2014

THE WELL-PREPARED DEALMAKERTHE IMPORTANCE OF METRICS FOR SUCCESSFUL M&A TRANSACTIONS

– VP OF CORPORATE DEVELOPMENT

“YOU NEED SOMEONE TO OWN EVERY DEAL, OTHERWISE IT WILL NOT HAPPEN.”

3

Organizations increase the probability of a successful transaction (M&A) by implementing a formal, sophisticated process — supported by relevant metrics — throughout a deal’s life cycle.

While every transaction poses its own unique challenges, Mercer researched and built a framework of best practices to improve clients’ M&A performance. Working directly with clients, Mercer compiled information on their experiences, approaches, processes, metrics, and other key components that relate to deal success. Mercer’s research clearly indicated that using this framework as a guide should help M&A teams agree on deal priorities, identify potential issues in a timely manner, and document experiences to avoid future mistakes. (See sidebar, Mercer Research at a Glance.)

From this research, metrics emerged as the essential factor, one that, in conjunction with four other equally important key practices, creates the strongest framework to increase the potential for success. M&A metrics keep the deal team engaged and on track to meet —and, where possible, exceed — the transaction’s parameters and expected results. Understanding and tracking the right metrics throughout a deal cycle plays an important part in M&A success — providing the ability to identify risks and build mitigation strategies before issues become problematic. At the very least, failing to monitor the necessary metrics can increase the financial costs associated with the deal and integration; at the most, it can ultimately lead to a failure to meet the transaction’s strategic goals.

BEST PRACTICES FOR SUCCESSFUL DEALSAlthough many different factors play a role in successful M&A deals, Mercer’s experience and research clearly show essential components that are applicable to any organization.

THE FOUR FACTORS•A clearly defined deal thesis, or rationale, that identifies the end

result and guides activities throughout all stages of the process.

•A robust, flexible, and holistic process that provides structure and the ability to address unexpected situations that arise.

•Governance and accountability at all stages that direct progress and ensure achievement of goals.

•Organizational learning from both previous and current deals to guide the transaction in progress and future M&As, as well as create a knowledge database.

THE WELL-PREPARED DEALMAKERTHE IMPORTANCE OF METRICS FOR SUCCESSFUL M&A TRANSACTIONS

MERCER RESEARCH AT A GLANCEMercer’s research study, The Well-Prepared Dealmaker: The importance of Metrics for Successful M&A Transactions, used the following approach:

•The study examined metrics used by acquirers at different experience levels, how organizational structure and processes support the setting and review of metrics, and the features of acquirers’ most successful deals.

•Mercer researched current literature on the topic and interviewed executives, using questions with Likert-scale responses, as well as open-ended questions. (A Likert scale is a rating scale that may, for example, ask respondents to rank their level of agreement with a given statement.)

• Interviewees from 80 acquisitive companies around the world included 55 human resources executives (mostly directors or vice presidents), 28 senior corporate development executives and managers, and 14 corporate M&A leaders.

• The study analyzed participant companies by deal experience, geography and industry, and title.

•The team developed a process model to propose best practices for using metrics throughout the deal life cycle.

4

METRICS SCORECARDMetrics — measurable and measured — represent the final factor, underpinning the other four components to tell the quantitative story of the deal. (See Figure 1, Essential Practices for a Successful M&A Deal.)

FACTOR 1DEAL THESISWhether the purpose of the M&A transaction is competitive advantage, geographic expansion, or the addition of intellectual capital to quickly build market position, the business case for the deal — the “deal thesis” — should act as a beacon that clearly points the way to achieving anticipated results.

However, an established business case does not always guide M&A team activities in a structured manner. Even robust and well- thought-out plans may lack effective implementation. While 70% of respondents to Mercer’s research have a system of procedures to guide M&A activities (an M&A “Playbook”), it typically focuses on deliverables rather than process.

Mercer recommends the following key points for best “deal thesis” practices:

•Clearly define the business case for the acquisition. The deal thesis defines the business case and rationale for the merger or acquisition. For example, “the purpose of the deal is to increase company revenue in Europe by (x) percent by providing our European customers with expertise and skills (in x, y, and z) through a merger with ABC firm that specializes in that service. The expected result is a complete integration of ABC with our European division.” With a clear thesis, the M&A deal executive, in conjunction with appropriate team members, can generate specific metrics that address strategic intent, integration strategy, the impact on products and/or customers, organizational and/or operational structure, revenue, profitability, and so on.

•Fully inform all M&A team members about the deal rationale. Everyone should understand the expected synergies (for example, revenue growth) and anticipated values (for example, better market positioning) to ensure their activities support the desired end result. The M&A team should be aware of the strategic intent of the deal, the proposed integration strategy, and the financial impact on the company’s bottom line. All members need to know their specific tasks and how they fit into the M&A process at all stages.

•Ensure that all stakeholders understand how targets and metrics link to the deal thesis. For example, if the deal rationale is to offer customers a specific expertise in, say, bridge construction, retention of key engineers through proper incentives is an important metric.

Figure 1

ESSENTIAL PRACTICES FOR A SUCCESSFUL M&A DEAL

1. Clear deal thesis.

2. Robust process.

3. Accountability and governance.

4. Organizational learning.

5. Performance metrics: Business case metrics + Integration metrics.

5

FACTOR 2M&A PROCESSNo M&A process, however detailed, can succeed without management overview and a workable timetable that allows for thorough completion of all tasks during:

•Strategy and planning.

•Due diligence.

•Transition management and integration planning.

•Integration execution and knowledge management.

To ensure that all activities have been completed with efficiency, accuracy, and forethought, the overall process plan should include the time period prior to the deal closing, as well as after the deal has been concluded. Depending on the complexity of a transaction, the pre- and post-close stages may last anywhere from a few months to a few years. As one client, the Corporate Head of Business Integration, noted: “No two deals are alike — defining the [integration] process is an art.”

Mercer recommends the following key points for best “process” practices:

•Create a process that is holistic, with interconnected and well-defined stages. Having a clear perspective of how individual activities overlap with others allows team members to better perform and complete their tasks. There should be a formal handover from one stage to the next to ensure that the deal moves forward. Without defined steps, implementation may falter. Metrics should also cascade from one stage to the next to ensure consistency throughout the deal life cycle.

•Make the process flexible to take advantage of unexpected opportunities or resolve unanticipated issues. Because of a deal’s complexity, situations may arise that require a change in timing or focus. The right people must be able to respond with competence, adaptability, and speed to address problems or opportunities at any stage.

•Develop a robust, well-planned process. Rushing to complete a deal without taking the necessary steps to ensure a smooth transition and integration can lead to future trouble. Cutting corners may also cost the acquiring firm additional time and money in the long run.

•Assign activities and responsibilities for each stage. The governance structure should ensure that the overall plan assigns tasks throughout the life cycle to specific team members so that no activity is overlooked or duplicated. Effective management of the plan is essential to ensure accountability and monitoring of performance measures.

To ensure that all activities have been completed with efficiency, accuracy, and forethought, the overall process plan should include the time period prior to the deal closing, as well as after the deal has been concluded.

6

•Set clear metrics, measure them, and adjust them, if necessary. Regular monitoring should address team performance and progress, as well as business case and operations metrics. If necessary, the deal executive with appropriate team members should revise the metrics as the M&A process moves forward.

FACTOR 3ACCOUNTABILITY AND GOVERNANCETo support the overall management of a transaction, an assigned deal executive must take ownership. Accountable to senior management, the deal executive is responsible for closing and integration; in other words, to make the deal successful. Within a defined governance framework, the deal executive flows information upward to top management, sometimes through a steering committee.

But while the deal executive is ultimately responsible for closing a transaction, that individual must rely on the team’s performance as they follow through on their roles. Typically, the business integration team represents the various business areas (sales, marketing, product development, and so on), and the functional integration team represents the functional areas (human resources, legal, information technology, finance, and so on). The makeup of these teams may vary, depending on the company’s corporate structure. (See Figure 2, Responsibilities During a Deal.)

Mercer recommends the following key points for best “governance and accountability” practices:

•Create an experienced, knowledgeable team to handle the business and/or integration aspects of the deal and deliver on targets. If the relevant expertise is unavailable in-house, obtain the assistance of external experts in tax, international law, human resources, etc. With so many deals today occurring cross-border, team members, depending on their role, need to maintain awareness of the following challenges:

Effective manage-ment of the process plan is essential to ensure accoun-tability and monitoring of performance measures.

Figure 2

Responsibilities During a Deal*

TargetSelection

Due Diligence

Preparing for Close

Close

Integration planning

Integration management

Knowledge management

CORPORATE DEVELOPMENT CORPORATE DEVELOPMENT

& DEAL EXECUTIVE DEAL EXECUTIVE & WORKSTREAMSCORPORATE DEVELOPMENT

*All stages of the transaction involve the HR function.

7

— Cultural nuances:

ɻ Country cultures can play a significant role in the interaction between the parties. For example, as cited in Mercer’s M&A HR Issues around the World report, family-owned businesses are common in some countries, with family members exerting power in business management and relationships.

ɻ Different management styles between merging companies can result in a clash of cultures that, in time, could lead to unwanted staff turnover, poor performance, and morale issues.

— Talent issues: Specific skill gaps or overlap may lead to increased hiring or layoffs. Although talent assessment can be completed at any time, the more information the acquirer has before signing a purchase agreement, or closing the deal, the better. One contributing factor to M&A transaction success is getting the right people into the right jobs at the right time. The acquirer needs high-performing individuals at all levels for the deal to reach its potential.

— Local workforce regulations and environments: Some countries mandate severance pay under strict guidelines, while others place a heavy emphasis on labor unions and collective bargaining.

— Market practices: Setting up a human resources policy demands knowledge of local pay and benefit practices, as well as the talent pool.

•Decide whether there should be incentives to motivate key players to achieve their expected goals. Consider:

— Special incentives for team members: Mercer’s Survey of M&A Retention and Transaction Programs found that nearly 30% provide incentives while still being concerned about not closing bad deals. Incentives, which are usually reserved for the corporate development team, focus on rewarding a completed deal — not on how successfully the two organizations integrate. Placing the sole emphasis on rewarding the deal closers — and failing to incentivize other team members — can lead to failed integration and staffing issues in the long run.

— Retention programs for the seller and buyer: Mercer’s research study found that such programs focus on retaining executives and senior managers considered essential to long-term value creation and continuity, as well as employees critical to the integration (for example, in finance and accounting roles). While few companies offer retention incentives to employees outside these groups, they are more common for all employee groups when the transaction is cross-border. Acquiring firms tend to be more cautious when the target is outside their home market and are likely to implement retention programs.

Although talent assessment can be completed at any time, the more information the acquirer has before signing a purchase agreement, or closing the deal, the better.

8

•Assign an individual to coordinate information exchange. To ensure accountability within the governance structure, there must be frequent exchange of information on deal status, team progress, pending issues, and other relevant matters. Regular communication to team members, as well as within sub-groups, keeps all players connected. Dissemination of information may be through emails, a dedicated intranet site, or through another delivery method that works best for the team.

FACTOR 4ORGANIZATIONAL LEARNINGMany companies in Mercer’s research study cited difficulty capturing and documenting lessons learned from the transaction. The problems involve determining when and how to do so, and in assigning responsibility for this function. If the process does not emphasize the importance of gathering intelligence on the team’s experience, future transactions risk failure should their teams repeat mistakes that could have been avoided through shared, codified knowledge.

Mercer recommends the following key points for best “organizational learning” practices:

•Ensure that lessons learned and experiences are gathered, organized, and available. Accomplishment of this task may be through using a library of M&A experience, shared files, a dedicated intranet site, or other source.

•Assign an individual to compile and document this data at a specific point(s) in the process. One individual should have the the task of creating a knowledge database, with performance. metrics addressing this responsibility. To make the process less burdensome, each function can provide feedback at every milestone. Mercer recommends using a formal process to codify the material.

•Determine how and when to share this information. At the end of the process, the data can be accessible as mentioned above. However, if feedback is submitted at every stage, the team can uncover early mistakes or unwanted results. The person documenting the information can share it quickly to avoid future errors in the deal’s subsequent phases.

•Conduct a post-deal audit. All team members — not only the person documenting the data — should share their experiences through a post-deal forum. The discussion should include any surprises that arose, the relevancy of the metrics, what was done well, and what could have been done better.

To ensure that integration succeeds, the M&A team should include human resources as early as possible in the process.

“Even if the metrics aren’t right, having any metrics was helpful to generate awareness and stimulate thought. Having a poor metric may actually help people think about what a better metric would be.”

— DIRECTOR OF SERVICE

SOLUTIONS

9

MERCER’S BALANCED SCORECARD APPROACHBRING IT ALL TOGETHERWhile the previously mentioned factors provide an effective guide to completing a deal, achieving optimal results requires a metrics system that measures and monitors how the process is moving forward or slowing down, along with the results achieved.

To implement a comprehensive approach, Mercer recommends using two broad categories of metrics — representing business case and integration aspects — that cover four relevant areas, with no more than three-to-five metrics in each quadrant. (See Figure 3, Use of Metrics by Deal Stage.) While an organization’s business strategy defines the specific quadrants used in its M&A metrics, any deal, at the very least, should include:

•Financial.

•Operations/technology.

•Customers/products.

•People.

The deal executive first sets the strategic business case metrics in coordination with the corporate development team. These measures link to the deal rationale and the synergies identified before the purchase decision is made. While financial targets remain key, business case metrics also need to include operational and human resource challenges throughout the deal timeline. Research participants reported their top priorities to be revenue growth and financial returns (58%), followed by geographic or market expansion (48%).

Figure 3

Use of Metrics by Deal Stage

TargetSelection

Due Diligence

Preparing for Close

Close

Integration planning

Integration management

Knowledge management

BUSINESS CASE METRICS

INTEGRATION METRICS

10

The deal executive then sets the operational integration metrics in coordination with the individual work streams. These measures are activity-driven, time-based, and linked to the deal strategy. Respondents to Mercer’s research consider talent and leadership, optimization of operational costs, and cultural integration as key components. Whether full integration would create or destroy value exerts a heavy influence on the company’s integration strategy.

Mercer’s methodology ensures a well-rounded effort by including measurable goals in the four quadrants, as illustrated in Figure 4, Critical Metrics Used. The metrics should reflect the specific parameters of the transaction as set by the business case and carried out through various phases. Considering the metrics in a holistic manner allows the team to see the interconnectedness of each quadrant. For example, although staff retention may fall under “people,” that component may also impact operations and/or finance.

SMART DEALS, SMARTER PLANNINGIn light of the complexity of every transaction, the M&A team should be knowledgeable about, and supportive of, best practices to ensure its success. These best practices include the use of metrics in conjunction with a clear deal thesis, a robust and holistic process, governance and accountability, and organizational learning.

Clarity around the deal rationale guides team activities throughout the cycle, as does a framework that emphasizes different success measures at each stage. With a clear deal thesis defined at the start of the process, the deal executive can monitor and evaluate team performance against goals — thereby ensuring accountability — as the activities move forward.

There should be a shift in metrics emphasized at each stage. In fact, Mercer experience has shown that agile and dynamic measures —reviewed throughout — allow a company to capitalize on unforeseen value creation opportunities. Finally, understanding lessons learned from the deal, particularly through the use of quantifiable measures, can benefit future M&A teams.

Bringing everything together in the four-quadrant scorecard approach creates a base for the team to work from, keeping everyone heading in the right direction, while supporting the business case rationale through the ongoing process to get the deal done right. With timing essential and a major investment on the line, the use of a comprehensive framework, underscored with well-designed, measurable metrics, can bring clarity and successful integration to even the most complex M&A deals.

Figure 4

CRITICAL METRICS USED

FINANCIAL

•Revenue/profit growth.

•Cost synergies.

CUSTOMERS/PRODUCTS

•Customer acquisition/retention.

•Market share.

OPERATIONS/TECHNOLOGY

•Productivity/utilization.

•Timing of operations integration.

PEOPLE

•Key employee retention.

•Organizational engagement.

11

ADDITIONAL RESOURCESMercer has a number of resources to assist organizations with the human capital issues that arise from global M&A deals. To obtain copies, please contact your Mercer consultant directly.

STUDIES• Survey of M&A Retention and

Transaction Programs: Retaining the Right Talent for Deal Success.

• Asia on the Buyside: The Key to Success - Human Capital and Hidden Risks in Cross-Border Transactions.

PUBLICATIONS• M&A HR Issues around the

World.

• Worldwide Benefit & Employment Guidelines.

ARTICLES• Going Global, Being Global:

Degrees of Difficulty in Cross-Border M&A Deals.

• Addressing Cross-Border Human Resource Management Challenges in an Age of Talentism.

• Develop an Effective Retention Strategy to Enhance M&A Deal Success.

• Talent Assessment in M&A: The People Factor.

• Divestitures and People Issues: Breaking Up Is Hard to Do.

• Culture in M&A: We Know It’s Important, So Now What? Discipline and Focus Prevail.

ACKNOWLEDGEMENTSA note of appreciation goes to those who graciously shared their knowledge, experiences, and insights into preparing this paper:

•Mercer’s Global M&A Business.

•Our many clients who have shared their experience.

•Our fellow Talent, Health, Retirement, and Investment consultants within Mercer.

For further information, please contact your local Mercer office or visit our website at:www.mercer.com

Argentina

Australia

Austria

Belgium

Brazil

Canada

Chile

China

Colombia

Czech Republic

Denmark

Finland

France

Germany

Hong Kong

India

Indonesia

Ireland

Italy

Japan

Malaysia

Mexico

Netherlands

New Zealand

Norway

Peru

Philippines

Poland

Portugal

Saudi Arabia

Singapore

South Korea

Spain

Sweden

Switzerland

Taiwan

Thailand

Turkey

United Arab Emirates

United Kingdom

United States

Venezuela

Copyright 2014 Mercer LLC. All rights reserved. 13-MAPOV-PU