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M&A Leverage

Volume 1 Issue 1

Buying Opportunities in North America and Europe
Doing your Due Diligence: Understanding Potential Human Capital Considerations Decoding the Joint Venture Double Helix Overcoming Risk Roadblocks in Deals: Pulling the Transaction Liability Solutions Lever

M&A Leverage
Volume 1 Issue 1
A bi-annual publication that presents seminal thinking and leading insights on M&A in the human resources and risk space.

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Feature:
Buying Opportunities in North America and Europe

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Human Capital:
Doing Your Due Diligence: Understanding Potential Human Capital Considerations Decoding the Joint Venture Double Helix

Risk:
Overcoming Risk Roadblocks in Deals: Pulling the Transaction Liability Solutions Lever

M&A Leverage

In this inaugural issue. At Aon Merger and Acquisition Solutions (AMAS). we increasingly hear our clients say they are grappling with human capital and risk challenges that have imperiled or sabotaged desired deal goals. as well as pertinent research. Having advised clients on 1. which can be instrumental in ring fencing critical risks. However. Jennifer Richards. drawing on our expertise in identifying and managing such risks for organizations.9 billion value of these deals. we offer a unique perspective that combines both human capital and operational risks in a transaction. by AMAS leader Michael Marzanno. represented an increase of 12% from 2010 levels. I have outlined for you the challenges and the benefits a JV can provide and ways to ensure success.77%. I hope you enjoy reading this launch Issue and find it insightful and pertinent to what you are dealing with in your organizations.500 M&A deals with total values being US$400+ billion. from Aon Risk Services. global deal activity is down 26. or a joint venture (JV).500+ transactions to date and having studied both mature and new deal makers. with China and India experiencing increased volumes of 21% and 27%. If you are thinking about a merger. With the instability of the US and European markets. while the US$42. Aon Mergers & Acquisition Solutions. I look forward to your feedback and comments so we can further enhance the quality of future publications. we will focus on some key questions that our clients often ask about the issues they are tackling. there were nearly 2. an acquisition. APAC is seeing a very different picture. Mainland outbound M&A deals climbed to a new record of 207 in 2011. the due diligence process is crucial. When looking at deals in emerging markets. Dave Kompare analyzes the critical role that HR needs to play in due diligence and provides tips on how to improve your team’s capabilities.Editorial The Launch Issue Welcome to the first issue of Aon’s Mergers and Acquisitions Solutions (AMAS) Asia Pacific Magazine. has given us a comprehensive and deep understanding of best practices and the key drivers for deal success. will highlight some of the risks as well as the rewards. This will be a semiannual magazine covering topical issues and sharing insights from our experiences helping clients navigate through deals. and I bring attention to an innovative risk solution known as a “Transaction Liability” solution. the question on everybody’s lips is “Is now a good time for Asia Pacific to pick-up a steal?” Our feature in this issue. up 10% year-on-year. AMAS Content Leader. According to Bloomberg. and transferring the risk out. As deal activity within Asia Pac and outbound from Asian economies picks up steam. Sharad Vishvanath Asia Pacific M&A Market Leader. Buying Opportunities in North America and Europe. respectively. In 2011. resolving misalignment of risk quantification between buyer/ seller. Aon Hewitt Volume 1 Issue 1 1 . But in the flurry of such activity. M&A deals are even more prone to human capital and operational risks which can too often be overlooked or underestimated due to deal-making euphoria and deal-closing haste. the joint-venture route should always be considered.

but not without risk…and reward.Feature Buying Opportunities in North America and Europe By Michael Marzanno and Jonathan Hendrickson Asian-based companies are likely to continue outbound transactions due to the continued buying opportunities in US and European markets. 2 M&A Leverage .

Baird highlights a similar trend in the middle market. exceeding 800 transactions again in 20112.1 These indications are proving true and are likely to continue in 2012 and beyond. M&M and the TATA group) have learned from the successes (and mistakes) of their western peers. as median transaction multiples (EV/EBITDA) paid for US and European-based middle-market companies continue their recovery. This upward trend is likely to continue. the pace has quickly recovered.5 These drivers suggest that outbound deals from Asia into the US and European markets are likely to continue with China. integration execution delays. and Siemens) also utilized this approach. 3 . Between 2002 and 2007. Situation Aon Hewitt’s Global M&A Pulse survey completed in Q3. However. but remain below 2007 levels. Low valuations. India. Opportunity Most acquisitive Asian-based companies undertaking outbound transactions have traditionally adopted a “portfolio” approach to managing acquisitions by allowing the acquired company to operate independently. decision-making approaches and communications make it exponentially more challenging for acquiring organizations to engage and retain the target company’s leadership and key talent. most western companies have adjusted their integration approach as they found that it was difficult to reap significant value from transactions. Despite a sharp drop in volume in 2008 and 2009.4X in 2011 (compared to 8.0x multiple experienced in 2007. 2011 found that 50% of Asia Pacific-based survey participants indicated that they were targeting North America and European markets for future transactions. many acquisitive western companies (e. Differences in experience levels. Japan and Australia leading the charge. risks and practical steps recommended for Asian-based acquirers to ensure they over-achieve their transaction objectives. However. According to Capital IQ.1X during the trough of 2009).4 • Stronger Currency Valuations: Finally. According to Thomson Reuters. and cultural assimilation hurdles. they are not without risk. and attractive financing rates are making it easier for them to acquire western companies at low post-recessionary prices. many outbound transactions have failed to achieve their objectives. taxes. depreciation. it remains below the 12.Summary Asian-based companies are likely to continue outbound M&A transactions into the US and European regions between 2012 and 2017. suggest that Asian-based firms have the ability to finance transactions cost-effectively without taking on excessive risk via operating leverage. Over the past two decades. integration into larger corporate organizations is more complex and fraught with higher risk. Volume 1 Issue 1 “ “ Upward trend of outbound deals from Asia are drive by lower market valuations. Unfortunately. the number of outbound deals from Asia skyrocketed. Aditya Birla Group. A few Asian-based companies (e. while the median enterprise value to earnings before interest. particularly when entering US and European markets. Challenges that Asian-based outbound acquirers have experienced include: loss of executive and key talent. including ~USD31 billion in the Americas and ~USD24 billion in Europe.3 The same findings hold true for European ratios. significant cash on hand. reaching close to 900 deals in 2007 (nearly six times 2002 levels).. the pace of outbound Asianbased M&A transactions nearly rebounded to the levels observed before the recession.. acquiring US and European companies can be risky if inexperienced firms are unskilled at talent retention. driven by a few key factors outlined below: • Lower Market Valuations: Low US and European valuation multiples persist when compared to prerecessionary levels. However. This is increasingly prevalent in outbound Asian transactions. Research by Robert W. In 2011. when the acquired organization(s) were not ultimately integrated into the parent company. Japanese companies spent a record USD69 billion on foreign deals in 2011. While a few companies’ experiences have been positive.g. which is roughly one-half of the European ratio and a third of the North American ratio. lower debt ratios and stronger currency valuations. Japanese buyers are benefiting from increased buying power. This article highlights the opportunities.g. cultural integration and seamless integration execution. and amortization (EBITDA) multiple for strategic transactions in the US climbed back to 11. These low debt ratios. • Lower Debt Ratios: Estimates by StarMine indicate that Asian-based companies sit at an average net debt/equity ratio of . combined with extremely attractive financing rates. as the yen has strengthened considerably against the US dollar and the Euro over the last four years.49. Philips. GE. These risks are further outlined below: • Leadership and Key Talent Flight: Organizations that tend to under-achieve their transaction objectives often do so because they lose leadership and key talent at an increasingly higher rate than other acquirers.

they establish an effective governance structure to drive integration activities. based on a sample of 96 companies representing over USD$568 billion in total deal value over a two-year period. This autonomy ultimately has the unintended effect of leaving synergies uncaptured and newer market opportunities unrealized.” Elizabeth Fealy. it is critical for Asian-based acquirers to increase their attentiveness and ability to lead outbound M&A transactions differently than previous efforts. However. Finally. This is particularly true for companies that don’t have seasoned M&A executives who have been through various transactions. Specifically. Because of generational gaps and differences in leadership style. First. often make decisions and communicate them to line managers and supervisors without their input or feedback. . within Asianbased companies. engagement and retention issues clearly have the potential to wipe out much of the synergy value sought in these transactions. leadership and communication styles. More on each of these points is outlined below. Asian-based companies that have successfully executed outbound M&A or expansion transactions have adopted several practices to ensure they over-achieve their transaction objectives. Consequently. • Cultural Dissonance: The risk of cultural dissonance is high between Asian-based acquirers and US and European targets. employee engagement plummeted and turnover skyrocketed after they were hired. By contrast. integration execution.• Integration Execution: Unsophisticated acquirers often lack a seasoned team and rigorous process for executing integration initiatives. Such an approach to decision-making and communication can convey a lack of interest on the part of the acquiring company for the opinions of the target company’s employees. Second. Differing time zones. executives in Asian-based companies (particularly in Chinese firms). Practical Execution Aon Hewitt’s research on the effectiveness of cross-border M&A transactions has found key differences between the practices of companies that over. One large Chinese technology outsourcing company failed to consider cultural ramifications during its acquisition of several telecommunications outsourcing employees based in Hong Kong. revealed that over USD$54 billion of deal value rides on the rate at which critical employees separate during or immediately following deals. This is critical as the volume and pace of decisions increases exponentially during a deal. For example. driving lower engagement and increased turnover at the point when retention is most critical. decisions and input from the acquiree. decision-making authority is included in the roles and responsibilities of a particular position held by an individual. historically in US and European companies. communications are often two-way with the opportunity for input and dialogue between executives and line managers. Global CoLeader of Aon’s Mergers and Acquisitions Practice. etc. growth plans. “The bottom-line is that while organizations understand cultural integration is critical to deal success. • Communications: Communications are another area where differences can impede integration. In US and European companies.or under-achieve their transaction aims. Organizational harmonization and synergy capture initiatives are frequently de-prioritized (or outright ignored) by Asian-based acquirers as they seek to allow the acquired organization the autonomy to make decisions on synergies. they proactively establish an M&A team and get them ready for deals. Aon Hewitt’s research on M&A transactions. due to differences in national culture. and language challenges exacerbate these challenges making the likelihood of cultural “dis-integration” more likely. levels of leadership maturity. are more likely to achieve transaction success. With roughly 10% of overall deal value at stake. and decision-making approaches. particularly organizational harmonization and synergy identification and capture. they spend far more time on cultural assimilation implementation activities. Acquiring companies that prepare for these challenges are much more likely to achieve transaction success. they continue to struggle to translate this into actionable initiatives that drive cultural integration forward. 4 M&A Leverage “ “ Acquiring companies that prepare for challenges related to leadership and key talent flight. hence. Consequently. cultural dissonance and communications. and they conduct rigorous due diligence on the target company to proactively understand the HR issues before they arise during the frenzy of the deal. decision-making can be hampered by the ambiguity surrounding decision authority. decision-making authority is often unique to a particular individual or a small group of individuals.

repeatable processes. They simulate transactions well before the transaction materializes to allow the team to learn before doing. Volume 1 Issue 1 5 . and tools to enable seamless due diligence through integration execution. At the immediate conclusion of each transaction. pension funding. practices and cultures of the target company or country under consideration. and templates that were utilized on every transaction. They adopted a multi-pronged approach to improve their transactionintegration capabilities. This was especially important as Chinese resources worked abroad to execute transaction-related activities. This toolkit provided a common language and instruction set for integration leaders and team members during transactions to adhere to. This company historically acquired targets in China. However. including: • First. medium. they developed robust. Sophisticated acquirers seek an indepth understanding of the HR/labor market issues that exist on a local level in order to be well-prepared prior to negotiations. training. they created a corporate team with a mixture of HR and business resources exclusively focused on employee transitions and hired regional employee transition leaders with in-depth local knowledge. This review is particularly important in European countries where labor laws. integration planning and integration execution. They invested heavily in the development of a human capital M&A toolkit with processes. Finally. but recent success in more complicated transactions has demonstrated significant improvement and tremendous promise. health and welfare plans. the newly formed employee transition team worked with human capital acquisition integration small. They acclimate the team to the laws. Companies like Aditya Birla Group and others have invested heavily in dedicated M&A teams. there was a profound emphasis on identifying and broadly sharing lessons learned. tools. paid-time-off or European employment or severance-related costs can range in the millions for an acquirer who fails to build these calculations into their financial model and purchase agreement language. Case Study Chinese Global Telecommunications Firm Over the past three years. and processes of cross-border efforts from due diligence through integration execution. experiential employee transition training designed for both HR and business resources and conducted the training at both corporate and regional locations. collective bargaining and works councils agreements and retirement plan designs/funding levels. complex transactions or a small number of unique cross-border deals have done so by preparing a small senior team of business and HR leaders for M&A work. practical processes. they realized that a different approach to integration preparation and execution was warranted. works councils and employment requirements vary by country and can be the most stringent in the world. risks. • Third. a large Chinese global telecommunications firm has made significant strides in improving their capability to perform outbound M&A transactions into Europe and other developed nations. after a series of transactions under-achieved their expectations. • Next. • Contextual Due Diligence: Basic due diligence on the human capital and risk-related issues often includes a rapid review of executive compensation. The implementation of this multifaceted strategy is still in nascent stages. Malaysia and underdeveloped emerging markets. They provide proven. instructions and content for conducting due diligence. This preparation includes immersion in the language. The highlights of their strategy included several of the key elements described above. A critical component of the improvement in transaction execution has been an increased emphasis on target local leadership involvement in integration. but also to share organizational operating methods with the target company’s leadership. The impact of items such as US change-in-control. They have had success pairing local target company leaders with Chinese resources to not only more quickly understand the inner workings of the target. enterprises (SMEs) to create rigorous. instructions and cases for understanding M&A transactions and their associated risks. they created an Employee Transition Community of Practice in which HR and business professionals are encouraged to ask questions and share lessons learned.• Preparing the Team: Companies that have successfully executed either large-scale.

These new approaches provide leadership continuity and allow the acquirer to evaluate leadership and high-potential talent for potentially broader leadership opportunities. Consequently. Aon Mergers and Acquisitions Practice (michael. Sources: 1. Aon Hewitt’s Global Strategy & Planning Leader (jonathan. leadership. China to China) will not work between Asia-based countries and western ones. acquirers need to quickly inventory the critical leaders and key talent and following transaction announcement. Thomson Reuters – StarMine 5. These “game plans” allow executives to evaluate options well before the frenzy of deal activity hits post announcement. • two-way assimilation. they are dedicating resources focused on line manager assimilation.g. Kurt Ewen. Acquirers and targets usually launch a global team to vet. insights and hands-on experience in drafting this article. However. Capital IQ 4. acquirers have realized that communications approaches that work within a country (e.com) Acknowledgements Special thanks to: Brian Wade. low debt levels and low enterprise valuations will likely continue to enable Asia-based companies to buy US and European-based companies at discounts to their prerecession levels. and relevant HR policy changes. 2011 2. companies are increasingly using technology to execute transactions across time zones.com) Jonathan Hendrickson. Sharad Vishvanath and Jaidev Murti for their ideas. M&A Leverage . used time-based retention bonuses that pay for remaining with the company a fixed period of time. To track progress against plan. Partner.. seeking employee feedback. Aon Hewitt’s Global Pulse Survey. Asian-based acquirers who learn from the successes (and failures) of their peers will be better prepared to reap the value of their transactions by avoiding risks. decision-making protocols. many companies have Authors Michael Marzano. Frederico Setti. alternative scenarios and plans to understand where and how synergies can be realized over various time horizons. • Region appropriate communication: Increasingly. and leadership/ high-potential development programs to ensure high engagement levels. and an integrated approach to the communications across various platforms and media. and spurring continued growth in the US and Europe. more recently. Capital IQ 3. implement and measure synergy realization throughout the lifecycle of a transaction. critical integration and operational initiatives. work to retain them via retention strategies. Prior to transaction announcement. This is particularly true for companies that are heavily dependent on intellectual capital. Thomson Reuters 6 “ “ Practices adopted by Asian-based companies with successful outbound M&A transactions include: • team preparation. and disciplined process for transaction execution is critical to achieving deal objectives. acquirers are increasingly developing and validating integration hypotheses. Mark Oshima. and key influential leaders. • contextual due dilligence. Early in the due diligence process. corporate culture. achieving synergies. and providing proactive communications about organizational structure. This involvement provides acquired executives with access to the parent company executives and the opportunity to become more informed regarding strategic direction. plan.hendrickson@aonhewitt. • Leadership engagement: Sophisticated acquirers sustain the involvement of acquired leaders and key talent in global corporate on-boarding processes. Historically. companies are incorporating performancebased requirements into them that encourage talent to “stay and play” over the next 18-24 months. • deal governance establishment. In a recent acquisition by an Indian automotive ancillary manufacturer – communication of the rationale behind the deal was planned during the pre-integration phase – which included identifying key employee groups.• Establishing Deal Governance: Sophisticated western acquirers and a selective number of Asian firms have realized that having an integration strategy. Cultural Integration in M&A. change ambassadors. • Two-Way Assimilation: Companies that over-achieve their transaction objectives realize that it’s imperative to focus on leadership and line manager retention and assimilation. Closing Cash on hand.marzano@aonhewitt. workstreams and milestones.

which is core to the success of most transactions.Human Capital Doing Your Due Diligence: Understanding Potential Human Capital Considerations By David Kompare As organizations focus on growth in 2012 and beyond. The ability to be successful in acquisitions and joint ventures depends on the quality of the due diligence. Volume 1 Issue 1 7 . many are realizing that acquisitions and joint ventures are required to meet their growth objectives. particularly due diligence in human capital.

Initially.g. it is easy to understand the important role of talent in realizing synergies (e. increased sales). there is an increasing need to focus on talent within acquired organizations. Aon Hewitt 2011 8 “ “ With the increasing importance of due diligence. sales personnel. pending employment claims). management). annual payroll. however. you could walk across the room to your colleagues and share your findings. Due diligence is also an opportunity to assess the impact of the proposed transaction on people.. are only a part of the impact of human capital. If there were questions. Years ago... The Critical Role of Human Capital in Due Diligence Many organizations are fond of saying that people are their most important asset. The diligence team members may not even meet each other in person and the chances of effectively sharing their findings across the team have become increasingly challenging. Perhaps the more significant impact of human capital is the difference people make in the value of the company. so are the attendant risks. the people impact can be understood in financial terms (e. it was common for all members of the due diligence team to gather together in a room and review the relevant documents. 58% 56% 38% M&A Leverage . If you found something of interest.The Changing Nature of Due Diligence Over the years.g. there is an increasing need to focus on the talent within acquired organizations. As the global complexity and size of deals increase. Financial terms.g. Will the transaction result in operational changes that will affect people in the target organization? These impacts could either be operational synergies (requiring staffing and selection decisions or potentially workforce reductions) or new Top Two Areas of Focus in M&A Activity Over the Next Two Years (% of respondents) 100% 84% 80% 60% 40% 20% 0% Focus on growth in new geographic markets and revenue growth Focus on growth in new/adjacent products and revenue growth Focus on cost of acquisition and possible cost synergies Heightened due dilligence to identify liabilities and compliance issues Focus on acquisition and retention of leadership and key talent 79% Source: Culture Integration in M&A. new or improved technologies. Assuming this is true. As you consider the core elements of growth (e. specifically human capital due diligence. due diligence is about understanding the impact of people on the transaction. In part. outstanding retirement obligations. An increasing number of transactions are focused on growth and with that. Also increasing is the importance of due diligence – particularly human capital due diligence. the nature of due diligence has changed. What are the track record and prospects for the research & development team? What is the nature and quality of the customer relationships with the sales team? What is the experience and perception of the management team? All of these questions require human capital due diligence far beyond financial statements. research & development. it is important to understand the critical role of human capital in due diligence. With the advent of electronic data rooms and a desire to minimize costs. you could walk down the hall and have your questions answered through direct conversations. due diligence has become more of a virtual exercise with diligence team members accessing documents directly from their desks.

• development of a sound set of support from due diligence materials.. These programs can often be tailored to the specific needs of individual organizations – whether it’s related to specific process expertise or geographic requirements. One approach to building capabilities in human capital due diligence is the development of a sound set of supporting due diligence materials.. and interview guides. A strong understanding of the potential impacts of integration is essential to an accurate financial model (i. A number of organizations that focus on acquisitions include acquisition interest or experience as a key element of their talent identification and development processes. Organizations that recognize acquisitions as a core part of their growth strategy are also looking more carefully at how they develop internal HR team members. paying the correct purchase price) and a complete due diligence. Impacts on people might also appear as changes in objectives or strategies that require people to work in different ways than they have in the past. but also to avoid making a bad acquisition that can have lasting consequences. Improved capabilities in human capital due diligence can be developed in a number of different ways. These materials include items such as comprehensive data requests.kompare@aonhewitt. due diligence becomes a core requirement – not only to identify the appropriate acquisitions and to pay the right price. a number of organizations have also looked to the development of M&A Playbooks or even a web-based transaction management system (e. Partner. For those organizations. reporting templates. help to drive acquisition success. For many organizations today. due diligence is not only understanding how the company has operated historically. In short.g. due diligence truly is the beginning of integration planning. These materials help to ensure a consistent approach to due diligence while providing resources for less experienced members of the due diligence team.growth opportunities requiring additional staffing.com) Volume 1 Issue 1 “ Capabilities in human capital due diligence can be improved through: • development of internal HR team members. Aon Hewitt’s TransAction Manager) as a means to gather the available resources and provide a sound framework for executing transactions. These programs can be incredibly valuable – not only in providing some of the essential technical considerations for due diligence but also in building consistent processes. These programs can also afford insights into the “best practices” engaged in by other experienced acquirers. “ Improving Your Capabilities in Human Capital Due Diligence With the changing nature of due diligence and the critical role of human capital in due diligence. As you consider the skills required to be effective in a due diligence setting. organizations are improving their ability to better understand that talent and. By improving their capabilities in human capital due diligence. It is often said that there is no substitute for experience. potential representatives of your organization in a potential acquisition. a sound understanding of the acquiring organization (to identify Author David Kompare. how do organizations with a limited history of acquisitions gain this experience? One approach is through participation in M&A training programs. With the increasing focus on growth in acquisitions. the only way to achieve their growth objectives is through acquisitions. detailed cost models. of course. If this is true. 9 . In considering the development of a supporting set of tools. cultural assessment tools. in turn. • participation in M&A training programs. In that sense.e. potential integration concerns) and an appropriate level of judgment and tact – these individuals are. but how it might operate following an acquisition. there is an attendant focus on the talent that is essential to that growth. Aon Merger &Acquisition Solutions (dave. there is a greater interest than ever in improving capabilities in human capital due diligence. These materials typically provide a broad range of resources – organized either by subject matter or process phase – to help support the due diligence process. it is often a blend of technical expertise.

rather than looking to HR leaders to solve the issues for them. JV partners also understand the talent landscape and typically operate off a low talent-cost base. JVs require a different mindset to M&A. Let’s explore the opportunities. The JV route of expansion has many advantages over say an acquisition or Greenfield buildout.Human Capital Decoding the Joint Venture Double Helix Leveraging Human Capital To Build Successful Joint Ventures in Emerging Markets By Sharad Vishvanath Introduction Corporates around the world continue to look at emerging markets for driving both revenue and profitability growth. challenges and a framework to build successful JVs in Asian emerging markets like China and India. we need to understand the contours of the issue landscape. the business leaders often lead the strategic initiative with their HR leaders. even if all else falls into place. Furthermore. The Contours of the Challenge To build successful JVs. the JV partner can bring significant distribution or after-sales reach. and can provide a smooth runway for growth in complex markets. then understand the linkage to HR systems. For example. In fact. The JV partner’s experience in navigating the bureaucratic landscape is typically invaluable. On the other hand. Other observations of the survey results include: • Over 60% of the survey respondents considered access to new markets as the most popular motivation for a JV. such as China or India. Aon’s research and experience show that in successful JVs. which provides leverage (as well as some issues). money and effort investment in JV’s. • 40% of the respondents stated that a JV helps reduce costs. While sometimes the JV route may be the only reality. In that respect. The second aspect is the right framework to apply to uncover the issues that are relevant to this particular JV. JVs require genuine collaboration to be successful. it is a burning platform for business leaders. and 10 M&A Leverage . these human capital issues ultimately can make or break the JV. it’s fair to forewarn uninitiated business leaders that it can present a minefield of issues on the human capital front. Aside from the fact that a JV partnership often times is the only way to enter a market due to regulatory realities. there are many other sound business arguments for the JV route. It’s very important to begin at the altar of business rationale. This perception is now changing as JVs are delivering on their promises. trust is fundamental. especially in Asia Pacific emerging markets. These reasons make strategic alliances and JVs an increasingly popular vehicle for corporate development in emerging markets. as well as the generic issues. Given the strategic criticality and the time. According to a KPMG report entitled “Joint Ventures – a tool for growth during the economic downturn”1. and notwithstanding its advantages in emerging markets. which inherently involves posturing for the highest selling price and the lowest buying price. focusing on both the common and unique issues. It’s critical to clearly articulate the strategic and operational goals behind the JV. One of the vehicles of gaining entry or expansion in these markets is through the Joint Venture (JV) route. JVs were not rated as the most preferred route to growth due to difficulties encountered in managing and delivering operations and strategies. local JV partners can help overcome any gaps in unfamiliar markets.

• Uniqueness of JV identity. Resulting HR Operational Issues Strategic Issues and Factors Partners have different strategic and business objectives for the joint venture Implication on HR Systems and People • Organization design • Leadership and talent selection • Incorporating the best practices from both organization into JV • Align leadership total rewards and perks • Retention of key roles and position required for JV • Defining an authority matrix agreed by both organization leaders • Leadership scorecards design • JV’s own/parent company’s HR Information System (HRIS). they can be distilled into some key business considerations and critical decisions that will ultimately dictate success. Let’s examine a few of the differences that our research and experience suggest MNC firms grapple with when they consider local JV partners in emerging markets (such as India and China). a R&D play. It’s very important to leverage the strengths of the partner that your organization may lack and to proactively manage the potential frictional points. etc. • Possible maturity of business-linked processes. • Wide variance in compensation and bands within the organization. But whatever the goals. • Centralized and quick decision making. a pricing play. • High appetite for risk by local partner. • Disruption tolerance. • Nature of the employment relationship for employees. There could be a myriad of key strategic goals that a JV may be driving. Some examples are new market or product expansion. but limited maturity of e-enablement of HR systems. • High connect with leadership team and lack of leadership scorecards and delegation of KPI’s.surface the possible HR operational considerations that are paramount to achieving these goals. Some of these critical decisions are as follows: • Degree of autonomy from the parent organization. culture and change management Intended exit strategy Employee secondments and repatriations Volume 1 Issue 1 11 . benefits and payroll • Redundancies related to overlaps in roles • Common compensation and bands structure • Incentive structure for high performance • Service transition agreement (if required) • HR HRIS/payroll systems for cost synergies • Communications. • Lack of adherence to governance structures. and the logic tree that connects them to HR implications. • Duration of the JV agreement and exit strategy. The chart below lays out an example of a probable framework. • Frequent cross-functional career movements. and the possible resulting HR operational issues. communication. culture and change management • Key talent’s willingness to join the JV employer brand • Tracking seconded and temporary transfers Intended ownership levels • Governance model • Roles and decision making • Operating model Imbalance in levels of expertise. • Incongruous and fluid organizational structure and roles. a critical link in the global supply chain for operational efficiency and cost plays. It’s critical to understand what some of the fundamental strategic issues and factors at play are. investment or assets brought into the venture by the different partners • Total Rewards and workforce strategy • HR service transition Clash in management styles and cultures EVP. localized product development and marketing. These differences offer both an opportunity to leverage some great practices and DNA that the local partner will offer. and also the ability to create natural friction points.

com. They now rightly believe this to be a competence they want to leverage and embed in their new ventures. “We will look at expanding this partnership as a long-term relationship. firms are treated as organic enterprises where people are viewed as assets. 2. This book presents some great lessons that global organizations can learn to leverage as they partner with firms in India and China. They have delivered consistently on all strategic success parameters of these forays. and financial services. They do this by drawing on improvisation. written by Professors Peter Cappelli. 4. and resilience to overcome endless hurdles. Culver told the reporters of livemint. Anil Ambani. suboptimal bureaucratic environments. acknowledged the strong asset the TATA brand brought to the table.” He went on to describe this JV as a “unique partnership which will launch some co-branded products under the Tata-Tazo brand. adaptation. This also extends to the talent supply chain. Strong local brand: This can be leveraged for both consumers and prospective employees. chairman of Reliance’s ADA group. The concept of “frugal management” sometimes provides inherent competitive advantages that can be leveraged in a JV to drive future growth and profitability. Globally competitive project management and growth principles under considerable constraints: This is a unique strength that many of the Chinese and Indian private sector firms possess that has made them successful. RIL’s interests range across petroleum. has successfully built a strong foundation for greater future expansion and growth in the diverse lines of business that it operates. as compared to their western counterparts. and Michael Useem from the Wharton School. Harbir Singh. 12 M&A Leverage . you run the risk of creating an imbalance between the talent quality and cost needed for the JV. Apart from operational goals and strategies. as this is most often a critical component of the success plan.. and infocomm. as well as an organizational receptivity to change with a social connotation. this concept is equally applicable to managing human capital assets and resources. Otherwise. and with the same human capital costs. It can be used to drive growth in the face of uncertainty and can foster a bigger “bang for your buck”. under the chairmanship of Mukesh D Ambani. Developing a working culture and sustaining employee morale are both critical to their success. The interests of the ADA group also range across telecommunications. but not always understood all that well. beautifully articulates the constructs underlying the concept of how Indian businesses manage to succeed. Jitendra Singh. has been able to grow apidly and become a leading player across multiple industries in a very short span of time. A pertinent example is of the two Reliance groups and their inherent project management and execution skills that both have demonstrated across petrochemicals. however. On the other hand. power etc) and now resources (the Hancock deal in Australia). Professor Harbir Singh. the book “The Indian Way”. GVK Industries in India has a great track record for venturing into unfamiliar industry segments like infrastructure (airports. John Culver. power. Strong supply chain and procurement skills: This can provide strong business leverage for a foreign player who is unfamiliar with the local market.. The presence of a strong inclination towards improvisation. Reliance Industries Limited (RIL). is that an optimal balance between local prevalence and the foreign partner’s needs has to be architected.We are excited about building an enduring company that has a positive impact on India. 1. and financial services. often within severe constraints.. while still maintaining the concept of “optimal management frugality” driving both growth and profitability. 3. As an example. Driving operational efficiencies and the concept of “frugal management”: Both Chinese and Indian firms have strong management practices wherein they do more with less.Let’s examine some the areas where foreign partners can gain immensely from the local partner’s strengths. A recent example of this is the TATA-Starbucks JV where Starbuck’s China and Asia Pacific president. explains that in the Indian business landscape. especially if the foreign partner’s brand is relatively unknown in highly competitive talent markets. As an example. and will now stand them in good stead as they go global. both in India and globally. and limited resources. Such global name recognition can be very critical for market and employer branding. telecom. power. are India’s contributions to the global business landscape. petrochemicals . One caveat on the talent supply chain.” This is quite an accolade in view of the fact that Starbucks is already a highly visible global brand in its own right.

Our research and experience show that clients who invest time to conduct a value driver tree analysis and follow up with a thorough as-is assessment. lean HR and governance. while retaining a focus on program aspects that work well in either organization.. are there other equity partners. • Culture alignment integration: Presence or lack of this can define success or failure. is it an integrated market opportunity involving multiple business divisions/products) have profound effects on how you structure and build governance. The value driver analysis has a three-step process: – start with business goals for the JV. Volume 1 Issue 1 “ 13 “ It’s very important to leverage the strengths of the JV partner that your organization may lack. there are also points of friction and issues that a foreign partner needs to evaluate and proactively manage. Framework and Markers for JV Success The backdrop laid out above on the landscape. multiple stakeholders – both from a data provision perspective and a decision-making perspective. Smart clients will institute a structured process for evolving the new organization structure and assessing leaders (from both organizations and/or externally) to fit critical roles. Once understood.. It is important to note that apart from strategy. However. • Focus organization design and governance focus: As a foreign partner. This aligns goals up front between the various stakeholders. and the people systems. staffing of key executive roles. it’s very critical to have a strong say and active involvement in the JV organization structure.g. • Evolve 3rd culture and systems: Leading-edge clients understand that they cannot force one organization’s culture and systems onto the other. Now let’s discuss some of the markers for success that foreign firms should embed as they look to select JV partners and set up JVs in Asian emerging markets. and the structure of the JV’s operating model (e. Rather. Finally. is the partner a State-owned/public sector enterprise). how much debt are your raising. • Prioritize your action plan: Successful clients prioritize the initiatives that will create maximum impact and have complexity that will impact the JV’s end goals.That said. they build a new organization with a new and distinctive identity that combines the best of both worlds. Some of these are as follows: • Lack of data availability/standardization and data veracity. ultimately enjoy a much higher rate of success. and embedding them into their organizational and individual leader scorecards. – and finally. you may well have to rely on your local partner’s talent and market knowledge. • Do a thorough diligence/as-is assessment on both complementary strengths and friction points: It’s imperative to do a structured diligence/assessment of the as-is state for both organizations (yours and the local partner). we also find that success is highly dependent on a strong focus on developing the right management governance structures and processes that evolve from the organization structure. . determine the HR strategy implications in order to enable those decisions. establishing benchmarks. • Compliance issues: Gray areas are the norm as interpretation of the law can have a wide range. they embed the partner’s strengths and their own strengths in the way that the new organization is structured. Foreign Corrupt Practices Act (FCPA) and anticorruption-led issues are a risk for US and European companies due to inherent corruption in some of the bureaucratic systems. The second key differentiator is that these clients also focus on quantifying these goals. the operating model adopted. and governance structures. It’s critical to move employees quickly to a stand-alone company mentality. • Mindset issues against and a lack of oversight and governance along with centralized decision making.g. – drill down to critical decisions needed to drive those goals. key opportunities and challenges underscores critical considerations when crafting successful JVs. and to proactively manage the potential frictional points. the financial model for the JV (e. • Reward structures and pay level differences and rudimentary HR systems that don’t enable efficiency.

if you are at odds with your local partner on how to address many of the key issues that a value driver analysis throws up. Joint Ventures fuelling growth during the downturn.e. such as goal setting. Asia Pacific M&A Market Leader. KPMG. it may be prudent to consider walking away. i. 2009 14 M&A Leverage “ “ It is critical for foreign partners to be in alignment with their local partners when addressing key issues emerging from a value driver. governance mechanism. opportunities and challenges.com) Sources: 1.• Enabling reward and key HR systems: Successful clients tend to closely link rewards and other key HR systems.. Otherwise. Aon Hewitt (sharad. . It is pertinent to note that as a foreign partner. JVs in emerging markets are not easy to execute and we have seen many failures. and expectations of employees to enable the JV to succeed. • Over-communicate: Another aspect that differentiates successful JV partnerships is the degree of communication and transparency that characterizes all the major themes of the new organization. and strategic goals. and career development to enable the new structure and operating model. its unique identity.vishvanath@aonhewitt. Aon Mergers & Acquisition Solutions. can dramatically increase its chances of success. it may well be prudent to even consider walking away. performance management. But our experience and research clearly suggest that some “genetic markers” embedded early and appropriately in the JV design and setup. new structure/operating model. Author Sharad Vishvanath.

these transactional risks and liabilities may pose roadblocks to the smooth and successful completion of the deal or even prevent a deal from proceeding.Risk Overcoming Risk Roadblock in Deals: Pulling the Transaction Liability Solutions Lever By Sharad Vishvanath and Jennifer Richards When an organization pursues a merger and/or acquisition (M&A) transaction. being overlooked entirely. or worse. Transactional risks emanate from multiple sources and often center around Volume 1 Issue 1 15 . resulting all too frequently in risks being under evaluated. Once identified. the euphoria of the deal and the need for speedy action can take hold.

What is W&I Insurance? W&I insures either a buyer or a seller against losses arising from breaches of warranties or indemnity claims in respect of the target company or target assets that are the subject of the sale. tax liabilities. and Contingent Liability Insurance. Tax Liability Insurance. • Enhance the amount and period of recourse for the buyer.g. Case Study Let’s examine how W&I insurance has been used as a risk solution to achieve a clean exit for the seller. the seller was looking to structure a clean exit and would only agree to a very limited escrow of US$1. what’s the value of such a solution?” The answer to this query lies in the various Transaction Liability Insurance Solutions that are available in the marketplace today. acquisition from a distressed seller or receiver or a disparate group of individual sellers. Issue In a US$150 million sale of a Hong Kong-based portfolio company by a private equity seller.. there is a suite of other transactional insurance products that are designed to address identified or ripened exposures. by accessing the insurance markets as an alternative capital source to facilitate transactions. duration of warranties. 16 M&A Leverage . which customarily survive for seven years. Key Features of Warranty and Indemnity Insurance W&I insurance solutions offer the following advantages. They: • Maximize distributable proceeds and optimize the value of the deal by reducing or eliminating the need to hold amounts in escrow or otherwise contingently reserved for claims. e. • Facilitate transactions by breaking the impasse between the parties related to the post-closing indemnification scheme and specifying the amount of indemnity caps. • Enable a clean exit for a seller. A question often asked by clients is “Can we transfer such risks out of our purview. the buyer was looking for US$20 million escrow to respond to breaches of warranties and indemnities over a two-year survival period. thresholds.. However. Other Transaction Liability Insurance Solutions While W&I Insurance provides coverage for unknown risks arising from the representations and warranties provided in an M&A transaction. The buyer supplemented this escrow with W&I insurance with a limit of liability of US$20 million and a survival period of two years for all warranties other than tax and title. The parties could not reach agreement on these disparate terms.hidden or unknown issues such as inadequate disclosure or undisclosed losses or liabilities. Solution A buyer-side W&I policy was implemented whereby the seller retained liability only for the limited escrow. Litigation Buyout Insurance. etc. • Address collection concerns.5 million for 12 months. known exposures. These products enable the smooth completion of a transaction by removing the sticking points and transferring their associated risks to the insurance markets. environmental issues or other contingent liabilities. These include Warranty and Indemnity Insurance (W&I). successful negotiation of an M&A transaction. Then again. transactional risks can stem from currently existing. and if so. This insurance based risk solution can be used by a seller to backstop the warranties and indemnities that it provides to the buyer (so called seller-side insurance) or it can be used by a buyer to replace or enhance a seller’s liability for warranties and indemnities (buyer-side insurance). These various insurance solutions can assist in transferring transactional risks from the buyer or the seller to the insurance markets. or prevent. Both known and unknown risks create uncertainty in the purchase price and can impede. while providing adequate post-closing indemnification for the buyer. Insurance products can be utilized to insure the full range of liabilities that exist or may arise in the M&A context. such as pending or threatened litigation.

especially when the escrow has already run its full course. Regional Director. In mature APAC markets like Australia. Practicality: Are These Risks Real? Our experience in working with a myriad of clients across many industries in the region indicates that such risks are not well understood.vishvanath@aonhewitt. Other contingent liabilities that may arise or be identified in the M&A context. A large global IT major known for its highly acquisitive nature insists on getting additional W&I cover whenever dealing with the sellers of firms that are relatively immature in risk management. Our belief is that such solutions offer a significant first-mover advantage to clients who adopt them for their deals in Asia. our research indicates that the vast majority of private equity deals and an increasing proportion of trade sales are now baking in the Warranty and Indemnity Solution at the initial discussion stage. We frequently learn from our clients about experiences where they’ve had their fingers burned on prior deals. Claims: Does the Solution Work? Historical claims data shows that claims are in fact made with relative frequency and that valid claims have been paid out. can be dealt with via Contingent Liability Insurance. or from the target company’s historical or current operations. Clearly. Authors Jennifer Richards. an insurer is required to act in good faith and handle the claim in a reasonable manner. 17 . is also not as certain as it would be with a well-capitalized insurance firm. fast exits with limited post-closing contingent liabilities. The use of transactional insurance products allows sellers to structure clean.com) Sharad Vishvanath.Tax Liability Insurance. We all know that in Asia there are many unascertained risks in target companies. deal participants are seeing the value of employing transactional insurance as a deal facilitation and risk management tool. such as successor liability or regulatory concerns. The seller’s ability to pay out on the claim. Litigation Buyout Insurance. If a claim is made on reasonable grounds with evidentiary proof. awareness of these solutions is fairly low in the region (except in Australia). and the availability of. even though they are widespread in Asia Pacific. Despite the need for. Losses that may arise from existing or threatened litigation can be addressed by means of Litigation Buyout Insurance. If however the same claim was brought against the seller rather than an insurer. Contingent Liability Insurance. especially for local-founder promoted companies that may not have the most sophisticated risk management systems.richards@aonhewitt. Aon Mergers & Acquisition Solutions. Aon M&A Solutions (jennifer. Asia Pacific M&A Market Leader. risk transfer solutions to manage both known and unknown risks. it is clear that there are convincing reasons for these solutions to be rapidly accepted as norms in managing the inherent risks in M&A transactions. Aon Hewitt (sharad. while at the same time providing buyers with adequate protection and recourse to well-capitalized insurance companies.com) Volume 1 Issue 1 “ “ Our research indicates that the vast majority of private equity deals and an increasing proportion of trade sales are now baking in the Warranty and Indemnity Solution at the initial discussion stage. On balance. Tax Liability Insurance protects the parties against taxes (and associated defense costs) arising from identified tax exposures stemming from either the structure of the deal itself. it might not necessarily be met with the same level of professionalism and care.

Aon Hewitt makes the world a better place to work for clients and their employees. implements. Reg.000 professionals in 90 countries.About Aon Hewitt Aon Hewitt is the global leader in human resource solutions. please visit www. and improve business performance.: 00005-BR . The company partners with organizations to solve their most complex benefits. retirement.aonhewitt. talent and related financial challenges. Aon Hewitt designs. No. health care.: 198301764G Job Code. communicates and administers a wide range of human capital. investment management.com ©2012 Aon Consulting (Singapore) Pte. With more than 29. Ltd. For more information on Aon Hewitt. compensation and talent management strategies. Co.