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VALUE CREATION IN
MERGERS & ACQUISITIONS
BYK S SRINIVASA MURTY
Head - Corporate Knowledge ManagementHindustan Lever Limited
STRUCTURE OF PRESENTATION
• Role & Relevance of M&A
• Value Capture during Transition Management : The case of HLL and TOMCO Merger
– Strategic case for the merger
– Key steps in transition management
– Value capture during and post Integration
ROLE & RELEVANCE OF M & A
• Mergers & Acquisitions add value through
– strengthening the core businesses
– expanding product - market scope
– capitalizing on economies of scale
– benefiting from technology / skill transfer
SOME FUNDAMENTAL ISSUES
• What are the expected benefits immediately and in the longer term
• What are the expected costs for the acquisition as well as the resources to be committed for securing all the benefits visualized
• what is going to be the likely environmental fall-out
THE CRITICAL SUCCESS FACTORS
• Strategic fit:– Is it consistent with the business strategy?– Will it significantly change the way you do business or
compete in that product category?– How will it add or develop your core capabilities?
• Quality of strategic and economic analysis.
• Effective due-diligence.
• Ability to capture synergy, improve operations, or both.
• Managing the process of integration.
• Over 60% of the mergers & acquisitions end in failure
• key reasons for failure:
– Failure to capture the merger synergies, improve the company's operations or both,
– Poor management of post merger integration
Value Capture During Transiton Management A Case
Merger Of HLL And TOMCO
TOMCO IN 1992/93
• 75 year old company
• Excellent brands (Hamam, 501,OK)
• Declining sales
• High operating losses
• Excessive overhead costs
• Low productivity of assets
• Severe liquidity crisis
Serious problem of viability !Serious problem of viability !
TOMCO VS. HLL-- KEY DATA
TOMCO HLL
Mar ‘93 Dec ‘92
Rs Crores
Turnover 312 2100PBT 1* 183Equity 21.5 140Employees 5225 10000
Sales (Tonnes) 132500 689000Manufacturing Units 10 14
(*Not adjusted for profit on sale of investments)
STRATEGIC CASE FOR THE MERGERHLL’S PERSPECTIVE
• Strengthen core business through :
– Strong ethnic brands - Hamam / 501/ OK– Brand complementarity / Positioning
STRATEGIC CASE FOR THE MERGERHLL’S PERSPECTIVE
• Geographical complementarity
– Strong market position in South– Manufacturing base in South
• Saving of future capital expenditure
STRATEGIC CASE FOR THE MERGERTATA / TOMCO’S PERSPECTIVE
• TOMCO business not a core priority area for the TATA’s
• Significant funds needed to revive / restructure TOMCO business
• Need to strengthen marketing / technology for TOMCO business
• Need to identify a partner with a compatible corporate culture
TRANSITION MANAGEMENT KEY ISSUES
• Leadership & functional support through an empowered senior Integration Team / Transition Management Team
• Turnaround Strategy - setting out priorities
• Managing the integration
• Full fledged communication plans - both internal & external, backed by a statement of corporate vision / corporate misson
• Cultural issues
TRANSITION MANAGEMENT TEAM (‘INTEGRATION TEAM’ )
• HLL team
– Head of Integration Team
– Finance & Commercial Advisor
– Technical Advisor
– Marketing and Sales Advisor
– Human Resources Advisor
• HLL team
– Head of Integration Team
– Finance & Commercial Advisor
– Technical Advisor
– Marketing and Sales Advisor
– Human Resources Advisor
• TOMCO team
– Key senior officers , each assisted by a few officers
• TOMCO team
– Key senior officers , each assisted by a few officers
TRANSITION MANAGEMENT TEAM KEY TASKS
• Contain losses and expedite the turnaround of TOMCO
– Maximize the realization of the synergies
– Introduce systems, procedures and controls to facilitate smooth integration
• Structure TOMCO operations for integration with HLL
– Address key strategic issues in each of the functional areas - marketing / sales, commercial, manufacturing and personnel
TRANSITION MANAGEMENT TEAM KEY TASKS
TURNAROUND STRATEGY PRIORITIES
• Margin improvement
• Liquidity management
• Rationalize overhead costs by
– Avoiding duplication in sales & distribution system
– Developing a long term manufacturing strategy
MARGIN IMPROVEMENT KEY STEPS
• Souring economies
– Oil buying / imports– Rationalization of 3P Contract Manufacturers
• Reduction in manufacturing costs
– Technical efficiencies– Optimization of formulations
• Rationalization of support expenditure
INTEGRATION MANAGEMENT THE APPROACH
• Fully involve TOMCO management in preparing and implementing the revival plans
• Mutual trust & respect create long term foundation for successful marriage
• Set in place MIS to review the progress
• Organize review meetings and functional conferences
• Create a learning environment
INTEGRATION MANAGEMENT KEY ISSUES
• Manage transition without loss of morale
– Understand and bridge cultural differences– Invest in development and retraining of retainable managers
/ staff
• Capture the synergies in the combined operations
• Prepare and implement the restructuring plans
• Protect the key assets- brands, key personnel, key customers and key suppliers - during the transition period
INTEGRATION MANAGEMENT CONTROL ISSUES
• M&A is already a structural discontinuity for both the participants - avoid introducing ambitious systems alien to both companies ( too much too soon)
• Competition / customers /employees can take advantage of confusion / control weaknesses in transition period:
– MIS is vital, systems provoke / condition behavior
– focus on possible leakages ( e.g. debtors, stock flows & cash flows)
• Necessary to over resource the organization in terms of experience / skills to manage discontinuities.
INTEGRATION MANAGEMENT SALES & DISTRIBUTION SYSTEMS
HLL TOMCO
Factories
53 C&FAs 37
2976 RSs 2050
502000 Wholesalers Retailers 358000
Consumers
INTEGRATION MANAGEMENT SALES AND DISTRIBUTION SYSTEMS
KEY STEPS
• Optimization of sales & distribution network
– Joint evaluation of 5000 RSs & 90 C&Fas
– Territory realignments (coverage plans)
• Identification of personnel for retention & training inputs
• Harmonization of invoicing & banking systems
INTEGRATION MANAGEMENT MARKETING
KEY STEPS
• Reposition/ relaunch key brands with
– Improved product features
– Focussed brand positioning
– Effective advertising
INTEGRATION MANAGEMENT TECHNICAL & MANUFACTURING
KEY STEPS
• Harmonization of operations and upgradation for
– Manufacturing flexibility
– Optimization of product formulations
– Productivity & efficiencies
• Training & skill upgradation
• Rationalization of sites
INTEGRATION MANAGEMENT COMMERCIAL
KEY STEPS
• Institute proper controls & reporting systems
• Harmonize systems & procedures to facilitate smooth integration
• Conduct an internal audit study to review the internal controls environment
• Integrate buying & logistics management
INTEGRATION MANAGEMENT HUMAN RESOURCES
KEY STEPS
• Bridge the cultural gap
• Training & development of TOMCO employees identified for retention
• Harmonization / fitment
• Counter the opposition of the unions to the merger
• Design suitable voluntary separation schemes
COMMUNICATION STRATEGY THE KEY TO SUCCESS
• Establish role clarity / expectations
• Consistency, openness, frankness
• Effective dialogue with union leadership
COMMUNICATION STRATEGY KEY STEPS
• Informal communication through
– Task forces
– Periodic review meetings / functional conferences
• Formal communication sessions ( immediately after legal merger)
• Communication kit / audio visuals
• Familiarization courses
CULTURAL ISSUES
• Cultural differences arise due to many reasons:
– Management style
– Standards of performance evaluation
– Remuneration practices
– Employee relations practices
– Value systems
BRIDGING THE CULTURAL GAP -- HOW ?
• Multiplicity of interactive skills
• Tremendous patience
• Multiplicity of interactive skills
• Tremendous patience
• Perseverance
• Sensitivity to human feelings
• Perseverance
• Sensitivity to human feelings
Without loosing sight of the objectives of the merger / acquisition
Without loosing sight of the objectives of the merger / acquisition
LESSONS LEARNT
• It is essential to capture real synergies , realize restructuring opportunities and improve the operations through transfer of skills / know-how
• Task forces incorporating members of both companies should be empowered to realize these opportunities
• MIS should be used to continuously monitor progress
• Success in transition management will depend on how
well the peoples’ issues have been handled
LESSONS LEARNT
• Understand and bridge the cultural differences
• Communicate effectively and involve people
• Establish credibility , transparency, honesty, fairness in all actions
LESSONS LEARNT
• Invest in training and skill upgradation of retainable employees
• Bring latent problems to the surface. Face them squarely and handle them
• Manage the transition without any loss of morale
LESSONS LEARNT
M&A are exciting, sexy and a quick road to growth, but
they can turn into nightmare if not well thought out
before hand and not well managed afterwards”.
CONCLUSION