austin office · plano office 2500 dallas parkway, suite 300 plano, texas 75093 phone (972) 748...

Plano Office 2500 Dallas Parkway, Suite 300

Plano, Texas 75093 Phone (972) 748-0300

Fort Worth Office 300 Throckmorton Street, Suite 520

Fort Worth, Texas 76102 Phone (817) 302-1681

Austin Office 2901 Via Fortuna, Building 6, Suite 550

Austin, Texas 78746 Phone (512) 766-0466

www.mcggroup.com

© 2017 Montgomery Coscia Greilich LLP 2

Merger and Acquisition Integration


What we’ll discuss…

• Why Companies Do Mergers and Acquisitions - and Why So Many Fail

• Successful Merger and Acquisition Themes

• Merger and Acquisition Integration Process, Activities

• Integration Best Practices Approach

• Merger and Acquisition Framework

• Key Activities for Addressing People Issues

• Critical Success Factors for Lasting Change


Reasons Companies Do Mergers and Acquisitions

High Importance Medium Importance Low Importance

Market/Pricing Power

Increase Profitability

Market Economies of Scale

Create Shareholder Value

Increase Sales

Operations Economies of Scale

Reduce Costs

Create Entry Barriers

Eliminate Competitors

Defense Strategy

Risk Spreading

Managerial Challenge

Acquire Technical Capabilities

Raise Skills and Depth of Management

Enhance Prestige


Value Gap Between Expected and Achieved Results Consists of Both “Transaction” and “Execution” Gaps

“Transaction” Gap Issues “Execution” Gap Issues

Expected Value (Purchase Price)

Achieved Value (Actual)

True Potential Value (Realizable)

Valu

e G

ap

Transaction Gap

Execution Gap


Acquisition Value Curve Value Levers

Investment

Return

Speed

Certainty

Portfolio

1

2

3

4

5

1 2

3 5

4

Integration Cost Impact

Baseline Ordinary Value

Extraordinary Value

Value Generated

Initi

al P

rem

ium

Integration Value Optimizing Integration


Why Do So Many Mergers and Acquisitions Fail?

Common Reasons for Failure

Failure to maintain focus on customer

Overestimation of synergies

Poor cultural fit and conflicts

Inability to transfer skills

Lack of vision

Lack of cohesive leadership team

Inability to articulate direction

Loss of momentum or focus

Flight of talent/knowledge capital

Organizational confusion and division

Excessive premium paid

Inadequate emphasis on speed


Key Success Factors for Large Combinations A number of key success factors that are important to a flawless integration.

Clear vision and purpose Leadership and accountability

Focus on value Rigorous project management

Committed resources Controlled process

Attention to stakeholders


Successful Merger and Acquisition Themes

Vision and Strategy

Performance and Synergy Management

Process, Technology and Systems

People, Knowledge and Culture

Merger Integration


High Level Merger and Acquisition Integration Process

Evaluate Execute Integration Plan Integration Execute

Transaction Plan Transaction

Corporate Strategy

Merger and Acquisition

Strategy

Acquisition Search

Preliminary Analysis and Risk

Assessment

Legal, Tax and Accounting Considerations

Formal Due Diligence

Transaction Documentation

Pre-Integration Planning

Project Team

Current-State Assessment

Future-State Design

Integration Planning

Organizational and Cultural Integration

Process, Technology

and Systems Integration


Additional Integration

Opportunities


Merger and Acquisition Activities

Evaluate Execute Integration Plan Integration

Vision and Strategy

Articulate strategy

Obtain buy-in from executives, workers and shareholders

Develop communication plan

Execute communication plan

Perform an assessment to determine if the end result matches the

original vision


Conduct interviews and focus groups in order to document current-state and to design

future-state processes

Configure and test systems


Conduct change readiness assessment

Define future-state organizational structure

Develop training plan and schedule

Develop end-user training

Conduct lessons learned sessions and gather

feedback from integration participants


Finalize project work plan and project team Identify

opportunities for consolidation and cost savings

targets

Hold frequent status meetings with variety of management

Continuously monitor effects of integration

Monitor and track performance against

value benefit timeline


Merger and Acquisition Deliverables

Evaluate Execute Integration Plan Integration

Vision and Strategy

Comprehensive communication plan

Delivered communications to integration audience

Merger and Acquisition Diagnostic Questionnaire


Fact Base Questionnaires

Documented future-state Business Process Procedures

System configuration documentation

System test scripts


Change readiness documentation with action

steps

Detailed training plan

End-user training materials

Documented feedback from those involved in

the integration


Project work plan, detailing the integration strategy by

process and/or division

Staffed project team

Status meeting documentation

Issues log including resolution

Performance measurement

documentation


Merger and Acquisition Success Requires Each Step in the Deal Continuum to be Managed Aggressively

Integrate and Operate Execute Investigate and

Plan Strategic Screen

Pre-Close Close Short-Term Longer-Term

Stra

tegy

Art

icul

atio

n

Evaluate Growth Strategy

Analyze Target

Markets

Identify M&A Candidates

Financial Diligence

Operations and Systems Diligence

Tax, Legal and Regulatory

Synergies and Value Drivers

Integration Plan and Structure

Negotiation and Closing

Execute 100 Day Plan

Integration Management Office

Governance/Org Structure

Project Team Structure

Risk/Issue Management

Day One Plan and Execution

Merger Communication

Employee/ Customer Retention

Synergy Planning and Realization

Transition Team Deployment

Organization/Cultural Alignment

Org. Design

Cultural Alignme

nt

Comp./Benefit Alignme

nt

Facility Alignme

nt

Operations Integration/Optimization

Systems Integration/Optimization

Communication and Change Management

Customer Integration

Supplier Integration


Merger and Acquisition Transaction Lifecycle

M&A Strategy Deal Formation

Transaction Management

Integration Design & Planning

Integration & Deal

Execution

Internal Approval Go / No Go Signing & Announcement

Closing & Day 1

• M&A Criteria

o Deal Structure Tolerance

o Geographic Pref

o Channel Pref

o Product / Service Categories

• Target Identification

o Competitor Analysis

o Pre-Deal due Diligence

• Preliminary Business Case

• Target Contact (or Strategic Fit Assessment)

• CDA / NDA

• Team Assembly

• Desk Due Diligence

• Deal Structure Assessment

• Business Case Validation

• Negotiation

• Preliminary Indication of Interest / Letter of Intent

• Negotiation

• Integration Vision & Planning

• Communication Planning

• Program & Integration Team Configuration

• Synergy Documentation

• Future State Configuration

• Functional Project Plans Developed

• Management Planning

• Integration Team Kick-off

• Day 1 Planning

• TSA Development

• Competition Authority Process

• Program Governance Model Established

• Organizational Design

• Day 1 Operations & Business Continuity Assurance

• TSA Management and Exit

• Post TSA Operations

• Program Oversight, Execution, and Reporting

• Synergy Capture

• Organizational Process, Systems, & Products Changes

• Internal and External Communications Execution


Integration Framework

Develop M&A Strategy • Market Entry • New product /

LOBs • Spin-off non-core

businesses Develop M&A Supporting Processes • Selection criteria • Deal structuring • Target(s)

identification • Initial target(s)

valuation and synergy identification

• Develop detailed target and synergy valuation

• Conduct due diligence and commercial review

• Prepare and conduct negotiations

• Complete required documentation and obtain necessary approvals

• Create preliminary implementation plan

• Establish steering committee

• Identify integration lead

• Build the integration team

• Define integration protocols

• Establish engagement strategy

• Define integration approach

• Confirm sources of value

• Set clear functional strategy / plan

• Design / harmonize policies

• Prioritize, approve initiatives

• Establish master integration plan

• Drive coordination

• Define initiative recommendations

• Develop initiative valuations

• Execute quick wins

• Functional support of value teams

• Harmonize policies

• Monitor progress, risk • Establish / enact

mitigation plans

• Execute the plan • Measure value

realization

• Manage change effectively

• Monitor implementation success

Acqu

isiti

on

Man

agem

ent

Sour

ce o

f Va

lue

Acqu

isiti

on

Enab

les

Mergers & Acquisitions

Strategy

Transaction Support Integration Strategy Integration Approach

Establish Governance &

Approach

Integrated Planning and Initial Rollout

Full-Scale Rollout

Phase 0 Phase I Phase II Phase III

Heads of Agreement MOU Ownership Approval Change of Control

Day One


Integration Best Practices Approach

Sense of Urgency

Select Leadership Quickly and Be Decisive

Open, Frequent,

and Timely Communicati

on

Explicit Focus on

Customers

Establish Strong

Integration Structure

and Approach

Rigorously Manage

Risks

Proactively Address Cultural Issues

Establish Clear Goals, Focus and Manage

Expectations


Merger and Acquisition Leading Practices • Prioritize integration efforts based on contribution to shareholder value and

speed/probability of success

• Launch small, focused, fast-paced, short-term transition teams

• Give priority to speed even at the risk of isolated errors

• Rapidly surface and resolve issues

• Dedicate full-time resources

• Populate the new organization quickly - Integrate first, streamline later

• Establish a framework to manage performance, establish accountability, and ensure anticipated benefits are achieved

• Communicate clearly and consistently

• Expect casualties and focus on the “survivors”

• Focus on creating value in the acquired company rather than just converting data and processes

• Achieve and maintain merger and acquisition benefits by continuously measuring and monitoring activity


Leading Practices for Addressing People Issues Change Management Plan

• Assess organizational readiness to change

• Articulate a clear vision for the reason to change

• Build leadership and stakeholder commitment

• Motivate individuals and teams affected by integration

• Align organization and management’s vision

• Align culture and values

Communications Plan • Implement a two-way multi-audience communication plan

• Some examples include: “Integration Announcement” “Welcome to Newco” “How the Merger Will Affect You” “Integration Survey”


Integration Team Structure

Division B

Division C

Division A

Members of Senior Management Business Integration

Leadership Team

Transition Leadership Accountable Executive Staff

Information Technology

Sales and Marketing Operations

Finance, Human Resources and Administration

Newco Board of Directors

Illustrative Integration Teams

Subject Matter Experts

Change Team


Project Management Structure and Responsibilities

Integration Steering Committee Key Executives

Project Management Office Project Office Leadership and Support

Integration Teams Core Integration Team Leaders

Finance and Accounting Procurement Information

Technology Facilities

Logistics Customer

Service Sales Marketing

Human Resources Manufacturing Research and

Development

Communications and Change Management


Characteristics of Effective Acquirers

• Coordinated diligence process that includes cross functional teams using standard approaches and due diligence analysis and presentations, including tools that identify and quantify quality of earnings issues

• Processes and tools that focus analysis on key value drivers and link to diligence objectives and results

• Thorough assessment of integration complexity during initial due diligence phases

• Efficient yet thorough executive-level decision making process

• Focus on coordination of diligence team with support functions (legal, finance, tax, information technology, human resources) to craft effective closing documents, especially purchase agreements and transition services agreements

• Consistent approach of communicating deal information to stakeholders

• Tight linkage of diligence efforts with integration planning that drives accountability and delivers the value of each deal in the shortest time frame

• Evaluation process that assesses the level of each deal’s success and continually improves the merger and acquisition process


Post Merger Integration is Demanding Data gathered from over 100 CEOs and CFOs indicates…

Post Merger Integration is the second most important deal issue of concern to executives

Managing the balance of integration while delivering core business is seen as the toughest

challenge

77% 71% 68%

55% 51% 49%

29% 24% 23%

0%

20%

40%

60%

80%

100%

% ra

nked

“m

ajor

con

cern

” or

“of

co

ncer

n”

Greatest Concern

Valu

e fo

r mon

ey

Post

mer

ger i

nteg

ratio

n

Earn

ings

impl

icat

ions

/ ac

coun

ting

impa

ct

Exec

utio

n ris

k

Man

agem

ent d

istra

ctio

n

Shar

ehol

der a

ttitu

des/

criti

cism

Fina

ncin

g iss

ues/

lend

er/

bond

hold

er c

once

rns

Cros

s-bo

rder

bus

ines

s cu

lture

di

ffere

nces

Tran

sact

ion

cost

s

34%

43%

47%

56%

58%

76%

0% 20% 40% 60% 80% 100%

Toughest Challenge

Time and resources required to implement plans while

continuing business as usual

Ambitious targets set in acquisition plans are hard to

achieve

Understanding of impact of cultural issues on

integration

Specific skills are required to deliver the plans

Acquisition plans are not specific or detailed enough to

implement

Lack of top management sponsorship and support

% ranked as priority no. 1, 2 or 3 out of 6


Focus on the Sources of Value (e.g., Operating Profit)

Business as Usual

Organic Growth

Synergies

Source of Operating Profit

71%

20%

9%

Company A

Company A

Company B

Company B

Synergies

Pre-Deal 3 Year Target

Deliver Integration Value

Sustain Momentum

% of Total Profit

68%

32%

% of New Profit


Speedy Transition Improves Performance

55%

52%

35%

38%

33%

61%

74%

63%

70%

68%

0% 20% 40% 60% 80% 100%

Productivity

Progress Toward Business Objectives

Cash Flow

Profitability

Gross Margin

% of Companies Reporting Favorable Results

Quick Transitions Have a More Favorable Effect on…

Quick Transition Slow Transition


Proven Approach to Integration


Integration Fundamentals Framework

1. What is the rationale for the

merger? 2. What are the

integration objectives?

5. What are the responsibilities of

each role in the integration structure?

3. What is the degree and Scope of

the integration?

6. What is the high level integration

timeline?

4. What is the integration approach

and program structure?

8. What are the restrictions on

sharing data and what can we do?

7. How will the integration program

be controlled and reported on?

Integration Fundamentals



1. What is the rationale for the

merger? 2. What are the

integration objectives?

3. What is the degree and Scope of the integration?




5. What are the responsibilities of

each role in the integration structure?

6. What is the high level integration

timeline?

4. What is the integration

approach and program structure?

8. What are the restrictions on

sharing data and what can we do?

7. How will the integration program be

controlled and reported on?



Integration Planning Blueprint

Delivering Integration/Value Benefits • Implement, track and monitor

Integration (including Synergy) plan • initiatives

Create Integration/Value Realization Plan • Develop charters for all integration and value

initiatives • Prioritize all integration initiatives into an executable

plan • Incorporate key interdependencies and prioritize • Ensure plan fits with core business and other project • Initiatives • Cross check with integration objectives

Execute 100 Day Plan • Execute Day One Plan • Deliver Quick Wins • Operate interim business model

Announcement 100 Days Post Close

Long Term Value Realization

1 100 Days Pre Completion First 100 Days Pre-Close

Day One

Develop Synergy/Value Initiatives • Identify and prioritize value initiatives and one-time costs • Identify Quick Wins

Design the Interim and Future State • Understand current operational environment, quality,

management practices and policies • Develop leadership, organization structure and people selection

processes • Design functional and operational transition and future states • Assess cultural differences and address change management

Plan for “Day One” • Identify Day One issues and develop detailed Day One plan • Map organization structures and define Day One reporting lines • Identify and execute financial, legal, regulatory and other Day • One requirements

Set the Course (Integration Fundamentals) • Articulate the integration strategy for the acquired company • Determine the degree of integration across functions/geographies • Transition the diligence findings and confirm synergy/value targets • Assign resources and define retention programs • Develop communication plan and execute early communications • Establish the Integration Program Office infrastructure and protocols • Launch integration planning teams

Program management, communication and value tracking • Manage risks, dependencies, issues, status reporting and value tracking, communication planning and execution • Address on-going change management needs


Integration Planning Blueprint Pre-Close Planning Steps

Set the Course (Integration Fundamentals) Plan for “Day One”


Prepare for “Day One”

Integrated “Day One” Plan

Marketing

Sales

Operations

Human Resources


Sourcing

Finance

Integrated Plan

Tasks/Actions

Marketing

Sales

Operations

Human Resources

Report to the Integration

Management Office


Sourcing

Finance • Treasury management

• Tax Structuring

• Purchase accounting

• Credit and collections

• Fixed asset inventory

• Financial reporting

• Budgeting and forecasts

• Entity consolidation


Integration Planning Blueprint Pre-Close Planning Steps

• Design the Interim and Future State

• Develop Synergy/Value Initiatives

• Program management, communication and value tracking


Pre-Close Environment Day One Environment Post Close Environment Go Forward Business Environment

Plan for Day One Operate Day One

Plan for Phase 1

Operate Phase 1

Plan for Go Forward Business Environment

Phase 2 and Beyond

Integration Milestones

Buyer

Target

Deal Close Interim Integration Milestone e.g., Phase 1 mergers complete,

Initial contracts migration

Final Integration Milestone (Future Vision)

e.g., Phase 2 mergers complete, Systems integration complete,

Data migration complete


Operations Integration - Approach

Local Merge: • Employees • Assets

Business Process Focused Approach Close Close + 2 Months Close + 3 Months Close + 4 Months Close + 5 Months

PTP

OTC

RTR

Typical Constraints • Customer requirements • Systems integration

Country Focused Approach Close Close + 2 Months Close + 3 Months Close + 4 Months Close + 5 Months

Typical Constraints • Local

statutory laws

• Tax merger plan

• Works councils

Countries A, B and C

merge

Countries D, E and F

merge

Countries G, H and I

merge

Countries J, K and L

merge Local Merge: • Employees • Assets

Local Merge: • Employees • Assets • Customers

Global Merge: • Systems merge

Local Merge: • Employees • Assets • Customers

Global Merge: • Processes merge


Operations Integration - Managing Through Change

Operational Area

Sales Separate Separate Separate and Combined Combined

Contracting Separate Separate Separate and Combined Combined

Manufacturing & Distribution Separate Combining Separate and Combined Combined

Management and Labor Separate Combining Separate and Combined Combined

Procurement Separate Combining Separate and Combined Combined

Facilities and Assets Separate Consolidating Separate and Combined Combined

Systems Separate Combining Separate and Combined Combined

Day One Pre Close

Wave 1 Mergers System Integration

Wave 1 Data Migration Wave 2 Mergers

Wave 2 Data Migration

Operating Guidelines v1



Common Business Processes and Policies

Prohibited Allowed Degree of Joint Operations


Operations Integration - Key Success Factors

• Focus on business requirements of both acquirer and target

• Align major events to key milestone dates to minimize complexity and maximize focus

• Identify and manage key dependencies and constraints (e.g., tax plans, statutory requirements, work council approvals, system conversions)

• Use a consistent company-wide program management to efficiently leverage resources and drive focus

• Establish a formal decision making and escalation process for integration issues

• Outline and communicate impacts to business operations before each integration phase to successfully manage stakeholders (Interim Operating Guidelines)

• Address systems integration and SOX compliance early in the planning process


Critical Success Factors for Lasting Change

Impetus for Change Shared Vision Leadership

Commitment

Employee Involvement/

Communications

Integrated Organizational

Changes

Performance Measures Lasting Change

No Action

No Direction

No “Role Models”

No Ownership or Understanding

No Integration

No Results

LASTING CHANGE

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Dallas 2500 Dallas Parkway Suite 300 Plano, Texas 75093

Fort Worth 300 Throckmorton Suite 520 Fort Worth, Texas 76102

Austin 2901 Via Fortuna, Building 6 Suite 550 Austin, Texas 78746

© 2017 Montgomery Coscia Greilich LLP

austin office · plano office 2500 dallas parkway, suite 300 plano, texas 75093 phone (972) 748...

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