AEB.Safeguarding Shareholder Value Role of Board in M&A Activity

Post-Merger Integration as an Instrument for
Improving M&A Efficiency
Paul J. Ostling
Association of European Business
Safeguarding Shareholder Value
Role of Board in M&A Activity
26 May 2010

PHOENIX Neftegaz Services, 2009
A Smart Company Carefully:
• Plans for the outcomes it expects
• Creates metrics and measures to judge success and failure
• Monitors every step of the process
• Holds everyone accountable
Otherwise, we suffer “value leakage”
2

It’s ultimately the Board’s
responsibility and role in it’s capacity of
“strategic management oversight”
and “approval of major transactions”
which justifies and mandates
Board involvement in M&A activities
3

M&A 2007:
4
Approx. $800 Billion
Approx. 7000 “serious” deals
But STATISTICS SHOW
1/3 Outright were Failures
1/3 Missed economic & productivity
goals but “survived”
ONLY 1/3 MEET EXPECTATIONS
FOR SYNERGY AND VALUE ADDITION!!

In the USA
• 60% of all mergers below $1 million go unreported
• At best 50% of all M&A transactions “succeed”
• Failure rate of mergers is equal to the divorce rate in the USA
-- Most Fail to Achieve Original Objective
5

Studies demonstrate that, on average,
M&A consistently benefits the TARGET’S (ACQUIRED
COMPANY’S) shareholders, but
NOT the acquiring company’s shareholders!
6

On Average, M&A leads to NO GAIN or slight LOSS in
both stock price and profit to the purchasing
company. But the stock price to the ACQUIRED
FIRM gains by an average of between 20% and 30%
(TAKE THE MONEY AND RUN!!)
7

If Some M&A Creates Value But
Most Does Not,
How Do We Measure Value?
• Return on Investment should exceed the cost of capital for investment
(ROIC)
• What returns on investment are hoped for?
- Cash flow
- Market Capitalization/Enterprise Value
- Synergies in operation
- Market Share or Entry
8

Critical Strategic Analyses for the Board
BEFORE You Commit to the Deal:
• Growing vs. Shrinking
• Building vs. Buying
• Keeping vs. Selling
• Integrating vs. Managing Separately
9

Question Number 1
Is it a MERGER?
Or…
Is it an Acquisition?
10

The Ultimate “Merger”
1986
Sperry Rand (Computers, Defense Contractor)
+
Burroughs (Computers, Info Tech)
= “UNISYS”
A New Brand (but had a “so-so” business after the deal)
11

The Classic “Screw Up” (Mistake)
1998
Exxon + Mobil =
Exxon Mobil
Was described as a “Merger”, but it was really a “take over” acquisition.
Labeling is very important!
12

Maybe a better example:
British Petroleum (BP)+Amoco
It was “called” a merger, but everyone understood the truth quickly, when no
one from Amoco was really on the Management Board after 6 months.
So after 6 months, everyone understood the game; and, BP acted humanely
(kindly)
13

What is the Problem with
“Mis-Labeling”?
• The people inside are confused and de-motivated…
“you promised us that we would be a happy couple, and now you
do not love me. So, why should I help you?”
• Wasted time, effort and money. Why?
• Loss of credibility and clarity. Why?
It is better to pursue merger targets and synergies
RUTHLESSLY and not “pretend”
14

Mergers Can Be Traumatic
• Job loss
• Impact on Health, Increased Stress
• Absenteeism, Decline in Productivity
• Decrease in loyalty
All of these hurt people and cost money. Lost Money =
Merger Failure!!
15

Merger Types/Issues
16
I. TONE II. FOCUS III. REGULATION
Friendly Horizontal
(combining competitors)
Securities
Hostile Vertical
(supply chain
consolidation)
Anti-Monopoly
Conglomerate
(diversification)
Security
(National Interests)
“State Champions”

Does Every M&A Do PMI?
NO!!!
• Financial Culture: Like KKR – add value by imposing superior, top down
management strategies in a short period of time, because you plan to
“flip” the asset (treat the acquired company like “stock” for re-sale)
• Strategic Culture: Like GE – each acquired company is made a member of
the “corporate family”. Two way enhancement is expected and planned.
Real integration is a key success factor. The acquired parts may lose their
separate identity
The Board must force management to understand the
real objective
17

Post-Merger Integration (“PMI”)
The “art” of combining two or more companies (not just on paper, but in
reality) after they have come under common ownership.
The combining of two or more companies elements that, will enable them to
function as ONE
18

• PMI = Change Management
• (Creating “the Burning Platform”)
No One REALLY Wants to “Change” Unless
They are Forced To
Therefore, You must “light the fire”
19

An M&A Plan
1. Managing the Transaction Stages (Strategic Planning; Target Search;
Corporate Development/Finance; Target Selection; Initial Contact/NDA;
Negotiation and Agreements; Due Diligence; Establish KPI’s; Regulatory
Processes; Deal Execution; Post- Merger Integration)
2. Assesing Key Target People (“taking hostages”)
3. Preparing Stakeholder Communications
4. Value Preservation Plan
5. Preparing for Integration (PMI Plan)
21

An M&A Plan (continuation)
• 6. Managing the “Transition Stage” (between announcement and
execution)
• 7. Installing and Empowering the PMI Team
• 8. Communicate, Communicate, Communicate
• 9. Execute, Execute, Execute
• 10. Monitor, Measure, Reward
22

PMI Can Be Used Other Than for Private and
Publicly Traded Companies; and, Other Than
for M&A’s:
• Governmental entities
• Not-for-profit
• Joint Ventures
• Strategic Alliances
• Partial Acquisitions
Major change management initiatives require PMI
tactics
23

A Word About Due Diligence
A Merger is like buying a second-hand (used) car. We try to do our
homework (“due diligence”), but the pre-acquisition analyses never tells
us all we need to know about how the company was run. It is like kicking
the tires, looking under the hood, and driving the car around the block.
You will have a tough time seeing things about the car that the seller does
not want you to see.”
Price Pritchett
After the Merger, 1997
24

Creating An Engine for Acquisition
A smart, acquisitive company makes M&A and PMI a permanent team
function on the organization chart. This company is ALWAYS creating
“products” that will “win” when they are evaluated against the systems and
processes of another company that it might merge with, or acquire, or be
acquired by (culture, vision, people process, production and quality,
information and financial systems, supply chain management, customer
relations management, etc.)
25

Nearly always, when a company has a strong engine for acquisition (i.e., it
has something to “sell” during PMI), the parts of that engine will be the
“winners” during the integration process. A strong, “built-to-last”
corporate culture always dominates the “NEWCO” in the long run. And,
this can “save” the entire M&A event
26
Creating An Engine for Acquisition

Smart Elements of a PMI Process
1. Membership from both sides
2. “Teambuilding” for the teams/rules of behavior
3. Devote adequate human and financial resources to PMI (It is like
CAPEX)
4. Recognize the difference between the “quick fix” vs. “long term”
solutions (you need some of each in good PMI)
5. Over-Communicate and CASCADE everything
6. Make decisions before your scheduled date
27

Smart Elements of a PMI Process
7. Transparency is always a better answer – the answer you create and
share will almost always be better than what people will “imagine” if
you do not communicate
8. Vision, Values and Culture ARE real and material systems, and cannot
be ignored
9. No one side can or should win every decision
10. Take on the hardest decisions EARLY and with aggression, tough
choices only get tougher
28

Elements of a Smart PMI Plan
1. Strategy Development and Re-Check (from the Vision, right through to
the “Balanced Scorecard” and Key Performance Indicators)
2. HR & People Management (Strategic Choices; Leadership; Right Sizing;
Attract; Retain; Reward; Develop)
3. Keeping your customers (tough choices)
4. Selecting/Keeping the Supply Chain
5. Maintaining/Restructuring Production, Technology, Methodology &
Quality
6. Selecting/Building Systems & Processes – trench warfare of M&A
29

Elements of a Smart PMI Plan
7. Managing Key Stakeholders (regulators, shareholders, media,
competitors, “towns and countries”, retirees/pensioners, suppliers,
employees)
8. Developing a strategy and viewpoint on “how much integration”; and
“how much centralization”; and “how much shared services”
9. If you think you are communicating “too much”, you are probably not
communicating enough – communications strategies are key success
factors in PMI
10. You always lose more people than you think you will, so plan
accordingly, and do not expect that you can or should save “everyone”
30

Common Mistakes
• If someone is an “enemy” of change, you should probably kill them –
the sooner, the better
• If you do not have an outstanding team of M&A experts inside, then go
hire them – you will pay much more from a bad plan or bad advice
• Take on the toughest jobs, the dirtiest jobs first –delay only makes
everything worse
• If you are not mindful of your people, and you do not make good
decisions, they eventually HURT you – nothing is harder to find and fix
than someone standing at his or her post, smiling, but doing nothing
31

Common Mistakes
• Plan, plan, plan
• Execute, execute, execute
• Reward your PMI team’s PMI success – it is a real, “day” job
32

AEB.Safeguarding Shareholder Value Role of Board in M&A Activity

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