Mergers and Acquisitions - Maximizing Deal Value

Mergers and Acquisitions
Maximizing Deal Value
Timothy Galpin
www.timgalpin.com

P2
Galpin, T. J. & Herndon, M. 2014. The Complete Guide to Mergers & Acquisitions 3rd Edition. San Francisco: Jossey-Bass.
Topics
• M&A risks
• M&A dynamics and common pitfalls
• M&A best practices
• Appendix

P3
M&A is a key part of many companies’ growth strategies…
Market Unforgiving
Reasons Operational leap – “shortcut to growth”
Targets Similar – industry, products, services
“8 C’s” – Costs, Channels, Content, Capabilities,
Customers, Countries, Capital, Capacity
Prizes
Mandate Synergy identification and successful execution
Risk Eroding deal value through poor M&A approaches
across the transaction stages

P4
…creating multiple challenges…
• Keeping day-to-day operations in tact, pre- and post- deal
• Workforce concerns – ‘me issues’ – at all levels
• Multiple, simultaneous M&A work streams
• Prioritizing pre-deal and post-deal actions
• Cross-functional coordination
• Global scope
• Culture clashes – company and geography
• “Shifting sand” – M&A actions are fluid
• For large deals, the future of the company is riding on making the deal
work

P5
…and a variety of change-management dynamics
• Aggressive financial targets
• Short timelines
• Intense public scrutiny
• Culture clashes
• Politics and positioning
• Communication-related issues
• Growth-related challenges
• Restructuring
• Reengineering
• Problems with retention of
personnel
• Issues related to employees’
motivation
Common M&A Change-management Dynamics

P6
Our data shows that companies still struggle to conduct deals
efficiently and effectively…
• 63% of respondents said that their companies M&A efforts were ‘Average or
Below Average’
• 68% of respondents rated their companies ‘Cultural Due Diligence and
Integration’ as ‘Average or Below Average’
• Only 33% reported that their companies completed post-deal integration
within the critical first twelve months after deal close
• 67% of respondents said that it took their companies from one to more than
five years to complete their post-deal integration efforts
• Almost half (49%) of survey respondents indicated that their company is in
need of “Merger Repair”
1
124 executives and middle managers, from 21 industries; The Complete Guide to Mergers & Acquisitions
Jossey-Bass, 2014.
Survey results – “The Current State of Mergers and Acquisitions”1

P7
…But, if managed well projected returns can be achieved
• Faster integration
• Projected synergies achieved sooner
• Productivity protected
• Customer focused maintained
• Smoother transition

P8
Topics
• M&A risks
• Appendix

P9
Committing any combination of the‘seven deadly mistakes’
of mergers & acquisitions ensures failure…
1. Poor due diligence (traditional and non-traditional)
2. Paying too much by not preparing for negotiations
3. Delaying the start of integration, and dragging out the finish
4. Allow divergent initiatives
5. Take too long to answer ‘me’ issues
6. Put no one in charge of due diligence and integration
7. Ignoring project management disciplines

P10
Throughout M&As, ‘Me Issues’ dominate both companies at
all levels…
• Will I have a job?
• Will my pay and benefits change?
• Who will I report to?
• Will I have to move?
• What will ‘they’ be like to work for?
…Creating an inward focus - away from the customer, loss of
productivity, and exiting of key talent

P11
Because employees get answers to their ‘Me Issues’ last…
…Executives must address the‘Me Issues’from the
organization’s view, not from senior management’s view
Staggered Experiences
Time
Productivity
Senior Mgmt.
Middle Mgmt.
Employees

P12
Avoid using “Killer Phrases”…
1. “This is a merger of equals.”
– There is no such thing.
1. “It’s too early in the deal to begin planning for integration.”
– It is never too early.
1. “We will communicate more when we have more information to share.”
– There is always something to communicate.
1. “We will ease the changes in.”
– This is death by a thousand cuts.
1. “We will freeze the two organizations for at least a year and, once things
settle down, we will begin integration.”
– Conduct integration with prudent, not reckless speed.
…because they create “Killer Actions”…

P13
Topics
• M&A risks
• Appendix

P14
M&A best practice examples can be learned from
successful global acquirers…
…The dynamics and best practices are the same for small and
medium-sized M&As, it is just a matter of scale
Example World Class Acquirers

P15
Prior to and during the deal are where value is
identified and agreed…
…while, ‘post-deal’ is where value is actually created
Deal Flow Model – Ten stages, over three phases
Post-deal
(realizing, building, and
reporting long-term value)
Pre-deal
(planning, locating, and
investigating value)
Three Phases Ten Stages
Deal
(forecasting, negotiating,
and agreeing value)

P16
Each of the ten M&A stages has a key objective
Objectives for each stage of the Deal Flow Model
Stage Key Objective
Formulate Clear M&A strategy
Locate Targets that fit the M&A strategy
Investigate No surprises
Valuate Realistic bidding range
Negotiate Clearly defined deal terms
Consummate Definitive purchase agreement
Integrate Accelerated synergy capture
Motivate Maximum workforce productivity
Innovate Additional revenue growth
Evaluate Measured and reported deal success
Post-deal
Pre-deal
Deal

P17
Ten key M&A success factors
1. Identify a clear M&A strategy
2. Target companies that fit your M&A strategy
3. Conduct thorough due diligence – traditional and non-
traditional
4. Prepare for negotiations and you won’t overpay
5. Understand the deal goals and define the degree of integration
required/desired with clear integration priorities
6. Standardize your M&A approach and tools
7. Appoint a capable project manager
8. Make decisions with ‘accountable speed’
9. Ensure continual senior management leadership
(communication, decision making)
10. Expect and track results (integration milestones and outcomes)

P18
Topics
• M&A risks
• Appendix

P19
Formulate
• Develop a well thought out M&A strategy, based on the firm’s strategy and
goals.
• You must put in the effort to understand your own internal firm capabilities
that can be supplemented through M&As.
• You need to answer key questions such as:
 Why would we do an M&A?
 What type of operations and cost structure does an ideal target have?
 What type of technology and capabilities does an ideal possess?
 What additional markets and customers would an ideal target provide?
 What type of culture and human capital would an ideal target bring?
 What type of geographic scope would an ideal target offer?
KEY PITFALL: Unclear firm strategy, leads to a poor M&A strategy
KEY OBJECTIVE: Clear M&A strategy

P20
Locate
KEY PITFALL: “Opportunistic M&As”, because they are available
• Based on a clear M&A strategy, locating potential target companies that fit
your M&A strategy is key to creating successful transactions.
• Target company prioritization should be determined from two perspectives:
1) Strategic fit: the similarity between firms in areas such as the products
or services they produce, or in the markets in which they operate.
2) Organizational fit1
: includes similarities between company cultures,
top management styles, reward and evaluation systems, values, and
organizational structure.
• The better the strategic and organizational fit, the higher the success rate of
M&As.
KEY OBJECTIVE: Targets that fit the M&A strategy

P21
Investigate
KEY PITFALL: Only conducting traditional due diligence
• The investigate stage entails detailed due diligence of a potential M&A
partner.
• Should explore all possible facets of the target company.
• A thorough due diligence process should be used that covers not only…
Traditional financial, legal, technical, and operational aspects,
 But, also the non-traditional organizational characteristics of the target
firm such as culture and human capital.
• Allocate the resources necessary, for the time available.
KEY OBJECTIVE: No surprises

P22
• Comparable Company Analysis (Public Comps):
o Evaluating other, similar companies’ current valuation metrics, determined by market prices, and applying them to
the company being valued.
• Discounted Cash Flow Analysis (DCF):
o Valuing a company by projecting its future cash flows and then using the Net Present Value (NPV) method to value
the firm.
• Precedent Transaction Analysis (M&A Comps):
o Looking at historical prices for completed M&A transactions involving similar companies to get a range of valuation
multiples. This analysis attempts to arrive at a “control premium” paid by an acquirer to have control of the business.
• Leverage Buyout/“Ability to Pay” Analysis (LBO):
o Valuing a company by assuming the acquisition of the company via a leveraged buyout, which uses a significant
amount of borrowed funds to fund the purchase, and assuming a required rate of return for the purchasing entity.
• In practice:
o Some combination of two or more of these methods will be employed to narrow in on a purchase price bid or
negotiating range.
• You should only pay a premium if you have identified private and uniquely valuable synergy opportunities.
Common M&A valuation techniques
KEY PITFALL: “Deal fever” – Making the numbers justify the
desire to do the deal, and you end up paying too much
Valuate
KEY OBJECTIVE: Realistic bidding range

P23
Negotiate
KEY PITFALL: Poor negotiation preparation
• The negotiate stage results in reaching a definitive purchase agreement
between the firms.
• Considerations include price, performance, people, legal protection, and
governance.
• Successful M&A negotiations depend upon objectivity, correct information
(gathered during the investigate stage), and on detailed preparation for the
negotiations.
• A crucial part of M&A negotiation preparation is to collect as much
information as possible regarding the participants in the negotiations,
especially for cross-cultural negotiations.
A lack of knowledge and understanding of the culture of the other party
causes flawed judgment that will result in poor negotiations.
KEY OBJECTIVE: Clearly defined deal terms

P24
Consummate
KEY PITFALL: Mismanaging the period between signing and
closing of the deal
• The key terms of the purchase agreement will often be dictated by four major
variables:
 The relative drafting and negotiating skill of each party’s legal counsel.
 The special risks and unique structural challenges of the transaction (typically a
reflection of problems identified during investigate/due diligence).
 The relative bargaining strength of the parties.
 Market conditions at the time the transaction is consummated.
• Signing and closing can happen simultaneously, but often do not. Therefore,
the period between signing and closing needs to be managed well.
KEY OBJECTIVE: Definitive purchase agreement

P25
Integrate
KEY PITFALL: Delaying the start and dragging out the finish
• M&A integration is defined as combining at least some part of firms’ business
processes, people, and/or technology after the transaction is completed.
• The degree of integration varies from deal to deal.
Some transactions require higher degrees of integration in order to
capture the synergies identified during earlier M&A stages.
While other transactions require less integration between the firms to
achieve desired performance outcomes.
• Prudent speed accelerates synergy capture.
KEY OBJECTIVE: Accelerated synergy capture

P26
Motivate
KEY PITFALL: Focusing only on operational integration
• Employee motivation and engagement is vital to the success of M&As.
• Numerous studies have found that employee motivation has a significant
impact on productivity, profitability, safety, and customer satisfaction.
• During the motivate stage, leaders must make a concerted effort to engage
the commitment of both company’s workforces to the overall success of
the combined organization.
• Communications are crucial to combined workforce motivation.1
• Retention and “Re-recruitment of key talent can make or break the success
of a deal.
KEY OBJECTIVE: Maximum workforce productivity

P27
Innovate
KEY PITFALL: Focusing only on cost synergy capture
• Beyond cost reductions from overlapping resources, transaction success
also often calls for revenue growth.
• A key way to accomplish revenue growth is by innovating additional or
redesigned products and services to sell to current and new customers.
• M&A innovation requires…
Exchanging knowledge between combining firms.
Job rotation between the combined firms’ management and
employees.
Forming combined new product and/or service development teams.
KEY OBJECTIVE: Additional revenue growth

P28
Evaluate
KEY PITFALL: Not assessing deal success against strategic intent
• The success or failure of M&As is typically evaluated based on financial
measures or the achievement of strategic objectives.
• But, there is no one measure that can comprehensively capture M&A
performance.
• So, a comprehensive M&A “scorecard” should be used, including four
main categories:
Integration measures
Operational measures
Financial measures
Cultural measures
KEY OBJECTIVE: Measured and reported deal success

P29
In general, thorough due diligence should be conducted in
twelve key areas...
1. Strategic*
2. Financial
3. Operational
4. Technology
5. Legal
6. Environmental
7. HR and Human capital*
8. Regulatory
9. Sales and Marketing
10. Culture*
11. Government Affairs
12. Self*
*Key areas typically missed during due diligence
Depending on the deal
and/or industry, other
DD areas can be added
and/or more emphasis
placed on some DD
areas than others

P30
An ‘Executive Summit’ is part of effective due diligence and sets
the stage for smoother integration
Executive Summit – Outcomes
• Executive alignment
– NewCo strategy
– Synergy (cost, revenue, product, customer, etc.) targets and timelines
– Integration priorities
– NewCo culture
• Executive team-building
– Attendees become more familiar with each others’ working style during the
session
• Integration process overview
– Roles and responsibilities
– Actions
– Tools
– Measurement and tracking

P31
Post-deal integration requires effective planning and
implementation of ten, simultaneous work streams
Ten Key Integration Work Streams
CommunicationCommunication
Structure and StaffingStructure and Staffing
Key Talent Retention and Re-recruitmentKey Talent Retention and Re-recruitment
Culture Change and AlignmentCulture Change and Alignment
Executive oversight and leadership (strategy clarification and key decision making)Executive oversight and leadership (strategy clarification and key decision making)
Integration teams detailed planning and cross-functional coordinationIntegration teams detailed planning and cross-functional coordination
Integration ExecutionIntegration Execution
Measurement , tracking, and reportingMeasurement , tracking, and reporting
Project planning and managementProject planning and management
Key Customer Retention and Re-recruitmentKey Customer Retention and Re-recruitment

P32
M&A integration is best coordinated through a temporary team
project structure…
M&A Integration Infrastructure
Culture
Integration
Human
Resources
Manufacturing
Legal/
Environmental
Technology/
R&D
Purchasing Finance
Information
Systems
Commun-
ications
Sales/
Marketing
Integration Task Forces
(Create integration plans for operational and functional areas)
Integration Project Management Team
Daily coordination of the Integration Task Forces
and communication resources
• Project Manager
• Assistant Project Manager
• Communications
ILLUSTRATIVE
Integration Steering Team
(Executives/Officers)
(Integration oversight, strategic
direction, impasse resolution,
investment decisions, integration
plans go/no-go decisions)

P33
…With detailed project plans driving an effective integration
effort…
Integration Project Action Plan
Implementation Timeline (Gantt Chart)
Personnel Associated With Integration
9/10
9/17
9/24
10/1
10/8
10/15
10/22
10/29
11/5
11/12
11/19
11/26
12/3
12/10
12/17
12/24
12/31
1/7
1/14
1/21
1/28
2/4
2/11
2/18
2/25
3/4
CriticalPath(X)
Status
Non-USresources
ITResources
HRResources
BeginDate
EndDate
9/10
9/17
9/24
10/1
10/8
10/15
10/22
10/29
11/5
11/12
11/19
11/26
12/3
12/10
12/17
12/24
12/31
1/7
1/14
1/21
1/28
2/4
2/11
2/18
2/25
3/4
CriticalPath(X)
Status
Sales
Marketing
Marketing
CustomerService&IT
CustomerService
Finance
Sales
DataWarehouse
DataConsultant
SalesAdmin
CorporateFinance
Sales
Marketing
CustomerService
SalesAdmin
InsideSales/Phx
Finance
Non-USresources
Manufacturing
Marketing
WorldwideMarketing
HeadHoncho
IT
HR
BeginDate
EndDate
9/10
9/17
9/24
10/1
10/8
10/15
10/22
10/29
11/5
11/12
11/19
11/26
12/3
12/10
12/17
12/24
12/31
1/7
1/14
1/21
1/28
2/4
2/11
2/18
2/25
3/4
Sales, Marketing, and Customer Service Integration Plan A A A
Sales A A
Define organizational/customer requirements A
Determine sales organization X A A 9/21 11/29
Sales and marketing define data requirements and due dates R R 9/21 9/24
Obtain legal sign-off re what can be exchanged A 9/21 9/22
OSI to complete CVI global data warehouse template R R 9/21 9/22
Develop joint customer master, with no sales detail A R 9/27 10/1
Map both customer lists A R 10/4 10/22
Develop consolidated database - Jan thru Aug direct/indirect X A R 9/27 10/8
Integrate analysis tool with database R R R R 9/27 10/15
Generate reports to confirm sales territories R R R 10/25 10/27
Define top sales people X R R R 10/28 11/5
Assign sales people to territories X R R R 11/8 11/11
Follow-up interviews (bubbles only) R R 11/15 11/22
Distribute termination letters X R 11/29 11/29
Sales tools A A
Consolidate sales interim reporting R R R 10/18 11/18
Integration into ‘Contract’ R R R 4/4 4/29
Marketing A
Define NewCo strategic portfolio A 9/21 11/19
Obtain key OSI marketing data (market plans, clinical studies, sales data by brand) I R R 9/21 10/8
Obtain three-years of OSI sales data by brand I R R 9/21 10/8
Obtain OSI sales policies I R R 9/21 10/8
Obtain OSI programs and promotions I R R 9/21 10/8
Obtain OSI manufacturing capacities and cost I R R 9/21 10/8
Obtain three-years of CVI sales data by brand R R 9/21 10/8
Status Key RACI Chart
C = Complete R = Responsible (Action Step Leader)
IP = In-Progress A= Accountable (buck stops here)
S = Scheduled C = Consult (seek input from)
NS = Not Scheduled I = Inform (keep advised)
ILLUSTRATIVE

P34
…That must be prioritized based on ‘Day 1’, ‘First Quarter’, and
‘Year 1’ actions…
Prioritized Action Plan ILLUSTRATIVE
Sales
Key Area Activities Priority Integr.
Planning
Day1 Day
120
Year 1
Sales integration team
Integration taskforce Establish taskforce structure High X
List sales activities High X
Identify any sub-taskforce teams needed High X
Confirm resourcing requirements High X
Select team and back-fill roles (include target team members wherever possible) High X
Confirm taskforce leaders/members, develop charters and launch High X
Kick-off integration taskforces High X
Complete taskforce charters High X
Arrange launch event/team briefing High X
Check with coordination team to confirm milestones and reporting requirements High X
Sales model
Overall sales model definition Capture strategic decisions, targets that impact the business model, and therefore sales model High X
Define sales model as far as necessary to decide on basic organization structure High X
Sales strategy development List top accounts (representing 50% of sales) High X X
Create specific sales objectives by segment/account and prioritize High X
Develop a mini operating plan and set of objectives for each segment High X
Identify untapped or undertapped sales potential from new customers or from current
customers
High X
Attach priorities to segment using likelihood of success and size of opportunity High X
Define competitive value proposition based on targeted segment needs High X
Decide on appropriate channels to deliver value proposition High X

P35
…With weekly progress updates and decision-making keeping the
integration process coordinated and moving forward
Integration Progress Update - Weekly Process
Monday Tuesday Wednesday Thursday Friday
9am
10am
11am
12pm
1pm
2pm
3pm
4pm
5pm
6pm
Weekly
integration
progress review
meeting (Project
Manager and all
Task Force Leads,
60-90 mins)
Weekly Integration
Steering Team
meeting (includes
Project Manager ,
60 mins)
Project Manager
emails reminder to
all Task Force
Leads (‘weekly
task force progress
updates’ due by
Tue 3PM):
1) Progress since last
week
2) Obstacles
encountered
3) Decisions needed
4) Cross-functional
coordination
Project Manager
receives updates
from all Task Force
Leads
Project Manager
distributes ‘weekly
progress meeting
summary’ to all
Task Force Leads
and Integration
Steering Team:
1)Progress updates
2)Agreed actions
3)Outstanding
decisions needed
Project Manager
emails Steering
Team meeting
summary to
Steering Team and
all Functional
Team Leads:
1)Agreed actions
2)Decisions made

P36
Cultural integration requires combining the organizations’
human capital “levers”
1. Strategy
2. Values
3. Organization Structure
4. Staffing and Selection
5. Communication
6. Training
7. Rules and Policies
8. Goals and Measures
9. Rewards and Recognition
10.Decision-making
11.Physical Environment
12.Ceremonies and Events
Organizational Levers Company A Company B NewCo
Cultural Integration Plan

P37
Design and implement a retention and “re-recruitment” plan
1. Sales
2. Ops
3. Person A
4. Person B
5. Person C
Key People/
Groups
Respons-
ibility
Impact
Of Loss
Key
Motivators
Retention &
RR Actions Timing
Retention and Re-Recruitment Plan

P38
Communicate even when there is “nothing to tell”…
Stakeholders
Who
Respons-
ibilityWhy How When
Retention
Involvement
Re-Recruitment
Productivity
Vehicles Frequency Development
Delivery
What
Messages
…Because people want to know that there is a “fair process”
Communication Plan

P39
M&A communication can take many forms…
“Frank”
HELLO, I’M FRANK
You and I will be getting to know each other in the coming weeks. First of all, you
need to know that my name is no accident. In the days ahead, it will be my job,
along with your supervisor, to communicate with you openly, frequently, and
candidly about the changes under way at our company.
I’ll be giving you information as early as I can—information you need to make
better decisions. I’ll tell you what I know about any aspect of the new venture. And
if I don’t know, I’ll say that and get back to you as soon as I can. I’ll tell you the good
news and the bad. I’ll help you tell the difference between rumor and truth.
I won’t promise that you will always be satisfied with what I have to say, but I am
committed to talking to you plainly, without any corporate doublespeak. In short,
I’ll treat you with respect and honesty.
• An electronic news service for employees
• Updated weekly or more frequently as news becomes available

P40
…including some fun!
CEO ‘Dunk Tank’ at the Welcome Picnic

P41
Out of the norm – A successful case example
• Global manufacturing company - $2B sales
• Purchased an industrial manufacturer for $775 million
• Commitment to Wall Street: $75 million in ongoing cost savings
achieved in 18 months (internal target of $106M)
• High financial leverage of the deal created significant pressure
to generate cash
• Needs: Clear integration methodology, project management,
and synergy measurement system

P42
Baseline Integration Timeline (Internal Plan)
Accelerated Integration Timeline
FACILITY
Q3-00
(7/00-9/00)
Q4-00
(10/00-12/00)
Q1-01
(1/01-3/01)
Q2-01
(4/01-6/01)
Q3-01
(7/01-9/01)
Q4-01
(10/01-1/02)
Headquarters Consolidation
8 Service Centers
Sales Reorganization
Location 1 (USA)
Location 2 (USA)
Location 3 (USA)
Location 4 (South America)
Location 5 (UK)
Location 6 (USA)
Location 7 (USA)
Location 8 (Europe)
=
=
Results - Timelines were accelerated
Synergy Sub-Project Timelines

P43
Source: Client’s internal synergy tracking system for integration
synergies only - i.e., not reduced by one-time operational inefficiencies
(restructuring costs) at receiving sites.
100%
142%
174%
Quick Hits
Accelerated
Synergy
Capture
Substantially Complete
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Months
(%oftarget)
Actual/Forecast
Plan
Purchase Economics
Synergy Targets
Results - Targets were exceeded
Synergy Targets

P44
Actual/Forecast
Plan
Purchase Economics
Cash Targets
100%
199%
331%
0%
50%
100%
150%
200%
250%
300%
350%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Months
(%oftarget)Results - Cash was accelerated
Cash Flow
Source: Client’s internal synergy tracking system for integration
synergies only - i.e., not reduced by one-time operational inefficiencies
(restructuring costs) at receiving sites.

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