Copyright© 2006 Hewitt Associates Presenter - Ken Vijayakumar source – Hewitt Associate Mergers and Acquisitions in Asia Pacific (Module-19) The Human Factor

Copyright© 2006 Hewitt Associates 2 Today’s Agenda Background of Study Trends and Drivers Due Diligence and Integration Lessons Learned Q&A

Copyright© 2006 Hewitt Associates 3 17% 33% 20% 30% Created Substantial Returns Created Marginal Returns Eroded Some Returns Substantially Eroded Returns 75% of 150 M&A deals over $500 million in the last decade did not significantly enhance shareholder value. First, the Bad News…Most Deals Do Not Create Value

Copyright© 2006 Hewitt Associates 4 Key Reasons for M&A Failure…People Integrating Organizational Cultures Keeping Employees Focused Engaging Employees in New ProgramsIntegration HR/Benefit Programs Percent of Responses 0% 10% 20% 30% 40% 50% 60% 70% 80% United StatesEuropeLatin AmericaAsia-Pacific

Copyright© 2006 Hewitt Associates 5 Trends and Drivers

Copyright© 2006 Hewitt Associates 6 Anticipated Level of M&A Activity Strong optimism about future M&A activity over the next two to three years:

Copyright© 2006 Hewitt Associates 7 Anticipated Level of M&A Activity by Region Most companies will focus geographically on Asia Pacific:

Copyright© 2006 Hewitt Associates 8 Why are Companies Acquiring? Improved market access by far the number one driver of M&A activity:

Copyright© 2006 Hewitt Associates 9 Synergy Objectives Growth Return Improved Market Access (bigger is better) Combined Business Creation (new is better) Coordinated Strategies (together we conquer) Shared Know How (know more) Vertical Integration (process we own) Consolidation of Functions (serve more with less) Negotiating Power Tax Benefits Financial Engineering Synergies with significant “People integration” Issues Shared Tangible Resources (use same for more)

Copyright© 2006 Hewitt Associates 10 Due Diligence and Integration: The Human Factor

Copyright© 2006 Hewitt Associates 11 Typical M&A Process Timeline of M&A Events Candidate Scouting Formal Due Diligence Initial HR Strategy Identify Implementation Leaders and Team Program Design Decisions Detailed HR Strategy Strategic Planning Confidential Courting Price and Terms Negotiations Preliminary Program Design Implementation of Integration Plans and Programs Announcement Closing “DAY 1” Candidate Scouting Formal Due Diligence Initial HR Strategy Identify Implementation Leaders and Team Program Design Decisions Detailed HR Strategy HR Process Strategic HR—Due Diligence Integration Preparation Integration Strategy Assessment HR—Liability & Synergy Gap Assess. Deal Input Program Office Setup Create “100 Day” Plans Create Optimization Plans... Execute 100 Day Plan Execute Optimization Plans Monitor Synergy Realization

Copyright© 2006 Hewitt Associates 12 Due Diligence Top Objectives Immediate and short-term objectives dominate. Long-term issues are of lesser concern:

Copyright© 2006 Hewitt Associates 13 People Issues Substantially Impact Deal Pricing Transaction costs Integration/ implementation costs Value of synergies to acquirer Stand-alone value of acquirer Stand-alone value of target ? $ Maximum price for target

Copyright© 2006 Hewitt Associates 14 Most Important HR Issues During Due Diligence Retention of key staff and compliance with applicable laws are most important. Much fewer companies focus on long-term issues such as cultural fit:

Copyright© 2006 Hewitt Associates 15 HR Issues in Due Diligence Percent of Companies (Ranking 1, 2, or 3) According to ImportanceAccording to Complexity Retention of key employees41%27% Compliance with applicable laws3631 Quantification of severance/benefit obligations3235 Alignment of compensation and benefit plans2635 Leadership assessment2634 Cultural fit2549 Employee communications2423 Leadership retention1813 Corporate governance1613 Labor relations1425 Sales force effectiveness1017 Organizational structure 915 Orange shade: over 30% of companies rank this high HR issues rank slightly different when comparing importance vs. complexity:

Copyright© 2006 Hewitt Associates 16 HR Issues in Due Diligence Cultural Fit Organizational Structure Sales Force Effectiveness Corporate Governance Leadership Retention Labor Relations Employee Communications Alignment of Compensation & Benefits Plans Leadership Assessment Quantification Of Severance / Benefit Obligations Compliance With Applicable Laws Retention Of Key Employees Complexity Importance

Copyright© 2006 Hewitt Associates 17 Top HR Integration Issues According to Importance and Complexity Culture fit clearly dominates top HR concerns for importance and complexity during integration:

Copyright© 2006 Hewitt Associates 18 Assessing Cultural Fit and Employee Engagement Although widely acknowledged as critical in an M&A transaction, formal assessments of cultural fit or employee engagement are used only by a minority of companies: Cultural FitEmployee Engagement

Copyright© 2006 Hewitt Associates 19 Lessons Learned

Copyright© 2006 Hewitt Associates 20 Top Five Issues Requiring Greater Attention in the Future (Due Diligence AND Integration) Majority of participants have unified view on the top three issues which merit more attention in future due diligence and integration projects: cultural fit, leadership assessment, and employee communication:

Copyright© 2006 Hewitt Associates 21 Changes to be Made in the Next M&A Transaction Less than half of respondents said that the integration of merged or acquired companies was successful or very successful. To address this issue, companies are making plans to change the following processes:

Copyright© 2006 Hewitt Associates 22 Summary M&A activity will continue to increase in Asia Pacific (and mainly within Asia Pacific) Main reason for M&A in Asia Pacific is improved market access. This is followed by the desire to create a combined business, then the desire to achieve coordinated strategies While many companies are satisfied in the way they achieved deal synergies, there is a lack of using formal tools and processes, which leads to lost opportunities lost Immediate and short-term objectives drive the due diligence process, which can be a potential risk as long-term integration/transition concerns may not be addressed sufficiently The retention of key staff and compliance with the law is most important during due diligence Companies consider cultural fit and employee communication to be the most critical and challenging HR issues to overcome during M&A. This is similar to companies in other regions of the world. These issues, along with leadership assessment, will receive more attention in future M&As