1. 1 Chapter 5a Global mergers and acquisitions

2. 2 Business development choices INTERNAL SOLUTION EXTERNAL SOLUTION OwnershipPartnership AcquisitionMerger of equals Joint venture Alliance Minority investment Control/IntegrationFlexibility/Coordination/ Cooperation Business development

3. 3 Mergers & acquisitions  Increasingly numerous  Increasingly transnational  In nearly all industries  Pressure for globalization; need for global reach  Pressure on costs; search for economies of scale and scope  More diverse technologies and standards; need for “systemic innovations”  Solution selling; system integration  Shorter product cycles; need to develop business fast  More segmented markets; need for developing multiple marketing competencies  Refocusing on core tasks and competencies; leads to outsourcing Why? M&As are:

4. 4 4 Global mergers & acquisitions - billion $ value

5. 5 Strategic value Strategic objectives Value creation potential What are the benefits of the the merger/acquisition? What value do we get from it? Target/counterpart analysis Fit analysis Due diligence Valuation Expectations Is the deal feasible? Negotiation and design Price Financial architecture Operational organization Governance How much do we pay? How? How do we organize and manage? AGREEMENT Post merger integration Transition Integration Evolution How do we put the companies together? How do we work? DECISION-MAKING IMPLEMENTATION Framework for the analysis of M&As

6. 6 PROBLEMS IDEA ACQUISITION JUSTIFICATION DECISION- MAKING PROCESS Clarity of strategic objectives Fragmented perspectives Lack of operational perspectives Quality of planning process Momentum Problems in deciding to acquire or merge - Urgency - Secrecy - Personal stakes - Pressures

7. 7 Value creation in M&As? Value of the acquirer A Value of the acquired B Value of B minus acquisition costs Increased efficiency Learning from B Cost saving due to combined operations Increased revenues due to joint marketing and products complementarily Increased profitability from joint innovation STANDALONE VALUE Value coming from the acquired company SYNERGY VALUE Value coming from the combination of the two companies

8. 8 What factors make an acquisition justified?  Clarity of strategic purpose  A shared set of priorities among key deciders  A detailed understanding of the source of benefits  Close attention to the risks and how to manage them  A shared sense of time and timing  An operating-led acquisition team for each acquisition

9. 9 Due diligence

10. 10 Cultural due diligence Concentrated power Diffused power Role/process oriented Result oriented Hierarchy Group Tradition Innovation Narrow distribution of information Wide distribution of information Bureaucratic Entrepreneurial Seniority/ status Performance Process oriented Action oriented Individualistic Collective 1234512345 1234512345 1234512345 1234512345 1234512345 1234512345 1234512345 1234512345 1234512345

11. 11 Cultural due diligence cont. What to anticipate? How to deal with it? Views about business objectives: o Growth o Profitability o Risks o Long/short term o Shareholder value o Stakeholders Views about competitive approaches: o Customer orientation o Pricing o Importance of quality o Importance of technology o Ethics Ways to manage: o Leadership style o Trust/control o Motivating factors Communication: o Openness/secrecy o Formal/informal o Importance of personal relationships Acquirer Acquiree

12. 12 Organisational due diligence What to anticipate? How to deal with it? AcquirerAcquiree STRUCTURAL DIFFERENCES: o Centralisation/Decentralisation o Form of organisation SYSTEMS AND PROCESSES: o Importance of formal systems o Sophistication of financial controls o Quality of IT o Importance of teamwork/ committees PERFORMANCES o Performance-based rewards o Career mobility o Quality of management

13. 13 Valuation of M&As after due diligence: a summary Standalone value as acquired +/ Adjustments to standalone +/- Synergies Free cash flow based on: a)Existing revenues - costs b)Projected growth c)Project costs Given: WACC Terminal value Debts Transaction fees + Disposal of assets - Exceptional expected cash outflow: Litigation Tax liabilities + Costs improvements: Rationalization Overheads Reduction Lay-offs + Additional revenues coming from: Quality improvement New team - Additional capital advertising, R&D expenditures - Contracts termination + Revenues synergies + Cost synergies + Financial synergies - cost of integration

14. 14 Pre-acquisition Due diligence Negotiation Valuation Memorandum of understanding MOU Letter of intent LOI Confidentiality agreement Agreement Legal process Contract Outstanding issues subject to.. Acquisition process flow

15. 15 SCOPE PRICE Mode of payment MANAGEMENT & STAFFING (for mergers) COVENANTS CONFLICT RESOLUTION What is for sale? 100% or partial Share or assets Transfer of rights: (Patent, brands, distribution agreements, licenses, contracts.) Mode of valuation Debts Cash Stocks Conditional clauses Board Positions Decision-making Control Recruitment Careers Remuneration Arbitration Conditions for closing Non-competitive clause Retention of key executives Hidden liabilities NEGOTIATION

16. 16 Value creation for shareholders in M&As

17. 17 Failure rates of M&As Mercer Group KitchingBooz Allen & Hamilton McKinseyPorterAT KearneyKPMG 1965-1970 1970-1984 1950-1984 1990-19951993-19961996-19981998-2000 Management assessment Cost of capital Divestments of acquisitions Stock market returns

18. 18 The odds are against success Potential merger results Is there a sound strategy guiding the combination? Is the combination implemented well? YesNo Yes No

19. 19 Pre-merger  Lack of strategic fit (d ifferent business logistics )  Poor due diligence  Overestimation of synergies  Empire building  Politics Deal  Excessive premium  Bidding fever  Pressures Post-merger  Lack of leadership  Poor communication  No integration plan  Unable to reduce anxiety  Too much emphasis on costs not enough on growth  Too inward-looking  Departure of good people Acquisitions go wrong for many reasons  Loss of key customers  Lack of trust  Sticking to theory ( forced synergies)  Clash of cultures  Lack of shared vision  Failure to show results fast  Inadequate funding  Politics

20. 20 Post M&A design 1.The “What” question (scope): –Which integration plan makes most economic sense 2.The “How” question (style): –Hard: acquirer imposes –Soft: build sufficient consensus on the plan to allow for a smooth execution 3.The “When” question (speed): –How fast?

21. 21 Same business Same customers Same economic, social, political environment Similar cultures Negative profitability Unstable/ declining market share Weak management Different business Different customers Different economic, social, political environment Different cultures High profitability Stable/ improving market share Strong management High operational synergies Low operational synergies How much autonomy due to differences in culture and business context Low need for autonomy To what extent do the operations need integration? High need for autonomy High need for integration Low need for integration Scope alternatives

22. 22 Difference in competitive contexts Need for organisational autonomy High Low High Low PreservationSymbiosis Absorption Amount of operational synergies Need for interdependence Scope alternatives cont.

23. 23 Preservation Keep separate Protect existing capabilities of the acquired firm Slow diffusion of target’s knowledge to the acquiring Facilitate innovation Example: Sony/Columbia Scope alternatives cont. Key integration tasks in preservation acquisitions Absorption Key integration tasks in absorption acquisitions Take advantage of scale economies Example: GE Capital, Novartis Symbiosis Start with preservation Selective integration Two ways transfer of capabilities Key integration tasks in symbiotic acquisitions Rapid and complete integration Implement best practices Harness complementarities Best of both: Air France/KLM

24. 24 Absorption Common operating procedures are adopted ( transfer of best practices or practices of acquirer). The target is completely integrated within the structure of acquirer or a new integrated structure is adopted. CULTURESTRUCTUREOPERATIONS Common culture is imposed or created. Example: SmithKline and Beecham More detailed scope alternatives No operational integration: only financial Reporting. The two companies are kept structurally separate. Only few reporting lines. Cultural differences are maintained. Example: Sony/ Columbia Preservation Selected operations are co-ordinated and common procedures are adopted ( transfer of best practices or practices of acquirer). Structures generally separated either legally or under a divisional form. Norms of conduct and expectations are established and revised over time to enhance cooperation and co-ordination. Symbiotic Example: Air France/KLM Most cross borders acquisitions belong to the symbiotic category since the majority of cross-border acquisitions are horizontal (same business) in dissimilar competitive environments.

25. 25 The post-merger integration phases PMI planning Transition phase Integration phase DealNegotiationImplementation (3 to 12 months)  Articulate vision for the combined company  Develop process and principles  Create transition team and leadership  Gather data (DD + cultural assessment)  Prepare a communication plan  Prioritize actions  Set integration teams and structure  Create performance milestones for each team  Look for short term wins  Reporting structure  Launch teamwork  Review, assess and implement recommended actions  Communication  Finalize integration  Finalize organisation  End/transform integration teams

26. 26 The post-deal situation  High emotional stress and anxiety - Employees - Suppliers - Distributors - Community  Uncertainty about future direction  « Synergies » still very theoretical  Cultural divide: - Values - Mindset - Competitive and business logic - Experience  Stereotypes  Systems and processes compatibility  Personality clash

27. 27 * * New sense of purpose * Mutual understanding * Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect Leadership Interface: ability to understand the two cultures Action-minded Communication Listener Clarity of message Commitment Transition phase

28. 28 * Leadership * Mutual understanding * Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect New sense of purpose Concrete objectives Consistent message to all parties Clarity of message Commitment Transition phase cont.

29. 29 * Leadership * New sense of purpose * * Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect Avoid cultural stereotypes Teamwork Data-driven Avoid a priority (agnostic) Mutual understanding Transition phase cont.

30. 30 * Leadership * New sense of purpose * Mutual understanding * * Credibility and commitment * Communication * Show respect Cross-functional teams Concrete agenda Shoot for short-term wins Customer and Operations focus Provides process methodology and measurement Harness complementarities Integration teams Establishing control Strengthening the operations Transition phase cont.

31. 31 * Leadership * New sense of purpose * Mutual understanding * Straight communication Realism Manage by phases Adopt best practice without bias Integration teams * Establishing control * Strengthening the operations * Credibility and commitment * Communication * Show respect Transition phase cont.

32. 32 Integration team structure Integration team leadership Top 2-3 executives from each company Provides direction, control, go/no go decision Meets every 2 weeks HR Sales & distribution IT Finance and accounting Marketing Procurement Manufacturing Operations R&D Each team works either full time at first and or twice a week later depending upon the nature of the task. Agenda: propose concrete actions to be submitted to integration team leadership.

33. 33 People and cultural issues in mergers and acquisitions

34. 34 Who does what? AcquirerAcquiree Top Middle Low Plan; negotiate Implement

35. 35 Stress and commitment cycles in a merger High Low Rumor Announcement Transition planning Transition implement- ation Post- transition Stress Commitment

36. 36 The “merger syndrome” Personal reactions  Distractions from job performance  Resistance to change  Worst-case scenarios and rumor-mongering  Feelings of fear, betrayal and anger Organizational reactions  Crisis management  War-room and combat mentality  Decreased communication (downward)  Increased centralization (upward) Cultural reactions  Clash of cultures  We (superior) versus they (inferior) syndrome  Stereotypes and chauvinistic biases  Hostility and distrust

37. 37 Manufacturing and logistics Sales and marketing Research and development General and administrative Purchasing Business developments Phaseout of products & parts complexity management Organization Finance and cost  Launch 22 new models  Introduce a mini-car model by 2002 in Japan  Cut number of suppliers in half  Reduce costs by 20% over three years  Close three assembly plants in Japan  Close two power-train plants in Japan  Improve capacity utilization in Japan from 53% in 1999 to 82% in 2002  Move to a globally integrated organization  Increase output efficiency by 20% per project  Move to a single global agency  Reduce SG&A costs by 20%  Reduce distribution subsidiaries by 20 in Japan  Close 10% of retail outlets in Japan  Create prefecture business centers or common back offices  Reduce SG&A costs by 20%  Reduce global head count by 21,000  Dispose of non-core assets  Cut automotive debt in half to $5. billion net  Reduce inventories  Reduce number of plants in Japan from seven to four by 2002  Reduce number of platforms in Japan from 24 to 15 by 2002  Reduce by 50% the variation in parts (due to differences in engines or destination, for example) for each model  Create a worldwide corporate HQ  Create regional management committees  Empower program directors  Implement performance- oriented compensation and bonus packages,including stock options 9 Nissan’s cross-functional teams Global alliance committee

38. 38 11 Renault-Nissan cross-company teams Products Marketing & sales Asia ComponentsVehiclesProcurementLogistics Marketing & sales Europe Marketing & sales North America Marketing & sales Central America Marketing & sales South America Marketing & sales Others Global alliance committee

39. 39 Carlos Ghosn as a leader Clarity of vision Hands-on Data-driven (No preconceived idea) Consistent (‘Say what you think and do what you say’) Demanding but respectful Listening but deciding Sets example by his own behaviour Communicates clearly Insists on concreteness Insists on time factor