M&A Integration


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M&A Integration

  1. 1. <ul><li>Post Deal Integration </li></ul>Mergers and Acquisitions
  2. 2. M&A What is it…?
  3. 3. Merger : Definition <ul><li>Merger means any transaction that forms one economic unit from two or more previous ones. </li></ul><ul><li>Common Mission: Synergy - that the combination of two businesses can create greater shareholder value than if they are operated separately. There are two basic types of synergy: operating and financial </li></ul>
  4. 4. Corporate Restructuring Process
  5. 5. Where Do You Really Need to Integrate? <ul><li>Plan for Ownership </li></ul><ul><li>Integrate Quickly Where it Matters </li></ul><ul><li>Put Culture High on Your Leadership Agenda </li></ul><ul><li>Maintain Firepower in the Base Businesses </li></ul>
  6. 6. Model based on two dimension <ul><li>The level of Analysis </li></ul><ul><ul><ul><ul><li>The task Level </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The Transaction/Acquisition Level </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The firm Level </li></ul></ul></ul></ul><ul><li>The Time horizon </li></ul><ul><ul><ul><ul><li>Short Term </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Long Term </li></ul></ul></ul></ul>
  7. 7. Relationship – Time and Level of Analysis Task Performance Acquisition performance Firm Performance Short Term Task Performance Long Term Task Performance Acquisition Performance Firm Performance
  8. 8. Short and Long Term Performance Indicators <ul><li>Short-term performance Indicators </li></ul><ul><ul><ul><ul><li>the quality of the conversion of IT and control systems, </li></ul></ul></ul></ul><ul><ul><ul><ul><li>the precision and effectiveness of knowledge </li></ul></ul></ul></ul><ul><ul><ul><ul><li>transfer processes, the degree of engagement and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>motivation of the workforce, etc. </li></ul></ul></ul></ul><ul><li>Long Term performance Indicators </li></ul><ul><ul><ul><ul><li>the retention of employees targeted for retention </li></ul></ul></ul></ul><ul><ul><ul><ul><li>the retention of customers, suppliers, and business partners with whom the combined entity wishes to maintain, and if possible improve, the relationship. </li></ul></ul></ul></ul>
  9. 9. Measure of Merger Performance
  10. 10. Who can do it? <ul><li>The top of the organization : Merger Requires direction from the top. </li></ul><ul><ul><ul><li>Appointing the right top team </li></ul></ul></ul><ul><ul><ul><li>Decide the structure </li></ul></ul></ul><ul><ul><ul><li>Define the agenda </li></ul></ul></ul><ul><ul><ul><li>Building the trust </li></ul></ul></ul><ul><ul><ul><li>Board and Management should have the right skill and capabilities. </li></ul></ul></ul>
  11. 11. Power of signal <ul><li>The kind of company created and commitment to that new company. </li></ul><ul><li>Three categories </li></ul><ul><ul><ul><ul><li>Senior Appointment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Alignment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Clarity about roles. </li></ul></ul></ul></ul>
  12. 12. Senior Appointment <ul><li>Direction and commitment </li></ul><ul><li>Timing – Earlier the decision making process begins and ends it is better </li></ul><ul><li>Unwillingness to face the prospect of job losses </li></ul><ul><li>Case of LSG Sky acquiring Cater Air </li></ul>
  13. 13. Alignment <ul><li>Executive committee support wholeheartedly </li></ul><ul><li>Integration of top team should not be just superficial </li></ul>
  14. 14. Role Clarity <ul><li>Works in a complimentary way </li></ul><ul><li>Take ownership </li></ul><ul><li>Define role from the future business need perspective </li></ul>
  16. 16. What is discipline in M&A ?? <ul><li>Estimating the correct value of the firm. </li></ul><ul><ul><li>Leading to lower acquisition premiums. </li></ul></ul><ul><ul><li>Leading to greater value creation for the shareholders. </li></ul></ul><ul><li>Quantifying the synergies (cost, capital, revenue, growth). </li></ul><ul><li>Assessing the likelihood of actually realizing the forecasted synergies. </li></ul>
  17. 17. What is discipline in M&A ?? <ul><li>Offsetting factors such as lost revenues. </li></ul><ul><ul><li>Due to overlap of business, clients, geographies etc. </li></ul></ul><ul><li>Projected value creation should be weighed against </li></ul><ul><ul><li>Target’s intrinsic value. </li></ul></ul><ul><ul><li>Rather than current share price. </li></ul></ul>
  18. 18. Why are shareholders getting a better deal ? <ul><li>Lower acquisition premiums. </li></ul><ul><ul><li>Greater proportion of cash deals… Why ?? </li></ul></ul><ul><ul><ul><li>Such deals signal management’s confidence in future earning potential. </li></ul></ul></ul><ul><ul><li>Greater no. of hostile bids… Why ?? </li></ul></ul><ul><ul><ul><li>Market believes hostile bids create more value than friendly ones. ( Efficient Market Hypothesis ) </li></ul></ul></ul>
  19. 19. Some stats… (Survey of 1000 M&As each greater than $500M from 1997 to 2006) <ul><li>Value created for buyers and sellers increased from 2% (1997-2000) to 6% (2003-06). </li></ul><ul><li>Price premium decreased from 30% to 20%. </li></ul><ul><li>Cash deals increased from 20-30% to 50%. </li></ul><ul><li>Average value created by hostile deals (11%) compared to average value created by friendly deals (2%). </li></ul>
  20. 20. It all boils down to that fact that… <ul><li>… to stand a good chance of reaping post merger rewards, companies must – </li></ul><ul><ul><li>exert discipline in negotiating deals. </li></ul></ul><ul><ul><li>CEOs and the boards must hold their nerves. </li></ul></ul><ul><ul><li>walk away from deals or become a seller if that is the best way to secure values for the shareholders. </li></ul></ul>
  21. 21. Arcelor-Mittal deal <ul><li>Best combination within the steel industry:Aditya Mittal </li></ul><ul><ul><li>Merger of equals. </li></ul></ul><ul><ul><li>Commonality in vision, market conduct, purchase, attitude towards par-exellence. </li></ul></ul><ul><ul><li>Leader in terms of technology, research and innovation. </li></ul></ul><ul><ul><li>3-4 times the nearest competitor. </li></ul></ul>
  23. 23. Building successful post integration team <ul><li>Reduce Role Ambiguity </li></ul><ul><ul><li>Control which employees leave and which remain </li></ul></ul><ul><li>Due Diligence Around Talent Is a Dangerous Corner to Cut </li></ul><ul><ul><li>Give sufficient attention to assessing the personnel who will lead the new enterprise </li></ul></ul><ul><li>Recognize Old Habits Die Hard — But Not All Should! </li></ul><ul><ul><li>Leaders should discern quickly which habits will best serve the company moving forward and support them </li></ul></ul><ul><li>Don’t Tolerate “Bad Behavior”-cliques, information asymmetries and the sabotage of decision making </li></ul><ul><ul><li>strong apolitical leadership and setting very public examples from the top </li></ul></ul><ul><li>Practice Patience With Purpose- fast or slow </li></ul><ul><ul><li>find the rhythm for pushing ahead that properly balances the need to respect the potentially fragile nature of newly forming relationships with the need to produce evidence of positive results </li></ul></ul><ul><li>Count — and Then Celebrate — Your Blessings </li></ul><ul><ul><li>Reinforce and communicate repeatedly the upside of the deal </li></ul></ul>
  24. 24. Integration Manager? <ul><li>To help lead the task of integrating companies after big mergers or acquisitions- mid- to upper-level executives relieved of their customary duties for six months to a year </li></ul><ul><li>Implementation of this important role often bedevils CEOs, thus that the effectiveness of integration managers varies widely. </li></ul><ul><li>How they are seen </li></ul><ul><ul><li>Process coordinators or Project managers </li></ul></ul><ul><ul><li>Best- Pivotal role, helping mergers to succeed by keeping everyone focused on the issues that have the greatest potential for creating value and by infusing integration efforts with the necessary momentum </li></ul></ul><ul><ul><li>Most however never get to assume such a role- Why </li></ul></ul><ul><ul><ul><li>CEOs fail to recruit the right people for the job; </li></ul></ul></ul><ul><ul><ul><li>integration managers don’t become involved in the </li></ul></ul></ul><ul><ul><ul><li>merger process early enough; and CEOs fail to give them adequate support </li></ul></ul></ul>
  25. 25. What can Integration Manager do? <ul><li>Much of the role does involve project management </li></ul><ul><li>However does more </li></ul><ul><ul><li>Helps create the integration teams </li></ul></ul><ul><ul><li>Create and oversee a small integration office to track the progress of the integration teams </li></ul></ul><ul><ul><li>Reports on the teams’ progress to a senior-executive steering committee </li></ul></ul><ul><ul><li>push integrating departments to identify the top performers, whose retention is a priority </li></ul></ul><ul><ul><li>track whether synergies are being captured & breaking the deadlocks </li></ul></ul><ul><ul><li>accelerate the pace by anticipating problems, rapidly solving them, and, above all, constantly driving the decision-making process </li></ul></ul><ul><li>Courageous, politically astute, and capable of influencing corporate opinion </li></ul>
  26. 26. Where to look for? <ul><li>Shouldn’t look to outsiders, to the acquired company, or to high-level executives whom the merger might make redundant </li></ul><ul><li>Someone who already knows the acquirer’s organization and systems and is committed to the merged entity’s future </li></ul><ul><li>Safe choice - GM >15 years of experience with the company, including frontline operating experience </li></ul><ul><li>Riskier Choice- less experienced rising star, with proven well-developed general management potential </li></ul><ul><li>Organizations that actively manage their talent pipeline will have an easy time identifying candidates </li></ul><ul><li>Serial acquirers should therefore have a strong talent-management system that makes it easy to identify potential integration leaders </li></ul>
  27. 27. Get your candidate on board <ul><li>Reluctant to give up important positions for a 6- to 12-month stint of intense work, at the end of which their previous job may have been eliminated or given to someone else and numerous attractive positions created by the merger will probably have been filled. </li></ul><ul><li>CEO should persuade, provide personal assurance and explain importance of the integration management role </li></ul><ul><li>Assure them that they will remain in it only as long as they are needed to maintain the momentum of integration </li></ul><ul><li>IM should know what position he or she will assume after successfully completing the job </li></ul><ul><li>If it isn’t possible to promise a specific one, the CEO should sketch out some realistic possibilities and describe the process for choosing among them as the integration effort unfolds </li></ul><ul><li>IM should have a senior-executive sponsor to help with his or her next career move. </li></ul><ul><li>IM who has a clear picture of his or her future will also be more effective in the job </li></ul>
  28. 28. When to install <ul><li>Install the IM early- a month or so before the deal is announced </li></ul><ul><li>Working early on with the CEO and with the team supporting the negotiations for the deal allows the integration manager to learn which </li></ul><ul><ul><li>customers, personnel, and projects will be critical for the success of the combined business and to take steps forestalling problems that involve them </li></ul></ul><ul><ul><li>Identifying employees whom the company can’t risk losing to competitors </li></ul></ul><ul><li>Deal often involve unwritten understandings, IM should know what they are before the merger announcement </li></ul><ul><li>identify and recruit a candidate as soon as it seems likely to go through but not to relieve the chosen executive of his or her primary responsibilities until its completion is imminent </li></ul>
  29. 29. Support the IM <ul><li>CEO’s support in several key ways </li></ul><ul><ul><li>Trust the IM to provide an invaluable set of eyes and ears throughout the integration process </li></ul></ul><ul><ul><li>Give IM authority to do the job and make it clear, at the integration kickoff meeting, that the IM will serve as the CEO’s proxy in many meetings </li></ul></ul><ul><ul><li>Support to muster resources against roadblocks by BU chiefs </li></ul></ul>
  30. 30. POST MERGER Smoothing integrations
  31. 31. The challenges in integration <ul><li>Sooner the companies are integrated the better the synergies are captured. </li></ul><ul><li>Deal financial aspects, explain to investors, negotiate with regulatory bodies, check all necessary compliances are met. </li></ul><ul><li>CFOs need to manage all these without access to some legally restricted data. </li></ul>
  32. 32. Necessity of CLEAN TEAMS <ul><li>The term clean team originated in the health and computer sciences fields, where a designated work environment – a clean room – is sealed off to prevent contamination. </li></ul><ul><li>In an M&A context, contamination refers to the disclosure of specific, confidential information that could affect competition between involved companies during the pre-closing period, or in the event the transaction falls through. They can be third party teams. </li></ul><ul><li>The clean team – operating under certain protocols and prior to regulatory approval or consummation of the deal – assembles, reviews, and analyzes sensitive, competitive, and other confidential data, then reports summarized or aggregated information to the business leaders, who are then able to make informed decisions about the transaction or the integration of the businesses. </li></ul>
  33. 33. Three types of clean teams.
  34. 34. Clean team-when not to go for it ? <ul><li>If the size of the merger is too small. </li></ul><ul><li>If the risk is very less compared to the cost of forming a clean team. </li></ul><ul><li>There can be good business reasons to avoid disclosing data to clean teams. E.g Patents, R&D information, formulas, oil exploration locations. </li></ul><ul><li>Thus a trade off between cost, risk and interests. </li></ul>
  35. 35. POST MERGER Art of post merger leadership
  36. 36. Why problem exists? <ul><li>Senior managers often fail to define a high impact role for themselves. </li></ul><ul><li>“ Perhaps most fundamental is that many senior managers simply do not know how to add real value during merger integration”. </li></ul><ul><li>Merely steering committees to handle issues as they arise. </li></ul><ul><li>Be defensive and protect own company from errors. </li></ul>
  37. 37. Leading from the top <ul><li>Leaders must know why they should handle issues and not the integration teams. </li></ul><ul><ul><li>Seniority clout </li></ul></ul><ul><ul><li>Breadth of strategic vision </li></ul></ul><ul><ul><li>Teams often overlook strategic levers and drivers. </li></ul></ul><ul><ul><li>Teams are often not having long tem vision. </li></ul></ul><ul><li>Leader need to take care of 5 challenges </li></ul>
  38. 38. 5 responsibilities of a leader. <ul><li>Move quickly to mold the top team. </li></ul><ul><li>Communicate the corporate story. </li></ul><ul><li>Establish a performance culture. </li></ul><ul><li>Champion external stakeholders. </li></ul><ul><li>Reinforce momentum with selective learnings. </li></ul>
  39. 39. POST MERGER Taming post merger IT integration
  40. 40. IT integration after merger <ul><li>Overcome the urgent technical challenge in path of the merger. </li></ul><ul><li>Obtain maximum synergy and minimum customer and employee disruption. </li></ul><ul><li>Often the decision makers take one of two questionable paths, some fearing cost and complexity never fully integrate, others in haste choose any one system over the other, alienating both customers and employees. </li></ul>
  41. 41. A question of Pace Rapid Integration Slow Integration Rapid integration garners some immediate synergies, in terms of cost and time. Expensive and delays to capture synergies. Typically drives away 8% customer base (study on banking systems). Less stress on customers and thus very little chance of losing customers. Some dissatisfied employees. Less impact on employees. Immediate benefits are lost due to customer and employee dissatisfactions and the resulting losses. The long expensive process sometimes causes the IT cost to be so high that the merging units falls behind its competitors. SO A TRADE OFF IS NEEDED BETWEEN THE TWO WAYS………..
  42. 42. The trade off decision <ul><li>Inputs </li></ul><ul><li>Identify target products, product gaps and customer sets. </li></ul><ul><li>Determine migration routines. </li></ul><ul><li>Decision tools. </li></ul><ul><li>Sequencing rules. </li></ul><ul><li>Trade offs. </li></ul><ul><li>Interdependencies. </li></ul><ul><li>Output </li></ul><ul><li>Migration Plan </li></ul><ul><li>NPV impact. </li></ul><ul><li>Required customer and employee communication. </li></ul><ul><li>Gap closures. </li></ul>
  43. 43. A question of leadership <ul><li>Sorting and managing different powerful interest groups. </li></ul><ul><ul><li>Product specialists and business groups: Minimum change at the cost of huge expense. </li></ul></ul><ul><ul><li>IT and systems groups: Tend to push for the best technology, at the cost of user comfort </li></ul></ul><ul><li>Confirm target product set. </li></ul><ul><li>Choose a system platform. </li></ul><ul><li>Identify gaps between offerings and services. </li></ul><ul><li>Finalize routines. </li></ul>