READ MMI CASE BELOW AND ANSWER THE FOLLOWING QUESTIONS:

1. How would you characterize the change initiatives during the MMI merger integration?

2. How effective was the roll out of these initiatives in terms of timeline, sequence, and impact?

3. What advice would you give Kruger to derive even more value from the merger?

CULTURAL AND ORGANISATIONAL INTEGRATION AT MMI: THE MOMENTUM AND METROPOLITAN MERGER*

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n an early, crisp March morning in 2017, nicolaas Kruger, group CEO of MMI Hold-ings Ltd, was reminded of Charles Dickens book A Tale ofTwo Cities, when he arrived

at the companys Parc du Cap office complex in Cape Town. MMI Holdings Ltd employed 14,697 people in South Africa and 2,863 internationally. In 2016, its return on embedded value, a widely used industry measure of value creation, was 13 percent compared to the industry average of 10.2 percent, and the new business present value of future premiums (PVP) was R44.1 bil-lion. (In September 2017, 1 South African Rand (ZAR) was 0.078 US Dollar; 1 US Dollar was 12.84 ZAR.) Like the stark contrast between the

strained Parisian lifestyle and the relaxed London setting of the seventeenth century, Cape Town had been the headquarters of Metropolitan, one of the two companies who merged to form MMI Holdings. Metropolitans culture had been characterized by a more for-mal, traditional management style with top-down decision-making. Momentum, the other firm in the merger, had been headquartered in the capital city of Pretoria and its proximity to the heart of South Africas financial district influenced its culture. The Momentum culture was considered modern and more informal, with empowered high-performing employees and less power distance between staff and management. With Table Mountain in the background and several cyclists and runners on the road, Kruger reflected on the different locations and rich history of each organisation as well as the mergers progress. For example, he noticed that there were no longer designated parking bays for executives in the Metropolitan build-ing and inside, MMI and Metropolitan logos shared wall space. Before the merger, the top floor had been for the exclusive use of exec-utives, but had been transformed into a staff cafeteria so that everyone could enjoy the view of Cape Town. To Kruger, this was significant progress towards aligning the two cultures around a common set of values. The ques-tion was, How could they capitalize on their progress to derive even more value from the merger?

PRELUDE TO A MERGER

Metropolitan and Momentum were two of South Africas top financial services compa-nies. Metropolitan began as African Homes Trust in 1898 to help low income earners build their own homes, and few companies had a history that so closely mirrored the progress of South Africa and its people. In 1912, African Homes Trust took over an insurance company and in 1985 changed its name to Metropolitan Life. Life insurance was its primary product, sold through mass-market agents to primar-ily entry-level and middle-income markets. It was highly efficient at processing new busi-ness accounts, serving clients, processing claims, and generally administering its policies. Metropolitan had sufficient scale in terms of the number of public and private sector clients in retirement fund administration to provide them with scale benefits and thus the ability to price competitively. It was also the leading player in private (closed) healthcare solutions administration. Metropolitan was proud of its special emphasis on designing products for those who had previously, especially during the Apartheid years, been unable to participate in long-term sav-ings. In the nineties, Metropolitan expanded to namibia, Lesotho, and Botswana, and in 2006 they acquired a 60 percent stake in a Ghana insurer. In 2010, Metropolitan had 5,500 people and a market capitalisation of R9 billion. Momentum, on the other hand, was a progres-sive company established in 1966 as Afrikaanse Verbond Lewens (meaning Afrikaanse Life Bonds in Afrikaans, one of South Africas offi-cial languages). It acquired Monument Assurance in 1973 to form Momentum Life. Rand Merchant Bank Holdings (RMBH) invested in Momentum in 1992 and its growth benefitted from a strong focus on middle and affluent market segments. In 1998, RMBH created FirstRand Limited, the largest finan-cial services company on the JSE. Momentum had 9,000 people and a market capitalisation of R16 bil-lion. It had strong products in open healthcare solu-tions administration and umbrella retirement funds, both distributed through a strong broker channel. Momentums life insurance product, Myriad, was a market leader in the industry due to its compre-hensive coverage. In 2010, Metropolitan and Momentum faced

similar challenges. Looking for growth, each firm had developed insurance products aimed at the markets where the other was strong, and each had struggled to gain share. Momentums Aspire product struggled to penetrate the lower income market while Metropolitans Odyssey Life Insurance product for the upper income market was unable to gain traction. Both organisations started looking for corpo-rate transactions as solutions to bridge these gaps. When Metropolitans CEO Wilhelm van Zyl and Momentums CEO nicolaas Kruger talked about their respective challenges, they began to discuss whether a merger between them might solve both companies challenges. On its face, their products and markets were complimentary, and the oper-ational risks from a merger were also lessened because there was little overlap in the broker and agency forces of the two companies. Over the next three months, various discreet

meetings with selected board members tested opinions about a possible merger. These meetings led to the formation of a merger committee.

The Case for Change The merger committee consisted of balanced rep-resentation of executive and non-executive mem-bers from both companies, including the CEOs of both companies, the Chief Financial Officer of Metropolitan, the Chief Operating Officer of Momentum, and so on. The merger committees mandate was to formulate a clear business case for the boards. It became an important reference point in directing decision-making. Whenever there was a question or choice, the team would invoke The business case must prevail rule. In a time of great uncertainty, it offered direction and clarity. The core of the business case recognized the

complementary product lines and markets served. In addition, there were revenue and expense synergies to gain by integrating certain back office functions. For example, Metropolitan ran a lower cost health care insurance administration business than Momentum. On the other hand, Momentum had access to FirstRands Rand Merchant Bank (RMB) asset man-agement business, which had a much stronger third-party client franchise and could improve efficiencies in Metropolitans business. Finally, Momentums health insurance businesses and Metropolitans life insurance business were well represented through-out Africa. Any regional expansion strategies into Africa would thus be complementary. The business case also helped the merger

committee to focus on MMIs long-term strategic direction, especially in the face of the immediate pressures for cost-savings. An organisation devel-opment consultant, Dr. Francois Hugo, facilitated some of the discussions to resolve differing views and offered input on building trust under conditions of uncertainty and conflicting perspectives. During several important decision points, the team mem-bers had to put the envisaged companys combined interest ahead of their own companys interest or their own individual interest. nonetheless, there were still a number of occasions when the two parties had dissimilar views that could prevent the deal from going through. An important point of contention early in theprocess was deciding on the combined entitys brand. Design consultants, for example, suggested names that combined parts of the two client-facing brands, like Metrum, Magma, Meridium, and Emminent. Eventually, agreement was reached with the name MMI. MMI was positioned as the investor brand, while the strong and trusted brands of Momentum and Metropolitan would be used in client-facing businesses. This decision reflected the strong belief that the financial value of the merger would be maximized by leveraging the Metropolitan and Momentum brand names.

Competition Tribunal Ruling The merger application to South Africas Competition Commission included the rationale of cost savings due to synergies from shared information technology platforms, combined locations, and approximately 1,500 (out of 13,000 positions) job redundancies. The transaction had to adhere to South Africas rigorous company competition laws and regula-tions prescribed in the Competition Act, no. 18 of 1998. The high unemployment rate in South Africa created sensitivity to layoffs, known as retrench-ments in the South African environment. They were governed by strict labour laws, such as the Basic Conditions of Employment Act, no. 75 of 1997 and the Labour Relations Act, no. 66 of 1995. The Competition Tribunal ruled that the merger between the two companies would be approved on the con-dition that, during the first three years, there would be no employee retrenchments, except for senior managers. From a legal point of view, MMI could have appealed the ruling. However, the two boards decided not to challenge the decision in part due to the negative publicity this would cause. Kruger recalled:

We decided to choose our battles. Instead, we focused on cost-savings through consolidating our business units and used natural attrition to reduce staff numbers.

On March 31, 2010, Metropolitan issued 950

million new shares to FirstRand, in exchange for Momentum shares, aiming to list MMI Holdings Ltd. on the JSE later in the year when agreement had been reached on the final terms of the merger trans-action. Following implementation of the merger, FirstRand unbundled all its shares in Metropolitan and MMI was listed on the JSE on December 1, 2010. The combined entity was 15.6 percent black-owned and, given South Africas Broad Based Black Economic Empowerment (B-BBEE) Act no. 53 of

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2003, it became one of the most empowered insur-ance companies in the country.

THE INTEGRATION PROCESS

The positioning of the transaction as a merger rather than a takeover was important in retain-ing key customer groups and talented employ-ees from both organisations. However, while Momentum had more experience acquiring other companies, such as Lifegro, Southern Life, and Sage Life, this was its first true merger. The idea of balancing representation on the board, as well as the executive committee and merger commit-tees, made the process significantly more com-plex, and seeking consensus between the parties led to several iterations of decisions. Momentums slightly larger embedded value resulted in 11 board members compared to Metropolitans nine MMI board members. The chairperson was initially from Momentum, but there was an agreement that after one year, he would step down and the Metropolitan chairperson, J.J. njeke, would become chairperson of the combined entity. Despite these efforts, some financial analysts, such as Tim Cohen of Business Day, questioned whether a true merger was possible. He insisted on calling it a soft takeover. Early in 2011, the two companies execu-tive teams were combined to form a new struc-ture (Figure 1). The different cultural approaches in Metropolitan and Momentum became even more apparent during this time and required rig-orous debate to reach compromises. The intent of achieving cost-savings through synergies, while retaining the best of both organisations, required consultations and meticulous attention to creating space for both organisations to be heard. At times, the extensive consultation to ensure fairness in decision-making slowed the integration process down. Kruger commented: We learned early in this merger process that the soft people issues were actually the hardest to deal with. There were a few months just prior to the merger where the senior executive roles in the new structure were not yet final. This dif-ficult time experienced by executives gave us more empathy with what our staff were going through during the merger process. As nicolaas Kruger, Momentums former

CEO, was appointed to the group CEO position, Metropolitans former CEO, Wilhelm van Zyl, was appointed as deputy group CEO. Kruger was responsible for Momentums and Metropolitans retail businesses as well as the group-wide support functions. Van Zyl was accountable for Metropolitan Health, Momentum Investments, Metropolitan International, and Momentum Employee Benefits. The rationale for the new structure was to offer

equal representation for both companies, and this structure purposefully balanced power between the two former CEOs. Moreover, a divisional structure made sense because the combined entity was too large for a functional structure and a matrix struc-ture would have been too complex in the early days of the combined entity. All executives were strong proponents of the

long-term envisioned benefits of the merger and repeated the benefits to staff regularly. Leadership purposefully demonstrated their commitment to the merger by being highly visible and accessible during this period of uncertainty.

Formulating Integration Plans Following the mergers approval, the merger com-mittee became responsible for finalizing the due diligence process and establishing an integration

program to manage the transition with a project approach. The composition of the merger commit-tee was adjusted and comprised two non-executive board members from each company, including the CEOs. Johan Burger, representing Momentums board, served as the committees chair. The merger committee had several debates to create a clear and common picture of the future that resulted in a jointly formulated vision: We will be a leader in meeting financial services needs. We will meet clients needs by providing a range of appropriate, value-for-money financial solutions in our market segments. The finalisation date of the MMI Group strategy was February 2011. (See Figure 2 for a summary of the action plan.) The merger committee, in turn, appointed working groups to flesh out the details of the merger process. Danie Botes was appointed as the MMI chief integration officer to coordinate this process, based on his first-hand change manage-ment experience in the Sage and Southern Life integrations. One group, for example, focused on the integration of people processes and IT plat-forms. Other working groups paid attention to the combined organisational structures for the invest-ments business unit, the international businesses, employee benefits, and the health care adminis-tration business units. Structures for the lower income market life insurance business, called the emerging market retail division, and the upper income market life insurance retail division were also developed with equal representation from both organisations. Using working groups compris-ing both Metropolitan and Momentum employees increased understanding of each companys reali-ties and aspirations. The merger committee also retained a strat-egy consultancy that had worked in both organ-isations. The consultancy had central oversight and was ideally positioned to facilitate the work-ing groups which utilized an inclusive bottoms-up involvement process to formulate the implemen-tation plans. Together, they developed strategies and integration plans that were presented to the merger committee for approval. Following approval by the merger committee, the working groups

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proceeded to implement their plans, taking into account top-down guidance from the merger committee.

Another important role of the merger commit-tee was coordinating the communication of inte-gration plans. For example, the two CEOs would formulate their communication messages and con-firm consistency of messaging with each other prior to sending out combined media releases or external communications to shareholders, as prescribed by the JSE. Internal communications were also sent out by both CEOs, making sure the employees of both organisations received the communica-tions at the same time. This enabled consistency in communication and prevented, to some extent, rumours in both the Gauteng and Western Cape provinces. These communications went out weekly to instill trust in leadership. When there was lack of progress, the CEOs gave honest feedback about unresolved issues and planned corrective actions. In one of the first coordinated communications

efforts, the newly formed executive committee in 2011 acknowledged that it would take a couple of years to bridge the vast differences in culture between the two organisations. As a result, they decided to focus on developing a common set of core values. The process commenced with an ini-tial values assessment where all employees were invited to participate in a vote for the values they preferred. The assessment revealed that there were many similar preferred values across the two organisations. Behaviours associated with these values might differ, but the commonalities formed a strong foundation for the integration and align-ment process, despite the different cultures. Six values emerged from this process, including integ-rity, accountability, diversity, innovation, teamwork, and excellence. The executive team also held country-wide road

shows, where as many staff as possible attended to hear first-hand what was planned for the merged entity. During these road shows, the former CEOs acknowledged the past, offered updates on merger progress, shared success stories, and reinforced the vision of the combined entity. Finally, the merger committee initiated a

Redeployment Centre (RDC) for those staff mem-bers whose jobs became redundant through the integration process. As jobs became available through natural attrition in the two organisations, employees were transferred back into these jobs. The RDC optimized resource redeployment and removed the need for layoffs. It further contributed towards MMI ultimately exceeding its annual cost savings target of R500 million on completion of the merger integration.

Strategy Reformulation By 2014, the initial vision of the combined entity needed updating. It had revolved around meeting financial services needs and the strategy included such statements as, We will use our insight into the needs of our clients, our strong client-facing brands, product innovation, and service excellence. Our game-changing strategy will establish MMI as a leader and enable us to deliver superior shareholder returns on a sustainable basis.

The executive team embarked on a reformu-lation of their strategy with client-centricity as its driving force. They created a purpose, instead of a vision and mission, namely to enhance the lifetime financial wellness of people, their communities,

and their businesses. They believed the idea of financial wellness was a continuous process of planning and managing clients money so that they could handle everyday expenses and still reach their goals over a lifetime. As part of the strategy reformulation, MMI

explicitly wanted to enhance the financial wellness of a broad range of clients, including individuals as well as small and medium businesses, large companies, and public enterprises. They also con-firmed the earlier strategic focus on South Africa, the rest of Africa, and selected international coun-tries. MMI had strong capabilities in the full range of long-and short-term insurance for individuals and corporate clients, asset management, property management, investment and savings, healthcare insurance administration as well as health risk man-agement. They summarized their strategic focus areas as client-centricity, growth, and excellence. They defined their aspirations in both financial (growth in earnings, new business and embedded value) as well as client (financial wellness partner) terms (Figure 3). Figure 3 also illustrates that MMIs executive team emphasised flexible and modular systems, innovation, culture, and data analytics as enablers of the strategy.

A Client-Centric Design The executive committee introduced a major organ-isational redesign to support MMIs client-centric strategy in 2014. The reformulated strategy demon-strated a significant move away from a product-focused and siloed set of businesses. To support the new strategy, the executive committee proposed an operating model with a new client engagement solutions group at the centre of the design (Figure 4). With the support of the centres of excellence (shown on the right), the client engagement solu-tions group supported all segments and channels (shown on the left) by developing engagement tools to enhance client experiences. This operating model was designed to optimise the execution of MMIs client-centric strategy. Segment and channel busi-nesses used their intimate understanding of clients to build financial wellness client value propositions. The value propositions would use client engage-ment and experience tools designed by the client engagement solutions business (in the centre), as well as products provided by MMIs centres of excel-lence. Group-wide functions supported the entire organisation. The MMI executive team consciously followed a phased approach to the merger integration. They wanted to take employees with them on the jour-ney and sometimes had to wait for the right time and opportunity to integrate a further aspect of the organisation. For example, the structural integration kicked off in 2011 with the complete back-office integrations of employee benefits, asset manage-ment, and health insurance administration divi-sions. However, the retail divisions were largely untouched. The new client-centric operating model with the client engagement solutions group in the center was not envisaged in 2011. The restructuring initiated in 2014 was thus a next phase.

Cultural integration interventions

By 2015, Dr. Marlene Dippenaar, an internal organi-sation development consultant, was asked to head up the cultural integration process. She realised that the Group CEO and executive committee were invaluable in understanding the requirements of cul-ture change and demonstrating their commitment to the process. During an executive team two-day breakaway, the executive committee acknowledged the cultural heritages of the original organisations and considered which aspects they wanted to retain. It was important for the executives that the aspired MMI culture would support the strategic direction of the organisation. They confirmed that the six values created earlier would be important enablers of living MMIs financial wellness purpose going forward and formulated specific behaviours that would charac-terize each value. They created a unifying narrative called The MMI Way to explain examples of the behaviors associated with each value. The executive committee asked Blueprint

Consultants from Canada to conduct a values assessment to establish the gap between the current and desired observed behaviors. The feed-back revealed each business units performance on these values and action plans were formulated to bridge the gap in each area. In some instances, they

initiated leadership development or team-building interventions.

A highlight of this journey was a leadership

summit for the top 200 leaders from all business units in September 2016. Participants were divided into focus groups and they discussed the organi-sational enablers that supported living the values as well as the challenges. This facilitated process assisted leaders in taking ownership of the process towards culture change. In addition, Dippenaar and her cultural integration team followed up the sum-mit activities with facilitated sessions that involved each business unit executive team. Team members offered each other feedback on whether they prac-tically lived the values, for example, holding others accountable. Each executive team identified its limiting beliefs and what prevented its members from living the values. Throughout the organisa-tion, storytelling sessions were held, during which employees shared how they were living the MMI values. These illustrations assisted in bringing the values alive. As part of the cultural intervention, Dippenaar and her team undertook an extensive project to align Human Resources (HR) practices to the MMI values. There were vast differences across the for-mer Metropolitan and Momentum companies and Dippenaar relied on the support of the MMI exec-utive team because the actions created intense resistance. Their implementation required several iterative consultation processes with employees. First, Dippenaars team redesigned the on-boarding process for new employees, exposing them to the purpose, strategy, and MMI way of conducting business. new employees received a document explaining each value with its associated behaviours. The team also audited whether HR poli-cies, such as recruitment, selection, and promotion, were aligned to the MMI values. Second, in terms of talent management, the team ensured that MMIs Employee Value Proposition (EVP) was aligned to the values. For example, the Multiply wellness and rewards pro-grammea fast-growing product that educated, engaged, empowered, and encouraged clients to improve their physical wellness, education, safety, and financial wellnesswas made available to employees. It encouraged employees to make healthy changes through appropriate incentives.

These actions contributed to establishing MMIs employee brand rather than Metropolitans and Momentums client-facing brands. In addition, employees could be nominated

for excellent performance and living MMIs values, and winners received an overseas vacation. The team also reviewed the bonus structure to ensure that employees were not awarded when they per-formed at the cost of others, as teamwork was one of the values. Employees were thus measured on task performance as well as value-aligned behaviour to influence promotion processes. Third, the project team redesigned and renamed the MMI performance management sys-tem. The new performance excellence system indicated that the approach was to inspire employ-ees towards excellence, and leaders were trained to explain how individual employees performance was aligned with MMIs purpose and strategy. Finally, an important intervention at this time

helped leaders assess their level of self-deception. The program asked if there were times when they knew they were not doing the right thing but jus-tified their behaviour. All managers had to attend the training, presented by Arbinger, to move from a default mode of self-focus (or in-the-box think-ing) to the results-oriented and outward mindset found in a service leader culture. Another leader-ship development initiative, Enabling Change, was created to build a continuous change management capability in the organisation. Kruger believed that although corporate culture was driven by leader-ship, it was the actions and interactions of every MMI employee that shaped the shared culture.

Reflections, Updates, and Observations In 2016 and 2017, MMI began to see additional benefits and results from the merger, and it con-tinued to make adjustments. For example, 2016 was a year of several awards. Metropolitan Retail was rated the number one life insurer in the South African Consumer Satisfaction Index. Momentum Retail was rated second in this index. The Corporate and Public sector business won the Financial Intermediaries Association of South Africa (FIA) 2016 award for Product Supplier of the Year in the Employee Benefits category. MMI was the winner in the Media24 competition for financial results reporting, and its Corporate Social Investment spend reached R33 million in 2016. As shown in Table 1, MMIs financial perfor-mance showed steady improvement between 2012 and 2016. The value of new business was R850 million (up 13 percent on a consistent basis). The total dividend paid during the 2016 financial year was R2,519 million. Diluted core headline earnings were up compared to 2012, but down by 16 per-cent to R3,206 million from their 2015 peak. The contribution of each business to the diluted core headline earnings (as of June 30, 2016, comprising operating profit and investment income on share-holder assets) was as follows: Momentum Retail contributed 50 percent and Metropolitan Retail, 21 percent. The Corporate and Public sector contrib-uted 19 percent, while International contributed a small percentage at 1 percent. Finally, share-holder capital contributed 9 percent to diluted core headline earnings. MMIs diluted embedded value increased to R42,989 million at the end of the 2016 financial year. The new operating model described above

offered significant optimization opportunities, and a number of group-wide optimization projects sup-ported the expense savings target of R750 million by 2019. Annual cost savings of R104 million was achieved during 2016 (slightly ahead of the target for the year). Finally, the composition of the 2017 executive committee was again adjusted. It demonstrated the progress of the merger integration and pointed to MMIs subsequent development (Figure 5). For exam-ple, where the previous structure had separate exec-utives for the Momentum and Metropolitan Retail Channels, the new design combined these positions. MMI achieved a Level 2 status on South Africas B-BBEE labor relations scorecard, and MMIs exec-utive committee of 2017 reflected the transforma-tion efforts of the last couple of years. For example, nicolaas Krugers team includes four women, one of which, Mary Vilakazi, is the Deputy Group CEO. In addition, more than half of the executive commit-tee is now from previously disadvantaged groups.

Strategic Choices Going Forward MMI believed that it was critical to embrace the advances in digitalization and future-proof the organisation. An important strategy in this regard was the launch of MMIs Exponential Ventures business in 2016. Partnering with leading Fintech players, they invested in innovative young busi-nesses that held the potential to transform the life insurance industry by profitably reaching new markets, meeting new needs, or leveraging new technologies and business models. Other African regions provided opportunities with respect to innovative technology-enabled micro-insurance products. For example, MMI entered into a joint venture (JV) with MTn, a South Africa-based mul-tinational mobile telecommunications company, to offer innovative insurance solutions through MTns

significant telco distribution network on the conti-nent. The JV was called aYo, which means Joy in Yoruba, a nigerian language. MMI brought health, insurance systems, and expertise to the venture. As well, Indias large population and economic

growth rates were attractive and MMI received reg-ulatory approval for its Health and Wellness JV with Aditya Birla Group, launching its first offering to a particular market segment in India. MMI will proba-bly exit selected African countries, namely Zambia, Tanzania, Mauritius, Swaziland, and Mozambique. The rationale for exiting these countries is to focus attention on more profitable countries in southern Africa with more attractive growth trajectories.

633 MMI will also most likely scale down its presence in the United Kingdom. Going forward, MMI aimed to increase its focus on the organisations large existing businesses in South Africa, as well as high potential growth initiatives in the country.