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Haygroup Harnessing Hidden Strengths Touching The Intangibles May12

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Dear LinkedIn Connection,

Despite uncertainties in the global stock markets, growth through acquisition is a viable option for MNCs seeking growth in Asia and for Indonesian companies keen on pursuing local and global opportunities. Globally, M&A deal values grew by 22% in 1H2011 compared to the same period in the previous year – an indication that corporate takeovers remain highly active. In contrast, transactions in Indonesia had more than doubled in value and volume in the ten-year period from 2001 to 2011 (Institute of Mergers, Acquisitions & Alliances).

Yet, M&As are inherently risky. Hay Group’s studies have shown that nearly 60 percent of deals transacted between 1992 and 2006 left the buyers with eroded shareholder value. Clearly, the long-term value of M&As is not guaranteed.

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Haygroup Harnessing Hidden Strengths Touching The Intangibles May12

  1. 1. 1 Harnessing hidden strengths: Touching the intangiblesMay 2012 How can Indonesian companies retain shareholder value throughout the M&A process? Open for business Despite uncertainties in the global stock markets, growth The reason for this lies in the fact that most buyers focus through acquisition is a viable option for MNCs seeking only financial and legal due diligence but ignore the growth in Asia and for Indonesian companies keen on intangible capital, i.e. the non-monetary assets that drive pursuing local and global opportunities. deal profitability, which accounts for up to 75 per cent of the value of any organization1. Globally, M&A deal values grew by 22 per cent in 1H2011 compared to the same period in the previous year Why? Mainly because information on the target – an indication that corporate takeovers remain highly companies’ intangible capital is considered too difficult to active. In contrast, transactions in Indonesia had more obtain2. And in a typical dash-to-the-finish M&A than doubled in value and volume in the ten-year period transaction, it is easy to overlook the intangibles. However, from 2001 to 2011 (Institute of Mergers, Acquisitions & as this paper will show, the tricky issue of managing the Alliances). intangibles is not insurmountable. Yet, M&As are inherently risky. Hay Group’s studies have shown that nearly 60 percent of deals transacted between 1992 and 2006 left the buyers with eroded shareholder 1 Ocean Tomo Research LLC value. Clearly, the long-term value of M&As is not guaranteed. 2 Hay Group research, ‘Dangerous Liaisons’, 2007 ©2012 Hay Group. All rights reserved www.haygroup.com/id
  2. 2. 2Harnessing the hidden Satisfaction not guaranteed Intangible capital refers primarily to the identifiable non-monetary assets that cannot be seen, touched or physically measured, thus making it hard to quantify and value. Unfamiliar to some, intangible capital can exist in different forms, with examples ranging from brand equity and client loyalty, to leadership attributes and corporate governance. To identify the elements of intangible How can intangible capital be optimized? capital that deliver the greatest impact As can be seen from Figure 1, there are 17 on post-merger integration, Hay Group types of intangible capital that need to be conducted a worldwide survey of 220 top taken care of. In M&A transaction, there executives involved in major M&A are a million things to take care of – activities across various business sectors. financial, legal, human resources, clients and intangibles. What should executives This is what we found: Companies do not focus on in the intangibles space to adequately assess the value and ‘fit’ of a maintain value? target’s intangible capital in the early stages of a transaction. Most M&A activities fail because of this. Consequently, mitigating such risks at the post-merger stage becomes difficult. Figure 1: Hay Group’s model of intangible capital Organizational capital Relational capital Human capital Culture and market convergence Brand Leadership ƒƒ Shared values, attitudes, beliefs and ƒƒ External and internal image and ƒƒ Clear vision established and customs reputation communicated Governance ƒƒ All that touches the customer ƒƒ Conflicts of interests coordinated and ƒƒ Aligned business processes experience balanced for all stakeholders ƒƒ Clear and effective governance Client intimacy ƒƒ Team commitment and employee recognition Agility ƒƒ Knowledge of the client ƒƒ Market coverage Employees ƒƒ Capacity to manage internal business transformation ƒƒ High potentials identified, developed Client loyalty and rewarded ƒƒ React quickly to new market demands ƒƒ Client satisfaction ƒƒ Demonstrate strong commitment and Communication and teaming ƒƒ Low turnover and high rate of referrals loyalty and valued by the organization ƒƒ Willing to share information External networks Development and management ƒƒ Simple channels/information flow ƒƒ Strong relationships with suppliers, ƒƒ New skills, knowledge and Energy and clarity distributors and other partners or leadership styles acquired with ƒƒ Communicated and understood centers of influence training and coaching business strategy Internal networks Engagement ƒƒ Clear direction for people to mobilize ƒƒ Effective internal communication ƒƒ Employee empowerment and degree their energy ƒƒ High impact cross functional teams of attachment to the company Organizational structure ƒƒ Enabling relationships across Productivity ƒƒ Effectiveness of the organization to organizational and geographic deliver the strategy ƒƒ Efficient management of costs, boundaries resources and time Tacit ‘know-how’ and information ƒƒ Willingness to innovate ƒƒ Unpatented intellectual property©2012 Hay Group. All rights reserved
  3. 3. 3 Figure 2: Intangible capital varies over timeActive Level of Intangible Capital Healthy The success of M&A largley depends on how buyers manage intangible capital over time Unhealthy Strategic planning Target screening Due diligence Pre-closing Post-merger integration Timeline of M&A Nothing is constant Candour The common mistake is assuming that By relaying information to employees – intangible capital retains its value even if it means revealing negative but throughout the course of M&A truthful details about the merger and ad- integration. In reality, it fluctuates with dressing immediate challenges – intangible internal and external changes – typically capital is activated through the assurance decreasing over the course of a that comes from managing with candour. transaction (Figure 2). A target firm’s Thus employees develop a greater sense of intangible capital is usually at its strongest trust towards management, and are more at the start of a transaction and typically disposed to aligning their efforts with that declines as throughout the process. of the executive team’s. Our research shows that in essence, it is the What does this mean for us in Indonesia? state and not the valuation of intangible In Indonesia, where the practice of “giving capital that drives a successful M&A. In face” (menjaga gengsi) can run counter to the multitude of tasks to be done during an frank discussions, managing with candor M&A transaction, is there any catalyst that can be difficult for both employees and can keep intangible capital in its active, management. This brings us to our next value-creating state? What are the most point: courageous follow-through. important drivers of intangible capital? From Hay Group’s research into M&As in Asia, we indentified identified four core drivers that are responsible for activating intangible capital: • Candour • Courageous follow-through • Calculated risks • Compatible Response www.haygroup.com/id
  4. 4. 4Harnessing the hidden Courageous follow-through Calculated risks Complexities and conflict are part and Both parties are taking calculated risks in parcel of M&As. Leaders from merging an M&A situation. Clearly, risk appetite entities must close ranks and not retreat differs between companies and individuals from making tough decisions that – some being more aggressive and others inevitably crop up in the course of the less so. transaction. Not making a decision is also a decision in itself. Regardless of scenario, the secret to long-term gains and synergy in successful Managers need to display flexibility in M&As resides sharing similar risk appe- accommodating changes, a strong ability tite. Given that the most significant M&A for rallying employees to face challenges, trend now is the move by an increasing and resilience when favouring one party’s number of Asian companies into Western service line over the other. They must markets through acquisitions, how can demonstrate perseverance in adapting to knowing the risk appetite profiles help new circumstances, adopting a common both buyers and target? fighting stance towards overcoming obstacles, and never taking “no” for an One way is to use Geert Hofstede’s answer. Uncertainty Avoidance Index (UAI), which we believe is a useful tool in measuring a What does this mean for companies in nation’s or a group’s tolerance for uncer- Indonesia? Fortunately, employees here are tainty and ambiguity – in other words, its more accustomed to a top-down approach. appetite for risk. As long as a difficult decision is sanctioned by top management, employees will In Hofstede’s study, UAI scores can range usually fall in line. But this does not mean from 0 (pure risk takers) to 100 (pure risk that leaders should just issue edicts and avoiders). At one end, Americans ranked ram changes through. Some appearance of lowest, preferring fewer rules and controls, selling and explaining will still be necessary and greater tolerance for a variety of ideas, for the long-term good of the transaction. thoughts, and beliefs. At the other end, Japan ranked highest in its UAI score, implying high levels of control in order to eliminate or avoid the unexpected.©2012 Hay Group. All rights reserved
  5. 5. 5There was no getting through: Why BenQ and Siemens hung upWhen BenQ decided to acquire Siemens’ loss-making mobile phone unit in exchange formore than 600 patents, it was confident that the deal would increase its profit share andopen-up new markets in Europe. After all, BenQ was combining its strengths in consumermarkets with Siemens’ reputation for high-quality products.However, the venture failed within a year, no thanks to clashes in decision-making frame-works and the speed of execution between the two entities. BenQ’s informal culture, whichwas flexible and entrepreneurial, collided head-on with the formality and processes atthe 100-year-old Siemens, which has a culture of adhering to strict procedures. This led tocritical delays in the decision to introduce a new phone model into the market – a missedopportunity that caused the venture to suffer a huge loss.They said it wouldn’t work: Nissan and RenaultIt was widely believed that cultural differences between the Japanese (Nissan) and theFrench (Renault) would destroy the merger.Moreover, the fact that Renault and Nissan targeted the same market segments sparkedfears of cannibalization. Renault’s technical expertise resided in its flair for design, whereasNissan was renowned for bland but reliable models and strong engineering skills. In short,there was a glaring difference in the intangible capital that existed in both firms.Nonetheless, the merger turned out to be a success. This was largely due to the structuralsimilarity between both organizations, which were bureaucratic and highly hierarchical.They shared similar approaches in “compatible response” – or general time-frame towardsexecution – both being highly collective organizations where decisions were made basedon general consensus. Even though Nissan and Renault had different intangible capital,their successful merger demonstrated that the right active drivers could result in bettervalue creation, overcoming geographical and cultural differences between the two. www.haygroup.com/id
  6. 6. 6Harnessing the hidden So in a M&A transaction, parties that be quick in action, or agree to be prefer to “wing it” and rely on “gut feel” methodical – as long as they are in tandem. are going to conflict with those who demand more analysis, higher conformity For example, we have seen conflicts arising and strict adherence to rules. rapidly when a bureaucratic decision- making process holds one party back, The implication for Indonesian companies frustrating the other side, which has a flat is this: in a deal, especially one that crosses organizational structure. Sadly, it is multiple borders, the closer everyone’s common to see incompatible decision- UAI, the better the outcome. making frameworks jeopardizing the performance of a successful M&A Compatible response transaction. When it comes to successful M&As, both What does this mean for companies in parties must respect the need for timely Indonesia? Unfortunately, Indonesian and prudent response, so that decision- managers have a tendency to delay making making does not become the Achilles’ heel decisions in order to gather more (or for either party. better) information. If this decision- making style is not shared by the other By compatible response, we mean that party, then it will be perceived as both parties ought to have a similar time- hesitation and ultimately, backfire on the frame for execution. Both parties can either deal.©2012 Hay Group. All rights reserved
  7. 7. 7 Ready, set, go! The M&A process is a race against time. There are many challenges to take care of, many difficult decisions to make, and often simultaneously. It is next to impossible to assess all of the various aspects of intangible capital during due diligence, and doing so could delay the transaction and destabilize the intangible capital even more. Instead of devoting what limited resources M&A is intrinsically a risky business; there we have to the valuation of intangible capi- is no safe bet. With increasing global tal, companies going through M&A should M&A market activity, there are good deals focus on these core drivers outlined here to be made to help companies in Indonesia that ensure an active state of intangible achieve new growth. capital, and not leave a successful outcome to chance. Armed with the right insights to make the best deal – a clear understanding of what Despite glaring differences, mergers can you are buying and how it ‘fits’ with your still succeed when both parties ensure that existing company though intangible capital their intangible capital drivers are well driver analysis – M&A can be a winning aligned and kept active. By unlocking this strategy for driving long-term growth for vital component, M&A partners will dis- the future. cover what keeps mergers afloat, and realize the benefits of their respective intangible capital. Contact Nidthia Chelvam, Managing Consultant for Hay Group Indonesia, helps multi-national companies and international organizations transform their business strategies into results. Nidthia also has extensive line and operational management experience with global companies across three continents. e| Nidthia.Chelvam@haygroup.comThe content in this report is provided solely for informational purposes. This report does not establish any client, advisory, fiduciary or professional relationship between Hay Group and you.Neither Hay Group nor any other person is, in connection with this report, engaged in rendering accounting, advisory, auditing, consulting, legal, tax or other professional services or advice. www.haygroup.com/id
  8. 8. Africa Frankfurt Middle EastCape Town Glasgow DubaiJohannesburg Helsinki RiyadhPretoria Istanbul Kiev North AmericaAsia Lille AtlantaBangkok Lisbon BostonBeijing London CalgaryHo Chi Minh City Madrid ChicagoHong Kong Manchester DallasJakarta Milan EdmontonKuala Lumpur Moscow HalifaxMumbai Oslo Kansas CityNew Delhi Paris Los AngelesSeoul Prague MontrealShanghai Rome New York MetroShenzhen Stockholm OttawaSingapore Strasbourg PhiladelphiaTokyo Vienna Regina Vilnius San FranciscoEurope Warsaw TorontoAmsterdam Zeist VancouverAthens Zurich Washington DC MetroBarcelonaBerlin Latin America PacificBilbao Bogotá AucklandBirmingham Buenos Aires BrisbaneBratislava Caracas MelbourneBrussels Lima PerthBucharest Mexico City SydneyBudapest San José WellingtonDublin SantiagoEnschede São PauloHay Group is a global management consulting firm that works withleaders to transform strategy into reality. We develop talent, organizepeople to be more effective and motivate them to perform at theirbest. Our focus is on making change happen and helping peopleand organizations realize their potential.We have over 2600 employees working in 85 offices in 48 countries.For more information please contact your local office throughwww.haygroup.com

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