m&as does the soft stuff really matter

Does the Soft StuffDoes the Soft StuffReallyReally Matter? Matter?

Jeff WalshEVP

KLC Associates

Karen Cornelius

President

KLC Associates

What do the data show?*What do the data show?*

Bruner's review of the existing research:• 128 individual analytic studies.• Covering 27,000+ acquisitions.• Spanning 1929 to 1999.• Identifying 17 discrete predictors of financial

performance.• With no consistent pattern of results.• With very wide dispersion around the mean.• Suggesting that in the aggregate, buyers break

even (returns cover the cost of capital).*Bruner 2001, 2004


Bruner's "Deals from Hell" study:• 2,805 "pure" acquisitions, 1985-2000.• Top and bottom performers (2.5%) differed in

– Degree of industry similarity.– Hot market bidding.– Extent of investment opportunities in target.

• Both extremes differed from the broad middle.• 3 year +/- trend (CMAR) determined by day 100.• Predictive validity low: R² @ day 300=.15 (all in)

*Bruner 2005


Bain study of cultural issues in acquisitions:• Measured a broad range of cultural and

organizational variables• Across 125 acquisitions valued at $1bn+

occurring between 1996-2000• Where the purchase price > 10% of acquirer's

market capitalization.• Magnitude of cultural differences between

acquirer and target was not significant.• Decision to proactively manage differences was.

*Vestring et. al. 2003


Proactive cultural integration

+5.1%

Ignored cultural integration

-4.4%

Post merger performance of acquirers versus industry sector peers on financial indices:



Scale-driven deals Scope-driven deals

Proactive cultural integration

+5.1% +6.4%

Ignored cultural integration

-7.9% -0.5%

Post merger performance of acquirers versus industry sector peers on financial indices:


SummarySummary: what do the data : what do the data show?show?"All deals are local" -- The combination of

variables, the ways they interact with each other, are more critical to long term success than the individual variables themselves.

There is a non trivial chance of meaningful losses in each and every deal.

The first 100 days post announcement are critical.No matter how great or small the difference,

proactively managing the integration of the two cultures improves acquirer performance post acquisition.

Managing Cultural Managing Cultural IntegrationIntegration

Corporate Cultural DifferencesCorporate Cultural Differences What are they What are they ?

• Unwritten Unwritten “Rules of the Road’ “Rules of the Road’ for for how things are donehow things are done

• Usually unconsciousUsually unconscious

• Reflect some or many elements ofReflect some or many elements of National or Regional CultureNational or Regional Culture

• Embedded in a company’s Embedded in a company’s systems, processes, policies, systems, processes, policies, leadership styles and behaviorsleadership styles and behaviors

Corporate Cultural DifferencesCorporate Cultural Differences

• Assume their way is theAssume their way is the right/only way right/only way of doing thingsof doing things

• Expect everyone else to Expect everyone else to operate the same wayoperate the same way

• See the See the behavior and behavior and motivation of partners motivation of partners from theirfrom their own corporate cultural lens.own corporate cultural lens.

The problem with CCDs…The problem with CCDs…Partners from different corporate cultures willPartners from different corporate cultures will::

Corporate Cultural DifferencesCorporate Cultural DifferencesOur research has identified Our research has identified 12 dimensions of 12 dimensions of organizational culture organizational culture with the potential to with the potential to derailderail mergersmergers (as well as partnerships, joint ventures, supplier (as well as partnerships, joint ventures, supplier relationships, etc.). The top five:relationships, etc.). The top five:

• Leadership styles, assumptions,Leadership styles, assumptions, and behaviorsand behaviors

• Decision-making processesDecision-making processes

• Existence and role of hierarchyExistence and role of hierarchy

• Communications processesCommunications processes

• Roles & Responsibilities: Roles & Responsibilities: the “Hows”the “Hows”

Corporate Cultural DifferencesCorporate Cultural Differences

The supporting sevenThe supporting seven::

• Use of subject matter expertsUse of subject matter experts

• Use of teamsUse of teams

• Goal-setting and alignmentGoal-setting and alignment

• Approach to planning /proposal Approach to planning /proposal developmentdevelopment

• StructureStructure

• Response to problemsResponse to problems

• Reward and recognitionReward and recognition

Corporate Cultural DifferencesCorporate Cultural DifferencesManaging DifferencesManaging Differences

• SurfaceSurface and understandand understand key differenceskey differences

• Create alignmentCreate alignment

• Build Build collaborativecollaborative relationshipsrelationships

• OverconfidenceOverconfidence

Failure to seeFailure to see important distinctionsimportant distinctions

“ “ It’sIt’s just just another bird”another bird”

Corporate Cultural DifferencesCorporate Cultural DifferencesWhat could What could go wrong go wrong ??

• A bias toward theA bias toward the status quo…status quo…

Assuming your way of Assuming your way of doing things is the right/doing things is the right/only way to do business only way to do business – hence no effort – hence no effort requiredrequired


• A preference forA preference for compromisecompromise(whether it makes good (whether it makes good business sense or not)business sense or not)

“ “ Well, of Well, of coursecourse we can appoint we can appoint two Co-Directors of Product two Co-Directors of Product Development”Development”


……So, what do you do to So, what do you do to avoid avoid pitfallspitfalls and and successfully manage successfully manage integrationintegration??

Corporate Cultural DifferencesCorporate Cultural DifferencesSuccessful IntegrationSuccessful Integration

Implementing Cultural IntegrationImplementing Cultural Integration

Before the Letter Of Intent is SignedBefore the Letter Of Intent is Signed

• Complete assessment ofComplete assessment of acquirer’sacquirer’s corporate culture corporate culture along the along the 12 dimensions12 dimensions

• Collect negotiating teamCollect negotiating team assessments of assessments of target’starget’s cultureculture


Before the Definitive Agreement is SignedBefore the Definitive Agreement is Signed

• CompleteComplete assessment of theassessment of the target’starget’s corporate corporate culture along the culture along the 1212 dimensionsdimensions



• First review ofFirst review of differences with differences with acquireracquirer Integration LeadersIntegration Leaders



• TargetTarget companycompany Integration Integration Leaders Leaders identifiedidentified

• Culture management planCulture management plan drafteddrafted


After the Definitive Agreement is SignedAfter the Definitive Agreement is Signed

• JointJoint CultureCulture IntegrationIntegration Team begins workTeam begins work

-- Review diagnostic data-- Review diagnostic data -- Develop alignment plan-- Develop alignment plan -- Create operational -- Create operational guidelinesguidelines



• JointJoint CultureCulture IntegrationIntegration Team continues workTeam continues work -- Begin employee -- Begin employee communicationscommunications



• JointJoint CultureCulture IntegrationIntegration Team continues workTeam continues work -- Build and foster -- Build and foster face-to- face-to- face- collaborative face- collaborative relationshipsrelationships throughout all throughout all levels and functions of thelevels and functions of the partner organizationspartner organizations


After the Deal Has ClosedAfter the Deal Has Closed

• JointJoint CultureCulture IntegrationIntegration Team continues workTeam continues work -- Form, launch and support -- Form, launch and support employee teams employee teams , with , with members from both partners,members from both partners, to achieve various to achieve various integration goalsintegration goals Involving employees generates ‘best’ solutions Involving employees generates ‘best’ solutions

and builds commitment to the integrationand builds commitment to the integration



• Goals of Goals of employeeemployee teams teams often include:often include: -- Assessing, integrating and-- Assessing, integrating and streamlining systems andstreamlining systems and processesprocesses -- Identifying ‘-- Identifying ‘Best Practices’Best Practices’ -- Solving-- Solving problems problems -- Identifying synergies-- Identifying synergies -- Enhancing product or -- Enhancing product or service innovation service innovation -- Reducing costs -- Reducing costs



• JointJoint CultureCulture IntegrationIntegration Team continues workTeam continues work -- Measure progress-- Measure progress -- -- Reward, recognition and Reward, recognition and celebration of achievementscelebration of achievements -- Launch and support of new -- Launch and support of new initiativesinitiatives

Until integration isUntil integration is complete, successful andcomplete, successful and maturemature


OutcomesOutcomes

Customers and Stakeholders

Managing Cultural Managing Cultural Integration Integration

–– The Soft Stuff Does The Soft Stuff Does MatterMatter

Karen Cornelius

President

KLC Associates

Jeff WalshEVPKLC Associates

Backup

• Bruner's 17 predictor variables identified in his review of the research literature (2)

• References (1)

Where M&A pays or strays

Strategic motivation Opportunistic motivation

Value acquiring Momentum growth/glamour

Focused/related acquiring Unrelated diversification

Credible synergies Unrealistic synergies

Use excess cash profitably Just to use excess cash

Negotiated private purchase Auction of public firm

Cross border for advantage Cross border naively

Go hostile Negotiate w/resistant target

Where M&A pays or strays

Buy during cold M&A market Buy during hot M&A market

Pay with cash Pay with stock

High tax benefits to acquirer Low tax benefits to acquirer

Judicious leverage Over-lever

Earnouts/staged payments Pay in full up front

True merger of equals Not a merger of equals

Mgt has significant stake Mgt has low or no stake

Shareholder-oriented Entrenched management

Active investors Passive investors

Data sources:

• Bruner, Robert F. Does M&A Pay? A Survey of Evidence for the Decision-Maker, Batten Institute working paper, 2001

• Bruner, Robert F. Applied Mergers and Acquisitions, Wiley, 2004.

• Bruner, Robert F. Deals from Hell, Wiley, 2005.• Bruner, Robert F. Profiles of Outlying M&A Transactions,

University of Virginia working paper, 2005.• Vestring, King, Rouse, and Critchlow. Merger integration:

why the 'soft issues' matter most, EBF, issue 13, spring 2003.

m&as does the soft stuff really matter

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