m&a agility: secrets to success in cross-border...
TRANSCRIPT
© 2008 Towers Perrin
M&A Agility: Secrets to Success in Cross-Border Integration
A Webcast for Global Organizations
June 25, 2008
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Today’s discussion
The current M&A environment
Getting started: Towers Perrin’s point of view and the link between people and performance
Doing due diligence right ─ on a global scale
Nuances of national and organizational culture
Communicating across cultures and borders
Why governance is critical
Q&A
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The M&A environment: What’s driving the deals?
Source: IMF, World Economic Outlook, October 2007; 2007 and 2008 growth rates projected.
2005 2006 2007 2008World output 4.8 5.4 5.2 4.8United States 3.1 2.9 1.9 1.9Euro area 1.5 2.8 2.5 2.1Germany 0.8 2.9 2.4 2.0Japan 1.9 2.2 2.0 1.7Africa 5.6 5.6 5.7 6.5China 10.4 11.1 11.5 10.0India 9.0 9.7 8.9 8.4
Recent Trends in Global Economic Growth
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Converging economic and demographic forces
Skilled talent pools and labor shortages (e.g., IT, engineering) are expected in many countries
U.S. companies are particularly vulnerable to cross-border acquisitions because of depressed valuations and the weak dollar
Many companies are maintaining significant cash reserves that can be used to fund acquisitions
European companies may also be targets
Today, many industries (specialty chemicals, transportation, oil and gas, pharmaceuticals, financial services) are consolidating rapidly
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Towers Perrin’s point of view: The people/performance linkage model
Areas of critical value
Employeebehavior
Customer behavior
Business performance
Culture
Leadership
Total rewards
Staffing and selection
Organization design
Governance
Attraction
Retention
Engagement
Attraction
Retention
Customer engagement
Revenue
COGS
SG&A
Operating margin
Stock performance
The linkage framework defines the connections between business performance, people and merger strategy in the context of national culture
National Culture
Business Strategy
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The starting point for merger integration is to understand the business strategy underlying the deal
Acquire people or technologyExpand geographicallyGain market shareReduce costs: sales, marketing, inventory
Buy Competitors
Secure raw materials/inputsImprove qualityLower costs: R&D, production, inventoryAcquire hard-to-duplicate assetsRespond to deregulationEnter higher-margin industry segment
Buy Suppliers
Balance market risksExpand product portfoliosEnter entirely new businessesIntegrate product line
Diversify
Own distribution networkFreeze out competitorsLower costs: production, inventory, salesImprove identity/visibility
Buy Customers
Continued…
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The starting point for merger integration is to understand the business strategy underlying the deal
Typical Reasons for Expanding into Geographic Markets
European UnionGain access to large capital, consumer and business marketsEstablish regional manufacturing or distribution centersAcquire unique assets or human capital
Gain access to emerging consumer and business marketsSecure natural resources and raw materialsEstablish low-cost export manufacturing operations
Gain access to emerging consumer and business marketsSecure natural resources and raw materialsEstablish low-cost regional and export manufacturing sites
Gain access to massive and varied consumer and emerging businessmarketsSecure natural resources and raw materialsEstablish low-cost regional and export manufacturing sitesAcquire unique assets or human capital
Gain access to large capital, consumer and business marketsGain access to technology and R&DAcquire unique assets or human capital
CEE and Russia
Japan, China, SE Asia and India
Mexico andSouth America
North America
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— and, in turn, the approach to harmonizing rewards
Company ADominance
Dominant Player Absorption
The business strategy informs the overarching integration “philosophy”
Limited Integration
Mutual Best-of-Both Integration Transformation to New Company
Very little integration of A & B
Full merger of best practices from A and B to create a new entity
B’s assets are fully integrated into A
Best-of-both integration that also incorporates external and new company best practices
IntegratedNew
Company
Best of Company A
Best of Company B
Absorptio
n
Company B
HoldingCompany
CompanyA
CompanyB
IntegratedNew
Company
External Best Practices
Best of Company A
Best of Company B
New CompanyBest Practices
Possible Integration Philosophies
No, or very little, harmonization of A & B Transfer-of-undertakings rules
Harmonize within labor relations context, preferably redesigning reward programs to
support new culture Redesign reward programs to support new culture
─ and Implications for Rewards
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In cross-border deals, due diligence is more critical than ever
Strategic acquisitions must pass the “better off” tests of creating value
Access to new opportunities that neither company would have alone; can impact sales, costs and/or capital investments
Gains economies of scale in shared activities; generally impacts costs
Transfer of skills between companies; can impact sales, costs and/or capital investments
Strategic Fit Scale
Scope
Skill
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Are our assumptions regarding cost and revenue synergies correct?
Are there liabilities that we can expect from the combination (customer overlap, golden handcuffs, pension plans, etc.)?
Are there major integration costs (shared services with parent, IT systems)?
Are there risks to the stand-alone value (litigation, environmental complaints, business ethics)?
Are there risks to achieving projected synergies (culture, long-term contracts, etc.)?
Are volumes, costs, margins expected to increase/decrease?
Are our accounting assumptions correct (tax, goodwill)?
Effective due diligence requires understanding three key drivers of business value…
Stand-alone Value RisksSynergies
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…and, in global deals especially, a sharp focus on key workforce and compliance issues
People Assets Adverse Margin Impacts People Costs Workforce Flexibility
Profile key managementOrganization chartSkill profileDemographic characteristics
Understatement of ongoing program costsSeverance paymentsCommitments to future cost increasesCollective agreement commitmentsExpatriatesRelocation expenses
Benchmark jobs and people costsBenchmark staffing levels
Goodwill issues/moraleProcedure stepsLegal barriersUnion/work council issuesTemporary/contract workers
Asset Liability Impacts Adverse Revenue Impacts Organizational Fit Compliance
Change-of-control triggersPension, welfare liabilities understatedContracts with executives may contain future liabilitiesBook accruals understated (e.g., vacation, sales commission)
Sales incentive designLikely employee turnoverRetention plansPending industrial disputes
Cultural barriersIncompatible job definitionsIncompatible reward structuresIncompatible process and structureDuplicate jobs
Programs and processesIllegal paymentsDiscriminationAcquired rightsPayroll and HRISCollective agreementsEmployee commitments
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Brazil
Pension underfunding
Plan tax status
Minimum health benefits
Termination indemnities
Small group insurance costs
China
Provincial employment laws
Legally required benefits
Unrecognized benefit costs and liabilities
Constraints on severance practices
France
Triggering of individual and union rights
Post-retirement medical and life
Termination indemnities
Early retirement incentive and severance plans
Employee housing subsidies
Complex labor environment
Individual employment contracts
Germany
Triggering of acquired rights
Variation in pension valuation methods
Restrictions on asset transfers
Elimination of pension discrimination policies/practices
Retirement plan mergers
Complex labor environment
Japan
Complex compensation programs
Variation in pension valuation methods
Restrictions on retirement plan changes and asset transfers
Employee housing subsidies
Minimum legal benefit levels
Legal limits on reductions in benefit levels
Country-specific labor and compliance issues can greatly complicate the picture when integrating across borders
This is just a sampling of local laws and practices that can have a significant impact on deal price
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Given the many moving parts, it’s important to focus on areas posing the greatest potential impact
BelgiumIreland
SwitzerlandExpats/IMEs
GermanyJapanU.S.U.K.
CanadaNetherlands
AustraliaItaly
FranceBrazil
Norway
GreeceKorea
MalaysiaMexico
PhilippinesPolandSpain
High
Mediumto Low
Small Medium to Large
Likely Significance of Employee
Benefit Liabilities
Number of Employees
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Case study: Global manufacturing acquisition
Bid price: Over US$2 billion
ChallengesLimited time and limited access to the data roomGlobal transaction ─ data room documents in different languages
Target HQ in Germany11,000 staff in 33 countriesStaff concentration in Germany, Italy, U.S. Other countries: Australia, Brazil, Canada, France, Japan, Netherlands, Norway, U.K.
Programs Financial Impact (in US$ millions)Understated pension liabilities $78 – $96 Germany — insufficient pension indexation $15 – $18 Germany — true commitment not valued $5 – $10 Japan — partial funding of benefits $10 – $15 Italy — unreserved accrued vacation $10 – $15 Change-in-control provisions $30 – $35 Change in control: vesting of stock options $8 – $46 Total $156 – $235
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Cultural issues — both organizational and national ─loom large in global deals and must be tackled early on
Culture is a pattern of actions, words, beliefs and behaviors that are shared by the members of an organization and that produce rules for behavior
In a sense, the organizational DNA
National culture determines manifestations of organizational culture (e.g., how people solve problems)
Core attributes of organizational culture are often (but not always) consistent from country to country within a single organization
In cross-border transactions, it’s critical to address issues not only of national culture, organizational culture and how they interact, but also issues surrounding how to connect culture and change to the business plan
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Understanding national cultures and cultural differences is essential to success…
Source: When Cultures Collide, Richard Lewis, Third Edition.
Africa
Arabs
Iran and Turkey
India
Indonesia and Philippines
Korea
China
Italy and Spain
Russia
France
Belgium
Australia and Denmark
Netherlands and Norway
U.S.A.
Switzerland Vietnam
Hispanic America
U.K. Sweden Finland Canada Singapore HongKong
JapanGermany
MULTI-ACTIVE
LINEAR-ACTIVE REACTIVE
Task oriented
Highly organized
Planners
People oriented
Loquacious
Interrelators
Introverted
Respect oriented
Listeners
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…as is understanding the DNAof each legacy company’s culture
LeadershipWhat they attend to, measure, reward and control; role modeling and coaching
Mission, Objectives, Values and Strategies
Customer Experiences
Shareholder Value
Business PartnerRelationship
Business ResultsE
mpl
oyee
Exp
erie
nce
Work EnvironmentDesign of physical space; socialization patterns
Programs, Policies and PracticesCriteria for recruitment, promotion and exit
Brand Promise
Organizational Structure
What definesculture
How it isdemonstrated
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Culture should align with strategic business priorities to drive value
Customer Service Company ImageEfficiency Quality Innovation
Safety focusStructure/process efficiencyTrainingCoordinationData orientationPerformance managementFocus on prioritiesInvolvementWorkload/resourcingPhysical conditionsCustomer understanding
Shared understanding of company direction/ brand Shared values/prideIntegrityLeadershipBelief in product/ service quality
Teamwork/BP sharingProcess quality focusEmpowerment TrainingLong-term orientationUnderstanding customer’s quality expectationsData orientation
Diversity of thoughtSupervisor relationsStimulating environment (physical)Stimulating environment (interpersonal) Information sharingCollaboration/ teamworkSupport for risk takingRewarding innovationBias for actionAnticipating customer needsFlexible work arrangementsCredible leadership
Career developmentPerformance managementLocal flexibilityPositive working relationshipsSupportive service environmentCustomer knowledgeService orientationValuesLearning/information sharingBelief in product/ service quality
Cultural differentiators* by strategy in financial high-performance companies
Major Strategic Priorities
*Differentiators derived from employee research into the survey questions and topics on which financially successful companies excel versus their peers.
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Critical issue: Is the current culture appropriately aligned with future direction?
0.10
-0.09
0.12
-0.19
0.15
-0.05
0.13
0.43
0.140.07
-0.50
-0.30
-0.10
0.10
0.30
0.50
Customer Quality Efficiency Innovation Image
Current Future
In this case, the current cultures of both parties to a deal were closely aligned, emphasizing customer, efficiency and image
However, the future business strategy called for a new emphasis on quality and innovation, enhanced focus on image and lower emphasis on efficiency
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Case study: Energy industry consolidation
In response to deregulation, an energy company began acquiring smaller companies within the industry
Company leadership felt culture was not an issue because the acquirer and the targets were already culturally aligned
While this was, in fact, the case, the current cultures were notaligned with the future strategy and industry environment
Current cultures were a reflection of the industry’s historical heavy regulationCompanies had become bureaucratic and paternalistic
The goal for the new organization should have been to create a culture that fosters customer service and innovation
Ultimately, leaders recognized the need to forge a new culture that rewards employee behaviors reflecting customer knowledge and innovation
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Research confirms that effective communication can make or break the integration process at the outset
Integrating benefit programs
Rigorous staffing and selection processes
Integrating pay and performance management programs
Helping middle managers accept their role as leaders
Focus on cultural alignment
Strategies to retain key employees
A well-executed employee communication program
Selection of the top team
Effective leadership from top team
Source: Towers Perrin TP Track Survey; percentages reflect the answers of those respondents who have completed at least one deal in the preceding three years.
Most Critical People Issues: First Three to Six Months of Global M&A Deal
27%
27%
29%
30%
47%
65%
75%
85%
87%
39%
47%
46%
41%
35%
28%
22%
10%
10%
20%
22%
14%
23%
12%
5%
14%
11%
6%
6%
1%
4%
2%1%
1%
2%
2%
4%
Critical Somewhat critical Neutral Not very/Not at all critical
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Effective communication strategies help companies address a raft of employee questions about how the deal will affect them personally
My Company
My Team
What will happen to me?
What will happen to opportunities for my career …long term?
How will my day-to-day work change …short term?
What will happen to the people I work with?
My Work
My Career
My Future
My Money
What will happen to my ability to earn money…short and long term?
What will happen to the company I joined?
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Case study: Global consumer goods acquisition
A large consumer goods company acquired a multinational division from a competitor in a multi-billion-dollar deal
Goal was to broaden the product offerings and gain distribution and sales networks in more than 30 countries, including key emerging markets
The company had stumbled in previous acquisitions by relying almost exclusively on centralized communication channels controlled by headquarters
Created uncertainty, distrust and union activity among acquired groups because the company failed to recognize that communication from HQ signaled unpleasant changes for many employees in other countries
To more effectively integrate this major global acquisition, the company devoted considerable effort to developing a balanced communication strategy
Identified the most appropriate media for delivering different messages Trained regional/national managers to play a prominent roleEmphasized personal, one-on-one messages from managers to help engage employees and inspire confidence in the transaction
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Why governance is especially critical in cross-border transactions
In the broadest sense, governance is the oversight process or processes an organization follows to mitigate risks and safeguard the corporation’s interests
Addressing governance in the cross-border M&A context is always difficult and often an unexpected tripwire because of issues such as:
Lack of familiarity with local and national requirements and normative practicesPoor documentation of existing authorities and accountabilities Failure to communicate parent company governance structures and oversight requirements
To provide meaningful control, establishing authorities and accountabilities cannot be an ivory tower exercise
Research shows that institutional investors will pay a premium for good governance practices and that companies with the highest governance rankings deliver higher financial returns
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How governance models differ between key regions
United States“Liberal model” ⎯ priority given to shareholders— Encourages radical innovation and cost competition Sarbanes-Oxley Act has codified governance framework
United Kingdom“Flexible model of regulation”Principle-based code that lists dozens of recommended practices— Publicly listed companies can choose whether to apply principles— If not applied, must explain in annual reports whyStructured, but with flexibility
Asia, Latin America and other European countries“Insider model” ⎯ interlocking networks and committeesFamily-owned companies common — Japan (keiretsus), Korea (chaebols), Philippines, Indonesia— Mexico, Brazil, Argentina, etc.— Italy, Spain and France (to a certain extent) Decision making concentrated at top levels
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In which cross-border transactions are governance issues most sensitive?
Lack of trust: governance models in certain regions, countries
Lack of transparency: understanding and penetrating complex networks Family-owned companies, conglomerates
Emerging Markets Target
U.S., W. Europe Target
Perception that targets in North America and Western Europe will have difficulty accepting foreign ownership (particularly from emerging markets)
Pronounced differences between family-owned companies in emerging markets and liberal model of the United States
U.S., W. Europe Investors
Emerging Markets Investors
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Key elements of the governance framework
Effective and Accountable Boards Board charterRules of governance
Internal Control Environment
Compliance Program
Reporting, Monitoring and Auditing
Policies and proceduresCritical process mapping and identification of risks and risk mitigantsDecision-making responsibility matrix
Stakeholder Management
Code of conductPolicies and proceduresCompliance trainingRisk assessment and risk management planning
Audit function Financial, operational and compliance reportsBusiness and compliance review processes
A corporate social and environmental responsibility program, plan and initiatives
Leadership and CultureMission and value statementsGuidelines for leadershipAnnual business and compliance plans
Management Tools
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Best practices in cross-border governance
Address governance issues early Consider basic RACI* model during due diligence or early in the integration processTest local, country, national normsAssess compliance risks and “vulnerability gaps”
Establish clear rules of the road and communicate them bi-directionally
Assess changes against a value creation/destruction framework
Key areas of focusDecision-making body and guidelinesOrganizational culture of complianceSuccession planning Performance metrics that include compliance measuresApproved protocols and limitsDocumentation and dissemination of process
*Responsible, Accountable, Consulted, Informed.
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Case study: A global professional services firm
After acquiring significant operations in Asia, a global professional services firm elected not to act on signals that governance processes in several of the Asian countries were ineffective and needed to be clarified
No culture of compliance in certain locationsAcquirer lacked familiarity with local requirements and normative practices
Within months of closing the deal, the firm became the target ofinvestigations by regulatory bodies in Japan and Korea
Japan and Korea offices barely escaped forced closing, but facedsevere sanctionsFuture business was jeopardized
The offices were forced to overhaul their governance practices — in particular, the compliance program and internal control environment
Closer attention to governance issues earlier in the process would have avoided big headaches and significant compliance and reputational costs
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Sample analysis of target company workforce…
Variability
Hig
hLo
w
FavorabilityLow High
Highest Risk
18% Flawed in XYZ Overall
Lowest Risk
32% Secured in XYZ Overall
Moderate Risk
32% Exposed in XYZ Overall
Slight Risk
18% Vulnerable in XYZ Overall
Exposed Vulnerable
Flawed Secured
Source: Towers Perrin-ISR compliance framework, which surveys employees to gauge the ethical characteristics of the workforce; a secure environment is one in which favorability on ethics questions is high and variability in those opinions is low (i.e., ethical practices are sound and that sentiment is widely shared).
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…and a closer look, by country
313328213230242744232630303944522947
% Exposed
1526338
1513371019281314159
20304718
% Flawed
1328China/Hong Kong930Thailand
2051United States
2239New Zealand1937South Africa2233Canada2527Brazil1225Argentina711Japan421Korea
1620Chile
32
323930422337
% Secured
23
211810211512
% VulnerableCountry
Australia
IndiaMexicoSingaporeVenezuelaRussiaTaiwan
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Some final thoughts on best practices for cross-border M&A transactions
Conduct thorough due diligence that encompasses financial and workforce issues and addresses critical integration issues (e.g., culture, governance)
Address national culture early and build awareness with leadership team(s)
Communicate aggressively, focusing on the business rationale but taking into account local/national cultural and communications norms
Assess organizational culture and alignment against business strategy
Review governance model against a value creation/ destruction framework
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Questions?
[email protected] [email protected]