The intelligent clean room: Re-invigorating an old process to speed up value creation in M&A transactions

By Andrew B. Zimmerman, Kristin L. Ficery Imagine the business The Accenture Intelligent Clean Room merely a way for a company that is approach enables you not only to for sale (especially in an auction) to benefits to U.S. companies reduce the time to implement merger reduce the interruptions required to if you could lawfully changes but also mitigate common gather data for multiple bidders. At jump start the merger business risks, such as slow decision best, traditional clean rooms lead to making, delayed business strategies, better bids and more accurate deal integration process and defections by key customers and valuations. At worst, they actually begin to capture the employees, and poor morale. hide many of the true obstacles to synergy capture. value of a deal before it Equally important, the Accenture closed. The time delays Intelligent Clean Room methodology But by thinking about the clean room can mitigate against the clear financial in a new way, it is possible to take required by regulatory costs of delays. For an acquirer advantage of the time before closing and governmental reviews expecting to reap US$500 million in to create real, measurable value. yearly cost savings from a deal, a Rather than limit the clean room to could work to your one-month delay reduces the net a simple collection of raw data, think advantage. Synergies present value of the deal by more than of it instead as a mechanism for could be identified, US$40 million (assuming a 10 percent capturing value. That's the essence of cost of capital). While acquirers Accenture's "Intelligent Clean Room". systems evaluated for should take some level of delay into It is used to begin actual post-merger integration, work plans consideration when determining an integration planning as well as reduce and implementation acquisition price, many do not or if the risks of a collapsed deal—all they do, they often underestimate the carefully within the requirements of timetables developed. In length of time to close. To make up the Hart-Scott-Rodino Act of 1976, short, you could begin to for lost value when the deal is finally which spells out antitrust regulations. consummated, the company begins Instead of due diligence experts, such maximize the value that the entire integration process in a as accountants, sifting through data, made the deal attractive rush, resulting in poor post-merger an intelligent clean room is staffed integration. in the first place. with independent third-party experts Nothing suggests that delays will go who conduct the same analysis that away. The average time between would be required if the deal had announcement and closing for the already closed. In other words, they largest deals is 10 months, according begin to plan for the post-merger to Accenture analysis, and the trend integration. is getting worse. Anthem's acquisition To ensure complete separation between of health insurance rival Wellpoint the two companies for legal and took 13 months to complete. Greater business reasons, the intelligent clean regulatory and governmental scrutiny— room is a physical, secure location, especially on cross-border deals and sealed off from either company's for semi-regulated industries—will be business activities. It is restricted to the norm, suggesting a new reality of authorized individuals who have access increasing delays. to data from the merging companies in a manner that fully complies with The "intelligent" the law. Typically, these authorized clean room concept personnel are not from either of the merging entities but from a third party, So what can companies do? The typical such as consultancies, investment clean room does nothing to speed banks, law firms or accounting firms. implementation timing, nor does it All information flow into and out of reduce risks associated with deal the intelligent clean room, especially delays. It is almost exclusively used as data requests, is scrupulously reviewed a repository of raw data, a library used by lawyers expert in the Hart-Scott- by acquirers to gather due diligence Rodino legislation and regulatory information. Often the clean room is requirements. Until the merger is An intelligent clean room • Access cards monitored movement officially closed, both companies in action in and around the room. continue to act independently and • Multiple layers of security prevented A major telecommunication company's as competitors. unauthorized access to sensitive data. merger provides a case in point. The One of the benefits of using third- deal created the largest wireless player • Clean room members were not party experts in an intelligent clean in North America, with 46 million allowed to bring anything into or room is that any actual or perceived customers and revenue of US$32 billion. out of the room. Bags and personal risk of anticompetitive behavior is Intense regulatory scrutiny was belongings were checked in lockers eliminated. Typical legal prohibitions, expected. However, with a US$40 billion before entering the room. which differ somewhat by country, cash deal at risk and at least eight • All clean room team members had are designed to keep companies from months of elapsed time between deal to pass a test demonstrating their making business decisions together, announcement and targeted closing, understanding of clean room especially those that affect pricing the acquiring company also was anxious guidelines as well as U.S. antitrust and customers. to keep merger planning progressing. requirements.

But the law does not forbid parties Executives realized that independent For the next six months, the team from engaging in many aspects of "clean teams," in addition to integration analyzed key aspects of the combined integration planning. Even without a teams, were needed to help drive the companies' business, modeled them clean room, many companies share timely delivery of benefits that the against value capture objectives and non-competitive data, such as how combined company could produce after assigned priorities. The process covered their organizations are structured and the transaction closed. Not wanting areas ranging from retail distribution how they conduct basic business to endanger the deal, the acquiring to billing processes to advertising processes. Many even begin one-sided company hired an independent third effectiveness. When the deal closed integration planning, which usually party to handle each company's eight months later, the Intelligent takes the form of the acquirer sensitive competitive data. Clean Room team delivered the plans, beginning pre-merger planning. Even priorities and timetables that would An early view to targeting synergies when performed well, however, such allow the combined company to begin in the merging organizations' IT and planning is limited because little real day one with a running start. data are available. supply chain in particular can help the deal sink or swim. A company's supply Intelligent clean room analysts, on chain is in many cases the most Conclusion the other hand, have access to much significant source of cost synergies, Once the deal is approved and closed, better data and can therefore conduct accounting for 30 to 50 percent of merger integration can start better planning because they do not the savings achieved. Issues of quality, immediately. If the deal falls through work for either company. As long as inventory turns, supply disruption and or is not approved, the intelligent the people—and the process—remain order fill rates are particularly important clean room is simply closed. All data scrupulously independent, they can to identify early rather than later in are destroyed or returned to the gather data that would otherwise not the merger process. often be shared with competitors for respective companies, depending on business reasons (such as cost data). To reduce the risk that any sensitive what confidentiality processes were The situation is similar to a survey information would leak beyond the established. The companies are then firm hired by an industry association. confines of the physical room, a highly assured that they did not give an Companies often provide confidential secure environment was created. Every actual or potential competitor any data-on salaries, costs, manufacturing precaution was taken to ensure that strategic information. data and analysis were shared only capacity and the like-to an outside In short, the Intelligent Clean Room among authorized personnel within survey firm on the conditions that it process gives both companies in a the Intelligent Clean Room. Security be held in strict confidence and that merger or acquisition the best of both procedures included these requirements: the information be summarized so worlds. They minimize the risk of a that it cannot be linked to the • Neither merging employees were broken deal by keeping critical data company providing it. Similarly, the allowed into the room for any reason. under strict control. When a deal is companies involved in a merger • Only named individuals, with prior closed, however, they can capture provide data to intelligent clean room written approved, were allowed access. enormous value with a smoother analysts, who use the information to integration process, fewer lost • Security guards were posted around begin merger planning. customers and accelerated cost savings. the clock. About the authors Publishing credits include co- Kristin Ficery is an Accenture partner authorship of the Electronic Access focused on corporate strategy and Andy Zimmerman is the Accenture Study, one of the most comprehensive mergers and acquisitions, particularly managing director for Communications studies of consumer demand for merger integration. She re-joined & High Tech Management Consulting interactive services to the home, and Accenture in January 2001, bringing & Integrated Markets and managing the New York New Media Industry 15 years of management and business director for the Communications Survey in 1995, the first in-depth process consulting experience. Prior Industry. study of the new media industry and to re-joining Accenture, Kristin was Prior to joining Accenture, Andy its impact on New York's economy, Director of Strategy Consulting for iXL Zimmerman was Chief Executive which received widespread coverage and was a Manager in Accenture's Officer of Predictive Systems, a including the New York Times, L.A. Strategic Services group where she network and security consulting and Times, and CNN Headlines News. focused on developing viable new information services company business models for Fortune 500 clients Andy Zimmerman received a B.A. from headquartered in New York City. Prior and led the development of a key Haverford College in three years and to Predictive Systems, Andy Zimmerman eCommerce offering. She also worked was subsequently awarded a Thomas was the chief operating officer of for Booz-Allen & Hamilton and J. Watson post-graduate Fellowship idealab! New York. Before idealab!, Accenture's Systems Integration group. during which he travelled and studied Andy Zimmerman was the Global Kristin received an M.B.A. from The with circuses in Western Europe and Leader of PricewaterhouseCoopers' Wharton School and a B.S. from the Soviet Union. He received an M.S. E-Business Consulting Practice. Vanderbilt University, summa cum laude. from New York University under a work/study program with Coopers and Lybrand and is a certified public accountant.

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