How Cultural Diagnostics Contribute

to an Effective M&A Integration

According to data research firm Dealogic, the large-
scale M&A activity seen so far in 2014 represents a
“From
“ a strategic perspective,
seven-year high, and many business experts believe an acquisition or merger is
this trend will continue. Earlier this year, Forbes
noted several factors driving this trend, including typically a path to faster growth
favorable credit markets, historically low interest
rates, increased corporate cash, a large inventory of
or market dominance. But the
companies owned by private equity, a healthy stock ability to achieve those goals is
market and a recent uptick in cross-border M&A
activity. far from assured, as many deal
From a strategic perspective, an acquisition or makers have found over the
merger is typically a path to faster growth or market
dominance. But the ability to achieve those goals is
years.”
far from assured, as many deal makers have found
over the years. When deals fail to meet financial,
competitive or other objectives, the reason often
Part of the problem, traditionally, has been the lack of
comes down to how well the entities fit together in
a rigorous way to identify the nature, extent and likely
terms of culture, strategic priorities, leadership style,
impact of differences and similarities between merging
and a variety of workforce and workplace practices
companies. Informal discussions among management
and processes.
teams, sharing examples and organizational practices,
Ironically, periods of heightened deal activity often help but rarely provide the fact base and level of detail
lead to a diminished focus on culture and leadership required to bridge gaps and build upon similarities.
issues due to the pressure to complete deals quickly.
In our work with clients, we rely on an array of
But in any transaction requiring effective integration
diagnostics to help identify both the facts and the
of multiple workforces, especially those involving
subtler attitudes and behaviors that lie beneath the
knowledge workers, overlooking these elements
surface. These diagnostics are an important element in
increases the risk of reduced productivity, engagement
developing the insights necessary to build appropriate
and effectiveness later on.
and detailed implementation plans that engage the
For large serial acquirers and other veteran deal joint workforce in a newly defined culture.
makers, culture and leadership routinely come into
the process early — in some cases, even during the Getting Started: Comparing Cultural
target evaluation phase. Identifying the challenges Attributes
as early as feasible makes it easier to work with
Corporate culture is one of the most elusive concepts
differences efficiently and avoid cultural-fit issues that
to identify and measure, as well as one of the most
can persist for years after all operational issues have
important. It’s nothing less than an organization’s
been satisfactorily resolved.
DNA — the foundation for the structures, systems,
For midsize and smaller organizations, the issues of processes and actions that support its strategy,
cultural fit and return on investment can be even more and explicitly or implicitly define interactions among
important, given the commitment and business impact employees, customers and other stakeholders.
that a deal can represent. And, while most executives
In some organizations, everyone has a clear and
understand the significance of cultural issues, many
shared view of their culture. In others, even people
still struggle to address them effectively.
within the same organization may not view the culture
in the same way. So finding out what people in each
organization think about their current culture lays
important groundwork.

towerswatson.com How Cultural Diagnostics Contribute to an Effective M&A Integration 2

One cultural diagnostic we use in the early phases of Figure 1. Laying the groundwork for cultural integration:
a deal — the Corporate Cross-Match — relies on a The corporate cross-match
framework of paired attributes representing opposite
ends of a spectrum. It helps employees pinpoint
The adjective pairs below describe opposite extremes of organizational culture.
where they think their organization lies across a list of
First, please indicate the type of culture you feel exists within the organization
relevant attributes.
in which you currently operate on a day-to-day basis. Then, separately, indicate
We administered this diagnostic for a global financial the type of culture you believe exists inside XYZ, even if your opinion may be
services company that was acquiring several business based on little direct experence.
units from another firm — the first time just after
Extremely Somewhat Equal Somewhat Extremely
close, and again before the start of the integration
Bureaucratic Entrepreneurial
process. All employees in the target units identified
Decisive Indecisive
where their current employer sat along the cultural
Risk avoiding Risk taking
continuum, as well as their perceptions of the
People-oriented Task-oriented
acquirer’s culture (Figure 1).
Directive Participative
While the results showed that these employees Reactive Proactive
perceived both firms as having a formal style, they also Analytical Intuitive
felt the acquirer was significantly less entrepreneurial Cohesive Divisive
and more risk-averse than their legacy company — as Inclusive Exclusive
well as more respectful, strategic, stable, analytical Confronting problems Avoiding problems
and focused (Figure 2). Team-focused Lack of cooperation

To drill more deeply into the data and test the accuracy Respectful Arrogant

of these perceptions, the acquirer then engaged Persuasive Intimidating

individuals from target units in specifically examining Formal Informal

policies and activities contributing to the perception Strategically oriented Short-term oriented

that their company was more bureaucratic and Stable Unstable

risk-averse. That information, in turn, led the acquirer Consistent Inconsistent

to rethink some of its overly complex review processes Focused Scattered

and create communication materials to explain the

need for processes that seemed restrictive to the
target employees.

At the same time, the acquirer also sought input on Figure 2. Acquired employees’ perceptions of both companies’ cultures
ways to maintain, and even strengthen, the attributes
of the acquired company that had shaped its more Formal
entrepreneurial culture. This was particularly important Scattered Entreprenuerial
since part of the rationale for the purchase was
Intuitive Risk avoiding
tapping into new sources of creativity and innovation
to expand the acquirer’s product line.
Unstable Respectful

Short-term oriented Strategically oriented

Arrogant Stable

Risk taking Analytical

Bureaucratic Focused
Informal

Acquired culture Buyer culture

towerswatson.com How Cultural Diagnostics Contribute to an Effective M&A Integration 3

While a cultural diagnostic typically comes into play innovation. Well-defined structures and processes,
after deals are announced, in some cases, such a tool by contrast, are more important for companies
can be used in the target evaluation phase, potentially differentiating themselves through efficiency and cost
contributing to a “no go” decision, thus sparing untold savings.
time and resources. More often, however, it helps
In the early stages of integrating two companies,
prevent early missteps that result from an ignorance
it’s valuable to test whether current attributes align
of cultural differences that are often magnified by
well with strategy and, even more important, which
employees’ already heightened anxiety over the impact
attributes will be most important given the planned
of the deal on their careers.
strategy shifts. We use our Culture Alignment Tool
(CAT), specifically designed for this purpose, to enable
Building the New Entity: Aligning Culture
executive leadership from the legacy organizations to
With Strategy
describe both their current culture and the one they
A body of evidence, including Towers Watson’s research think will be necessary for the merged entity.
on the cultural drivers of organizational performance,
Online, leaders sort 30 cultural descriptors (e.g.,
underscores the importance of a high level of
support for risk taking) that have been validated for
alignment between a company’s business strategy (i.e.,
relevance to the strategies shown in Figure 3. We
its chief basis for competition) and its internal culture.
then conduct a statistical analysis of the results to
For example, a manufacturer competing mainly on cost
determine the relative level of alignment between the
and efficiency needs a very different culture from a
current and future cultures of each legacy company,
luxury goods retailer for which personalized customer
vis-à-vis the company’s current and future strategic
service is the primary differentiator. Ensuring that
focus. Figure 4 displays the results of this process
culture reinforces and reflects the attributes needed to
for a recent client acquiring a small competitor. In this
deliver on a company’s strategy is a hallmark of high-
instance, the leaders of both organizations agreed
performing companies.
their primary basis of competition currently was brand,
Through our research, we’ve identified a set of which the results confirmed. Both also agreed that
workplace cultural attributes associated with financially brand would remain critical for their combined future
successful organizations that excel at five specific culture, giving them an important area of similarity
business strategies (Figure 3). As shown, support for upon which to build.
risk taking is one of several cultural attributes critical
for companies competing primarily on the basis of

Figure 3. Key cultural attributes required for specific strategic priorities

Aligning strategic priorities with culture

Strategic Business Priorities
Efficiency Quality Innovation Customer Service Brand
•• Comprehensive training •• Best practices exchange •• Diverse thought and •• Continual information •• Brand promise
in basic processes •• Empowerment to opinion sharing engrained
•• Precise job roles improve processes •• Support for risk taking •• Positive team •• Strong belief in product
•• Disciplined workload •• Disciplined use of •• Bias for action relationships •• Deep pride
allocation performance data •• Anticipating emerging •• Strong customer •• Integrity guides
•• Clear and effective •• Long-term focus needs orientation business
structure •• Advanced training •• Consistently recognizing •• Customer-centric •• Environment reflects
•• Data-driven assessment •• Superior processes new ideas •• Focus on talent brand
•• Coordination of efforts •• Leadership clarity on retention •• Leadership inspires
future priorities •• Local authority and respect
empowerment

towerswatson.com How Cultural Diagnostics Contribute to an Effective M&A Integration 4

Figure 4. How leaders assess alignment between strategy and culture
1.
.8
.6
.4
.2
0
-.2
Quality Efficiency
Buyer current culture Target current culture Buyer future culture
At the same time, the analysis revealed two important
gaps. First, although both sets of leaders agreed
that innovation would be very important in the future,
the diagnostic results and follow-up analysis showed
that only the target’s culture currently supported
two attributes important to innovation — diversity of
thought and opinion, and a bias for action.
Neither of these attributes, however, was present to
any extent in the acquirer’s culture. Given leadership’s
shared agreement on the importance of innovation for
the combined entity, preserving these elements of the
target’s culture and expanding them into the broader
merged company became one of the top integration
priorities.
A second gap appeared in the area of customer
service. The acquirer’s leaders saw customer service
as far more critical to future success than the target’s
leaders did, which is why the diagnostic results
showed the buyer’s culture to be more closely aligned
with this strategy. So the challenge for the leadership
team was to:
•• Develop a shared vision of the relative importance
of customer service as a basis for competition
•• Find ways to engage the target’s employees and
embed this attribute in the new culture
towerswatson.com
“Once
“ integration kicks
in full force, it’s useful to
take a baseline measure
of how well the process
is working — and learn
where and to what extent
course corrections could
be necessary.”
Innovation Customer service Brand
Target future culture
To support that goal, we identified the specific cultural
attribute that explained the difference between the
buyer and target cultures in this regard: giving local
employees the authority to make on-the-spot decisions
affecting customers.
Given the sophisticated analysis and interpretation
attainable with the CAT diagnostic, we typically initiate
a series of facilitated dialogues with the relevant
leaders to dig deeper into the results and identify
the actions required to drive alignment between the
emerging culture and agreed-upon strategies.
In the above example, we worked with the leadership
team to determine what aspects of the target’s
culture produced the bias for action so important to
innovation. We also explored the rationale for the
buyer’s belief that customer service would be a critical
differentiator in the future.
Through this work, the combined leadership team was
able to come together on a shared vision and strategy.
This understanding led to a series of action steps
that involved changing certain review and approval
processes, and removing some of the structural
barriers to rapid decision making. Both of these
initiatives helped drive a culture focused on innovation
and customer service.
How Cultural Diagnostics Contribute to an Effective M&A Integration 5
“A
“ body of evidence, including Towers Watson’s research on the
cultural drivers of organizational performance, underscores the
importance of a high level of alignment between a company’s business
strategy (i.e., its chief basis for competition) and its internal culture.”
Confirming the Integration Process
Once integration kicks in full force, it’s useful to
take a baseline measure of how well the process
is working — and learn where and to what extent
course corrections could be necessary. A relatively
straightforward survey such as our Merger Monitor is
well suited for this purpose and can be repeated on
a regular basis (e.g., every three months) to assess
changes over time.
This diagnostic, unlike the others we use, asks direct
questions about the progress of the integration,
drawing content from a combination of validated
questions from Towers Watson’s employee opinion
database and deal-specific items. Common topics
include:
•• Understanding of the deal’s rationale
•• Level of personal commitment to the new
organization
•• Confidence in the integration’s success
•• Clarity of merger-related communications
•• Confidence in leaders’ ability to manage integration
successfully
•• Impact on one’s role and career development
prospects
We used this diagnostic recently during the merger
of two large manufacturing companies, administering
20 questions to a representative random sample
of employees from both companies. The findings
highlighted several key issues for follow-up, as
well as some important differences across the two
companies.
Specifically, employees from ABC Company were
significantly less confident that their company’s
strengths would be maintained in the new entity than
were employees of XYZ Company. At the same time,
more of the ABC employees also believed leadership
was doing a good job communicating about the merger
than did their colleagues at the other company.
towerswatson.com
We also used the results of this survey to identify the
top statistical predictors, or drivers, of employees’
personal motivation to make the new company a
success. In this case, we identified three motivational
drivers that carried across employees of both the
merger partners:
•• Confidence they could achieve desired career
objectives at the new company
•• Belief that the new company will deliver higher-
quality products and services than either of the
legacy companies
•• Perception that leadership will confront and resolve
issues arising from the integration
Interestingly, while these issues were equally
important to employees across both legacy
companies, we found distinct differences in their
views about whether the new company could deliver
on these motivators. At ABC Company, employees
were far more positive that product quality would
improve. At XYZ Company, however, employees had
more confidence that leadership would take them
successfully through the integration.
Armed with these insights, the leadership team
could identify not only what to focus on in building
new processes — career development and quality
programs, as a start — but also which areas should
be a particular focus for each group of employees.
While focusing on all three areas would help increase
the commitment of all employees, there was a specific
need to help XYZ Company employees understand
how the company planned to improve product quality
and delivery, and a similar need to demonstrate
to ABC Company employees how leadership would
address integration issues. This led to a more
segmented and efficient approach to managing
the integration process as well as a better way of
determining the right communication and change
management strategies for all employees.
How Cultural Diagnostics Contribute to an Effective M&A Integration 6
Putting It All Together
The impact of culture is like a strong ocean current.
In countless ways, both obvious and invisible, it
influences what employees focus on, talk about and
look forward to. It guides their behavior in ways that
can either enhance or erode performance. A cultural
undertow can even wash out deals that otherwise
have great strategic and operational potential.

Any corporate transaction brings with it cultural

integration issues; they simply come with the territory.
Getting ahead of these challenges — understanding
what the differences are, how strong they are and
what people expect to happen — is the only way to
determine how best to address and resolve them.
In M&A integrations, as in every other important
endeavor, forewarned is forearmed.

About Towers Watson

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company that helps organizations improve performance
through effective people, risk and financial management.
With more than 14,000 associates around the world,
we offer consulting, technology and solutions in the
areas of benefits, talent management, rewards, and
risk and capital management.

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