Post-Merger integration – How to integrate new companies into the spare part process Jukka Pihamaa Vice President, Supply Chain Service Business Line

Contents

Valmet in brief

Merging Company Structure and Organization

Maintaining key Expertise

Impact on Master Data and System Landscape

Lessons learned from post-merger integrations

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Post-Merger integration – How to integrate new companies into the spare part process

Valmet in Brief Committed to moving our customers’ performance forward

Converting renewable resources into sustainable results

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End- products

Services

Automation

Technologies

Raw materials

Customer industries

Heat Electricity Chem pulp Diss pulp Mech pulp Paper Board Tissue

Biogas Biofuels Biochemicals New paper grades Biomaterials

Energy production Biofuel refining Pulp Paper

Waste Recycled paper

Pulp

Agro Wood

Energy Paper

Full scope offering for the pulp and paper industry

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6 7

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4

9

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1 Wood handling

2 Heat and power production

3 Chemical pulping

4 Chemical recovery

5 Pulp drying

6 Recycled fiber

7 Mechanical fiber

8 Stock preparation

9 Board and paper making

10 Tissue making

Automation • Distributed Control System

(DCS) • Performance solutions • Quality Control System (QCS) • Profilers • Analyzers and measurements • Industrial internet solutions • Automation services • Process simulators • Safety systems and solutions

Services • Mill and plant improvements • Spare and wear parts • Paper machine clothing

and filter fabrics • Roll services • Services for evaporation

plants, power and recovery boilers

• Services for environmental equipment

Technologies

Our offering for energy industry and biotechnologies

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Automation • Distributed Control System

(DCS) • Performance solutions • Analyzers and

measurements • Industrial internet solutions • Automation services

Services • Plant improvements • Rebuilds • Performance services • Services for environmental

equipment • Components and spare parts • Training

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2

3

4 6

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1 Fuel handling

2 Gasification

3 Boiler and flue gas cleaning

4 Bio-oil production

5 Modularized power plants

6 Prehydrolysis For biofuels, biomaterials and biochemicals, and bio coal production

Technologies

Key figures 2015

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Net sales by area Net sales by business line Orders received EUR 2,878 million Net sales EUR 2,928 million

EBITA before NRI1 EUR 182 million EBITA margin (before NRI1) 6.2% Employees 12,306 Market position #1-2 Services #1-3 Pulp & paper automation #1-2 Pulp #1-3 Energy #1 Paper, board, tissue

38%

8% 31%

23%

ServicesAutomationPulp and EnergyPaper

21%

11%

45%

10%

13%

North AmericaSouth AmericaEMEAChinaAsia-Pacific

1) NRI = non-recurring items Stable business = Services and Automation business lines Capital business = Pulp and Energy, and Paper business lines

OEM Services to a Wide Machinery Base Worldwide

Valmet offers a full range of services regardless of the original supplier of the equipment As a result of acquisitions and mergers, Valmet has a wide technology base to provide and develop OEM services further

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Ahlström Carcano

Dominion

Jylhävaara

Wärtsilä

Pacific Mitsubishi Paper Machinery

Sunds Defibrator Appleton Brunnschweiler

Wyesco

Kvaerner Metso

Valmet Beloit Tampella Sandusky Walmsley

KMW Kone Roll Handling Tamfelt Grabitech

Nilsen Engineering

Jylhäraisio Pinaltek Enerdry

Honeycomb

Fabco

Götaverken

Bender

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Post-Merger integration – How to integrate new companies into the spare part process

Mergers and Acquisition's

Justifications: The most used word in M&A is synergy - Strategic fit Growth - opportunity to grow market share without having to really earn it by doing the work Increase Supply Chain Pricing Power - vertical merger Eliminate Competition

Results: Studies shows about 60% of mergers destroy shareholders wealth

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Justification versus results

Daimler-Chrysler merger decreased market value by

$60B

Ebay deal on Skype $2.6B, four years later to be sold

at $1.9B

Bank of America’s acquisition of Countrywide in 2008 for $2.5B

cost more than $40B due to financial losses, legal costs and

associated expenses. AOL Time Warner $54B charge against earnings

Drivers of Successful Post-Merger Integration

Coherent Integrations Strategy “Mergers of equals” versus acquisition

Decisions should not be made on the basis of imitating the status quo

Strong Integration Team Full-time function with ample resources and strong leadership

Balanced with members from both companies

Communication From senior management, constant and coherent

Speed of Implementation Slow speed can be sign of uncertainty and hamper innovation

Aligned Measurements Both performance and integration result measures

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“A strong PMI process will bring home-run even for problems in design”

Marc J Epstein studies

Merge of equals

Fitting smaller completely in

existing

Maintain autonomy

Maintaining Key Expertise

Right people on board – Change agents – Able to confront brutal facts – Capable to deliver – More important than strategic vision or

direction

Team will stay motivated even if direction will change – Persons motivated by direction doesn’t

stay on board if direction will change

Right people will deliver results even if direction is sometimes a bit lost

Resolve the power and people issues quickly

Take it as an opportunity to create something good for existing organization also

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First Who…..Then What

Merging Company Structure and Organization

1. Manage the integration through a "Decision Drumbeat“ – Stick with planned time schedules – Quick decision making to keep the momentum

2. Focus on value creation – What’s important from customer service point of view – Look for new business opportunities – merge capabilities

3. Achieve economies of scale – Target: Integrated supply base with merging physical network – Equal opportunity to contribute

4. Commit to one culture - Commit to one way of working – Talk about it – Create an organizational structure and decision-making principles that are

consistent with the desired culture – Customers value consistency (hide the complexity)

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Key Success Factors for successful spare parts integration

KPI follow-up

Merging Company Structure and Organization

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Execution time line for spare parts supply chain

Pre-Close First 3 months First 1-2 years

• Establish tools and teams • Identify change

agents • Assess current

capabilities • Estimate potential • Create plans,

KPIs and targets

• Confront the facts • Compare

contracts and pricelist – obtain best / cherry pick

• Inventory rationalization

• Merge commodity strategy teams

• System integration

• Integrate processes

• Execute product re-designs

• Execute sourcing strategies

Target state

• Integrated purchasing process, systems and teams

• Common commodity strategy

• Vendor management harmonized

Common identified problems

Common identified problems: 1. Diminished product/service quality (53 percent) 2. Order fill rate problems (52 percent) 3. Stock outs (46 percent) 4. Inventory buildup (44 percent) 5. Increased supply disruptions (36 percent)

Other highlights from the Accenture study: – The limited involvement of procurement and supply chain organizations during the pre-

closing (21 percent) – Focused only on cost savings during merger-integration efforts, at the expense of other

metrics such as quality, inventory turns, supply disruption, and order fill rates (54 percent)

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Source: Accenture study (interview of 154 Supply Chain professionals)

Master Data and Documentation How much effort should be invested to re-

organize master data How much should I invest to eliminate

duplicates? – Life cycle approach – Risk vs. value – Customer commitment – ERP/PDM capabilities

How to merge part numbers (material codes)? – Pre-fix / post-fix

Electronic archives – Impact on PLM/PDM systems

Physical archives

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Valmet example of Post-Merger integration

VALMET IPR Group in NA Scope of Support

Customer CD / DVD Creation – 240 projects completed

• Customer Information & Codes • Item Masters • Bill of Materials • Order Records (Paper & Fiber) From Multiple Sources • Drawings and Specs. - BEL-CADD, AutoCAD, CADkey , Catia and etc. • Machine Manuals • Miscellaneous

• Standards, Safety, etc. • R&D, Field Service reports • Technical Publications, etc.

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IPR Relocation & Management Example of Consolidation of documentation

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Start… ….finish

After approximately 2 years and countless hours of work….

2016

Common mistakes in Supply chain integrations

Choosing the wrong metrics Coverage; in minimum financial, supply and delivery performance Data readily available from both companies

– Availability higher priority than finding a perfect metric

Verify the differences in definition before establishment of target Financial metric should exclude overhead component

– Could lead to sub-optimization between organization rather than looking for greatest value of both together

Inventory turns metric support also common merge target of freeing resources and net working capital

Delivery performance metric – Set to avoid the common issue of supply disruptions from happening – Avoid metric which sets flexibility against efficiency

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Lessons learned

Common mistakes in Supply chain integrations

Trying to consolidate systems too soon Often counter productive Overwhelming task in the beginning

Consider common database first – Allows time for learning of business and data structures – Becomes repository for documenting the differences – Will address transactional discrepancies (e.g. duplicate) – Faster solution

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Lessons learned

A

B

Common A+B

• Planning • Mat. Mgt • Delivery

performance monitoring

• Reporting

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Lessons learned

Common mistakes in Supply chain integrations

The changes should managed via roadmap which is broken down into a series of projects lasting three to four months each to achieve tangible and visible results frequently

Defining the end state but not the steps to get there Typical approach Risk/outcome

Replace existing systems and processes all at once to achieve that desired state

Increased risk of disruptions

Focus on short terms savings (typically in integrations lead by “numbers only”)

Neglecting long term productivity gains. Don’t allow learning to happen between organizations.

Shortage of investments/expenditure earmarked for integration

Integration will require resources before it will free up resources

Focus on transactional execution

Planning processes yield long term sustainable savings

Energy level will drop soon after closing the deal but expectation will remain

Uncoordinated initiatives tend to sprout in different parts of the organization because of the pressure to quickly create financial benefits

Common mistakes in Supply chain integrations

Failing to consider the degree of disruption Consider this:

– As a buyer/supply chain professional: What is your expectation when you hear that your vendor is merging? How often have you seen positive outcome for delivery capability? Are you more or less likely to change vendor in such situation?

The initial projects should be focused on delivering better customer value than before merge

Keep customer posted with frequent communication Organize a proper feedback channel for customer already from the start Focused on long-term productivity gains instead of short-term cost savings

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Lessons learned

According to Robert Holthausen, a professor of accounting and finance and academic director of mergers and acquisitions at the Wharton School of Business, probably 60 percent—and some estimates are as high as 80 percent—of acquisitions fail to create value for the acquirer.