May 18, 2004
Financial Executive International
M&A Issues Dealing With Plan Combinations and Integration
Presenter:
Len Gray 312 902 7646 [email protected]
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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
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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
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Due DiligenceDue Diligence
Project PlanningProject Planning
Organization Engagement
Human Resource FunctionHuman Resource Function
LeadershipLeadership
Performance Management Performance Management Inte
gra
tio
n P
lan
nin
gIn
teg
rati
on
Pla
nn
ing
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
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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
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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
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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
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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
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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
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Due Diligence Know thyself
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The “Deal”The “Deal”The “Deal”The “Deal”
Employment Agreements
Employment Agreements
Payroll & SalaryGrade StructurePayroll & SalaryGrade Structure
Retirement &Other Employee
Benefits
Retirement &Other Employee
Benefits
Short-termIncentive Comp
Short-termIncentive Comp
Long-term Incentive Comp
Long-term Incentive Comp
DeferredCompensation
DeferredCompensation
CIC Plans/ParachutesCIC Plans/Parachutes
PerquisitesPerquisites
OrganizationCulture
OrganizationCulture
HR FunctionHR Function
Due Diligence Key topics to address
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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
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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
Employment Agreements
Employment Agreements
Large number of employment agreements
Large severance payment multiples
Broad application of severance plan
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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
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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 IssuesResolution of
Potential Issues
Due DiligenceResolution of potential issues
Review alternative approaches Negotiate acquisition price
Negotiate
Unfunded or underfunded obligations
Inappropriate valuation assumptions
Noncompliance
Retirement &Other Employee
Benefits
Retirement &Other Employee
Benefits
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Policy or contract lapse on change in control
Due DiligenceResolution of potential issues
Get coverage in place by closing
Negotiate adjustment to acquisition price
Review potential liability exposure. Get coverage in place by closing if appropriate
Potential IssuesResolution of
Potential Issues
Benefits triggered on sale
Unpaid claims
Significant exposure to risk due to inappropriate or lack of insurance
Retirement &Other Employee
Benefits
Retirement &Other Employee
Benefits
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Due DiligenceResolution of potential issues
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
Short-termIncentive Comp
Short-termIncentive Comp
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Due DiligenceResolution of potential issues
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 IssuesResolution of
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”
Long-term Incentive Comp
Long-term Incentive Comp
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Acquiring company does not have deferred compensation plan for current participants to roll-over account balances
Due DiligenceResolution of potential issues
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 IssuesResolution of
Potential Issues
Large deferred compensation account balances with no funding or security
DeferredCompensation
DeferredCompensation
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Due Diligence Resolution of potential issues
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
Resolution of Potential IssuesPotential Issues
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
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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
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Due Diligence Resolution of potential issues
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
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Due DiligenceLearn from cultural differences
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Differences in staffing levels, processes and structure
Due Diligence Resolution of potential issues
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
Resolution of Potential IssuesPotential 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
HR FunctionHR Function
Integration Prepare for pre-close, “day 1”, immediate and extended integration
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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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Due DiligenceDue Diligence
Project PlanningProject Planning
Organization Engagement
Human Resource FunctionHuman Resource Function
LeadershipLeadership
Performance Management Performance Management Inte
gra
tio
n P
lan
nin
gIn
teg
rati
on
Pla
nn
ing
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
Integration Project Planning Elements of integration
Integration
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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
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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
ComplianceCompliance
Performance Performance ManagementManagement
Human Human Resources Resources FunctionFunction
Total Total RemunerationRemuneration
Sales ForceSales Force
LeadershipLeadership
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
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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?
Total RemunerationTotal Remuneration
Integration Total remuneration
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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
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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
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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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Due DiligenceDue Diligence
Project PlanningProject Planning
Organization Engagement
Human Resource FunctionHuman Resource Function
LeadershipLeadership
Performance Management Performance Management Inte
gra
tio
n P
lan
nin
gIn
teg
rati
on
Pla
nn
ing
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
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Q&A
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