Chapter 5a Global mergers and acquisitions

1. Chapter 5aGlobal mergers and acquisitions

2. Business development choices Business development INTERNAL SOLUTION EXTERNAL SOLUTION Ownership Partnership Acquisition Merger of equals Minority investment Joint venture Alliance Control/Integration Flexibility/Coordination/ Cooperation

3. Mergers & acquisitions • Increasingly numerous • Increasingly transnational • In nearly all industries M&As are: Why? • Pressure for globalization; need for global reach • Pressure on costs; search for economies of scale and scope • More diverse technologies and standards; need for “systemicinnovations” • Solution selling; system integration • Shorter product cycles; need to develop business fast • More segmented markets; need for developing multiple marketing competencies • Refocusing on core tasks and competencies; leads to outsourcing

4. Global mergers & acquisitions - billion $ value

5. Post merger integration • Transition • Integration • Evolution Framework for the analysis of M&As What are the benefits of the the merger/acquisition? What value do we get from it? • Strategic value • Strategic objectives • Value creation potential • Target/counterpart analysis • Fit analysis • Due diligence • Valuation • Expectations DECISION-MAKING Is the deal feasible? • Negotiation and design • Price • Financial architecture • Operational organization • Governance How much do we pay? How? How do we organize and manage? AGREEMENT How do we put the companies together? How do we work? IMPLEMENTATION

6. Problems in deciding to acquire or merge PROBLEMS IDEA • Clarity of strategic objectives • Fragmented perspectives • Lack of operational perspectives • Quality of planning process • Momentum DECISION- MAKING PROCESS ACQUISITION JUSTIFICATION • - Urgency • - Secrecy • - Personal stakes • - Pressures

7. Value creation in M&As? Value of the acquirer A Value of the acquired B Value of B minus acquisition costs STANDALONE VALUE Value coming from the acquired company Increased efficiency Learning from B Cost saving due to combined operations SYNERGY VALUE Value coming from the combination of the two companies Increased revenues due to joint marketing andproducts complementarily Increased profitability from joint innovation

8. What factors make an acquisition justified? • Clarityof strategic purpose • A shared set of priorities among key deciders • Adetailed understanding of the source of benefits • Close attention to the risks and how to manage them • Ashared sense of time and timing • An operating-led acquisition team for each acquisition

9. Due diligence

10. Cultural due diligence 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Concentratedpower Diffused power Role/process oriented Result oriented Hierarchy Group Tradition Innovation Narrow distribution of information Wide distribution of information Bureaucratic Entrepreneurial Seniority/status Performance Process oriented Action oriented Individualistic Collective

11. Cultural due diligence cont. Acquirer Acquiree Views about business objectives: o       Growth o       Profitability o       Risks o       Long/short term o       Shareholder value o       Stakeholders What to anticipate? How to deal with it? Views about competitive approaches: o       Customer orientation o       Pricing o       Importance of quality o       Importance of technology o       Ethics Ways to manage: o       Leadership style o       Trust/control o       Motivating factors Communication: o       Openness/secrecy o       Formal/informal o       Importance of personal relationships

12. Organisational due diligence Acquirer Acquiree What to anticipate? How to deal with it? STRUCTURAL DIFFERENCES: o       Centralisation/Decentralisation o       Form of organisation SYSTEMS AND PROCESSES: o       Importance of formal systems o       Sophistication of financial controls o       Quality of IT o       Importance of teamwork/ committees PERFORMANCES o       Performance-based rewards o       Career mobility o       Quality of management

13. Valuation of M&As after due diligence: a summary +/ Adjustments to standalone Standalone value as acquired +/- Synergies + Revenues synergies + Cost synergies + Financial synergies - cost of integration • Free cash flow based on: • Existing revenues - costs • Projected growth • Project costs • Given: • WACC • Terminal value • Debts • Transaction fees • + Costs • improvements: • Rationalization • Overheads • Reduction • Lay-offs • + Additional • revenues coming from: • Quality improvement • New team • - Additional capitaladvertising, R&D expenditures • Contracts termination • + Disposal of assets • Exceptionalexpectedcash outflow: • Litigation • Tax liabilities

14. Acquisition process flow Memorandum of understanding MOU Confidentiality agreement Outstanding issues subject to.. Letter of intent LOI Agreement Contract Pre-acquisition Due diligence Legal process Valuation Negotiation

15. PRICE SCOPE Mode of payment • Mode of valuation • Debts • What is for sale? • 100% or partial • Share or assets • Transfer of rights: • (Patent, brands, distribution agreements, licenses, contracts.) • Cash • Stocks • Conditional clauses NEGOTIATION MANAGEMENT & STAFFING (for mergers) CONFLICT RESOLUTION • Board • Positions • Decision-making • Control • Recruitment • Careers • Remuneration COVENANTS • Arbitration • Conditions for closing • Non-competitive clause • Retention of key executives • Hidden liabilities

16. Value creation for shareholders in M&As 16

17. Failure rates of M&As Kitching Booz Allen & Hamilton McKinsey Porter Mercer Group AT Kearney KPMG KPMG 1965-1970 1970-1984 1950-1984 1950-1984 1990-1995 1993-1996 1996-1998 1998-2000 Management assessment Management assessment Cost of capital Divestments of acquisitions Stock market returns Stock market returns Stock market returns Stock market returns

18. The odds are against success Potential merger results Yes Is there a sound strategy guiding the combination? No Yes No Is the combination implemented well?

19. Acquisitions go wrong for many reasons Pre-merger Post-merger Deal • Loss of key customers • Lack of trust • Sticking to theory (forced synergies) • Clash of cultures • Lack of shared vision • Failure to show results fast • Inadequate funding • Politics • Lack of strategic fit (different business logistics) • Poor due diligence • Overestimation of synergies • Empire building • Politics • Lack of leadership • Poor communication • No integration plan • Unable to reduce anxiety • Too much emphasis on costs not enough on growth • Too inward-looking • Departure of good people • Excessive premium • Bidding fever • Pressures

20. Post M&A design The “What” question (scope): Which integration plan makes most economic sense The “How” question (style): Hard: acquirer imposes Soft: build sufficient consensus on the plan to allow for a smooth execution The “When” question (speed): How fast?

21. Scope alternatives How much autonomy due to differences in culture and business context Low need for autonomy High need for autonomy Same business Same customers Same economic,social, political environmentSimilar cultures Different business Different customers Different economic,social, political environmentDifferent cultures Negative profitability Unstable/ declining market share Weak management High profitability Stable/ improving market share Strong management To what extent do the operations need integration? Low need for integration High need for integration High operational synergies Low operational synergies

22. Preservation Symbiosis Absorption Scope alternatives cont. High Difference in competitive contexts Need for organisational autonomy Low High Low Amount of operational synergies Need for interdependence

23. Scope alternativescont. Key integration tasks in preservation acquisitions Key integration tasks in symbiotic acquisitions • Keep separate • Protect existing capabilities • of the acquired firm • Slow diffusion of target’s • knowledge to the acquiring • • Start with preservation • Selective integration • • Two ways transfer of capabilities Preservation Symbiosis Best of both: Air France/KLM Facilitate innovation Example: Sony/Columbia Key integration tasks in absorption acquisitions Absorption • • Rapid and complete integration • Implement best practices • • Harness complementarities Take advantage of scale economies Example: GE Capital, Novartis

24. More detailed scope alternatives STRUCTURE OPERATIONS CULTURE The target is completely integrated within the structure of acquirer or a new integrated structure is adopted. Common operating procedures are adopted ( transfer of best practices or practices of acquirer). Common cultureis imposed or created. Absorption Example: SmithKline and Beecham The two companies are kept structurally separate. Only few reporting lines. No operational integration: only financial Reporting. Preservation Cultural differences are maintained. Example: Sony/ Columbia Symbiotic Selected operations are co-ordinated and common procedures are adopted ( transfer of best practices or practices of acquirer). Structures generally separated either legally or under a divisional form. Norms of conduct and expectations are established and revised over time to enhance cooperation andco-ordination. Example: Air France/KLM Most cross borders acquisitions belong to the symbiotic category since the majority of cross-border acquisitions are horizontal (same business) in dissimilar competitive environments.

25. The post-merger integration phases Negotiation Deal Implementation Transition phase Integration phase PMI planning (3 to 12 months) • Articulate vision for the combined company • Develop process and principles • Create transition team and leadership • Gather data (DD + cultural assessment) • Prepare a communication plan • Prioritize actions • Set integration teams and structure • Create performance milestones for each team • Look for short term wins • Reporting structure • Launch teamwork • Review, assess and implement recommended actions • Communication • Finalize integration • Finalize organisation • End/transform integration teams

26. The post-deal situation • High emotional stress and anxiety - Employees - Suppliers - Distributors - Community • Uncertainty about future direction • « Synergies » still very theoretical • Cultural divide: - Values - Mindset - Competitive and business logic - Experience • Stereotypes • Systems and processes compatibility • Personality clash

27. Transition phase • Interface: ability to understand the two cultures • Action-minded • Communication • Listener • Clarity of message • Commitment Leadership * * New sense of purpose * Mutual understanding * Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect

28. Transition phase cont. • Concrete objectives • Consistent message • to all parties • Clarity of message • Commitment * Leadership * Mutual understanding * Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect New sense of purpose

29. Transition phase cont. • Avoid cultural stereotypes • Teamwork • Data-driven • Avoid a priority (agnostic) * Leadership * New sense of purpose * * Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect Mutual understanding

30. Transition phase cont. • Cross-functional teams • Concrete agenda • Shoot for short-term wins • Customer and Operations focus • Provides process methodology • and measurement • Harness complementarities * Leadership * New sense of purpose * Mutual understanding * * Credibility and commitment * Communication * Show respect Integration teams Establishing control Strengthening the operations

31. Transition phase cont. • Straight communication • Realism • Manage by phases • Adopt best practice without • bias * Leadership * New sense of purpose * Mutual understanding * Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect

32. Integration team structure Provides direction, control, go/no go decision Integration team leadership Top 2-3 executives from each company Meets every 2 weeks HR R&D Procurement Manufacturing Operations Marketing Sales & distribution IT Finance and accounting Each team works either full time at first and or twice a week later depending upon the nature of the task. Agenda: propose concrete actions to be submitted to integration team leadership.

33. People and cultural issues in mergers and acquisitions

34. Who does what? Acquirer Acquiree Top Plan; negotiate Middle Implement Low

35. Stress and commitment cycles in a merger High Stress Commitment Low Rumor Announcement Transitionplanning Transitionimplement-ation Post-transition

36. The “merger syndrome”

37. Phaseout of products & parts complexity management Manufacturing and logistics Sales and marketing General and administrative Finance and cost Business developments Purchasing Organization Research and development 9 Nissan’s cross-functional teams Global alliance committee • Reduce SG&A costs by 20% • Reduce global head count by 21,000 • Launch 22 new models • Introduce a mini-car model by 2002 in Japan • Dispose of non-core assets • Cut automotive debt in half to $5. billion net • Reduce inventories • Cut number of suppliers in half • Reduce costs by 20% over three years • Close three assembly plants in Japan • Close two power-train plants in Japan • Improve capacity utilization in Japan from 53% in 1999 to 82% in 2002 • Reduce number of plants in Japan from seven to four by 2002 • Reduce number of platforms in Japan from 24 to 15 by 2002 • Reduce by 50% the variation in parts (due to differences in engines or destination, for example) for each model • Move to a globally integrated organization • Increase output efficiency by 20% per project • Create a worldwide corporate HQ • Create regional management committees • Empower program directors • Implement performance- oriented compensation and bonus packages,including stock options • Move to a single global agency • Reduce SG&A costs by 20% • Reduce distribution subsidiaries by 20 in Japan • Close 10% of retail outlets in Japan • Create prefecture business centers or common back offices

38. 11 Renault-Nissan cross-company teams Global alliance committee Products Components Vehicles Procurement Logistics Marketing & sales North America Marketing & sales Asia Marketing & sales Central America Marketing & sales South America Marketing & sales Europe Marketing & sales Others

39. Carlos Ghosn as a leader • Clarity of vision • Hands-on • Data-driven (No preconceived idea) • Consistent (‘Say what you think and do what you say’) • Demanding but respectful • Listening but deciding • Sets example by his own behaviour • Communicates clearly • Insists on concreteness • Insists on time factor