Post Merger Integration: Keys to Success

Financial Planning & Analysis for CPG

Chicago, May 23 – 24, 2012

Post Merger Integration of CPG Companies

By Anders Stubkjaer

President, AS Consulting Group

This presentation is solely for the use of conference participants. No part of it may be circulated, quoted or reproduced for distribution outside the participants’ organization without prior written approval from AS Consulting Group. This material was used by AS Consulting Group during an oral presentation; it is not a complete record of the discussion

AS Consulting Group

© AS Consulting Group

Anders Stubkjaer Background

· President of AS Consulting Group· Focus on profitability improvements, acquisition integrations and turnarounds

· Mix of line management jobs and consulting experiences· 14 years as CFO and division finance roles in public, family owned and private

equity sponsored companies· Recently spent 3 years as CFO / COO completing dramatic turnaround

· 10 years as management consultant

· Extensive acquisition experience· Acquired over 20 companies for public and private equity sponsored companies· Integrated over 15 companies – 4 largest were consumer products companies

· Involved in over $300 M of annual profit improvements and acquisition synergies

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Observations:

· Most buyers pay a premium over the stand alone value of the selling company· Synergies are required to justify

purchase price

· Synergy opportunities are real, but too often the synergies are not implemented or is offset by other events

· When combined with a business practices review of both the buyer and seller organizations, the total profit improvements can often be well larger than the pure integration synergies· The extra amount adds significant

value to the buyer

The Post Merger Integration Is Critical To The Success Of An Acquisition

Value Creation from Improving Margins

Value Purchase ValueRevenue Margin $ @ 7 Mult Price to Buyer

500 6% 30 210 250 (40) 500 9% 45 315 250 65 500 12% 60 420 250 170

EBITDA

CPG Merger Integration – Examples of Results

Examples Revenue Projected Actual Act %#1 330 20 35 11%#2 225 8 6 3%#3 500 25 30 6%#4 700 50 75 11%

Profit Improvements

Target improvements at 4 – 6% of the acquired revenue


Keys To Integration Success

1. Start integration process before closing

2. Focus on running the core businesses with limited distractions

3. Dedicated focus on integration effort

4. Integration teams develop targets and project schedules

5. Keep the customers happy

6. Make culture and senior people decisions early

7. Go beyond traditional integration savings

8. Track implementation


Observations:

· In due diligence phase, ask for more information than is strictly needed to value the company, but which is useful in preparing for the integration

· Employee communication in both buyer and seller organizations is needed immediately following announcement of the deal. Communication assures the employees that a fair process will be involved in integrating the companies

· Use period until closing to get organized· Determine integration teams and

preliminary members· Involve larger group in understanding

strategy for the deal and synergy analysis used for valuing the deal

Start Integration Process Before Closing

Integration Team - Example


Observations:

· Inattention to the core businesses can quickly cause profitability to deteriorate· Many small decisions involving

management teams add up quickly· Integration is disruptive no matter how

well it is executed. Identify disruptions and how to handle them.

· Senior managers normally part of the integration savings. Keep management teams motivated to focus on core business with incentive programs

· Until a function is integrated each leader must be empowered to make day to day decisions as in the past without second guessing by the other leader or by the integration teams. Decisions on hold create more issues than slightly wrong decisions

Focus On Running The Core Businesses With Limited Distractions

Cost of Distraction - Example

Buyer Acquisition CombinedRevenue 1,000 400 1,400 Growth Reduction

% 1% 3%$ 10 12 22

Profit on growth reduction 4 5 9

Pricing softness 0.5% 2%Loss on pricing softness 5 8 13

Total Profit Impact 9 13 22 % of Acqusition Revenue 2% 3% 5%


Observations:

· Integration is separate project – not an additional part of everyone’s job

· Appoint dedicated integration leader and backfill prior position

· Dedicate financial person to assist in analyses and track implementation progress

· Bring in extra help· Process expertise to keep project on track· Functional expertise to help determine best

solutions (e.g. supply chain) or implement solutions (e.g. IT)

· Best practices expertise to improve beyond consolidation savings

· CEO / President must show personal support for / involvement in the integration process. Sometimes they have already moved on to the next hot project without appreciation of the integration scope

Dedicated Focus On Integration Effort

Team Budget - Example


Observations:

· Teams will have members from both companies

· Acquisition assumption synergies are reviewed / validated / modified by each team without a detailed analysis. This is used to set targets for each team.

· Teams develop more detailed project schedule with resource requirements and expense budgets

· More detailed analysis will invalidate or reduce certain synergies and increase others

· Analyses may be less thorough than normal for the size of the decision. However, better to get 80% now and move to regular business status than 100% next year

· Once decisions have been made, implementation plans gets developed, communicated and progress gets tracked

Integration Teams Develop Targets And Project Schedules

Project Timeframe - Example


Keep The Customers Happy

· Customers view acquisitions as warning signs for trouble based on their past experience· Supply disruptions (system conversions, facility consolidations)· Communication mistakes as long term links with sales reps, CSRs and plant personnel are

broken· Competitors use the acquisition as a door opener for them· As a result, customers often use the acquisition as a reason for a supplier review

· Customers’ integration concerns must be addressed by communication, including visits by the CEO / President / Sales Management and visits by integration team members· Communicate early in process and as major events happen· Visits can be used to not just calm the customers but as senior sales calls to increase

business· Don’t forget to also communicate to the buyer’s customers and to also visit some

representative medium sized accounts· Integration and growth opportunities will be enhanced by understanding what the customers view

as both companies’ strengths and weaknesses and understanding how their purchasing process works· E.g. customer may be looking for supply chain assistance not previously offered· Ask customers how they would like to get serviced

· Cross sell opportunities often widely overestimated· Ability of sales reps to sell multiple lines also often widely overestimated


Make Culture And People Decisions Early

· Cultures are frequently different between the two companies. · Unless acquisition is used as a way to change the buyer’s culture, the buyer’s culture will

prevail. Unrealistic to maintain two separate cultures for any integrated functions no matter how attractive it looks on paper

· Create top level organization structures early in the process· Determine which functions should be integrated, which not, which are TBD· Determine which administrative locations to integrate into· Fill the positions

· Buyer’s senior management team will normally prevail due to already fitting the culture, working together and located in integrating location.

· Unless buyer is looking to upgrade a position or seller has an obvious star manager, don’t spend a lot of effort on analyzing who should run the combined function

· Create stay bonus programs for those critical in the transition period· Communicate organizational decisions early.

· Better to know the future than hang in suspense· Mid-level management and lower positions can normally not be determined until further into the

integration process with many more seller employees continuing to work for the combined company.

· Remove the nay-sayers quickly. Listen to the people raising valid practical issues. Sometimes it is difficult to differentiate between the two.


Go Beyond Traditional Integration Savings

Observations:

· Profit improvements from a deeper business process review are often larger than the traditional consolidation synergies

· Supply Chain example:· Both companies will typically have multiple warehouses

and supply to an overlapping customer base. Weight per cube will often vary.

· Consolidating smaller warehouses into larger warehouses will provide some warehouse savings

· A full supply chain logistics study may reveal that neither company have warehouses located in the right locations and that the optimal combined company network will be different from either individual optimal network. Network studies can become very complex including reviewing sensitivities to future diesel prices and customer going from store to CDC deliveries

· Savings can be very large. In one case, the new combined supply chain costs was less than the buyer’s standalone prior cost due to moving to different warehouse locations and the light weight acquired products could nearly ride for free on trucks that was maxed out by weight constraints for the buyer’s products

Optimal Network - Example


Other Functional Tips

· IT integration is critical· IT is often a major synergy area and a facilitator to achieve supply chain and other synergies· Conversions efforts are often underestimated resulting in supply chain / customer service

disruptions · Success more likely if

· Changing company processes to fit the software process without customization· Detailed review of data being converted

· Manufacturing consolidation should include improved manufacturing processes and impact on supply chain costs· Often the savings from moving production to a more efficient plant can mostly be achieved

in the existing plant by adopting the same processes as in the target plant· Mixing two types of manufacturing in one plant may look good on paper, but not work nearly

as well in practice

· Finance must quickly establish tracking mechanisms· Standard reports, dashboards, account profitability, pricing changes, cost changes· Cost plus pricing organizations in danger of giving away the synergy savings

· Be selective in integrating sales, marketing and R&D functions. May integrate for some accounts and product lines and not for others.


FP&A Should Be Included In The Integration Teams

· Get to understand the new business, so it is easier to spot any problem trends early

· Assist developing integration budgets

· Question assumptions used by integration teams

· Perform financial analyses of profit improvements under review

· Expand the number of options under consideration

· Summarize synergies and other improvements. Provide reasonableness checks on savings and timeframes – up or down depending on culture and team leaders

· Provide realistic forecast of the acquired business as acquired staff often less likely to provide bad news

· Track implementation progress monthly in the beginning and quarterly later on.

Excellent learning experience for the FP&A staff


Contact Information

Anders Stubkjaer

[email protected]

847-778-2477 Cell .

847-496-4385 Office

www.ASConsultingGroup.com

mailto:[email protected]

http://www.asconsultinggroup.com/

Post Merger Integration: Keys to Success

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