May 18, 2004 Financial Executive International M&A Issues Dealing With Plan Combinations and Integration Presenter: Len Gray312 902 [email protected]

May 18, 2004

Financial Executive International

M&A Issues Dealing With Plan Combinations and Integration

Presenter:

Len Gray 312 902 7646 [email protected]

Mercer Human Resource Consulting 2©2004, Mercer Human Resource Consulting LLCAll rights reserved. This document is the confidential and proprietary property of Mercer Human Resource Consulting LLC. This document (including the format and the presentation thereof) may not be reproduced, modified, sold or otherwise transferred or provided, in whole or in part, to any other person or entity without the prior written permission of Mercer Human Resource Consulting LLC.

Agenda

Section 1 – M&A Overview

Section 2 – Pre-Deal Strategy & Planning

Section 3 – Due Diligence

Section 4 – Integration

M&A OverviewKnow key M&A frameworks and terminology


Source: Mercer, Inc.

1

1.5

2

2.5

3

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Level of Importance

Not Difficult but Very ImportantNot Difficult and Less Important

Difficult and Very ImportantDifficult but Less Important

High

HighLow

Stabilizing the organization and 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…

Stabilizing and building support

within the customer base

Maximizing the advantage from

accounting strategies

Rationalizingprocesses

Linking IT/ systems support

Identifying potential

operational efficiencies and

combining plants and/or locations

effectively


Due DiligenceDue Diligence

Project PlanningProject Planning

Organization Engagement

Human Resource FunctionHuman Resource Function

LeadershipLeadership

Performance Management Performance Management Inte

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Total RemunerationTotal Remuneration

Sales ForceSales Force

ComplianceCompliance

Workforce & Staffing AlignmentWorkforce & Staffing Alignment

Do by Close IntegrationDo by Close Integration CLOSECLOSEStrategy and PlanningStrategy and Planning

Project Management

M&A Overview High level process

Pre-Deal Strategy & Planning Align action plan with merger rationale


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 Assessing human capital issues


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

Strategic ObjectivesStrategic Objectives

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

ConsolidationConsolidation

Geographic ExpansionGeographic Expansion

Extend Product PortfolioExtend Product Portfolio

Add Intellectual CapitalAdd Intellectual Capital

Industry ConvergenceIndustry Convergence

Achieve Critical MassAchieve Critical Mass

Pre-Deal Strategy & Planning Merger rationale and strategic objectives


Pre-Deal Strategy & PlanningPrioritizing critical people issues

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

Business & Organizational Design

Leadership

Resourcing

Rewards

Performance Management

Cultural Integration

Organizational Engagement & Communication

Employee Relations

Employment Legal Issues

HR Organizational Infrastructure

Consolidatio

n

Extended Pro

duct

Portfolio

Geographic E

xpansion

Added

Intellectu

al Capita

l

Industry

Convergence

Critical M

ass

Critical People IssuesCritical People Issues

Merger Rationale


Pre-Deal Strategy & Planning Build M&A context

Capture business leaders’ perspectives on…

Identify major impediments to achieving success

Identify major impediments to achieving success

Provide clear understanding of the outcomes of transaction

Provide clear understanding of the outcomes of transaction

BuildBuild understanding of business drivers the deal

BuildBuild understanding of business drivers the deal

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

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

Key steps to implement the strategy

Key steps to implement the strategy

EnvironmentEnvironmentEnvironmentEnvironment StrategyStrategyStrategyStrategy ActionsActionsActionsActions BarriersBarriersBarriersBarriers WinningWinningWinningWinning

Due Diligence Understand important executive and employee issues


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 Know thyself


The “Deal”The “Deal”The “Deal”The “Deal”

Employment Agreements


Payroll & SalaryGrade StructurePayroll & SalaryGrade Structure

Retirement &Other Employee

Benefits


Benefits

Short-termIncentive Comp


Long-term Incentive Comp


DeferredCompensation


CIC Plans/ParachutesCIC Plans/Parachutes

PerquisitesPerquisites

OrganizationCulture

OrganizationCulture

HR FunctionHR Function

Due Diligence Key topics to address


Due DiligenceThree levels of thinking. . .

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

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

Identify any potential “deal breakers”Identify any potential “deal breakers”Identify any potential “deal breakers”Identify any potential “deal breakers”

Collect information to identify Collect information to identify integration issues and begin planningintegration issues and begin planning

Collect information to identify Collect information to identify integration issues and begin planningintegration issues and begin planning

Where each issue sits on this scale is influenced by:

Size of the deal

Risk tolerance of acquirer

Acquirer familiarity with specific risk

Liability Scale


Due DiligenceResolution of potential issues

End negotiations/ do not do deal

Adjust acquisition price down

Awareness and timing of severance (e.g., staggered terminations)

Adjust acquisition price down

Potential IssuesPotential IssuesResolution of Resolution of

Potential IssuesPotential Issues

Large/excessive severance/change in control payments (e.g., as percentage of market capitalization)

Informal benefit promises



Large number of employment agreements

Large severance payment multiples

Broad application of severance plan


Due Diligence Resolution of potential issues

Potential IssuesResolution of

Potential Issues

Awareness/understanding of Union contracts

Evaluate translation into acquirer structure prior

Awareness/integration recognition

Large number of Union employees

Complex or different salary philosophy/structure

Large payroll expense

Payroll & SalaryGrade StructurePayroll & SalaryGrade Structure


Asset transfers

Change in control provisions

European Works Council

Negotiate acquisition price and remedy compliance concerns via reps & warranties and/or indemnification

Negotiate with target’s actuaries; apply own assumptions


Potential Issues


Review alternative approaches Negotiate acquisition price

Negotiate

Unfunded or underfunded obligations

Inappropriate valuation assumptions

Noncompliance


Benefits


Benefits


Policy or contract lapse on change in control


Get coverage in place by closing

Negotiate adjustment to acquisition price

Review potential liability exposure. Get coverage in place by closing if appropriate


Potential Issues

Benefits triggered on sale

Unpaid claims

Significant exposure to risk due to inappropriate or lack of insurance


Benefits


Benefits



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

Awareness/lower acquisition price

Resolution of Potential IssuesPotential Issues

Variance in bonus targets or measures between companies

Variance in eligibility between companies

Guaranteed bonus payments





Roll current outstanding options into acquirer company plan (e.g., exchange ratio)

Cancel options

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


Potential Issues

Include options in share price calculation / adjust price per share

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

Large number of unvested options outstanding that are “out of the money”

Large number of “in the money options”




Acquiring company does not have deferred compensation plan for current participants to roll-over account balances


Purchase price should reflect payout of all account balances

Create deferred compensation plan at target (for current participants or larger group)

Payout balances to participants


Potential Issues

Large deferred compensation account balances with no funding or security





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

Awareness/potential purchase price adjustment


Large number of employees with change of control gross-up provisions

Large number of “double trigger” changing in control arrangements

Large cost exposure

Large number of “single trigger” change in control protections

CIC Plans/ParachutesCIC Plans/Parachutes


Loans

Company Car and Driver

Financial Planning

Executive and Individual Retirement Promises

Retiree Health

Executive Health

Executive/Director’s Life Insurance

Vacation & Holidays

Profit sharing

Long service leave and bonuses

Benefits and PerquisitesBenefits and PerquisitesBenefits and PerquisitesBenefits and Perquisites

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

Due DiligenceOther executive benefits and perquisites

PerquisitesPerquisites



Understand own culture; “strengthen strengths”; address shortcomings before deal

Achieve alignment through change communication

Resolution of Potential Issues

Differences in expectations regarding transaction

Potential Issues

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

Executive level differences – “social issues”

OrganizationCulture

OrganizationCulture

Build employee and HR readiness for deals

Follow same approach for target DD as for self-analysis


Due DiligenceLearn from cultural differences


Differences in staffing levels, processes and structure


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)

Address issues in integration planning and execution


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

HR FunctionHR Function

Integration Prepare for pre-close, “day 1”, immediate and extended integration


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

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

Project Planning

Identify internal/external team

Build transaction context

Integration Project Planning Value from an acquisition








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Project Management

Integration Project Planning Elements of integration

Integration


Integration Project Planning Key steps

Pre-deal Doing the deal Integration

Prepare your team

Know the process

Know the target

Assess situation

Prioritize key areas

Identify distinct projects

Develop project

charters

Create detailed plan


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

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

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

Develop understanding of target and current state Perform initial employee selection / deselection Develop retention / transition strategy Develop performance management system

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

IMMEDIATE INTEGRATION EXTENDED INTEGRATIONDO BY CLOSE CLOSE

Assess legal compliance – retirement, employment practices / contracts Review HR policies and programs Address employee relations issues – formal and informal

FORM

PROJECT

TEAMS

Perform customer analysis Perform sales analysis Design new sales program Assess customer service / programs


Performance Performance ManagementManagement

Human Human Resources Resources FunctionFunction

Total Total RemunerationRemuneration



Workforce and Workforce and Staffing Staffing

AlignmentAlignment

Integration Integration process map

ProjectProjectManagementManagement

Organizational Organizational EngagementEngagement

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

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


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


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

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

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

a global compensation and benefits strategya global compensation and benefits strategy

gap analysis between current practice(s) and strategy

gap analysis between current practice(s) and strategy

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

a minimum

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

a minimum

DevelopDevelopDevelopDevelop PerformPerformPerformPerform DevelopDevelopDevelopDevelop








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Project Management

M&A Overview High level process


Q&A

AAQQ&

Documents

May 18, 2004 Financial Executive International M&A Issues Dealing With Plan Combinations and Integration Presenter: Len Gray312 902 [email protected]