A merger that looks great on paper can become unstuck when two disparate cultures collide, writes Muireann Bolger. Winning hearts and minds – one way or another – is vital to ensure a successful union
As the ink dried on the merger papers between Max Capital and Harbor Point, this year’s World Insurance Forum in Bermuda was full of talk that a wave of M&A activity could follow.
But one cautionary word kept popping up: culture. Marsh & McLennan president and chief executive Brian Duperreault warned that any planned merger or acquisition had only a 50/50 chance of success. These poor odds, he believes, are mainly down to the dreaded culture clash.
“The cultures have to match from the start,” Duperreault told delegates, and the industry leaders that spoke to Global Reinsurance agreed. While transformational deals translate to big paydays, enhanced reputations and sexy headlines, the devil, as ever, is in the detail. But how do you define culture, and what can help – or hinder – two company cultures meshing successfully?
All culture really means is people; how they do their jobs and how they behave towards one another. There is little question that a merger or acquisition can be a traumatic process for many of the staff involved. Take just a handful of the deals that have shaped the market in recent years: Aon Re and Benfield, PartnerRe and Paris Re, and Validus and IPC.
The $1.5bn Aon Benfield merger in December 2008 prompted a large number of Benfield players into the welcoming arms of rivals such as Cooper Gay, Guy Carpenter and JLT. When PartnerRe and Paris Re tied the knot last July, it was followed by the inevitable announcement that leaders from acquired company Paris Re would leave “to pursue other opportunities”.
It can work both ways, however. After scuppering Max Capital’s bid for IPC in a hostile M&A, Validus refused point blank to keep any IPC underwriters.
But does it have to be that way? The Max Capital and Harbor Point deal has been trumpeted as a ‘merger of equals’, as both become united under the new umbrella of Alterra Holdings. Max Capital chief executive Marty Becker reckons getting the culture right will ensure a seamless transition.
“These are human resources or people businesses – the cultural compatibility of the people is extremely important in any financial services industry M&A,” he says. “Both Harbor Point and Max have similar underwriting approaches, similar views towards risk appetite, and at the same time each of us run what I would call very people-sensitive businesses.”
Becker defines culture as a shared vision and feeling. “I think you can look back at some of the M&As in this industry and, while there may be a variety of reasons why they didn’t work, I think the failure to align people with a common vision and direction is probably the number one reason.”
But corporate transition expert, and professor at the college of business in San Francisco State University, Mitchell Lee Marks believes that acquisitions are rarely an alignment of equals. He claims that when one company buys another, there is inevitably “an insinuation that ‘I’m better that you’”. This can lead the employees of the more powerful company to become dominating towards their new colleagues, especially if they were previously rivals.
It’s all too familiar to Aon Benfield co-chief executive Dominic Christian, who headed Benfield’s international division before the merger. “You do have to look at the challenge of how do you make friends with your enemy,” he admits.
Of a past M&A, he says: “We had 80 businesses and we didn’t get to one company quickly enough to tell our story and, in those circumstances, people feel they can’t understand what is new. You notice the difference if you don’t get to everyone in a quick and approachable way.”
Despite the loss of several leading Benfield players, Christian believes this past experience was put to good use in the Aon Benfield merger. He describes how the deal went through three crucial stages over an 18-month period: defensive, cohesive and aggressive.
“The first six months of defensive mode is where you get together, and look at whether it is a complementary business model and whether it is intelligently designed. When there is belief in that, you start to become cohesive – building your brand and sharing knowledge,” he says.
“Then after 12 months, you get into an aggressive mode where you start investing in the best things about the combined firms and growing the business. Finally, you get to the stage at around 18 months where you begin to protect your environment and become proud of who you are.”
The Aon Benfield merger took several months to complete and a substantial reshuffle of the senior management team. But Christian believes that, while the loss of some individuals is inevitable, the high retention of senior leaders from both companies is a testament of success.
“In our case, 95% of the leaders have stayed. That is a statement that we have a culture that works,” he says firmly. Indeed, it’s better than the average. One leading corporate strategy consultant, Implementing Management Associates (IMA), holds that in an average M&A, 25% of managers in one organisation are gone within a year, and 75% within three years, as a result of a clash between two company cultures.
XL Insurance’s UK head of client relationship management, Nigel Bamber, thinks the insurer got it right when parent company XL Capital acquired Winterthur International in 2001. “XL was more of an underwriting-driven company and Winterthur was more of a marketing-led company,” he explains.
He believes that, as XL had previously been closer to brokers, the acquisition of Winterthur helped cultivate better relationship with clients. “You need a blend: not forgetting that underwriting is very important and critical for understanding clients’ risk, but at the same time being very customer focused.”
IMA president Don Harrison says: “Eighty-five per cent of M&As fail to deliver on time and on budget what they promised their shareholders. In the vast majority, it is not strategic or economic issues; it is cultural issues that fail to get the return on investment.”
Cause and effect
There are many scenarios that can lead to culture clash. Every company has a set of unwritten rules or success patterns that have become deeply engrained. These can manifest in different ways: dress code, ways of answering the phone, attitudes towards time-keeping and approaches to climbing the corporate ladder.
For example, in one company, an employee may have learnt that touting an idea as far up the management hierarchy as possible is the path to promotion. However, in the other company, going above your immediate boss could lead to a major furore.
Further, if one company is driven by a powerful set of leaders and the other promotes a more collaborative approach, different attitudes towards leadership can create confusion. A company with a teamwork-led culture will likely clash with one that believes confrontation and criticism forces people to work harder and produce the best ideas.
Harrison explains that there are ways that cultural integration can be achieved, including workshops, focus groups, surveys and individual interviews. He also describes a process called a “yoking”, where one manager in one organisation swaps places with a manager in another to get a sense of how the different companies work and to blend their styles.
Becker says that it is important for a company to use every tool available. “We’re spending a lot of communication time at multiple levels of the organisation, explaining who we are, what we are doing and where we are going. This will be a continuous process over the next 12 months – it doesn’t happen in one conversation.”
Christian explains that, following the Aon Benfield merger, the company blended ideas from both companies to form an “educational programme led by future leaders” to enthuse employees. Meanwhile, Bamber points out the simple act of moving both sets of employees into one building helped to distil the two cultures.
The strong survive
In some cases, companies differ but are allowed to maintain their individual cultures. For example, market pundits view the Munich Re-backed Watkins syndicate in LIoyd’s as having retained its own character, while Pro Solutions also maintained an individual culture despite being owned by reinsurance giant Swiss Re. However, its new parent Tawa is widely expected to start integrating it.
Others believe that past M&As, including American Re and Munich Re, Generation Re and National Indemnity, and Swiss Re and GE, have adopted the approach of assimilation, where the culture of the acquired company is suppressed. One prominent market source says of these examples: “I don’t think they secured enough of the leaders in each acquired firm. If that happens, it is very hard to get a cultural progression or integration. You just get a takeover, not a merger.” What’s more, he believes the entrepreneurial spirit often resides with the acquired parties, and the failure to maximise this potential is a missed opportunity.
However, perceptions of the success of an acquisition can differ. PricewaterhouseCoopers partner Colm Holman believes that the strongest culture will survive at the expense of the other. “You can really only have one culture winning out over time,” he says, adding that sometimes it is easier when there is a hostile takeover, because the acquirer is setting the pace of change. “It may cause some more initial friction, but it is like getting rid of all the pain at first. It can be more successful than dealing with the legacy issues that arise when you try to allow cultures to co-exist.”
Marks believes that trying to integrate cultures following an acquisition can be a near-impossible task. “You can’t convert people if they don’t want to be converted.” Which is why Duperreault’s warning rings so very true. GR