An executive viewpoint on Risk Risk Discussion Group

1. 15/06/2016
1
An executive viewpoint on Risk
Risk Discussion Group
Sydney at Canadian Consulate House 19 May 2016
Welcome by Andrew Crawford, Founder of Group
Welcome: Andrew Crawford (Founder of Risk Group in 2010)
Formal Welcome from Glenn Ahern, CPA President Lisa Gray and Deputy President Richard Sharpe
Welcome to the 400 followers of this group and the 73 registered for tonight’s event
Event management: Treasurer Helen Dong
Lucky door prizes, presented by Helen Dong and her Cadet team Shan, Jenna, Lydia, Nabila and Rebecca
Thanks to our sponsors GIA and CPA and our supporters, especially ACS, Sydney University Business School, Macquarie University, Institute of Chartered
Accountants
Speakers tonight
Paul Kernaghan, Senior Executive Financial Services
Saranne Cooke, Professional nonexecutive Director
David Fenwick, HSBC Commodity Finance Risk
Moderator: Mr Paul O’Brien
Volunteer Awards: Lisa Gray, Divisional President of CPA
Supporters

2. 15/06/2016
2
Value destruction by
acquisitions
PAUL KERNAGHAN
MAY 2016
3
What is value destruction in M&A?
 Price paid is more than the changes in cash flow resulting from the
acquisition.
𝑃₀ >
∆𝐶𝐹1
(1+𝑖)
+
∆𝐶𝐹2
1+𝑖 2 +
Δ𝐶𝐹3
(1+𝑖)3 + ⋯
Δ𝐶𝐹𝑛
(1+𝑖) 𝑛
• Where P₀ is the acquisition price,
• ΔCF is the change in cash flow resulting from the deal in any year
• i - is the acquirer’s cost of capital
4

3. 15/06/2016
3
Many studies indicate that the majority
of acquisitions destroy value for the
acquirer
 HBR – 70% to 90% failure rate
 KPMG – 53% destroyed value,
30% added no value
 AT Kearney – 58% destroyed value
 McKinsey – 60% to 80% destroyed value
 Sirrower – 66% destroyed value
 LEK Consulting – 60% destroyed value
The majority of value goes to the target’s shareholders!
5
Some Australian Examples in Financial
Services:
• HIH + FAI
• AMP + GIO
• AMP + NPI (UK)
• NAB + Yorkshire & Clydesdale (UK)
• NAB + Homeside (USA)
• IAG’s UK Insurance Acquisitions
• QBE’s 100+ Global Acquisitions
• Big 4 Banks Wealth Mgt Acquisitions?
Warning signs – if price represents…
 High PE ratio relative to current multiples and similar deals in the relevant
sector
 Big Premium to target’s pre deal share price
 Large goodwill value (ie price paid minus net assets of the target)
Acquirer’s share price usually falls after an acquisition
announcement as value is transferred to target’s shareholders
6

4. 15/06/2016
4
Six core reasons why value gets
destroyed?
7
Strategic Fit &
Rationale Price Paid Due Diligence
Integration
Planning
Resourcing &
Execution
Governance &
Alignment
Why does too much get paid?
 Over-estimate synergies.
 Fail to take into account negative synergies
 Loss of customers, talented staff and huge disruption to existing businesses
 Fail to ID legal and financial issues during Due Diligence.
 Under-estimate the cost, complexity and risks of integration.
 Valuation errors, assumptions and models.
 Management bias and ego.
 Investment bankers!
8

5. 15/06/2016
5
Due Diligence and Integration
Planning
 DD Scope too narrow – legal and financial is not enough.
 Fail to validate synergies and identify negative synergies.
 No detailed integration plan on which to base one off costs.
 Insufficient attention to people, culture and systems.
 No clear integration blueprint, change and risk management model.
 Inadequate resourcing plan for integration.
9
Organising for M&A success?
Deal Team
Integration
Planning Team
Due Diligence
Team
10
Role of M&A
In Strategy
Target
Selection
Criteria
Search
Process
Steer
Co
Steer Co
Integration
Executive
BU1
BU2
BU3
Comms &
Change Mgt
Systems
Human
Resources
Finance & Risk
Mgt
BU4

6. 15/06/2016
6
Risk – a view point from
non executive director
and researcher
Saranne Cooke
FCPA MComLaw MBus(Mkt) BCom GAICD AFAMI CPM
The transition from executive to non-
executive director in managing risk
• Managing ‘high’ risks in executive roles
• Transitioning from management to oversight
• Board and committee responsibilities

7. 15/06/2016
7
The delineation of board and management
• The board oversees risk , the executive manages risk
• Where is the line?
• The line is variable and moveable
Researching ASX200 directors
• The ASX Corporate Governance Council Principles and
Recommendations
• What are directors saying?
• What keeps them awake at night?

8. 15/06/2016
8
Risk and Innovation
• The National Innovation and Science Agenda
• Being innovative and managing risk
• Risk as a positive
Reflecting on risk
David Fenwick,
Commodities Finance Risk Management,
HSBC Australia
May 2016
PUBLIC

9. 15/06/2016
9
Disclaimers
• This presentation is general in nature on matters of general interest. It
is not intended to be comprehensive, is not advice, and does not take
account of personal situations. Where appropriate you should seek
professional advice.
• The material contains personal views of the author, is not sanctioned
by HSBC and may not represent their views
• All information is in the public domain
PUBLIC
Reflect on my risk roles
PUBLIC

10. 15/06/2016
10
PUBLIC
1: risks develop slowly, and then very quickly
Something else I learned through that time
PUBLIC
2 : to manage risks, rules and principles are needed

11. 15/06/2016
11
Project Triangle
PUBLIC
time
cost
quality
RISK
time
cost
quality
3 : you can’t have it all - time vs cost vs quality…and RISK
PUBLIC

12. 15/06/2016
12
PUBLIC
• Modelling
• Stress testing
• Scenario testing
4 : the map is not the terrain
Thoughts to leave you with:
1 : risks develop slowly, and then very quickly
2 : to manage risks, rules and principles are needed
3 : you can’t have it all - time vs cost vs quality…and RISK
4 : the map is not the terrain
PUBLIC

13. 15/06/2016
13
What does that mean for today?
PUBLIC
To join the group contact
Chair - Darren on ljd.change@bigpond.com
Treasurer – Helen Dong on hdaccount@email.com
Founder – Andrew Crawford, https://au.linkedin.com/in/andrewcrawfordfmba
Chair of Gosford Group – Richard Sharpe, Richard@sharpebros.com.au
GIA representatives
Lea Rushton, Peter McGee and Kerry McGoldrick