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March2002Merger IntegrationIntellectual Capital CollectionGeneric ProposalA.T.Kearney4/1375C/MergerIntegration108319_Macros2Table of contentsTable of contentsnExecutive SummarynOur Understanding of Your SituationnA.T.Kearneys Perspective on Merger IntegrationnProposed Overall ApproachnRealizing Integration SynergiesnIntegration ManagementnA.T.Kearney QualificationsA.T.Kearney4/1375C/MergerIntegration108319_Macros3Executive SummaryExecutive SummaryThis section is tailored to the client This section is tailored to the client situation and summarizes the approach situation and summarizes the approach proposed in the documentproposed in the documentA.T.Kearney4/1375C/MergerIntegration108319_Macros4Our Understanding your Our Understanding your SituationSituationThis section is tailored to the client This section is tailored to the client situation and summarizes the key drivers situation and summarizes the key drivers of the merger.It should highlight of the merger.It should highlight relevant quantitative and qualitative relevant quantitative and qualitative analysis that demonstrate our insight into analysis that demonstrate our insight into the clientthe clients particular challenges and s particular challenges and drivers of success for the integrationdrivers of success for the integrationA.T.Kearney4/1375C/MergerIntegration108319_Macros5A.T.KearneyA.T.Kearneys Perspective s Perspective on Merger Integrationon Merger IntegrationA.T.Kearney4/1375C/MergerIntegration108319_Macros6The best value-builders combine organic growth with mergers and The best value-builders combine organic growth with mergers and acquisitionsacquisitionsSource:A.T.Kearney Monograph on Value-Building Growth 2001RevenueRevenueGrowthGrowthValue GrowthValue GrowthUnder performersUnder performersProfit SeekersProfit SeekersSimple GrowersSimple GrowersValue GrowersValue GrowersGrowth Matrix(CAGR 1988-Growth Matrix(CAGR 1988-20002000)Value Growers Follow Conscious,Constant Process To Growth Value Growers Follow Conscious,Constant Process To Growth A.T.Kearney4/1375C/MergerIntegration108319_Macros7Mergers and acquisitions are key growth driversMergers and acquisitions are key growth driversWhat really matters in What really matters in“acquisition for growthacquisition for growth”strategies strategies is executionis executionSource:A.T.Kearney Monograph on Value-Building Growth 2001Sources of GrowthSources of Growth40%of Growth Is From Acquisitions 40%of Growth Is From Acquisitions Value Value Growers Growers Manage Both Manage Both WellWellA.T.Kearney4/1375C/MergerIntegration108319_Macros8Few mergers actually create shareholder valueFew mergers actually create shareholder valueSource:A.T.Kearney Analysis 2001,SDC database,Global WorldscopeAcquirers Value Growth Following a MergerAcquirers Value Growth Following a MergerTop performing mergers create significant shareholder valueTop performing mergers create significant shareholder valueValue growth3 3%8 8%1212%2 27 7%2 21 1%1 16 6%3%3%Underperformance compared Underperformance compared to industry averageto industry averageOverOverperformance compared performance compared to industry averageto industry average-100%-100%-60%-60%-30%-30%30%30%60%60%150%150%-15%-15%15%15%0%0%Average:Average:2.8%2.8%49.5%49.5%50.5%50.5%Top-PerformingTop-PerformingMergersMergers1010%A.T.Kearney4/1375C/MergerIntegration108319_Macros9Business Integration issues require Business Integration issues require“u usualsual”management decisions while management decisions while four main factors add another level of considerable complexityfour main factors add another level of considerable complexity ScopeScopeHigh number of decisions to be made in all operational and functional areasDozens of projects/initiatives and risks to be managedTime pressureTime pressureAll stakeholders expect rapid execution(shareholders,employees,management,regulation committees,government,)Decisions need to be made without delaySimultaneitySimultaneityCo-existence of strategic,tactic and operational decisionsStrong inter-dependence of the decisionsShort term and strategic decisions may seem incompatibleHuman componentHuman componentHigh number of people potentially involved(operational,functional and executive people)Risk of cultural mismatchScarce resources to bridge between merged companiesUsual Management decisionsStrategy&IPODefinethescopeofcombinedentityConfirmeachcountrysscopeofactivityformobilesDesignstrategyleveragingonbroaderglobalpresenceDefinefinancialandoperationaltargetsaswellastimingofexpectedbenefitsPreparetheIPOOrganisationChoosethebestorganisationalmodelattheEuropeanmanagementlevelIdentifythecentral/localfunctionsevolutionscheduleDefineorganisationalchartsandmanagementnominationDefinekeydecisionprocesses(committees,procedures,)InfrastructureReducetotalcostofexternalpurchasesthroughbestpriceevaluationvolumeconcentration,competitivebiddingSharebestpracticesSupport functions Rationalisesharedsupports(AlignandselectInformationSystemsfortheintegrationAlignprocessesandsharebestpracticesCommunicationDefineexternalcommunicationstrategyDefineinternalcommunicationstrategySelectcommunicationrulesandproceduresChoosemedia(intranet,documents,speeches)Integration mgnt IntegrateoverallplanningandmilestonesDetailplanningbytopicandcountryManagetransitionphaseTrackandexecutefinancialsynergiesManagerisksA.T.Kearney4/1375C/MergerIntegration108319_Macros10 explaining why only few mergers and acquisitions succeed fully explaining why only few mergers and acquisitions succeed fully Note:(1)Shareholder returns from buyer divided by shareholder returns(industry average)after the mergerSources:A.T.Kearney analysis,Global PMI Survey,1998;DatastreamHigherHigherNoNochangechangeLowerLower100%=230 companies100%=230 companiesOnly 29%of Companies Realize an Only 29%of Companies Realize an Increase in Aggregate Increase in Aggregate ProfitabilityProfitabilityPerformance relative to industry average10%11%21%18%17%23%-15%-25%+15%+25%Top PerformingMergersUnder performance Outperformance Number of companiesIndustry averageOnly 42%of Companies Outperform Their Peers in Shareholder Value(1)42%58%A.T.Kearney4/1375C/MergerIntegration108319_Macros11Top performers across most industries can create significant Top performers across most industries can create significant shareholder valueshareholder valueCreation ofShareholderReturnsErosion ofShareholderReturnsNote:(1)Total shareholder returns percentage over/under performance relative to industry index in the timeframe between 3 months before and 24 months after merger announcement;total shareholder returns defined as the tangible returns investors receive through dividends and stock price appreciationsSources:Datastream;A.T.Kearney Analysis 2001RetailersRetailers62.5%64.5%32.3%44.2%26.6%49.9%34.2%26.6%36.1%25.1%16.0%43.3%26.0%27.5%17.2%17.4%31.9%22.4%18.0%40.4%17.4%14.8%4.0%-6.5%-31.5%-38.9%-10.8%-25.9%-11.0%-35.0%-20.6%-17.6%-28.8%-18.0%-9.7%-39.6%-22.7%-24.9%-17.4%-20.3%-35.3%-26.7%-24.1%-46.8%-26.5%-27.2%-19.4%-24.1%RecreationRecreationChemicalsChemicalsMetal ProducersMetal ProducersPaperPaperTransportationTransportationDiversifiedDiversifiedDrugs,Cosmetics&Health CareDrugs,Cosmetics&Health CareUtilitiesUtilitiesAutomotiveAutomotivePrinting and PublishingPrinting and PublishingElectronicsElectronicsFinancialFinancialBeveragesBeveragesMetal Products ManufactureMetal Products ManufactureFoodFoodTobaccoTobaccoMachinery&EquipmentMachinery&EquipmentElectricalElectricalMiscellaneousMiscellaneousOil,Gas,Coal&Related ServicesOil,Gas,Coal&Related ServicesConstructionConstructionTextilesTextilesAerospaceAerospaceIndustry Specific Ranges of Value CreationIndustry Specific Ranges of Value Creation(1)(1)A.T.Kearney4/1375C/MergerIntegration108319_Macros12Once the deal is closed,the principal problems relate almost entirely Once the deal is closed,the principal problems relate almost entirely to failures in to failures in merger managementmerger management,rather than to the underlying,rather than to the underlying strategic rationalestrategic rationaleProblems Identified inProblems Identified inMerger IntegrationMerger IntegrationUnder-communicationUnder-communicationFinancial/synergy Expectations Unrealistic/UnclearFinancial/synergy Expectations Unrealistic/UnclearNew Org.Structure With Too Many CompromisesNew Org.Structure With Too Many Compromises“Master PlanMaster Plan”Missing MissingMissing MomentumMissing MomentumMissing Top Management CommitmentMissing Top Management CommitmentUnclear Strategic ConceptUnclear Strategic ConceptMissing Pace of ProjectMissing Pace of ProjectIT Issues Addressed Too LateIT Issues Addressed Too LateSource:A.T.Kearneys Global Merger Integration Survey 1998Percent of RespondentsPercent of RespondentsA.T.Kearney4/1375C/MergerIntegration108319_Macros13To manage inherent risks,To manage inherent risks,“critical success factorscritical success factors”can be distilled can be distilled from successful large-scale mergers to guide value creationfrom successful large-scale mergers to guide value creationCritical Success Factors from Large-Scale MergersCritical Success Factors from Large-Scale MergersSource:A.T.Kearney Merger IntegrationCreateasenseofurgencyandreduceuncertaintythroughcleareventmilestones,andmovequicklySelecttop-levelleadershipquicklyandfairly;avoid“two-in-the-box”leadershipforintegrationplanningandexecutionunlessabsolutelynecessarySetoutsynergygoalsandobjectives,toprioritizeactivitiesandprovideabaselineforperformancetrackingManagemarketexpectationscarefully.SetconservativedollartargetswithatimeframethataccommodatesunforeseencircumstancesKeepstrong,explicitfocusonkeycustomerretentionandservicewithteeth(i.e.,measurementandtracking)MaintainopenandtimelycommunicationswithemployeestoensureunderstandingandretentionConductdecentralized merger IntegrationguidedforciblyviaClearguidingprinciplesOverallframeworkandtoolsforintegrationReportingstandardsEstablishastrongcentralIntegrationofficeanddecentralizedIntegrationteamswithcorporate-wideperspectivesonResultsProjectstatusRiskLeadroleoninternal/externalcommunicationsInstillrobust,well-definedprocessestoensureobjectiveandtimelyriskandinterdependencytrackingSense of UrgencyTop-Level Leadership Selected QuicklyClear Synergy GoalsManage Market ExpectationsExplicit Focus on CustomersOpen,Timely and Consistent CommunicationsDecentralized Merger IntegrationStrong Central Integration OfficeWell-Defined ProcessesA.T.Kearney4/1375C/MergerIntegration108319_Macros14Source:A.T.Kearneys global PMI survey 98Value Capture of Top Performers Over TimeValue Capture of Top Performers Over Time15%15%Year 1Year 1Year 2Year 2Cumulative ValueCumulative ValueCaptureCapture After Two Years After Two Years85%85%TimeTimeClosingClosingthe Dealthe Deal1 12 23 34 45 56 67 78 89 91010-10-10-8-8-6-6-4-4-2-20 02 24 46 6ValueValueCapture/LossCapture/Loss($MM)($MM)Year in Which Synergies Are RealizedYear in Which Synergies Are RealizedTiming of Synergy Realization Is Also CriticalTiming of Synergy Realization Is Also CriticalSource:Marl L Sirower:The Synergy Trap.Calculated based on a$10MM acquisition premium,representing 50%of market valueIn our experience,the most critical element in achieving targeted In our experience,the most critical element in achieving targeted benefits is speedbenefits is speedA.T.Kearney4/1375C/MergerIntegration108319_Macros15Proposed Overall ApproachProposed Overall ApproachA.T.Kearney4/1375C/MergerIntegration108319_Macros16A.T.Kearney has a flexible merger integration framework with a A.T.Kearney has a flexible merger integration framework with a comprehensive toolkit to support planning and implementation comprehensive toolkit to support planning and implementation throughout the merger processthroughout the merger process to ensure value capture to ensure value captureA.T.KearneyA.T.Kearneys Merger Integration Frameworks Merger Integration FrameworkDevelop StrategyDevelop StrategyEstablish Structure Establish Structure and Planand PlanMerger/Acquisition optionsCreate/articulate/validateMarkets/customersCompetitionResourcesSources of valueUnderstand type of mergerEstablish the integration programBuild integration capabilityAssess sources of valueDevelop organization strategy&designDevelop IT integration strategyDesign/harmonize HR policiesCreate master plan and prioritizeValidate sources of valueImplement quick hitsDevelop SOV IT enablersImplement HR planMonitor progress and riskExecute the planRealign the organizationImplement IT integration planMerger Merger Manage-Manage-mentmentSourcesSourcesof Valueof ValueMergerMergerEnablersEnablersChange of ControlChange of ControlShareholder ApprovalShareholder ApprovalMOUMOUIntegrated Integrated Planning Planning and Initial and Initial RolloutRolloutFull-Scale Full-Scale RolloutRolloutDayDayOneOnePhase 0Phase 0Phase IPhase IPhase IIPhase IIPhase IIIPhase IIIMultiple Multiple ToolsToolsExist for All Exist for All CellsCellsA.T.Kearney4/1375C/MergerIntegration108319_Macros17This allows merging entities to rapidly capture available sources of This allows merging entities to rapidly capture available sources of value value by focusing on operational synergies,as well as seamlessly by focusing on operational synergies,as well as seamlessly merging the organizationsmerging the organizationsMerge the Merge the Organizations as Organizations as Seamlessly as PossibleSeamlessly as PossibleDevelop and communicate a shared strategic agenda DefineOrganization structures/leadershipKey business processesTechnology platform/architectureChange integration requirementsDrive top line growthNew value propositions/productsCross selling/sales pull throughEnsure customer focus/retentionIntegrate day-to-day Integrate day-to-day operations operations Ensure sustainable changeEnsure sustainable changePosition for growthPosition for growthAchieve$XX million(annual rate)of synergy savings within 1218 monthsSalesOperationsProcurementCorporate overlap and duplicationCost of distributionTechnology/R&DOthers to be identifiedEliminate/minimize sources of riskDrive the short-term valueDrive the short-term valueExceed the marketExceed the markets s expectationsexpectationsMI Sources of ValueMI Sources of ValueAchieve Growth Synergy Achieve Growth Synergy and Cost Synergy and Cost Synergy Targets as Quickly as Targets as Quickly as PossiblePossibleA.T.Kearney4/1375C/MergerIntegration108319_Macros18The program structure supports focused value capture teams working The program structure supports focused value capture teams working across all SBU/Geographic teamsacross all SBU/Geographic teamsIllustrativeIllustrativeIntegration OfficeIntegration Office OthersOthersSteering CommitteeSteering Committee BusinessBusiness Develop-Develop-ment ment TeamTeamCorporate Corporate CenterCenterTeamTeamGlobal Global OperationsOperationsTeamTeamGlobal Global SourcingSourcingTeam Team TechnologyTechnology/R&DR&DTeamTeamHuman Human ResourcesResourcesTeamTeamInformation Infor