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Panel 3: Doing, Implementing and Following The Deal - "Insider" Views (Slides & Presentations) Bower p. 1-8 Earnest p. 9-11 Hernandez p. 12-19 Jones p. 20-22 ThiNganHang.com ThiNganHang.com
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A managerial perspective on M&A Joseph L. Bower Harvard Business School FTC Roundtable on M&A December 9, 2002 A Managerial Perspective on M&A M&A is a make or buy decision Three types of managerial perspective: The variations in what the managements are ThiNganHang.com trying to accomplishThe process over time The process of implementation Joseph L Bower - FTC Roundtable ThiNganHang.com 1
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7 Different Strategic Objectives: Reduce overcapacity, eg Chemical Bank merges with Chase (mega-mergers) Acquire or merge with competitors to take capacity off line and rationalize other activity Use larger market share to strengthen pricing Roll up a fragmented industry, eg. BancOne in the 1980’s Expand geographically in an industry with local delivery – often a service Product or market extension, Quaker buys Snapple Extend product line, or enter new country markets 7 Objectives, cont. Use M&A as R&D, eg Microsoft buys Vermeer Acquisitions used instead of R&D to build position quickly Build a new industry, eg Viacom buys Paramount ThiNganHang.com A bet that there are strategic benefits to be gained from integration across industries An Investor Buy-out A bet that value can be created with new, private, leveraged ownership and Blue fish Joseph L Bower - FTC Roundtable ThiNganHang.com 2
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Leaving out bluefish U.S. M&A >$500m by Motive 1997-99 Roll up 13% 9% Mature Consolidation 1% 4% Product Line Extension Industry convergence 37% M&A as R&D 36% Investors What difference does it make? Companies can be thought of as consisting of resources, processes, and values Resources are the assets – tangible and intangible Processes are the way companies convert assets into goods and services ThiNganHang.com It is relatively easy to assess and rationalize assets Values are the way employees think about what they do andwhy. They shape priorities and decision making It is very hard to assess processes or change them It can be even harder to see the depth with which values are held. It may be impossible to change them. Joseph L Bower - FTC Roundtable ThiNganHang.com 3
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What difference does it make? M&A is a business process. Managements need to learn how to do it well. Targeting – assessing resources, processes and values Doing the deal: Negotiating – getting the price right Closing – getting to yes Integrating – rationalizing resources, imposing (or modifying) processes and values Implementation: The wrong price If the price was too high, there is no way of succeeding against a strict financial test (An Anglo perspective?) ThiNganHang.com Attempts to make such deals succeed oftendestroys the acquired companyAnd sometimes the acquirer. Joseph L Bower - FTC Roundtable ThiNganHang.com 4
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High Yield Bond Issues and Bankruptcy Assets 1983-1999 200 150 High Yield Bond Issues 100 Bankruptcy Assets 50 0 83 85 87 89 91 93 95 97 99 Research on Implementation:Two dimensions of success High Mixed Success: Successful satisfied employees, acquisition but no operational synergies achieved ThiNganHang.comLevel of completion of human integration Failed acquisition Mixed success: operational synergies achieved Low at expense of employees Low High Level of completion of task integration Joseph L Bower - FTC Roundtable ThiNganHang.com 5
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The basic finding A longitudinal study (5 years +) nine big deals The substance of human integration and task integration involve two different trajectories But they are deeply interdependent so that failure in one can block or defer success in the other. Failure at task integration has its source in failed human integration Value creation requires both The Panel Discussion Proceed following the process of a deal Targeting Doing the deal ThiNganHang.com ImplementationLessons The Cosmic Question Joseph L Bower - FTC Roundtable ThiNganHang.com 6
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Panelists • Peter Brodsky – Partner, • Michael Jones, Business Hicks-Muse Development Leader – GE • Bill Earnest, GM Corp Medical Systems Planning & Strategic • John Mayfield, Group Transitions, Conoco- Controller, Construction Phillips Products and Finishing • Juan Pedro Hernandez, Systems Group, Illinois VP/Treasurer P&G Tool Works • Robert Ingraham, COO • Dan Scheinman, Chief GlaxoSmithKline Strategy Officer - Cisco ThiNganHang.com Joseph L Bower - FTC Roundtable ThiNganHang.com 7
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FTC Merger Outcomes Roundtable - Merger Integration Best Practices William E. Earnest ConocoPhillips MERGER INTEGRATION – SUCCESS FACTORS • Set high merger aspirations top down that include both financial and Set high aspirationsSet high aspirations nonfinancial targets • Recognize current business momentum has greater value than Protect current businessProtect current business integration synergies and act swiftly to protect it Establish separateEstablish separate • Establish a merger management leader/organization and an integration integration organizationintegration organization management team to manage the merger Establish strongEstablish strong • Move swiftly, front-end load decision making and pursue 70% solutions integration processintegration process that are 100% implementable, empower integration leaders ThiNganHang.comFocus onvalue creationAddress culturalchallengesFocus onvalue creationAddress culturalchallenges •• Focus on value creation and business objectives – not only on integrationIdentify the cultural challenges based on differences between the twoorganizations upfront and explicitly design a process to address themfocused on core business processes Establish strong peopleEstablish strong people • Appoint new managers as early as possible, striving for excellence, even selection processselection process at the expense of perceived equity between merger partners Have focusedHave focused • Communicate often and early, focusing equally on the process of communicationscommunications integration and the content of key decisions made Source: McKinsey Co. 1 ThiNganHang.com William E. Earnest - FTC Roundtable 1
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CHOICES IN INTEGRATION DESIGN ILLUSTRATIVE Takeover • Overall integration approach Keep Takeover Best of both Transformation separate • Organizational structure, processes, Keep Choose Create Merge and systems separate 1 of 2 new BlueprintBlueprint • Informal structure / cultural change Passive/ Proactive reflective • Leadership role of CEO Selective, Active, delegative energizing • Scope/role of integration leader/office Process “Integration manager CEO” LeadershipLeadership • Integration decision making model Bottom-up Top-down • Pace of integration decisions (and Get 100% Faster execution) answer is better • Degree of planning prior to regulatory Cautious Full disclosure, push legal approval legal attitude constraints ExecutionExecution • Degree of “strategic reassessment” Sequenced Concurrent during integration 2 Integration Management ConocoPhillips Merger Executive Sponsors Interface with Archie Dunham & Jim Mulva Executive Management Deal Closure: Resources:Resources: - FTC / Regulatory Integration Management Office • Process• Process - Proxy filing / Mailing Team Leads: John Lowe & Phil Frederickson • Communications• Communications - Shareholder Approval • Coordination• Coordination • Legal• Legal Deal Closure linked to Integration, but managed separately ThiNganHang.comConocoPhillipsintegration teams FinanceFinance SystemsSystems DownstreamDownstream(Chemicals)(Chemicals) Services/OtherServices/Other UpstreamUpstream(Gas processing)(Gas processing) Human ResourcesHuman Resources Supply & TradingSupply & Trading(Commercial)(Commercial) 64 sub-teams 3 ThiNganHang.com William E. Earnest - FTC Roundtable 2
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Three Phases of Merger Integration 9 mos. before close 6 mos. before close Closing Completed Architecture designArchitecture design Implementation planningImplementation planning Implementation and trackingImplementation and tracking • Integration process design • Day 1 readiness preparation • Synergy and key issues • • tracking Subteam scoping and launch Implementation plans and • coordination • Accountability thru Information sharing / Operating Plans comparisons • Organizational structure, • staffing and business • Portfolio and strategic Stretch synergy targets and process design issues synergy categories • Portfolio and strategic • Transition to day-to-day issues operational teams • Synergy initiative/action plans • Handoff to new management team 4 ThiNganHang.com ThiNganHang.com William E. Earnest - FTC Roundtable 3
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FTC Bureau ofFTC Bureau of Economics RoundtableEconomics Roundtable December 9, 2002December 9, 2002 Juan P. HernandezJuan P. Hernandez Vice President and Treasurer,Vice President and Treasurer, The Procter & Gamble CompanyThe Procter & Gamble Company FTC Bureau AgendaAgenda M&A Planning ProcessM&A Planning Process Approaches to Value CreationApproaches to Value Creation Q&A’sQ&A’s ThiNganHang.com ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 1
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P&GP&GStatement ofStatement ofFTC Bureau PurposePurpose Our M&A Program flows from our StatementOur M&A Program flows from our Statement of Purpose.of Purpose. “We will provide products and services of“We will provide products and services of superior quality and value that improve thesuperior quality and value that improve the lives of the world’s consumers.lives of the world’s consumers. “As a result, consumers will reward us with“As a result, consumers will reward us with leadership sales, profit and value creation,leadership sales, profit and value creation, allowing our people, our shareholders, andallowing our people, our shareholders, and the communities in which we live and workthe communities in which we live and work to prosper.”to prosper.” FTC Bureau M&A ProgramM&A Program PlanningPlanning Fish In The Right PondFish In The Right Pond ThiNganHang.com ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 2
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FTC Bureau Value Creation Through M&AValue Creation Through M&A PlanningPlanning M&A Process StepsM&A Process Steps 1.1. Integration with Corporate Strategy ProcessIntegration with Corporate Strategy Process 2.2. Target Selection & PrioritizationTarget Selection & Prioritization -- Clearly Defined Objectives-- Clearly Defined Objectives -- Reality Check on “Fit” Elements-- Reality Check on “Fit” Elements 3.3. Initial ValuationInitial Valuation -- Internal Analysis-- Internal Analysis -- Walk Away price-- Walk Away price 4.4. Due DiligenceDue Diligence 5.5. Refined ValuationRefined Valuation 6.6. Negotiation –Negotiation – TransitionTransition –– Integration into P&GIntegration into P&G FTC Bureau Value Creation Through M&AValue Creation Through M&A PlanningPlanning Strategic PlanningStrategic Planning Operating units develop business strategyOperating units develop business strategy and set long and medium term goals.and set long and medium term goals. Business unit M&A program flows from theBusiness unit M&A program flows from the business where-business where-toto--play/howplay/how--toto--competecompete choices.choices. Screening priority setting at the businessScreening priority setting at the business ThiNganHang.comunit level.unit level. Business Unit strategy and M&A ProgramBusiness Unit strategy and M&A Program reviewed and prioritized at the Corporate/reviewed and prioritized at the Corporate/ CEO level.CEO level. ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 3
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Value Creation ThroughValue Creation ThroughFTC Bureau M&AM&A PlanningPlanning Target SelectionTarget Selection Fit with P&G’s Core Competencies:Fit with P&G’s Core Competencies: ---- BrandingBranding ---- InnovationInnovation ---- Scale/EfficienciesScale/Efficiencies Fit with P&G’s Growth Strategy:Fit with P&G’s Growth Strategy: ---- Faster GrowingFaster Growing ---- Higher MarginHigher Margin ---- More Asset Efficient BusinessesMore Asset Efficient Businesses FTC Bureau Value Creation Through M&AValue Creation Through M&A PlanningPlanning Internal Analysis/ValuationInternal Analysis/Valuation Current business model and its sustainability.Current business model and its sustainability. Asset’s performance and future potential ifAsset’s performance and future potential if merged in our portfolio.merged in our portfolio. Identification of “value creators”Identification of “value creators” where/how/when value is created.where/how/when value is created. ThiNganHang.com Assessment of asset availability.Pre-Deal type and structure.Assessment of asset availability.PreDeal type and structure.-determined walk away price.determined walk away price. ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 4
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FTC Bureau Value Creation Through M&AValue Creation Through M&A PlanningPlanning Due DiligenceDue Diligence Right team and clear objectives. Team is aRight team and clear objectives. Team is a combination of business owners and subjectcombination of business owners and subject matter experts.matter experts. Leader of the team should be the ultimateLeader of the team should be the ultimate business owner if/when transaction isbusiness owner if/when transaction is completed.completed. Assign responsibilities to team members onAssign responsibilities to team members on checklist specific items.checklist specific items. Validate internal analysis (growth, synergies),Validate internal analysis (growth, synergies), valuation major risks and price.valuation major risks and price. Identify key transition issues.Identify key transition issues. Fine-Fine-tune thinking on structure.tune thinking on structure. FTC Bureau Value Creation Through M&AValue Creation Through M&A PlanningPlanning Transition & IntegrationTransition & Integration Critical part of the planning process.Critical part of the planning process. Follow the business plan in the acquisitionFollow the business plan in the acquisition recommendation.recommendation. Systems compatibility are normally an issue.Systems compatibility are normally an issue. Plan ahead transition needs and whatPlan ahead transition needs and what needs toneeds to be done. Assign responsibilities.be done. Assign responsibilities. ThiNganHang.com Don’t wait until closing to start integration.Assign people to the transition and to theacquired business who worked the acquisitionDon’t wait until closing to start integration.Assign people to the transition and to theacquired business who worked the acquisition process, including due diligence.process, including due diligence. ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 5
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FTC Bureau Value Creation Through M&AValue Creation Through M&A Sources of Value CreationSources of Value Creation Strategic FitStrategic Fit Core Competencies:Core Competencies: BrandingBranding InnovationInnovation Scale/EfficienciesScale/Efficiencies Value Creation Through M&AFTC Bureau Value Creation Through M&A Sources of Value CreationSources of Value Creation Customers stock our products (rightCustomers stock our products (right place, visibility, price, etc.)place, visibility, price, etc.) We communicate the unique productWe communicate the unique product benefits to consumers (compellingbenefits to consumers (compelling advertising).advertising). Consumers chooseConsumers choose our brands –our brands – useuse ourour brands –brands – and find them a terrific value.and find them a terrific value. ThiNganHang.com Do these with right cost & capitalstructure …Do these with right cost & capitalstructure …Shareholder Value CreationShareholder Value Creation ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 6
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Value Creation Through M&AFTC Bureau Value Creation Through M&A Sources of Value CreationSources of Value Creation RVI:RVI: -- Global Beauty Care InfrastructureGlobal Beauty Care Infrastructure -- Access to Skin and ConditioningAccess to Skin and Conditioning TechnologyTechnology -- Great Equities: Olay, PanteneGreat Equities: Olay, Pantene -- Synergies: Surfactant TechnologySynergies: Surfactant Technology from Detergentsfrom Detergents Consumers:Consumers: -- Real Science to Personal CareReal Science to Personal Care -- Great Value to ConsumersGreat Value to Consumers FTC Bureau Value Creation Through M&AValue Creation Through M&A Sources of Value CreationSources of Value Creation Iams:Iams: -- Terrific EquityTerrific Equity -- Access New Specialty ChannelsAccess New Specialty Channels -- Pet Care TechnologyPet Care Technology -- Synergies at Technology EndSynergies at Technology End (Tartar/Pet Tooth Care)(Tartar/Pet Tooth Care) ThiNganHang.com---- Mass Distribution ChannelsLonger and Healthier Life of PetsMass Distribution ChannelsLonger and Healthier Life of Pets ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 7
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FTC Bureau Value Creation Through M&AValue Creation Through M&A Sources of Value CreationSources of Value Creation SpinbrushSpinbrush - Battery Operated Brush- Battery Operated Brush - Low Cost Technology- Low Cost Technology - Under Crest Equity- Under Crest Equity - Great Value to Consumers:- Great Value to Consumers: A Better Product, ImprovedA Better Product, Improved End Benefits at Very AffordableEnd Benefits at Very Affordable Costs.Costs. Q&A’sQ&A’s ThiNganHang.com ThiNganHang.com Juan Pedro Hernandez - FTC Roundtable 8
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GE Medical Systems Acquisition Integration and Implementation Michael Jones December 2002 Key Elements of GE Integration Approach 9 Ensure Seamless Operational Hand-Off … Starts with Due Diligence Process 9 Balance Independence and Integration Speed 9 Adopt Best Practices from Acquired Companies 9 Broad Business and Functional Engagement 9 Commercial Sensitivity … First Priority … Always On the Screen Leadership 9 Set Clear Measurements and Closely Monitor ThiNganHang.com999 Business Leaders Ultimately Own IntegrationsRight Incentives… Get Key Players to Give GE a Chance Focus On Commercial and Key Talent Retention People 9 Integration Managers … Integral Part of Team from Beginning 9 “A” Players on Both Teams … GE and Acquisition e-Integration Tool Brings All Together … Clear Objectives, Goals and Track ThiNganHang.com Michael A. Jones - FTC Roundtable 1
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