1. M&A INTEGRATION – HOW TO BEAT THE ODDS & BE SUCCESSFUL

2. Merger & Acquisition Trends

3. 3 M&A activity has been at record levels in the U.S. and globally. Source: The New York Times, 1/3/2016

4.  Low interest rates  Relatively stable economy  Lots of cash on corporate balance sheets  Activist investors  “Tax inversion” deals  For most of 2012-15, acquirer stock prices have been rewarded upon announcing a deal  Tempered expectations for global growth Drivers for Mergers & Acquisitions 4

5. But, Capturing Deal Value is Elusive…

6.  In a survey of more than 400 U.S. and European corporate executives published by Accenture, 55% of executives said that their most recent deals did not achieve expected cost- saving synergies.  A McKinsey study found that in 70% of the deals studied the buyer failed to achieve the expected levels of revenue synergies.  Of 277 big M&A deals in America between 1986 and 2000, 64% destroyed valued for the acquirer’s shareholders. The Research Shows 6 1 Survey by The Economist and Accenture, March 2006 2 Where Mergers Go Wrong, McKinsey Quarterly, May 2004 3 The M&A Paradox: Factors of Success and Failure in M&A - Weber, Oberg, Tarba, 2014 Research studies have shown the rate of M&A deal failures of at least 50%...and up to 83%.

7.  In the mid-1990s, Chrysler Corporation was the most profitable automaker in the world. Chrysler had taken a risk in producing vehicles that captured the bold American spirit – eg. the Dodge Ram, the Jeep Grand Cherokee. Chrysler's integrated design teams and noncompetitive relationships with suppliers kept costs down.  In 1998, threatened by an activist shareholder, Chrysler agreed to merge with Daimler-Benz in a $36B stock-swap deal.  The merger was hailed as a “merger of equals, a merger of growth, and a merger of unprecedented strength” to serve both the mass and the luxury markets. The combined company would take advantage of synergy savings in retail sales, purchasing, distribution, product design, and R&D. 9 Years Later…  In 2007, after losses in the billions, Daimler sold 80% of Chrysler for $7.4B to a PE firm, Cerberus Capital. Example 7

8.  Rupert Murdoch’s News Corporation had grown into a successful global media conglomerate. It’s holdings included dozens of well-known newspapers, magazines, Fox Broadcasting, Fox News, etc.  Successful acquisitions included 20 th Century Fox, Hong Kong based STAR-TV, and many more globally.  In 2005, News Corp acquired MySpace for $580M, to bolster its Digital Media division.  At that time, MySpace was the world’s fastest-growing social network, with 20 million unique visitors each month in the US. That number soon soared to 70 million. 6 Years Later…  After several years of disappointing results, and losing to Facebook in social networking, in June 2011, MySpace was sold to the advertising network Specific Media for approx. $35 million. Another Example 8

9.  The consequences of a bad deal are far greater for a mid-market company (those < $1B revenues) than for a big corporation  Large companies have more managers & resources to resolve problems  Challenges for a mid-market company  Typically have less experience on M&A  Sufficient management bandwidth to take on the integration process, PLUS run the current business  Underestimating the integration costs and risks, especially if the deal is outside of your core business  Impact to financials/earnings is proportionally more for a mid-market company Word of Caution for Mid-Market Acquirers 9

10. 10 Why Are Deals Not Achieving Expected Value? “The success or failure of an acquisition lies in the nuts and bolts of integration.” - Harvard Business Review “The Big Idea: The New M&A Playbook” Professor Clayton Christensen, et al “The success or failure of an acquisition lies in the nuts and bolts of integration.” - Harvard Business Review “The Big Idea: The New M&A Playbook” Professor Clayton Christensen, et al “Most deals look great on paper, but few organizations pay proper attention to the integration process—that is, how the deal will actually work once all the paperwork is signed.” - “Why Half of All M&A Deals Fail, and What You Can Do About It”, Forbes, 3/19/2012 “Most deals look great on paper, but few organizations pay proper attention to the integration process—that is, how the deal will actually work once all the paperwork is signed.” - “Why Half of All M&A Deals Fail, and What You Can Do About It”, Forbes, 3/19/2012

11. 11 Integration is Really Hard Organizational efficiencies System integration Spend reduction Revenue growth > 1+1 = 2 New Go-to-Market value proposition Better defined processes Improved efficient organization Customer experience Employee experience Target operating model Processes and systems How to capture synergies, such as… And strategically position against competition… While integrating our… Financial performance Current customers Employees Shareholders Vendors / suppliers Without negative impact to…?

12. “Companies that acquire with frequency and make it a major core competency tend to do well and perform better than their peers.”  Ref: Why Do So Many Mergers Fail? - Prof. Martin Sikora, Wharton School of Business  Executing Mergers & Acquisitions is an organizational “skill”  Like any other Skill – the more you do it, the better you get at it  Experienced Acquirers – have significantly higher success rates than the “average”  The ability to execute M&A can be a strategic competitive advantage  Successful Acquirers take advantage of best practices, lessons learned, and organizational learning The Key to Integration Success

13.  Identify & retain key personnel  Manage cultural issues  Communications & change management  Starts at the top  Quick decision-making  Clear ownership  Complete  Standalone  Hybrid  Growth  Increase scale  Cost reduction  Establish formal IMO  Cross functional execution  Identify necessary resources  Leverage best practices  Formal methodology & process  Capture lessons learned Manage your integration based on key focus areas: A Framework to Improve Integration Success People First Deal Drivers Level of Integration Leadership Setup the Team Continuous Improvement

14. Start with Clarity on Value Drivers

15.  Be absolutely clear on the key “Value Drivers” for the business you are acquiring  Requires detail understanding of the market in which it competes  Example Value Drivers:  Acquired customer base  Efficient operations which drive a lower cost of manufacturing  Industry-leading technology  The Value Drivers are commonly included in the Deal Justification, but sometimes are not truly fleshed-out  Especially if you are expanding in markets outside your expertise  Need to dynamically model customer trends, competition moves, etc.  “Pre-mortem assessment” is a technique which can be helpful  Be sure your Integration Plans define the “Future State”  Define measurable Success Metrics tied to the Value Drivers Key Best Practices 15

16. Daimler-Chrysler  From about 1988 to 1998, Chrysler had aggressively modularized its products, outsourcing the subsystems to its tier-1 suppliers. This simplified its design processes that Chrysler could cut its design cycle from 5 years to 2 (compared with about 6 years at Daimler) and could design a car at one-fifth the overhead cost that Daimler required.  Pressure for “synergy savings” resulted in Daimler folding Chrysler’s resources (factories and technology) into its operations. The real value of Chrysler (it’s speedy processes and lean profit formula) then disappeared. News Corp acquisition of MySpace  In the 2005-2009 timeframe, the critical success factor for the emerging “social networking” technology was innovation.  After the acquisition, MySpace did not innovate much. One limitation - the site was built on Microsoft’s.NET technology, which was ill-suited to a site for 10’s of millions of users.  Upstart Facebook focused on product development & innovation. In 2007, Facebook opened its platform to 3 rd party developers. MySpace followed suit, but over a year later.  By 2009, Facebook had surpassed MySpace in unique visitors per month, and kept growing. Case Studies – Failing to Understand Where the Value is 16

17. Acquisitions Must be Led, Not Managed

18.  The highest level Exec possible, in most cases the CEO, should communicate the Vision & Strategic Rationale for the merger or acquisition.  During times of change – people need to see visible, engaged Leadership.  Leadership alignment – between the two companies  As soon as possible, to align on a Shared Vision, Guiding Principles, what is the Future State for the combined business  Accelerate team effectiveness: forming, storming, norming, performing (Tuckman’s model)  Establish, and live by, “Guiding Principles,” for example:  No Layoffs  Customer Satisfaction is the top priority  Define process for escalating issues, and decision-making. Key Best Practices 18

19. Daimler-Chrysler  The deal was publicized in 1998 as a “Merger of Equals”, however it quickly became apparent that Daimler-Benz was in charge.  Daimler CEO Jürgen Schrempp and Chrysler CEO Bob Eaton did not communicate much. Schrempp felt the Chrysler team had done a great job in the past, and left them alone. Eaton appeared detached.  With a top leadership vacuum, and growing cultural differences, key Chrysler VP’s (engineering & manufacturing) left to go to Ford. Many others fled to GM or Ford.  Eaton retired in 1999. It was not until 11 months after, that Schrempp installed a German management team in November, 2000. During that interval, Chrysler bled cash. Case Study – Leadership Mis-Steps 19 References from “The DaimlerChrysler Merger” – Prof. Finkelstein, 2002, Tuck School of Business at Dartmouth

20. Setup the Integration Team for Success

21.  Closing the Deal is a sprint; Integration is a marathon.  A central PMO (or IMO) for managing cross functionally, centralized communications, and consistent management reporting.  Develop and document a detailed Integration Plan, identify potential risks, budget, and resourcing to execute on the Plan.  Having merger integration experience on your team is critical. Best Practices - Structuring the Integration Team 21 A merger integration is a complex, cross-company change initiative, with high visibility, a tight schedule, many risks, and many cross-functional dependencies.

22. Example - Structured Integration Team Exec Steering Committee Integration Management Office (IMO) Security Finance Other Functions HRManufactIT Program & Project Management Systems FP&A Operations Supply Chain Oversight & Governance Manage & Coordinate Function or Workstream Tracks (execution) The IMO meets weekly to track progress, resolve issues, and communicate cross-functionally. Each Function holds their own meetings as needed, and frequently updates the IMO. Communications & Change Management Org Design Comp & Benefits SOX/Audit Accounting

23. Deal with People Issues First

24.  Early in the process, identify key personnel, and develop retention strategies  Conduct cultural and talent due diligence, and develop strategies for alignment  Ensure mechanisms are in place to collect and address feedback  Improve the speed of acceptance for changes with clear communication & change management Best Practices - Address the People Issues 24 People issues and cultural compatibility are often cited as top integration failure factors.

25. Culture Affects the Integration Approach

26. Daimler-Chrysler  Brand Differences – Mercedes universally perceived as the high-quality, German engineered car. Chrysler, Dodge, Plymouth, and Jeep were the blue-collar cars, with the image of assertiveness and cowboy aura.  The plan was for Chrysler to use Daimler parts, components and vehicle architecture. However, the Mercedes-Benz luxury division was reluctant to share with its mass-market partner.  Despite spending several millions on cultural sensitivity workshops for its employees, the brand perceptions fueled an undercurrent of tension. This was amplified by different wage structures, with American workers earning appreciably more than their German counterparts. News Corp acquisition of MySpace  The critical success factor for the emerging “social networking” space was innovation. Despite News Corp’s vow to ‘not disrupt anything,’ “the corporate policies creeped in, the lawyers, accountants…They started to become slow.” 1 Case Studies – The Impact of Culture 26 1 Excerpt from “ MySpace – What Went Wrong” – The Guardian, 3/6/2015

27.  Pixar brought creative team of graphics engineers, illustrators  Disney has the marketing, distribution network  Successfully addressed the cultural issues  Has delivered successful movies including: Wall-E, Up, Toy Story 3 Successful Examples of Merger Integration 27  Chinese manufacturer acquired the IBM PC business in 2005  Lenovo PC’s continue to be highly-rated products  Some of top IBM execs (GM, CTO) still at Lenovo 10 years later  Lenovo’s Hong Kong-listed shares have risen more than 5X since 2005

28.  In 2008, Chrysler was on verge of bankruptcy. The US Government stepped in, and arranged for Fiat to acquire up to 35% of Chrysler in 2009.  Fiat had lots of capital, and excellent small, efficient engine technology. Both companies produced in mass, thus their production processes and marketing were quite similar.  CEO Sergio Marchionne has actively run both automakers since 2009.  In 2010, the intro of the newly-designed Jeep Grand Cherokee is a success; U.S. Chrysler dealers start to sell the Fiat 500.  In 2014, Fiat SpA bought the rest of Chrysler it did not already own for $4.35B.  Chrysler is once again an efficient, successful and profitable company. It is the main source of profit for the combined Fiat-Chrysler. Successful Examples of Merger Integration 28

29. 29 Maturity Curve for Merger Integration “Ad-Hoc”  Infrequent deal flow, typic. 1-3 deals per year  Ad hoc integration teams  No consistent integration process  Integration issues considered post-close  Limited knowledge capture; lack of repeatable processes “Managed”  Regular deal flow  Designated integration teams  Development & documentation of integration processes  Integration issues considered during Due Diligence  Use of post-mortems, capture of key learnings, best practices “Strategic Competence”  Growth via M&A is a corporate initiative  Dedicated IMO & established integration teams, with career ladder  Well-defined integration processes, segmented by deal scenario/type  Integration considered during Target Selection  Clear metrics to measure process performance  Consistent use of best practices  Continual focus on process improvement, benchmarking Maturity(high)(low) Integration Capabilities

30.  A high proportion of M&A transactions fail to achieve the desired results. One root cause is ineffective integration.  There are many challenges to executing a merger integration successfully.  There is a maturity curve for merger integration. Companies can develop the capability as a corporate competence, just as they would for any other organizational capability.  Successful Acquirers take advantage of best practices, lessons learned from other deals, and organizational learning  Experienced Acquirers – have significantly higher success rates than the “average”.  Those who develop the competency could have a strategic differentiator over their competition. Summary 30

31. Q&A Session

32. THANK YOU.

33. Your Presenter Today: George Chin RGP North American Managing Director, Transaction Services gchin@rgp.com