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    Mergers can prove a dangerous game. How can

    organizations ensure that their M&A delivers real value? >>

    10 | 2007

    DangerousMergers andacquisitions: theintegration game

    liaisons

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    Contents

    A dangerous game 2

    Critical actors or M&A success 3

    Part I getting merger strategy right 5

    Part II striking the balance 6

    Part III the impact o leadership 10

    Conclusion the perect match 14

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    00 Dangerous liaisons: the integration game

    2007 Hay Group. All rights reserved

    The dominant feature of the global business agenda in

    2007 has been the unprecedented level of corporate

    mergers and acquisitions. But mergers can be a

    dangerous game and, with access to credit likely

    to be more difcult in 2008, companies will need to

    ensure that any merger activity delivers real value to

    stakeholders.

    A dangerous game

    Hay Group and La Sorbonne asked European business leaders to share thereal story behind the complex world o mergers and acquisitions. Our researchrevealed that only nine per cent o business leaders considered their deal to haveachieved its original objectives. Some 45 per cent o the executives we polled hadopposed the mergers that they experienced 30 per cent actively.

    We all know that appearances can deceive. An attractive balance sheet may notnecessarily point to the perect corporate partner. How can suitors be certainthat behind the seductive gures lies their ideal acquisition, beore they go

    down the M&A aisle?

    2

    Our research

    Hay Groups Dangerous Liaisons report combines the results o a three-phaseresearch program, conducted jointly with La Sorbonne and believed to be themost detailed study o European M&As ever conducted.

    Hay Group conducted interviews with 200 senior European business leaderswho have experienced a major merger or acquisition during the past three years.

    It then carried out desk research into the 100 largest M&As to take place inEurope over the same period.

    Finally, La Sorbonne conducted qualitative and quantitive research amongst 300global employees o merging organizations on behal o Hay Group.

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    1

    Critical actors or M&A success

    We have identied two key actors which provide a rm oundation or asmooth integration process and that companies should adopt to be part o thesuccessul ew.

    Striking the right balance

    Get the balance right: careully consider how to align and integrate boththe tangible and intangible assets o the companies to be merged.

    Raise the due diligence game: use the time between announcement andcompletion to audit ully both tangible and intangible assets.

    The impact of leadership

    Prioritize a leadership capability review: acknowledge that the rolesrequired in a M&A context are oten one or two levels higher than seniormanagers current capacity.

    Do not delay: top team selection needs to be carried out quickly. hesooner key roles are deined and allocated, the better. he rest will ollow.

    Live the vision: the top team must demonstrate the new company values tothe workorce as a whole in everything they do.

    Only nine per cent o business leaderssurveyed considered their deal to haveachieved all its original objectives.

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    00 Dangerous liaisons: the integration game

    2007 Hay Group. All rights reserved

    4

    Hay Groups intangible asset model can

    be broken down into three key areas.

    Hay Groups intangible assets model

    Culture and market Brand Leadership

    convergence

    Governance Client intimacy Employees

    Agility Client loyalty Development andmanagement

    Communication and External networks Engagement

    teaming

    Energy and clarity Internal networks Productivity

    Organizational structure

    Tacit know-how and

    innovation

    Organizational capital Relational capital Human capital

    What are intangible assets?

    Tese are a new class o assets that include the ollowing:

    organizational capital o each company and includes culture and marketconvergence, governance, agility, communication and team working ethos

    relational capital includes brand, client loyalty and a companys external andinternal networks

    human capital reers to actors such as leadership capability, workorce skills,and employee engagement and productivity.

    It is vital to assess the intangible assets as well as the tangible assets in order to

    ully understand the dierences between the organizations and evaluate the risksinvolved in any merger or acquisition.

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    3

    Part I getting merger strategy right

    Tere is more to getting mergerstrategy right than adding up thenumbers. Companies too requentlyocus on this as they struggle to

    combine merging organizations anddeliver better returns to shareholders.

    Tis whitepaper looks at the criticalomissions in due diligence and post-merger integration strategies thatare among the primary causes oM&A ailure. wo areas that areoten neglected are the managemento intangible assets and the role oleadership.

    We ound that rms still emphasizetraditional nancial and systemsdue diligence and integration, at theexpense o the vital, intangible assets

    which may not be visible on balancesheets.

    Tese actors are equally critical to themerger process and include rontlineability to deliver brand promise, clientrelationship management, corporategovernance, organizational structureand human capital.

    O all the survey

    respondents, only one third

    saw a signicant increasein shareholder value or

    a notable upturn in sales

    and market share and/or

    achieved signicant cost

    eciencies.

    Intangible value as a percentage of total market capitalizationby sector in 1975 vs 2005

    Energy

    Materials

    Industries

    Consumerdiscretionary

    Consumerstaples

    Healthcare

    Financials

    Telecomm

    sservices

    Informationtechnology

    Utilities

    100%

    90%

    80%

    70%

    60%

    50%

    40%

    30%

    20%

    10%

    0%

    The rise and rise o intangible value:

    intangible assets made up on average

    23 per cent o companies market

    capitalisation in 1975, compared with 73

    per cent in 2005. Source: Ocean Tomo

    LLC, gure data rom Ned Davis research

    n 1975 n 2005

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    00 Dangerous liaisons: the integration game

    2007 Hay Group. All rights reserved

    6

    Te value a successul merger cancreate is undisputed but there isalso a risk in an increasingly volatilemarket. M&A deals are not or the

    ainthearted. Despite the recentimpact o sub-prime lending on theaverage availability o credit overall,M&A remains a trusted weapon inthe growth strategies o organizationstoday.

    Yet a mere nine per cent o businessleaders told Hay Group that theirM&A experience had been ullysuccessul which means that morethan nine in every 10 corporate

    mergers ultimately ail to deliver on allthe criteria which initially drove thedeals in the rst place.

    Our research reveals that mostexecutives today ocus on integratingtheir tangible assets such as P&Laccounting, I and procurementsystems and unctions such as HR,marketing and nance. Far ewermade any attempt to identiy ormitigate the risks to intangible assets which our research proves is one othe two key determinants o M&Asuccess.

    Part II striking the balance

    Old habits die hard: our survey

    resondents are still ocusing on auditing

    tangible assets during due diligence.

    Due diligence priorities

    Financial

    100%

    90%

    80%

    70%

    60%

    50%

    40%

    30%

    20%

    10%

    0%

    IT systemsLeadershipcapability

    Culturalcompatability

    Human capitalaudit

    93%

    55%

    41%

    27%

    22%

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    5

    Risky business

    Indeed, business leaders seem only tooaware o the risks inherent in ailing to

    pay due attention to these intangibleaspects o the merger process.More than hal o business leadersbelieve that this strategic imbalanceintensies the risk o ailure: 54 percent state that neglecting to auditnon-nancial assets such as businessculture increases the danger omaking the wrong acquisition.

    What is clear is that or executives, oldhabits die hard. Tough there is a keenawareness o the need to deal withintangible assets, the ocus remainson traditional due diligence: nearlythree quarters o buyers 70 per cent ailed to audit the intangible assetso the target company altogether.

    ackling integration by way osystems and nance integration is acommon approach but one whichultimately risks ailure i the balance isnot struck between the tangible assetsand the more complex elements suchas business culture, human capitaland corporate structure: the intangibleassets comments David Derain,

    director within Hay Group who leadsits M&A work in EMEA.

    Another consequence o neglecting

    intangible assets is the lack o supportor mergers at all levels in the acquiredcompany even among the mostsenior ranks. Almost hal o theacquired leadership teams opposed themergers they experienced. A worrying30 per cent reported they were activein their opposition. Among rontlinesta, some 78 per cent are opposed tosuch deals with over hal actively.

    Business leaders lack o strategicocus on intangible assets may be inpart due to inherent difculties inobtaining the necessary data on theseaspects to make inormed decisions.It is or this reason that many are

    demanding a robust orm o reportingon business culture, human capitaland organization structures as part othe due diligence process.

    Te post-merger integration strategyshould begin during the pre-closingphase. Its ocus should be on boththe intangible as well as the tangible

    assets, with a related risk analysis plan.

    70 per cent o business

    leaders claim it is too dicult

    to conduct due diligence onintangible assets.

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    00 Dangerous liaisons: the integration game

    2007 Hay Group. All rights reserved

    Culture shock

    Our study has highlighted thepotentially disastrous consequenceso neglecting intangible assets. Oneis the impact o ailing to integratebusiness cultures. Almost two thirdso executives surveyed 63 per cent

    believe that, ater integration, thereremains a notable dierence in cultureand levels o commitment between thetwo organizations.

    Business culture represents theunwritten rules o how organizationswork the unique organizationalglue which every company develops

    and which may not prove compatiblewhen two or more organizationsare to be used. In a cross-bordertransaction, it may be exacerbated bynational dierences in values, belies,expectations and attitudes towardswork, management styles and a hosto other cultural actors.

    Ignoring culture when rms mergeis likely to ensure old behaviorspersist. Tis will ultimately destroyintegration. Distinct and otenopposed camps emerge as peoplestrive to protect their habitual wayso working and their emotionalequilibrium. Companies which donot take steps to address dierences incorporate culture are planning to ail.

    It is perhaps no surprise then thatexecutives who have been throughthe M&A process expressed markeddissatisaction with the post-mergerculture, with over one th 22 percent describing the early months asculture shock and an additional 16per cent even going so ar as to label it

    trench warare.

    With this in mind, integrationstrategies must engage and enablethe workorce in the post-mergerprocess. Our research ound that onlyone in 10 companies gave priorityto engaging the workorce as part otheir integration strategy.

    When a workorce eels excluded romthe integration process, resistance islikely to emerge. Empowering theworkorce as agents o the changeprocess will engender more positiveattitudes and actions towards themerger.

    In any organization, employeeslook to their direct line managersand senior leaders or clues aboutacceptable parameters o behavior. Ina merger situation, this tendency willbe all the more marked once the dealhas been announced. Te alignmento the leadership o both sides o the

    deal is thereore critical to success. Ileaders on either side are seen not tosupport the change, the result will beproblematic levels o active oppositionrom employees at every level.

    8

    Almost two thirds o

    executives surveyed 63

    per cent believe that, ater

    integration, there remains

    a notable diference in

    culture and levels o

    commitment between the

    two organizations.

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    Getting the balance right

    Te outcomes o mergers andacquisitions are difcult to predict.Human and cultural aspects inparticular make each organizationunique. When setting out to combinethe DNA o two companies, it is

    impossible to know precisely what theend outcome will look like.

    With this is mind, there are stepsbusiness leaders can put in place tocreate the right balance or a smoothand successul integration process.

    Getting the balance right between the

    intangible and tangible assets requiresclear strategic thinking rom the verybeginning o any deal. Te nancesmay look attractive, but seriousthought needs to be given to howwell the organizational, relational andhuman capital can be integrated.

    Integration o tangible assets such aspolicies, unctional processes and costeconomies is oten what is tackledrst. It is more straightorward to workout a plan to deal with these visibleelements o the merger. While thisis key to delivering cost reduction,ocusing on integration synergies alone

    will not deliver growth or increaseshareholder value.

    In order to get to the value creationzone more quickly, mergingorganizations must align intangibleassets. Tese elements would includebrand promise, governance, employeeengagement and client relationship

    management, as they start to integratetheir processes and systems. Tetwo aspects o integration strategyshould be addressed in parallel. As ourresearch has revealed it is too late tothink about this six months ater thedeal has gone live.

    49 per cent o business leaders demandrobust mandatory reporting structures

    or business culture and human capital.

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    00 Dangerous liaisons: the integration game

    2007 Hay Group. All rights reserved

    Part III the impact o leadership

    10

    Where opposition to a deal occuredit became more pronounced asone moves down the organization.Resistance was more marked at middle

    management level, where almost halo managers opposed mergers, a thactively so.

    Mergers and acquisitions are, by theirnature, disruptive. Any transaction,no matter how large or small, initiatesa period o undamental change, orboth the organizations themselves andor the workorce living through theintegration process.

    Hay Group examined a variety oactors that impact upon the success oa merger or acquisition. It is clear thattwo actors really make the dierencebetween the average perormers and

    those that excel: the balance betweenthe intangible and tangible assets andleadership. We studied, in particular,the impact o leadership on thesuccess o M&A, the speed and ease ointegration o merging companies andthe level o disruption caused by theintegration process.

    Worryingly, we ound that eectiveleadership is the vital missing link inmost M&A activity. Te capacityto align merging organizations inparticular the intangible assets restsprimarily with the top team, arguesDavid Derain. Business leaders musttake an objective view when selectingthe top team, in order to select the

    best team possible one capable orising to the challenges o post-mergerintegration.

    Executives who conducted a ormalleadership capability review duringthe due diligence stage were ultimatelyour times more successul in

    delivering the objectives which drovethe merger. One th o them reportedthat their merger was completelysuccessul almost twice the average.Tis compares with a mere ve percent o those who did not reviewleadership ability in a ormal way.

    Business leaders who carried outleadership due diligence were alsomore likely to garner support or themerger at every level o the acquiredorganization. Nearly hal (47 per cent)o these executives described the rst100 days ater integration as a bravenew world o opportunity, with aurther one th calling their smooth

    transition business as usual.

    In contrast, almost hal o businessleaders who ailed to conduct aleadership capability review said theirorganization developed a destructivepost-merger climate.

    Business leaders also reported that

    ailure to ocus on leadership duringdue diligence also had a negative eecton levels o employee productivity andmotivation.

    A quarter o top executives whoneglected to audit leadershipexperienced a dip in productivity andengagement levels among rontline

    workers once integration wascompleted.

    Business leaders who

    prioritized a leadership

    capability review wereour times as successul

    in achieving their merger

    objectives.

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    However, those who did conduct aleadership capability review reportedan improvement in motivation levelso more than 10 per cent.

    During merger and integrationeective leaders will demonstrate theirbelie in and commitment to the deal.Tat in turn will help sustain employeeengagement and productivity. An in-depth understanding o employeesskills and motivations at leadershiplevel will provide valuable insight

    when taking vital steps to engage theworkorce and convince them that adeal makes sense.

    Executives always underestimate theimpact o M&As on the inormal andsocial networks that make a ormalorganization work, argues Claude

    Dion, who works extensively on M&Apost-merger deals at Hay Group.Tis is why leaders need to be clearabout their strengths and weaknesses

    and have a realistic plan o actionsupporting the integration strategy.Yet, despite the critical role leadershipplays in M&A success, more than

    hal o companies ailed to reviewleadership capability as part o the duediligence process.

    Leadership is the vital missingingredient in most M&As. Te impactthe leadership team has on the successo integration and the perormance omerged companies is clear.

    Business leaders who are prospectingor acquisitions must audit leadershipcapability at the earliest opportunitywhen considering a merger, and actdecisively to put the right team inplace i they are to ensure a smoothtransition one which maintains

    employee productivity and canposition the new company orprotable growth.

    Only 13 per cent o business

    leaders stated that

    engaging and integrating

    senior management and the

    workorce was given high

    priority as part o

    their companys

    integration strategy.

    The impact of new leadership on value

    Has the merger or New leadership team Old leadership teamacquisition genuinelyunlocked new value?

    Yes a signicant amount 50% 19%

    Yes a small amount 35% 31%

    No 8% 4%

    Not yet 7% 46%

    00 D li i th i t ti12

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    00 Dangerous liaisons: the integration game

    2007 Hay Group. All rights reserved

    12

    All change?

    Given the critical impact o leadershipon successul post-M&A integrationand on the uture perormance o thenew company, one crucial decision

    buyers ace is whether or not to replacethe top management team.

    Tere can be no hard and ast rulein answer to this. Making the rightdecision depends on the strategicdrivers behind the M&A, mergerobjectives, transaction type, relativeperormance o the merging companies

    and the leadership capabilities alreadyin place. All o this emphasizes theimportance o carrying out leadershipdue diligence.

    However, our research suggests thatthere are clear advantages to bringingin a new senior management team.

    Buyers who elected to replace themanagement team are better thanthose who keep the existing team inplace. Appointing a new managementteam is nearly three times more likelyto deliver success.

    A new leadership team is also morelikely to deliver increased shareholder

    value with 29 per cent o buyers whoappointed new leadership claimingthat the merger had increased shareprice a great deal, compared to justve per cent o those who retained theacquired rms management teams.

    So why does replacing the leadershipteam have such a critical impact on

    success? Te key lies in the attitudeo the management team to the

    merger, and the impact this has on theculture and operations o the mergingorganization.

    Te senior management team mustlive the vision or a newly mergedorganization, demonstrating the rightbehaviours and setting the tone rightrom the outset, in order to reassureemployees o the validity and uturesuccess o the new company, explainsGaurav Lahiri, M&A director at HayGroup.

    A new management team should beput in place as early as possible duringthe merger or acquisition, not onlyto enhance the integration process,but equally to bolster the likelihoodo success when it comes to achievingbusiness objectives. Replacing the top

    tier may appear to be high risk, but asour research demonstrates, the pay-oin terms o results more than justiesit.

    Te message or merging companiesis clear, argues Deborah Allday, M&Adirector, Hay Group. For thosecompanies acquiring star perormers

    or making portolio acquisitions inunamiliar territory, retaining theexisting management team will deliverbusiness as usual.

    However, or buyers aiming to drivesignicant new value, or achieveeconomies o scale by integratingcompanies, a new management team

    is three times more likely to deliverresults.

    A new management team is

    nearly three times more likely

    to deliver success.

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    Merging organizations entails thebringing together o two or more setso strategies, operations, processes,people and cultures, in a way that still

    enables the new company to operateefciently and to grow protably.

    Such a complex undertaking is boundto have a disruptive eect on customercare so the need or speed is clear. Teaster a leadership team is in placeand able to dedicate its resources toensuring a smooth transition, the less

    disruptive to eective operations andcustomer service a merger is likely toprove.

    Yet merging companies are allingshort in this regard. Te average timeto appoint a new management teamor the transactions studied by Hay

    Group was 74 days which amountsto two and a hal months o leaderlessoperations.

    Te impact o this on rmsperormance is disastrous. Businessleaders estimated the average period odisruption to rontline operations o

    acquired companies to be a staggeringtwo and a hal years. A quarter omergers studied had still to reachcomplete integration as much asthree years ater the deal. O thosewhich had already achieved completeintegration, the average time taken was19 months.

    Yet signicantly, companies appointinga new management team as earlyas the due diligence stage are morethan twice as likely to reach ullintegration within a year, signicantlyreducing disruption time. Close tohal 46 per cent o rms undernew management rom an early stage

    managed this, compared to less than aquarter o those ailing to put in placea new management team during duediligence.

    The need or speed

    The average time to appoint

    a new management team

    was 74 days. The impact o

    this on rms perormance

    is disastrous.

    00 Dangerous liaisons: the integration game14

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    00 Dangerous liaisons: the integration game

    2007 Hay Group. All rights reserved

    14

    Te value a successul merger cancreate is undisputed. Despite theimpact o recent sub-prime lending onthe average availability o credit overall,

    M&A remains a trusted weapon inthe growth strategies o organizations.Private equity rms remain hungry orinvestment opportunities, at least inthe medium-term.

    Yet buyers must pay due attentionto a companys real value: that whichis ound in its boardroom, human

    capital and business culture. A keenstrategic ocus on these intangibleassets is vital not just during courtship,but throughout the merger process, iacquirer and acquired are to enjoy along and prosperous uture together.

    When the balance is achievedbetween tangible and intangibleassets it provides a solid oundationor strategic growth and ensures

    return on investment. It also allowssenior executives to embrace theleadership challenge in a realisticway. Tis approach is reassuring ornancial partners and shareholders.Te degree to which those responsibleor merger strategy prioritize gettingthe intangibles right can make thedierence between an engaged,

    productive workorce and acrimoniousopposition; between a brave new worldo value and all-out warare.

    Achieving a marriage o businesscultures will make the dierencebetween lucrative return and expensiveailure. Ater all, divorce is a costlybusiness.

    Conclusion the perect match?

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    Hay Group is the only management consultancy that helps mergingorganizations manage both the intangible as well as tangible assets involved ina merger or acquisition. We help businesses ensure that the value o the newlyormed organization is realized right rom the start.

    Hay Groups global M&A practioners have extensive experience o working withsenior leaders to bring an objective perspective to the M&A process, helping tokeep the ocus o the new organization on what matters externally: customers.

    An expert view o the assets and interests o the companies involved in a mergeror acquisition and o the issues and challenges aced throughout the transactioncan greatly enhance the speed o integration and the sustained success o the newcompany.

    Hay Group is a global consulting rm that works with leaders to turn strategiesinto reality. With 89 ofces in 47 countries, we work with over 7,000 clientsacross the world. We develop talent, organize people to be more eective andmotivate them to perorm at their best.

    Hay Group helps merging organizations by:

    clariying merger or acquisition strategy and aligning top teams around newstrategic intent

    creating new governance processes, dening new operating models andexecutive management structures

    identiying and managing the risks to tangible and intangible assets

    establishing transitional management, leadership and synergy teams to speedup integration

    developing communication strategies and processes that help to engageemployees and build workorce commitment

    For copies o Hay Groups Dangerous Liaisons white paper contact:[email protected]

    About Hay Group

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    g g g

    2007 Hay Group. All rights reserved

    The content in this report is provided solely or inormational purposes.This report does not establish any client, advisory, duciary or proessionalrelationship between Hay Group and you. Neither Hay Group nor any otherperson is, in connection with this report, engaged in rendering accounting,advisory, auditing, consulting, legal, tax or other proessional services or advice.

    About the authors

    Claude Dionjoined Hay Group in1997 and has 25 years experience inconsulting mainly on organizationaleectiveness and business management

    to restructure companies. He iscurrently responsible or businessdevelopment in CEE countries andworks extensively in M&A post-merger deals.

    [email protected]

    Caroline Laforet is a Europeanmergers and acquisitions researchanalyst at Hay Group. She has a PhDin Organizational Psychology rom La

    Sorbonne. Over a period o our years,she conducted independent researchinto the success actors o mergersand acquisitions. She has research anddevelopment expertise in the M&Aeld.

    [email protected]

    Gaurav Lahirijoined Hay Groupin 2000 initially in Singapore, thentranserred to Melbourne beore goingon to set up Hay Groups practice in

    India. Currently based in London, hehas a special ocus on M&A, workingwith clients to align their organisationswith their strategic agenda.

    [email protected]

    Deborah Alldayjoined Hay Groupin 2004. She is based in London andheads up Hay Groups M&A workin the UK. Deborah works withCEOs and their top teams to increaseshareholder returns by improvingtheir delivery o post-integration cost-reduction and growth benets andmanaging tangible and intangible asset

    [email protected]

    David Derainjoined Hay Group in1994. Based in Paris, he is currentlydirector or the EMEA region andresponsible or M&A activities. Hehas extensive experience in managingglobal projects specializing in M&Arisk management and [email protected]

    Dangerous Liaisons

    For additional copies o Hay GroupsDangerous Liaisons report and urtherinormation about Hay Group pleasecontact:[email protected]

    A PDF o this report is available at:www.haygroup.com

    Hay Group worked in partnershipwith Man Bites Dog public relationsto develop the concept and researchor this report. Additional research wasconducted on behal o Hay Group byVanson Bourne.

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    Hay Group is a global management consulting rm that works with

    leaders to transorm strategy into reality. We develop talent, organize

    people to be more efective and motivate them to perorm at their

    best. Our ocus is on making change happen and helping people and

    organizations realize their potential.

    We have over 2600 employees working in 86 oces in 47 countries.For more inormation please contact your local oce through

    www.haygroup.com.

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