By Sarah Moore and Sally Dixon, PwC UK
Culture can often be an afterthought in private equity (PE) deal-making. Yet with PwC’s Creating value beyond the deal: private equity research highlighting the extent to which cultural issues can derail an otherwise well-planned deal, it’s clear that culture should be a key focus of the agenda. How then can you turn culture from a factor out of your control to a driver of deal value?
From the initial rumours of a takeover through to the vital first few days of ownership, most interactions between acquirer and acquired, however small, have a cultural element. Employees want to know what kind of people are taking over their business, how it’s going to change and whether they will continue to have a future in the newly acquired business. If handled well, this is an opportunity to inspire the workforce and build momentum. However, a wrong word or misstep can create resentment and lead to the best people looking for opportunities elsewhere.
It’s therefore little wonder that when we asked 100 PE dealmakers about what delivers or destroys value, culture was such a prominent factor. Unfortunately, most would want to handle it differently next time: 57% said that cultural issues hampered deal value realisation. The resulting loss of talent can quickly throw plans off course: 83% of the deals that lost significant value saw between 21-30% of key talent leave the business. A breakdown of morale in the business can also deter new talent from joining.
Why then is culture and the talent issues that stem from it so often a problem? In part, this can come from a lack of direct contact with the target company. One of the big differences between PE and corporate deal-making is that there’s often no need to integrate teams, so personal engagement with the acquired business and associated retention plans are generally limited to executives. Yet, people just below the top tier also drive real value within the business – the innovators, motivators and sales leaders, for example. If 20% of these people go, revenues potentially leave with them. There could also be the double hit of losing these people to one of the target’s competitors.
Culture has also tended to be seen as overly complex and difficult to control. While PE buyers know well the financials and cost saving potential, they can find it tricky to put hard numbers on culture or have little experience with positively influencing it.
So, as a PE buyer, how can you build a cultural bridge and turn this to your advantage? While most deals have different objectives and characteristics, a number of examples of how to make this work well do stand out:
Even before the deal is formally announced, you can be working with the target’s executive team to identify the people just below the top tier who are crucial to delivering deal value. You can then develop engagement and incentive plans to help retain and motivate them.
As a PE buyer, a lack of early interaction with target company staff creates barriers and undermines trust. However, this doesn’t need to be the case. In one example, the buyer developed a targeted marketing campaign that included video profiles of the personnel leading the deal. Not only does this humanise the transaction, it also means that if difficult decisions do have to be taken, there are lines of communication to explain them and rapport to execute them.
There can be a perception within the target business that PE acquisition will automatically trigger cost-cutting and potential job losses. The reality may be very different, especially since enterprise transformation is such an important element of value strategies. The gains from the deal could include greater autonomy over strategy or helping to make the business fit for the future through investment in technology or more agile ways of working. Communicating these benefits can help to build support.
The benefits to the overall value proposition may include key talent retention, as well as also creating common ground between acquirer and acquired and greater impetus for turning around the enterprise. And with care and planning, achieving this may not be as complicated as you might think.