Delivering Synergies : A closer look at post merger integration

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Presentation made at "CFO Strategies Middle East 2008" Conference, October 2008

Published in: Economy & Finance, Business

Delivering Synergies : A closer look at post merger integration

  1. 1. Delivering Synergies A closer look at post merger integration Sanjay Uppal Group Chief Financial Officer Emirates NBD 18 October 2008 Dubai. UAE
  2. 2. Introduction July 2007 : Communicating ‘Expected’ Value of Merger Integration : Delivering Value July 2008 : Communicating ‘Real’ Value of merger Conclusion 1
  3. 3. M&As make significant contributions to relative growth – but most acquisitions tend to destroy relative value A strong and well executed M&A strategy can . . . but most acquisitions fail to create value help companies realize growth . . . Explanatory power for differences in Improvement in share price from T – 2 years to company growth*, R², percent T + 2 years, adjusted for returns on MSCI World Index***, % Innovation** Market 23% growth Success 38% 39% 61% Failure 39% Inorganic activity * Based on the time series growth regression of 54 large companies across a broad range of sectors ** Remainder including disruptive innovation and noise in regression analysis *** Based on analysis around 1229 large deals executed before 2005 Source: SDC, Hoovers, Company reports, Analyst reports, McKinsey analysis 2
  4. 4. Key stages of a M&A process Pre-transaction Execution Process Post-transaction Post Target Transaction merger Corporate M&A identifica Launch Capability Execution manage- building strategy strategy tion Process ment Success of the Transaction depends on success at every stage 3
  5. 5. Introduction July 2007 : Communicating ‘Expected’ Value of Merger Integration : Delivering Value July 2008 : Communicating ‘Real’ Value of merger Conclusion 4
  6. 6. Expected synergies : Articulating the merger benefits AED m Communicated to shareholders & 151 346 market – July 195 2007 26 Revenue Costs Total Non- synergies recurring % of Expected** E t d** 10.5% 10 5% 22.2% 22 2% smaller Synergy Realization base Benchmark*** 10.0% 26.0% 2008 = 33% % of Expected** 4.1% 8.3% 2009 = 66% combined 2010 = 100% base Benchmark*** 5.0% 14.0% * Figures have not been adjusted for inflation ** As a % of NBD’s base *** Domestic transactions
  7. 7. Value creation potential – REVENUE Synergies Revenue Synergy Breakdown Details % Total Key Actions Key actions Corporate & • Expanded product offering & services Investment 121 62% • Leverage increased balance sheet and Bank financial strength to generate and retain greater number of larger projects • Focus on cross-selling among major Retail Bank 60 31% p product categories g • Increased revenue from market share / pricing advantages & leveraging largest distribution network in UAE Cost of Funds 4% • Improved cost of funding due to a stronger 8 capital base Brokerage 6 3% • Improved sales due to integrated brokerage TOTAL 195 100% 6
  8. 8. Value creation potential – COST Synergies Details Revenue Synergy Breakdown % Total Key Actions Key actions • Branch & ATM network consolidation Retail Bank 52 34% • Integration of card acquiring business • Pricing advantages on advertising / marketing spend Head Office 40 26% • Optimized Head Office functions • Redundancies in group functions 25% • Consolidation of IT centre IT & Operations 38 • Reduced Capital expenditure Corporate & • Cost-efficiency from integrated platform 10 7% Inv. Bank Brokerage 6 % 4% • Cost efficiency from integrated platform Islamic Bank 3% • Leverage Emirates Islamic Bank as 5 platform for unified Islamic offering TOTAL 151 100% 7
  9. 9. Introduction July 2007 : Communicating ‘Expected’ Value of Merger Integration : Delivering Value July 2008 : Communicating ‘Real’ Value of merger Conclusion 8
  10. 10. Integration : Guiding Principles Guiding Principles • Create a single company with one face to the customer Mission that builds th t b ild on – and goes beyond – th best of the d b d the b t f th merging companies • Leverage expertise of both entities & select the best Enable creation of people for respective positions “Emirates NBD” in line with • Manage integration & maintain ongoing business at the the strategic aspirations, same time while maximizing the hil i i i h – Executive Committee / Line executives responsible for integration success & running day to day business synergies in the shortest time possible – Integration Teams aligned with organisation structure –E l Employees work i parallel on th i d il b i k in ll l their daily business as wellll as on the integration related tasks i.e., will be working on integration part-time
  11. 11. Integration : Key Stages Phase 2: Launch Phase 1: Design Phase 3: Handover to Integration Organization Integration Plan Line Management & Initiatives Joint Steering Comm Emirates NBD CEO Emirates NBD CEO CEO CEO Emirates NBD ExCo Emirates NBD ExCo ExCo ExCo Integration Office/ Task Forces Line Integration M&A team Handover 1 Handover 2 management organization / i ti of integrated initiatives organization 06/03 02/07 05-06/09 16/10 End of 2007 2009 Milestones Merger Financial EGM Legal Target business Integration announced closing closing model defined completed
  12. 12. Establish an Integration organization & a dedicated team CEO Integration Offi I t ti Office Follow up on integration more • Support & coordinate Integration closely to speed up progress Teams and selected cross ExCo (Steering Committee) functional projects Acts as Integration Steering • Consolidate input & develops CEO + Executive Committee Committee and approve all Integration Roadmap major decisions j A Integration Office Cross-functional projects Project Baseline/ Communi- Top priority projects with cross Manage- Synergies a age Sy e g es cat o cation Governance & organization bus ess u ct o a e e a ce business functional relevance ment B Strategic HR Branding Move & relocation planning Day-1 management and MIS BU/SU Integration Teams Collaboration of the two C banks to develop individual integration initiatives as input g p Retail Banking HR for Integration Roadmap by Business / Support unit Wholesale Banking IT/Ops Treasury Finance Wealth M W lth Management t Admin Ad i International Risk management Islamic Banking Audit
  13. 13. Each Integration Team has key deliverables • Integration Team organization Organizational set-up • Detailed workplan definition for Integration Team Input to • Compare & assess both banks’ business models Integration g Roadmap • Develop Emirates NBD value proposition, strategy & go-to-market model • Develop target organization structure & resources • List of initiatives to combine models & achieve synergies target (including quick wins) •T Transition plan iti l
  14. 14. Organization Structure : Seizing Day ONE September 2007 December 2007 Day-1 Organization Final Organization Address key organizational questions during integration Put in place initial top- Move to final level organization organization structure structure directly after once key strategic legal closing to ensure questions have been fast and effective properly addressed to decision making ensure realization of synergies & business go t growth
  15. 15. Communicating with all stakeholders . . . and articulated issues & our approach for d ti l t d i hf Developed a Stakeholder Map . . . each stakeholder group Internal External Others Stake- Their Our Message Channels holders issues objective j Staff Shareholders General Public Shareholders Value Increase Safe / Press / Enhanced Website Transaction Customers Service/ Competitive Larger bank, Press / Boards Customers Advisors Ad i Pricing distribution.. Website UAE regulators Accountants Staff Job Security/ Attract and Better Intranet Career Retain best opportunities webcasts, Foreign Outlook talent in diversified newsletters regulators Legal Advisors organisation Analysts Regulators Transparency/ Compliance/ Other Advisors Meeting Blueprint Best Practice Media Ratings g agencies Suppliers 14
  16. 16. Communicating with staff started early 15
  17. 17. Integration : Keeping Track October 2007 November 2007 Activity 39 40 41 42 43 44 45 46 47 Board Board meetings ExCo Updates CEO ExCo Integration decisions Integration Update meetings with p g Office Integration Teams/ Cross-functional teams Functional Project Updates Teams Integration I t ti Updates Teams
  18. 18. Introduction July 2007 : Communicating ‘Expected’ Value of Merger Integration : Delivering Value July 2008 : Communicating ‘Real’ Value of merger Conclusion 17
  19. 19. Synergy identification & tracking process Due diligence Identification/ Planning Execution Phase: April – August 2007 Oct - Dec 2007 Jan 2008 onwards Phase 1 2 3 4 Planning phase: Commitment Realisation & Finalise Identification & to the t th market k t Tracking T ki Documentation D t ti Commitment 1. Agree mechanism to 1. Provide evidence & documents calculate & evidence 2. Revenue synergies – track 2. Freeze baselines actual achievements ocumentation Flow 3. State assumptions & pre- Synergy Synergy identification Realisation & 3. State annual recurring requisites amounts and P&L impact for 4. Define milestones & recording recording each year Board Memo Tracking Sheets g Do will form part of documentation provided to auditors Summary Business Unit wise tracking template
  20. 20. H1 2008 : Actual synergies achieved AED Millions Total Synergies y g 400 372 300 246 200 61% 200 124 100 0 2008 2009 2010 Target Actual (H1'08) Note 1: Base used when computing synergy targets were 2006 financials
  21. 21. Exceeded 2008 full year targets on synergies 250 Revenue Synergies 195 AED Millions 200 150 129 100 87 34% 65 50 0 2008 2009 2010 Total Synergies 400 372 151 150 Cost Synergies 300 246 91 82% 100 200 61% 100 200 124 + 50 100 50 0 0 2008 2009 2010 2008 2009 2010 Target Actual (H1'08) 30 One-off Synergies 26 22 20 17 144% 9 10 0 Note 1: Base used when computing synergy targets were 2006 financials 2008 2009 2010
  22. 22. Synergies achieved : Key drivers AED millions Annualised synergies Total, % Key drivers of synergies achieved in H1’2008 • Largest distribution network of 115 branches & 486 ATMs • Focus on cross selling – e.g. mortgages >AED100m loans Revenue 87 41 • Enhanced market share/pricing advantages – e.g. FDs • Embedded Customer efficiency framework – e.g. Tafawouq has tripled branch sales in Umm Suqeim & DCC • Single Head-office in place Costs 91 48 • Created efficiencies through unified business models • Combined marketing & advertisement activities • Projects & initiatives discontinued due to merger, namely Islamic One offs 22 11 banking set up previously planned in NBD Total 200 100 21
  23. 23. Key performance indicators : Cost-Income ratio Cost Income ratio for H1-2008 is 37.4% (vs. 38.8% in H2-2007) Before synergies H1-2008 cost-income ratio is 38.6% Synergies contribute to 1.2% drop in cost-income ratio Jaws of 4% achieved in H1-2008 vs. H2-2007 (before synergies 1%) 40% Cost: Income ratio 39% 38.8% % 38.6% Synergy 38% Impact = 1.2% 1 2% 37.4% 37% H2-2007 H1-2008 (before ( H1-2008 synergies) Note: Above financials exclude one-off integration costs
  24. 24. Integration Update : Q3 2008 Integration on track Key integration achievements in Q3-2008 include: Inauguration of Emirates NBD’s Large Corporate Unit (LCU) Treasury team now working as a single integrated FX trading entity Operations staff co-location in our new IT & Operations Processing Center in Al Barsha ATMs integrated to form the largest network in the UAE of over 500 ATMs & CDMs Mobile & Online Banking integrated; enhanced functionalities & 13 payment partners Completed the largest culture roll-out program in the Banking and Finance sector in the region – ‘My Bank, Our Values’; 5,000 employees attended 107 workshops Single Treasury system in place Rebranding across all Combined trading New Core Banking branches – One bank coverage to both bank’s system roll-out in across all channels customers EBI 12/08 01/09 Q1/09 Q2/09 Integrated credit cards I t t d dit d Legal merger L l Core-Banking R ll C B ki Roll-out to tt platform at Network Emirates Bank and NBD NBD: New system online International legally merge into one for combined entity entity Integration of all support units
  25. 25. Introduction July 2007 : Communicating ‘Expected’ Value of Merger Integration : Delivering Value July 2008 : Communicating ‘Real’ Value of merger Conclusion 24
  26. 26. Integration : Key success factors Identify & communicate merger benefits early in the process Develop a robust Integration Roadmap Dedicated team in place before transaction closes Measure & review constantly what you plan to achieve Sense of urgency is critical Communicate Focus on people Maintain business momentum End is not concluding the transaction – it is delivering the value 25

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