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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
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
“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.
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:
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
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
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
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
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.
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.