M&A Integration
In association with:
A mergermarket report on issues surrounding post-deal integration for European companies
February 2007
ContentsIntroduction 1
Forewords 3
M&A Integration Survey Findings 8
M&A - A Game of Skill not Chance IBM 13
Unlocking Potential CMS Cameron McKenna 16
Investor Relations Survey Findings 21
Hedge Funds A worrying Factor in the
M&A market? Georgeson 28
Notes & Contacts 31
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M&A Integration, February 2007
Introduction
With M&A activity so pronounced in Europe over the past two years following a decline in the early part of the decade, the spotlight has fallen once again on the need to conduct post-deal integration quickly and effectively, and to demonstrate a protection and enhancement of business and shareholder value. A significant difference between the current and forecasted M&A market and the M&A bubble of the late 90s is the performance of the capital markets: in the past, a bullish global market all but guaranteed a rise in shareholder value, in many ways disguising how effectively integration served to build a strong underlying foundation for the business. This is no longer true - and the market is more aware than ever of M&A that does not deliver value.
In light of this increased attention, we are delighted to
publish M&A Integration - in association with CMS Cameron McKenna, Georgeson and IBM. The aim of the report is
to provide the reader with an insight into the integration
experiences and views of senior European corporates who
have carried out M&A programmes in recent years. We
explore their rationale for and approach to M&A integration,
and hope to illuminate some key factors in determining a
successful merger.
We interviewed 80 C-level corporates for our survey: 20
CEOs; 20 CFOs; 20 COOs; and 20 IT and HR Directors. All
had undertaken M&A transactions in the past 3 years.
Furthermore, we conducted a survey of 20 heads of Investor
Relations regarding proxy solicitation on M&A transactions,
and how pre-deal shareholder issues impact on post-deal
success.
CMS Cameron McKenna, Georgeson, IBM and
mergermarket hope you find this report both interesting and
insightful, and would welcome any questions, comments or
feedback you might have. Full contact details are available at
the back of the report.
Something tells usyoull want to fill in the blanks. Get The Global CEO Study 2006 at ibm.com/special/uk/ceo
what makes you special?
IBM, the IBM logo and What Makes You Special? are registered trademarks or trademarks of International Business Machines Corporation in the United States and/or other countries.Other company, product and service names may be trademarks or service marks of others. 2006 IBM Corporation. All rights reserved.
Two-thirds of the CEOs we interviewed expect their organisations to be
inundated with over the next two years. Some writers and analysts,
like Tom Friedman, view the world as . Others, like ,
assert that its spiky. But virtually everyone agrees that the topography is
fundamentally .The forces overturning the status quo are many
and varied. At the top of their list, CEOs mentioned market forces such
as and unexpected market shifts. But there were more.
CEOs told us that workforce issues, , regulatory
concerns and are all bearing down on their organisations,
forcing significant change. We believe that their views are justified.
11280 IBM Strategy Change A4_V1 10/13/06 11:52 AM Page 1
M&A Integration, February 2007
Foreword
It was late Friday evening, and, rather than leave for his usual round of golf, Simon was still at his desk fighting fires. For one of the few times in his career, he was stumped. The friendly acquisition by his company of their closest competitor, completed three months ago, had gone extremely well. Everyone from outside investors to his top management team had commented on how thorough the due diligence and negotiations had been.
The two groups had a complimentary range of products and skills, opportunities for cost-cutting were spotted early, and now everyone were doing what was key staying focused on the business. Why was it then that almost every day some new problem cropped up? The first months data showed an alarming drop in on-time order fulfilment. On Wednesday he had been told that, rather than being easy to integrate, the IT department was going to need an extra 500,000 and twelve months to sort out the mess. And now, to top it all, his long-standing FD had just resigned, saying somewhat cryptically that he just couldnt carry on working this way, and could no longer see a long-term future for himself in the new firm. That makes the fifth senior resignation since the merger, four of whom were in fact prior employees of his own company.
It remains an established fact a majority of all mergers or acquisition fail to reach the value goals set by top management. While the figures are improving, this survey clearly demonstrates that there remains some way to go many respondents stated for example that their most recent deal did not significantly improve factors such as operating cost, customer satisfaction, staff turnover, or share price, reasons often cited pre-deal in support of the acquisition.
What is clear is that a majority of deal failures are not due to poor selection of business partner, nor ineffective negotiation of the deal. More often than not, mergers and acquisitions fail to deliver because of poor post-deal integration. Failure comes in many forms: an inability to secure the cost savings anticipated, loss of customers, a reduction in combined shareholder value, or even an embarrassing de-merger twelve months on. In some cases poor integration of an acquisition has been directly responsible for the ultimate collapse of the business. Recent high-profile examples of troubled mergers abound, from HP Compaq to AOL Time Warner to DaimlerChrysler. In all of these cases, it is now widely recognised that success or failure was determined largely by their ability to integrate quickly and effectively.
So why is successful integration so elusive? Several obvious trouble spots tend to quickly appear loss of business focus, difficulties with IT, defection of key talent, conflicting working practices, and unaligned HR policies, especially in the area of staff remuneration. But these are only symptoms of deeper issues, and to deal with them, an understanding of root causes is necessary.
This post-merger integration survey provides some interesting insights and benchmarks into what management found key to integration success, both before and after deal closure. It highlights areas where management effort is typically focused during the process, who is typically involved at each stage, and when key activities such as combined business blueprinting are typically conducted. In line with other research, the largest problem areas continue to centre around people, specifically around softer issues such as culture, executive leadership, clarity across the business of the future vision and strategy, and insufficient communication of specific objectives to be delivered through the acquisition. On the harder side, the survey also tells us that some management teams fail to take sufficient time up-front to fully understand the way in which integration impacts all facets of an organisation, how to deal practically with this complexity, and how to prioritise the truly important vs integration distraction. Comprehensive, advanced planning and structured execution continue to rank highly as critical success factors.
Acquisitions are once again playing an increasingly major part in the growth strategy of most businesses. This trend is likely to accelerate over the coming few years due to factors such as the relative availability of cheap debt, the rise of private equity activity, and the consolidation and global expansion of businesses within emerging economic areas including Brazil, Russia, India and China. What differentiates this recent surge from the M&A boom of the late 90s is the fact that todays more volatile stock markets cannot be guaranteed to hide the impact of a poor integration. For some, the increasing financial transparency brought on by Sarbanes-Oxley also requires a more open view of acquisition and integration performance.
Successful acquirers always remember that the benefits of mergers and acquisitions do not come automatically once a deal is closed. Completing an acquisition only buys you the opportunity to generate value in your business, integration is what delivers it.
Carlos Keener Post Merger Integration Specialist
In fact, understanding is what sets us apart. It grows from the great relationships we have with our clients, and it means we can respond in a clear and focused way. And the result? We deliver better legal solutions to your commercial problems.
We call it the power of understanding.www.law-now.com
A key strength is the way CMS CameronMcKenna gets to understand our business by getting to know us.
Commercial Director,leading construction firm
CMS Cameron McKenna LLP
They were very knowledgeable, very responsive.Great people to deal with.
General Counsel,financial services
RemarkAdvert.qxd 3/8/06 4:41 pm Page 1
M&A Integration, February 2007
Foreword
Lawyers are no strangers to the merger process. For some law firms, a merger of their own business provides a route to increased opportunity, growth and profit As professional advisers, M&A is not an occasional activity, its our bread and butter.
At CMS Cameron McKenna, we invest a lot of time and
effort in getting to know our clients and their businesses.
We build up an understanding of their industries and their
organisations, and grow to like their people. We become
attuned to the particular styles of individuals. We develop
a nose for the directions that problems come from. All this
makes relationships more rewarding, and more productive.
Sometimes a merger means we lose a client. Suddenly,
after days spent at each others side around the negotiation
table, a couple of scrawled signatures can spell the end of a
long and close collaboration, expressed in trust, respect and
even friendship. But just as often, it heralds the start of new
relationships, new collaborations, new adventures. Who says
M&A is just a transaction?
It is not just the hours spent drafting, or in data rooms, or
in meetings, that help us to help our clients. We know the
need to face compliance issues early, not to use money as
a substitute for treating people fairly, not to forsake existing
business and customers while becoming immersed in an
exciting new project. Above all, we know that mergers need
leaders, with a clear vision of where they want to end up, and
the courage to spell it out and to persuade people to follow.
And we know it will not all be plain sailing. We know this
because the lawyers job is to take care of difficulty and
detail, and to provide thought-through, workable solutions.
We will be involved in all sorts of areas: jumping through
regulatory hurdles, arranging funding, crafting internal
communications, terminating agreements with suppliers,
licensing new software, assessing environmental risk,
harmonising employee terms and conditions, merging
pension schemes, and many others besides. We work
in teams across different legal disciplines, all centred
on our clients.
Some mergers produce an awkward tension between two
seemingly irreconcilable forces: on the one hand, the clear-
eyed assessment of opportunities for profit and growth; on
the other, an emotional response to the threats of change,
and loss, and difference.
At CMS Cameron McKenna, we understand the need to
address the emotional, human side: the part that views
integration as a contest between them and us, or a cultural
crusade to impose our way of doing everything. We also
recognise the conflict of loyalties when hard-headed plans to
release synergies, efficiencies and cost-savings mean saying
goodbye to blameless suppliers or workers. And we know
the effect on morale when a reliable, if outdated, IT system is
upgraded to something newer and every bit as unpredictable
as it is unfamiliar.
We know too that all the upheaval can ultimately bear
fruit. Sooner than anyone expects, the merged entity will
emerge in a different, altogether better place. The bottom
line benefits come through. Change becomes a friend;
and uncertainty becomes the old word for exciting new
possibilities. Hope breeds success: mergers prove that being
bigger is good because it provides a chance to become better
too. Anyone who wants things to stay as they were will very
soon fall short of rising standards.
As we help to integrate and improve our clients businesses,
the pay-off is in strengthened relationships - and a little
reflected glory too. As we advise, we also learn. We meet
new people; and we get a chance to show what we can
do. We push ourselves to achieve new goals, backing our
judgement and experience. All this makes us better advisers.
It can even be fun, despite the long hours.
The results of the mergermarket survey provide fascinating
reading. They recognise not simply the bottom line by which
any mergers success or failure will be judged but also that
the bottom line does not invent itself: success is the product
of exhaustive preparation, detailed planning, careful research,
agonising allocation of priorities, sensitive handling of difficult
decisions and above all, unwavering vision and leadership
from the top. At CMS Cameron McKenna, we recognise
this recipe for a successful merger because we have helped
make it happen, time and again.
Dick Tyler Managing Partner CMS Cameron McKenna LLP
M&A Integration, February 2007
M&A Integration Survey Findings
How many entities has your firm partly or fully integrated into your business over the last two years?
1 only
2 to 3
4 to 9
10+
48%
11%
28%
13%
The largest share of respondents interviewed 48%
have integrated either two or three companies with
their businesses in the last two years. However, a
narrow minority have only completed one integration
in this time period.
A further 28% have handled between four and
nine integrations within this timeframe, whilst 13%
of respondents have completed a significant ten or
more acquisitions.
EU accession in 2004 has served as a badge of respectability for Central and Eastern European markets and encouraged
many smaller Western European companies to look at ways of penetrating these markets. The motives for making acquisitions
include unlocking value, buying lower cost manufacturing capacity and, increasingly, being able to exploit growing
consumer demand in these markets.Iain Batty, Head of CEE Commercial Group
CMS Cameron McKenna
M&A Integration, February 2007
We have seen a significant shift in the last three years from purely cost driven objectives towards the desire to
grow revenue. However, delivering revenue synergies often proves much more challenging than acquirers anticipated.
IBM
When considering your most recent merger or acquisition, to what degree do you believe the following were important measures of overall success?
0 20 40 60 80 100
Improved efficiency or reduced complexity of internal ways of working
Improved financial security
Employee morale
Reduced operating cost
Enhancement of core business skills or intellectual property
Retention of top management or key talent
Increased or retained customer satisfaction
Increased turnover
Enhancement of core business skills or intellectual property
Increased range of products or services
Increased share price
Increased market share
New customers
Crucial to integration outcome
Of considerable importance
Useful for measuring success
Somewhat important
Not important for evaluating success
Increased potential for growth
Increased profit
2 3
14
12 10 34 44
9 184 33 36
5 232
35 35
1719 24 14 26
188 28 23 23
2820 35 16
3526 24 12
2011 29 33 7
2214 26 29 9
228 27 29 14
268 30 22 14
213 26 35 15
194 31 29 17
2711 30 14 18
1
29 52
3
Percentage of respondents
The overall rationale most used by respondents to measure
or justify a recent merger is Increased potential for growth.
This is selected by 52% of respondents as being Crucial to
integration outcome. The second most important measure
of success for respondents is Increased profit, which is
deemed crucial by 44% of respondents.
Looking within different respondent groups, these two
leading drivers Profit and Growth potential are
also top rated by CEOs, CFOs, and COOs. However,
interestingly, among IT directors Improved efficiency
of internal ways of working is second most important,
pushing Increased profit some way down in their
consideration. Meanwhile, in a similar fashion, HR directors
place Increased share price above both Increased profit
and Increased potential for growth.
M&A Integration Survey Findings
M&A Integration, February 2007
Considering your last integration, please rate the following factors in terms of importance for the integration outcome:
0 20 40 60 80 100
Integration of HR policies & procedures
Branding & public relations
Rationalisation of product portfolios
Supply-chain effectiveness
Cultural alignment
Focus on day-to-day business
Retention of top talent
Sales & marketing integration
Integration of IT systems & infrastructure
Integration-focused due diligence
Speed of integration
Internal communication
Leadership & accountability for integration
Integration planning
Strutured execution of integration
Establishment of the right management team
Crucial for integration outcome
Very important
Significant
Somewhat important
Not important forintegration outcome
2
1
4
2
6 15
15 26 36 20
17
16363411
7 25 15
1327242511
7
4 24 42 24 6
16 29 38 10
3815
3
33306 14
3
23 34 22
1
2
9
11 32 514
4
4 14 34 48
42
3130326
9 31 31 25
24342812
341455
16 32 48
29 59
Percentage of respondents
The Establishment of the right management team
is the most important overall factor for respondents
rated crucial by 59% of respondents. Meanwhile, a
Structured execution of integration is important for 51%
of respondents. Tied in equal third are Integration planning
and Leadership & accountability for integration.
Among the different respondent groups, HR and IT
directors again differ slightly from CEOs, CFOs and
COOs. HR directors place Integration planning as first
consideration. Meanwhile, IT directors place Leadership
& accountability for integration in first place.
It is not surprising that HR directors rate Integration planning as the most important factor, given the mass of practical and legal issues they have to deal with in an integration. New laws, like the ICE regulations, increasingly require employees to be given much
earlier insights into corporate planning. Such early outline disclosure can be a constructive device both for managing expectations and
smoothing the eventual disposal process.Simon Jeffreys, Employment Partner, CMS Cameron McKenna
In our experience the one critical success factor is to have a structured integration planning process. This ensures you put in place the right leadership and governance, develop appropriate
communication plans, and have accountability for execution. The risks are substantially reduced if integration planning is started
well before deal completion.IBM
Considering your last acquisition or merger, please select the areas that attracted most integration effort:
0 10 20 30 40 50 60
Non-employee policies & procedures
Research/new product development groups
Corporate branding
Employee salary & benefits schemes
Supply chain operations
Product & service ranges
Corporate values, principles, culture & behaviour
Financial management & supporting functions (ie treasury, legal)
Sales, marketing & business development groups
Information technology
Percentage of respondents
58
49
49
44
40
37
23
16
12
10
M&A Integration, February 2007 9
Information technology is the area that requires the
most integration effort according to 58% of respondents.
Also requiring significant attention are the areas of
Sales, marketing & business development and Financial
management & supporting functions both selected
by 49% of respondents.
Next placed are the less business function related,
more intangible areas such as Corporate values,
principles, culture & behaviour.
It is understandable that IT is perceived to attract the most effort on integration many of the IT issues are extremely
complex and the consequences of any change in IT can have a significant impact. The key is how quickly and effectively IT
integration can be achieved in order to achieve additional savings or efficiencies and understanding the consequences there may be
of not getting it right. Isabel Davies, TMT partner, CMS Cameron McKenna
IT often consumes significantly more effort than it should. This effort can be reduced by starting IT planning early and ensuring IT planning is tightly integrated with the
overall programme management.IBM
M&A Integration Survey Findings
0 M&A Integration, February 2007
Considering your last acquisition or merger, in what way was your business different two years post-deal?
0 20 40 60 80 100Staff turnover
Improved financial security
Employee morale
Improved efficiency or reduced complexity of internal ways of working
Reduced operating cost
Retention of top management or key talent
Increased or retained customer satisfaction
Enhancement of core business skills or intellectual property
Increased share price
Increased range of products or services
New customers
Increased profit
Increased turnover
Increased potential for growth
Increased market shareVery much improved
Improved significantly
Perceivable improvement
Only slight improvement
Not at all improved
Percentage of respondents
38341510
5
9
5 33
14 23 39 22
36 25
24 37 29
10 45 38
3
2
1
1
2
7 15 26 31 21
22
7 18 38 24 13
4 14 46 27 9
4
12 21 33 26 8
725272714
8 13 31 42 6
516372814
13 18 52 17
20 32 34 10
11 29 17 21
Respondents are broadly very positive about the
acquisitions they have made in recent years. In not
one area does a majority feel there has been less than
a perceivable improvement.
The top three leading areas of improvement are
Increased market share, Increased potential for
growth, and Increased turnover.
Improved financial security and Staff turnover garner
the weakest endorsement, but even here over half of
respondents believe there has been at very least a
perceivable improvement.
Employment law increasingly forces employers to make an early announcement about redundancies and the new right for employee representatives to be informed about takeovers (The
Takeover Directive Regulations 2006) only adds to this. British employers will need to adapt their approach to become more
nearly like that of their continental counterparts. Many of them have legal environments where deals cannot be concluded or
restructurings implemented until information and consultation processes have concluded with an agreement.
Simon Jeffreys, Employment Partner, CMS Cameron McKenna
Considering planning is rated as the most important driver of success it is surprising how many start their detailed planning
so late in the process. Our experience is that acquirers often underestimate the scale of change required to deliver synergies.
Once the deal is done they want rapid results but delivering these without proper planning can be risky and potentially destroy
value in other areas of the business.IBM
M&A Integration, February 2007
At what point in the process did each of the following activities begin to take place at a detailed level?
0
20
40
60
80
100
Development of formal
acquisition & integration measures of
success
Evaluation of culturaldifferences
Evaluation ofIT systems
Evaluation of core
business processes
(e.g. supplychain)
Development of an outline'blueprint'
for thecombinedbusiness
During due diligence
Shortly pre-deal
Shortly post-completion
During integration
Not at all
Per
cen
tag
e o
f re
spo
nd
ents
5
10
18
66
16
19
14
50
18
19
22
41
14311
23
23
37
13
7
13
38
30
Perhaps unsurprisingly, respondents prioritise the
Development of an outline blueprint for the combined
business. Two thirds of respondents attended to this
task during due diligence.
Of least relative priority is the Development of formal
acquisition & integration measures of success, which
only 30% of respondents attended to during due diligence.
Instead, a greater 38% preferred to deal with this shortly
pre-deal, and somewhat alarmingly, 7% have not felt any
need for such an activity.
As external advisers on many transactions, the benefits of getting a greater understanding of the acquisition issues and integration strategy earlier on are without question. We would much rather our clients understood and addressed the problems early on even if that puts them off the deal than have to deal with an unsuccessful transaction. Isabel Davies, TMT partner, CMS Cameron McKenna
Which of the following individuals or groups played a leading role in each of the following steps in the process?
0
10
20
30
40
50
Measurementof integration
success
Integrationcommunication
Integrationexecution
Integrationplanning
CEO/MD
HR Director
IT Director
CFO
COO
Per
cen
tag
e o
f re
spo
nd
ents
34
79 10
21 21
810 11
31
41
15
8
5
14
30
2
8
29
13
Unsurprisingly, according to respondents, the CEO/MD
takes a pre-eminent role in all but one of the steps in the
integration process above. In Integration execution, it is
the COO who is deemed most likely to lead, with the CEO
second most likely.
Meanwhile, in the area of Measurement of integration
success it is the CEO who leads, but very closely followed
by the CFO. This is not surprising considering that the
majority of these measures will be based on financial KPIs.
In transactions involving the separation of related and complex businesses, the time and effort it takes to determine the best way to split, terminate and transfer customer and supplier contracts, or to address procurement or change of control issues should not be underestimated. Developing and implementing a coherent strategy in this regard can be critical to the successful sale of the relevant businesses.David Bresnick, Corporate Partner, CMS Cameron McKenna
Did you nominate a dedicated Integration Manager? If Yes, when did he or she assume responsibility?
Pre-deal
On deal announcement
Shortly post-completion
Later into the integration process
62%
1%
15%
22%
Almost three quarters (74%) of respondents nominated
a dedication Integration Manager as part of their M&A
process.
Among these respondents, 62% did so pre-deal, and a
further 15% on announcement of the deal. A relatively
sizeable 23%, however, were prepared to wait until after
sale completion.
Successful acquirers appoint their integration director pre-deal. This enables them to start planning earlier and hit the ground running on day one, giving them a head start in delivering synergies.IBM
What, if anything, would you have done differently with regard to integration management?
Quicker integration
Nothing went smoothly
More communication
Better planning
HR issues
Better marketing
Cultural factors
Other19%
25%
4%
6%
7%
13%
17%
9%
The following key themes emerged from respondents answers:
. Quicker Integration: start early; pay particular attention to IT issuesFor a quarter of respondents their M&A integration process
could have been quicker. As one respondent remarks: Give the
integration process more speed and targets at the beginning.
For a couple of respondents it is not just a case of a speedier
integration process, but also about starting the process earlier.
The area of information technology emerges as a particular
area of concern. Two respondents in particular mention the
requirement to have earlier involvement of IT people, or
start earlier evaluation of IT compatibility. Meanwhile, another
respondent laments: We should have been much more
challenging of our IT team who turned out to be very weak.
Whilst a number of respondents suggested that things could have been done more quickly, speed is speed is not a panacea. Take for example the IT integration. The consequences of getting that wrong can be significant damage to the existing businesses. Whilst not being totally efficient, it may be possible, and indeed better, to run two IT systems in parallel until an optimum solution is found than to attempt an early IT transition onto the wrong platform. Isabel Davies, TMT partner, CMS Cameron McKenna
For many acquirers IT is a key enabler of synergies. This should put it at the heart of synergy planning.IBM
Survey Findings
2 M&A Integration, February 2007
M&A Integration, February 2007
2. Nothing it went smoothlyA sizeable 19% of respondents feel that their integration
process could not have been improved. In the words of one
respondent: We have a lot of experience with M&A activities in
the last ten years. Therefore we are convinced that we made no
substantial mistakes in our last business integration projects.
. More CommunicationAnother recurrent theme is the need to prioritise and ensure
strong lines of communication between employees and
management, coupled with the cultural meshing required. As
one respondent says: We would have exerted more effort
to explain the reasons behind the acquisition, established a
common vision between the merging companies and shown
more respect for the culture and business model embedded in
the acquired company.
More communication is a theme that runs throughout all the EU-derived new laws on workplace information and consultation. Companies need to do as much as they can to carry staff with them, as well as to comply with their heightened legal obligations. Notification and consultation with employees can, and will, drive deal timetables.Simon Jeffreys, Employment Partner, CMS Cameron McKenna
People are at the heart of any merger. At the same time many staff are at best nervous and at worst already dusting off their CVs. The more you communicate the more people are reassured and can engage in delivering the desired outcomes.IBM
4. Better PlanningPerhaps inevitably, planning also emerges as an area that
could be improved upon. As one respondent says: Begin
earlier with planning (during due diligence process); be more
strict and focussed on origin planning while excecuting; more
detailed integration controlling and reporting; define earlier
concrete responsibilities of integration team members.
The mergermarket survey supports our experience of corporate clients carrying out strategic acquisitions or buy and build programmes. Generally, those clients who put the most resource into forward integration planning and prioritise, in particular, the integration and management of head count tend to be in a position to push through the synergy/growth benefits they seek far more quickly than those who see this as an optional due diligence activity which can be left and dealt with later.David Bresnick, Corporate Partner, CMS Cameron McKenna
Most acquirers expect high value synergies from M&A deals; there are a number of enablers and must do projects; and existing business must be protected. Whilst these projects are underway the business structure is changing around them. This requires careful coordination and needs dedicated resource to deliver value.IBM
4 M&A Integration, February 2007
Introduction
Once again, deal activity hits an all time high; the revered
failure statistics trotted out and the old integration chestnut
paraded as the chief culprit. Do we never learn? It is not about
integration. In fact the mere presumption of integration is
enough to cause failure.
Is it a surprise that bringing together two former competitors is
fraught with difficulty? The sheer scale and complexity of the
challenge means that things will inevitably go wrong. And if
your enthusiastic Integration team is diligently executing the
wrong plan, is it a surprise that you spend money instead of
making it?
One investment banker likened the challenge to replacing the
wheels on an aircraft in mid flight. If thats all it involved, the
job would be easy. Try moving the passengers at the same
time, but with all the seats rearranged. How about replacing
the pilot with one trained on a different plane? The CAA wants
your engines to be quieter and more fuel efficient before you
land. And a cheap carrier just cut prices on the same route by
40%. You begin to get the real picture.
So if not integration, then what?
In our experience three things:
1. A brutally honest exposition of the real reasons for
undertaking the journey.
2. An unwavering focus on the destination objectives.
3. Relentless execution of the right Transition Strategies.
. Exposition
Even in the biggest most complicated transactions there are
only ever a handful of true value drivers. And in the faithful
application of such fundamentals to the Transition Strategy lies
the secret of success. But between the euphoria of closing the
deal and the shock of running it, this vital connection is almost
always missed. Nature hates a vacuum and the Integration
Plan rushes in. Weve all seen them, dozens of projects,
hundreds of Gant charts, thousands of activities, all based on
the presumption of integration and, by design, doomed.
It is only by focusing with laser sharp clarity that you can
maintain purpose through the disruption that is a true merger.
And heres the rub - 50% of Integration activities destroy
value. In contrast, building the right Transition Strategy is as
much about what you stop as what you do.
Over the years we have established a structural approach
similar to finite element analysis that first exposes the true
value drivers and then uses them to build the Transition
Strategy. The rigour of this approach maintains design
integrity through legal, financial and operational due diligence,
negotiation, and closure to ensure synergy delivery.
Importantly, it puts you on top of the day one mountain. It
positions you for immediate deployment of key work streams.
It directs you straight into the single most vital phase - doing it
all again or Regeneration. Why is this so essential?
M&A - A game of skill not chance
M&A Integration, February 2007
2. Focus
50% of synergies evaporate the instant you sign the deal. Is all
that expensive due diligence worthless? Not necessarily, but it
does have severe limitations. Asking a competitor to disclose
sensitive information which will be used to exercise control
over them is a strange contortion and in a Sarbox world, there
are real penalties for getting it wrong. The result is at best a
murky picture.
Moreover, up to the point of ownership yours is the dominant
perspective, often limited, always vulnerable to blind spots.
Time to engage the other side and root out synergies that
wont survive contact with reality. In one of M&As strangest
ironies it is not the list that got the deal done in the first place
- you have to go much deeper and regenerate the list.
Framing the targets with the new leadership team is the
first challenge. It is a rare group that even when in heated
agreement on the strategic rationale, have hammered out
the practical consequences for Transition. Equipped with this
revised insight, the next step is to mine the business with
the people who know where to look. This is where the real
discoveries are to be made - especially with revenue synergies
What gets measured gets done, so all synergy projects must
have clear business cases. The Transition Director measures
benefits realisation right through to the post implementation
review. The same benefits are also built into revised business
plans and, in parallel, tracked through the line. With this vital
triangulation, we ensure delivery.
Regeneration, Reframing and Mining typically identify
synergies well in excess of the original plan. It is in the
exploitation of these discoveries that we set out to beat
expectations.
. Execution
With synergy regeneration comes the ability to prioritise
radically those Transition activities that will deliver the
promised value and ensure that you are not deflected from
this purpose. Radical Prioritisation formally engages the most
senior leaders in deciding what Transition projects will be
done, and is the mechanism by which a huge amount of costly
Integration activity is simply stopped.
So knowing the departure points and key destination
objectives, it remains to chart the migration paths of all
essential elements, both tangible and intangible. This is
where our structural design approach flushes out critical
interdependencies and binds the whole Transition Strategy into
a cohesive programme, focused and prioritised on delivering
the money.
Despite this hard won focus many synergies will be lost
without the right Governance. It is easy for the senior team
to be distracted designing the new organisation and making
essential appointments with inevitable delays and disruption.
Another vacuum, and in its presence, people will make
things up in the name of integration squandering value
as they go. Transition Governance, derived from Radical
Prioritisation puts the best and brightest leaders at the head
of critical programmes - fast. At the same time the original
flight plan must be maintained until the new one takes over,
also demanding your best and brightest - exposing by far the
biggest headache - scarce expertise.
M&A Integration, February 2007
M&A - A game of skill not chance
Transition expertise
Would you submit to the ministrations of a surgeon whose
only experience is you? Unlikely, yet many executives bet the
farm on little or no Transition experience because they know
their business. Of course they do. Transition is another matter.
The more you do it, the better you get. You wouldnt hesitate
to get the best deal advice or due diligence. Why would you
risk it all in the maelstrom of integration?
Summary
In a phrase, Follow the Money. All deals are the same. There
are only ever a few value drivers. All deals are different. Your
drivers will be unique. Structural Analysis* gets to the point
and stays there - so much so that weve patented it. It can
help you beat the odds. So can we.
* IBMs Component Business Modelling process applied to
M&A Transition
Steve Wood Mergers & Acquisitions Global Leader IBM Global Business Services [email protected]
Paul Price Mergers & Acquisitions UKISA Leader IBM Global Business Services [email protected]
For further information visit ibm.com/gbs/uk
M&A Integration, February 2007
This was Carly Fiorinas view shortly after completing the
Hewlett Packard / Compaq merger. Others had misgivings,
both at the time and subsequently. It was these misgivings
which ultimately cost Ms Fiorina her job, and the merged
company US $21.4m in compensation.
What was the merger all about? Is success simply the
fulfilment of a mergers original rationale and objectives, or
does it always depend on increased revenue, profitability or
other metrics? Is there a right and a wrong way to measure
success? How long does it take before a valid judgment can
be made?
Rationale
The mergermarket survey reflects CMS Cameron McKennas
own experience that there has been recent buoyancy in the
M&A market, and shares our confidence that M&A activity
will stay high for a while yet. In particular, since EU accession
served as a badge of respectability, many smaller western
European companies have started to look at ways to grow in
central and eastern Europe.
In the UK when we look at M&A activity we often look at
it in comparison to activity in the US and other traditional
western European markets. However we should also compare
activities in other parts of Europe. Companies have continued
to look for targets in the more traditional CEE markets such
as Hungary, Poland and the Czech Republic, but we have also
seen a massive increase in interest in countries further south
and east, across Europe. Our Bulgarian and Romanian offices
have seen greatly increased levels of demand for assistance in
the purchase of companies across a wide range of sectors.
The survey also demonstrates that, whatever their geography,
businesses buy or merge with other businesses to make
money. Rated measures of success are about growth: growth
potential, turnover growth, profit growth, share price growth,
customer base growth, market share growth, product range
growth, IP asset growth. The buyer has seen something that
they believe to be undervalued in the sellers business they
think they can improve on or they see some added value
from the combination of their existing business with that of
the target. This can often turn negotiation and due diligence
into tense affairs, as buyers try not to reveal where they think
the unrealised value is, in case the price starts going up.
The survey also examines the timing of key activities. Ignoring
a tiny minority of respondents claiming not to have addressed
these issues at all, it is reassuring to see that businesses are
bringing forward the moment they start facing up to the main
potential headaches of integration, whether they be employee
issues, pensions, IT or other business drivers. It is the
responsibility of the senior management of both the acquirer
and the target to work together to address these issues, aided
of course by their professional advisers. They also need to
put aside any mixed personal feelings they have about the
transaction and, in some cases, differences of both style and
substance with the other party.
The traditional role of lawyers in business integration is as
executors of a pre-defined strategy decided on by the acquirer
or merging companies. However, our experience indicates
that this is not always the optimum approach. Lawyers are
usually brought in during the pre-deal stage, perhaps to finalise
a term sheet or heads of agreement before full contract
negotiations. However, rather than confining us to this role we
can contribute experience, analysis and insights which go far
beyond mere legal guidance, for instance, in developing the
strategy for integration as well as its implementation.
Unlocking Potential
This was a great quarter. By any measure, we hit our stride and demonstrated what the merger was all about.
M&A Integration, February 2007
Key drivers
Mergers and acquisitions take place for a variety of reasons.
They can enable companies to achieve scale and revenue
beyond that which can be achieved organically, open up a
closed market or plug a gap in an existing portfolio. They can
also catapult companies into a different league: so-called
step change acquisitions, such as Morrisons acquisition of
Safeway or RBSs acquisition of NatWest. They can also be
defensive, to keep the target out of a rivals hands, maintain
market position or kill off a new competitor. They may also
occur for cost saving where the sheer scale of the new
business can drive cost savings and efficiencies.
There are other drivers too: the technology sector experienced
a surge of activity in the late 1990s, predominantly driven by
companies looking for new technology and solutions for their
existing businesses. The dotcom boom led to huge premiums
being paid for companies with technology which was
perceived to be leading edge but which was often unproven
or still in development.
An acquisition can even be driven by other factors. During the
dotcom boom Nortel Networks, a long established company,
acquired internet start-up company Bay Networks. Nortel
identified the target company for its technology and its new
Silicon Valley culture and business methodology to enable
Nortel to adapt its corporate culture. Today companies also
acquire for reasons such as speed to market or a new type or
geography of customer (eBay and Skype). The acquisition of
MySpace by News Corp gave News Corp an immediate leap
into the internet to rival both Google and Yahoo.
As the survey shows, a range of strategies drives mergers; but
acquisitions to increase profitability may only achieve a short-
term spike unless the acquirer can ensure a pull-through
transfer of the targets experiences and practices to its own
organisation. Other acquisitions, say to increase market share,
may seek a push-through transfer of an existing business
practice to the target. Either way, the key measure of success
is whether the desired benefits can be realised within a
sufficiently short timescale to prevent the destruction of value
through a protracted and problematic integration process.
Problem issues
There is a whole host of issues that need to be addressed if
the value sought from any merger is to be released, whether
in markets, products, customers, technology or some other
aspect of the business.
A number of the key issues in any merger integration strategy
relate to the human element. There will be a due diligence
and verification process involving a thorough investigation of
the targets workforce in terms of headcount, payroll cost,
statutory and contractual rights but the real value lies in a
separate exercise: addressing the wider strategic and business
impact of employee issues at an early stage.
Loss of morale or loss of key employees, either within the
acquiring company or more particularly within the target,
can seriously undermine the integration process. There are
those who will automatically think that their career prospects
are limited or that there will be changes they will not like.
It is imperative to establish a positive and encouraging
environment that will incentivise the doubters, and allow the
full benefits of the merger to be realised.
This requires early assessment of whether the cultures of the
two organisations are compatible. It also requires effective
leadership to ensure that morale and drive is maintained
throughout the integration process. Good and regular
communication can go a long way towards giving people the
reassurances they need. Most difficulties are better faced
than feared; and most rumours expand to fill a vacuum.
There may be commercial, regulatory or confidentiality
considerations which make it difficult to reveal the full
underlying logic of the transaction. On the other hand, painting
a picture of a profitable combined future could be exactly what
is needed to quell employee insecurity and unrest. Sell them
the benefits, as the marketers would say.
Unlocking Potential
M&A Integration, February 2007 9
Some kind of communication may anyway be required
as part of workforce consultation or as part of regulatory
requirements. This should generally be started at the earliest
opportunity. Across Europe, there is a wide variation in the
extent to which employee representatives (trade unions or
works councils) have rights to be informed and consulted
about mergers and acquisitions. Some benchmarks have been
laid down by the European Union, principally the Acquired
Rights Directive (ARD) which has been around in various
forms since 1977 and applies to asset deals, but the European
Works Council Directive may apply in some cross-border deals,
and more recently we have had the Takeovers Directive of
2004 which applies to share deals.
There is a wide divergence in the way in which member
states have implemented requirements of the ARD such
as the information and consultation aspect. For example,
in France the transfer of ownership does not take effect
until the necessary process of informing and consulting the
representatives has taken place; but in the UK, the deal can
be completed whether or not representatives have been
consulted but a default penalty of up to 90 days pay is payable
to the affected employees.
Irrespective of the differences at national level, ensuring good
relations with the current and future workforce can sometimes
not just be a matter of best practice but of vital commercial
importance. Some aspects of the consultation process may
have to be carried out with a view to reaching agreement.
However, avoid putting yourself in a position where the
whole transaction is conditional on employee negotiations.
If more than a few redundancies are contemplated, there
are statutory timescales that must be observed, which may
also affect the progress of the transaction. There may also
need to be a harmonisation of terms and conditions. The law
does not always make this easy to achieve. Upwards-only
harmonisation could be prohibitively expensive. Downwards
harmonisation could lead to a barrage of claims.
A related and equally significant area is pensions. As
much time can be spent on pension issues in a merger and
acquisition process as can be spent on the acquisition itself.
This is not surprising given the figures involved: the cost
of addressing pensions issues can comprise a significant
proportion of the overall transaction value. Deals can fold due
to the impact of pension deficits.
For example in the sale of the business of Marconi to Ericsson
in 2005, the treatment of the 2.7 billion fund was a prime
consideration and the sale was only approved by the Pensions
Regulator once arrangements for protection of the scheme
were agreed. These involved a substantial initial contribution
in the scheme and a 500 million escrow account which
could only be distributed after any further amount required by
the pension scheme had been paid. Expert advice is always
needed to understand the full pensions implications of a
transaction, from future funding requirements to scheme
closure. Last minute negotiations may help to round the
edges but pensions can easily make or break a deal and
cannot be ignored.
Arrangements with customers of the target also need detailed
investigation. Contracts with customers of the target may
include provisions that allow the customers to terminate or
renegotiate their supply arrangements following a change
of control. Often, when the target is not a company but the
underlying business, then the transfer of the contract with the
customer may require the consent of the customer. If such
consent was not to be forthcoming, the loss of the contract
or key customer could greatly affect the profitability of the
business being acquired so it is essential to make a realistic
assessment of any potential impact on top line revenue
through the due diligence process and then to formulate a
mitigation strategy.
20 M&A Integration, February 2007
Unlocking Potential
Ensuring that customers are comfortable with the
prospective transaction, while working within the boundaries
of confidentiality and disclosure requirements, can be an
enormous challenge. Some customers can feel offended if
the first they hear of the acquisition is in the media, which
means that discussions get off on the wrong foot and may be
difficult to retrieve.
It may be perceived that lawyers have less to contribute to
customer and market issues but it is impossible to overstate
the importance of detailed investigation and analysis by those
with broad and deep experience of the commonly-occurring
issues affecting the particular market sector and transaction
type. The due diligence process will cover all the key aspects
of the business, including supply arrangements, sales or
business contracts, intellectual property rights and IT, many of
which have a large market-facing element.
As the transaction proceeds and the experts are scouring
the paperwork, it is important to ensure that the existing
businesses of both acquirer and target are not left
unattended. This can often happen in large transactions where
management has such a job of integration that the existing
business may suffer. The acquisition of Safeway by Morrisons
was so significant that initial results following the merger
suggested that not only was the target business affected, but
so was the underlying Morrisons business. The merger was
impacting the core business. The main lesson to be learnt
is the compound effect this can have, not just in immediate
loss of sales and morale, but in market jitters and longer-term
damage to the integration itself. More recent results are
encouraging, suggesting that the merger, after a sticky start,
may be beginning to pay dividends.
Equal care and attention must be shown where the target is
dependent on a particular supplier for a key component or sole
source arrangement. Although a supplier will not want to walk
away from a significant revenue stream, it may be in the same
or similar business as the acquirer and reluctant to supply to a
competitor. These situations are not insoluble, but they need
to be identified and dealt with decisively.
The survey identifies IT as the issue needing the most
integration effort, even though it is not necessarily viewed
as an important driver of the transaction. In our experience
at CMS Cameron McKenna, it is more important to get the
IT integration right than to get it done quickly. There is often
no reason why two or more IT systems cannot be run in
parallel for a while. This may not be the most efficient way
of operating but it can be a lot less risky and expensive than a
hasty and botched implementation of a poorly thought-through
IT integration strategy. It may be that the acquirer is working
on one financial accounting system whereas the target has
just implemented another. What is the best long-term solution
for the combined group? It may be that the target has more
efficient systems which it would be sensible for the acquirer to
adopt, even though this would involve the tail wagging the dog.
Where IT is outsourced, there may be other considerations.
There may be two different outsource providers. The acquirer
may be looking to exit one of the arrangements, or to bring
them both under one roof. Careful consideration should be
given to the consequences and implications of doing so.
In addition to IT audits in corporate transactions an Intellectual
Property (IP) audit can provide a springboard to the
understanding, integration and rationalisation of IP within the
merged organisation. This not only relates to IP in the context
of IT but across the board, not least as highlighted by the
survey in the area of corporate branding.
Compliance can also create unexpected problems. In a recent
acquisition, the acquirer put its own regulatory compliance
into question simply because the target was not compliant
with Sarbanes Oxley reporting requirements. It is necessary
to understand the processes and procedures of the target
because wholesale changes may be needed to ensure that
the acquirer remains compliant with regulatory requirements.
Early planning and action will invariably save more time and
expense than they create.
M&A Integration, February 2007 2
The survey also reveals some interesting views about where
integration brings success, and where it doesnt. The findings
indicate that the financial/growth drivers for integration are
generally achieved within a couple of years but at an obvious
human cost of job losses, job insecurity, lower morale and
new ways of working. This may be what made the target
attractive in the first place: the growth opportunity existed
because the business was poorly managed, with too many
unproductive staff and insufficient technology. Mergers can
keep the HR and IT functions extremely busy in thankless,
under-recognised roles. Businesses can suffer considerable
reputational as well as financial damage if they fail to handle
systems migration properly. The same is true of workforce
reductions, especially given the protections available under
redundancy, unfair dismissal and discrimination laws, to
name but a few. These issues can also become a significant
distraction for senior management.
The survey clearly demonstrates the importance of leadership.
The drive for integration has to come from the very top, or
the difficult tasks will not be given enough priority. Facing
up to the most difficult issues is what leaders are there for.
According to the survey, the CFO achieves a heightened
importance at results time: success is clearly based on
financial metrics, not hygiene factors such as headcount, sales
volumes or systems improvements. The other members of
the leadership team are less conspicuous: like the lawyers,
they are often hard at work behind the scenes, doing a series
of thankless tasks that wont grab the headlines but still need
to be done. Indeed, this is often where increased growth
or profit comes from: it doesnt just magically appear out of
thin air, it is achieved through systems integration, customer
focus, overheads reduction, workforce realignment and other
unglamorous activities.
And lessons learned? The 19% of survey respondents
claiming they would do nothing differently next time round
are not to be believed. The more popular experience is that
integration needs to be planned earlier and an execution
strategy identified sooner rather than later. The call for better
communication also rings true: people are naturally resistant
to change and will fight integration unless they are shown a
positive vision of what their own future will look like and are
persuaded to welcome it rather than adopt guerrilla tactics to
spoil it and slow it down.
Finally, as we lawyers would say, capital invested in a well-
planned integration is money well spent. Of course, it must
be kept under control because it impacts on profitability and
therefore on success. However, experience tells us that the
most important aspects of business integration are usually
the most difficult. Expect these to cost money and take time.
Experience also tells us that the smartest money is often spent
earliest on strategy, on planning and on thorough due diligence.
Detailed work at the outset may well identify the hidden
costs of the transaction. These hidden costs can include
the cost of closure of competing product lines, IT costs for
continuing to run parallel systems, regulatory compliance costs
and many others. If these costs and risks are uncovered at the
right time, they can be reflected in the purchase price. It is not
until you know the worst about what you are buying that your
hard work can really begin.
OMA COMPUTERSHARE C PANY
| CERTAINTY | INGENUITY | ADVANTAGE |
Leave nothing to chanceEnsure success in your next proxy campaign.Go with the proven leader.
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Cas SydorowitzManaging Director > Corporate AdvisoryGeorgeson Shareholder68 Upper Thames StreetLondon EC4V 3BJ UK
Phone: +44 (0) 870 703 0302Mobile: +44 (0) 7810 750 442Fax: +44 (0) 870 702 [email protected]
Proxy Solicitation > Asset Reunification > Information Agent > M & A Advisory Services
A4_georgeson_ad.qxd 4/1/07 15:16 Page 1
Which party in your average M&A transaction makes the final selection of a proxy solicitor?
0 10 20 30 40 50
Legal counsel
Financial advisor
Company director(Comp Sec dept)
Companydirector (IRO)
Company director(CEO or higher)
Corporate banker
Percentage of respondents
Note: some respondents selected more than one reponse to this question
41
24
24
18
18
12
According to 41% of our survey group of investor relations
directors, the selection of the proxy solicitor1 is typically
made by the Corporate broker. That said, this selection
process may also be made directly by someone in the
company, either in the guise of CEO (24%), Investor
relations officer (24%) or Company secretary (18%). 1 A specialist (firm) hired to gather proxy votes.
The evidence that in many cases the corporate broker recommends the proxy solicitor, and that the decision is made at a very senior level highlights the importance of the role in an M&A transaction.Cas Sydorowitz
Georgeson, Managing Director > Corporate Advisory
How important is it for you to communicate with the following stakeholders?
0
20
40
60
80
100
Privateclient
brokers
Retailinvestors
Employeeshare-
holders
ADRholders
Foreignshare-
holders
Institutionalshare-
holders
Crucial
Very important
Important
Slightly important
Not Important
100
30
30
10
15
15
28
17
11
22
22
25
30
30
5
10
10
35
30
15
10
10
45
30
15
Per
cen
tag
e o
f re
spo
nd
ents
Given the dominant share of company ownership that
Institutional shareholders usually hold, it is perhaps
not surprising that respondents are unanimous on one
thing: the primacy of communicating with institutional
shareholders. Indeed, every single respondent believes it is
crucial to communicate with this group.
By contrast, other stakeholders are given markedly less
importance by respondents. Nevertheless, a sizeable
60% of respondents believe communication with Foreign
shareholders is either Crucial or Very important.
Employee shareholders are crucial or very important
with 55% of respondents.
The survey results confirm that issuers agree on the overwhelming importance of reaching out to their institutional shareholder base, with a particular focus on the foreign component. This is commensurate with Georgesons experience with the relative weighting of institutional ownership as part of the issued share capital in most companies, and with the complexities of cross-border voting.Cas Sydorowitz
Georgeson, Managing Director > Corporate Advisory
Investor Relations Survey Findings
M&A Integration, February 2007 2
Investor Relations Survey Findings
24 M&A Integration, February 2007
To assess the position of your shareholders on the offer, have you used the proxy solicitor/information agent to communicate with either institutional or retail shareholders?
0
20
40
60
80
100
Retailshareholders
Institutionalshareholders
Per
cen
tag
e o
f re
spo
nd
ents
No
Yes
44
56
44
50
50
Respondents are evenly divided over using proxy solicitor/
information agents when communicating with either
institutional shareholders or retail shareholders.
Georgeson has seen a marked rise in the importance attached by issuers to retail shareholder sentiment on transactions. As a result, we have been retained on numerous occasions to flank an institutional solicitation campaign with an information agent role geared towards private investors.Cas Sydorowitz
Georgeson, Managing Director > Corporate Advisory
If so, who appoints the proxy solicitor/information agent at the pre-deal stage?
0 10 20 30 40 50 60
Investmentbank
CEO
Corp sec
FinancialPR agency
Corporatebroker
IR department
Percentage of respondents
44
Note: some respondents selected more than one response to this question
58
50
25
17
17
8
If a proxy solicitor/information agent is appointed for
communication with shareholders at the pre-deal stage,
it is often a collaborative decision, with most likely the
IR department taking a decision 58% of cases, or a
Corporate broker in 50% of cases. Meanwhile, in a
quarter of instances a financial PR agency will have input.
Do you know which hedge funds are buying/selling your stock during a transaction?
Yes
It depends/sometimes
No
40%
25%
35%
The largest share of respondents (40%) are aware of
which hedge funds are either buying or selling their stock
during an M&A process. As one respondent explains, this
awareness comes through our share registrar, the broker
and also direct contact with the hedge funds themselves.
A further 40% of respondents, however, feel that
awareness of hedge funds buying activity is incomplete
at times. One respondent in particular says: yes and no,
it depends on which hedge funds are involved; whether
we have a relationship with the hedge funds and the size
and level of dealings. Meanwhile, another respondent
adds that It depends how their stock is registered, if its
via a CFD it is difficult to trace transactions via the register.
Otherwise, a quarter of respondents do not know which
funds are trading. As one respondent says: No, we dont
care. Its more important to get involved with institutional
and retail shareholders.
When do you actively engage your retail holders or private client brokers?
Yes, during the year
No, we let that communitycome in on their own
Yes, during a transaction only
50%
20%
30%
Half of respondents actively engage retail shareholders or
private client brokers during the year. A further 20% do
engage these parties, but only during an M&A transaction.
Meanwhile, 30% of respondents leave these groups alone.
Georgeson has seen a marked rise in the importance attached by issuers to retail shareholder sentiment on transactions. As a result, we have been retained on numerous occasions to flank an institutional solicitation campaign with an information agent role geared towards private investors.Cas Sydorowitz
Georgeson, Managing Director > Corporate Advisory
M&A Integration, February 2007 2
2 M&A Integration, February 2007
What are the key determining factors when considering an information agent/ proxy solicitor?
0
20
40
60
80
100
Numberof irrevocables
Percentageheld byforeign
investors
Size ofretail
holders
Level ofacceptances
required
Crucial
Very important
Important
Slightly important
Not important
12
53
35
18
35
35
66 6
13
31
37
13 12
46
18
18
6
Per
cen
tag
e o
f re
spo
nd
ents
The most important determining factor for respondents
when selecting an information agent/proxy solicitor is the
Level of acceptances required. 88% of respondents select
this as either Crucial or Very important.
Determining factors in the decision over whether to use a proxy solicitor are key elements that show a direct linkage to the transaction itself, and to the shareholder base in question; in most cases, there is a clear, quantifiable rationale for the role.Cas Sydorowitz
Georgeson, Managing Director > Corporate Advisory
During an M&A transaction, under what circumstances would you consider selecting a Receiving agent other than the incumbent Registrar to the target?
0 10 20 30 40 50 60 70 80
Others
Price
Adviser relationship withnon-incumbent registrar
Services
Company relationshipwith non-incumbent registrar
Hostile
Percentage of respondents
44
Note: some respondents selected more than one reponse to this question
63
56
50
31
25
13
A majority of 63% of respondents are most inclined to
employ a Receiving agent when an M&A situation is
hostile.
Otherwise, 56% of respondents would select a Receiving
agent if there was no incumbent Registrar to the target.
This finding supports the logic behind adding the considerable resources of a proxy solicitor to augment services provided by the incumbent registrar for shareholders with questions. There is a clear differentiation between service level and type offered to holders with questions regarding their shares, and those relating to the transaction at hand.Cas Sydorowitz
Georgeson, Managing Director > Corporate Advisory
Corporate actions questions
Investor Relations Survey Findings
On M&A transactions where the target company will remain listed, how important are the following factors in your selection of a Receiving agent?
0
20
40
60
80
100
Companyrelationship
withRegistrar
Adviserrelationship
withRegistrar
Value-addedservices
(e.g. proxysolicitaion)
Annualregister
maintenancefess
Receivingagentfees
Per
cen
tag
e o
f re
spo
nd
ents
Crucial
Very important
Important
Slightly important
Not Important
15
47
15
2315
8
39
23
1521
7
29
29
14 13
34
20
20
13 13
6
25
43
13
The leading considerations when selecting a Receiving
agent are cost based: the Receiving agent fees or the
Annual register maintenance fees. That said,Value added
services that a Receiving agent can offer, such as proxy
solicitation, are also important for respondents.
If a bidder from abroad targets a listed UK company and the offer consideration includes shares, how would you rate the importance of the following factors in the selection of a Receiving agent and ongoing Registrar?
0
20
40
60
80
100
Relationshipwith Registrar
Internationalpresence
Depositoryinterest
expertise
Price
Per
cen
tag
e o
f re
spo
nd
ents
Crucial
Very important
Important
Slightly important
Not Important
8
8
25
26
3325
50
8
1725
58
17 17
33
42
8
When an overseas bidder is targeting a UK company, the
core consideration in the selection of Receiving agent and
ongoing Registrar is Price 33% of respondents rate this
as crucial.
The second most important consideration with 25% rating
it crucial is Depository interest expertise. International
presence, whilst very important for 58% of respondents, is
deemed crucial by only 17% of respondents.
M&A Integration, February 2007 2
2 M&A Integration, February 2007
In a contested bid situation, how comfortable would you feel in engaging a Receiving agent that is already acting for one of the bidders, and has a track record of working on more than one side of a transaction?
Uncomfortable
Comfortable
Quite comfortable
Very comfortable
46%
20%
7%
27%
Respondents are somewhat divided over whether they
would engage a Receiving agent that is already acting
for one of the bidders. Almost half of respondents (46%)
would be uncomfortable in such a scenario. However,
the remaining 54% would be either quite comfortable,
comfortable, or very comfortable if this were to happen.
At what stage in the preparation of an M&A transaction would you typically think about engaging the Receiving agent?
During the Due Diligence period
Around the timeof a Rule 2.4 announcement
During the early draftsof the Offer document
During the final draftsof the Offer document
37%
25%
13%
25%
Respondents would not appear to prioritise the
employment of a Receiving agent. Indeed, the largest share
(37%) would choose to engage a Receiving agent is during
the due diligence period. A further quarter would do so
during the early drafts of the offer document.
However, a quarter of respondents would employ a
Receiving agent somewhat earlier around the time of the
Rule 2.4 announcement.
Investor Relations Survey Findings
How open are you to allowing for a beauty parade amongst the Receiving agents?
Open
Quite open
Not keen
37%
25%
38%
Three quarters of respondents are Quite open or Open to
conducting a beauty parade amongst Receiving agents. A
quarter, however, are Not keen.
During an M&A transaction, how valuable do you believe is the packaging of data that a Receiving Agent compiles for a Financial PR company you select to employ?
Valuable
Indifferent
Quite valuable
Very valuable
33%
7%
27%
33%
Respondents are somewhat divided over the value of the
data that a Receiving Agent compiles for the financial PR
during an M&A transaction. A third believe such data is
valuable, whilst a further third are indifferent to it.
How valuable do you feel it would be to include the Receiving agent in daily all adviser telephone conference calls on an M&A transaction?
Indifferent
Valuable
Quite valuable
7%
21%
72%
The majority of respondents (72%) are indifferent to
including the Receiving agent in the daily all adviser
telephone conference calls during an M&A transaction.
A minority of 21%, however, believe such a high level
inclusion would be Valuable to the M&A transaction.
M&A Integration, February 2007 29
Over the past few years, hedge funds have entered the
realms of common parlance, with even the uninitiated
investor being aware of the term, even if theyre not
completely sure what it means.
It has been argued that the upsurge in mergers and
acquisitions seen over the past 2 years has been due to
the influence of hedge funds which are able to use their
immense power and resource to help push deals through.
Such funds are estimated to have resources in the region of
$1.1 trillion globally, and this figure is expected to grow by
around 300 per cent over the next 5 years. With such vast
sums under hedge fund control, it is not surprising that their
impact in the M&A arena is becoming increasingly apparent.
One of the key differences with a hedge fund is its time
horizon its aim to make its investors richer now rather than
in 20 years time. That means that they are often likely to exert
pressure on companies to act for the short term, while in
actual fact company strategy may have a longer term horizon.
Hedge funds take advantage of market anomalies which may
make more money if a company fails, which is not in the best
interest of all shareholders. Their bet may be that a particular
M&A fails, because then the stock involved may go down and
the funds short position may make them more money than if
they were long on the stock and the M&A went through.
Sometimes a hedge fund is able to amass enough stock
themselves or alongside similar funds to prevent or frustrate
a deal from going through. A recent example was seen with
Polygon preventing Telent from completing their intended
scheme of arrangement. The M&A was pulled as Polygon (an
American hedge fund best-known for the aggressive positions
it has taken during corporate restructurings at British Energy
and Monsoon) thought that Telents stock was being picked up
too cheaply.
In this kind of situation, hedge funds are not necessarily only
holding out for a big payout just for themselves, but rather
trying to use their shareholding and ability to block a deal
and get a better price for everyone. In other cases they do
manage to achieve concessions that just benefit themselves.
The hedge fund may manoeuvre to a position where they get
to buy an asset that has to be sold off for competitive reasons
or as a pre-set agreement to get a particular shareholder
onside. Effectively the fund may be acting like a private
equity firm and buying an asset for less than market value in
exchange for support.
In another recent situation North Sound called an EGM to
remove the chairman of African Platinum plc:
At an extraordinary general meeting called by hedge fund manager North Sound Capital yesterday, African Platinum non-executive chairman Charles Hansard was ousted despite a unanimous recommendation by the board to the contrary. Director Mark Bristow, CEO of Randgold Resources resigned on principle shortly thereafter. North Sound Capital owns a 10.10% stake in Afplats
Source: Resource Investor
The US-based hedge fund refused to talk to the company
while the existing chairman was in place, but once they had
succeeded in removing him, they agreed to talks. Many view
this power as too all-encompassing, feeling that hedge fund
managers are able to ride roughshod over a company while
not truly understanding its long-term prospects.
Worse still is when hedge funds dont own the underlying
stock, but instead own a derivative instrument, like a contract
for difference (CFD). They are able to buy the CFD for
less than the stock; can buy on margin AND avoid stamp
duty. They are purely betting on the companys stock price
moving in one direction or another with no economic or legal
entitlement of ownership. The fund peddles their influence
using these derivative instruments. In the Polygon Telent
example; the US hedge fund had some shares and a larger
position in CFDs.
Hedge funds a worrying factor in the M&A market?
0 M&A Integration, February 2007
Hedge funds aim to make their investors richer every year, never mind in the long-term and use a wide variety of investment techniques to achieve this goal. They enjoy great freedom to invest in almost any financial instrument, and do not need to confine themselves to any particular market place or type of investments.
M&A Integration, February 2007
They simply had to convert the CFDs into the ordinary shares
for them to block the proposed transaction. However, this
conversion does not always happen in practice, and instead
the hedge fund through their CFD position gets their prime
broker, whom they bought the CFD from, to vote on the
underlying shares according to the funds wishes, as if they
were the owners of the stock.
A big incentive to do business in this way is that buying CFDs
is stamp duty exempt. HM Treasury is currently missing
out on a huge opportunity to close a loophole that issuers
are paying for. Additionally, there is no disclosure on these
derivative instruments when issued with a 212 letter, which
requires ordinary investors to disclose how many shares they
own in a particular company. Why can these hedge funds
influence issuers and the corporate actions they engage in
and yet not have to provide the same disclosure that ordinary
owners are required to?
It appears that from the proliferation of hedge funds
and indeed the websites set up for the sole purpose of
undertaking recruitment for such companies, that this
aggressive approach to making money is here to stay,
whether or not it benefits the companies who are the
subject of the attention. The M&A market place has been
considerably affected by hedge fund practices and this
is set to continue apace.
Cas Sydorowitz Managing Director > Corporate Advisory
London Office Vintners Place
68 Upper Thames Street
London UK EC4V 3BJ
Phone: +44 (0) 870 703 0302
Mobile: +44 (0) 7810 750 442
Fax: +44 (0) 870 702 0158
www.georgeson.com
New York Office Tom Kies 17 State St. 10th Floor
New York, NY USA 10004
Phone: 1-212-805-7000
Paris Office Matthieu Simon-Blavier 38, Rue de Bassano
Paris, France 75008
Phone: (+)33 1 44 31 20 22
Fax: (+)33 1 44 31 20 79
Rome Office Stefano Marini Via Emilia 88-00187
Roma, Italy
Phone: (+)39-06-421711
Madrid Office Pedro F Sa Zubarn 18, 5a pl
Madrid 28010, Spain
CERTAINTY INGENUITY ADVANTAGE
CASE STUDY
FACING THE MUSICSanctuary Group weathers a potentially contentious vote
FACTSThe Sanctuary Group Plc, theinternational music companyresponsible for managing renownednames including Guns N Roses and James Blunt, recently wentthrough a period of tradingproblems, aborted takeover talksand increasing debt levels.
As a result the Company share price fellrapidly and the alternative to breakingup the Group was to restructure andrefinance by way of a Placing, and anOpen Offer. This fundraising and relateddebt restructuring was to be put toshareholders at an EGM to seek theirsupport in what was a critical proposalfor the future of the company.
CRITICAL ACTIONA successful outcome wasdependent on at least 75% ofSanctuarys shareholders voting in favour of