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Chapter 5aGlobal mergers and acquisitions

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Business development choices

INTERNAL SOLUTION

EXTERNAL SOLUTION

Ownership Partnership

Acquisition Merger ofequals

Jointventure

AllianceMinorityinvestment

Control/Integration Flexibility/Coordination/ Cooperation

Businessdevelopment

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Mergers & acquisitionsIncreasingly numerous

Increasingly transnational

In nearly all industries

Pressure for globalization; need for global reach

Pressure on costs; search for economies of scale and scope

More diverse technologies and standards; need for “systemicinnovations”

Solution selling; system integration

Shorter product cycles; need to develop business fast

More segmented markets; need for developing multiple marketing competencies

Refocusing on core tasks and competencies; leads to outsourcing

Why?

M&As are:

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Global mergers & acquisitions - billion $ value

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Strategic value• Strategic objectives

• Value creation potential

What are the benefits of thethe merger/acquisition?

What value do we get from it?

Target/counterpart analysis• Fit analysis

• Due diligence• Valuation

• Expectations

Is the deal feasible?

Negotiation and design• Price

• Financial architecture• Operational organization

• Governance

How much do we pay?How?

How do we organize andmanage?

AGREEMENT

Post merger integration• Transition• Integration• Evolution

How do we put thecompanies together?

How do we work?

DECISION-MAKING

IMPLEMENTATION

Framework for the analysis of M&As

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PROBLEMS

IDEA

ACQUISITIONJUSTIFICATION

DECISION-MAKING

PROCESS

• Clarity of strategic objectives• Fragmented perspectives• Lack of operational perspectives• Quality of planning process• Momentum

Problems in deciding to acquire or merge

- Urgency- Secrecy- Personal stakes- Pressures

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Value creation in M&As?Value of the

acquirerA

Value of the acquired

B

Value of Bminus acquisition

costs

Increased efficiency

Learning from B

Cost saving due to combined operations

Increased revenues due to joint marketing andproducts complementarily

Increased profitability from joint innovation

STANDALONE VALUEValue coming from the

acquired company

SYNERGY VALUEValue coming from the

combination of thetwo companies

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What factors make an acquisition justified?

Clarity of strategic purpose A shared set of priorities among key deciders A detailed understanding of the source of benefits Close attention to the risks and how to manage them A shared sense of time and timing An operating-led acquisition team for each acquisition

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Due diligence

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Cultural due diligenceConcentratedpower

Diffusedpower

Role/processoriented

Resultoriented

Hierarchy Group

Tradition Innovation

Narrowdistribution ofinformation

Wide distributionof information

Bureaucratic Entrepreneurial

Seniority/status

Performance

Processoriented

Actionoriented

Individualistic Collective

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

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Cultural due diligence cont.

What to anticipate?How to deal with it?

Views about businessobjectives:o Growtho Profitabilityo Riskso Long/short termo Shareholder valueo Stakeholders

Views about competitiveapproaches:o Customer orientationo Pricingo Importance of qualityo Importance of technologyo Ethics

Ways to manage:o Leadership styleo Trust/controlo Motivating factors

Communication:o Openness/secrecyo Formal/informalo Importance of personal relationships

Acquirer Acquiree

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Organisational due diligence

What to anticipate?How to deal with it?

Acquirer AcquireeSTRUCTURAL DIFFERENCES:

o Centralisation/Decentralisationo Form of organisation

SYSTEMS AND PROCESSES:

o Importance of formal systemso Sophistication of financial controlso Quality of ITo Importance of teamwork/ committeesPERFORMANCES o Performance-based rewardso Career mobilityo Quality of management

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Valuation of M&Asafter due diligence: a summary

Standalone valueas acquired

+/ Adjustmentsto standalone

+/- Synergies

Free cash flow based on:a) Existing revenues

- costsb) Projected growthc) Project costs

Given:• WACC• Terminal value• Debts• Transaction fees

+ Disposal of assets- Exceptional

expectedcash outflow:

• Litigation• Tax liabilities

+ Costs improvements:• Rationalization• Overheads• Reduction• Lay-offs+ Additional revenues coming from:• Quality improvement• New team

- Additional capitaladvertising, R&D expenditures

- Contracts termination

+ Revenues synergies+ Cost synergies+ Financial synergies- cost of integration

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Pre-acquisition Due diligence

NegotiationValuation

Memorandum of understanding

MOU

Letter of intentLOI

Confidentialityagreement

Agreement

Legal process

Contract

Outstandingissues

subject to..

Acquisition process flow

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SCOPEPRICE

Mode of payment

MANAGEMENT& STAFFING(for mergers)

COVENANTS

CONFLICTRESOLUTION

• What is for sale?• 100% or partial• Share or assets• Transfer of rights:(Patent, brands, distribution agreements, licenses, contracts.)

• Mode of valuation• Debts • Cash

• Stocks• Conditional

clauses

• Board• Positions• Decision-making• Control• Recruitment• Careers• Remuneration

• Arbitration• Conditions

for closing• Non-competitive clause• Retention of key executives• Hidden liabilities

NEGOTIATION

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Value creation for shareholders in M&As

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70%

83%

58%52%

60%60%55%

50%

0

25

50

75

100

1973 1984 1986 1987 1995 1998 1999 2001

M&

A F

ailu

re R

ates

(%)

Failure rates of M&As

Mercer Group

Kitching Booz Allen & Hamilton

McKinsey Porter AT Kearney KPMG KPMG

1965-1970 1970-1984 1950-1984 1950-1984 1990-1995 1993-1996 1996-1998 1998-2000Management assessment

Management assessment

Cost of capital

Divestments of acquisitions

Stock market returns

Stock market returns

Stock market returns

Stock market returns

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The odds are against success

Potential merger results

Is there a sound strategy guiding the combination?

Is the combination implemented well?

Yes No

Yes

No

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Pre-merger

Lack of strategic fit (different business logistics)

Poor due diligence Overestimation of

synergies Empire building Politics

Deal

Excessive premium

Bidding fever Pressures

Post-merger

Lack of leadership Poor communication No integration plan Unable to reduce anxiety Too much emphasis on costs not enough on growth Too inward-looking Departure of good people

Acquisitions go wrong for many reasons

Loss of key customers

Lack of trust Sticking to theory

(forced synergies) Clash of cultures Lack of shared

vision Failure to show

results fast Inadequate funding Politics

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Post M&A design

1. The “What” question (scope):– Which integration plan makes most economic sense

2. The “How” question (style):– Hard: acquirer imposes– Soft: build sufficient consensus on the plan to allow for a

smooth execution3. The “When” question (speed):

– How fast?

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Same businessSame customersSame economic,social, political environmentSimilar cultures

Negative profitabilityUnstable/ declining market shareWeak management

Different businessDifferent customersDifferent economic,social, political environmentDifferent cultures

High profitabilityStable/ improving market shareStrong management

High operational synergies

Low operational synergies

How much autonomy due to differences in culture and business context

Low need for autonomy

To what extent do the operations need integration?

High need for autonomy

High need for integration Low need for integration

Scope alternatives

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Difference in competitive contexts

Need fororganisational

autonomy

High

Low

HighLow

Preservation Symbiosis

Absorption

Amount of operational synergies Need for interdependence

Scope alternatives cont.

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Preservation

• Keep separate• Protect existing capabilities of the acquired firm• Slow diffusion of target’s knowledge to the acquiring

Facilitate innovation Example: Sony/Columbia

Scope alternatives cont.Key integration tasks inpreservation acquisitions

AbsorptionKey integration tasks in absorption acquisitions

Take advantage of scale economiesExample: GE Capital, Novartis

Symbiosis

• Start with preservation• Selective integration• Two ways transfer of capabilities

Key integration tasks in symbiotic acquisitions

• Rapid and complete integration• Implement best practices • Harness complementarities

Best of both: Air France/KLM

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AbsorptionCommon operating procedures are adopted ( transfer of best practices orpractices of acquirer).

The target is completelyintegrated within the structure of acquirer or a new integratedstructure is adopted.

CULTURESTRUCTURE OPERATIONS

Common cultureis imposed or created.

Example: SmithKline and Beecham

More detailed scope alternatives

No operational integration:only financialReporting.

The two companies arekept structurally separate.Only few reporting lines.

Cultural differencesare maintained.Example: Sony/

Columbia

Preservation

Selected operations areco-ordinated and common procedures are adopted ( transfer of best practices orpractices of acquirer).

Structures generally separated eitherlegally or under adivisional form.

Norms of conduct and expectations are established and revised over time to enhance cooperation andco-ordination.

SymbioticExample: Air France/KLM

Most cross borders acquisitions belong to the symbiotic category since the majority of cross-border acquisitions are horizontal (same business) in dissimilar competitive environments.

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The post-merger integration phases

PMI planning Transitionphase

Integrationphase

DealNegotiation Implementation

(3 to 12 months)

Articulate visionfor the combined company Develop processand principles Create transition team and

leadership Gather data (DD +cultural assessment) Prepare a communicationplan Prioritize actions

Set integration teams and structure Create performance milestonesfor each team Look for short term wins Reporting structure Launch teamwork Review, assess and

implement recommended actions Communication

Finalize integration Finalize organisation End/transform

integration teams

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The post-deal situation High emotional stress and anxiety

- Employees- Suppliers

- Distributors- Community

Uncertainty about future direction « Synergies » still very theoretical Cultural divide:

- Values- Mindset- Competitive and business logic- Experience

Stereotypes Systems and processes compatibility Personality clash

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** New sense of purpose * Mutual understanding* Integration teams* Establishing control* Strengthening the operations* Credibility and commitment* Communication* Show respect

Leadership• Interface: ability to

understand the two cultures

• Action-minded• Communication• Listener• Clarity of message• Commitment

Transition phase

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* Leadership

* Mutual understanding* Integration teams* Establishing control* Strengthening the operations* Credibility and commitment* Communication* Show respect

New sense of purpose

• Concrete objectives• Consistent message to all parties• Clarity of message• Commitment

Transition phase cont.

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* Leadership* New sense of purpose *

* Integration teams* Establishing control* Strengthening the operations* Credibility and commitment* Communication* Show respect

• Avoid cultural stereotypes• Teamwork• Data-driven• Avoid a priority (agnostic)

Mutual understanding

Transition phase cont.

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* Leadership* New sense of purpose * Mutual understanding*

* Credibility and commitment* Communication* Show respect

• Cross-functional teams• Concrete agenda• Shoot for short-term wins• Customer and Operations focus• Provides process methodology and measurement• Harness complementarities

Integration teamsEstablishing controlStrengthening the operations

Transition phase cont.

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* Leadership* New sense of purpose * Mutual understanding*

• Straight communication• Realism• Manage by phases• Adopt best practice without bias

Integration teams* Establishing control* Strengthening the operations

* Credibility and commitment* Communication* Show respect

Transition phase cont.

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Integration team structureIntegration team leadership

Top 2-3 executives from each company

Provides direction,control, go/no go decision

Meets every 2 weeks

HR

Sales & distribution IT Finance and

accountingMarketing

ProcurementManufacturing

OperationsR&D

Each team works either full time at first and or twice a week later depending upon the nature of the task. Agenda: propose concrete actions to be submitted to integration team leadership.

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People and cultural issues in mergers and acquisitions

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Who does what?

Acquirer Acquiree

Top

Middle

Low

Plan; negotiate

Implement

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Stress and commitment cycles in a merger

High

Low

Rumor Announcement Transitionplanning

Transitionimplement-

ation

Post-transition

Stress

Commitment

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The “merger syndrome”Personal reactions

Distractions from job performance Resistance to change Worst-case scenarios and rumor-mongering Feelings of fear, betrayal and anger

Organizational reactions

Crisis management War-room and combat mentality Decreased communication (downward) Increased centralization (upward)

Cultural reactions

Clash of cultures We (superior) versus they (inferior) syndrome Stereotypes and chauvinistic biases Hostility and distrust

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Manufacturingand

logistics

Salesand

marketing

Researchand

development

Generaland

administrative

Purchasing

Businessdevelopments

Phaseout ofproducts &

parts complexitymanagement

Organization

Financeandcost

Launch 22 new models Introduce a mini-car model by 2002 in Japan

Cut number of suppliers in half Reduce costs by 20% over three years

Close three assembly plants in Japan Close two power-train plants in Japan Improve capacity utilization in Japan

from 53% in 1999 to 82% in 2002

Move to a globally integrated organization

Increase output efficiency by 20% per project

Move to a single global agency Reduce SG&A costs by 20% Reduce distribution subsidiaries by 20 in Japan Close 10% of retail outlets in Japan Create prefecture business centers or common

back offices

Reduce SG&A costs by 20% Reduce global head count by 21,000

Dispose of non-core assets Cut automotive debt in half to $5. billion net Reduce inventories

Reduce number of plants in Japan from seven to four by 2002 Reduce number of platforms in Japan from

24 to 15 by 2002 Reduce by 50% the variation in parts

(due to differences in engines or destination, for example) for each model

Create a worldwide corporate HQ Create regional management

committees Empower program directors Implement performance- oriented

compensation and bonus packages,including stock options

9 Nissan’s cross-functional teamsGlobal alliance committee

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11 Renault-Nissan cross-company teams

Products

Marketing& sales

Asia

Components Vehicles Procurement Logistics

Marketing& salesEurope

Marketing& salesNorth

America

Marketing& salesCentral America

Marketing& salesSouth

America

Marketing& salesOthers

Global alliance committee

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Carlos Ghosn as a leader

• Clarity of vision• Hands-on• Data-driven (No preconceived idea)• Consistent (‘Say what you think and do what you say’)• Demanding but respectful• Listening but deciding• Sets example by his own behaviour• Communicates clearly• Insists on concreteness• Insists on time factor