Post-Merger Integration as an
Instrument for Improving M&A
Efficiency
Paul J. Ostling
Finance Academy
Under the Russian Federation
14 February 2008
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MERGER…
A combination of 2 corporations,
in which only 1 corporation survives
There are many types of
“Mergers & acquisitions”; E.g.:
• Acquiring “assets only” (somebody has a
“problem”
• Acquiring “assets & liabilities” (the classic
“corporate marriage”)
• “Reverse Triangular Merger” (the acquired
company has a “better brand”)
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Classic in the CIS:
“The Roll-Up”
In a market with a disaggregated (many
small players) industry; where the
disaggregated entities are sub-optimized
standing alone;
and/or where there are efficiencies of
scale available; and/or where reductions of
duplication will increase margins
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Question Number 1
Is it a MERGER?
Or…
Is it an Acquisition?
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The Ultimate “Merger”
1986
Sperry Rand (Computers, Defense Contractor)
+
Burroughs (Computers, Info Tech)
= “UNISYS”
A New Brand (but had a “so-so” business)
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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!
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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)
What is the Problem with
“Mis-Labeling”?
• The people inside are confused and demotivated…
“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?
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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!!
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M&A Last Year
Approx. $800 Billion
Approx. 7000 serious deals
But STATISTICS SHOW
1/3 Outright Failure
1/3 Miss economic & productivity
goals but “survive”
ONLY 1/3 MEET EXPECTATIONS
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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
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Studies demonstrate that, on average,
M&A consistently benefit the
TARGET’S (ACQUIRED
COMPANY”S) shareholders, but
NOT the acquiring company’s
shareholders!
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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!!)
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If Some M&A Creates Value But
Most Do 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
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Critical Strategic Analyses
BEFORE You Commit to the Deal:
•
•
•
•
Growing vs. Shrinking
Building vs. Buying
Keeping vs. Selling
Integrating vs. Managing Separately
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Merger Types/Issues
TONE
FOCUS
REGULATION
Friendly
Horizontal
Securities
(combining competitors)
Hostile
Vertical
Anti-Monopoly
(supply chain consolidation)
Conglomerate
Security
(diversification)
“State
Champions”
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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”
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; PostMerger Integration)
2. Assesing Key Target People (“taking hostages”)
3. Preparing Stakeholder Communications
4. Value Preservation Plan
5. Preparing for Integration (PMI Plan)
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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
Does Every M&A Do PMI?
NO!!!
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• 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
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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
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PMI = Change Management
(Creating “the Burning Platform”)
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PMI Can Be Used Other Than for
Companies, and Other Than for M&A’s:
•
•
•
•
•
Governmental entities
Not-for-profit
Joint Ventures
Strategic Alliances
Partial Acquisitions
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We will not talk about today
Corporate Finance; Securities and Corporation
Law Process (notices, proxies, tenders,
shareholder rights, etc.); Negotiation of Deals;
etc.
TODAY, WE ASSUME A DEAL IS AGREED
BETWEEN THE PARTIES (even after a “fight”,
like Arcelor-Mittal),
THE REGULATORS DO NOT OBJECT, AND
THE COMBINATION WILL PROCEED
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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
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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.)
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Creating An Engine for Acquisition
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
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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
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
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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
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
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Elements of a Smart PMI Plan
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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”
Common Mistakes
•
•
•
•
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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 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
Common Mistakes
•
•
•
Plan, plan, plan
Execute, execute, execute
Reward your PMI team’s PMI success – it is a
real, “day” job
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We will not talk about today
Corporate Finance; Securities and Corporation Law
Process (notices, proxies, tenders, shareholder
rights, etc.); Negotiation of Deals; etc.
TODAY, WE ASSUME A DEAL IS AGREED
BETWEEN THE PARTIES (even after a “fight”, like
Arcelor-Mittal),
THE REGULATORS DO NOT OBJECT, AND THE
COMBINATION WILL PROCEED