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Mergers, Acquisitions and Takeovers - Ms. Arpita Mehrotra

BSE M&A- Arpita Mehrotra

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Mergers,

Acquisitions

and

Takeovers

- Ms. Arpita Mehrotra

A brief introductory journey of the concepts.

Mergers, Acquisitions, and Takeovers:

Merger

A strategy through which two firms agree to integrate their

operations on a relatively co-equal basis

Acquisition

A strategy through which one firm buys a controlling, or

100% interest in another firm with the intent of making the

acquired firm a subsidiary business within its portfolio

Takeover

A special type of acquisition when the target firm did not

solicit the acquiring firm’s bid for outright ownership

Acquisitions

Cost new product

development/increased

speed to market

Increased

diversification

Increased

market power Avoiding excessive

competition

Overcoming

entry barriers

Learning and

developing new

capabilities

Lower risk

compared to

developing new

products

Reasons

for

M&A

M&A Process

Analysis

Due

Diligence

Post Merger

Integration

Target

Identification Negotiation

Deal

Closing

Announcement

Acquisitions

Problems

in

Achieving Success

Integration

difficulties

Inadequate

evaluation of target Large or

extraordinary debt

Inability to

achieve synergy

Too much

diversification

Managers overly

focused on

acquisitions

Too large

Corporate Strategy

Elements of CS

Growth

Turnaround

M&A

Restructuring

PPP

Innovation

Acquisitions

• Acquisition of a company in the

same industry in which the

acquiring firm competes

increases a firm’s market power

by exploiting:

– Cost-based synergies

– Revenue-based synergies

• Acquisitions with similar

characteristics result in higher

performance than those with

dissimilar characteristics

Horizontal Acquisitions

Acquisitions

• Acquisition of a supplier or

distributor of one or more of

the firm’s goods or services

– Increases a firm’s market

power by controlling

additional parts of the

value chain

Horizontal Acquisitions

Vertical Acquisitions

Acquisitions

• Acquisition of a company

in a highly related industry

– Because of the difficulty

in implementing

synergy, related

acquisitions are often

difficult to implement

Horizontal Acquisitions

Vertical Acquisitions

Related Acquisitions

Takeover Code

“I buy companies, break them up into pieces and then I sell that off; it’s worth more than the whole”

Explains the callous corporate acquirer enacted by Richard Gere in the celebrated movie, Pretty Woman.

The movie shows him scheming to acquire a financially distressed company through a hostile bid and strip it of its assets, completely disregarding the years of hard work invested in the company by its promoters.

Brief Overview

Takeover laws have been enacted by most of the countries, prescribing a

systematic framework for acquisition of stake in listed companies, thereby

ensuring that the interests of the shareholders of listed companies are not

compromised in case of an acquisition or takeover.

Protection of the interests of minority shareholders is a fundamental corporate

governance principle that gains further significance in case of listed companies.

The takeover regulations ensure that public shareholders of a listed company

are treated fairly and equitably in relation to a substantial acquisition in, or

takeover of, a listed company thereby maintaining stability in the securities

market.

It is also the objective of the takeover regulations to ensure that the public

shareholders of a company are mandatory offered an exit opportunity from the

company at the best possible terms in case of a substantial acquisition in, or

change in control of, a listed company.

Paragraph 2(a) of the City Takeover Code, United Kingdom

summarizes the objective of the City Takeover Code as,

mentioned herein below:

The Code is designed principally to ensure that

shareholders in an offeree company are treated fairly

and are not denied an opportunity to decide on the

merits of a takeover and that shareholders in the offeree

company of the same class are afforded equivalent

treatment by an offeror. The Code also provides an

orderly framework within which takeovers are conducted.

In addition, it is designed to promote, in conjunction with

other regulatory regimes, the integrity of the financial

markets

Brief Overview (Cont’d)

Securities and Exchange Board of India (Substantial Acquisition of

Shares and Takeovers) Regulations, 2011 (hereinafter referred to as

the “Takeover Code”), the extant Indian takeover regulations also

regulate the acquisition of stake in Indian listed companies and

ensure transparency in the affairs of the company.

The interests of the public shareholders are protected by the

Takeover Code by obligating the acquirers to mandatorily provide an

exit opportunity to the public shareholders in case of a takeover or

substantial acquisition.

The Takeover Code seeks to ensure that the securities market in

India operates in a fair, equitable and transparent manner.

The evolution of the Takeover Code began with the SEBI Act, 1992 which expressly

mandated SEBI to regulate substantial acquisition of shares and takeovers by

suitable measures.

SEBI provided a legal framework by enacting the takeover regulations, 1994, which

came into force on November 4, 1994

In November 1995, SEBI appointed a committee to review the takeover regulations,

1994 under the chairmanship of Justice P.N. Bhagwati (the Bhagwati Committee).

The said committee submitted its report in January 1997. Taking into consideration its

recommendations, the Substantial Acquisition of Shares and Takeovers) Regulations,

1997 (hereinafter referred to as the “1997 Code”) was notified by SEBI on February

20, 1997, repealing the takeover regulations, 1994.

In 2001, a review of the 1997 Code was carried out by a reconstituted committee

chaired by Justice P.N. Bhagwati. The reconstituted Bhagwati committee submitted

its report in May 2002.

SEBI, vide its order dated September 4, 2009, constituted the Takeover Regulations

Advisory Committee (“TRAC”) under the chairmanship of Mr. C. Achuthan with the

mandate to examine and review the 1997 Code and to suggest suitable

amendments, as deemed fit.

Based on the recommendations made by the Takeover Regulations Advisory

Committee, SEBI brought to effect the Takeover Code, repealing the 1997 Code with

effect from October 23, 2011.

Basic Concepts

The takeover regulations are applicable on

the acquisition of Voting Rights or Control

over the Listed Company.

Basic Concepts

Voting Rights Control

Shares

Shares

Means: Equity Share capital carrying voting

rights.

Includes:

Security which entitles the holder to

exercise voting rights.

Depository receipts carrying an entitlement

to exercise voting rights.

Acquisition

Regulation 2(1) (b) of the Takeover Code, SEBI has

newly introduced the definition of “acquisition” as

“directly or indirectly, acquiring or agreeing to

acquire shares or voting rights in, or control over, a

target company” .

The Takeover Code identifies an “acquirer” as any

person who, directly or indirectly, acquires or agrees

to acquire whether by himself, or through, or with

persons acting in concert with him, shares or voting

rights in, or control over a target company

Person Acting in Concert

Persons who for a common objective acquire shares or voting rights or control over the

Target company,

pursuant to an agreement or understanding,

formal or informal,

directly or indirectly

co-operate for acquisition of shares or voting rights or control over the Target company.

Enterprise Value

Value calculated as

Market Capitalization of a

company

Debt + Minority Interest + Preferred Shares

Total Cash + Cash Equivalents

Control Includes Right to

Control the

Management

Control of

Policy Decisions

Appoint majority

Of Directors

Exercisable

Individually PAC Or with

Directly Or Indirectly

Shareholding Management

Rights

Shareholders

Agreement

Voting

Agreement

By:

Triggered Points

for

OPEN OFFER

Types of Offer

OPEN OFFER

MANDATORY /

TRIGGERED OFFER VOLUNTARY OFFER

Initial Threshold Creeping

Acquisition

Change in

Control

Indirect

Acquisition

Initial Threshold & Creeping

Acquisition

3 (1)

Acquirer along with

PAC

25% or more shares

or voting rights

3 (2)

Acquirer with PAC

Holding 25%- 75%

Creeping Acquisition-

5% in each F.Y.

Indirect Acquisition

Acquisition of Voting Rights or control over other

entity that enable the acquirer to exercise of such

percentage of voting or control over Target Company.

Acquirer B UK Ltd. Target Company

Global

Offer

100%

Control

72.93%

Indirect Acquisition of 72.93%

of the target company

Voluntary Open Offer

Separate

Provisions

for

Voluntary

Open

offer

Minimum

Offer

Size is

10%

Subject to

certain

eligibility

criteria’s,

conditions

And

restrictions

1 2 3

Substantial Acquisition of Shares and Takeovers

(Trigger limits)

Competency

Overview Creeping Acquisition

trigger:

A creeping acquisition

limit of 5 % per financial

year is permitted to any

person holding more than

25% but less than maximum

permissible non-public

shareholding percentage.

Initial Trigger:

Acquisition of 25 % or more

of voting rights is the initial

threshold at which an open

offer obligation is triggered

Acquisition of Control

Regardless of the level of

shareholding and acquisition of

shares, acquisition of control

over a target company would

require the acquirer to make an

open offer.

Indirect Acquisitions

Acquisition of shares/voting

rights/ control over any entity that

would enable the acquirer to

exercise or direct the exercise of

such percentage voting rights in,

or control over the target

company, as would attract the

obligation to make an open offer

Trigger

Limits

When can an indirect Acquisition be termed as direct

The proportionate NAV of the target company as a %age of the

consolidated net asset value of the entity or business being acquired.

The proportionate sales turnover of the target company as a %age of the

consolidated sales turnover of the entity or business being acquired

The proportionate market capitalisation of the target company as a %age

of the enterprise value for the entity or business being acquired

Is in Excess of 80 %age on the basis of recent financial statements (Audited)

Voluntary open offer

Shareholders holding shares entitling them to

exercise 25 % or more of the voting rights in

the target company.

An acquirer who has acquired shares in the

preceding fifty two weeks would not be eligible

to make such a voluntary open offer

Such an acquirer( through voluntary offer)

would also be barred from making any

acquisition for six months after the open offer

except pursuant to another voluntary open

offer

Disclosures

Triggering Event

• Acquisition of 5% or more shares or voting rights

• Acquisition or disposal of 2% or more shares or voting rights by the acquirer already holding 5% or more shares or voting rights

Disclosure by

• Acquirer

• Acquirer or seller

Target company and stock Exchange

Time period

Within two working days

of:

• receipt of intimation of

allotment of shares; or

• acquisition of shares

or voting rights;

• Within two working

days of such

acquisition or disposal

Event based disclosures

Continuous disclosure

Regulation

29(1) & 29(2)

Disclosure by

Acquirer holding 25% or more shares or voting rights

Disclosure to

Target company and stock Exchange.

Time period

Within seven working days from the end of financial year

Disclosure to

Offer Size General Rule All open offers other than voluntary offers require the acquirer to make an open offer for at least 26% of total shares of the target company

Voluntary offer

In case of a voluntary offer, the offer size shall

be a minimum of 10% of voting rights in the

target company and maximum of such number

of shares which will not breach the maximum

permissible non public holding.

•An Acquirer can increase the offer size in response to another competing voluntary

offer within a period of fifteen working days from the public announcement of a competing

offer

•An Acquirer can increase the number of shares for which the open offer has been made

to such number of shares as he deems fit in response to competing offer

Offer Period and Tendering period

Tendering period: The period within which shareholders may tender their shares in

acceptance of an open offer to acquire shares made under these regulations

Offer period: The period between the date of entering into an agreement, formal or

informal, to acquire shares, voting rights in, or control over a target company requiring

a public announcement, or the date of the public announcement, as the case may be,

and the date on which the payment of consideration to shareholders who have

accepted the open offer is made, or the date on which open offer is withdrawn, as the

case may be.

Offer Price( Direct Acquisition)

Should be the highest of:

The highest

negotiated price

per share after the

public

announcement of

an open offer.

The volume-

weighted average

price paid for any

acquisition during

the fifty-two weeks

immediately

preceding the date

of the public

announcement

The highest price

paid for any

acquisition, during

the twenty-six weeks

immediately

preceding the date

of the public

announcement

The 60 trading day

volume weighted

average market

price, for

frequently traded

shares. For

infrequently traded

shares*, the price

determined by the

acquirer and the

manager to the

open offer taking

into account

valuation

parameters

Note: - Where the acquirer has acquired or agreed to acquire whether by himself or through or with PAC with

him any shares or voting rights in the target company during the offer period, whether by subscription or

purchase, at a price higher than the offer price, the offer price shall stand revised to the highest price paid or

payable for any such acquisition. Provided that no such acquisition shall be made after the third working day

prior to the commencement of the tendering period and until the expiry of the tendering period.

- The non-compete fee or control premium shall be a part of the negotiated share price.

The per share value

of the target

company, if

computed (in

case of indirect

acquisition where

value of the target

company

exceeds 80% of

overall transaction.)

Offer Price( Indirect Acquisition)

Should be the highest of:

The highest

negotiated

price per

share after the

public

announcemen

t of an open

offer.

The volume-

weighted

average price

paid for any

acquisition

during the

preceding 52

weeks*

The highest

price paid for

any acquisition,

during the

preceding 26

weeks*

60 trading day *

volume weighted

average market

price, in case of

frequently traded

shares

*Cut-off date: Earlier of, the date on which the primary acquisition is contracted and the date on which

intention or decision to make primary acquisition is announced

**The per share value of the target company needs to be specifically computed and disclosed along with

detailed description of the valuation methodology in the LO.

The per share

value of the

target company

(if value of the

target company is

not more than

80% of the

overall

transaction)**

The highest

price paid or

payable by the

acquirer during

the date of

contracting or

announcing the

primary

acquisition and

the date of PA in

India

Note: - Where the acquirer has acquired or agreed to acquire whether by himself or through or with PAC with

him any shares or voting rights in the target company during the offer period, whether by subscription or

purchase, at a price higher than the offer price, the offer price shall stand revised to the highest price paid or

payable for any such acquisition. Provided that no such acquisition shall be made after the third working day

prior to the commencement of the tendering period and until the expiry of the tendering period.

- The non-compete fee or control premium shall be a part of the negotiated share price.

Mode of payment & Conditional Offer Mode of payment

One or combination of any of the following:

• Cash

• Issue, exchange or transfer of:

- listed equity shares of the acquirer or PACs

- listed debt instruments issued by the acquirer or

- PACs (with rating not inferior to investment

grade)

convertible debt securities

Conditional Offer

• Open offer conditional as to minimum level

of acceptance

• The agreement must contain a clause to the

effect that in case minimum level of

acceptance is not achieved, the acquirer will

not acquire any shares under the open

offer.

• The acquirer will not acquire any share in

the target company during the offer period.

Exemption to an open offer

Some of the Circumstances:

A persons holding not less than 51% of the equity

shares in a company or its subsidiary

shareholders of a target company who have been PAC

for a period of not less than 3 years prior to the

proposed acquisition and are disclosed as such

pursuant to filings under the listing agreement

Acquisition made under section 18 of the Sick Industrial Companies (Special

Provisions) Act, 1985

A stock broker registered with the Board on behalf of his client in exercise of

lien over the shares purchased on behalf of the client under the bye-laws of

the stock exchange where such stock broker is a member

Acquisition by way of transmission, succession or inheritance

Competing Offers Competing offer should be made within

15 business days of the date of detailed

public statement by acquirer

An open offer made by a competing

acquirer shall not be regarded as a

voluntary open offer

It can be a conditional offer only if the

first open offer is conditional.

On PA of competing offer, an acquirer

who has made a preceding offer is

allowed to revise the terms of his open

offer, if the terms are more beneficial to

the shareholders of the target company.

The upward revision of the offer price

can be made any time up to 3 working

days prior to commencement of the

tendering period.

Withdrawal of open offer

Withdrawal can be done under the following circumstances:

The statutory approval(s) required have been

refused.

The sole acquirer, being a natural person, has

died

Any condition stipulated in the agreement for acquisition attracting the

obligation to make the open offer is not met for reasons outside the

reasonable control of the acquirer

Such circumstances as in the opinion of SEBI merits withdrawal

Obligations of

Acquirer

The acquirer has made financial arrangements to

fulfil open offer obligation

If acquirer has not made PA on its intension to

alienate asset of target shall be debarred from

causing such alienation for a period of two

years after the offer period

The acquirer & PAC shall not sell shares of the

target

Company during the offer period

The acquirer to provide true, fair

and adequate information in all material aspects

Target

Upon PA of an open offer, B.O.D shall ensure that

during the offer period, the business of the target

company is conducted in the ordinary course

During open offer the company cannot alienate

any asset or borrow from outside

Any change in capital structure is prohibited

The committee of independent directors shall

provide its written reasoned recommendations on

the open offer to the shareholders of the target

company

Timelines for the Open Offer process

Activity

Public Announcement (PA) to SE

PA to target company

Detailed public statement (DPS), in

newspapers, sending to SEs, SEBI, Target

Company

Draft letter of offer to be submitted to SEBI

and sent to target company

SEBI provides its comments on the letter

of offer (LoF)

Dispatch of letter of offer to shareholders

Upward revision in offer

Time Line

T (on the date of agreeing to acquire voting rights

or control)

T+1

Not later than 5 business days from PA

Not later than 5 business days

from detailed public statement

Not later than 15 business days from filing the draft

LoF with SEBI

Not later than 7 business days from the date of

receipt of comments from SEBI

Up to 3 business days prior to commencement of

tendering Period

T

T+1

T+5

T+10

T+25

T+32

T+34

Timelines for the Open Offer process

Activity

Issue of advertisement announcing the

schedule of activities for open offer

Date of opening of Offer

Date of closure of offer

Payment to shareholders

Overall time for completion of offer

formalities

Report to be sent by merchant

banker to SEBI

Time Line

1 business day prior to commencement of the

tendering period

Not later than 12 business days from the date of

receipt of comments from SEBI

10 business days from the opening of the

tendering period

Not later than 10 business days from the close of

the tendering period

57 business days

Within 15 business days from the close of the

tendering period

T+36

T+37

T+47

T+57

T+57

T+62

Defense Strategies

Brief Overview

All bids that are made between companies are, as mentioned

earlier, not always welcomed with open arms from the target

company’s board of directors. In that case the bid is recognized as

hostile, also called unconsolidated bid.

When facing a hostile takeover trough a hostile bid the board of

directors will act accordingly to protect their independence and

current management or to ensure that the hostile bidder is

pressured to sweeten their bid further.

Brief Overview

The main purpose of the chosen defense strategy is to make the

acquisition more costly or time consuming and in such way making

the targeted company less attractive due to the rise in cost which

follows. This can be done through several different ways and these

measures are commonly called defense strategies.

Proactive Defense measures

Used to make the company less attractive

before the actual hostile bid presents itself.

Poison Pill

A poison pill is designed to make the transaction being pursued by a hostile bidder extremely unattractive from an economic perspective, compelling the bidder to negotiate with the target's Board of Directors.

A poison pill is a strategy that tries to create a shield against a takeover bid by another company by triggering a new, prohibitive cost that must be paid after the takeover.

How it works/Example

Offering a preferred stock option to current shareholders allows them to exercise their purchase rights at a huge premium to the company, making the cost of the acquisition suddenly unattractive. Another method is to take on a debt that would leave the company overleveraged and potentially unprofitable.

Some companies have created employee stock ownership plans that vest only when the takeover is finalized. In addition to a dilution of the stock value, such employee benefits may result in an employee exodus from the company leaving it without its talented workforce (which is often one of the drivers of the acquisition).

Another example is to offer a series of golden parachutes for company executives. This could also make the takeover of the company prohibitively expensive the buyer had planned to replace the top management.

Finally, one non-financial method of a poison pill is to stagger the election of the board of a company, causing the acquiring company to face a hostile board for a prolonged period of time. In some cases, this delay in gaining control of the board (and therefore the votes necessary to approve certain key actions) is a sufficient deterrent for a takeover attempt.

An extreme implementation of a poison pill is called a suicide pill.

Why it Matters:

Poison pills raise the cost of mergers and

acquisitions. At times, they create enough of a

disincentive to deter takeover attempts

altogether. Companies should be careful, however,

in constructing poison pill strategies. As a strategy,

poison pills are only effective as a deterrent. When

actually put into effect, they often create potentially

devastatingly high costs and are usually not in the

best long-term interests of the shareholders.

Super-Majority Amendment

For approving takeover or other large decisions in a company,

majority of the votes (around 50%) are needed to approve the same.

But if a company implements a super-majority amendment in its

corporate chart then this defense measure can raise this specific per

cent age needed to approve large majority decisions to somewhere

between 67 – 90 per cent.

Regarding this defense strategy, the bidder does not actually have

to own the share to complete a merger, it only have to present a

merger proposal which then the shareholders have to vote on, but

now have to acquire a larger acceptance

Golden Parachutes

Golden Parachute as a defense strategy is a special and lucrative

package, which aims to stagger and make hostile takeovers more

expensive by distributing what is usually a lumpsum payment to the

board of directors of the target company.

Its primary function in a hostile takeover is to align incentives

between shareholders and the executives of the target company as

there generally are concerns about executives who face a hostile

takeover while risking losing their jobs, oppose the bid even when it

increases the value for shareholders.

It is concluded that the probability of executives opposing a takeover

bid, is directly related to the takeover’s effect on their personal

wealth.

Thus, Golden Parachutes are in fact intended to help executives

resist takeover attempts that endanger their jobs by aligning their

wealth more closely with the shareholder’s interests

Active Defense measures

It is implemented in connection to hostile bid

made.

Attack the Logic of the Bid

By attacking the logic of the bid, the board is trying to persuade the shareholders that a fusion will have a harmful outcome on both the company and the stock price.

Based on argument that the bid is too low and is not adequately representative to the real value of the firm.

Also discourage the shareholders’ beliefs about the acquiring company through accusing them of being incompetent.

Management can also devolve insider

information to other potential bidders, to

encourage them to enter the bidding contest

thus increasing the probability of a higher bid.

White Knight

This involves a third party.

The targeted firm seeks for a friendly firm which can acquire a majority

stake in the company and is therefore called a white knight.

The management of the targeted company can negotiate several deals that

do not have to include a full takeover of the firm and risk losing their

positions.

Reasons for white knight: friendly intentions, belief of better fit, belief of

better synergies, belief of not dismissing employees or historical good

relationships.

Through this technique, the targeted company slips away from a hostile

bidder.

White Squire

Here, instead of acquiring a majority stake in the targeted company

the white squire acquires a smaller position.

But position enough to hinder the hostile bidder from acquiring a

majority stake and thereby fending off an attack.

It is not always needed to be found but can also be created by

raising an investment fund with the help of financial advisors.

Greenmail

If the bidders’ interests are short-termed profit rather than long-termed corporate control then an effective, then greenmail defense measure is used.

Also known as targeted repurchase or a goodbye kiss.

Involves repurchasing a block of shares which is held by a single shareholder or other shareholders at a premium over the stock price in return for standstill agreement.

As per this agreement, the bidder will no longer be able to buy more shares for over a period of time, often longer than five years.

Effective towards short-termed profits seeking bidders by offering incentives to a bidder to cease the offer and sell its share back at a profit.

Crown Jewel

Here, the target company has the right to sell the entire

or some of the company’s most valuable assets (Crown

Jewels) when facing a hostile bid.

Results in making the company less attractive in the

eyes of acquiring company and force a drawback of the

bid

Another way is that the target company sell its Crown

Jewels to another friendly company (White Knight).

Later on, if the acquiring company withdraws its offer,

buy back the assets sold to the White Knight at a fixed

price agreed in advance.

Litigation

Involves legal injunction, filing a law suit against the bidding company.

This pressures the bidder to gather information to prove its legitimacy of the takeover.

During the time the bidder is preparing and presenting its legal preferences, the targeted company receives a space to implement other defense measures or to pressure the bidder to sweeten the bid additionally in exchange drop the litigations.

These litigations often pressures the bidding company to reveal its post-acquisitions plans for the company, which may even more strengthen the board of directors arguments towards the bid

Integration

Predictable Dynamics

For Individuals

The Psychological

Shockwaves

For the Organization

The Growing Pains

What to Expect -

The “Psychological Shockwaves”

:

No Matter How Exciting the Merger Is …

Expect a Sense of Loss

The sense of loss triggers three emotional

stages :

Stage 1: Shock and Numbness

Stage 2: Suffering

Stage 3: Resolution

Emotional Roller Coaster

Anticipation

Fear

Anxiety

Relief

Concern

Excitement

Hope

Enthusiasm

Disappointment

Stage One : Shock and Numbness

Stage Two : Suffering

Stage Three : Resolution

Sense of Loss - triggered by announcement of deal, organizational structure,

relocation, new boss, loss of compensation and benefits, etc.

Staggered Experiences Beginning of End of

Transition Transition

Resolution

Suffering

Shock &

Numbness

TIME

Executives Managers Employees

The Three Emotional Stages

What stage are you in?

What stage are your people in?

How will you manage them through the

Emotional Roller Coaster?

Develop an Action Plan for Managing

Through to Resolution.

The “Psychological Shockwaves”

No Matter How Competent People Are…

Expect an Increase in Uncertainty and Ambiguity.

No Matter How Well the Merger Is Planned and

Executed, Expect the Loss, Uncertainty, and

Ambiguity to Lead to a...

Deterioration of Trust.

Expect the Deterioration of Trust and the Ambiguity

to Lead to…

Self-Preservation.

Organizational “Growing Pains”

Communication Tangles

Productivity Drop

Loss of Team Play

Power Struggles

Lower Morale, Weak Commitment

Bailouts

Three Merger Pressure Points

Resistance

Communications

Productivity

Ten Reasons Why Extra Communication

Efforts Are Necessary

1. More questions than answers.

2. Rumor mill cranks at E-speed.

3. The truth is a moving target.

4. New and different information routes.

5. Confusion over whom to include.

6. Skepticism and lack of trust.

7. Desire for more information and better answers.

8. Less willing to commit to decisions.

9. More is happening.

10. Messages get “slicked up.”

Communication Guidelines

Silence is a major sin.

Over-communicate.

All communications should be two-way.

Explain the reasons for the change.

Communicate in mass.

Tell the full truth (good, bad, and ugly).

Tell people early…as soon as possible.

Tell people when you don’t know.

Don’t make any promises that you aren’t 100% certain that you can keep.

Magnetize yourself to bad news.

Don’t extemporize.

Merger Productivity Curve

Guarantee 1:

During merger integration, there will

be change.

Guarantee 2:

There will be resistance to

change.

The Two Guarantees of Change

Sometimes People Resist Merger-

Related Changes for Reasons They

Personally ...

Cannot Articulate

Do Not Really Understand Themselves

Will Not Level With You About

What is your action for finding resistance within

your team?

Eight Reasons Why

People Resist

1. Misperception of the situation.

2. Low tolerance for ambiguity.

3. Lack of self-confidence.

4. New standards of performance.

5. Can’t see the benefits.

6. Stand to lose more than they gain.

7. Displaced feelings.

8. Believe change is wrong or bad.

Factors Affecting Successful Integration

The pace of integration

Integration planning

Effective communication

Customer focus

Making the tough decisions early

Focusing on the highest leverage issues

Understanding the Deal 4 S’s

Strategy for the deal

Synergy for the companies

Structure of the deal

Steps for integration

Acquisition Process

Negotiation/Agreement

Due Diligence

Integration Planning Integration

Announcement

Planning

Regulatory Approval

Agreement Announcement

Close

Viewing Integration as a Process

Integration planning

Developing communication plans

Creating a new organization

Developing staffing plans

Functional integration

Integrating corporate cultures

Structure of the Deal

Describe the structure of the deal

Understand the perceptions of the market of

the deal

Understand the target company’s perception

of the deal

Consciously target communication to match

the structure of the deal

Integration Strategy for the Deal

1. The acquired company is a stand-alone entity with no change in strategy.

2. The acquired company is left as a stand-alone entity, but with significant change in strategy or structure.

3. The acquired company’s support functions are partially integrated in to the acquiring company.

4. The acquired company’s operations are partially integrated into the acquiring company’s operations.

5. The acquired company is totally integrated into the acquiring company.

Integration Strategy/Milestones

What Level of Integration?

What functions are to be integrated?

What functions are to be left alone?

What are the major milestones for integration?

What has been determined so far with regards to integration?

(Headquarters location, sales offices..)

Integration Infrastructure

Executive Board or Management

Steering Committee

Integration Team

Task Forces

Sub Teams

Implementation Teams

The Comparative Business Analysis

In developing the Integration Plan, it is important to to

develop a clear picture of both businesses at the organizational,

process and job levels. This picture is the Essence of the

Business, which includes analysis of:

• Strategy

• Process

• Organizational Design

• Performance Management and Measurement

• Ongoing Improvement Initiatives

• Operating Styles

• Systems / Information Technology

Three Levels of Comparison

DIPLOMA

Job/Performer Level

Job and Human Performance Roles/Responsibilities Skills

JOB DESCRIPTION

• -----

• -----

• -----

• -----

DIPLOMA

Process Level

Process B

Information Flow/ Support Systems Work Process

Input/Supplier Requirements

Process A

Performance Mgmt

System Measures

Organization Level

Strategy Organization

Structure Goals and Rewards

Policies

POLICY MANUAL

Values and

Behaviors

Communication

Comparative Analysis

Essence of

Business

Company A

Essence of

Business

Company B

Analysis

‘s Identified

Recommendations

•Process

•Performance Management

Decision Analysis

•Risk Assessment M&A

•Integration Planning

Integrated Performance Improvement Plan

Implementation

Interpretation Session

Developing Options: Data, Analysis,

Recommendations

•Keep Both

•Keep One, Discard Other

•Combine elements of both

•Discard process all together

•Create from scratch

Performance Measures

Process

Policies

Organization

Initiatives

•Decide “What”

•Next comes more decisions

Performance Measures

Process

Policies

Organization

Initiatives

Company

A

Company

B

Integration Challenges

Identify Key barriers for integration

Discuss action items to address them

Assign who is accountable

Integration Approach

Design

New

Organization

Plans

Implementation Approval

May May May-June July August-Dec

Review Plans with

Integration teams

•Integration Teams

Chartered

•Integration

guidelines

•Comparison of

organizations

•Initial integration

opportunities -

“Early Wins”

•Identify barriers to

integration

Overall

Objectives

Principal

Outcomes

Implementation

Planning

Develop Business

Objectives

Operating Structure

Organization

Develop

Implementation

Plans

Execute

Implementation

Plans

Initial Comparison

of Organizations

•Review of

Analysis phase

•Obtain clarification

on findings

•Validate direction

•Approve easy

decisions

•Review with

steering committee

•Define Business

Direction/ Objective

•Detail Org. Structure

-Business Processes

- Roles and

Responsibilities

- Measures

• Preliminary

Implementation

Plans

•Business case

•Detail project plans

•Detail infrastructure

needs, space, tech,

resources, $

•Organizational

staffing

•HR programs

selection

•Information Tech.

migration plans

•Begin

implementation of

project plans

•Business Planning

cycle

New Benefits

New Comp

New Budgets

Measurements/

Monitoring

Analysis

Initial

Plans

Integrating Corporate Cultures

Cultural issues: Differ by

Size and maturity of company (start-ups versus mature)

Industry (high tech versus finance and retailing)

Geographic location (domestic versus foreign)

Cultural profiling: Using employee surveys and interviews, identify

How the target and acquirer cultures are alike and how differ

Characteristics of both cultures that are to be encouraged

Techniques for integrating corporate cultures: Establish shared

Goals to foster desired behavior

Standards based on “best practices”

Services such as accounting, legal, public relations, internal

audit, benefits planning, R&D, and information technology

Space by co-locating employees

Overcoming Culture Clash:

Allianz AG Buys Pimco Advisors

Allianz AG, the leading German insurance conglomerate, acquired Pimco Advisors LP for

$3.3 billion, boosting assets under management from $400 billion to $650 billion and

making it the sixth largest money manager in the world. The cultural divide separating the

two firms represented a potentially daunting challenge. Allianz’s management was well

aware that firms distracted by culture clashes and the morale problems and mistrust they

breed are less likely to realize the synergies and savings that caused them to acquire the

company in the first place. A major motivation for the acquisition was to obtain the well-

known skills of the elite Pimco money managers to broaden Allianz’s financial services

product offering.

Although retention bonuses can buy loyalty in the short run, employees of the acquired

firm generally need much more than money in the long term. Pimco’s money managers

stated publicly that they wanted Allianz to let them operate independently, the way Pimco

existed under their former parent, Pacific Mutual Life Insurance Company.

Overcoming Culture Clash:

Allianz AG Buys Pimco Advisors

Allianz had decided not only to run Pimco as an independent subsidiary but

also to move $100 billion of Allianz’s assets to Pimco. Bill Gross, Pimco’s

Legendary bond trader, and other top Pimco money managers, now collect

about one-fourth of their compensation in the form of Allianz stock.

Moreover, most of the top managers have been asked to sign long-term

employment contracts and have received retention bonuses. Joachim

Faber, chief of money management at Allianz, played an essential role in

smoothing over cultural differences. Led by Faber, top Allianz executives

had been visiting Pimco for months and having quiet dinners with top

Pimco fixed income investment officials and their families. The intent of

these intimate meetings was to reassure these officials that their operation

would remain independent under Allianz’s ownership.

Discussion Questions:

1. How did Allianz attempt to retain key employees? In

the short run? In the long run?

2. How did the potential for culture clash affect the way

Alliance acquired Pimco?

3. What else could Allianz have done to minimize the

culture clash?

Mechanisms for Integrating Business Alliances

Leadership: Establish a shared vision.

Teamwork and role clarification: Establish teams with clearly identified roles and responsibilities

Coordination: Exert control through coordination rather than mandate.

Policies and values:

Ensure employees understand how decisions are made.

Communicate who will be held accountable and how rewards are determined.

Consensus decision making: Give all participants opportunity for ample input, but make decisions within a reasonable time frame.

Resource commitments: Partners should live up to commitments to contribute high quality resources.

Important aspects

Post-closing integration is a critical phase of the M&A process

Integration can be viewed as a process consisting of six activities

Except in highly complex situations, combining companies should be

done quickly to

Minimize key employee, customer, and supplier turnover

Eliminate redundant assets, and

Achieve returns expected by shareholders

Successfully integrated M&As are those whose management candidly

and continuously communicate a clear vision, set of values, and

unambiguous priorities to all stakeholders

Unlike M&As, integrating business alliances is usually a lengthy

process because of shared control and the overarching need to gain

consensus on key decisions

Seven Deadly Sins in Merger

Integration

1. Delay the start, drag out the finish.

2. Put no one in charge.

3. Allow divergent initiatives.

4. Forget the business and the customer.

5. Under communicate.

6. Ignore project management disciplines.

7. Use second-rate staff.

Thank you!