Objectivity and integrity• Product innovation• Customer service quality• Technology leveraged

Defining the Core Values

Bottom-line orientation Profitable products and

services Cost efficiency Market confidence Expansion into other markets Strategic alliances Service efficiency Technology is important

Bottom-line orientation Profitable products and

services Cost efficiency Market confidence Expansion into other markets Strategic alliances Service efficiency Technology is important

StrategyStrategy

Core Values

Mission

Strategy

External Environment

Internal Environment

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Intense competition

Increasing customer

demands and

sophistication

Leveraging leading-

edge technology

Intense competition

Increasing customer

demands and

sophistication

Leveraging leading-

edge technology

• Customer service quality

• Speed and efficiency

• Flexibility

• Technology leveraged

Core Values:

External EnvironmentExternal Environment

Defining the Core Values

Core Values

Mission

Strategy

External Environment

Internal Environment

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Professional and flexible Better decision making

process Clear performance -

based rewards More inter-department

collaboration Tailored employee

communication

Professional and flexible Better decision making

process Clear performance -

based rewards More inter-department

collaboration Tailored employee

communication

Internal EnvironmentInternal Environment

Defining the Core Values

Core Values:

Core Values:• Employee of choice • Efficient decision making - initiative,

flexibility• Objectivity and integrity• Open communication• Teamwork

Core Values

Mission

Strategy

External Environment

Internal Environment

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Mission• Customer service quality• Bottom-line driven

Mission• Customer service quality• Bottom-line driven

New set of Core Values

Internal Environment• Employer of choice• Efficient decision

making - initiative, flexibility

• Objectivity and integrity• Open communication• Teamwork

Internal Environment• Employer of choice• Efficient decision

making - initiative, flexibility

• Objectivity and integrity• Open communication• Teamwork

Strategy• Bottom-line driven• Objectivity and

integrity• Product innovation• Customer service

quality • Technology

leveraged

Strategy• Bottom-line driven• Objectivity and

integrity• Product innovation• Customer service

quality • Technology

leveraged

External Environment• Customer service quality• Speed and efficiency• Flexibility• Technology leveraged

External Environment• Customer service quality• Speed and efficiency• Flexibility• Technology leveraged

New Set of

Core Values

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New Core Values

Organisation

Bottom-line driven

Employee oriented

Teamwork

Technology leveraged

Customers / Stakeholders

Customer service quality

Objectivity and integrity

Product innovation

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• Interviews • Focus Groups• Management Workshop

Best Practice Best Practice ResearchResearch

Best Practice Best Practice ResearchResearch

• Interviews• Focus Groups• Corporate Culture Audit

Current Culture Current Culture Current Culture Current Culture

• List of Desired ValuesList of Desired Values• Behaviour IndicatorsBehaviour Indicators• List of Desired ValuesList of Desired Values• Behaviour IndicatorsBehaviour Indicators

Culture Development Culture Development Programs Programs

Culture Development Culture Development Programs Programs

Desired CultureDesired CultureDesired CultureDesired Culture

The Process of Culture Development

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Reinforcing New Culture

Desired CultureDesired Culture

CommunicationCommunication Performance ManagementPerformance Management

Culture Development

Initiatives

Culture Development

Initiatives

Performance Mgmt Plan

Performance Mgmt Plan

Total Rewards Strategy

Total Rewards Strategy

Culture Development

Team

Culture Development

Team

Learning& Development

Plan

Learning& Development

PlanCommunication Communication

PlanPlanCommunication Communication

PlanPlan

Leadership Development

Plan

Leadership Development

Plan

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Employee acceptance and support was enhanced through a comprehensive communication plan

Knowledge sharing, involvement, and communications

Phase Scope Purpose

Phase 1Awareness Building

"This is what is happening"

Company-wide * Link change initiatives with strategic plans* Give specific information about the process.

* Announce senior management's involvement

Phase 2Program Status"This is where we are going."

Company-wide * Demonstrate senior management commitment.

* Identify managers' and employees' issues.

* Gain information from pilot tests.* Provide the "big picture".

Phase 3Roll-Out"This is what it means to you."

Program Specific * Provide specific information on the changes being made and how they will affect people.

* Provide training in new roles skills and methods.

Phase 4Follow-Up"This is how we will make it work."

Team Specific * Listen to and act on manager's and employees' needs to implement changes.* Refine changes to ensure success.

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Communication Plan

Communication of Core Values to ALL employees Core Values statement Video from CEO Divisional briefings Incorporate into orientation for new staff

Incorporate into Performance Management training via competency model

33

Performance Management

Using the Balanced Scorecard approach, we helped

– develop the organisation scorecard– develop the departmental scorecards– define the performance targets

Developed a competency model based on Core Values

Performance management training for all employees

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Recognition Programs

Bonuses/Incentives

Individual Merit

Base Pay

Benefits

PerformanceResults-Related

Programs

CorePrograms

Stock

Total Rewards Strategy

35

Culture Development Initiatives

Learning & Development

Plan

• Identify organisational development needs

• Develop learning and development plans that link to business and strategic objectives

Leadership Development

Plan

• Conduct one-to-one sessions with management team members to develop individual leadership development plan

Culture Development

Teams

• Build cross-functional teams

• WW facilitates the interactions, planning and decision making of the teams

• Encourage and appraise the demonstration of desired behaviours

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Leadership Development Plan

“Leaders walk the talk.”

The degree to which the TopTeam accepts the change plan as the best one under the circumstances

The degree to which the TopTeam accepts the new culture as being in line with their personal goals.

The competence of the organization, in

terms of abilities, systems,

infrastructure in achieving the change plan.

The extent to which the Top

Team shares the interpretation of the new culture.

In any change initiative, the critical point is to give people the competencies they need to make change happen. This should start from the leadership team who needs to act as Role Models.

Through a self assessment, we assisted members of the senior management team to build an individualized leadership development plan.

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Learning and Development Plan

LEARNING AND DEVELOPMENT provides the knowledge, skills and the information sharing forum to help employees change their behaviors to match the culture and vision.

Tackles the areas needing development in the whole organization.

The training or development might take several forms: project work, customer visits as well as classroom training.

We identified the organization-wide gaps and a development plan to bridge them. We then monitored the implementation of the plan.

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Teams created within each Business Unit to address existing barriers that prevent the desired culture from being demonstrated. Issues may involve:• rules and policies• goals and measures• physical environment• organizational structure

HR culture teams can address these issues:• staffing and selection• training and development• ceremonies and events• rewards and recognition

Culture Development Teams

CULTURE DEVELOPMENT TEAMS instill new culture,values and behaviors by solving critical business problems, caused by old work culture and thinking, that prevent us from most effectively supporting the strategy.

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Organization MeasurementS

urv

eys “We keep a continual pulse check on whether we

are staying true to our culture/ vision.”

MEASUREMENT Regularly tracks the current state and progress to enable readjustment of goals and methods

Methods might include:

• Culture Audits• 360 Degree Feedback• Employee Opinion Surveys• Customers Surveys

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Lessons Learned Important to get the CEO’s personal involvement in culture

development or any other major HR initiatives

Understand the CEO’s style and personality and adapting the approach accordingly.

Intimate involvement of client (HR team) at all stages of project e.g.

– getting their sign off on any communication documents – interview questions– presentation slides– liaison for all meetings

Be open to changes in project scope and deliverables