Delivering Synergies : A closer look at post merger integration

Delivering SynergiesDelivering SynergiesA closer look at post merger integration

Sanjay UppalGroup Chief Financial OfficerEmirates NBD

18 October 2008Dubai. UAE

Introduction

July 2007 : Communicating ‘Expected’ Value of Merger

Integration : Delivering Value

July 2008 : Communicating ‘Real’ Value of merger

Conclusion

1

M&As make significant contributions to relative growth – but most acquisitions tend to destroy relative value

Improvement in share price from T – 2 years to

. . . but most acquisitions fail to create value A strong and well executed M&A strategy can help companies realize growth . . .Explanatory power for differences in Improvement in share price from T – 2 years to

T + 2 years, adjusted for returns on MSCI World Index***, %

Explanatory power for differences in company growth*, R², percent

23%Innovation**

38%Market growth 39% Success

39%

61%Failure

39%Inorganic activity

2

* Based on the time series growth regression of 54 large companies across a broad range of sectors** Remainder including disruptive innovation and noise in regression analysis

*** Based on analysis around 1229 large deals executed before 2005Source: SDC, Hoovers, Company reports, Analyst reports, McKinsey analysis

Key stages of a M&A process

Pre-transaction Post-transactionExecution Process

Transaction Execution Process

M&A strategy

Corporate strategy

Target identification

Post merger manage-ment

Launch Capability building

ment

3

Success of the Transaction depends on success at every stage

Introduction




Conclusion

4

Expected synergies : Articulating the merger benefits

AED m346151

195

Communicated to shareholders & market – July

200726

Costs Total synergies

Non-recurring

Revenue

2007

E t d** 10 5% 22 2%

synergies recurring

Expected**

Benchmark***% of smaller base

10.5%

10.0%

22.2%

26.0%Synergy Realization

2008 = 33%

2009 66%% of combined base

4.1%

5.0%

8.3%

14.0%

Expected**

Benchmark***

2009 = 66%

2010 = 100%

* Figures have not been adjusted for inflation** As a % of NBD’s base

*** Domestic transactions

Value creation potential – REVENUE Synergies

• Expanded product offering & services• Leverage increased balance sheet and

Revenue Synergy Breakdown % Total Key Actions

62%121Corporate & Investment

Details Key actions

Leverage increased balance sheet and financial strength to generate and retain greater number of larger projects

31%60

Bank

Retail Bank• Focus on cross-selling among major

product categories60 p g• Increased revenue from market share /

pricing advantages & leveraging largest distribution network in UAE

4%8Cost of Funds • Improved cost of funding due to a stronger capital base

3%6Brokerage • Improved sales due to integrated brokerage

6

100%195T O T A L

Value creation potential – COST Synergies

• Branch & ATM network consolidation• Integration of card acquiring business

Revenue Synergy Breakdown % Total Key ActionsDetails Key actions

34%52Retail Bank• Pricing advantages on advertising /

marketing spend

• Optimized Head Office functions40Head Office 26%

25%

• Redundancies in group functions

38IT & Operations • Consolidation of IT centre• Reduced Capital expenditure

7%

4% • Cost efficiency from integrated platform

10

6Brokerage

Corporate & Inv. Bank

• Cost-efficiency from integrated platform

% Cost efficiency from integrated platform

5

6Brokerage

Islamic Bank 3% • Leverage Emirates Islamic Bank as platform for unified Islamic offering

7

100%151T O T A L

Introduction




Conclusion

8

Integration : Guiding Principles

Mission• Create a single company with one face to the customer

th t b ild d b d th b t f th

Guiding Principles

Mission that builds on – and goes beyond – the best of the merging companies

• Leverage expertise of both entities & select the best people for respective positionsEnable creation of people for respective positions

• Manage integration & maintain ongoing business at the same time

Executive Committee / Line executives responsible for

Enable creation of “Emirates NBD” in line with the strategic aspirations,

hil i i i h – Executive Committee / Line executives responsible for integration success & running day to day business

– Integration Teams aligned with organisation structure

E l k i ll l th i d il b i ll

while maximizing the synergies in the shortest time possible

– Employees work in parallel on their daily business as well as on the integration related tasks i.e., will be working on integration part-time

Integration : Key Stages

Phase 2: LaunchIntegration Organization& Initiatives

Phase 1: DesignIntegration Plan

Phase 3: Handover to Line Management

CEO CEOJoint Steering Comm

ExCo ExCoEmirates NBD ExCoEmirates NBD CEO

Integration Office/Task Forces

Emirates NBD ExCoEmirates NBD CEO

Task Forces

Integration i ti /

Line managementM&A team Handover 1 Handover 2

Milestones 06/03 05-06/09 200902/07

organization / initiatives

managementof integrated organization

M&A team Handover 1 Handover 2

End of 200716/10MilestonesMerger

announcedEGM Integration

completedFinancialclosing

Target business model defined

Legalclosing

Establish an Integration organization & a dedicated team

I t ti OffiCEO

Integration Office• Support & coordinate Integration

Teams and selected cross functional projects

• Consolidate input & develops Integration Roadmap

CEO + Executive Committee

ExCo (Steering Committee)Acts as Integration Steering Committee and approve all major decisions

Follow up on integration more closely to speed up progress

Integration Roadmap

Project Manage-

Baseline/Synergies

Communi-cation

Integration OfficeA

j

Governance & organization

Cross-functional projectsTop priority projects with cross business functional relevancea age

mentSy e g es cat o

Strategic HR Branding

Governance & organization bus ess u ct o a e e a ce

B

C

BU/SU Integration TeamsCollaboration of the two banks to develop individual integration initiatives as input

Move & relocation planning Day-1 management and MIS

Retail Banking

Wholesale Banking

Treasury

W lth M t

HR

IT/Ops

Finance

Ad i

g pfor Integration Roadmap by Business / Support unit

Wealth Management

International

Admin

Risk management

Islamic Banking Audit

Each Integration Team has key deliverables

• Integration Team organization

• Detailed workplan definition for Integration TeamOrganizational set-up

• Compare & assess both banks’ business modelsInput to Integration

• Develop Emirates NBD value proposition, strategy & go-to-market model

• Develop target organization structure & resources

gRoadmap

• List of initiatives to combine models & achieve synergies target (including quick wins)

• T iti l• Transition plan

Organization Structure : Seizing Day ONE

September 2007Day-1 Organization

December 2007Final Organization

Address key organizational questions during integration

Put in place initial top-level organization structure directly after legal closing to ensure

Move to final organization structure once key strategic questions have beenlegal closing to ensure

fast and effective decision making

questions have been properly addressed to ensure realization of synergies & business growthg o t

Communicating with all stakeholders

d ti l t d i & h f. . . and articulated issues & our approach for each stakeholder group

Their issues

Ourobjective

Message Channels Stake-holders

Internal OthersExternal

Developed a Stakeholder Map . . .

j

Shareholders Value Increase Safe /Enhanced

Customers Service/ Competitive Larger bank,

Press /Website

Press /

Staff General Public

Transaction Ad i

Shareholders

CustomersBoardsPricing distribution..

Staff Job Security/ Career Outlook

Attract and Retain best talent

Better opportunities

Intranet webcasts,

Website Advisors

Accountants

Customers

UAE regulators

Foreign

Boards

Outlook talent

Regulators Transparency/ Blueprint

in diversified organisation

newsletters

Compliance/ Best Practice

Meeting

Foreign regulators

Analysts

Legal Advisors

Other Advisors

Media

Ratings agencies

14

g

Suppliers

Communicating with staff started early

15

Integration : Keeping Track

October 2007 November 200740October 2007 November 2007

39 41 42 43 44 45 46 47

Board meetings

Activity

Board

ExCo Updates

Integration

CEO

Update meetings with

Integration decisions

ExCo

Integration p gIntegration Teams/Cross-functional teams

Integration Office

FunctionalUpdates

Updates

Functional Project Teams

I t ti UpdatesIntegration Teams

Introduction




Conclusion

17

Synergy identification & tracking process

Due diligence Identification/ Planning Execution Phase:

Commitment t th k t

Planning phase: Identification & Realisation &

T kiFinalise

D t ti

1 2 3 4

Due diligenceApril – August 2007

Identification/ Planning Oct - Dec 2007

Execution Phase: Jan 2008 onwards

Phas

e

to the market Commitment Tracking Documentation

Synergy identification& recording

Synergy Realisation & recordingn

Flow

1. Provide evidence & documents2. Revenue synergies – track

actual achievements3. State annual recurring

amounts and P&L impact for each year

1. Agree mechanism to calculate & evidence

2. Freeze baselines3. State assumptions & pre-

requisites4. Define milestones

Board Memoocum

enta

tio

each year

Tracking Sheets Board Memo

Do

Summary Business Unit wise tracking template

gwill form part of documentation

provided to auditors

H1 2008 : Actual synergies achieved

Total Synergies

AED Millions

y g

246

372

300

400

124

200

100

20061%

0

100

2008 2009 2010

Target Actual (H1'08)

Note 1: Base used when computing synergy targets were 2006 financials

Exceeded 2008 full year targets on synergies

250

65

129

195

87100

150

200AED MillionsRevenue Synergies

34%

0

50

2008 2009 2010

151Cost SynergiesTotal Synergies

372400

50

100

151

91

50

100

150 Cost Synergies

82%

+124

246200

100

200

300

400

61%

02008 2009 2010

0

100

2008 2009 2010

Target Actual (H1'08)

9

17

2622

20

30 One-off Synergies

144%9

0

10

2008 2009 2010Note 1: Base used when computing synergy targets were 2006 financials

Synergies achieved : Key drivers

Total, %

• Largest distribution network of 115 branches & 486 ATMs

Key drivers of synergies achieved in H1’2008Annualised synergies

AED millions

87

Largest distribution network of 115 branches & 486 ATMs• Focus on cross selling – e.g. mortgages >AED100m loans• Enhanced market share/pricing advantages – e.g. FDs• Embedded Customer efficiency framework – e.g. Tafawouq has

tripled branch sales in Umm Suqeim & DCC

Revenue 41

91• Single Head-office in place• Created efficiencies through unified business models• Combined marketing & advertisement activities

Costs 48

22• Projects & initiatives discontinued due to merger, namely Islamic

banking set up previously planned in NBDOne offs 11

200Total 100

21

Key performance indicators : Cost-Income ratio

Cost Income ratio for H1-2008 is 37.4% (vs. 38.8% in H2-2007)

Before synergies H1-2008 cost-income ratio is 38.6%

Synergies contribute to 1.2% drop in cost-income ratio

Jaws of 4% achieved in H1-2008 vs. H2-2007 (before synergies 1%)

38.8%39%

40% Cost: Income ratio

%38.6%

38%

39%

Synergy Impact = 1 2%

37.4%

37%H2-2007 H1-2008 (before H1-2008

= 1.2%

Note: Above financials exclude one-off integration costs

(synergies)

Integration Update : Q3 2008Integration on track

Key integration achievements in Q3-2008 include:

Inauguration of Emirates NBD’s Large Corporate Unit (LCU)

Treasury team now working as a single integrated FX trading entity

Operations staff co-location in our new IT & Operations Processing Center in Al Barsha

ATMs integrated to form the largest network in the UAE of over 500 ATMs & CDMs

Mobile & Online Banking integrated; enhanced functionalities & 13 payment partnersMobile & Online Banking integrated; enhanced functionalities & 13 payment partners

Completed the largest culture roll-out program in the Banking and Finance sector in theregion – ‘My Bank, Our Values’; 5,000 employees attended 107 workshops

Single Treasury system in placeCombined trading coverage to both bank’s customers

Rebranding across all branches – One bank across all channels

New Core Banking system roll-out in EBI

12/08

C B ki R ll t tI t t d dit d

01/09 Q1/09 Q2/09

L l Core-Banking Roll-out to NBD: New system online for combined entityIntegration of all support units

Integrated credit cards platform at Network International

Legal mergerEmirates Bank and NBD legally merge into one entity

Introduction




Conclusion

24

Integration : Key success factors

Identify & communicate merger benefits early in the process

Develop a robust Integration Roadmap

Dedicated team in place before transaction closes

Measure & review constantly what you plan to achieve

Sense of urgency is critical

Communicate

Focus on people

Maintain business momentumMaintain business momentum

End is not concluding the transaction – it is delivering the value

25

Delivering Synergies : A closer look at post merger integration

Economy & Finance

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