VALUE CREATION IN

MERGERS & ACQUISITIONS

BYK S SRINIVASA MURTY

Head - Corporate Knowledge ManagementHindustan Lever Limited

STRUCTURE OF PRESENTATION

• Role & Relevance of M&A

• Value Capture during Transition Management : The case of HLL and TOMCO Merger

– Strategic case for the merger

– Key steps in transition management

– Value capture during and post Integration

ROLE & RELEVANCE OF M & A

• Mergers & Acquisitions add value through

– strengthening the core businesses

– expanding product - market scope

– capitalizing on economies of scale

– benefiting from technology / skill transfer

SOME FUNDAMENTAL ISSUES

• What are the expected benefits immediately and in the longer term

• What are the expected costs for the acquisition as well as the resources to be committed for securing all the benefits visualized

• what is going to be the likely environmental fall-out

THE CRITICAL SUCCESS FACTORS

• Strategic fit:– Is it consistent with the business strategy?– Will it significantly change the way you do business or

compete in that product category?– How will it add or develop your core capabilities?

• Quality of strategic and economic analysis.

• Effective due-diligence.

• Ability to capture synergy, improve operations, or both.

• Managing the process of integration.

• Over 60% of the mergers & acquisitions end in failure

• key reasons for failure:

– Failure to capture the merger synergies, improve the company's operations or both,

– Poor management of post merger integration

Value Capture During Transiton Management A Case

Merger Of HLL And TOMCO

TOMCO IN 1992/93

• 75 year old company

• Excellent brands (Hamam, 501,OK)

• Declining sales

• High operating losses

• Excessive overhead costs

• Low productivity of assets

• Severe liquidity crisis

Serious problem of viability !Serious problem of viability !

TOMCO VS. HLL-- KEY DATA

TOMCO HLL

Mar ‘93 Dec ‘92

Rs Crores

Turnover 312 2100PBT 1* 183Equity 21.5 140Employees 5225 10000

Sales (Tonnes) 132500 689000Manufacturing Units 10 14

(*Not adjusted for profit on sale of investments)

STRATEGIC CASE FOR THE MERGERHLL’S PERSPECTIVE

• Strengthen core business through :

– Strong ethnic brands - Hamam / 501/ OK– Brand complementarity / Positioning

STRATEGIC CASE FOR THE MERGERHLL’S PERSPECTIVE

• Geographical complementarity

– Strong market position in South– Manufacturing base in South

• Saving of future capital expenditure

STRATEGIC CASE FOR THE MERGERTATA / TOMCO’S PERSPECTIVE

• TOMCO business not a core priority area for the TATA’s

• Significant funds needed to revive / restructure TOMCO business

• Need to strengthen marketing / technology for TOMCO business

• Need to identify a partner with a compatible corporate culture

TRANSITION MANAGEMENT KEY ISSUES

• Leadership & functional support through an empowered senior Integration Team / Transition Management Team

• Turnaround Strategy - setting out priorities

• Managing the integration

• Full fledged communication plans - both internal & external, backed by a statement of corporate vision / corporate misson

• Cultural issues

TRANSITION MANAGEMENT TEAM (‘INTEGRATION TEAM’ )

• HLL team

– Head of Integration Team

– Finance & Commercial Advisor

– Technical Advisor

– Marketing and Sales Advisor

– Human Resources Advisor

• HLL team

– Head of Integration Team

– Finance & Commercial Advisor

– Technical Advisor

– Marketing and Sales Advisor

– Human Resources Advisor

• TOMCO team

– Key senior officers , each assisted by a few officers

• TOMCO team

– Key senior officers , each assisted by a few officers

TRANSITION MANAGEMENT TEAM KEY TASKS

• Contain losses and expedite the turnaround of TOMCO

– Maximize the realization of the synergies

– Introduce systems, procedures and controls to facilitate smooth integration

• Structure TOMCO operations for integration with HLL

– Address key strategic issues in each of the functional areas - marketing / sales, commercial, manufacturing and personnel

TRANSITION MANAGEMENT TEAM KEY TASKS

TURNAROUND STRATEGY PRIORITIES

• Margin improvement

• Liquidity management

• Rationalize overhead costs by

– Avoiding duplication in sales & distribution system

– Developing a long term manufacturing strategy

MARGIN IMPROVEMENT KEY STEPS

• Souring economies

– Oil buying / imports– Rationalization of 3P Contract Manufacturers

• Reduction in manufacturing costs

– Technical efficiencies– Optimization of formulations

• Rationalization of support expenditure

INTEGRATION MANAGEMENT THE APPROACH

• Fully involve TOMCO management in preparing and implementing the revival plans

• Mutual trust & respect create long term foundation for successful marriage

• Set in place MIS to review the progress

• Organize review meetings and functional conferences

• Create a learning environment

INTEGRATION MANAGEMENT KEY ISSUES

• Manage transition without loss of morale

– Understand and bridge cultural differences– Invest in development and retraining of retainable managers

/ staff

• Capture the synergies in the combined operations

• Prepare and implement the restructuring plans

• Protect the key assets- brands, key personnel, key customers and key suppliers - during the transition period

INTEGRATION MANAGEMENT CONTROL ISSUES

• M&A is already a structural discontinuity for both the participants - avoid introducing ambitious systems alien to both companies ( too much too soon)

• Competition / customers /employees can take advantage of confusion / control weaknesses in transition period:

– MIS is vital, systems provoke / condition behavior

– focus on possible leakages ( e.g. debtors, stock flows & cash flows)

• Necessary to over resource the organization in terms of experience / skills to manage discontinuities.

INTEGRATION MANAGEMENT SALES & DISTRIBUTION SYSTEMS

HLL TOMCO

Factories

53 C&FAs 37

2976 RSs 2050

502000 Wholesalers Retailers 358000

Consumers

INTEGRATION MANAGEMENT SALES AND DISTRIBUTION SYSTEMS

KEY STEPS

• Optimization of sales & distribution network

– Joint evaluation of 5000 RSs & 90 C&Fas

– Territory realignments (coverage plans)

• Identification of personnel for retention & training inputs

• Harmonization of invoicing & banking systems

INTEGRATION MANAGEMENT MARKETING

KEY STEPS

• Reposition/ relaunch key brands with

– Improved product features

– Focussed brand positioning

– Effective advertising

INTEGRATION MANAGEMENT TECHNICAL & MANUFACTURING

KEY STEPS

• Harmonization of operations and upgradation for

– Manufacturing flexibility

– Optimization of product formulations

– Productivity & efficiencies

• Training & skill upgradation

• Rationalization of sites

INTEGRATION MANAGEMENT COMMERCIAL

KEY STEPS

• Institute proper controls & reporting systems

• Harmonize systems & procedures to facilitate smooth integration

• Conduct an internal audit study to review the internal controls environment

• Integrate buying & logistics management

INTEGRATION MANAGEMENT HUMAN RESOURCES

KEY STEPS

• Bridge the cultural gap

• Training & development of TOMCO employees identified for retention

• Harmonization / fitment

• Counter the opposition of the unions to the merger

• Design suitable voluntary separation schemes

COMMUNICATION STRATEGY THE KEY TO SUCCESS

• Establish role clarity / expectations

• Consistency, openness, frankness

• Effective dialogue with union leadership

COMMUNICATION STRATEGY KEY STEPS

• Informal communication through

– Task forces

– Periodic review meetings / functional conferences

• Formal communication sessions ( immediately after legal merger)

• Communication kit / audio visuals

• Familiarization courses

CULTURAL ISSUES

• Cultural differences arise due to many reasons:

– Management style

– Standards of performance evaluation

– Remuneration practices

– Employee relations practices

– Value systems

BRIDGING THE CULTURAL GAP -- HOW ?

• Multiplicity of interactive skills

• Tremendous patience

• Multiplicity of interactive skills

• Tremendous patience

• Perseverance

• Sensitivity to human feelings

• Perseverance

• Sensitivity to human feelings

Without loosing sight of the objectives of the merger / acquisition

Without loosing sight of the objectives of the merger / acquisition

LESSONS LEARNT

• It is essential to capture real synergies , realize restructuring opportunities and improve the operations through transfer of skills / know-how

• Task forces incorporating members of both companies should be empowered to realize these opportunities

• MIS should be used to continuously monitor progress

• Success in transition management will depend on how

well the peoples’ issues have been handled

LESSONS LEARNT

• Understand and bridge the cultural differences

• Communicate effectively and involve people

• Establish credibility , transparency, honesty, fairness in all actions

LESSONS LEARNT

• Invest in training and skill upgradation of retainable employees

• Bring latent problems to the surface. Face them squarely and handle them

• Manage the transition without any loss of morale

LESSONS LEARNT

M&A are exciting, sexy and a quick road to growth, but

they can turn into nightmare if not well thought out

before hand and not well managed afterwards”.

CONCLUSION