Copyright© 2006 Hewitt Associates Presenter - Ken Vijayakumar source – Hewitt Associate Mergers...

Copyright© 2006 Hewitt Associates

Presenter - Ken Vijayakumar source – Hewitt Associate

Mergers and Acquisitions in Asia Pacific (Module-19)

The Human Factor

Copyright© 2006 Hewitt Associates2

Today’s Agenda

• Background of Study

• Trends and Drivers

• Due Diligence and Integration

• Lessons Learned

• Q&A


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


Key Reasons for M&A Failure…People

Integrating Organizational Cultures Keeping Employees Focused

Engaging Employees in New Programs Integration HR/Benefit Programs

Per

cen

t of

Res

pon

ses

0%

10%

20%

30%

40%

50%

60%

70%

80%

United States Europe Latin America Asia-Pacific


Trends and Drivers


Anticipated Level of M&A Activity

Strong optimism about future M&A activity over the next two to three years:

Increasing significantly,

44%

Increasing slightly, 29%

M aintaining current, 19%

Decreasing slightly, 6%

Decreasing markedly, 1%


Anticipated Level of M&A Activity by Region

Most companies will focus geographically on Asia Pacific:

Within Asia-Pacific region,

59%North America, 12%

Europe , 12%

Africa, 9%

Do not know, 5%

South America, 3%


0% 20% 40% 60% 80%

Percentage of Respondents

Other

Shared tangible resources

Vertical integration

Shared know-how

Consolidation of functions

Coordinated strategies

Combined business creation

Improved market access

Rank 1 Rank 2 Rank 3

Why are Companies Acquiring?

Improved market access by far the number one driver of M&A activity:


Synergy Objectives

Growth Return

Improved Market Access

(bigger is better)

CombinedBusiness Creation

(new is better)

CoordinatedStrategies

(together we conquer)

SharedKnow How

(know more)

Vertical Integration

(process we own)

Consolidation of Functions

(serve more with less)

Negotiating Power

TaxBenefits

FinancialEngineering

Synergies with significant “People integration” Issues

Shared Tangible Resources

(use same for more)


Due Diligence and Integration: The Human Factor


Typical M&A Process

Timeline of M&A Events

CandidateScouting

FormalDue Diligence

Initial HR StrategyIdentify Implementation Leaders and Team

Program DesignDecisionsDetailed HR Strategy

StrategicPlanning

ConfidentialCourting

Price and TermsNegotiations

PreliminaryProgram Design

Implementation of Integration Plans

and ProgramsAnnouncementClosing“DAY 1”

CandidateScouting

FormalDue Diligence

Initial HR Strategy

Identify Implementation Leaders and Team

Program DesignDecisions

Detailed HR Strategy

HR Process

Strategic HR—Due Diligence Integration Preparation Integration

Strategy Assessment

HR—Liability & Synergy

Gap Assess.

DealInput

ProgramOfficeSetup

Create “100 Day”

Plans

Create Optimization

Plans...

Execute 100 Day

Plan

Execute Optimization

Plans

Monitor Synergy

Realization


0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Percentage of Respondents

Other objectives of the due diligence process:

To examine the impact of a potential deal on competitorsand industry

To identify w hat needs to be done during integration

To evaluate the identif ied synergies

To def ine the right price

To determine that the deal can be successful in theimmediate/near-term


Due Diligence Top Objectives

Immediate and short-term objectives dominate. Long-term issues are of lesser concern:


People Issues Substantially Impact Deal Pricing

Transaction costs

Integration/implementation

costs

Value of synergies to acquirer

Stand-alonevalue of acquirer

Stand-alone value of target

?

$

Maximum price for target


0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Percentage of Responses

Employee communications

Cultural fit

Alignment of comp. & ben. plans

Compliance with applicable laws

Retention of key employees

HR

Is

su

es


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:


HR Issues in Due Diligence

Percent of Companies (Ranking 1, 2, or 3)

According to Importance According to Complexity

Retention of key employees 41% 27%

Compliance with applicable laws 36 31

Quantification of severance/benefit obligations 32 35

Alignment of compensation and benefit plans 26 35

Leadership assessment 26 34

Cultural fit 25 49

Employee communications 24 23

Leadership retention 18 13

Corporate governance 16 13

Labor relations 14 25

Sales force effectiveness 10 17

Organizational structure 9 15

Orange shade: over 30% of companies rank this high

HR issues rank slightly different when comparing importance vs. complexity:


HR Issues in Due Diligence

0

10

20

30

40

50

0 10 20 30 40 50

Cultural Fit

Organizational Structure

Sales Force Effectiveness

Corporate Governance

Leadership Retention

Labor RelationsEmployee Communications

Alignment of Compensation & Benefits Plans

Leadership Assessment

Quantification Of Severance / Benefit Obligations

Compliance With Applicable Laws

Retention Of Key Employees

Complexity

Importance


0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Percentage of Responses

Employee communications

Decision-making

Leadership assessment and selection

Harmonization of compensation and benefitplans

Cultural fit

Are

as


Top HR Integration Issues According to Importance and Complexity

Culture fit clearly dominates top HR concerns for importance and complexity during integration:


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 Fit Employee Engagement

Measurement of Cultural Fit

Formal assessment

process, 13%

Informal assessment

process, 71%

No assessment for cultural fit, 17%

How Engagement is Measured

Focus groups/qualitativ

ely, 24%

Anecdotal information is gathered, 26%

Yes it is important, but it

was not measured, 16%

Survey/ quantitatively,

34%


Lessons Learned


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:

66%60%

58%

45% 44%

0%

10%

20%

30%

40%

50%

60%

70%

Cultural f it Employeecommunications

Leadershipassessment and

selection

Retention of keyemployees

Harmonization ofcompensation

and benef it plans

Issues

Pe

rce

nta

ge

of

Re

sp

on

se


52%49%

47%42%

26%23%

10%

0%

10%

20%

30%

40%

50%

60%

Strongerchange

managementprocesses

A morecomprehensiveassessment oftarget (pre-due

diligence)

Beginintegration

preparation andprocess sooner

Better alignmentbetw een

synergies andintegration

Bring additionalgroups into thedeal process

sooner

Move w ithgreater speedthrough during

integration

Others

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:


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

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Copyright© 2006 Hewitt Associates Presenter - Ken Vijayakumar source – Hewitt Associate Mergers...

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