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Ensuring Success in Post-Close Integration


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Ensuring Success in Post-Close Integration

  1. 1. @Firmex, #FirmexMCRubber Hits the RoadEnsuring Success in Post-Closing Integration andHarvesting Intellectual Assets Firmex Webinar Series Andrew J. Sherman, Esq. M&A Master Class Jones Day 51 Louisiana Avenue, N.W. Washington, D.C. 20001-2113 December 8th, 2011 202-879-3686 1:00 p.m. to 2:00 p.m.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 1
  2. 2. About Firmex Firmex is focused on providing the best virtual data room solution for managing corporate transactions and financial complianceJoelLessem Who uses Firmex?CEOFirmex • Firmex community includes over 200,00 users worldwide • Conducted over 10,000 deals in the last 18 months Why offer an M&A Master Class? • As part of our value-added service, we believe it is important to offer educational resources to our expanding community ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 2
  3. 3. Andrew J. Sherman Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,500 lawyers worldwide. He is the author of 23 books on business growth, capital formation and the leveraging of intellectual property. His eighteenth (18th) book, Road Rules Be the Truck. Not the Squirrel. ( is an inspirational book which was published in the Fall of 2008. He has appeared as a guest and a commentator on all of the major television networks as well as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First Business,” and Bloomberg’s “Small Business Weekly. ” He has appeared on numerous regional and local television broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development. He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he teaches courses on business growth strategy. He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time champions and supporters of entrepreneurship.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 3
  4. 4. M&A Integration Strategies and Best Practices©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 4
  5. 5. The Integration Challenge “Cultural & people issues present the biggest specific challenges during the post deal period…” Only 20% of respondents were well Top Post-deal Challenges prepared to deal with cultures differences Complex integration of two businesses 32% • Cultural challenges – Differences in working styles, Dealing with different 30% leadership approach Organization cultures – National culture differences People issues 27% – Behavioral differences • People Issues IT 24% – Key members of management team leaving – Employee moral and motivation Customer retention 10% – Retention of key staff Time and – Consultation with staff and 4% management representative bodies Proportion of respondentsSource: KPMG Global M&A survey …yet two thirds of companies had not placed a great deal of emphasis on addressing people and cultural issues in planning for the post deal period©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 5
  6. 6. Acquisition Integration: Surviving the “Day After”Options for Integrating Acquired BusinessMinimal – only selected corporate functions are merged (e.g.HR/benefits), primarily to achieve staffing synergies or costefficiencies; acquired business remains decentralized withautonomy for decision making and agreed-upon reportingrequirements to the “mother ship”Moderate – certain key functions are consolidated ( & sales, capital planning, procurement); strategicplanning and monitoring is centralized while most day-to-dayoperations remain autonomousFull – all processes, people and systems are consolidatedand management decisions are centralized into parentcompany©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 6
  7. 7. Acquisition Integration: Surviving the “Day After”Integration: Whats the Big Deal?• A poorly executed integration plan can create or destroy shareholder value; the results are felt long after the deal closes• Integration is a difficult, complex and sensitive process; it is not just an ad hoc “to-do” list• There is no rigid or “one size fits all” framework for integration• A typical integration process has many owners and constituents©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 7
  8. 8. Acquisition Integration: Surviving the “Day After”Top Reasons Cited for Integration Failure “Integrating two organizations is like trying to build a rocket while its blasting off.” -- Anonymous• People issues – e.g. losing talent; organizational exhaustion• Cultural incompatibility• Poor communication across all organizational levels• Lack of leadership and change management• Resource Constraints; concurrent pressures• Poor planning / slow execution of integration tasks• Pre-deal horse trading – not fulfilling early promises after deal closes©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 8
  9. 9. Acquisition Integration: Surviving the “Day After”Tactics for Retaining Key Players• Provide financial incentive for successful (and timely) completion of integration action items• Reinforce a positive vision of their role in future of merged company; answer the “me” questions in the merger• Involve in integration task force activities• Communicate regular updates; explain “why” decisions are made; provide a forum for venting questions/concerns• Provide timely positive feedback and recognition when something is well done• Follow up words with actions and be persistent• Involve others to help “recruit” as needed©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 9
  10. 10. Acquisition Integration: Surviving the “Day After” Tactics for Determining the “Best Process” The “Process Maturity Model” – road map for process improvement • Provides a context for evaluating specific processes with a goal of determining (or redesigning) the best process that delivers higher performance over time • Built around five key “anchor points” which provide a common approach and common language among employees Process Maturity Model “Anchor Points”  Design – understanding of how the process is to be executed  Ownership – appointment of a key manager or group with responsibility for process implementation and execution  Performances – abilities of the people who operate the process activities  Infrastructure – effectiveness of the information and management systems that support the process activities  Metrics – quality of measures used to track process performance Note: Adapted from the ”Process & Enterprise Maturity Framework,” created by Michael Hammer See “The Process Audit” published in the Harvard Business Review, April 2007©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 10
  11. 11. Acquisition Integration: Surviving the “Day After”Common Tactics for Integration Survival• Concentrate on real value drivers – anticipate issues; plan appropriate responses• Maintain continuity across deal phases – from structuring to due diligence to implementation of integration plans• Coordinate resources/timing and assign responsibility – a lack of speed or accountability may kill potential benefits• Manage change proactively – take action to remove uncertainty while bridging any “cultural” gaps• Communicate with internal and external constituents – provide information early, often and carefully to build support and acceptance©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 11
  12. 12. Acquisition Integration: Surviving the “Day After”Concentrate on Real Value DriversValue Realization: Synergy action plans• Identify and prioritize synergy opportunities (and related challenges) during due diligence and adjust throughout the transaction lifecycle – remember the “20/80 rule”• Each synergy challenge should have an unique action plan with responsibilities assigned• Synergy action plans should consider one-time transition/integration costs or capital outlays (as well as timing of cash flows) and be linked to financial forecasts©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 12
  13. 13. The Integration Challenge Desired Outcome Typical Results • Rapidly capture • Synergies not achieved in cost & revenue synergies 70% of cases • Streamline organization and • 45% of executives leave by critical business processes year 3 • Minimize disruption to • Customers frustrated by employees and customers change • Execute an issue-free Day One • Employee uncertainty • Maintain focus on current translates into disengagement business • First 4-8 months • Quantify progress and results productivity reduced by 50% Source: Deloitte Consulting LLP M&A Survey 2008©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 13
  14. 14. The Integration Challenge How Do You Capture Synergies…. Personnel Reductions Facilities Consolidation Sourcing/Purchasing…. …..While Integrating…. Customers Management/Employees Suppliers/Systems…. …..Without Negatively Impacting…. Financial Customers Employees Vendors/Suppliers Performance… …All while relying on the same leaders/employees who are attempting to do their “day job” and maintain current business momentum 14©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 14
  15. 15. Integration Management Office (IMO)Integration Playbook: Typical Elements Planning Execution EXECUTION AND MONITORING PROCESSES PURPOSE Functional Integration Planning with Acquired Company Resources SCOPE Project Portfolio Management Processes Playbook Scope INTEGRATION PROJECT CLOSING Relationship between Playbook Elements End State Tracking Process INTEGRATION MANAGEMENT PLAN Lessons Learned Process Organization COMMUNICATION MANAGEMENT PLAN (CMP) Governance Communication Schedule Communication Management Execution Processes INTEGRATION PLANNING PROCESSES Reusable Integration Message Products Integration Phases Overview SYNERGY MANAGEMENT PLAN (SMP) Pre-Close Processes and Tools Synergy Initiative Planning Integration Planning Discovery Phase Synergy Initiative Process Management Human Resources Data Requirements CULTURE/TALENT ASSESSMENT PLAN (CTAP) Accounting Data Requirements Culture Assessment Tools Initial Integration Plan Culture Analysis/Recommendations Talent Assessment Tools Retention/Separation Planning 15 ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 15
  16. 16. Post-Closing Challenges©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 16
  17. 17. Post-Closing Challenges• The closing of a merger or acquisition usually brings a great sigh of relief to the buyer, seller, and their respective advisors. Everyone has worked hard to ensure that the process went smoothly and that all parties are happy with the end result. But the term closing can be misleading in that it suggests a sense of finality, when in truth, particularly for the buyer and the integration team, the hard work has just begun.• Often one of the greatest challenges for the buyer is the post-closing integration of the two companies. The integration of human resources, the corporate cultures, the operating and management information systems, the accounting methods and financial practices, and related matters are often the most difficult part of completing a merger or acquisition.• It is a time of fear, stress and frustration for most of the employees who were not on the deal team and may only have limited amounts of information regarding their roles in the post-closing organization.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 17
  18. 18. Post-Closing Challenges (Cont’d)• The seller must facilitate a smooth transition of ownership and management to the buyers team without ego, emotion, or politics. The buyer must have procedures in place to prevent the seller undermining these transitional efforts and assume control of the company--also without ego, emotion, or politics.• Post-closing challenges may arise in a wide variety of subject areas, e.g., operations, finance, personnel, and information systems and many other areas as set forth in the post-closing check list set forth below. In order to achieve desired synergies from a deal, an effective and rigorous synergy management with a constant eye on milestones is required.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 18
  19. 19. Strategic Post-closing Issues• Who should lead the transition team?• Which changes should be made and how quickly?• How will the changes be presented and sold?• How can the seller’s transition from owner to employee status be managed?• How can “turfmanship” be avoided?©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 19
  20. 20. Common Post-Closing Problems• Lack of Communication • Indecisiveness• Weak Leadership • Inexperience Among Executives• Mistakes Made In Due Diligence Process or Advisors• Realization of Efficiencies and • Post-Closing Synergies Over- Synergies Took Too Long (or Were Estimated or Unrealistic Obsolete or Stale By The Time They Were Achieved) • Stakeholder Resistance Under-• Unexpected Rapid Shift in Post- estimated Closing Market or Economic Conditions • Customer and Channel Partner• Unexpected Post-Closing Third Party Loyalty Over-Estimated Claims on Liabilities • Technology Integration or• Cultural Differences Greater Than Infrastructure Costs Well Above Predicted Budget• Market Share or Valuation Failed To Be Accretive©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 20
  21. 21. Communication is Hyper Critical • The primary tool for dealing with fear, and many of the other emotions that surface during the course of acquisition transition, is communication. If a merger is thought of as the beginning of a marriage, think of the amount of communication that is necessary in the first few weeks and months of such a relationship. As with any relationship, a lack of communication typically means a lack of success. • In a merger, the two keys to effective communication are to determine (1) the importance of the information and (2) who should communicate it. Information should be communicated in the order of its importance. This means that you want to first communicate that information that affects people directly, including changes in the organization, especially who is staying and who is leaving: • Reporting structures • Job descriptions and responsibilities • Title, compensation, and benefits • Job location and operating procedures©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 21
  22. 22. Post-Closing Focus Area Check List Human Capital Issues • Cultural Alignment • Integration of Leadership Team • Integration of Staff • Termination Plan Due To Efficiencies and Overlap • Overseas Workers • Union Issues • Regulatory Issues • Temporary Workers and Part-time Employees • Independent Contractors©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 22
  23. 23. Post-Closing Focus Area Check List (Cont’d) Relationship Capital Issues • Integration of Customer Relationships • Integration of Supplier Relationships • Integration of Channel Partners • Integration of Advisory Teams and Consultants • Integration of Strategic Alliance and Joint Venture Partners • Subcontractors and Teaming Relationships Infrastructure • Physical facilities • Warehousing and Logistics • Information Management and Computer Systems©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 23
  24. 24. Post-Closing Focus Area Check List (Cont’d) Regulatory and Contractual Controls • Regulatory Approvals • Post-closing assignments and consents Branding and Marketing • Branding issues • Communications issues • Public relations strategy • Redefining the customer value proposition Operational Issues • Store/office trade dress and alignment • Community relations • Amendments to Real Estate and Operating Leases©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 24
  25. 25. Key Post-Closing M&A Employee Issues• What’s going to happen to me?• What’s expected of me?• What’s in it for me?• Be sure that post-closing planning and communication addresses these three fundamental human concerns. Take control of the rumor mill before it takes control of you and your transaction. Most rumor mills begin as a result of an information gap.• It is the responsibility of senior management to fill this void with clear and consistent information at all levels, even if some of the data shared is bad news.• Leaving the door open to water cooler-driven information channels will often lead to the best and the brightest people heading for the exits, when it is often those exact folks that need to be directly motivated, incentivized and retained.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 25
  26. 26. Dealing With Post-Closing M&A Customer Issues• When a buyer acquires a business, one of the most valuable assets is the customer base.• One of the post-closing challenges is to determine the profitability of the customers.• Often the acquired company has legacy customers that they have been unwilling or unable to terminate if the customer is unprofitable or difficult to manage.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 26
  27. 27. Dealing With Post-Closing M&A Customer Issues (Cont’d) • The acquirer should review all customers for profitability and sustainability. • It makes little sense to keep a customer if it is not possible to make a profit on the relationship, unless the customer enables the merged company to penetrate a new market or if the customer helps achieve scale economies, thereby enabling other customers to be profitable. However, even in these cases, there is a limit to the amount of losses that make financial sense. • In addition, the customer may be a direct competitor of the buyer or of one of the buyers customers. As a result, it is important to evaluate the sellers customer base.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 27
  28. 28. Dealing With Post-Closing M&A Customer Issues (Cont’d) Perhaps more important, however, is for the seller to transfer the goodwill of its customers to the buyer. A disgruntled employee can very quickly destroy this goodwill and perhaps jeopardize a significant income stream on which the value of the acquisition was based. The key steps to transferring this goodwill are: • Personal introductions to customer contacts • Social events to acquaint customers with the new owners • Letters from both the seller and buyer that thank customers for their business and announce the new management and plans for the merged entity©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 28
  29. 29. Post-Closing M&A Issues: Physical Facilities • Often one of the larger expenses on the income statement, rent and/or lease payments are a natural place for a buyer to focus when evaluating the efficiencies to be gained by a merger. • When examining the space requirements of the combined entity, it is certainly helpful to consider the square footage. • The space should be evaluated to determine if the rent is more or less expensive than other company space and if the amount of space is more than is needed. This will go a long way toward helping to cut expenses in order to reach the target return.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 29
  30. 30. Post-Closing M&A Issues: Physical Facilities However, there must also be human considerations: • How long have the employees been in this space? • How does the commute compare to where they might be relocated? • How much interaction is required between the staff being relocated and staff in a different location? • How much reconfiguration of the office and facilities of each company will be required to accommodate additional staff or functions? • How much productivity can be expected from these people during the course of the move?©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 30
  31. 31. Post-Closing Integration Best Practices Overview©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 31
  32. 32. Post-Merger Integration Key Challenges & Best Practices Here are some key lessons learned for developing an effective post- closing integration plan: 1. Pick your poison. Many deals fail because a strategy for integrating (or not) the 2 cultures was never clearly defined. • Will the seller’s culture become dominant? • Will the buyer’s culture be absorbed by the seller’s team and employees? • Or will, if feasible, the cultures allowed to “peacefully co- exist?” • Or will it be a hybrid driven by compromise and merit (e.g. they do that better, but we do this better, so let’s find ways to truly combine the best of the best in each area) • Buyers should not lose sight of the value of the culture that they are buying, just because their ego or ignorance assumes that their culture must be dominant on a post-closing basis©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 32
  33. 33. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 2. Align cultural decisions with overall M&A goals and growth strategy. • Employees want to see a fit between the post- closing integration decisions made and the overall strategy which is driving the transaction. • If the CEO of BuyerCo talks about the need to cut costs, but then nobody is fired, then employees are relieved (for now) but confused. • If the BuyerCo CEO talks about the need for geographic expansion, but then closes offices and plants, the decisions do not appear aligned with the strategy which has been articulated.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 33
  34. 34. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 3. Compatibility does not always mean an exact match. • Post-closing executives and consultants will often “force feed” a quest for “sameness” that is unnecessary. • Cultures can be compatible and functional even if they are not an exact mirror image of each other. • For example, both could be driven by merit-driven performance and rewards, even if the rewards are not exactly the same. • Both could be driven by customer service excellence, even if that manifests itself in very different ways, especially if the two companies are in different types of businesses.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 34
  35. 35. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 4. Communicate early and communicate often. • The more that can be done to reduce or eliminate the stress and fear of the typical employee, the better. • If the leadership is perceived as playing their cards too close to the vest or being fearful of making the hard decisions, both cultures will erode quickly, having a significant adverse effect on the value of the entity on a post-closing basis.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 35
  36. 36. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 5. Reach for the stars, but be realistic about post-closing objectives. • The excitement and optimism expressed during the transaction is wonderful and is energy which should be contagious but post- merger goals should be realistic and attainable. • Goals that are neither believable nor achievable will only disappoint the investors, the employees, vendors and customers and reflect poorly on the management team of the recently- integrated company. • I am sure that every CEO of BuyerCo believes in her “heart of hearts” that getting this deal done will increase the value of the company by tenfold or even twentyfold down the road …. but is that realistic in the near-term? • And if no, is it realistic to have employees believe that a tenfold increase in value in the near-term is the actual goal, only to be disappointed when it is nowhere even close.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 36
  37. 37. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 6. Meaningful systems need to be in place to set, measure and adjust the goals of the transaction. • A clear set of 12/24/36 month “goals and objectives” to be achieved as a result of this transaction should be articulated as part of the post-integration plans. • Yes, some portion of the results will be intangible and difficult to measure (e.g. our customers just “feel better” about us now), but even goodwill should manifest itself in higher customer loyalty and increases in sales that can be easily measured. • Repeat sales, upsales, renewals to commitments, lower turnover rates can all be measured and closely monitored.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 37
  38. 38. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 7. Treat both sets of customers as gold.  At the end of the day, you can write-up all of the press releases in the world, but if customers are not convinced that this M&A deal is good for them, then the objectives of the deal will not be met.  Take the time to explain the post-closing value proposition to both sets of customers.  If the deal will result in lower costs or better pricing, then tell them and show them how and why.  If the deal will result in higher prices but better service and support, then be ready to justify and explain the value of the trade-off.  If the deal will result in broader and better product lines or service offerings, then have your cross-selling strategies and tools ready to go.  Remember that your competitors will try to attack the deal and market to your customers if they see the opportunity; you need to be ready to push back.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 38
  39. 39. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 8. Don’t hide the poop under the rug. • In an attempt to paint a rosy post-closing picture, buyers and sellers may choose to defer problems and challenges identified pre-closing to some undefined time period after closing. • This “we’ll get to it later” approach is a time bomb just waiting to explode and the clean-up will not be pretty. • The failure to either unearth lurking problems, or worse, the intentional decision to ignore them, is a recipe for disaster. • Problems in the area of human resources, environmental liabilities, lack of clear ownership in intellectual property, poorly-drafted earn-outs, unpaid taxes, unclear major customer commitments, underfunded pension plans, etc. are not problems that will go away with the waiving of a post-closing magic wand. • The parties may feel pressure from the marketplace or from their advisors or from their sources of capital to “just go ahead and get this deal closed and we’ll figure out these problems later,” which is bad advice and a bad strategy. • The delays in closing that solving these problems would create are viewed as the evil, instead of the problems themselves. • Yes, momentum is important and there may be minor problems which are not worth the derailing of a transaction, but material issues and challenges must be resolved prior to closing.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 39
  40. 40. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 9. Do your due diligence the right way the first time. • Improper or hasty due diligence often results in post-merger integration plans going awry. • Key issues that should have been discovered and dealt with pre- closing wind up to be a source of tension and dispute post-closing because due diligence was piecemeal or improperly staffed. • Due diligence staffing means the right number of people with the right skill sets who are prepared to invest the time and effort to ask the right questions and challenge the answers that don’t make sense. • Subject matter experts should be brought in when necessary, especially for high-tech or biotech/life science transactions. • For example, if you are buying a government contractor and one of the key assets is a long-term supply contract with the Department of Defense for providing advanced technology and support, then those contracts had better be reviewed by someone more senior and more knowledgeable than a 2nd year general corporate practice associate of your local law firm.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 40
  41. 41. Harvesting Intellectual Assets©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 41
  43. 43. Key Strategic Questions • New book out in Fall of 2011 • We can learn many lessons about business growth and intellectual capital development from the best practices of our agricultural ancestors. • We are all farmers. We mark our turf. We protect our property. We plant our seeds. We nurture the soil. We plow our land. We combat adverse weather and ecosystem conditions and overcome adversities. We prepare for our harvest. • We hope for the best and prepare for the worst as the market sets a price for our efforts. We embrace the notion that our results will be directly tied to our levels of effort and expertise. • “We reap what we sow.” • We begin anew with each new season.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 43
  44. 44. Key Strategic Questions (Cont’d) • Who will be on your team to assist you in these efforts? • Who will you hire to help you raise, harvest and sell the produce at your farm? • What tools, resources and expertise will you require to maximize the fruits of your harvest? • What adverse weather or market conditions must you overcome to be successful? • Who else is growing these same crops and how does their experience compare to your own? • Do you have a keen sense for the cycles and timetables that will optimize your harvest? • What is your game plan for bringing your crops to the marketplace? Will you do it alone or join with others?©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 44
  45. 45. The Evolution of a Revolution Agricultural Plant Digital Revolution Cultivate Revolution (Food) Harvest (Intellectual Capital) • The picks and shovels of yesteryear have been replaced by the laptops and smart phones of today • Yet we must be committed to toiling in the fields for long hours to harvest productive and profit-driven assets (even if the venue and the crops have changed)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 45
  46. 46. Every Farmer Needs A Game Plan • Put an intellectual capital development and harvesting plan in place • Develop organizational charts and accountability for innovation (Chief Innovation Officer) • Alignment of seeds to be planted and demands of targeted market • Adjusting the plan in real-time around weather conditions and competitive trends©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 46
  47. 47. Planting Seeds • What seeds will you plant today? • What crops is your land most capable of growing? • Have you assessed demand and competitive trends? • What adverse conditions will you face? • Establishing a genuine culture of innovation©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 47
  48. 48. Irrigating the Field • Gathering the water, the nutrients and the fertilizer to make sure that intellectual capital can be harvested (human capital, financial capital, etc.) • Predicting the unpredictable (Mother Nature) • Too much vs. too little water (drought vs. floods) • Fire hose vs. garden hose (SME leaders spend too much time and precious resources on putting out fires instead of irrigating new ideas)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 48
  49. 49. Nurturing The Soil • Finding the right mix of nutrients • Know the needs of the soil • Building the right team for nurturing and evaluating new ideas: which are ripe for picking and which need more time? • Google’s 70/20/10 Rule – what’s yours???©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 49
  50. 50. Monitoring Progress Carefully To Ensure A Timely Harvest • Building effective IAM systems • Accountability and internal controls • R&D spending: Know when to say when • Innovation metrics©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 50
  51. 51. A Bountiful Harvest • Systems and processes in place to ensure innovation, not just invention • Understanding the different types of innovation harvesting strategies • Proper rewards and incentives to encourage innovation and effective intellectual capital harvesting©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 51
  52. 52. Bringing Crops To The Marketplace • Developing efficient distribution channels (don’t try to do it all alone) • Timing and balance issues: how and when to bring crops to market (The 8 track tape store and the flying car) • Impact of Web 2.0 and the developing E-marketplace • Wisdom of Crowds/Custom Merchandise in Real Time©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 52
  53. 53. Evolving Strategic Views Towards Intellectual Capital (IC) Assets Traditional View Enhance the company’s competitive advantage and strengthen its ability to defend its competitive position in the marketplace (IC as a barrier to entry and as a shield to protect market share) (reactive and passive approach) Current Should not be used merely for defensive purposes but should also be View viewed as an important asset and profit center which is capable of being monetized and generating value through licensing fees and other channels and strategies, provided that time and resources are devoted to uncovering these opportunities (especially dormant IC assets which do not currently serve at the heart of the companys current core competencies or focus) (proactive/systemic approach) Future Premiere drivers of business strategy within the company and encompass View human capital, structural/organizational capital and customer/relationship capital. IAM systems need to be built and continuously improved to ensure that IC assets are used to protect and defend the companys strategic position in domestic and global markets and to create new markets, distribution channels and revenue streams in a capital efficient manner to maximize shareholder value (core focus/strategic approach)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 53
  54. 54. Intellectual Asset Management (IAM) (The IP Discovery, Management and Mining Process) • IAM is a commitment to building systems to create, organize, prioritize and extract value from a set of intellectual property assets. The intellectual capital and technical know-how of a company are among its most valuable assets, provide its greatest competitive advantages and are the principal drivers of shareholder value • (Professor Lev – NYU, estimates that only 15% of a company’s “true intrinsic value” is reflected on its financial statements), yet rarely do smaller and growth companies have adequate personnel, resources and systems in place to properly manage and leverage these assets (“Finding and Harvesting The Rembrandts in The Attic”). Discussion Point: What other major body part are we estimated to only use 15% of its true capacity? Is there a correlation? When are our value- drivers “blindspots”?©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 54
  55. 55. Intellectual Asset Management (IAM) (Cont’d) • IAM systems facilitate collaboration and help break down silos in communications regarding new product development, the harvesting of intellectual assets and provides training to employees at all levels on the importance of the protection and leveraging of intellectual property. 55©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 55
  56. 56. Harvesting Process Intellectual Asset Chief Innovation and Collaboration & Brainstorming, Intellectual Asset Communication Retreats, Facilitating, Harvesting Officer Creativity, etc. (“CIIAHO”) • Software & Systems • Periodic Meetings & Retreats • Accountability & • IP Audit (take inventory as to Resources for Identifying, what already exists) Harvesting, & Leveraging Rewards • Market Screens • Customer Demand Screens • Resources Screens Strategic Screens & • Human (Who?) Product/Service Filters • Financial (How?) Development Plan • Resource Allocation Screens • Profitability/Prioritization • Shareholder Value • Patent • Trademark IP Protection • Copyright • Organic • Trade Harvesting • External Strategy Secret • Other©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 56
  57. 57. Questions & Answers©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 57
  58. 58. Book Winners!• A. Hawkins – Rawlison Butler• D. Bastien - Deloitte• C. McKillop - Cogeco• M. Shimp – Venture Mgmt• J. Yoon – CNJ Captial Congratulations! We will be following up shortly to get your book preference and mailing address.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 58
  59. 59. Thank You Our next webinar is Jan 17th, 1pm Eastern Alert to M&A Advisors: What’s Ahead for 2012 and later? Why are so many middle market M&A advisors not particularly successful? For starters, this is not your father’s M&A world. In fact, there is a whole new world out there. The realities of professional M&A practice have been transformed during the 21st century. Know how to catch the right waves and the right deals with the right techniques. Featuring Dennis J. Roberts, author of the widely selling An Insider’s Guide to the Purchase and Sale of Middle Market Business Interests. Today’s Recorded Webinar, Slides, and Complementary Checklists will be made available in a follow-up email shortly.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 59