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Post-Merger Integration as an Instrument for Improving M

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Post-Merger Integration as an Instrument for Improving M&A Efficiency Paul J. Ostling Finance Academy Under the Russian Federation 14 February 2008 – PowerPoint PPT presentation

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Title: Post-Merger Integration as an Instrument for Improving M


1
Post-Merger Integration as an Instrument for
Improving MA Efficiency
  • Paul J. Ostling

Finance Academy Under the Russian Federation 14
February 2008
2
MERGER A combination of 2 corporations, in which
only 1 corporation survives
3
There are many types of Mergers acquisitions
E.g.
  • Acquiring assets only (somebody has a
    problem
  • Acquiring assets liabilities (the classic
    corporate marriage)
  • Reverse Triangular Merger (the acquired company
    has a better brand)

4
Classic in the CIS The Roll-Up
  • In a market with a disaggregated (many small
    players) industry where the disaggregated
    entities are sub-optimized standing alone
  • and/or where there are efficiencies of scale
    available and/or where reductions of duplication
    will increase margins

5
Question Number 1
  • Is it a MERGER?
  • Or
  • Is it an Acquisition?

6
The Ultimate Merger
  • 1986
  • Sperry Rand (Computers, Defense Contractor)
  • Burroughs (Computers, Info Tech)
  • UNISYS
  • A New Brand (but had a so-so business)

7
The Classic Screw Up (Mistake)
  • 1998
  • Exxon Mobil
  • Exxon Mobil
  • Was described as a Merger, but it was really a
    take over acquisition.
  • Labeling is very important!

8
Maybe a better example
  • British Petroleum (BP)Amoco
  • It was called a merger, but everyone
    understood the truth quickly, when no one from
    Amoco was really on the Management Board after 6
    months.
  • So after 6 months, everyone understood the game
    and, BP acted humanely (kindly)

9
What is the Problem with Mis-Labeling?
  • The people inside are confused and de-motivated
  • you promised us that we would be a happy
    couple, and now you do not love me. So, why
    should I help you?
  • Wasted time, effort and money. Why?
  • Loss of credibility and clarity. Why?

10
Mergers Can Be Traumatic
  • Job loss
  • Impact on Health, Increased Stress
  • Absenteeism, Decline in Productivity
  • Decrease in loyalty
  • All of these hurt people and cost money. Lost
    Money Merger Failure!!

11
MA Last Year
  • Approx. 800 Billion
  • Approx. 7000 serious deals
  • But STATISTICS SHOW
  • 1/3 Outright Failure
  • 1/3 Miss economic productivity goals
    but survive
  • ONLY 1/3 MEET EXPECTATIONS

12
In the USA
  • 60 of all mergers below 1 million go unreported
  • At best 50 of all MA transactions succeed
  • Failure rate of mergers is equal to the divorce
    rate in the USA
  • -- Most Fail

13
  • Studies demonstrate that, on average, MA
    consistently benefit the TARGETS (ACQUIRED
    COMPANYS) shareholders, but
  • NOT the acquiring companys shareholders!

14
  • On Average, MA leads to NO GAIN or slight LOSS
    in both stock price and profit to the purchasing
    company. But the stock price to the ACQUIRED
    FIRM gains by an average of between 20 and 30
  • (TAKE THE MONEY AND RUN!!)

15
  • If Some MA Creates Value But
  • Most Do Not,
  • How Do We Measure Value?
  • Return on Investment should exceed the cost of
    capital for investment (ROIC)
  • What returns on investment are hoped for?
  • - Cash flow
  • - Market Capitalization/Enterprise Value
  • - Synergies in operation
  • - Market Share or Entry

16
  • Critical Strategic Analyses
  • BEFORE You Commit to the Deal
  • Growing vs. Shrinking
  • Building vs. Buying
  • Keeping vs. Selling
  • Integrating vs. Managing Separately

17
Merger Types/Issues

TONE FOCUS REGULATION
Friendly Horizontal (combining competitors) Securities
Hostile Vertical (supply chain consolidation) Anti-Monopoly
Conglomerate (diversification) Security
State Champions
18
A Smart Company Carefully
  • Plans for the outcomes it expects
  • Creates metrics and measures to judge
    success and failure
  • Monitors every step of the process
  • Holds everyone accountable
  • Otherwise, we suffer value leakage

19
An MA Plan
  1. Managing the Transaction Stages (Strategic
    Planning Target Search Corporate
    Development/Finance Target Selection Initial
    Contact/NDA Negotiation and Agreements Due
    Diligence Establish KPIs Regulatory
    Processes Deal Execution Post- Merger
    Integration)
  2. Assesing Key Target People (taking hostages)
  3. Preparing Stakeholder Communications
  4. Value Preservation Plan
  5. Preparing for Integration (PMI Plan)

20
An MA Plan (continuation)
  • 6. Managing the Transition Stage (between
    announcement and execution)
  • 7. Installing and Empowering the PMI Team
  • 8. Communicate, Communicate, Communicate
  • 9. Execute, Execute, Execute
  • 10. Monitor, Measure, Reward

21
Does Every MA Do PMI? NO!!!
  • Financial Culture Like KKR add value by
    imposing superior, top down management strategies
    in a short period of time, because you plan to
    flip the asset (treat the acquired company like
    stock for re-sale)
  • Strategic Culture Like GE each acquired
    company is made a member of the corporate
    family. Two way enhancement is expected and
    planned. Real integration is a key success
    factor. The acquired parts may lose their
    separate identity

22
Post-Merger Integration (PMI)
  • The art of combining two or more companies
    (not just on paper, but in reality) after they
    have come under common ownership.

The combining of two or more companies elements
that will enable them to function as ONE
23

PMI Change Management (Creating the Burning
Platform)
24
(No Transcript)
25
PMI Can Be Used Other Than for Companies, and
Other Than for MAs
  • Governmental entities
  • Not-for-profit
  • Joint Ventures
  • Strategic Alliances
  • Partial Acquisitions

26
We will not talk about today
  • Corporate Finance Securities and Corporation
    Law Process (notices, proxies, tenders,
    shareholder rights, etc.) Negotiation of Deals
    etc.
  • TODAY, WE ASSUME A DEAL IS AGREED BETWEEN THE
    PARTIES (even after a fight, like
    Arcelor-Mittal),
  • THE REGULATORS DO NOT OBJECT, AND THE
    COMBINATION WILL PROCEED

27
A Word About Due Diligence
  • A Merger is like buying a second-hand (used)
    car. We try to do our homework (due
    diligence), but the pre-acquisition analyses
    never tells us all we need to know about how the
    company was run. It is like kicking the tires,
    looking under the hood, and driving the car
    around the block. You will have a tough time
    seeing things about the car that the seller does
    not want you to see.
  • Price Pritchett
  • After the Merger, 1997

28
Creating An Engine for Acquisition
  • A smart, acquisitive company makes MA and PMI a
    permanent team function on the organization
    chart. This company is ALWAYS creating
    products that will win when they are
    evaluated against the systems and processes of
    another company that it might merge with, or
    acquire, or be acquired by (culture, vision,
    people process, production and quality,
    information and financial systems, supply chain
    management, customer relations management, etc.)

29
Creating An Engine for Acquisition
  • Nearly always, when a company has a strong
    engine for acquisition (i.e., it has something to
    sell during PMI), the parts of that engine will
    be the winners during the integration process.
    A strong, built-to-last corporate culture
    always dominates the NEWCO in the long run.
    And, this can save the entire MA event

30
Smart Elements of a PMI Process
  1. Membership from both sides
  2. Teambuilding for the teams/rules of behavior
  3. Devote adequate human and financial resources to
    PMI
  4. Recognize the difference between the quick fix
    vs. long term solutions (you need some of each
    in good PMI)
  5. Over-Communicate and CASCADE everything
  6. Make decisions before your scheduled date

31
Smart Elements of a PMI Process
  1. Transparency is always a better answer the
    answer you create and share will almost always be
    better than what people will imagine if you do
    not communicate
  2. Vision, Values and Culture ARE real and material
    systems, and cannot be ignored
  3. No one side can or should win every decision
  4. Take on the hardest decisions EARLY and with
    aggression, tough choices only get tougher

32
Elements of a Smart PMI Plan
  1. Strategy Development and Re-Check (from the
    Vision, right through to the Balanced Scorecard
    and Key Performance Indicators)
  2. HR People Management (Strategic Choices
    Leadership Right Sizing Attract Retain
    Reward Develop)
  3. Keeping your customers (tough choices)
  4. Selecting/Keeping the Supply Chain
  5. Maintaining/Restructuring Production, Technology,
    Methodology Quality
  6. Selecting/Building Systems Processes trench
    warfare of MA

33
Elements of a Smart PMI Plan
  1. Managing Key Stakeholders (regulators,
    shareholders, media, competitors, towns and
    countries, retirees/pensioners, suppliers,
    employees)
  2. Developing a strategy and viewpoint on how much
    integration and how much centralization and
    how much shared services
  3. If you think you are communicating too much,
    you are probably not communicating enough
    communications strategies are key success factors
    in PMI
  4. You always lose more people than you think you
    will, so plan accordingly, and do not expect that
    you can or should save everyone

34
Common Mistakes
  • If someone is an enemy of change, you should
    probably kill them the sooner, the better
  • If you do not have an outstanding team of MA
    experts inside, then go hire them you will pay
    much more from a bad plan or bad advice
  • Take on the toughest jobs, the dirtiest jobs
    first delay only makes worse
  • If you are not mindful of your people, and you do
    not make good decisions, they eventually HURT you
    nothing is harder to find and fix than someone
    standing at his or her post, smiling, but doing
    nothing

35
Common Mistakes
  • Plan, plan, plan
  • Execute, execute, execute
  • Reward your PMI teams PMI success it is a
    real, day job

36
We will not talk about today
  • Corporate Finance Securities and Corporation
    Law Process (notices, proxies, tenders,
    shareholder rights, etc.) Negotiation of Deals
    etc.
  • TODAY, WE ASSUME A DEAL IS AGREED BETWEEN THE
    PARTIES (even after a fight, like
    Arcelor-Mittal),
  • THE REGULATORS DO NOT OBJECT, AND THE
    COMBINATION WILL PROCEED
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