M&A and Divestitures

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M&A and Divestitures Driving Value Creation in Corporate Transactions CONTENTS

1. INTRODUCTION 04

2. OVERVIEW: OUR M&A SERVICE PORTFOLIO 05

3. PRE-DEAL PHASE 06

4. POST-DEAL PHASE 10

5. CARVE-OUT 22

2 Driving Value Creation in Corporate Transactions 3 1. INTRODUCTION

Industry leaders get involved in change management to steer the middle market deals, with a customized corporate transactions to create value complexity of M&A transactions and approach to suit our clients’ market and increase shareholder returns. With leverage our cross-functional and global strategy and transaction focus. Our a range of complex strategic options, teams. Moreover, we address the soft approach of attributing the same many transactions fail to deliver their factors of an integration challenge. This significance to financial objectives as well intended value, resulting in penalties helps our clients creating and accelerating as to people and cultural integration – that can be damaging to market share, merger intergration synergies and imple- where both are required to realize value – capital market confidence as well as to mentation. Through our expertise and is unique in the consulting industry. As a the company employees involved. capabilities we support our clients leader in post-merger integration services, with the planning and execution of the our global footprint enables us to support At Capgemini Invent, our global Mergers following transactions: cross-border transactions in mature and and Acquisitions practice advises senior emerging markets and in major industries. management on navigating the transac- • Mergers and Acquisitions tion cycle. We align M&A activity with corporate strategy by developing sector • Divestitures and Demergers strategies and identifying attractive acqui- • Alliances, Joint Ventures and sition candidates, improving the quality Licensing Partnerships of decision-making in due diligence, and increasing the integration capability. Track Record and Value Our Expertise and Unique Delivery Approach Our clients value our ability to deliver tangible benefits and payback realization Our consultants combine their extensive for their M&A projects. We have helped transactional expertise with profound corporate development executives in over understanding of specific industry sectors. 200 M&A related projects in the last five Capgemini Invent offers unique capabilities years. Our experience includes support for in strategy, operations, technology and large, cross-border transactions as well as

4 Driving Value Creation in Corporate Transactions 2. OVERVIEW: OUR M&A SERVICE PORTFOLIO

Given the high rate of failures during The post-deal phase can be separated into analyze the current integration status, M&A, a structured and holistic approach is post-merger integration and if needed, compare it with the initial integration crucial: Our M&A service offering guides at a later stage, divestiture planning & targets and to derive recommendations you through the entire M&A process execution. Post-merger integration is to bring the integration process back on covering the pre-deal as well as post-deal the key in creating sustainable value in track (please refer to chapter 4.6). During phase (figure 1). a merger. We support our clients during the carve-out phase, divestiture planning the whole integration management & execution, we support our clients in During the pre-deal phase, we support our process and use our functional capability defining an exit strategy and managing clients in defining an investment strategy, units in order to drive the functional the data room and due diligence process. conducting industry scans and identifying integration. Moreover, depending on Divesting selected assets regularly results and qualifying potential acquisition the client’s and/or the target’s individual in carve-out transformation projects targets. Our transaction advisory services situation, we offer business growth (chapter 4.7) which is another key offerings consist of M&A transaction support and restructuring initiatives. competence of Capgemini Invent. support, due diligence (our focus is on Please see chapter 4 for a full picture of commercial, operational and IT due our key post-merger integration services: diligence) and data room management. In Integration strategy (chapter 4.1), first all pre-deal activities we can provide our 100 days planning (chapter 4.2), business clients with the latest industry insights continuity planning (chapter 4.3), synergy and company information through our management (chapter 4.4) and change global expert network and our extensive management (chapter 4.5). Furthermore, global research databases. For more we would like to introduce the PMI flash insights into our commercial due diligence project. The aim of this service is to step and data room – or as we call it “clean into an ongoing integration in order to room” approaches, please see chapter 3.

Figure 1: Capgemini Invent M&A Service Portfolio

Pre-Deal Post-Deal

Investment Strategy Transaction Advisory Post-Merger Integration Carve-Out

Investment Strategy M&A Transaction Support Integration Management Exit Strategy “Build, buy or ally” analysis and Investment thesis Integration Strategy Portfolio analysis and strategy strategy Synergy calculation Day 1 preparation assessment First 100 Days plan Industry sector strategy Negotiation support Exit options evaluation Business Continuity Planning Value chain reshaping M&A process management Sales documents preparation Integration Mgmt. Office Industry Scans and Strategies Data Room Commercial Due Diligence Synergy Management Market scans by sector and Management and support of Analysis of attractiveness, risks Change Management geography building data room and sustainability of target’s Functional Integration Detailed company analysis for business model Vendor Due Diligence Marketing and Sales buyout or investment Operational Due Diligence Supply Chain and Operations Identification and pre- opportunities qualification of potential buyers Efficiency gains identification Finance and HR Acquisition Screening & Key personnel identification IT integration ‘Reverse’ due diligence of buyer Selection needs to pre-qualify bidders Business Growth Target identification, qualification Major process improvement areas Carve-Out and selection IT Due Diligence Product and market expansion Sales and profit growth Divesture Strategy Candidate assessment IT systems and processes Restructuring Separation of entities, functions Data room (The Clean Room) Turnaround Management and data Program Management Office Flash Assessment Strict confidentiality Status quo assessment in integration process Short-term measures execution

Deep dives in this document

5 3. PRE-DEAL PHASE

3.1 Commercial Due Diligence In order to make a sound investment capabilities of the potential target in close decision, it is essential to have a clear collaboration with the client team during During an M&A process, the buyer understanding of all external (market our commercial due diligence process. The needs to obtain a thorough assessment environment, trends and forecasts, etc.) evaluations are based on the pre-defined of the target’s business model and and internal (organizational structure, strategy and performance goals of our business plan and put them into a market product portfolio, etc.) factors as well as clients. Having ready-to-use, state-of-the- perspective, including projected market dynamics influencing and shaping the art analytical tools and methodologies, we developments and the competitive business context in which the potential focus on the value enhancing aspect of environment. Capgemini Invent follows target operates. the potential deal. This results in a better a holistic approach regarding strategic understanding of the additional value that Capgemini Invent’s commercial and operational due diligence. We set our the transaction could deliver, reducing due diligence aims at analyzing the focus not only on validating acquisition the risk of overpaying for the target or attractiveness and sustainability of the assumptions but also on providing greater underestimating the effort required target’s business model, evaluating future insights that enable companies to proceed post deal. Based on our in-depth project cash flows and financial forecasts and confidently with subsequent integration expertise, our consultants know how to indicating potential risks by reducing the activities. A thorough and professional address typical challenges like complexity, often inherent information asymmetries due diligence will safeguard our clients’ limited data availability and scarce access (figure 2). Thus, we ultimately help our investment by confirming all the material to key experts and stakeholders while clients to increase the success rate of facts relevant to the transaction. coping with a tight schedule. future merger or integration processes. Context Approach Acquiring or divesting a business is generally complex and entails numerous Capgemini Invent has developed a proven challenges. Identifying the potential holistic approach. Our global experts risks involved is a crucial success factor. review the industrial and commercial

Figure 2: Components of a Commercial Due Diligence

1.Summary: key findings 5.Production, purchasing and suppliers 9.Balance sheet analysis Scope of service and information basis Main production locations Overview Company profile Production capacity Capital assets Overview balance sheet, P&L, cash flow Investment plan Inventory General key findings and open issues Quality management Accounts receivables SWOT analysis (operating model, USP) Supplier and creditor analysis Liabilities Contract and negotiation findings Main supplier contracts Accrued liabilities Purchasing organisation Equity capital 2.Market environment Market size and segments 6.Organization and personnel Historic market growth Organizational chart 10.Profit & loss analysis Overview Projected market growth Legal framework Sales and margin Growth drivers Management quality Production costs Regulatory framework Corporate management incl. shared services Other operating revenue Segment specific trends Succession policy Staff development and employee overview Distribution expenses 3.Competitive landscape Employee productivity Research and development costs Key competitor analysis Payment system and motivation Administration costs Market share trends Pension and other payments Basic EBITDA Products and services (incl. USP) Financial result Gross profit and gross margin 7.Accounting and controlling Significant sales factors Controlling instruments 11.Budgeting and planning Company strategy Controlling and steering processes Overview of earnings, balance sheet and Risk management and corporate governance cash flow forecasts 4.Sales and customers Internal and external revision Forecasting system Customer analysis IT infrastructure Forecasting accuracy Order analysis Overview business activity of current year 8.Cash flow analysis Distribution channels Forecasting assumptions Debtor management Overview Sensitivity analysis Sales force and 3rd party agents Working capital

Core components Extended components (shared with Financial Due Diligence) © Capgemini Invent 2019

6 Driving Value Creation in Corporate Transactions Results consultants take a three step approach and personnel. In addition, we have the to deliver the final report: Planning and flexibility to cover extended financial Our commercial due diligence results in conceptual design, research and analysis, components like analysis of accounting a compact and structured written report. validation and finalization. The report and controlling, cash flow, balance We assess the projected future cash includes all major areas such as market sheet, profit & loss as well as budgeting flows and earnings by understanding environment, competitive landscape, sales and planning. and analyzing all underlying internal and customers, production, purchasing business and external market factors. Our and suppliers as well as organization

7 3.2 The Clean Room Context Our clean room is an enhanced version of a data room with a further purpose. A clean room can maximize deal value by The success of a post-merger integration In addition to being a tool for due accelerating transaction closure, enabling depends on the acquirer’s ability to diligence, a clean room is used to advance more accurate valuation of assets, and analyze target companies in order to the release of information needed for providing a jump start on implementation gain a valid assessment of their economic integration work or other post-deal as well as realizing synergies. In a clean situation. Therefore, in M&A transactions activities (figure 3). room, a third party advisor can devise – whether acquisitions, auction processes, legal arrangements that allow the advisor or mergers – a data room is set up to For this critical step, Capgemini Invent has to have access to information that would accomplish the disclosure of documents proven methodologies and capabilities normally not be released between the and to share information between supporting an in-depth planning of the parties. This allows much more in-depth parties in a controlled environment, transaction, thus accelerating the capture planning for post-merger integration and typically during the due diligence process. of synergy benefits of the integration accelerates the capture of the synergy Confidentiality is paramount and strict once the deal is closed. benefits of the integration once the deal controls for viewing, copying and printing is closed. are imposed.

Figure 3: Concept and tasks of a Clean Room

Regulatory bodies (e.g., Competition Other stakeholders (e.g., employees, Bureau, international jurisdictions, OSFI) shareholders, public / local community) Interaction with Interaction with regulatory bodies stakeholders Capgemini Clean Room Third party = Capgemini Invent Program Management Office Develop and manage project plan Oversee delivery of key milestones Identify and manage risk

Management of transaction Further development of Support of the transaction Planning for post-merger information transaction synergies Support development and integration Facilitate the collection and Further analyse contributions and negotiation of deal structure Develop asset rationalisation custody of information expected benefits / synergies Support due diligence strategy, product / customer Sanitise data for use Assess value impact of Manage tax requirements realignment strategy, core / Maintain confidentiality while Competition Bureau remedies Oversee regulatory requirements support process realignment validating data source and strategy, systems integration, & consistency communication plan Proactively manage Competition Bureau requirements and filings

Secure exchange of information Company A Company B

8 Driving Value Creation in Corporate Transactions Approach More reliable and intelligent • Increased likelihood of success in administration of documents: integrating two companies The clean room ensures the secure Capgemini Invent will provide a plan exchange of information in the context • Audit trail function allowing for how to start the integration of an anticipated transaction. Moreover, monitoring of the use of documents of multiple organizations at it functions as an interface between the and thus tracking of the potential closing, thereby providing a better companies and regulatory bodies as well buyer’s interest in specific sections understanding of cultural issues and as further company stakeholders. The of the target’s documents key element of Capgemini Invent’s clean taboos that could hinder cost savings room is a strong Program Management • Dynamic indexing of documents • Identification of additional Office which conceptually develops • Flexible management of access and manages project plans, oversees opportunities for savings and the delivery of key milestones and is rights synergies Capgemini Invent has experience responsible for risk management. Specific • Watermarking of documents tasks of the Program Management Office in identifying cost savings beyond include: • Compatibility with a variety of file traditional M&A focuses such as formats HR, IT, and operations on balance • Management of transaction sheets, by deploying focus groups on information Platforms for Virtual Clean Rooms are offered by specialized providers and can internal and external relationships • Further development of transaction be adapted to specific needs of the client. • Accelerated realization of savings synergies This allows Capgemini Invent to leverage and synergies its group capabilities in information • Support of the transaction, as well as Capgemini Invent will plan the security and data processing. Setting up planning of post-deal activities a VCR usually takes 1 to 2 weeks, new organizational design and implementation in the clean room Capgemini Invent’s clean room service depending on the time needed for describes a set of specific activities and selecting and preparing the actual content in a timely manner, renegotiate deliverables for each task to be achieved and documents. contracts to be effective on closure by a specific deadline. day and pre-establish metrics to Results measure implementation progress Virtual Clean Room Our experience shows that using a clean as well as trigger cost savings and For reasons of cost, efficiency and room offers a number of benefits and can synergies on day 1 lead to cost savings and synergies from security, Virtual Clean Rooms (VCR) have • Confidentiality and security day 1 after deal closure. Key benefits of a widely replaced the more traditional Capgemini Invent will ensure data physical data room. Although similar in clean room are: confidentiality by imposing strict many ways to its predecessor, the physical • Compliance with regulations controls for the viewing, copying and clean room, for example in allowing the Capgemini Invent will ensure that buyer/third party involved to conduct printing of documents an organized assessment, the virtual the negotiating parties do not share clean room also represents an enhanced information about operations, trade version: secrets, and pricing for customers as prescribed by the Department of Better organized access to documents: Justice, Federal Trade Commission, • 24/7/365 service hotline or European Commission regulations Q&A function increasing the • Resolving organizational issues of comprehensibility of documents integration planning • Text recognition enabling a quick and Capgemini Invent will support effective searching of documents executive management in integrating an operation by diminishing uncertainty about the deal closure

9 4. POST-DEAL PHASE

Our general post-merger integration contract, an integration strategy should realignment, asset allocation, product & approach (figure 4) is split into four be defined in order to set the stage for customer realignment, core & support phases. Each phase has inherent complex the upcoming integration activities. process realignment and system integration issues that our consultants After the contracts have been signed, integration. Integration execution should are trained to address with their in-depth “Day 1” – meaning the closure of the start right after that. The whole process knowledge and experience. A letter of deal should be prepared. Moreover, a should be supported by strong project intent starts the process of defining an detailed first 100 days plan needs to be management, synergy management, integration approach that sets the scene developed. During these first 100 days business continuity planning and last but for upcoming integration activities. After after closing, the focus is on analysis not least, suitable communication and the letter of intent but before signing the and design regarding organizational change management activities.

Figure 4: Generic Post-Merger Integration Approach

Letter of Intent Signing Closing – Day 1 Day 100

Preparation of Day 1 and Implementation of Pre-Signing Run First 100 Days the First 100 Days Integration Re ali g T O r P S S P I I Re ali g nt e nt e r r r y y o o a g s ne r c ce s d t a n g g k e Merger goals Overall target picture u r r i m c g n n n iza t a t a t s t y g m m

(business and legal view) & C Integration approach i o i o en t en t i o n n

Integration strategy per n High level Roadmap u s

functional area t Workstreams / o Synergy logic m Target organization structure E e

S Core Dimensions Joint integration Team r KPI tracking structure A r Purchasing System integration plan o p s

o Supply Chain n h e

Contingency and risk i o r t

o Production / Manufacturing c mitigation k s C r un o First 100 days plan F Marketing / Sales W R&D Communication plan Finance

Change Management s t n intervention r Legal i o t c pp o

Project / work stream setup u HR un S F IT

Integration Management Office (PMO)

Change Management and Communication

10 Driving Value Creation in Corporate Transactions 4.1 Integration Strategy success is the definition of the right Approach integration strategy during the Integration strategy is an essential part pre-signing phase. An integration We believe that a close collaboration of the post-deal phase (if required, strategy defines how closely the two with our clients delivers the best integration strategy starts during end independent organizations should be results. We have therefore chosen of pre-deal phase) and is the first step interlinked with each other following a workshop-based approach used to drive post-closure shareholder value. the merger, and thereby provides a to develop a comprehensive merger Following a detailed analysis in the framework for all integration activities. integration strategy. Usually, we clean room, an integration strategy is a To help our clients identify the most conduct a workshop lasting for two comprehensive concept which focuses successful integration strategy, we to three days at an offsite location on real and sustainable sources of have developed a workshop-based and leverage Capgemini Invent’s value, which shall be quantified and integration strategy concept consisting tailored workshop methodologies. openly communicated. of three main components: the merger The participants should comprise top- management from both companies Context vision, the integration level setup and the integration master plan. The with the functional expertise to More than 70% of post-merger integration strategy concept is one formulate and represent the main integrations fail to deliver the expected of the most important modules from strategic intent of the planned results mainly due to the absence our comprehensive post-merger business integration. of clear post-merger planning. One integration approach. of the key factors to a merger’s

Figure 5: Integration Level per Merger Type

Integration Strategy Integration areas Integration level (schematic)

1 Stand Merger of Full alone Equals Integration „Volume deal“ Acquisition of competitor “economies of scale“ Brand strategy Multiple Brand One brands family brand 2

„Capability deal“ Acquisition of know- Sales Legacy Best of how, new technologies Unified sales approach both approach

3 Employees, culture Two employers/ Partly One employer, „Cross region deal“ cultures integrated one culture Same industry, but other region

Operations, Supply Chain As-is, Competing solutions Bundled 4 decentral CoEs operations

„Cross industry deal“ Acquisition outside own Administration, industry field Support functions Fully independent, Partly centralized, (e. g. IT, Finance, HR) One Corporate local sites „hosted services“ centre, SSCs

11 The foundation of an integration Each type of merger shows a certain Context strategy is a shared merger vision generic integration pattern (figure 5). which explains the strategic intent of For example, a volume deal should The first 100 days of a merger have a the merger and defines the purpose typically result in a full integration of disproportionately high impact on the and priorities of the joint company. all areas to leverage all aspects of size, overall success of the integration. The It is translated into strategic goals whereas other types of merger vary in goal of the first 100 days is to ensure and forms the basis for defining the their integration level in different areas. business continuity, confirm synergy integration levels. Both the vision and The integration level in each integration targets and define a target operating strategic goals should be tangible area offers an initial indication of model, while following a critical path to and shared by both companies’ senior synergy potentials to be leveraged. best mitigate integration risks. management, and thus form the In this context, a large integration Thus, having a plan for the first 100 baseline for all related communication. level represents a significant synergy days in place is decisive for the success potential and vice versa. The next step is to set the overall of a post-merger integration. For this critical phase, Capgemini Invent has integration frame by defining the Results integration levels. Therefore, we proven methodologies and capabilities analyze the different integration Finally, we translate both merger vision to develop and execute the plan. and integration level setup into a feasible areas such as brand strategy, sales, Approach employees etc., of the future merged master plan, a document containing organization and determine each area’s the main aspects of the integration Applying core components of the integration level. The setting highly strategy and a tool to translate the first 100 days plan to integrate areas depends on the merger vision, strategic vision into action. Typically, the master of the new business results in a pre- goals and type of merger. In general, plan includes high-level journey to defined set of key milestones. This four different types of merger can be a new organization and business high-level plan must then be detailed identified: model, an activity roadmap and a in action plans for each integration communication plan. area, specifying activities that are • Volume deal: The merger is based on strategically as well as operationally economies of scale. 4.2 First 100 days important (figure 6). In addition, critical • Capability deal: The merger is based The success of a merger is usually paths across all integration activities on the enhancement of the joint determined during the first 100 days are defined to ensure that the first 100 capability portfolio. post-close. Using information from days of integration proceed rapidly the due diligence phase, an effective and remain on track at all times. • Cross-region deal: The 100 day plan can greatly increase the Consequently, a clear and result-driven merger is based on the joint chance of a successful deal while major path to post-merger integration is given geographical reach. disruptions during the establishment at the outset of the project. • Cross-industry deal: The merger is of the new, joint operating model based on the ability to expand in are avoided. new business fields.

12 Driving Value Creation in Corporate Transactions Figure 6: High-level Plan for the First 100 Days

day 30 day 80 day 100

io Marketing, t Sales & Services Current product portfolio To-be product Go to market a and customers assessed portfolio defined strategy defined r s g

e Supply Chain &

t Operating model Target operating Assets (capacities and Current contracts and Target asset Purchasing Approach demand vs. re a Operations

n assessed model defined capabilities) assessed suppliers assessed landscape defined strategy defined supply defined a

R&D Current R&D product Actions to secure R&D strategy o re i portfolio assessed IP defined developed C

Admin & s Financial risks NewCo balance sheet Accounting & reporting Finance assessed and P&L created standards established g re a

a Human Key people New HR procedures and Compensation New governance model

ti n Retention measures n Resources identified initiated guidelines established package defined and organisation defined io t a ppo r

r IT Current IT system Target IT system IT migration strategy IT cutover plan u landscape assessed landscape defined developed defined S te g n

i Legal Legal setup Signing authorities Customer and supplier contracts Legal roadmap Key employee clarified defined reviewed and adjusted defined contracts adjusted

Clear view on current status To-be design completed Integration execution plan finalised

Integration area milestone Global key milestones Integration areas (exemplary)

Results • Early measures to retain key • Structured integration management performers – define the future – safeguard ongoing operations Our experience shows that the leadership organization and Respecting these success factors is foundation for a successful post-merger retention measures for key necessary to reduce risks, maximize integration is laid during the first 100 stakeholders early in the process days. Critical success factors are: value creation and secure business • Transparent and focused continuity. Leveraging our broad • Strict adherence to the initial merger communication – follow clear network of international experts and rationale – do not lose sight of the response patterns in case of conflicts our tools and checklists, we will ensure original strategic intent an efficient and effective support • Decisive change leadership – top throughout our clients’ integration • Increased customer focus – the management as change sponsors challenge. customer is part of the process and need to generate and drive the must not be neglected momentum

13 4.3 Business Continuity Context Capgemini Invent has developed a Planning structured Business Continuity Planning During the integration of organizations, (BCP) approach supporting companies After the deal is closed, business the primary focus of attention is often in successfully managing business risks continuity planning is an effective tool on achieving the targeted synergies along the entire integration process to manage risks in a structured way and and benefits, while disregarding risks (figure 7). The comprehensive plan is secure business continuity from day 1 for the daily business and the seamless focused on securing and maintaining until the end of transformation. The continuation of operations. Neglecting daily operations. It effectively creates integration of a business continuity these risks can quickly have a severe awareness for the potential risks, planning in PMI projects will reduce negative impact, such as financial and/ prepares for their possible occurrence, impacts on daily business with both or customer losses and a damage in and provides feasible mitigating preventive and reactive mitigating external and internal reputation. As a measures. Thus, a BCP implementation measures and thus lead to reduced result, the initial merger expectations significantly increases the probability of overall cost of the merger. may not be met or, in the worst case, a successful merger. the entire integration may fail.

Figure 7: Business Continuity Planning Methodology

BCP development

Risk Identification RRisiskk EEvvaalluaattioonn Design & Implementation

Start WS1 WS 2 WS 3 Final Delivery (optional ASE1 ) Probability Evaluation Internal Input Monitoring Process Evaluation of risks’ Definition Existing client risk probability by Capgemini material/catalogue Selection of monitoring tool Invent based on prior Definition of reporting process Client experts project experience input Validation with client BCP Tool experts/ key stakeholders established Comprehensive prioritised risk Design catalogue mitigating Validate Preventive and Compile and Assess measures, reactive mitigating probabilities assessment define validate and create measures comprehensive and impacts on monitoring prioritized risk risk long list risks process and Monitoring process catalogue allocate incl. tool, metrics responsibilities and personnel Allocation of responsibilities for risk clusters External Input Pre-defined risk Business Impact Analysis catalogue Definition of weighted Best Practice Mitigating Measures Extensive impact dimensions Definition of preventive and reactive experience from Joint evaluation of impact mitigating measures based on best similar projects along all dimensions practices

1 We propose to use an ASE (Accelerated Solution Environment) this is a proven workshop concept by Capgemini to increase productivity and achieve a greater alignment among key stakeholders

14 Driving Value Creation in Corporate Transactions Approach results in a detailed business continuity Successfully managing risks and their plan, which includes a list of the impact on daily business directly Our methodology is used to jointly set prioritized risks, defined preventive contributes to reducing merger costs up a customized tool for identifying, and reactive mitigating measures, and increasing the overall probability assessing, and addressing all major an underlying monitoring and of merger success. Our collaborative risks during the integration process. communication process, as well as clear approach creates high awareness and It is structured in three collaborative roles and responsibilities. acceptance amongst key stakeholders workshops involving all relevant client in the client’s organization. In addition, stakeholders as well as Capgemini Results clients benefit from our Capgemini Invent industry and post-merger Capgemini Invent’s business continuity Invent experts, equipped with an integration experts. planning approach delivers tangible in-depth understanding of the typical The first workshop delivers a compre- results: risks in the respective industries and hensive and aligned overview of the comprehensive experience in the • A ready-to-use BCP tool, including all potential risks for ongoing company execution of merger integration required information to prevent and operations during the integration projects. mitigate any potential major risks for process. Leveraging our risk catalogue day-to-day operations from previous projects, these risks are adjusted by the project team • An implemented monitoring process and validated by key stakeholders of determining how to track and the client. monitor the identified risks

In the second workshop, the risks are • A clear assignment of responsibilities evaluated according to their business ensuring the right allocation of tasks impact and probability, helping us to as well as the commitment of key adequately prioritize the allocation of personnel relevant resources. The last workshop

15 4.4 Synergy Management M&A cycle, synergy management Approach encompasses the pre-deal estimation The incorrect management of synergies of synergy potentials and the As an integral part of a post-merger is one of the most frequent reasons for subsequent post-deal re-evaluation integration, synergy management aims the failure of post-merger integrations. and realization. at combining the two merging entities Synergy management should be an as effectively as possible, thus releasing integral part in the entire merger The criticality of synergy management hitherto untapped value. Effectively process – In calculating potential in post-merger integration cannot realizing these synergies begins with synergies during the pre-deal phase be overstated. Pre-deal estimations a structured identification of synergy and in realizing the synergies during of synergy potentials are a key driver potentials prior to the actual deal. the post-deal phase. The following of the transaction value, and their Verifying and leveraging such synergy paragraph demonstrates how realization determines the success of opportunities after a merger is the successful synergy realization depends management in creating shareholder job of a PMI synergy manager in close on synergy management, in other value. alignment with a business responsible words the selection and alignment of To support our clients in this critical for the actual implementation. the appropriate levers. process, Capgemini Invent has proven Context methodologies and capabilities that ensure an accurate assessment of pre- The success of a post-merger deal synergies and provide structure, integration depends primarily on the transparency and know-how for the realization of the targeted synergy post-deal realization. For the most part, potentials. However, ensuring that the this support is embedded in a broader combined enterprise value exceeds the transaction or integration offering. sum of its parts is a complicated and timely process. Spanning the entire

Figure 8: Synergy Type and Realization Timeframe

One-off effects to it implement cost synergies Structural cost synergies

B ene f Quick win synergies Revenue synergies Quick wins Timeline Quick win synergies Revenue synergies Structural cost synergies Fast cost savings with focus purely on quick Accelerate growth momentum and market Capitalise on best-of-both-worlds cost wins with large initial impact penetration structures and economies of scale and scope Deliver short- to medium-term benefits Deliver medium- to long-term benefits Delivers medium- to long-term benefits Top-down opportunity and solution Exploit additional growth potentials by Bottom-up opportunity and solution identification e.g. leveraging identification Inventory reduction Cross-selling opportunities Business process reengineering Capacity and workforce rationalisation Licenses and patent exchange Supply chain optimisation Access to new markets SG&A and infrastructure reduction Increased customer base A A Cost Revenue B Cost B A B

Activity volume/Complexity Activity volume/Complexity Activity volume/Complexity

16 Driving Value Creation in Corporate Transactions Addressing available integration As shown in figure 9, our approach is the estimated synergy potentials. synergies begins with identifying them designed to clearly distinguish between In addition, during the second in three broad classes (figure 8): the pre-deal and post-deal activities, as in-depth identification and synergy these require different methods, tools, classification, the synergy management • Quick win synergies – Quickly and actions. team analyzes four criteria that play realized cost savings that have a a key role in prioritizing and realizing large initial impact The focus of the pre-deal phase is the synergy potentials: an initiative’s on developing consistent synergy • Revenue synergies – Medium-to effect, the speed of execution, its calculation logic and identifying long-term top-line growth sustainability, and how well it fits the available synergy potentials. The through access to new markets corporate culture. The business case overall goal is to achieve a top- or the leveraging of cross-selling is then finalized once the findings down estimation of the synergy opportunities have been enriched by benchmark potentials using specifically designed data from Capgemini Invent. The • Structural cost synergies – calculation tools. A set of industry- final task completing our 7-step Medium- to long-term cost savings specific benchmarks helps to identify Synergy Management approach is stemming from combined resources the right topics. Furthermore, the benefit tracking. and structural change synergy managment team accesses an international pool of previously After this initial evaluation of synergy Results identified synergy potentials along potentials, the team proceeds with its different industry value chains. These Throughout the pre-deal and post- analysis along the critical steps of the guide the collaborative workshops of deal synergy management phases, value chain. Once synergy potentials the first few weeks during which the the synergy management team is such as the bundling of purchasing synergy management team qualifies supported by the overarching synergy volumes have been identified, and quantifies synergies that ultimately controlling stream. The latter centrally quantified and verified within a larger feed into the overarching business case. quantifies and tracks the synergy audience, they are assigned to an estimation and realization to prevent employee responsible for their delivery. Once the right synergy levers have activities having a negative impact on been identified and the deal is closed, Capgemini Invent has developed other activities currently conducted. synergy management has to verify and a 7-step approach to synergy Furthermore, the synergy controlling deliver the savings. Using company management which helps to avoid team also ensures transparency for data that goes beyond the previously common pitfalls and realize synergy top management using a centrally provided information, the team verifies potentials faster and more effectively. quantified progress tracking.

Figure 9: Synergy Management Approach

Pre-deal synergy management Post-deal synergy management Deal Closure Synergy mgmt. Synergy & Synergy Synergy Synergy Synergy Benefit set-up / synergy business case identification estimation revision qualification tracking logic approval

Synergy controlling

Project management office/communication

17 4.5 Change Management the delivery of the integration goals • Differing organizational cultures, through a holistic and structured e.g. strategic large corporation vs. One of the main reasons for mergers people transformation approach pragmatic SME culture failing to deliver the expected results (figure 10). is the absence or lack of clear change • Rationale of the merger Each merger has specific challenges management support. Typical reasons These factors strongly influence the that need to be addressed by for failure are: cultures do not match, project setup, its challenges and customized change management. The inability to implement changes, and the approach towards the merger, carefully chosen change management clash of leadership styles. Therefore, which is jointly developed with the interventions have to be specifically change management is a critical part client. Capgemini Invent follows a tailored to fit the affected companies’ of every PMI and an early involvement 3-tiered project approach for change situation. Consequently, a project of change management experts is management consisting of vision & approach for change management is essential for a successful integration of diagnosis, transformation architecture, essential and determined by several two organizations. and transformation management. major merger factors: Context • Significantly different business Actively managing change from an models of merger partners early stage on is crucial: The experts • Number of national cultures involved should already be involved during the in the merger pre-merger phase in order to reduce the overall risk of failure and to support

Figure 10: Change Management Dynamics s

e Pre-merger/ merger First 100 days Post-merger s

a / t h c p

e j e Due Letter Project Signing Closing Day 1 First 100 days Integration o g

r diligence of intent team kick-off cascade concluded n P a

h Understand & align Transition & start Acceptance & integration c

n o n

i “How can we quickly provide a vision?” o s i t n n e “How do we t “How do we achieve

t constructively tt e openness and Executives c

a address rumours?”

e realignment?“ f j o o r l p e

v d e e l Employees t / a e p v i “How do we manage to r

c “How do we generate a

i “How do we avoid u

t establish the change and c positive momentum for ‘integration fatigue’?“ n the merger?” vision of the new company?” A

Time s

r Addressing foreboding & uncertainties Initiating departure & realignment Supporting familiarisation & alignment

e l

v Ensure a targeted communication Enable “letting go” Convey reassurance a i e t

l Address uncertainties Showcase the “new world” Support confidence n e e g

t Convey the background Create a positive attitude Enhance commitment n o

P Leverage key people Promote trust Enable integration and opinion leaders Ch a Safeguard retention

18 Driving Value Creation in Corporate Transactions Approach and Results In the course of a merger the aspect and focuses on the provision of integration of a new vision and people a specific skill set and training for new Our change management approach strategy has to be finalized within positions. At the same time, it aims to addresses and helps to mitigate the the first 100 days in order to inspire motivate and empower people in order three major integration challenges: and direct the new company and its to drive the new company towards the Smoothen cultural differences, employees. During that stage the target picture. During a PMI a clash of implement changes and align leadership team plays a decisive role national and corporate cultures arises leadership styles. and needs to be the key driver of and requires both, awareness around Building on Capgemini Invent’s integration and acts as role models. the key impact of the culture and the profound experience of more than Through stakeholder mobilization, creation of a common new culture. 20 years, the approach is built on 7 awareness for change management Furthermore, it is crucial for change change levers for a successful people among stakeholders is created and sustainability to identify local change transformation (figure 11). The aim provides crucial insights for establishing agents for ensuring sustainability and is to focus on key levers in order to focused and tailored change knowledge transfer in the later stages achieve the highest possible impact architecture. The lever organization & of the integration. for the client’s merger. The respective process alignment aims to accelerate change management interventions the clarification of roles as well as to are designed in a collaborative manner handle dissatisfaction triggered by a together with the client to account for lack of FTEs or redundant positions. specific challenges. In PMIs, people performance is a vital

Figure 11: Change Management Levers

Change vision & people strategy Create new common vision early on Align the leadership around the people integration journey

Change sustainability Leadership commitment & engagement Monitor results to create/ accelerate momentum and measure success Align different leadership teams and styles Create trust and commitment within the new Create change capabilities within leadership team the new organisation Manage winner/ loser reality

Cultural development People Create awareness around the key Transformation Stakeholder mobilisation impact of culture Create awareness of change management Manage the clash of national and among all stakeholders corporate cultures and create a Develop targeted activities to ensure key common “new culture” stakeholder alignment

People performance Organisation & process alignment Motivate and empower people to drive the Accelerate the clarification of roles and responsibilities NewCo towards the target picture Handle dissatisfaction triggered by a lack of FTEs or Develop targeted measures based on survey redundant positions results Mitigate people impact of potential carve-in, carve-out

19 4.6 Flash Assessment It is based on a proven standardized • Where did we want to go? methodology and therefore highly • Where are we now? The integration of two independent efficient. Unlike conventional projects, corporate entities is a complex the focus is not on comprehensive • What do we have to do? process. Driven by high synergy and examination of existing documents • How and when do we realize it? new business potential expectations, but on a standardized, interview the integration often fails to deliver based analysis combined with an Usually, the first step is to understand the desired outcome. Frequently, in intensive evaluation of results. This the original rationale and strategic post-merger integrations, the actual leads to a solution design supported goals of the merger. These should be development steers off the planned by benchmarks and based on broad translated into tangible integration course, producing results considered industry and PMI expertise, which also targets for each relevant function. “below track” and thus leading to reduces the time for onboarding. For instance, an integration target significant deviations in key areas such for the function “product” might be Our PMI Flash project approach delivers as performance, synergies and costs. the implementation of a common transparency of the actual status of the Unforeseen cultural barriers – a typical product catalogue and an effective merger integration, starting with the pitfall of integrations – combined sales force. However, for the “support initial merger rationale and the derived with a decreasing willingness among processes” (IT, HR, etc.) of the merged integration targets. A major outcome is employees to cooperate may widen companies, the integration target a “100-day action plan” with clear roles the opening gap. At this highly critical might be to implement efficient best- and responsibilities, as well as further stage, our proven PMI Flash project in-class processes. If in some cases the improvement initiatives to ensure that offers our clients the necessary support integration targets are not explicitly the process gets back on track. (figure 12). defined, our methodology will offer Context Approach support in formulating them post hoc; whatever may be the respective A PMI Flash project is an accelerated A PMI Flash project typically consists integration target, the next step in approach delivering actionable results of two phases and mainly four steps the PMI Flash project approach is to in a short time (approx. six weeks). following a clear and coordinated logic determine and analyze the integration and delivering answers to the following gap. questions:

Figure 12: Flash Assessment

Verify integration gaps Identify and plan improvement measures s

p Understand the Analyse the Identify improvement Plan the

t e integration targets integration gap measures Implementation S

Investigate/review Conduct interviews with Qualitatively and Develop a short-term

s original integration relevant integration quantitatively evaluate measures plan e

t i targets managers interview results (“100-day action plan”) i

v Align analysis focus areas Consolidate interview Consolidate and prepare Develop further t i c Adapt questionnaire and results recommendations improvement initiatives A KPIs

Where did we How and when do we Where are we now? What do we have to do? want to go? realize it?

20 Driving Value Creation in Corporate Transactions This is done by a customized evaluation Results results for our clients. For that reason, of KPIs and benchmarks. The objective we established the Capgemini M&A of this step is to generate a holistic The main results of the PMI Flash Toolbox. The rationale behind the view of the current integration status, project are: toolbox is to consolidate the existing and in addition mobilize important • Clearly defined and tangible know-how into one pragmatic merger managers of both organizations by integration targets for each relevant integration framework and approach. involving them in the process. Building function derived from the merger We developed a guide to learn more on the analysis results and addressing rationale and strategic goals about the merger integration tools, the existing gaps, the third step is templates, guidelines and examples. to identify improvement measures • Holistic picture of the merger The toolbox is built along the four designed to best achieve the defined integration status and a detailed gap merger phases, pre-signing, day integration targets. Due to the fact analysis for each function 1 preparation, first 100 days and that each company and merger • Actionable measures that should be integration execution. In each phase, integration process has its own specific implemented to achieve the defined the relevant groups / functions are characteristics, designing the solution integration targets and ensure supported by specific tools to achieve is generally a complex task requiring an the full exploitation of available defined deliverables. extensive industry and PMI expertise. synergies Naturally, due to scarce company Along the modules, the toolbox resources or interdependencies, not all • Implementation plan for short- provides identified measures can and should be term measures with clearly defined • Valuable tools implemented simultaneously. Hence, in roles and responsibilities (“100- the last step of the PMI Flash project, day action plan”), and further • Checklists they need to be allocated to work improvement initiatives including • Key activities packages prioritized for benefits and interdependencies effort and planned for implementation 4.7 The Capgemini M&A • Case studies along a specific time line. Toolbox The M&A Toolbox is constantly updated with latest insights and individually During our PMI projects, we constantly adapted to the client at hand to ensure develop and apply numerous tools an up-to-date project approach. and frameworks to achieve the best

21 5. CARVE-OUT

In recent years divestment activities of operating model in order to ensure and employees during the change. companies have increased significantly business continuity and to build up two While divesting, several success factors in the global market. In the course of a or more stand-alone companies out of have to be taken into account such divestment, a sizable part of a business one. The operating model delivers a as the establishment of a dedicated is separated from its parent organization comprehensive, strategic and schematic and capable divestment team for in order to transform the divested parts view on how a certain set of activities achieving efficient and significant into stand-alone companies. There are and capabilities can be structured and results. Maintaining business continuity many different motives for a company to divest: To (re-)focus on the core business, bundled. The dimensions that have is another key to success within a to strengthen its capital position or to be addressed when developing an divestment. Additionally, all links (e.g. even to eliminate an underperforming appropriate operating model, involve cooperation or possible separation) division. Regardless of the motives for five key areas: Structure, processes, between the remaining and carved- a divestment decision, a fundamental governance & performance, IT systems out organization have to be clarified change in a company’s composition and people & culture. In an efficient and determined in the context of a cannot be avoided and always leads to operating model these areas interact Transitional Service Agreement (TSA) or a complex unbundling process of old seamlessly with each other and thus exit plans. structures, while setting up new ones support the overall strategy of the on both sides – the remaining and the company. Complex corporate changes divested company. are usually associated with a high Context level of risks and potential errors. Many companies underestimate the In case of a divestment both the complexity of a carve-out, focus only on remaining and the carved-out company one aspect of the process (e.g. financial have to develop or amend their own ratios) or fail to retain key knowledge

Figure 13: Carve-Out Approach

LOI Signing Closing / Day 1 Day 100 Define Evaluate Implement Make successful Harvest

Decision / Preparation Carve-out Takeover of control & Separation Analysis Transformation Phase Day 1 Planning 100-Days-Plan

How is it all linked together? Carve-out Layers Portfolio assessment & divestment Carve-out areas identification and recommendations ranking Strategy All dimensions of the organization Strategic & financial assessment Detailed description of carve-out have to be taken into account Business Continuity and criteria according to overall tasks per carve-out area in order to conduct a thorough, Operating Model Design strategy holistic and successful carve-out Carve-out planning incl. Project Management Definition of divestment object milestones & resources Change Management Separation strategy for value Calculation of carve-out maximization costs

Identification of dependencies Interdependency matrix

Potential investors listing incl. Identification of value strategic fit analysis drivers Carve-out work streams What does it include? and activities Compelling equity story for every Pro-forma financials of interested investor target, historical & forecast Vendors due diligence Various activities through all business Support Business Operating functions have to be performed in functions Continuity Model order to ensure Business Continuity Core functions Activities Development while developing a new Operating Project Mgmt. Model, all supported by a sustainable Change Mgmt. Project and Change Management

Out of scope (Definition and Evaluation phase) Focus (Implementation phase) Overlap (Takeover phase)

22 Driving Value Creation in Corporate Transactions Thus, a divestment project needs a The strategy review evaluates the For employing the carve-out profound and holistic approach in vision and overall strategy followed by framework, a range of activities across/ order to overcome all obstacles that the business model review. It focuses throughout all business functions has may occur during a carve-out and to on the consideration of a potentially to be analyzed and performed during complete the deal successfully. For revised strategy and business model. the carve-out phase so that business that reason, Capgemini Invent has The organizational design consists of continuity is ensured, while a new developed a clear and well-structured the development of organizational operating model is developed. At the carve-out framework for the support of structures at high level. To ensure same time, all carve-out work streams companies in divestment activities. business continuity, various activities and activities are involved in the have to be conducted during the carve- operating model development. Approach & Results out phase in conjunction with the A classical carve-out deal contains operating model development for the two upstream phases, namely the review and development of functional decision & preparation and separation strategies and organizational designs. analysis before the actual carve-out The two remaining layers, change and implementation takes place. Our carve- project management, aim at developing out framework includes the review of retention and communication plans all dimensions of business and ensures as well as conducting project, risk and a stable and efficient future operating business continuity management. model for both the remaining and the carved-out company (figure 13).

23 About Capgemini Invent

As the digital innovation, consulting and transformation brand of the Capgemini Group, Capgemini Invent helps CxOs envision and build what’s next for their organizations. Located in more than 30 offices and 10 creative studios around the world, its 6,000+ strong team combines strategy, technology, data science and creative design with deep industry expertise and insights, to develop new digital solutions and business models of the future.

Capgemini Invent is an integral part of Capgemini, a global leader in consulting, technology services and digital transformation. The Group is at the forefront of innovation to address the entire breadth of clients’ opportunities in the evolving world of cloud, digital and platforms. Building on its strong 50-year heritage and deep industry-specific expertise, Capgemini enables organizations to realize their business ambitions through an array of services from strategy to operations. Capgemini is driven by the conviction that the business value of technology comes from and through people. It is a multicultural company of 200,000 team members in over 40 countries. The Group reported 2017 global revenues of EUR 12.8 billion.

Visit us at www.capgemini.com/invent

People matter, results count

Contacts

Dr. Christoph Stich Head of Mergers and Acquisitions Vice President Loeffelstrasse 44-46, 70597 Stuttgart – Germany +49 151 4025 0696 [email protected]

Igor Barkalov Divestiture/Carve-out Expert Principal Mainzer Landstrasse 180, 60327 Frankfurt am Main – Germany +49 151 4025 1630 [email protected]