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May 18, 2004. Financial Executive International M&A Issues Dealing With Plan Combinations and Integration. Presenter: Len Gray 312 902 7646 len.gray@mercer.com. Agenda. Section 1 – M&A Overview Section 2 – Pre-Deal Strategy & Planning Section 3 – Due Diligence Section 4 – Integration.

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slide1

May 18, 2004

Financial Executive InternationalM&A Issues Dealing With Plan Combinations and Integration

Presenter:

Len Gray 312 902 7646 len.gray@mercer.com

agenda
Agenda
  • Section 1 – M&A Overview
  • Section 2 – Pre-Deal Strategy & Planning
  • Section 3 – Due Diligence
  • Section 4 – Integration
m a overview why they fail difficulty of addressing key employee issues
M&A OverviewWhy they fail – difficulty of addressing key employee issues

M&A integration issues vary greatly in terms of importance to the organization and difficulty to achieve…

Difficult but Less Important

Difficult and Very Important

High

Linking IT/ systems support

1

Stabilizing the organization and addressing key employee issues

Rationalizing

processes

Stabilizing and building support within the customer base

1.5

Identifying potential operational efficiencies and combining plants and/or locations effectively

2

Maximizing the advantage from accounting strategies

2.5

Not Difficult and Less Important

Not Difficult but Very Important

3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Low

High

Level of Importance

Source: Mercer, Inc.

m a overview high level process
M&A Overview High level process

Due Diligence

Do by Close Integration

Strategy and Planning

CLOSE

Human Resource Function

Leadership

Total Remuneration

Project Planning

Workforce & Staffing Alignment

Integration Planning

Sales Force

Performance Management

Compliance

Organization Engagement

Project Management

pre deal strategy planning assessing human capital issues
Pre-Deal Strategy & PlanningAssessing human capital issues

Strategy & Planning

Strategic People Implications

  • Build understanding of the deal and potential targets
  • Build organizational readiness for business transactions
  • Build Human Resource function readiness for business transactions
pre deal strategy planning merger rationale and strategic objectives

Consolidation

Geographic Expansion

Extend Product Portfolio

Add Intellectual Capital

Industry Convergence

Achieve Critical Mass

Pre-Deal Strategy & PlanningMerger rationale and strategic objectives

Strategic Objectives

Acquirer - part of industry with excess capacity - eliminates capacity, gains market share, and creates a more efficient operation

Successful company expanding geographically - operating units remain local

Acquisitions extend a company’s product line or its channel coverage

Acquisitions are used in lieu of in-house R&D to build a market position quickly

Company bets on new industry emerging and establishes a position by calling resources from existing industries w/ eroding boundaries

A company increases its size significantly to achieve minimal competitive size or to reduce the risk of “blockbuster” failure

pre deal strategy planning prioritizing critical people issues

Merger Rationale

Geographic Expansion

Added Intellectual Capital

Extended Product

Portfolio

Industry Convergence

Consolidation

Critical Mass

Critical People Issues

Business & Organizational Design

Leadership

Resourcing

Rewards

Performance Management

Cultural Integration

Organizational Engagement & Communication

Employee Relations

Employment Legal Issues

HR Organizational Infrastructure

Merger Rationale adapted from Not All Mergers Are Alike, Joseph Brower, HBR, March 2001

Pre-Deal Strategy & PlanningPrioritizing critical people issues
pre deal strategy planning build m a context

Environment

Strategy

Actions

Build understanding of business drivers the deal

Facilitate alignment of business drivers with “people issues” and the HR organization

Key steps to implement the strategy

Pre-Deal Strategy & Planning Build M&A context

Capture business leaders’ perspectives on…

Barriers

Winning

Identify major impediments to achieving success

Provide clear understanding of the outcomes of transaction

due diligence global self audit
Due DiligenceGlobal self-audit
  • Identify and resolve own issues before integrating acquisitions
  • What programs do we have, and why?
    • Systems, processes and tools
    • Cost and liabilities
    • Where (and who) is our key talent?
    • What needs to change pre and post acquisition?
    • How easy will change be?
    • How does it vary by country?
  • Too often companies think they know themselves because they know themselves in their HQ country
due diligence key topics to address
Due Diligence Key topics to address

Employment

Agreements

HR Function

Payroll & Salary

Grade Structure

Retirement &

Other Employee

Benefits

Organization

Culture

The “Deal”

Perquisites

Short-term

Incentive Comp

CIC Plans/

Parachutes

Long-term

Incentive Comp

Deferred

Compensation

due diligence three levels of thinking
Due DiligenceThree levels of thinking. . .

Liability Scale

Identify any potential “deal breakers”

  • Where each issue sits on this scale is influenced by:
    • Size of the deal
    • Risk tolerance of acquirer
    • Acquirer familiarity with specific risk

Identify factors requiring adjustment to purchase price and/or deal terms

Collect information to identify integration issues and begin planning

due diligence resolution of potential issues
Due DiligenceResolution of potential issues

Resolution of Potential Issues

Employment

Agreements

Potential Issues

  • Large/excessive severance/change in control payments (e.g., as percentage of market capitalization)
  • Informal benefit promises
  • End negotiations/ do not do deal
  • Adjust acquisition price down
  • Large number of employment agreements
  • Large severance payment multiples
  • Broad application of severance plan
  • Awareness and timing of severance (e.g., staggered terminations)
  • Adjust acquisition price down
due diligence resolution of potential issues1
Due Diligence Resolution of potential issues

Resolution of Potential Issues

Payroll & Salary

Grade Structure

Potential Issues

  • Large payroll expense
  • Awareness/integration recognition
  • Large number of Union employees
  • Complex or different salary philosophy/structure
  • Awareness/understanding of Union contracts
  • Evaluate translation into acquirer structure prior
due diligence resolution of potential issues2
Due DiligenceResolution of potential issues

Resolution of Potential Issues

Retirement &

Other Employee

Benefits

Potential Issues

  • Negotiate acquisition price and remedy compliance concerns via reps & warranties and/or indemnification
  • Negotiate with target’s actuaries; apply own assumptions
  • Unfunded or underfunded obligations
  • Inappropriate valuation assumptions
  • Noncompliance
  • Asset transfers
  • Change in control provisions
  • European Works Council
  • Review alternative approaches Negotiate acquisition price
  • Negotiate
due diligence resolution of potential issues3
Due DiligenceResolution of potential issues

Resolution of Potential Issues

Retirement &

Other Employee

Benefits

Potential Issues

  • Significant exposure to risk due to inappropriate or lack of insurance
  • Get coverage in place by closing
  • Negotiate adjustment to acquisition price
  • Review potential liability exposure. Get coverage in place by closing if appropriate
  • Benefits triggered on sale
  • Unpaid claims
  • Policy or contract lapse on change in control
due diligence resolution of potential issues4
Due DiligenceResolution of potential issues

Resolution of Potential Issues

Short-term

Incentive Comp

Potential Issues

  • Guaranteed bonus payments
  • Awareness/lower acquisition price
  • Variance in bonus targets or measures between companies
  • Variance in eligibility between companies
  • Recalibrate upon integration using buyer’s plans OR rollover the target’s plan
  • Use buyer’s eligibility and phase out/in target’s participants over time
due diligence resolution of potential issues5
Due DiligenceResolution of potential issues

Resolution of Potential Issues

Long-term

Incentive Comp

Potential Issues

  • Large number of “in the money options”
  • Include options in share price calculation / adjust price per share
  • Large number of unvested options outstanding that are “out of the money”
  • Roll current outstanding options into acquirer company plan (e.g., exchange ratio)
  • Cancel options
  • Large number of unvested options outstanding that will vest and be exercised immediately following a change in control
  • Large number of restricted shares that will vest as a result of a change in control
  • Recognize and consider lost tail value in current options when making grants to continuing employees
  • Consider making retention grants for key individuals if significant turnover risk exists
due diligence resolution of potential issues6
Due DiligenceResolution of potential issues

Resolution of Potential Issues

Deferred

Compensation

Potential Issues

  • Large deferred compensation account balances with no funding or security
  • Purchase price should reflect payout of all account balances
  • Acquiring company does not have deferred compensation plan for current participants to roll-over account balances
  • Create deferred compensation plan at target (for current participants or larger group)
  • Payout balances to participants
due diligence resolution of potential issues7
Due Diligence Resolution of potential issues

Resolution of Potential Issues

CIC Plans/

Parachutes

Potential Issues

  • Large cost exposure
  • Large number of “single trigger” change in control protections
  • Purchase price should reflect full cost of payments, including tax liability
  • Awareness/determine whether immediate turnover will be a significant issue, create need for retention strategy
  • Large number of employees with change of control gross-up provisions
  • Large number of “double trigger” changing in control arrangements
  • Awareness/potential purchase price adjustment
due diligence other executive benefits and perquisites

Benefits and Perquisites

Executive/Director’s Life Insurance

Company Car and Driver

Executive Health

Loans

Vacation & Holidays

Retiree Health

Profit sharing

Executive and Individual Retirement Promises

Long service leave and bonuses

Financial Planning

Due DiligenceOther executive benefits and perquisites

Perquisites

Note also: Director’s Compensation (often administered by Corporate Secretary, Legal Department or CEO’s office)

due diligence resolution of potential issues8
Due Diligence Resolution of potential issues

Resolution of Potential Issues

Potential Issues

Organization

Culture

  • Executive level differences – “social issues”
  • Understand own culture; “strengthen strengths”; address shortcomings before deal
  • Differences in country/geography cultures
  • Substantial differences in human capital strategy or business model (labor-intensive v. capital-intensive)
  • Substantial differences in employee relations history and management/employee attitudes toward unions
  • Differences in attitudes and behaviors regarding achievement, environment, perspective, power & risk
  • Build employee and HR readiness for deals
  • Follow same approach for target DD as for self-analysis
  • Differences in expectations regarding transaction
  • Achieve alignment through change communication
due diligence resolution of potential issues9
Due Diligence Resolution of potential issues

Resolution of Potential Issues

HR Function

Potential Issues

  • Multiple, fragmented systems
  • Unreliable employee data
  • Plan administration compliance issues Significant difference in governance, service delivery model or HR competencies
  • Poor relationship with management, employees
  • No transaction experience
  • Ineffective ability to execute
  • Unlikely an HR operations issues would stop the deal or have a significant impact on price (possible exception: extreme non-compliance that cannot be quickly fixed)
  • Differences in staffing levels, processes and structure
  • Address issues in integration planning and execution
integration project planning value from an acquisition
Integration Project Planning Value from an acquisition

Project Planning

The value realized from an acquisition is directly related to the success of the execution of the integration – the more successful, the more value; the less successful, the less value

  • Identify internal/external team
  • Build transaction context
integration project planning elements of integration
Integration Project PlanningElements of integration

Due Diligence

Do by Close Integration

Strategy and Planning

CLOSE

Human Resource Function

Leadership

Total Remuneration

Project Planning

Workforce & Staffing Alignment

Integration Planning

Sales Force

Integration

Performance Management

Compliance

Organization Engagement

Project Management

integration project planning key steps
Integration Project Planning Key steps

Integration

Pre-deal

Doing the deal

Know the process

Know the target

Assess situation

Develop project charters

Prioritize key areas

Prepare your team

Identify distinct projects

Create detailed plan

integration integration process map
Integration Integration process map

DO BY CLOSE

CLOSE

IMMEDIATE INTEGRATION

EXTENDED INTEGRATION

  • Design HR structure
  • Identify HR staffing
  • Develop technology transition / integration
  • Make insourcing / outsourcing / cosourcing decisions

F

O

R

M

P

R

O

J

E

C

T

T

E

A

M

S

Human Resources Function

Leadership

  • Identify leadership behaviors
  • Select/deselect leadership
  • Develop assessment and feedback
  • Develop transition arrangements

Total Remuneration

  • Develop framework and philosophy
  • Review compensation and benefits with gap analysis
  • Design / Implement compensation and benefits program

Workforce and Staffing Alignment

  • Develop understanding of target and current state
  • Perform initial employee selection / deselection
  • Develop retention / transition strategy
  • Develop performance management system
  • Perform customer analysis
  • Perform sales analysis
  • Design new sales program
  • Assess customer service / programs

Sales Force

Performance Management

  • Identify desired behaviors and achievements
  • Assess desired behaviors and achievements
  • Reinforce desired behaviors and achievements

Compliance

  • Assess legal compliance – retirement, employment practices / contracts
  • Review HR policies and programs
  • Address employee relations issues – formal and informal
  • Review communication strategy and materials for key messages
  • Conduct preliminary assessment of communications channels
  • Develop media and audience matches
  • Specific plans – pre-close, “first 100 days”, longer term
  • Characterize current and desired cultures
  • Identify cultural gaps/differences
  • Understand business implications of cultural differences
  • Identify workout strategies to join cultures by engaging employees
  • Execute engagement events

Organizational Engagement

  • Resolve tension between results, time, resources
  • Prioritization of issues/challenges
  • Integrated project plan and detailed plans for specific tracks
  • Track execution and achievement of goals
  • Capture learnings for continuous improvement

ProjectManagement

integration total remuneration
Integration Total remuneration

Total Remuneration

  • Main concerns
  • How do we retain and motivate key people in all parts of the merged organization?
  • What are the appropriate short and long-term reward packages which will help to achieve business and cultural strategic goals?
  • Base and variable compensation programs?
  • Retirement programs?
  • Health and Group programs?
  • Expatriate programs?
  • Miscellaneous programs?
integration total remuneration do by close
Integration Total remuneration – do by close
  • Stock purchase – often nothing, everything comes with the deal, but not always. Need employee communication strategy and integration plan
  • Asset purchase:
    • works council consultation/negotiation
    • payroll (including expatriate administration)
    • employment contracts
    • insured contracts/ risk assessment
    • retirement plans (assets, liabilities, administration)
    • HR systems, tools and processes
    • HR function
    • transition services agreement (not available everywhere)
    • employee communications
    • integration plan
integration total remuneration close
Integration Total remuneration – close
  • Global roll-out of employee communications
  • Due diligence on all transition activities
  • Manage any “delayed” closings as effectively as possible
  • Don’t let up on transition project management
integration total remuneration post close
Integration Total remuneration – post close
  • A thorough due diligence makes integration easy, but reality is that HR rarely has all the information needed, or sufficient time to have developed a full integration strategy, so:
    • Integrate rapidly, or don’t integrate at all!
    • Key integration challenge: harmonizing benefits without increasing costs

Develop

Perform

Develop

a global compensation and benefits strategy

gap analysis between current practice(s) and strategy

implementation plan (including grandfathering of existing programs, but keep grandfathering to a minimum

m a overview high level process1
M&A Overview High level process

Due Diligence

Do by Close Integration

Strategy and Planning

CLOSE

Human Resource Function

Leadership

Total Remuneration

Project Planning

Workforce & Staffing Alignment

Integration Planning

Sales Force

Performance Management

Compliance

Organization Engagement

Project Management