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Acquisition Integration
Surviving the "Day After"
AICPA Controllers' Workshop
Las Vegas, Nevada
July 19, 2007
Presented By: Alan G. Millis
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Acquisition Integration: Surviving the "Day After"
Today's Discussion Topics
AICPA Controllers Workshop
July 19, 2007
Current M&A Environment
Integration: What's the Big Deal?
Common Integration Challenges
Case Study: The AIMCO Wager
Tactics for Integration Survival
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Acquisition Integration: Surviving the "Day After"
Recent M&A Activity: What are the Odds?
70% of senior executives are undertaking or planning an M&A
transaction within a year (source: Accenture/Economic Intelligence Unit global survey)
Why is the number of M&A
deals increasing?
Perceived lack of organic
growth opportunities
Favorable interest rates &
availability of cash & debt
Explosion of private equity
capital
Aging baby boomers
desiring exit strategy
Receptive financial markets
rewarding sensible deals
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Acquisition Integration: Surviving the "Day After"
Why Place a Bet on M&A Deals?
Desire to deliver greater value to shareholders
accelerate earnings growth
Lower costs
Combine facilities
Eliminate redundant functions, personnel, expenses, etc
Achieve economies of scale
Standardize/streamline processes
Increase revenue
Gain market share
Enter new markets; acquire new product/service
Leverage operating strengths
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Acquisition Integration: Surviving the "Day After"
Are Acquisitions a Good Bet?
2/3 of companies fail to achieve synergies or meet anticipated
profit goals after a merger transaction; nearly 1/2 fail to meet
cost-cutting goals
Buyers (shareholders) look for deal to deliver
the promised value as soon as possible
In the early months following a deal:
employee productivity decreases by 50%
Nearly half of the acquired firm's executive management
leaves
(source of data: Watson Wyatt surveys of 190 company executives and 1,000 companies)
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Acquisition Integration: Surviving the "Day After"
Options for Integrating Acquired Business
Minimal only selected corporate functions are merged
(e.g. HR/benefits), primarily to achieve staffing synergies
or cost efficiencies; acquired business remains
decentralized with autonomy for decision making and
agreed-upon reporting requirements to the "mother ship"
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Moderate certain key functions are consolidated (e.g.
marketing & sales, capital planning, procurement); strategic
planning and monitoring is centralized while most day-to-day
operations remain autonomous
Full all processes, people & systems are consolidated &
management decisions are centralized into parent company
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Acquisition Integration: Surviving the "Day After"
Integration: What's the Big Deal?
A poorly executed integration plan can
create or destroy shareholder value; the
results are felt long after the deal closes
A typical integration process has many
owners & constituents
Integration is a difficult, complex and
sensitive process; it is not just an ad hoc
"to-do" list
There is no rigid or "one size fits all"
framework for integration
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July 19, 2007
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People issues e.g. losing talent; organizational exhaustion
Acquisition Integration: Surviving the "Day After"
Top Reasons Cited for Integration Failure
"Integrating two organizations is like trying to build
a rocket while its blasting off." Anonymous
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Pre-deal horse trading not fulfilling early promises after deal closes
Cultural incompatibility
Poor communication across all organizational levels
Lack of leadership & change management
Resource constraints; concurrent pressures
Poor planning / slow execution of integration tasks
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Acquisition Integration: Surviving the "Day After"
Common Challenges Facing CFO's / Controllers
Oversee integration tasks while continuing to
manage day-to-day business activities
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Identify acquisition transaction tax effects and
capture one-time tax issues / benefits
Transition to common IT platforms/applications
Realign department structure / eliminate
redundant positions while retaining talent
Determine best process for critical accounting
and operating functions
Implement standardized controls & policies
Implement process to rapidly consolidate and
report financial results (historical, pro forma, etc)
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Acquisition Integration: Surviving the "Day After"
Tactics for Retaining Key Players
Provide financial incentive for successful (and timely) completion of
integration action items
Reinforce a positive vision of their role in future of merged company;
answer the "me" questions in the merger
Involve in integration task force activities
Communicate regular updates; explain "why" decisions are made;
provide a forum for venting questions/concerns
Provide timely positive feedback and recognition when something is well
done
Follow up words with actions and be persistent
Involve others to help "re-recruit" as needed
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Note: Adapted from the "Process & Enterprise Maturity Framework," created by Michael Hammer.
See "The Process Audit" published in the Harvard Business Review, April 2007
The "Process Maturity Model" = road map for process improvement
Acquisition Integration: Surviving the "Day After"
Tactics for Determining the "Best Process"
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Provides a context for evaluating specific processes with a goal of determining
(or redesigning) the best process that delivers higher performance over time
Built around five key "anchor points" which provide a common approach and
common language among employees
Process Maturity Model "Anchor Points"
Design understanding of how the process is to be executed
Ownership appointment of a key manager or group with responsibility
for process implementation & execution
Performers abilities of the people who operate the process activities
Infrastructure effectiveness of the information & management systems
that support the process activities
Metrics quality of measures used to track process performance
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Acquisition Integration: Surviving the "Day After"
Determining the "Best Process" Example Maturity Model
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Level 0 - Unpredictable Level 1 - Defined/Consistent Level 2 - Highly Effective Level 3 - Optimized
Context
Process inputs, outputs, suppliers
& customers have not been
defined
Process inputs, outputs, suppliers
& customers have been defined
Needs of process' customers are
known and agreed upon
Process owners within organization
collective have established mutual
performance expectations
Documentation
No functional documentation
exists
Functional documentation exists
and can be followed
End-to-end documentation of
process exists
Documentation describes
interfaces with other processes
and links to IT systems / data
architecture
Identity
No process ownership has been
identified / defined
Process is informally owned by an
individual or group
A formal process owner with
necessary clout & credibility has
been designated by top
management
Process comes first for owner in
terms of time allocation, mind
share and goals
Activities
Personnel are not held
accountable for process activities
Identifies process activities,
communicates with performers &
sponsors small scale change
projects
Articulates process vision & goals;
ensures process compliance;
sponsors & plans improvement
efforts
Works with other process owners
to integrate processes to achieve
organization's goals
Authority
No authority to make process
changes appears to exist
Lobbies for the process but can
only encourage change among
functional managers
Has authority to identify and
allocate resources to process
activities or assemble a redesign
team
Controls IT systems that support
the process; has influence over
personnel assignments and
process budget
Knowledge
Understand own functional role but
not broader process
Able to name process being
executed and aware of key metrics
Able to describe process activities
& how work effects customers and
other employees
Understands drivers of business
performance & how work effects
other processes & enterprise's
performance
Skills
Generally can only perform day-to-
day process activities
Skilled in process activities and
aware of improvement techniques
Skilled in teamwork and self-
management
Skilled at business decision-
making
Behaviors
Not always willing to follow
organizational policies or practices
on a consistent basis
Have some allegiance to process;
primary allegiance to activities
they execute
Try to follow process design and
perform activities correctly; try to
accomplish work efficiently
Strive to ensure that process
delivers results needed to achieve
organization's goals
IT systems
Minimal IT systems to support the
process (generally performed via
spreadsheets or manual forms)
Fragmented legacy IT systems
support the process
IT system from functional
components supports the process
IT system is integrated with other
systems and adheres to
organization's standards
HR systems
No reward system is in place
related to achievement of process
performance objectives
Resolution of functional problems
and attainment of functional goals
is rewarded in a process context
Process design drives role
definition and competency profiles;
job training is based on process
documentation
Hiring, development & recognition
systems emphasize process needs
and balance w/organization's
needs
Definitions
No metrics have been identified
for the process
Some basic measures (e.g. cost &
quality) exist for the process
Key metrics derived from strategic
and/or customer requirements are
used
Key metrics for specific processes
(and across processes) are derived
from organization's strategic goals
Uses
No metrics are used for the
process
Managers use the metrics to
monitor process performance &
determine root cause of process
problems
Managers use metrics to compare
process performance to
benchmarks and set performance
targets
Managers use dashboards to
monitor metrics for day-to-day
process oversight
Evaluation Scale
"Anchor Points" / Process Enablers
METRICS - Quality of
measures used to track
process performance
DESIGN - Understanding of
how the process is to be
executed
OWNERSHIP - Appointment
of key manager or group with
responsibility for process
implementation and
execution
PERFORMERS - Abilities of
the people who operate the
process activities
INFRASTRUCTURE -
Effectiveness of the
information and management
systems that support the
process activities
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Acquisition Integration: Surviving the "Day After"
Integration Case Study: The AIMCO Wager
AICPA Controllers Workshop
July 19, 2007
What are the business drivers / synergy opportunities?
What are the key risks for integration failure?
What are the CFO's greatest challenges in the integration
effort? How would you address each challenge?
How may the identified issues impact deal value.. such as:
- Financial impact e.g. additional costs
- Loss of synergies
- Employee productivity / morale
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Acquisition Integration: Surviving the "Day After"
Common Tactics for Integration Survival
Concentrate on real value drivers -
anticipate issues; plan appropriate responses
Manage change proactively take action to remove
uncertainty while bridging any "cultural" gaps
Maintain continuity across deal phases from structuring to
due diligence to implementation of integration plans
Communicate with internal & external constituents
provide information early, often & carefully to build support & acceptance
Coordinate resources / timing & assign responsibility
a lack of speed or accountability may kill potential benefits
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Acquisition Integration: Surviving the "Day After"
Concentrate on Real Value Drivers
Value Realization: Synergy action plans
Identify and prioritize synergy opportunities (and related
challenges) during due diligence & adjust throughout the
transaction lifecycle remember the "20/80 rule"
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Each synergy challenge should have a unique action plan
with responsibilities assigned
Synergy action plans should consider one-time transition /
integration costs or capital outlays (as well as timing of cash
flows) and be linked to financial forecasts
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Acquisition Integration: Surviving the "Day After"
Concentrate on Critical Transition Items
Common integration "must have day one" items facing
CFOs / Controllers:
Communication plans for CFO organization / staff
Transition services agreements
Change of control agreements
Key supplier / customer / employment agreements
Financial close & consolidation / reporting
Accounting policies / procedures
Bank accounts & cash management
Payroll & HR databases
Technology applications & support systems
Insurance coverage
Regulatory reporting
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Acquisition Integration: Surviving the "Day After"
Maintain Continuity Across Deal Phases
Letter of Intent Due Diligence
Pre-Closing
Planning
Closing
Post-Closing
Integration: First
100 days
Post-Closing
Integration: Long-
Term Plans
Deal Structuring Tax Diligence
Evaluation of Synergy Opportunities
Information Technology
Financial Analysis & Valuation
Operations / Legal
Critical Ownership Transition Items
Organizational Change Management
Phases of the Acquisition Transaction Process
Synergy Realization & Action Plans
Overall Integration Planning and Project Management
Human Resources / Comp & Benefits
Tax Planning / Structuring Tax Compliance
Areas of due
diligence
specialization
Tax specialization
Critical
components
of Integration
Process
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Anatomy of a typical M&A transaction:
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Acquisition Integration: Surviving the "Day After"
Coordinate Resources / Assign Ownership & Accountability
Executive Steering Committee
Integration plan development, execution and oversight
Identify & assign resources
Investment and "go / no-go" decisions
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Integration Project Teams
Assign & direct integration action items
Execute communication plans
Task Forces / Assigned Personnel
Execute specific action items at direction of project team leaders
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Acquisition Integration: Surviving the "Day After"
Coordinate Resources: Example of an Integration Plan
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Owner Ref Integration Project Categories 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1 Due Diligence findings review
2 Synergy opportunity identification
3 Communication plans (external and internal)
4 Organizational structure
5 Compensation / benefits plans
6 Payroll administration
7 Personnel & HR policies
8 Treasury / cash management
9 Finance & accounting processes
10 Information technology systems
11 Risk management & insurance
12 Tax compliance & reporting
13 Purchase accounting
14 Purchasing / supply chain
15 Sales force / marketing
16 Facilities & operations
17 Regulatory compliance
18 Legal & contracts
Executive
Steering
Committee
HR / Benefits
Project Team
CFO & IT Project
Teams
Operations /
Sales Project
Teams
Legal Project
Team
Pre-Merger Planning Closing First 100 Days
Detailed checklist of integration
activities prepared for each
functional category
EXAMPLE week by week
timeline for project planning
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Acquisition Integration: Surviving the "Day After"
Manage Change Proactively Bridge Cultural Gaps
An organization's culture is created & continuously reinforced by actions in
several areas (listed below). Pay attention for warning signs that may
indicate there are cultural gaps to be bridged.
Leadership behaviors
Organizational structure & protocols
Policies & rules (control systems)
Communication (formal: company-wide; informal: between individuals)
Goals & measures
Rewards & recognition
Training & development
Ceremonies & events
Use of technology
Physical environment
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Acquisition Integration: Surviving the "Day After"
Manage Change by Following a Proven Process
1. Establish a sense of Urgency
2. Form a powerful Guiding Coalition
3. Develop a Vision and Strategy to direct change effort
4. Communicate the change Vision
5. Empower Others to act on the change Vision
6. Plan for and create Short-Term Wins
7. Consolidate improvements and produce even more change
8. Institutionalize new approaches in the Culture
(Source: Leading Change: Why Transformation Efforts Fail John P. Kotter)
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When organizations are successful at managing change,
the process generally looks like this ..
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Acquisition Integration: Surviving the "Day After"
Communicate with Internal / External Constituents
3. Rollout action items "this is what it means to you" Integration
area specific
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"The certainty of misery is better than the
misery of uncertainty." Pogo comic strip
Four Phases of the Communication Process Scope
1. Build awareness "this is what is happening" Corporate
wide
2. Update project status "this is where we're going" Organization
specific
4. Follow up "this is how we'll make it work" Team specific
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Acquisition Integration: Surviving the "Day After"
Summary of Key Points
The quality of pre-closing due diligence &
integration planning impacts the deal value realized
Adopt a systematic, thorough and expedient
integration process use standard frameworks &
tools, but maintain a flexible approach to addressing
unique challenges & requirements
Integrating people, processes, systems & cultures is
a major change management effort
Communication with internal & external constituents
should be carefully planned and executed
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Acquisition Integration: Surviving the "Day After"
The Complete Guide to Mergers and Acquisitions Timothy Galpin and Mark
Herndon, 2000
Selection of Suggested Reading Materials
Leading Change: Why Transformation Efforts Fail John P. Kotter, 1996
"The Process Audit" Michael Hammer Harvard Business Review April 2007
The Art of M&A Integration Alexandra Reed Lajoux, 1998
"Making Mergers Work: Critical Role of the CFO" Booz / Allen / Hamilton 2007
"Why Do Mergers Fail? What Can Be Done to Improve their Chance of Success?"
Key Strategy Limited January 2006
"Merger Integration in Silicon Valley" PricewaterhouseCoopers 2004
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