M&A Making the deal work Perspectives on driving merger and acquisition value

Dear reader,

Mergers and acquisitions continue to be a favored corporate development tool of executive teams, as evidenced by 2015 and 2016's record- setting level of deal-making. And while M&A may not continue at this pace, the trend seems far from abating. According to a recent Deloitte CFO Signals™ survey, many companies intend to continue combining for numerous strategic reasons, including expanding in existing markets and gaining scale efficiencies.

Is your company considering near-term M&A? If so, are you also considering the potential implications on functions including strategy, finance, information technology, human resources, tax, treasury, cyber security, sales and marketing, and supply chain? What opportunities and challenges in these areas might you face on the way to achieving post-M&A synergies?

For M&A to be successful you can’t just make the deal; you have to make the deal work.

Whether you are involved in your first–or your hundredth–M&A deal, each one is unique. And Deloitte is here to help. As acknowledged by many industry analysts, our experience in assisting clients across industries and the full spectrum of M&A lifecycle activities is unmatched. If you’re looking for a seasoned advisor with broad capabilities and real-world experience, we’re ready.

Jeff Weirens Olivier May National M&A Services Leader Principal Mergers & Acquisitions Mergers & Acquisitions Deloitte Consulting LLP Deloitte Consulting LLP [email protected] [email protected] M&A Making the deal work M&A Making the deal work

Table of contents

Introduction 1

Strategy M&A: A Critical Tool for Growth 4

The Crux of Corporate Strategy: Building an advantaged portfolio 6

Winning in M&A: How to become advantaged acquirer 19

Due diligence for synergy capture: Building deals on bedrock 24

Deal-making in Downturns: The “big, black cloud of slowdown” has a silver lining 28

Sales & Marketing M&A–driven sales & marketing: Know where to play and how to win 41

Supply Chain Supply Chain’s role in M&A: Achieving value creation through supply chain 53

Technology Informed IT integration: Three-phase approach can boost M&A synergy capture 58

Human Capital Driving value through HR integration: Get it right from the start 72

Lead with a winning hand: Positioning leaders for integration and transformation 80

Regulating the pulse of an M&A transaction from announcement through Day 1 82

People-related “must-do’s” for the first 100 days 86

Safeguarding M&A deal value: Managing culture clash 91

Using integration to catalyze HR transformation 98

M&A-driven organization design: Seven practices to help lock-in deal value 101

Finance Finance integration: Fine-tuning reporting capabilities for long-term M&A value 105

Tax Tax considerations during M&A integration: Shaping the new organization 108

Advisory Eight keys to a successful treasury integration 112

Don’t drop the ball: Identify and reduce cyber risks during M&A 121

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Introduction

M&A Making the Deal Work Winning in M&A: How to become an growth, shareholder value, and competitive advantaged acquirer advantage. Implementing a successful M&A Making the Deal Work is a compendium Factors that have been driving M&A for the strategy during these periods requires of articles by Deloitte M&A professionals last few years—low interest rates, accessible sufficient balance sheet capacity; reasonable that provides guidance on a broad set of and inexpensive financing, healthy balance expectation that there will not be investor issues across the M&A lifecycle of strategy, sheets, and an economy that’s growing at backlash against a deal during a period due diligence, transaction execution, less than four percent annually—remain of heightened uncertainty; and attractive and integration. The articles are grouped intact. However, winning and creating value targets that are also willing sellers. by functional areas: Strategy, Sales and in this environment may require something Marketing, Technology, Human Capital, more: a set of detailed action steps to help Sales & Marketing Supply Chain, Finance, Tax, and Advisory. We companies proactively identify and transact hope you find the information we present in strategic deals rather than reactively pursue M&A-driven sales and marketing: Know these articles to be helpful during your deal disparate, ad hoc opportunities. This article where to play and how to win planning and implementation. examines some common buyer mistakes A company’s Sales & Marketing organization during merger waves and suggests ways can play an essential role in helping to Strategy that companies can potentially avoid them capitalize on growth opportunities across by becoming advantaged acquirers. the pre-deal and post-deal phases of an M&A: A critical tool for growth M&A transaction. This is particularly true M&A’s numerous potential benefits Due diligence for synergy capture when company executives are aligned to – building scale, improving a target’s As corporations and private equity (PE) and guided by a Sales & Marketing growth performance, removing excess industry firms consider mergers and acquisitions framework that aids decision-making around capacity, and fueling long-term, profitable that will combine operations, they generally “where to play” and “how to win.” This growth – dictate that it be viewed as rely on high-level, top-down assumptions framework should help executives identify an important arrow in the corporate to identify cost synergies that are built into and validate growth opportunities; tie these quiver; ready to be loosed when needed. valuations. Yet these same organizations to the newly combined company’s go-to- However, companies should not wait until are often surprised when assumed post- market strategy; strengthen customer- an attractive target is in view to sharpen deal operational improvements aren’t as related functions; and facilitate functional their M&A capabilities: proactive planning, significant as planned or take longer than readiness across the enterprise. building internal M&A capabilities and expected to realize. partnering with experienced advisors can Synergy-capture diligence, a bottom-up Supply Chain improve the odds of hitting a strategic bulls- approach that puts management’s skin in eye. the game early on, can verify where specific Supply Chain’s role in M&A: Achieving cost reductions may be achieved. Such value creation through supply chain The Crux of Corporate Strategy diligence can help justify valuations, drive Supply chain synergies are a significant A central objective of corporate strategy early alignment around the new operating source of potential M&A deal value. is for executive management to define model for the combined businesses, and In addition, a transformed, integrated the businesses in which they should build a blueprint for accelerating synergy supply chain can be a critical enabler of participate and the ways in which they capture during post-merger integration. long-term corporate growth and market create value within and across their competitiveness. To meet synergy goals, businesses. Deloitte has found that the Deal-making in downturns: The “big, black supply chain executives should proactively most “Advantaged Portfolios” exhibit three cloud of slowdown” has a silver lining identify potential sources of value during a broad characteristics: they are strategically Common wisdom holds that acquisitions transaction’s due diligence and pre-close sound, value-creating, and resilient. This should be pursued when the economy is phases, and take early advantage of Clean article explores the characteristics of strong and companies are flush with cash, a Rooms and external advisors to support an Advantaged Portfolio and its trio of strategy termed “buy rich.” However, during the immediate launch of post-Day 1 synergy attributes, and shares the process to get market downturns, strategically focused projects. there. companies can challenge the status quo and disrupt stagnant thinking by using M&A to create new avenues for significant

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Technology – including post-deal integration and merger and/or acquisition because M&A organizational transformation. Preparing transactions are subject to increased Informed IT integration: Three-phase leadership to do so involves defining the investor scrutiny. Failure to address culture approach boosts M&A synergy capture new operating model, assigning each during M&A can impact a company’s One of the biggest challenges during M&A- leader’s role in the new organization, performance in subtle ways: integration driven IT integration is to quickly deliver on tailoring messages to address concerns delays due to cultural inhibitors, a decline a transaction’s strategic business objectives of key audiences, and providing rigorous in productivity and innovation, or increased while making sure that both companies’ day- training and practice sessions employee turnover. Companies should to-day operations continue uninterrupted consider culture as one of the key levers during the rapid countdown to Legal Day 1 Regulating the pulse of an M&A they can pull to sustain and improve (LD1). Early planning, ongoing collaboration transaction from announcement through post-M&A performance. By effectively between IT and business functions, and Day 1 understanding and shaping their culture, efficient implementation of a three-phase Effective communication is the key to executives can drive business strategy M&A IT integration lifecycle approach can maintaining organizational stability in the and achieve their operational and financial help head-off potential issues and boost face of M&A-driven change and ambiguity. objectives. post-deal synergy capture. The pulse of a deal lies in the timing and mix of corporate messages; the challenge is to Using integration to catalyze HR Human Capital regulate this pulse by providing message transformation clarity and consistency. To structure and Merger and acquisition transactions often Driving value through HR integration: Get sustain these efforts, Human Resources place significant stress on an organization it right from the start (HR) and Communications staff should and its employees. Whether the transaction The evidence is overwhelming: Acquiring focus on sharing the facts and promoting is a small bolt-on or a large “merger of companies can neither focus too much employee understanding of the deal; talking equals” the newly combined population and nor too early on an M&A transaction’s to leaders; setting the stage for a positive HR’s M&A-related synergy expectations people implications. Early involvement by employee experience; and establishing often make transformation a necessity – a company’s Human Resources function communications governance. even though HR typically will be expected can help to optimize a deal’s financial and to do more while also spending less. Yet, operational synergies. HR can share vital People-related “must-do’s” for the first with the proper mix of planning, process, business information and expertise that 100 days and execution, HR leadership can harness may influence the identification of potential Enabling a smooth employee transition – the integration’s momentum to transform partners, the structure of the deal, effective especially during the first 100 days after the function, optimize HR’s service delivery timing for key decisions and milestones, an M&A deal closes – correlates very model, and better support the new business and development of strategies to support a highly with an acquisition’s overall success. and its employees. smooth integration. HR executives can also Regardless of which integration approach a lead the organization’s efforts to identify company selects, when HR staff members M&A-driven organization design: Seven potential business and human capital risks, focus on several critical people-related practices to help lock-in deal value and shape the strategy and integration plan. “to-do’s they can help new employees Once an M&A deal is finalized and the dust smoothly integrate into the organization and settles HR executives typically face the Lead with a winning hand: Positioning cool the water cooler chatter. Focus areas complex task of implementing numerous leaders for integration and include: supporting a positive and seamless operating model and organization changes transformation onboarding experience; having a combined to realize expected deal value. Seven An M&A deal provides a rare opportunity leadership team that is visible, accessible, leading practices – applicable in virtually to bring together the very best people, and aligned with one another; engaging all industries and deal types – have been products, and operations into one with employees to get them excited about shown to consistently drive value from post- organization; to create more value in the future of the combined company; and Day 1 organization design. Incorporating months than in-house development can outlining long-term goals for the integration. these practices can help corporate and in years. However, success often hinges on Human Resources leaders find the right executives’ ability to lead with a winning Safeguarding M&A deal value: Managing balance between locking in short-term hand; to engage the workforce and lead culture clash deal value and positioning the future-state proactively, positively, and enthusiastically Performance is always a top-of-mind issue organization for long-term success. throughout the transaction lifecycle for executives; even more so during a

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Finance Advisory

Finance integration: Fine-tuning reporting Eight keys to a successful Treasury capabilities for long-term M&A value integration Throughout an M&A integration, the C-suite executives expect today’s Treasury appropriate level of focus on reporting organization to serve as a strategic advisor capability will allow management and to Finance, the Chief Financial Officer business leaders to make effective decisions (CFO), and the overall business. Included that support both the long-term goals of in Treasury’s evolving role is providing the organization and the synergy targets strategic support for M&A transactions, of the deal. The initial focus for public especially post-deal integration. Showcasing companies should be on the deal’s impact Treasury’s ability to manage debt, mitigate on external reporting and the ability to close risk, unlock cash, and drive cross-functional the books in a timely manner to meet SEC alignment during an integration can lay requirements and investor expectations. the groundwork to expand the function’s After satisfying external reporting footprint and support continued value requirements, attention should shift to creation. providing business leaders with access to necessary financial data, eliminating the role Don’t drop the ball: Identify and reduce of the acquired company’s systems, and cyber risks during M&A assessing the impact of the integration on As if M&A deal teams didn’t have enough support functions. balls to juggle during a transaction’s lifecycle, today’s complex and porous Tax digital marketplace is tossing in one more–increased cyber risk. Every stage of Tax considerations during M&A M&A–strategy, screening, due diligence, integration: Shaping the new organization transaction execution, and integration– Tax executives should lobby for a seat at the is subject to heightened risk for cyber table with their C-suite counterparts during threats and attacks which, if not discovered M&A integration planning, for they can offer and defused, could harm both acquirer important insights and recommendations and target…and even scuttle the deal. A to accomplish strategic tax goals associated dedicated cyber risk management team with the transaction. Their involvement can provide strategic value at each stage should begin early, extend through the by assessing, identifying, and reducing integration lifecycle, and address key potential cyber security risks prior to and business decisions, synergy prioritization, after deal close legal entity readiness, and countdown to Day 1.

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M&A: A critical tool for growth

By William Engelbrecht and Tanay Shah

Global merger and acquisition (M&A) activity Access to new intellectual property (IP) is returns.8 However, reported failures should hit a record high of $4.7 trillion in 2015 and also an important driver of growth-oriented not necessarily discourage companies continued its momentum in the first half of deals, especially in highly innovative from pursuing M&A. Well-developed 2016 reaching $1.7 trillion.1 Although that industries such as pharmaceuticals and due diligence, valuation, and integration may prove to be the high-water mark for technology, where IP is a company’s capabilities can anchor an effective risk deal flow, a majority of corporate executives lifeblood. Case in point: Over the past five mitigation strategy. There is enough and private equity (PE) professionals years, the cost to develop a pharmaceutical knowledge and experience among the M&A nonetheless expect deal activity to remain asset has increased by roughly a third, while community and associated professionals strong in 2016.2 Conducive macroeconomic average peak sales for the industry have that properly prepared acquirers can conditions have helped fuel the boom, fallen by 50 percent over the same period.6 expect to gain considerable financial and but astute observers can see an evolving M&A provides an additional means of competitive value from their M&A pursuits. strategic rationale for deal-making. bringing promising therapies into a pharma company’s portfolio. M&A is expected to remain a critical tool M&A can be an important means for for growth and long-term shareholder building scale, improving a target’s Meanwhile, big technology firms are value-creation. Management teams planning performance, or removing excess industry making headlines for their deal activity to engage in strategic deal-making should capacity, and can fuel long term, profitable (and a fair number of deals are not focus on building internal M&A capabilities growth. M&A’s numerous potential benefits disclosed or publicized). For instance, a and partnering with experienced advisors to dictate that it be viewed as an important major social media platform company has improve their chances of hitting a bulls-eye. arrow in the corporate quiver; ready to be completed more than 50 deals in its short loosed when needed. However, companies history, with recent acquisitions adding should not wait until an attractive target is capabilities in e-commerce, virtual reality, in view to sharpen their M&A capabilities; speech recognition, and other fields. proactive planning can improve the odds of Some companies’ portfolio of IP-related hitting a strategic bulls-eye. In fact, acquisitions is even more eclectic. Adding Deloitte’s M&A Trends Report 2016: Our credence to this trend, Deloitte’s latest annual comprehensive look at the M&A corporate development survey reveals that market,3 found that corporations are placing the pursuit of innovation is transforming more emphasis on developing an M&A the M&A landscape. Roughly two thirds strategy in 2016. of corporate development leaders who responded to the survey said their function The sluggish pace of global economic has become a more important source of growth enhances the attractiveness of innovation over the past two years, and M&A. In addition, sustained low interest nearly 60 percent of executives believe that rates, strong US equities markets, cash-rich the volume of innovation-centered deals will balance sheets, and increasing business increase over the next two years.7 confidence give companies the ability and attitude to pursue deals as a means to grow. In the midst of this boom, it is worth In fact, executives’ most commonly cited remembering that not all M&A deals add reasons for engaging in M&A are growth- value. Thirty-nine percent of corporate oriented: accessing new customer bases, respondents and 56 percent of private gaining entry into new geographic markets,4 equity (PE) respondents said that more than and expanding products and services.5 half of their transactions completed over the past two years had not generated expected

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End Notes 1. “Will the New Year be ‘Sweet ‘16’ for Deals?” The Wall Street Journal, December 31, 2015, http://www.wsj.com/articles/will-the-new-year-be-sweet-16-for- deals-1451557804. Cited in M&A Trends Report 2016: Our annual comprehensive look at the M&A market, Deloitte, 2016

2. M&A Trends Report 2016: Our annual comprehensive look at the M&A market, Deloitte, 2016

3. From February 19 through March 15, 2016, a Deloitte survey conducted by OnResearch, a market research firm, polled 2,292 executives at US companies and private equity firms to gauge their expectations, experiences, and plans for mergers and acquisitions in the coming year.

4. M&A Trends Report 2015: Our annual comprehensive look at the M&A market, Deloitte, 2015

5. M&A Trends Report 2016: Our annual comprehensive look at the M&A market, Deloitte, 2016

6. Measuring the return from pharmaceutical Innovation 2015: Transforming R&D returns in uncertain times, http://www2.deloitte.com/us/en/pages/life-sciences-and- health-care/articles/measuring-return-from-pharmaceutical-innovation.html

7. Corporate development strategy: Thriving in your business ecosystem, Deloitte University Press, 2016, http://dupress.com/articles/corporate-development-strategy- survey/

8. M&A Trends Report 2016: Our annual comprehensive look at the M&A market, Deloitte, 2016

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The Crux of Corporate Strategy Building an advantaged portfolio

By Mike Armstrong, Jonathan Goodman and Gavin McTavish

One of the central objectives of corporate In this paper, we explore the characteristics as a system (i.e., how the parts interact), strategy is for executive management of an Advantaged Portfolio and the trio of not just on the individual components; and to think holistically about a company’s attributes that constitute each (Figure 1). it should be tailorable to the company in portfolio of businesses—conceiving and These attributes in aggregate are key to fully question, since each company has different spearheading ways to make the aggregate assess, assemble and maintain a goals and aspirations. The Advantaged value of a company’s holdings durable over top-performing corporate portfolio. A Portfolio framework is designed to meet time, and greater than the sum of its parts. company may need to include additional these criteria. This vital mission comprises two central company-specific criteria to meet its specific questions: In which businesses should we goals and aspirations,4 and the specific participate? And, how do we create value weighting of attributes will vary by company. within and across1 our businesses? In other But the nine attributes noted in Figure 1 are words, where will we play and how will we “default” criteria that may be relevant in a win2, at the portfolio level? wide range of portfolio contexts.

Monitor Deloitte has found3 that the most Executives, academics and consultants successful portfolios typically exhibit three have devised numerous frameworks for broad characteristics: They are strategically building and sustaining an optimal corporate sound, value-creating and resilient. Perhaps portfolio. Our experience suggests that any this seems obvious. But in our experience— successful portfolio design framework (as maybe because it requires consideration distinct from the portfolio itself) should have and testing across a wide range of three important features: It should be multi- attributes—companies seldom apply this dimensional in its criteria because portfolio tripartite “Advantaged Portfolio” approach. evaluation and construction cannot be reduced to a simple 2 x 2 matrix; it should focus on the performance of the portfolio

Figure 1: Characteristics of an Advantaged Portfolio

1Strategically Sound 2 Value- Creating 3 Resilient Competitively Positioned Maximizes Intrinsic Value Survives Scenarios Balances Innovation Addresses Market Value Builds Optionality Creates Synergies Finds the Right Owner Weighs Feasibility and Risk

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What Is a Portfolio? In a corporate strategy context, a portfolio is the collection of businesses than an organization chooses to own or invest in. Portfolios can exist at multiple levels within a company. In a corporate-level portfolio, the unit of analysis is the strategically distinct business (SBD), each of which has distinct competitors, geographies, etc. SBDs may or may not correspond to a company’s organizational business units or reporting units. Portfolios also can exist within a business unit, a division, or even a product line, as depicted in Figure 2 by Bayer AG’s multiple sets of portfolios. The correct unit of analysis for a portfolio will change based on the level of the portfolio being assessed.

Figure 2: Portfolios Can Exist at Multiple Levels of an Organization

HOLDING Bayer AG COMPANY

Bayer Bayer CropScience Bayer HealthCare SUBGROUPS MaterialScience

Animal Health Consumer Care Pharmaceuticals Medical Care DIVISIONS

Women’s THERAPEUTIC Cardiology Oncology Ophthalmology Healthcare AREAS

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An advantaged portfolio should be strategically sound

1Strategically Sound 2 Value- Creating 3 Resilient Competitively Positioned Maximizes Intrinsic Value Survives Scenarios Balances Innovation Addresses Market Value Builds Optionality Creates Synergies Finds the Right Owner Weighs Feasibility and Risk

An Advantaged Portfolio, first and foremost, Thus, an effective portfolio is weighted in should be strategically sound. That means it favor of structurally attractive markets in should foster a strong competitive position, which the company has a demonstrated support multiple levels of innovation, and ability to win (Figure 3). Portfolios that create synergy. are more widely distributed—or worse, weighted toward structurally unattractive Competitively Positioned markets with no (or no enduring) When a portfolio is competitively positioned, advantage—are far less likely to produce its businesses in aggregate participate attractive returns over time. in more structurally attractive markets and can more effectively compete in their chosen markets. Even in the context of In their recent book, Playing To Win, A.G. blurring industry boundaries, the concept Lafley and Roger Martin set out a clear and and applicability of structural attractiveness pragmatic strategic framework based on the endures. According to Michael Porter, in Strategic Choice Cascade, a demonstrated his book Competitive Strategy, industry approach to addressing strategy as a set attractiveness is a function of five forces: of five interrelated questions, including: competitive rivalry, the bargaining power Where will an organization play? And, how of buyers and suppliers, the threat of new will they win? The framework was developed entrants, and the threat of substitution.7 over 20 years by strategy consulting firm The simple fact is that some industries or Monitor Group and used by hundreds segments are more likely to support higher of organizations. It provides a powerful returns over time than others.8 Of course, a approach to thinking about strategic choice company is able to realize the full potential and action. of any industry or segment by winning—i.e., being better than competitors at both creating and capturing value for customers.

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Figure 3: Competitive Position Matrix

Poorly positioned portfolio Well-positioned portfolio High High

Strategically Distinct Businesses INDUSTRY ATTRACTIVENESS INDUSTRY ATTRACTIVENESS INDUSTRY

Low High Low High ABILITY TO WIN ABILITY TO WIN

Balances Innovation There is a “Golden Ratio” for allocating Interestingly, the same research data show To be strategically sound, portfolios innovation investments. According to that the ratio of returns on investment is should also reflect an appropriate blend of Monitor Deloitte research published in roughly the inverse of the ideal investment innovation opportunities. The idea is to sow the Harvard Business Review,9 companies allocation: core innovations typically the seeds for growth across various time that allocated about 70 percent of their generate 10 percent of the returns on horizons (short, medium, and long-term) and innovation activity to core initiatives, 20 innovation investment, adjacent efforts various levels of risk and reward in line with percent to adjacent initiatives, and 10 generate 20 percent and transformational a company’s ambition and risk tolerance. As percent to transformational initiatives generate 70 percent. shown in Figure 4, innovation opportunities outperformed their peers—typically can be classified as core, adjacent or realizing a P/E premium of 10 to An Advantaged Portfolio will support a transformational, depending upon how far 20 percent. The ratio is an average across spread of innovation initiatives across core, they diverge from existing offerings and industries and geographies and the right adjacent and transformational horizons, customer base. A “core innovation” is an balance will vary by company. A technology consistent with the degree of threat and incremental improvement to an existing company, for example, likely will find opportunity presented by disruptive product targeted at existing customers. A a greater investment in adjacent and technologies, disruptive business models, “transformational innovation” transformational innovations to be optimal. or competitive activity in the industries is an initiative focused on offering new represented in the portfolio. products to new customers or to serve In so doing, the portfolio will typically needs that have never been expressed. improve the competitiveness of the enterprise in the short, medium and longer terms.

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Figure 4: The Innovation Ambition Matrix and Associated Returns on Innovation Investment

Create new Transformational “Given the time and investment it takes to markets and customers 10% create a transformative innovation, we are always working on multiple ideas at any 70% point in time. [Procter & Gamble’s] Gillette Enter new Adjacent markets and organization is masterful at managing customers 20% S-curves in blades and razors. As one 20% transformative platform is being launched,

Serve existing the next two platforms are already being Core markets and designed. In between new platforms their customers 70% innovations extend the advantages and 10% build on Gillette’s outstanding equity.”10

Existing Extended New offers —Kathleen Fish, Chief Innovation Officer, Procter & Gamble products and offers and and assets assets assets Typical Typical innovation innovation investment returns

Creates Synergy • Horizontal synergies are typically produced Articulating the synergies in a portfolio Synergy is a well-worn term that is all in two ways: applying valuable assets is not only necessary when designing a too often used to justify acquisitions or and capabilities resident in one business new portfolio. It is increasingly important the presumed soundness of an existing to other businesses in the portfolio, or for day-to-day portfolio management as corporate portfolio. But for a corporate combining assets and capabilities in shareholders, and activist investors in entity to create value over time, it should different businesses to create new value. particular, ratchet up the pressure on public add value above and beyond that which Examples include joint purchasing, joint companies. In many cases of shareholder could simply be created (and captured) R&D, brand extensions, and sharing best activism, the portfolio’s composition is within its existing stand-alone businesses. In practices. at issue.11 Management should be able other words, the value of the whole should to explain clearly and concisely why the • Downward synergies can come from be greater than the sum of the parts. In company’s various businesses create more leveraging the parent company’s assets this context, Advantaged Portfolios create, value together than apart. in the business units. Examples include support or reinforce synergy across at least access to the parent’s balance sheet, one of the following four dimensions (and extending the parent brand to the BUs; often across several): “Synergies are not only and access to parent networks and • Management-oversight synergies can be relationships. about cost reduction. created by using enhanced management • Portfolio system synergies refer to the value Synergies can be access processes and skills in the corporate created when a portfolio’s parts interact center to boost the top line or reduce to markets, exchange with each other as a system. Examples costs across the SDBs. Examples include might include combining countercyclical of products, avoiding sophisticated target and incentive setting; businesses to dampen excessive volatility exemplary training and recruitment; and overlaps, and exchange of or vertically integrating key operations to superior treasury and capital allocation 12 address failed supply or demand markets. best practices.” processes. —Carlos Ghosn, Chief Executive Officer and Chairman, Renault Nissan

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An advantaged portfolio should be Value-Creating

1Strategically Sound 2 Value- Creating 3 Resilient Competitively Positioned Maximizes Intrinsic Value Survives Scenarios Balances Innovation Addresses Market Value Builds Optionality Creates Synergies Finds the Right Owner Weighs Feasibility and Risk

The second core characteristic of an As with any attribute of an Advantaged Figure 5: Intrinsic Value Creation Advantaged Portfolio is that it should Portfolio, maximizing intrinsic value should create more value than alternative portfolio start with evaluating the current portfolio’s + Stop Value Maximize Value options. But that value should be viewed performance. This involves assessing where Destruction Creation through three lenses to help provide a clear value is being created or destroyed within picture: intrinsic value, capital markets value, the portfolio, which requires looking at the SDB and the value of the assets to other owners. two critical drivers of intrinsic value: the Focusing on any one to the exclusion of revenue growth and return on invested 0% the others risks overlooking value-creation capital (ROIC) of each component business. opportunities, if not destroying value outright. It’s important for a company to This is a critical step in forming preliminary REVENUE GROWTH consider and balance all three views on how to treat each business going Improve Grow Asset Base Profitability forward: Should we reduce investment or - Maximizes Intrinsic Value increase it? Do we need to fix performance Low WACC High Intrinsic value can be best represented first? (See Figure 5). The second, and by the risk-adjusted cash flows (net of typically more difficult step of maximizing RETURN ON INVESTED CAPITAL (ROIC) investments) a corporation’s existing (and intrinsic value comes in constructing the expected future) businesses produce, and new portfolio. Management should conceive “Intrinsic value [is] an all- is best measured by discounted cash flow different portfolio options, estimate and (DCF) analysis. An Advantaged Portfolio is aggregate the cash flows of each component important concept that simply one whose intrinsic value is greater business, and layer in both the synergies offers the only logical than that of competing portfolio options, all and dis-synergies inherent in each option. For other things being equal.13 Moreover, value instance, what is the value of cross-selling approach to evaluating is created over time by improving intrinsic Business 1 products into Business 2? the relative attractiveness value—whether by increasing returns on What input cost synergies can we get from existing capital employed, consistently combining procurement activities across of investments and investing new capital to generate returns businesses? What are the tax implications businesses. Intrinsic value that exceed a company’s cost of capital, or if we exit Business 3? Done effectively, an by releasing unproductive capital. Hence an Advantaged Portfolio maximizes these can be defined simply: It Advantaged Portfolio is one that lends itself aggregate cash flows. is the discounted value of to increasing intrinsic value—which, typically, is more likely if the portfolio in aggregate the cash that can be taken is competitively positioned (as described out of a business during its earlier). remaining life.”14

—Warren Buffet, Chief Executive Officer, Berkshire Hathaway

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One of the mistakes we see all too often in Find the Right Owner “As separate publicly public companies is excessive management When management identifies the option traded entities, each focus on how investors value the portfolio. that both maximizes intrinsic value and While a company must address the current addresses capital markets pressures, value company should market value of a portfolio in certain will be maximized, right? Not so fast. benefit from enhanced circumstances (which we describe below), it can maximize long-term shareholder value Even if a portfolio owner is creating management focus, more through a ruthless focus on enhancing significant intrinsic value for a business, efficient capitalization intrinsic value—i.e., the present value of the owner may not be creating as much expected future cash flows value as another owner could. A financial and increased financial buyer might be able to extract more value transparency. In addition, Address Capital Markets from the same assets through leverage As already noted, intrinsic (DCF) value and financial engineering. A competitor shareholders will have a should be the primary metric for assessing might have an adjacent business through more targeted investment the value of a portfolio and different which it could create synergies the current portfolio options. However, market value owner cannot. In such cases, the current opportunity, and incentives cannot, and should not, be ignored; it can owner should consider selling the under- for management and be as important as intrinsic value in certain exploited business for full value to the value- circumstances. In theory, market value maximizing party, sometimes called the employees will be more (driven by market expectations) should “natural owner.” The proceeds could then closely aligned with align with intrinsic value. In practice, the two be paid out to investors or re-invested into measures of value can diverge at a given higher-potential businesses—businesses company performance moment for reasons not related to business for which the company is truly the value- and shareholder interests. performance. For example, a bidding war maximizing owner. in a consolidating sector may cause a listed Given these advantages, company’s equity to trade above its intrinsic Slow-growth, cash-generative businesses we are confident that this value. Conversely, a large-bloc shareholding used to be seen as necessary sources of in the company that constrains trading financing for higher-growth businesses transaction will enable liquidity may drive down the share price. in the portfolio. However, with the rise of Brink’s Home Security In such cases where intrinsic and market private equity and other specialized market values diverge, a company may have to (or players, the capital markets have created (BHS) and Brink’s, Inc. to wish to) make changes to its portfolio that it multiple means of monetizing these “cash more quickly realize the would not otherwise make. cows,” often for even greater value than 15 the current owner could generate from valuations they deserve.” A significant under-valuation of a business in the asset. Unless capital markets are the capital markets can actually hurt intrinsic particularly tight and financing and M&A —Michael Dan, Chairman, President value (e.g., by reducing financing options) are constrained, companies should not and Chief Executive Officer, The Brink’s and in extreme cases can jeopardize a feel compelled to keep a business unit just Company in discussing the pending company’s independence (e.g., by increasing because it generates cash. Generating cash separation of his two businesses exposure to a hostile bid). Similarly, if by selling an asset may in fact be the best management believes a firm’s equity is way to maximize value. over-valued in the market, the firm might consider using that valuable equity currency As executives evaluate or redesign their to fund acquisitions that it otherwise might portfolios, they should consider the not make. Such over- and under- valuations potential stand-alone value of each business often occur when the portfolio contains to different potential buyers and compare businesses that trade at markedly different those values to the intrinsic value of multiples. In these cases, portfolio moves keeping the business within the portfolio, may be warranted due to changes in market as illustrated in Figure 6. On balance, over values, despite no change in underlying time, an Advantaged Portfolio will consist cash flows and associated intrinsic value. An of assets for which the current owner is the Advantaged Portfolio is guided by intrinsic value-maximizing owner. value creation but is not blind to potential threats or opportunities created by the capital markets. 12 M&A Making the Deal Work | Strategy

Figure 6: Assessing the value of an asset to different owners “We are trying to be as

Status quo intellectually honest as we value to us can with ourselves and Growth option look at each operation on value to us a present value basis. And Value to new entrant just as [CEO Joe Quarin] has Value to said repeatedly, if we are OWNER competitor not the best owners, find Value to out who is.”16 financial buyer —Ian Kidson, Executive Vice President and Chief Financial Officer, Progressive $0 $10 $20 $30 $40 Waste Solutions VALUE OF ASSET

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An advantaged portfolio should be Resilient 1Strategically Sound 2 Value- Creating 3 Resilient Competitively Positioned Maximizes Intrinsic Value Survives Scenarios Balances Innovation Addresses Market Value Builds Optionality Creates Synergies Finds the Right Owner Weighs Feasibility and Risk

An Advantaged Portfolio should be not only consequences for industry dynamics and “We’re testing our portfolio strategically sound and value-creating, it boundaries, customer interactions, or the under different scenarios and... is also resilient. In our experience, matters winning business models we’ll see that we have a resilient of risk and resilience are among the most overlooked, and least understood, A company should create a number of portfolio with flexibility to adapt dimensions of portfolio evaluation and scenarios and portfolio options, and if circumstances warrant. Now design. However, they also are among the evaluate the likely value of the options in some things might change, most important each scenario. Consider the example in Figure 7. In this instance, the status quo but here’s what’s not going to Three attributes define resilience. option appears to do well in only one of the change. We’re going to allocate scenarios (Scenario 4). It capital prudently. We’ll continue Survives Scenarios thus is less robust than Option 3, which We live and operate today in a period of does well in two. Scenarios not only serve an to migrate our portfolio to great change and uncertainty. With shifting evaluative purpose. They also play a creative a lower cost of supply. We’ll economic conditions and the possible role, helping companies to generate novel maintain capital and financial consequences of massive disruptive strategies and portfolio options. technologies, no one can be certain how flexibility and we’ll pay our customer needs, competitive dynamics, or shareholders first.”18 industry boundaries might change. In some instances, executives deny uncertainty; in —Ryan Lance, Chairman and Chief others, they become paralyzed by it. The Executive Officer, ConocoPhillips trick is to confront uncertainty, especially when assessing and designing corporate 60 OPTIONS: portfolios. In this context, an Advantaged Status quo Portfolio is one that—in aggregate—is more Portfolio Option 1 50 likely to perform well in a variety of different, Portfolio Option 2 plausible, future environments, not just one Portfolio Option 3 40 that might reflect an executive team’s official future.17 30 Current company share price Leading-practice companies use scenarios to stress-test the performance and risk of 20 DCFPER SHARE ($) individual businesses and portfolios overall.

Scenarios go beyond simple sensitivity 10 analyses (for example, deviations of 5 to 10 percent from some base-case forecast). 0 They describe coherent stories about how Scenario 1 Scenario 2 Scenario 3 Scenario 4 the relevant macro environment might evolve very differently five, 10 or 15 years INDUSTRY SCENARIO in the future, and illustrate the potential Figure 7: Discounted Cash Flow Value of Strategic Options by Scenario

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Builds Optionality it? Are there targets available “I can’t take the risk of Executives tend to think their strategies’ with the assets we need? Risk addresses choosing the ‘double down success hinges largely on a particular event the potential for unfavorable developments (availability of an acquisition target; passage once the portfolio is created. Will in the core’ portfolio or a of a law; successful test of a technology, competitors launch a counter-measure? ‘step-out’ portfolio today. etc.). However, these events may not How much does the portfolio depend on happen for some time (if at all), and their the success of a new technology? Will the I need to know whether final form or effects might be less desirable regulatory environment change? I can get the necessary than what the company had hoped. The portfolio of today, indicative of a Moreover, as described earlier, significant company’s current strategy, constitutes deals done for each before uncertainty is pervasive across industries a certain risk profile. Alternative portfolio I commit one way or the and geographies. An Advantaged Portfolio options present different risk profiles in prudently builds optionality into its portfolio both the nature and magnitude of risk. An other. I need the option to choices, thus enabling multiple potential Advantaged Portfolio is one whose feasibility go either way depending on routes to value in the future. Several tools and risk are more attractive than alternative can help create such optionality: portfolios, given the company’s ambition what we learn.” and risk appetite. • Stage-gating: mapping strategic choices —Chief Executive Officer, a company will have to make as various In this respect, a company should be Electronic Materials Company industry events occur or fail to occur (“if/ comprehensive in considering the types then”); of feasibility and risk (see Figure 8 below), • Defining transaction pathways: mapping recognizing many executive teams tend to alternative deal sequences a company underestimate the risk of the status quo could pursue depending on the success or and overestimate the risk of doing (or in this failure of specific desired acquisitions; and case, constructing) something different.19

• Identifying trend triggers: identifying the leading indicators of critical trends so a company can dynamically adjust a Figure 8: Sample Risk-Assessment Framework portfolio over time.

It might be asked whether building Sample dimensions Portfolio option X Portfolio option Y optionality runs afoul of the idea of commitment – the idea that you should Feasibility (pre-build) choose one path rather than many, and do Ability to Finance HIGH LOW the one thing well. In this case, the answer is no, because the optionality we are dealing Availability of Targets MED MED with here is different. Optionality in the Advantaged Portfolio sense involves hewing Antitrust Feasibility HIGH LOW to one path that has many forks, and taking Management Executability HIGH HIGH one of those forks when a defined event occurs. It helps keep a company on one Risk (post-build) path at a time, preventing it from “letting a thousand flowers bloom” with the attendant Competitive Reaction LOW LOW costs of watering them all. Technology Risk MED MED

Weighs Feasibility and Risk Regulatory Risk HIGH HIGH Ultimately, considering, constructing and refining a corporate portfolio is an exercise Capital Markets Reaction MED HIGH in weighing feasibility and risk. Feasibility addresses the challenges of constructing M&A Integration LOW LOW a new portfolio. Can we finance it? Does Macroeconomic Risk MED LOW management have the bandwidth to create

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Importantly, a company should address businesses: animation, parks and resorts, “We manage our business feasibility and risk both at the component cable channels, consumer products, and as a portfolio and believe and the portfolio or system levels. For interactive media. Its portfolio is strategically instance, the component parts of the sound—most of its five business units we are positioned very portfolio may be executable individually, are among the leaders in their industry, well to invest, innovate but may not be manageable in aggregate. and they are knitted together with clear Portfolio-level risks are not always, however, synergies. and balance risk with simply an aggregation of individual risks. performance during any Aggregate portfolio risk, for example, can For example, its animated characters be lower than the individual risk levels populate its theme parks, media networks economic environment. of the BUs, if the BU profit curves are and merchandise. And two recent This balance gives us a counter- cyclical or uncorrelated in nature acquisitions—Marvel and LucasFilm21— and effectively “smooth” the aggregate have not only advanced these cross-BU competitive advantage portfolio’s profit performance. synergies, but have reinvigorated the especially during times company’s innovation engine by injecting A Case in Point: Disney new characters and storylines. Disney’s when markets are in Disney is a notable example of a company portfolio is also value- creating, which the transition or seeing slower in which successive generations of capital markets have recognized. In the 20 executive management (starting from past five years,22 in fact, its share price has growth.” Roy Disney himself) have carefully risen more than twice as fast as the S&P considered, constructed and nurtured 500.23 Impressively, it has done so in a stable —John T. Chambers, Chairman and an Advantaged Portfolio. Leveraging its and consistent fashion over that period, Chief Executive officer, Cisco Systems historic core capabilities in character- demonstrating a great degree of resilience. development and animation, Disney has built very successful positions in five related

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Conclusion

An Advantaged Portfolio of businesses—one that is strategically In reality, developing an Advantaged Portfolio is more about sound, value-generating, and resilient—is at the heart of many creativity and optimization than linear calculation. It involves successful companies. The nine attributes we discussed illustrate viewing portfolio options through a wide array of lenses, as well as what an Advantaged Portfolio should look like, at least at the most evaluating both individual and system effects. And it involves using basic level for a typical company. They can serve as a valuable criteria tailored to the company at hand. Most of all, however, guide for executives in their ongoing work to define the businesses designing advantaged portfolios demands hard work: the hard in which they should participate and the ways in which they create work of wrestling with data, making trade-offs, and making tough value within and across their businesses. Of course, building an choices. In fact, in our view, management should be prepared to “Advantaged” portfolio is not easy. It is not a matter of assessing hold challenging, data-rich, iterative discussions about what to do things on just two or three dimensions. It is not simply a matter of (as well as what not to do) when creating an Advantaged Portfolio. evaluating the strength of individual businesses. Nor is it an Because at the end of the day, good strategy is all about choices. arithmetic or algorithmic exercise or a matter of applying a rigid set And making the right choices is fundamental to sustaining growth of criteria to all companies. and competitive advantage over the long term.

The Process of Building an Advantaged Portfolio Thus far we have focused on describing the characteristics of an Advantaged Portfolio to answer the question, what does it look like once I get there? The next obvious question, though, is how do I get there?

The short answer is that there is a welldefined process for creating an Advantaged Portfolio, and we call it StrategybyDesignTM. This portfolio-shaping process encompasses three major stages (see Figure 9): expressing or assessing a company’s current portfolio strategy; developing and choosing among alternative portfolio options; and finally, detailing and acting on the future strategy and its associated execution and change management requirements.

Figure 9: The StrategybyDesign TM Process

Current strategy Alternative strategies Future or emergent strategy

Express Assess Develop Choose Detail Act

The key to using this process effectively is to tailor it to the needs of the company at that particular point in time. Some companies need help simply articulating or expressing their portfolio strategy so management can align around it. Others need help assessing whether their current portfolio actually works and will continue to work in the future. Some need help generating options or choosing from among an already-agreed set of options. Others may just need help getting traction on a portfolio strategy they have already agreed to. And still others may need to work through the process from end to end. The best counsel on process is for executives to figure out where the company might be getting stuck across this spectrum of steps, and customize the portfolio-design process accordingly.

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End Notes

1. A different way of asking the question is how do we create value at the corporate level, above and beyond that which can be created at the business level? Or more succinctly, what is the value-add of the corporate center?

2. See, for example, A.G. Lafley and Roger Martin, Playing to Win (Massachusetts: Harvard Business School Publishing, 2013). This book outlines Monitor Deloitte’s approach to strategy definition and expression.

3. Through our experience over three decades with hundreds of multi-business entities globally whether they be public, private, family-controlled or state owned enterprises.

4. For example, one family-controlled company determined that stability of dividend income was a critical goal of the corporate portfolio; for a particular manufacturing company, reducing dependence on a scarce and volatile raw material input was paramount.

5. Bayer AG, “Product areas,” http://www.bayer.com/en/Subgroups.aspx, accessed February 24, 2015.

6. Seeking Alpha, “Royal Dutch Shell Management Discusses Q3 2010 Results - Earnings Call Transcript,” October 28, 2012, http://seekingalpha.com/article/233476- royal-dutch- shell-management-discusses-q3-2010-results-earnings-call-transcript?all=true&find=%22competitively%2Bpositioned%22, accessed February 24, 2015.

7. Michael E. Porter, Competitive Strategy (New York: The Free Press, 1980).

8. See Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter, Really?” Strategic Management Journal, Volume 18 (Summer Special Issue) 1997; and Gabriel Hawawini, Venkat Subramanian, and Paul Verdin, “Is Performance Driven by Industry- or Firm-Specific Factors? A New Look at the Evidence,” Strategic Management Journal, Volume 24 (2003).

9. Bansi Nagji and Geoff Tuff, “Managing Your Innovation Portfolio,” Harvard Business Review (May 2012).

10. Seeking Alpha, “Procter & Gamble’s (PG) CEO Alan Lafley Hosts 2014 Analyst Meeting (Transcript),” November 14, 2013.http://seekingalpha.com/article/2682815- procter- and-gambles-pg-ceo-alan-lafley-hosts-2014-analyst-meeting-transcript?all=true&find=%22innovation%2Bportfolio%22, accessed February 24, 2015.

11. In a recent survey of activists and corporations, respondents identified ten catalysts of shareholder activism, four of which are linked to portfolio configuration: acquisition announcements, strategic/ operational changes; asset sales, and spin-offs. Schulte Roth & Zabel LLP and Mergermarket, Shareholder Activism Insight, 2014.

12. “In Interview, Ghosn Mulls ‘Prize’ In Possible Alliance With GM,” Wall Street Journal. July 13, 2006. http://online.wsj.com/articles/SB115282069310906058, accessed March 18, 2015.

13. Remember that risk needs to be factored into these cash flows. This is done in two ways: 1) through the use of the weighted average cost of capital (WACC), which reflects the “systematic” or inherent risk of the industries in which a company plays; and 2) through the use of probability-weighted forecasts reflecting the company- specific risks of the future cash flows. Risk also needs to be addressed in a more qualitative fashion, as explained in the section on Resilience.

14. Howell, Robert, “The Two Most-Important Words for a CEO: Intrinsic Value,” The Wall Street Journal, November 25, 2013. http://blogs.wsj.com/experts/2013/11/25/ the-two- most-important-words-for-a-ceo-intrinsic-value/, accessed February 24, 2015.

15. Kohl, Geoff, “Brink’s to spin-off Brink’s Home Security” February 25, 2008.http://www.securityinfowatch.com/news/10561293/brinks-to-spin-off-brinks-home- security, accessed February 24, 2015.

16. Seeking Alpha, “Progressive Waste Solutions’ CEO Discusses Q1 2014 Results - Earnings Call Transcript,” April 25, 2014. http://seekingalpha.com/article/2166533- progressive- waste-solutions-ceo-discusses-q1-2014-results-earnings-call-transcript?all=true&find=%22best%2Bowner%22, accessed February 24, 2015.

17. In the context of scenario planning, “the official future” is the macro industry environment and competitive environment that the company’s management team believes is the most likely to emerge.

18. Seeking Alpha.“ConocoPhillips’ (COP) CEO Ryan Lance on Q4 2014 Results - Earnings Call Transcript,” January 29, 2015. http://seekingalpha.com/article/2865956- conocophillips-cop-ceo-ryan-lance-on-q4-2014-results-earnings-call-transcript?all=true&find=%22resilient%2Bportfolio%22, accessed February 24, 2015.

19. See, for example, Roger Martin, “Underestimating the Risk of the Status Quo,” Rotman Magazine, Spring 2007.

20. Seeking Alpha. “Cisco Systems’ CEO Discusses F2Q13 Results - Earnings Call Transcript,” http://seekingalpha.com/article/1182051-cisco-systems-ceo-discusses-f2q13- results- earnings-call-transcript?all=true&find=%22balance%2Brisk%22, accessed February 24, 2015.

21. Walt Disney Company, “Disney to Acquire Lucasfilm LTD,” October 30, 2012.http://thewaltdisneycompany.com/disney-news/press-releases/2012/10/disney-acquire- lucasfilm-ltd, accessed March 18, 2015.

22. From March 1, 2010 to March 1, 2015.

23. Nasdaq, “Walt Disney Company Historical Stock Prices” http://www.nasdaq.com/symbol/dis/historical, accessed March 18, 2015

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Winning in M&A How to become an advantaged acquirer

By Mark Sirower, William Engelbrecht and Steve Joiner

Mergers and acquisitions (M&A) continue can potentially avoid them by becoming 100 percent in phase four. This final phase to be a favored corporate development tool advantaged acquirers. is where many ill-advised and costly deals of executive teams, as evidenced by last are struck—often leaving a legacy of broken year’s record-setting level of deal-making. Merger wave challenges promises and lost value.6 By the end of 2015, companies had spent Merger waves happen when deal volumes some $3.8 trillion on M&A—the highest increase dramatically, crest, and then fall. The third challenge is a lack of options. amount ever—according to data compiled The first such period began in the 1920s Amid continued market volatility, there is by Bloomberg.1 And while M&A may not and ended with the Great Depression. concern that the US economy may not be continue at this pace, the trend seems far Subsequent waves occurred in the 1960s the driver of corporate growth that many from abating. Many companies intend to and in each decade since the 1980s. While had hoped. In such an environment—and continue combining for numerous strategic the reasons behind these merger waves often at the urging of activist shareholders— reasons, including expanding in existing vary, there are several common mistakes companies may turn to M&A in an effort to markets and gaining scale efficiencies, that acquiring companies often make during increase shareholder value simply because according to a recent Deloitte CFO Signals™ them. they believe they have no other choice. survey (see sidebar, “Reasons to deal”).2 Also, because deal-making has become so The first mistake is having anundefined common in certain industries–consumer 2015’s M&A volume indicates that we may growth strategy or one that does not products, technology, and health care, to be in a “merger wave”—concentrations of clearly consider the role that M&A will play name a few–various stakeholders, including accelerating M&A activity—possibly the in that growth–both of which can push investors and company boards, may favor sixth so far in the last century.3 While time companies into being reactive buyers. Some M&A over organic growth. will tell if we have crested the wave, this type companies unwittingly outsource their of heated pace can trigger buyer mistakes, growth strategy to investment bankers and, The potential benefits of being an such as deals that don’t fit strategically or as a result, end up reacting to available deals advantaged acquirer achieve anticipated benefits. Moreover, those intermediaries present instead of • Develop a better pipeline of priority premiums that acquirers agree to pay over proactively identifying viable candidates that targets as part of the company’s M&A the target’s pre-bid share price tend to support their strategic growth goals. While strategy. escalate as competition intensifies. that deal-making process is fairly common in the general M&A landscape, it tends to • Save tremendous resources by not Amid such deal exuberance, it may benefit be magnified during merger waves, as more focusing on inappropriate deals. companies to not only become an acquirer, inexperienced acquirers enter the arena, • Be less driven by someone else’s (e.g., but to become an advantaged acquirer. making capital investments they weren’t competitor) timing and rush to close. Several factors that have been driving making before, and experienced players • Understand which auctions are most M&A for the last few years—low interest expand their risk profiles in the search for important and which should be avoided. rates, accessible and inexpensive financing, attractive targets. healthy balance sheets, and a U.S. economy • Raise diligence and integration issues that’s growing at less than four percent Overpaying is another mistake that before valuation and negotiation begin. 4 annually—remain intact. Winning and often happens as deal volume escalates. • Use landscape education process to creating value in this environment may Academics Peter Clark and Roger Mills argue reassess growth pathways and alternative require something more: a set of detailed that there are four distinct phases in merger transactions. action steps to help companies proactively waves, as reflected in assets’ purchase • Build credibility with the board and identify and transact strategic deals rather prices.5 Bid premiums in phase one have efficiently move targets through the than reactively pursue disparate, ad hoc averaged just 10-18 percent during merger pipeline. opportunities. This article examines some waves since 1980; premiums rise to 20-35 common buyer mistakes during merger percent in phase two, reach beyond 50 Source: Mark L. Sirower, “Becoming a Prepared waves and suggests ways that companies percent in phase three, and may surpass Acquirer,” Corporate Dealmaker, June, 2006 19 M&A Making the Deal Work | Strategy

Characteristics of the advantaged 3. Competitor signaling. It’s important Reasons to deal: Why will CFOs pursue acquirer to look at competitors’ strategic intent. M&A? A large percentage of M&A transactions Much can be learned from examining The case for 2016 do not deliver the value promised at the competitors’ M&A deals over the last In Deloitte’s Q4 2015 CFO Signals report, time of the deal.7 Acquiring companies several years in terms of geographies, some 63 percent of CFOs indicated that that avoid this fate—particularly during capabilities, size, product or service they expect to pursue M&A deals in 2016. merger waves—tend to have a disciplined offerings, and targeted customer Among them, however, there is considerable process that enables them to identify segments. Call it competitor signaling– diversity of purpose; sometimes reflecting value-creating targets and avoid the likely past behavior will often foreshadow industry differences but often reflecting underperformers, thereby maintaining a which acquisition targets may be next company-specific factors: competitive edge and delivering shareholder on their priority lists. Armed with that value. The tenets of this process typically information, an advantaged acquirer can • M&A deals serve multiple purposes: include the following: often determine if a deal it is considering CFOs selected an average number of 2.6 does or does not make sense, or purposes for M&A, indicating significant 1. Self-assessment. A company’s whether to begin preparing for a battle breadth in expected outcomes. Just 17 executive team members should on a priority deal. percent of CFOs selected only one purpose assess the organization’s strengths, (most often to diversify their customer weaknesses, and opportunities for 4. Strategic screening. Once they base or to obtain bargain-priced assets), growth, both in revenue and value. This identify the universe of opportunities, and 29 percent selected just two purposes may include deciding which customer advantaged acquirers strategically (expanding and diversifying their customer segments and associated geographies screen them. While M&A strategy helps base or diversifying their customer base are most attractive to serve and how to to develop prioritized pathways for and pursuing scale efficiencies). do so in ways that competitors cannot growth, target screening filters the deal • Heavy growth focus: About 54 percent easily replicate; and understanding the universe in those pathways to generate of CFOs selected expanding in existing capabilities and market access required portfolios of priority candidates. These markets, and 51 percent selected to achieve those goals. Essentially, filters may include everything from size, diversifying into new markets (27 percent a company should develop an M&A geography, and customer segments to selected both). Overall, 80 percent of strategy to complement strengths and technology and talent. Management respondents selected at least one of these backfill weaknesses. A company that may debate what the strategic priorities growth purposes. Those who didn’t select hasn’t gone through that process will are along those pathways; however, the growth tended to pick a combination of likely trap itself into being a reactive filters are important strategic choices pursuing synergies and scale efficiencies, acquirer, working backward from the that can help senior executives and the with a significant number selecting deal into a strategy. board to understand why a particular obtaining bargain-priced assets. priority target was identified in the first • Heavy scale efficiency focus: Sixty 2. Identified priority pathways. place. As one Fortune 100 executive told percent of CFOs selected pursuing scale Advantaged acquirers which have us, “The more you look, the more you efficiencies; only one percent solely conducted a careful assessment know find; the more you look, the more you selected this purpose. Among CFOs not what their M&A priorities are. In other learn; and the more you look, the more citing scale efficiency, 40 percent chose words, they know if M&A is going to you test your strategies.” pursuing synergies, half chose growth in comprise 10 percent of their growth, current markets, and 54 percent chose 20 percent, or more. As part of the 5. Disciplined execution. Advantaged growth in new markets. process, they likely have identified acquirers consider integration to be an • Vertical integration and consolidation priority pathways at the business-unit essential element of target identification synergies: About half of CFOs selected (BU) level that address new products and prioritization in the transaction pursuing synergies. More than 80 percent or solutions they will bring to market at execution process. For example, if the of these CFOs also chose a growth prices that will add value for customers. potential for difficult culture issues, purpose, selecting expansion in existing Corporate-level growth expectations such as compensation, autonomy, labor markets (which suggests possible vertical can be de-averaged to the BU level and disputes, or distribution gaps exist in a integration strategies) or pursuit of scale used to highlight gaps and prioritize the particular deal, acquirers should factor efficiencies (which suggests possible role of M&A across those units. Without them into the screening process. It can consolidation strategies). that prioritization, you can likely expect be extremely difficult to analyze synergy • Bargain-priced assets often an add-on to face a reactive political process– potential or conduct a detailed valuation benefit: Thirty percent of CFOs selected with various business executives without evaluating such integration risks obtaining bargain-priced assets, and championing their favorite deals versus and determining if the right resources almost all of those also chose at least two potential deals that are in the best and talent are available to integrate the other purposes—implying bargain-priced interest of the BU or the company. acquisition effectively. assets are often a secondary (or even tertiary) benefit of M&A deals rather than the primary benefit.

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What will be the purpose of your M&A deals for 2016? Percentage of CFOs selecting each purpose (N=70)*

Pursue scale efficiencies Pursue scale efficiencies

Expand customer base in existing markets Expand customer base in existing markets (current (current geographies and products/services) geographies and products/services)

DiversityDiversity customer customer base viabase new via markets new markets (new geographies(new geographies and/or products/services) and/or products/services)

Pursue synergies

Obtain bargain-priced assets Obtain bargain-priced assets

Respond to investors' demand for revenue growth Respond to investors' demand for revenue growth

0% 25% 50% 75%

*Results are only for the 63% of CFOs who expect M&A deals in 2016. Source: CFO signals, Q4 2015, January 2016, US CFO Program, Deloitte LLP.

Executive teams bring discipline and accounting, technology, operations, strategy, that strategy if the target was acquired patience and human resources to make sure that by a competitor. There may be times To be strategically sound, portfolios In our acquired assets are integrated properly. when it is in a company’s best interest for experience, advantaged acquirers use the Finally, they can demonstrate patience by competitors to capture the prize because above process to develop a watch list of having strategic alternatives in case anything of the time it will take to integrate the opportunities that they continually refresh. goes awry. Along the way, these executive acquisition or the limited value it adds in They also tend to close just a small fraction teams are often guided by several common certain markets. of the potential deals on that list. As long- questions: • Do we have the appropriate integration term successful acquirers, they regularly • Are we looking at the right deals? Being capabilities? Can we execute this strategy talk to and negotiate with companies but an advantaged acquirer ultimately with the resources we have? It’s often the only pull the trigger on deals that fit their means knowing the potential targets financial team’s responsibility to not only overall strategy at appropriate valuations. most important to the company. That identify what financial resources should In addition, their senior executives typically involves understanding the universe of be allocated to the transaction, but also bring both discipline and patience to the opportunities so a company is not in the what talent is needed–and the cost of that process. Specifically, executive teams act as position where an investment banker or talent–to integrate the target properly. stewards by determining whether a specific seller proposes a deal the company hasn’t • What can we walk away to? A company deal fits the company’s agreed growth already considered. strategy and operating plans. They do so by should always have a best alternative to sticking to their defined rationale and not • Have we measured the transaction’s every deal. As premiums rise, executive becoming overly enamored of a particular potential impact on ourselves—and our teams should be in a position to decide if target so that its acquisition could harm the competitors? Acquiring companies should it is better to buy at 50 times earnings or company. Moreover, executive teams can conduct scenario planning to measure walk away and do something else with the help bring discipline to the M&A process by how a potential deal could support overall capital. assembling the right people in finance and strategy, as well as how it could impede

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Many senior executives complain that they Leveling the playing field: Tips for mid- • Build a reputation as an “acquirer of have trouble finding quality assets. One sized companies choice”–Sellers prefer being acquired by of the other demonstrated benefits of M&A deals typically fall into the hands of companies that will accelerate their value- being an advantaged acquirer is that these serial acquirers, large companies which creation trajectory, a consideration that quality assets typically find the acquirer as have developed this core competency, is often as important as price (especially it uncovers the universe of opportunities in understand how to strike deals, know how if the target’s management remains in the market. This holds true for companies to translate them into shareholder value place or has a continuing financial interest of all sizes (see sidebar, “Leveling the playing and, thus, have greater success winning bids. in the company). Building a reputation as field”). Once a company has completed its Companies with scale can seemingly afford an acquirer of choice takes time, but can self-assessment, strategy development, to take larger risks and pay higher prices. start with communicating the company’s target identification and prioritization, the Given this landscape, it can be challenging value proposition, strategic intent, and viability of a particular deal should become for mid-size companies to prevail in the corporate culture principles. increasingly clear. And if a deal does not M&A auction process, where they often face • Be a serious and engaged buyer–Sellers meet agreed-upon parameters, there is unique challenges, including: limited M&A gravitate to buyers that create certainty. often an option to walk away and pursue experience/skill sets, constrained access Mid-size companies should be prepared other high-priority deals on the watch list or to capital, and potential internal resistance to explain a well-designed deal rationale to reapply the funds to other segments of from boards unwilling to approve high and integration strategy to the target’s the business. After all, advantaged acquirers valuations or take on perceived risk. In short, management. Buyers should actively can afford to be patient—they know what mid-sized organizations typically appear participate during due diligence, asking they want. outgunned–however, they may significantly the right questions, and proactively improve their odds of winning by following addressing the seller’s integration the first principle of an advantage acquirer– concerns. Prudent use of experienced self-assessment–and doing the following: external advisors can augment internal • Prepare to make smarter and bigger M&A capabilities, aid preparation and bets–Being crystal clear about which professionalism, and raise the buyer’s level targets are absolute “must-haves” may of credibility and certainty. enable a mid-size buyer to engage in an exclusive deal, avoiding the auction While mid-sized companies will often feel process altogether. If the target does call like M&A underdogs, they can tip the odds in for an auction, defining the unique value their favor and, in doing so, be positioned to proposition for these assets and the win a greater share of the acquisitions they strategic trade-offs may bolster company pursue. confidence to pay higher premiums.

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End Notes

1. “2015 Was Best-Ever Year for M&A; This Year Looks Good Too,” Bloomberg, January 6, 2016, http://www.bloomberg.com/news/articles/2016-01-05/2015-was-best- ever-year-for-m-a-this-year-looks-pretty-good-too.

2. CFO Signals, Q4 2015; http://www2.deloitte.com/us/en/pages/finance/articles/cfo-signals-survey-executives-sentiment-betting-america-despite-concerns-2015q4. html.

3. “Riding the wave,” The Economist, http://www.economist.com/news/business/21587207-corporate-dealmakers-should-heed-lessons-past-merger-waves-riding- wave, October 2013.

4. “National Income and Product Accounts: Gross Domestic Product: Fourth Quarter and Annual 2015 (Second Estimate),” Bureau of Economic Analysis, http://www. bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm, February 2016.

5. “Masterminding the deal: Breakthroughs in M&A strategy and analysis,” Peter Clark and Roger Mills, Kogan Page, August 2013.

6. Masterminding the deal: Breakthroughs in M&A strategy and analysis, Peter Clark and Roger Mills, Kogan Page, August 2013: (Original source of acquisition purchase premium (APP) percentages, Beyond the Deal: Optimizing Merger and Acquisition Value, see pp 20-23, 47-54; Harper Business, 1991.)

7. “Integration report 2015:Putting the pieces together;” Deloitte LLP, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-ma- integration-report-030415.PDF

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Due diligence for synergy capture Building deals on bedrock

By Mark Sirower

As corporations and private equity (PE) pre-close, and the resulting integration Synergy-capture diligence by the firms consider mergers and acquisitions slowdown causes confusion and angst in the numbers that will combine operations, they generally workforce. Questions then surface about Acquirer management teams should rely on high-level, top-down assumptions the credibility of the deal’s true value or, consider structuring a bottom-up approach to identify cost synergies that are built into even worse, the deal’s overall investment to synergy-capture diligence that tests initial valuations. Yet these same organizations thesis. top-down assumptions about synergies and are often surprised when assumed post- builds a blueprint for accelerating synergy deal operational improvements aren’t as Synergy-capture diligence, a bottom-up capture during post-merger integration. significant as planned or take longer than approach that puts management’s skin in Based on Deloitte’s work with clients in expected to realize. the game early on, can help identify where numerous industries, we have identified specific cost reductions may be achieved. five steps in the “diligence and plan” process Acquirers typically spend three to four Such diligence can help justify valuations (Figure 1): weeks on financial accounting diligence to and drive early alignment around the normalize EBITDA and commercial diligence new operating model for the combined that tests the real market opportunity and businesses. customers’ satisfactions and dissatisfactions with the target. Unfortunately, diligence Pre-close synergy-capture diligence may teams often gloss over cost reductions that enable acquirers to avoid predictable are perceived as easy to achieve–the “magic problems such as: 10 percent.” Yet this oversight can have • Planning delays, lack of management huge ramifications on realized value and focus, and unrealistic integration management credibility if those synergies schedules do not occur or are delayed. Prospective acquirers may be able to negate this issue • Failure to think through costs that will be by performing synergy-capture diligence–a incurred to achieve each benefit vital piece of operational due diligence that • Deal team vulnerability to increase the bid can be done alongside typical financial and price without a credible fact base commercial diligence. • Lack of accountability for specific The story is a familiar one. Post-close, when synergies and no input from management an acquirer needs to quickly launch critical about responsible parties integration activities around geographic, • Little consideration of scenarios that might headcount, and functional alignment, the help or hinder projected performance executive team belatedly realizes that improvements, often leading to surprises projected cost reductions have not been fully tested and related decisions have not • Delayed attention to customers and been made. What often happens next? revenue-generation, opening the door to Integration teams are forced to perform competitor actions diligence that should have taken place

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Figure 1. The Synergy-Capture Process

Execute

Launch and monitor synergy Diligence and Plan achievement • Facilitate organizational decisions Initiate “Bottom-up” analysis and develop detailed operating model • Create consistent cost and “Top-down” analysis functional baselines • Plan synergies customize synergy tracking tools, and develop Segment and prioritize synergy • Develop synergy targets based on • reporting templates high-level review of company P&Ls opportunities • Implement specific projects and Quantify specific benefits costs and • Validate synergy estimates based on • monitor synergy realization industry deal data or past owner of each opportunity experience • Provide periodic reporting to Develop new financial model • Acquirer senior management • Create synergy—capture blueprint

1. Create consistent cost and functional 3. Quantify specific synergy opportunities 5. Create a synergy-capture enterprise baselines. The acquirer’s management and cost-to-achieve by functional area. blueprint and integration road map. team should begin by gathering profit Through detailed interviews with An enterprise blueprint is a definitive & loss (P&L) data from recent financial executives and functional leaders, the statement of how the new organization statements for both companies to acquiring company should next identify should operate to achieve the deal’s view the total “pie” and normalize the redundancies across all functional intended business results. Developing statements by removing one-time, support areas for Phase I synergies. This this blueprint is a critical final step nonrecurring costs. The team can use helps to build the new organization from in the “diligence and plan” process this information to create a consistent the ground up, identifying responsible because it functions as a road map–with baseline that maps the cost pools parties who are “signing up” for the plan. milestones, dependencies, and potential from the combined P&L to specific Other parts of this step are determining bottlenecks–guiding the organization functional areas such as finance, HR, and the costs to achieve synergies, such from overarching deal rationale through marketing. as severance pay, lease termination, post-deal value-capture measures. and other one-time exit costs; and While the combined organization’s 2. Segment and prioritize synergy identifying additional overhead cost end-state vision likely will evolve as opportunities. Team members should pools that may have been missed in new information is assimilated during make initial hypotheses about synergies initial assumptions. the M&A transaction, an enterprise that can be realized quickly (Phase blueprint provides a valuable frame I)–such as full-time-equivalent (FTE) 4. Develop new financial model and explain of reference for focusing the entire rationalization, corporate insurance, variances from initial assumptions. The organization on desired results. public company costs and audit fees, buyer’s management team can use and management overhead. Also the bottom-up cost-reduction and important are hypotheses about cost-to-achieve estimates to develop a synergies that require additional new financial model and resulting P&L information (Phase II), such as to present to the company’s board of information technology (IT) and directors. The model should identify customer relationship management and explain all variances–positive and (CRM) consolidation, fleet and vendor negative–from the initial top-down rationalization, and corporate facilities analysis. and customer service site rationalization.

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The economics of M&A deals are • The evaluation encompassed G&A and Value achieved support-function cost elements–for straightforward: the cost-of-capital clock • Our client identified approximately $150 example, operations, finance, marketing, begins ticking the moment capital is million more in incremental synergies than and HR–where a “bottom-up” analysis was invested. As a result, unexpected and initial estimates, and also front-loaded conducted. needless delays in realizing synergies can synergy capture to 50 percent in the first become costly to investors. By following the • We gathered financial data and conducted year. above steps to pre-deal synergy-capture interviews with senior executives to • We helped the client determine a diligence, acquirers should be able to provide estimates of net efficiency purchase price that was accretive for surpass traditional testing of top-down gains focused on: reducing headcount investors, and our work helped boost cost reduction assumptions, whether redundancies–for example, two operators management’s confidence and clarity they are provided by bankers or based serving customers in the same region; regarding objectives for jump-starting the on past industry experience. This process consolidating span of control and reducing synergy-capture process. also encourages relevant management redundant senior management positions; involvement, input, and personal and identifying new synergy opportunities Practical lessons for working with buyer commitment from the outset. not previously considered–for example, and target teams (See: “Practical lessons for working with inclusion of corporate insurance and audit buyer and target teams.”) It stress-tests fees. the valuation according to size, timing, and Potential implications for the buyer investment required to achieve specific Value achieved • Assembling the right team: Numerous target cost-reduction targets, and is designed company functional areas may offer post- • Our client identified 50 percent more to generate a flexible financial model to deal synergy opportunities. It is critical, incremental synergies than its previous accommodate new information as it is therefore, that buyer team members top-down synergy estimates indicated revealed. who are conducting the pre-deal synergy would be possible. assessment be knowledgeable about Because responsible functional parties those functions. Pre-deal synergy validation: Life are identified along with specific synergy sciences tools company initiatives, senior management can focus • Gaining rapid access to internal data: A much earlier on the new end-state operating Business issue –Validate and refine the buyer may miscalculate the time required model, serving customers, and preserving client’s synergy opportunities by cost pool to gain access to their internal data, which and growing revenue–the life blood of any and function for its acquisition of a target may slow analyses that require financial acquisition. twice its size in terms of revenue. information from both target and buyer. Product purchase and selling prices, Synergy-capture diligence in action Scope and approach detailed functional cost breakdowns, and other internal data are typically required The following examples illustrate how • Deloitte supported the executive team’s to build functional baselines and assess Deloitte’s synergy-capture diligence pursuit of a life-event transaction for the potential synergies. professionals have supported organizations acquirer by conducting pre-deal synergy in their efforts to determine realistic identification to inform the deal valuation. • Appreciating synergy-realization challenges: synergies, costs to achieve those synergies, A buyer’s M&A team may underestimate • We engaged both acquirer’s and target’s early blueprints for end-state operating the time and costs required to achieve functional leaders in validating and models, and tactical steps for effective anticipated synergies as well as quantifying synergies across COGS, R&D, translation of the strategy into execution overestimate run rate benefits. A senior sales and marketing, and G&A with timing during the integration process. executive should play the “pressure- and cost-to-achieve considerations, testing” role across each function before Pre-deal synergy assessment: Regional thereby facilitating leaders’ buy-in on synergy assumptions are built into utilities company synergy targets. valuation models. Business issue–Assess the client’s synergy • In complete confidentiality, Deloitte • Safeguarding deal confidentiality:One of estimates for its largest-ever potential provided pre-deal support to both the common challenges of performing acquisition. acquirer and target from pre-signature–45 bottom-up synergy diligence is days prior–through announcement date. Scope and approach maintaining deal confidentiality. Because this is essential, the buyer’s diligence team • Deloitte supported the executive team should be as small as possible. Where it is by performing due diligence to validate not possible to have representatives from its synergy estimate and update the each function, external advisors can help company’s final bid. fill any gaps. 26 M&A Making the Deal Work | Strategy

• Building a flexible synergy model: The • Coordinating with the entire diligence team: possible headcount reductions; or pricing synergy team should build a flexible Buyers only get so many opportunities to information for potential cross-selling financial model that accommodates interact with target management, so it is initiatives. Management teams can multiple scenarios (e.g., initial estimates, important that the synergy, accounting, use external advisors to help manage worst case and best case). As commercial, and operational due diligence confidentiality concerns related to this management uncovers new information teams are coordinated. That enables the information and help avoid potential throughout the diligence process, having buyer to leverage data already captured antitrust issues. a flexible model can help the team quickly from the target. • Assisting the target with data preparation: adjust the high and low ranges by function • Asking questions that yield unbiased answers: Tactfully communicating the buyer’s and facilitate discussions about which Cost synergies can be a sensitive subject, knowledge about the target company’s cases are most realistic for each function. so questions should be phrased to elicit information technology (IT) systems unbiased responses from the target’s and data sources, such as enterprise Potential implications for the target executives. For example, rather than resource planning (ERP) systems and data • Requesting and prioritizing data: Because asking about poor performers, questions warehouses, may help to expedite the rapid access to target data is critical could focus on current employee data-gathering process with the target’s during a pre-deal synergy assessment, evaluation policies and recent results. employees. establishing a quick, simple, and trackable • Accessing confidential and sensitive data: data request process will help the buyer Bottom-up analyses of cost and revenue team avoid delays and missed data as it synergies often involve accessing becomes available. Prioritizing requested sensitive target company information. data enables the target’s management to This may include employee salaries, focus on and invest time in providing the hire dates, and termination policies for most important data first.

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Deal-making in downturns The “big, black cloud of slowdown” has a silver lining By Bruce Brown, Raghav Ranjan, Will Engelbrecht and Tanay Shah

Market downturns can deliver disguised miss downturn-driven opportunities to “buy Why do savvy shoppers wait for clearance sales M&A opportunities that create value for value” at lower market premiums and before making large purchases? and drive long-term growth better interest rates, which could position Words like “downturn,” “recession,” and them for long-term revenue growth and cost Why do bargain hunters line up outside the “slowdown” may send a cold chill down the synergies. electronics store the night before Black Friday? spines of most company executives – and rightly so, since they are widely associated While select corporate “strategic shoppers” Why does a league-leading baseball player wait with periods of stunted growth and poor understand that market downturns1 present for a curve ball before swinging for the fences? performance, and may lead to pay cuts, an opportunity to acquire companies that layoffs, and cost-reductions. However, are heavily leveraged or poorly managed, Why does stock price increase when the buyer’s within the big black cloud of an economic more often, Private Equity (PE) players take acquisition bid is perceived to create value? slowdown there is a silver lining; an advantage of this approach. In fact, in the opportunity that many organizations fail to early 2000s, PE groups increased their M&A ………..They are all making acknowledge, let alone seize. During market activity during the economic slowdown, in EFFECTIVE USE OF TIMING downturns, strategically focused companies contrast to corporate M&A activity (Figure can challenge the status quo and disrupt 1). During the financial crisis of 2007-2009, stagnant thinking by using mergers and PE firms initially slowed their M&A activity, acquisitions (M&A) to create new avenues only to crank it up again as they recognized for significant growth, shareholder value, the value presented by lower valuations. and competitive advantage. This is because a slowdown in economic activity may present a much more significant Common wisdom holds that acquisitions challenge for smaller or underperforming should be pursued when the economy is companies versus their larger and better- strong and companies are flush with cash, capitalized competitors, resulting in a strategy termed “buy rich.” However, by opportunities for consolidation, distressed solely following this path, companies may sales, and buyouts.

Figure 1: M&A Activity among Private Equity groups

Number of Deals

3,000 2,500 2,000 1,500 1,000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

Source: Deloitte Internal Analysis 2016

28 M&A Making the Deal Work | Strategy

Economic slowdowns also ma y be an due to decreased interest rates. Figure 2’s opportune time for larger and well- charts show that interest rates can drop capitalized manufacturers to go shopping, significantly during periods of downturn. as they can acquire smaller players at a Deloitte analysis shows that over the past reduced market premium and recoup a nine recessions, the Effective Fed Funds rate significant return on investment (ROI) from has dropped by 390 basis points, on average their M&A plays. Furthermore, companies (Figure 2). Lower interest rates reduce can raise capital to fund M&A transactions the cost of debt and make downturns an by shedding underperforming assets or opportune time to increase M&A activity. taking advantage of cheaper debt financing

Figure 2: Interest rates during downturns

Late 1950s Early 2000s Early 2000s 2008-09 Great Recession Recession Recession Recession 10% 10% 10% 10%

5% 5% 5% 5%

0% 0% 0% 0% Interest Rate Interest

Source: Deloitte Internal Analysis 2016 Note: Recession is defined based on the National Bureau of Economic Research

Whether companies overpay or underpay term and strategic perspective. Hence, a that overall valuations are lower during for an acquisition is typically measured “cleaner” premium or discount for a deal downturns (Figure 3). This is because asset by the 30-day Average Market Premium. is better understood by measuring the values are depressed and premiums may During the onset of an economic downturn, market premium within the context of also be reduced as a reflection of risk and the premium typically dips, indicating market valuations. The Acquisition Price uncertainty. In the 2001 recession, the lower valuations. During the downturns Index, defined as the product of the 30-day Acquisition Price Index (Figure 3) dropped starting in 2001 and 2007, the premium Average Market Premium and S&P 500 more than 10 percent. This discount was dropped significantly from the previous index, represents the normalized acquisition even more apparent during the Great year and well below the long-term average premium paid for a deal, factoring in Depression of the 1930s, when the Index of 27 percent. However, market premiums both the lower asset value and the lower dropped more than 30 percent below are factored on an asset’s market value, premium produced by slower expected its peak, only to rise by more than 70 which itself often drops drastically during growth and greater uncertainty. percent four years later. The deflated a downturn. This means that the same Acquisition Price Index/reduced premium business that previously was valued Upon examining market premiums in on transactions makes downturns an much higher by capital markets may be conjunction with the broader market’s opportune time to shop for deals. perceived as less valuable in the downturn, underlying value, represented by the rewarding investors who bring a long- Acquisition Price Index, it is apparent

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Figure 3: Acquisition Price Index during downturns

Acquisition Price Index S&P500 Index * Avg. 30 Day Market Premium

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 Index Value Index 0 2000 Q1 2000 Q3 2001 Q1 2001 Q3 2002 Q1 2002 Q3 2003 Q2 2004 Q1 2004 Q4 2005 Q2 2005 Q4 2006 Q2 2006 Q4 2007 Q2 2007 Q4 2008 Q2 2008 Q4 2009 Q2 2009 Q4 2010 Q2 2010 Q4 2011 Q2 2011 Q4 2012 Q2 2012 Q4 2013 Q2 2013 Q4

Year

Source: Deloitte Internal Analysis 2016 Note: Timeframe of 2000-13 was selected for this analysis to assess M&A activity and market trends in the period leading to economic recessions, and until the effects of slowdown were fully observed or neutralized

Making acquisitions by leveraging low Looking at the 20 largest acquisitions that recessions have outperformed the S&P 500 interest rates and lower valuations took place during the 2001 and 2008-09 index over the period. In other words, the during a downturn has the potential to recessions, acquirers subsequently have stock markets also reward those companies generate significant shareholder value exhibited substantial upticks in their stock that demonstrate the courage to make by enabling companies to compete more price (Figure 4). Across industries, many buyouts during a recession. effectively in the broader market. large players who made acquisitions in

Figure 4: Market returns for largest public acquirers during 2001 and 2008-09 recessions

Stock Returns Since 2001 Stock Returns Since 2008 400% 900% 350% 800% 300% 700% 250% 600% 200% 500% 150% 400% 100% 300% 50% 200% 0% 100% -50% -100% 0% PG GE JNJ PEP DIS JPM SLB CCL ABT VLO COP MO BMY DUK DVN NEM MDT NOC PFE PEP BHI FTR JPM DAL PNC BAC RSG CME NOV MRK WFC ATVI DOW AMGN ORCL BRK.B CMCSA

S&P 500 Return Over Same Period 2001-2016 S&P 500 Return Over Same Period 2008-2016 Average Return of Select Group Average Return of Select Group

Source: Deloitte Internal Analysis 2016

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Undoubtedly, downturns create heightened There is a significant uptick in volatility downswing in the S&P 500 index) offsets uncertainty, which can ultimately impact during downturns, as illustrated by the the heightened risk (indicated by an valuations and potentially challenge the surging VIX index of 2001-2002 and 2008- upswing in VIX index). For example, the VIX rationale for a buyout. The Chicago Board 2009 in Figure 5. Furthermore, there is volatility index rose from 23 in 2000 to 27 Options Exchange (CBOE) Volatility Index an inverse correlation between the CBOE in 2002 while the S&P 500 index dropped (VIX) is a widely used measure of market risk VIX and the S&P 500 indices. A higher from nearly 1500 to 800. In other words, that is often referred to as the “investor fear CBOE VIX index and a lower S&P 500 index increased volatility during downturns gauge.” It is a forward-looking expectation would imply lower valuations during times allows for a shift in bargaining power, better of 30-day volatility, constructed from the of increased uncertainty. This begs the enabling acquirers to negotiate favorable implied volatilities of a wide range of S&P question of whether companies can take terms and valuations. It’s only natural to fear 500 index options (both calls and puts). advantage of this increased volatility during downturns, but organizations that overcame Some key insights can be gleaned by downturns to acquire at reduced valuations. that fear and engaged in M&A were evaluating the average CBOE VIX during An interesting pattern that emerges is rewarded with returns that outweighed the downturns. that eroding market value (indicated by a risk.

Figure 5: Comparison of Avg. CBOE Volatility Index vs. S&P 500 Index

Source: Deloitte Internal Analysis 2016

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The following perspectives on the Mining, • Larger mining companies are selectively Automotive, and Industrial Products acquiring smaller ones that are struggling industries illustrate how companies have to stay profitable as commodity prices fall capitalized on downturns to drive significant strategic value. During 2013-2015, the mining industry was still responding to slower GDP growth in What’s happening across industries? late 2012. Recent M&A activity suggests that companies may be purchasing targets when Spotlight: Mining earnings expectations are higher, which may result in overpaying or eventual write- • Weaker global demand since 2014, downs. Therefore, if miners focused on M&A especially in China, has led to a decline activity in the midst of downturns rather in commodity prices and mine closures than, say, six months after conditions are throughout the world, including South improving, they could achieve higher returns America, Southeast Asia, and Australia. on their acquisitions. Environmental regulations have also driven the closure of coal mines in the US and Europe, as developed countries shift to cleaner energy sources

Figure 6: Value & Count of Mergers & Acquisitions in Mining against OECD growth (2010-13)

Source: Deloitte Internal Analysis 2016

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• Most Mining industry M&A deals since 2006 have involved companies based in Canada, Australia, the US, and China (Figure 7).

Figure 7: M&A Deals in Mining by geography

Source: Deloitte Internal Analysis 2016

• Deloitte analysis shows that many mining equipment manufacturers are forming alliances with suppliers to offer a full portfolio of parts and services to their customers globally. For example, one of the largest mining equipment manufacturers has more than 40 alliance partners that provide mines with products ranging from lubricants to safety technologies.

Situation How to derive value?

Mining companies and • Larger, cash-rich companies could use the downturn as an contractors, particularly opportunity to buy struggling players in anticipation of the smaller players, are mining industry reviving in 2017-18. undergoing significant financial and operating • Such acquisitions could be funded by trimming stress. underperforming mining assets or using leveraged financing that takes advantage of lower interest rates.

• Mining equipment OEMs can dip further into their alliance programs and offer a host of equipment and services to large miners looking to consolidate vendors.

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Spotlight: Automotive

• Deloitte analysis shows that some/ many/ most automotive suppliers and original equipment manufacturers (OEMs) that aggressively cut costs during the 2008-2009 economic downturn are consolidating to bolster competitive advantages and better leverage global platforms.

• Economies of scale and global leadership are key drivers of merger and divestiture activity among auto suppliers.

• Transaction value has fluctuated over the past four years while deal volume has remained relatively constant (Figure 8).

Figure 8: Value and Count of Mergers and Acquisitions in Automotive (2010-13)

A. Most Automotive industry M&A transactions since 2006 have involved companies based in the US, followed by Germany and China.

Source: Deloitte Internal Analysis 2016

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Figure 9: M&A Deals in Automotive by geography

Source: Deloitte Internal Analysis 2016

Situation How to derive value?

The global Automotive • While market premiums are high, automotive players may industry, particularly in the consider divesting underperforming or non-core businesses US, is growing where they don’t expect much growth. tremendously and posting significant profits since it • They could then focus on strategic initiatives to expand market was paralyzed in the most share and grow their customer base. recent downturn • Further, they may make investments to gain competitive advantage in their core businesses, either organically or through acquisitions.

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Spotlight: Industrial Products • Notable heavy equipment manufacturers have been pursuing innovations such as • Cost-cutting measures and slow global next-generation Underground Mining growth have driven Industrial Products Equipment through joint ventures and companies to pursue deals in high-growth alliances. Such moves are occurring sectors, such as alternative energy. as the Mining industry is at an all-time • Similar to the Automotive and Mining low, which illustrates the resolve and industries, some Industrial Products strategic thinking of OEMs to invest in core companies are consolidating to take high-growth areas during a downturn in advantage of economies of scale and anticipation of long-term returns when the reduce costs. market recovers.

Figure 10: Value and Count of Mergers & Acquisitions in Industrial Products (2010-13)

• The majority of Industrial Machinery M&A deals since 2006 have occurred in the US, Germany, and Britain (Figure 12).

Source: Deloitte Internal Analysis 2016 Note: Timeframe of 2010-13 was selected for this analysis to assess M&A activity and market trends in the period leading to economic recessions, and until the effects of slowdown were fully observed or neutralized

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Figure 11: M&A Deals in Industrial Products by geography

Source: Deloitte Internal Analysis 2016

Situation How to derive value?

Industrial Products • Companies could consider this a potential restructuring manufacturers are under opportunity to gain operational efficiencies or economies of tremendous pressure to scale among their related businesses. manage costs effectively while serving rising global • Further, consolidation of their businesses could position them demand as “one-stop-shop” preferred vendors to better serve OEMs that are looking to streamline suppliers.

• Industrial Products manufacturers that are not as diversified could grow their portfolio by acquiring businesses that deliver economies of scale.

Source: Deloitte Mergers and Acquisitions Communications Playbook

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How does a company capture value in A. Optimize portfolio & free up capital downturns? by divesting non-performing assets PE firms and corporate leaders that B. Discipline spending and costs of regularly employ the following two remaining portfolio to increase asset approaches should be well-positioned to productivity leverage organizational performance during C. Reinvest capital in new growth a downturn and capitalize on the ensuing targets leveraging lower prices economic recovery. during the slowdown

1. Target inorganic growth Companies that use the three-step framework depicted in Figure 12 that focuses on inorganic growth can evolve their business models as needed to pursue acquisitions in high-growth areas. Steps include:

Figure 12: Deloitte’s Fuel for Growth Framework

A. Portfolio Grow Optimization

Client Need: Freeing up underutilized capital Highly unlikely DIVEST MAXIMIZE Actions Taken: NON-PERFORMING VALUE Profitability Baseline and ASSETS CREATION Fix-Sell Analysis

C. Reinvest to fuel new growth B. Increase opportunities Asset Current

Asset Growth Asset Client Need: Growing Client from renewed leaner Productivity Position base (hypothetical) Client Need: Efficient operations Actions Taken: Growth IMPROVE GROW strategy development Actions Taken: PROFITABILITY ASSET BASE and deal support Functional assessments to streamline the remaining organization

Consolidate

Improve Maintain Economic Margin

38 M&A Making the Deal Work | Strategy

2. Target organic growth How can Deloitte help? • Deloitte can perform benchmarking Taking advantage of organic growth and diagnostics of operations such as • Deloitte has knowledge, tools and opportunities can increase sales and build production, manufacturing efficiency, resources to assist organizations looking upon a company’s current strengths, order to delivery, time to customer, and to make strategic acquisitions to create helping to put it in a better position if stock availability. new or expanded portfolios; or to divest and when executives begin to evaluate non-core or non-performing businesses. • Deloitte can provide integration planning the potential for future acquisitions. and assist in execution to realize cost For example, Manufacturing OEMs and • Deloitte’s capabilities span the M&A savings attributed to process synergies, suppliers could take advantage of recent transaction lifecycle, from advisory and organizational design, and system market consolidation to offer existing execution planning to implementation consolidation. customers a global, one-stop-shop value and integration. Services includes Target proposition that contrasts with smaller Identification, Diligence (Commercial/ players that have limited offerings and a Operational/ Finance/ Tax/ IT), M&A or regional geographic presence. They could Divestiture/Spinoff Day-1 Planning, Deal also attract existing and new customers with Execution, and Post Day-1 Integration. alliance programs that offer global supplier • Deloitte’s Pricing practice can help in contracts and benefits. Additionally, structuring discounted pricing levels and market downturns may push downstream frameworks for global customers. companies to the wall, forcing them to trim their supplier base. This could give larger, • Deloitte’s Sourcing practice can assist well-managed companies an advantage in developing sourcing and logistics compared to smaller players, due to their strategies for OEMs to serve global global presence, focused relationships, customers. and alliance programs. Engaging in these • Deloitte’s Supply Chain practice can help and other organic growth strategies may streamline the acquired entities’ supply help companies bolster their market chain costs and operations to derive capitalization and balance sheet strength, economies of scale and scope. and provide a favorable jumping-off point for executing a stock purchase or cash buyout when the timing is right.

39 M&A Making the Deal Work | Strategy

End Notes 1. Note: Timeframe of 2000-13 was selected for this analysis to assess M&A activity and market trends in the period leading to economic recessions, and until the effects of slowdown were fully observed or neutralized

2. Note: Timeframe of 2010-13 was selected for this analysis to assess M&A activity and market trends in the period leading to economic recessions, and until the effects of slowdown were fully observed or neutralized

40 M&A Making the Deal Work | Sales & Marketing

M&A-driven sales & marketing Know where to play and how to win

By Iain Bamford, Brett Beckett, Nik Chickermane and Steve Maddox

Introduction In most cases, achieving M&A-related A company’s Sales & Marketing organization A company pursuing an M&A transaction growth becomes a question of focus, can play an essential role in helping to often has a strong growth rationale for capability, and executional readiness. capitalize on growth opportunities across the deal. In theory, M&A provides many However, in their haste to integrate the pre-deal and post-deal phases of an opportunities for growth – expanded operations and reap “tangible” cost M&A transaction. This is particularly true market presence, larger customer base, synergies, companies often miss when company executives are aligned to and broader product/service portfolio, opportunities to become more customer- and guided by a Sales & Marketing growth among others. In reality, only 27 percent centric, achieve quick-win revenue framework (Figure 1) – that aids decision- of acquisitions are able to help a company synergies, and build a long-term growth making around “where to play” and “how to grow faster than its historical rate or keep platform. Many factors can divert an win.” This framework should help executives pace with its peers.1 organization’s focus from achieving growth identify and validate growth opportunities; goals including different management tie these to the newly combined company’s visions, disparate operating models built on go-to-market strategy to strengthen legacy systems and processes, outdated customer-related functions; and facilitate customer experiences that don’t leverage functional readiness across the enterprise. digital or other technologies, and culturally diverse workforces.

Figure 1. Growth in M&A framework

What management What are our goals Where will we play? How will we win? How to configure? processes and and aspirations? systems? • Confirm growth • Validate existing • Define combined • Drive integrated • Drive process and targets—growth growth value proposition product portfolio system readiness to expectations and opportunities and messaging to execute the plan revenue synergy across markets and drive a unified go- • Enhance pricing goals customer segments to-market strategy and profitability • Enable customer and field readiness • Develop revenue • Develop new • Enhance customers • Align marketing to ensure that they baseline for the growth experience to and digital strategy are ready to combined entity opportunities by increase purchase conduct business sizing and decision • Optimize sales and with NewCo prioritizing channels mix and combined baseline access

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Pre-close planning and preparation of the target’s competition, and how well the Analyzing growth goals and opportunities, combined company can penetrate markets defining a go-to-market (GTM) strategy, going forward. By interviewing select and developing a customer experience management and customers, acquirers strategy are critical elements of M&A pre- can identify and prioritize potential close planning and preparation. A cohesive opportunities by product, customer sales and marketing vision that is backed segment, market size, or region. This by robust data and analytics can support disciplined approach keeps planning efforts functional integration, leverage operational focused on the highest-value opportunities. synergies, and increase deal value. Effective growth analyses align stakeholders – including sales and business leaders – Analyzing growth opportunities who, ultimately, will be accountable for and The first step in determining where impacted by sales results. and how to grow is to baseline existing capabilities and identify and prioritize Case study: A global technology hardware growth opportunities. While the overall company was aiming to become the deal model serves as a directional goalpost leader in enterprise asset management around baseline growth targets, it typically by acquiring an enterprise solutions provides floor, not ceiling-level, objectives. business. To achieve desired synergies, A separate but aligned growth framework the combined company needed to align its identifies a structured and logical approach sales, marketing, and channel capabilities. to analyze and quantify growth and the After identifying growth opportunities time-phasing required, based on prioritizing across combined capabilities, developing an opportunity’s size and ease of execution growth roadmaps and a future-state vision (Figure 2). Typically, the analysis occurs for business functions and systems, the in a “clean room” environment pre-deal combined company ultimately achieved close, given the confidential nature of the its desired revenue synergies and revenue information that cannot be shared during growth. It will have about 20,000 channel this phase in the M&A lifecycle. partners in more than 100 countries, and will hold a robust portfolio of intellectual A growth analysis examines the total property (IP), with approximately 4,500 addressable market for the combined US and international patents issued and product and solution portfolio, the strength pending.

Figure 2. “Where to play” framework

Where to play

1 2 3 What growth Which customer What is the opportunities exist segments to invest addressable and what customer in and focus market? behaviors to drive? resources out?

How do we define Who are target What are actionable market boundaries? decision makers and and meaningful What high level unmet what behaviors do we segments? How do we needs are we want to change? prioritize and sequence addressing? customers?

Opportunity sizing Buying process Action segmentation*

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Defining go-to-market strategy • Sales and service delivery: Sales targets, Once the deal team has identified specific sales coverage, channel mix market opportunities, the next step is to • Marketing: Customer messaging, define a unified go-to-market strategy branding, targeting, new value proposition (Figure 3) to achieve growth objectives, maintain business continuity, and efficiently • Research and development (R&D): and effectively deploy both companies’ Portfolio rationalization, roadmap talent and resources. planning, product innovation efforts

Adding the target company’s offerings to the A thorough understanding of new customer acquirer’s product and service mix can shift segments and a clear GTM strategy should the GTM approach in dramatic ways. The enable better alignment of the post-merger new strategy should translate data inputs sales channels with the post-merger into an actionable, growth-focused structure product portfolio. that is defined by segment, market, product, channel, and sales. It can be challenging Case study: A software company that to identify and prioritize the most critical primarily operated with an indirect sales strategic inputs, but doing so will determine model (selling via channel partners) was the effectiveness of the deal vision, considering the acquisition of a software- structure, and subsequent decision-making as-a-service (SaaS) company with a direct when executing the strategy post-close. sales model and its own sales force. To achieve growth objectives, the acquiring One critical process is to develop jobs- company focused resources upfront to based customer segments that reflect determine the right mix of direct versus what the new company’s target customers indirect sales based on the market strategy want to accomplish, rather than how they it established, as well as whether it needed accomplish the goal. The segmentation to build additional capabilities. Based on this model should cascade into a targeted GTM assessment, the company was able to plan plan that encompasses: necessary adjustments to its sales channels • Overall resource allocation after deal close, accelerating the time to results.

Figure 3. “How to win” framework

How to win

4 5 6 What do segments How to How to effectively do and why do outmaneuver the activate customer they do it? competition? segments?

What drivers and What are the What value proposition barriers must we differentiating benefits addresses target address with each and attributes of our segments? What are target segment? product/service? the key elements of our offer?

Differentiating Value proposition and Customer portrait capabilities offer structure

43 M&A Making the Deal Work | Sales & Marketing

Developing a customer experience Case study: A major telecom provider was strategy An effective and profitable customer merging with another telecom provider with Delivering a consistent brand promise and experience strategy is predicated on a large prepaid customer base. The acquirer experience across all customer touchpoints delivering the right messages and services wanted to create a seamless and integrated enables a company to gain more value from through the right channels. Common customer experience for these diverse its customer relationships. In the context wisdom holds that it is easier and less customer bases across target and acquirer of M&A integration planning, companies expensive to retain a customer than to channels, while carefully managing customer should develop and implement a customer acquire a new one – within the context disruptions as it integrated the companies. experience (CE) strategy framework (Figure of a merger, a breakdown in customer 4) that is designed to maintain business experience can amplify customer retention The project team defined the target and operations and allow both companies issues. acquirer’s current customer experiences, to unlock value for customers and including key channels, interactions, and shareholders. An effective CE strategy can In addition to strengthening customer pain points in the customer lifecycle – from increase customer retention, spur higher retention, an effective customer learning about a product and buying it to and more frequent spend per customer, and experience strategy can be a major source obtaining customer care and upgrading to lessen price sensitivity. The CE strategy and of differentiation in highly competitive additional services. The team built customer framework should focus on: industries such as consumer products, journey maps for both acquirer and target 1. Evaluating the current customer technology, and life sciences. customers to show how the experience experience and assessing the voice of would change during the integration. the customer; The acquirer then migrated the target’s 2. Developing customer experience customers onto its network and billing “personas” to build a customer-centric platform while enhancing the target’s organization; customer experience within its online and 3. Identifying and prioritizing CE physical sales channels. Ultimately, this improvement opportunities; and enabled the acquirer to achieve its cost 4. Executing and measuring the results of synergy targets and increase customer the CE improvements. retention.

Figure 4. Customer experience strategy framework

CE capabilities Retail stores

CE vision

Evolve Research Customer insight

Contact center Customer value proposition Channels Service The customer Choose Operations

Online Organization

Use Order Technology Other (e.g. email, kiosks, etc.) Measurement

Customer and shareholder value

Customer New sales Upsell ability Cost to serve Retention satisfaction

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First 100 days sprint Case study: During the merger of two B2B Enabling customer and partner readiness, 1. Talk to customers early and often, even technology manufacturing companies, the using cross-selling strategies to generate if not all the answers are available; planning team developed communications, quick wins, and building the new company’s 2. Determine the combined customer training materials, and enablement activities brand are important sales and marketing base’s needs and proactively address for the sales team and channel partners focus areas when integrating two companies them; to address key account management and during the first 100 days sprint. 3. Create playbooks to prepare customer- operational changes around quoting, facing employees to conduct consistent ordering, and invoicing. A Day 1 sales Enabling customer and partner but differentiated customer interactions; playbook (Figure 5) was created to help readiness 4. Establish a customer “war room” as the them focus on short-term cross-selling A lengthy or complex M&A transaction can central point for issue resolution; and opportunities, to consistently communicate often trigger feelings of uncertainty and 5. Prepare and support customers and deal value drivers to customers, and to unease among the participating companies’ partners for changes on their end identify potential customer risks. Specific customers and partners. Even long-term (ordering, payments, etc.). rules of engagement were defined to govern relationships may be negatively impacted areas of potential customer and sales by the slightest changes in the combined All partners need to understand their role team confusion (for example, accounts company’s products, sales model, or in the combined company so that they with overlapping sales teams positioning services strategy (Figure 5). can support operational changes and help for similar products). These measures execute the new GTM strategy. Frequent minimized customer confusion and attrition, To strengthen retention, protect revenues, and clear communication is critical to which enabled the sales teams to quickly and drive growth, the new company should mitigate attrition and create a foundation for transition their focus to cross-selling and proactively manage its legacy customer and long-term growth. additional growth opportunities. partner relationships. Five tactics can help customers and partners prepare for the transition:

Figure 5. Customer experience implications for readiness

Customer experience implications

Customer Company

Concerns on continued delivery of Focused on retention and maintaining

Deal services areas of strength announced

Focused on maintaining delivery of core Sensitive to service disruptions services during Day one cut over Dayone

one Planning for, and building, a compelling, Simple, integrated experience seamless, and integrated CX future Day - state Post

45 M&A Making the Deal Work | Sales & Marketing

Using cross-sell strategies to generate Case study: A global biotech reagents quick wins provider acquired a major biotech Cross-selling and up-selling both the instruments provider, with extensive acquiring company’s and target company’s projected growth synergies for the new products and services can help quickly entity within three years through cross- capture post-close revenue synergies. To selling. enable the combined sales staff to promptly act on potential opportunities, company Pre-Day 1, the company developed a executives will need to clearly define what to combined list of customer accounts sell, to whom, and how to reach them: Will and distributors, reprioritized customer all products be sold to all accounts? What segments by profit pools, redeployed the products will be best-suited for cross-selling combined sales force by priority segment, by each of the sales representatives? Will the analyzed products from both companies existing reps be allowed to sell the acquired and sales bags to maximize the potential for products? cross-sells, and developed revenue synergy estimates for cross-selling, pricing capture, Company executives should develop key and channel upsells globally. account strategies to allocate cross-selling responsibilities in specific customer Post-Day 1, the company reduced segments and mitigate the risk of reverse uncertainty in the sales force ranks by leverage from key customers. Furthermore, establishing a clear account management sales compensation plans (incentives, spiffs, structure focused on priority segments; bonuses) for cross-selling and up-selling presenting a single face to the customer by should be announced and implemented integrating order channels and the quote- quickly after close. Promoting simplicity and to-cash process; launching a sales and transparency can help improve process marketing handbook at a joint sales summit efficiency and reduce legal and finance risk. to drive a uniform customer experience; and defining an approach to track revenue synergy by initiative. Through these efforts, the company exceeded cross-sell sales expectations and saw greater collaboration among the combined sales forces at key accounts.

46 M&A Making the Deal Work | Sales & Marketing

Managing pricing receive and analyze sensitive data from Pricing improvement efforts should be Pricing management is an important sales both companies while remaining isolated driven by the sales and marketing functions, and marketing function that executives from other integration efforts until the deal but they also require strong support from frequently overlook during integration closes. Typically, companies treat pricing as finance, IT, and operations. A dedicated planning. This can be a costly oversight, as their most sensitive competitive information integration pricing team should, therefore, pricing projects are usually quite effective and choose to address new pricing be viewed as a cross-functional “SWAT” team in terms of time to realization and impact. strategies only after the deal is complete. with representatives from each function. Most pricing benefits are realized within the This can mean a delay of six months to It also should have a clear charter from first 12 months, which is within the critical a year or longer before taking action— the Integration Management Office and time period during which analysts expect to leaving months of revenue and margin be empowered by all functions to drive see deal results. Further, a pricing project’s improvement on the table and opening the implementation of its recommendations. return on investment (ROI) typically exceeds door for competitors. 300 percent, and most pricing projects Case study: A major financial services improve gross margins by 10 percent or A useful framework for analyzing and company challenged with integrating a more– 2too much potential value to ignore. determining pricing changes is to consider newly acquired division chose to focus on the degree of market overlap and value gain centralizing the pricing function to drive To effectively build pricing improvements for customers (Figure 6). Time can be spent revenue generation. As a result, the new into an integration plan, management in the pre-close phase analyzing data and integrated business unit generated both should evaluate which initiatives should be doing high-level planning. Policy changes a significant average price increase and a completed pre- versus post-close, and how that may affect pricing improvements should sales volume increase, achieving the desired pricing strategies should be managed on be implemented in the post-close phase. impact to their bottom line. Day 1. The effective use of “clean teams” Other post-close initiatives may include in the pre-close phase can accelerate changing discounting and promotions pricing integration while enabling the policies to reduce inconsistencies across the combined company to comply with antitrust two firms, and eliminating unprofitable or requirements. Clean teams, composed of low-value transactions by adjusting the price joint staff from the acquirer, and/or target of selected SKUs. Again, the key is to quickly (and, sometimes, external consultants) can leverage the pre-close analysis results.

Figure 6. Pricing for profitability framework

Business strategy

Product management Set Distribute Company shareholder Marketing Pricing 4 value Profitability Sales Management Corporate objectives

Realize Negotiate Channels/Partners

Deals and contracting

Finance Foundational capabilities

Organizational alignment Pricing technology and Price strategy and governance data management

Tax and regulatory Advanced analytics and Price execution effectiveness price setting

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Building the new company’s brand Websites, mobile applications, and social Case study: When two technology and digital presence media channels are digital representations conglomerates – providers of hardware, A merger or acquisition often surfaces of each company’s brand and should be technology and cloud solutions – merged difficult questions about the value of one carefully managed alongside other branding they needed to develop an end-state system brand relative to another, as well as the changes. A digital roadmap (Figure 7) of tools to support the joint organization’s business areas impacted by a rebranding should define all changes across all online marketing strategy. To identify the right tools effort. Branding is one of the first visible channels to confirm a seamless customer the planning team first created a master indicators of a combined company’s experience and ongoing engagement. For inventory of tools across both companies direction and, thus, should be addressed at Day 1, marketing executives should update and a filtration system to identify which the corporate, product, and service levels. landing pages and site linkages, refine tools were within the marketing function’s Despite its importance, brand decisions their advertising targeting strategy, and scope. The team then interviewed a number are often rushed or based on political adjust the online execution of new brand of tool and capability owners across both and emotional factors. A poorly planned campaigns. Following deal close, they should organizations, which helped to identify and and/or executed rebranding campaign communicate any impending changes prioritize decision-making criteria to enable can result in a “Frankenstein” brand that to their digital assets to customers and the marketing strategy. dilutes the power of the legacy brands; an partners to support a smooth transition to overly long branding process can result in new sites and online services. Team members from both organizations missed sales and marketing opportunities. held joint working sessions to align on the Acquirers need to determine which brand selected tools, identify common tools for is more valuable to convey to customers, contract consolidation and synergies, and employees, stakeholders, investors, and set broad assessment processes to aid regulators. Even if one brand is centuries future decision-making to achieve the end old and inspires confidence at home, it may state. be a blank slate in a new market or product category.

Figure 7. Digital roadmap

Omni-channel Business strategy Primary digital engagement and brand promise capabilities

Strategy and Web transformation

Mobile Customer insights Service Discover

Product and service Social development Customer Use Shop segments

Contact center Sales

Set up Buy Marketing and customer In-store engagement

Media and advertising Customer service

Direct marketing Organization

48 M&A Making the Deal Work | Sales & Marketing

Post-Day 1 environment Four tactics can help guide product Inevitably, some existing products and Sales and marketing’s role in generating roadmap decisions and manage customer services may need to be retired or divested. M&A deal value typically kicks into high gear expectations during an M&A transition: In such cases, delivering the news early and in the post-Day 1 operating environment. 1. Eliminate product overlap based on in a constructive way to both customers and Important contributions include planning customer and market requirements; sales personnel will reduce confusion and and executing a product/service roadmap, 2. Look to non-customers as well as anxiety, and begin the conversation about transforming the combined companies’ current customers to build a longer-term migrating to other solutions. sales force, managing product/service roadmap of market-sustaining and pricing, and capturing long-term revenue -creating products; Case study: A global medical device synergies. 3. Conduct go-to-market (sales, marketing company acquired a competitor with an and product) summits to educate teams overlapping product portfolio. As part of the Planning and executing a product and on competitively sensitive information post-deal integration, the company needed service roadmap (previously not shared or assessed via a to align and optimize the two product Composition of the new product and service clean room) and to align leaders around portfolios. The integration team identified portfolio that the combined company will a go-forward vision; and product rationalization opportunities take to market typically is driven by the 4. Announce product roadmaps as early as and built a resulting set of analyses into a market opportunity validation conducted legally possible. product optimization business case. The at the deal’s outset. In the short term, team also developed a detailed roadmap sales and marketing leaders may take Sales and marketing departments should to realize savings by executing quick-win steps to quickly create new product convey messages about the new company’s deletion and optimization opportunities. bundles or solutions and identify product growth story quickly to reassure customers As a result, the team identified significant improvements brought in by the acquired and other stakeholders. A high-level product margin improvement and cost savings business (Figure 8). roadmap provides a starting point but it opportunities needs to include a services component. Making longer-term product decisions The acquirer should define a unified and is inherently more difficult due to the consistent strategy regarding services potential influence of customer preferences positioning and decide how the combined and technical or operational complexity. services will be described, packaged, and However, it is important to put a stake in the sold. ground early to better integrate products and improve R&D collaboration

Figure 8. Product portfolio management decision-making bodies

Defines Executive Corporate vision and strategy corporates committee strategy

Creates Tec SU1 SU2 SU3 SU4 product and P&L Tech technology leadership Product strategy strategy teams

Manages Portfolio portfolio and mgmt. Portfolio and pipeline management pipeline board

Idea Concept Plan and design Develop and test Launch EOL

Product and project execution

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Transforming the sales force The next attention area is the sales channel, Case study: A major biotech company Integrating sales forces and developing a which should be viewed as a strategic acquired a bioinstrumentation firm with sales transformation framework (Figure partnership. A symbiotic relationship with goals of expanding its market presence, 9) are significant post-Day 1 processes for partners is important so that both parties capturing revenue synergies, protecting virtually every M&A transaction. Effective mutually benefit. Agreement terms should revenue, and minimizing churn. The integration should minimize disruption to be based on profitability analyses and the acquisition doubled the organization’s sales teams and accounts, and accelerate importance each channel plays in the overall size and targeted hundreds of millions of revenue growth; in contrast, poor execution sales pipeline. synergies across geographies and business may adversely impact customer satisfaction, units. The major challenge was choosing retention, and revenue synergies. Developing a robust infrastructure to a GTM strategy for the legacy companies’ support the new sales team is another distinct brands and disparate, regional sales Integration should begin by identifying critical element. Sales processes, enabling processes and channels. the drivers behind customers’ purchase technologies, and tools need to be behaviors and developing a flexible channel harmonized and support the overarching strategy. Customers may seek arbitrage channel strategy. Communication between The project team evaluated multiple opportunities and behave in unexpected executive leadership and customer-facing options across customer segments and ways – understanding the customer is sales and marketing teams needs to be tight developed an optimized sales operating essential to unlocking the combined to enable seamless delivery of the expanded model that established governance and company’s competitive differentiators. product and service suite on Day 1 and cross-functional strategy and planning beyond. mechanisms. The team also developed rules of engagement, including defining quota/compensation plans for the sales force; revised the order-to-cash process to support a dual-brand strategy; and facilitated global sales manager readiness. As a result, the new company had a successful Day 2 dual-brand launch and Figure 9. Sales transformation framework exceeded revenue targets.

External forces Sales transformation Impacts

Growth and Market landscape Go to market strategy 1 profitability

Competitive Partner and channel management preserves 2 Market share

Customer needs Enablers and expectations 3

Enabling Sales process and Productivity and People technology execution infrastructure differentiation Technology landscape

Sales adoption Product and Sustainability service lifecycle

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Capturing long-term revenue synergies According to Deloitte’s 2015 Integration M&A transactions should be based on Survey, 10 percent of executives reported a clear understanding of desired short- that they did not know if their synergy and long-term revenue synergies. Cost targets were achieved. Successful acquirers reductions typically are a factor, but they create effective measurement criteria as should not be confused with synergies— part of their post-merger plans. These which are motivated by a vision of how the metrics make it easier to track results and combined company will be able to increase keep companies focused and accountable revenue and market share at a faster clip over the long term. than either company could do on its own. Case study: A major chemical company Many companies tend to track M&A-driven wanted to capture revenue synergies and cost savings more closely than revenue analyze sales and marketing functions improvements, simply because these to identify cost-saving synergies across savings produce a shorter-term impact its priority markets. The project team and are specific and measurable. In many conducted a baseline review of the current cases, revenue and margin goals for the state, competitive set, market, and customer new business are adjusted and there is no segments. The team identified synergy separate tracking of post-deal synergies drivers and derived potential synergy – company leaders may know they are values to help prioritize the relevant obtaining some growth but may be unaware integration activities. It also identified Brazil of what is left on the table or whether as the key market and uncovered sizable the business unit is executing against the complementary product opportunities strategy that led to the acquisition. across its portfolio. Subsequently, the company was able to unlock previously A good approach involves setting unidentified synergies and improve its accountability and measurement criteria to profitability with minimal disruption to its make certain that the company is focused customer base. on capturing long-term revenue synergies.

Closing An M&A transaction can be a huge catalyst for revenue and market growth; however, success is never guaranteed. Growth-oriented M&A may require taking a disciplined approach to sales and marketing based on a real understanding of the drivers of short- and long-term value – where to play and how to win. By addressing the priorities outlined in this article, both early in the deal process and throughout post-deal integration, companies can emerge as high performers and capture long-term revenue synergies.

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End Notes 1. “Growth through M&A: Promise and Reality”; Deloitte Review; https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Mergers- and-Acquisitions/gx-ma-growth-promise-and-reality-021915.pdf

2. Deloitte Consulting analysis based on Fortune magazine’s Fortune 500 list (April 18, 2005); Deloitte Consulting experience tracking merger synergies; and AMR Research, The Customer Management Applications Report, 2004-2009, August, 2005.

52 M&A Making the Deal Work | Supply Chain

Supply chain’s role in M&A Achieving value creation through supply chain By Kurt Schmid, Nate Windom, Joel Schlachtenhaufen, Steve Mangal, Srini Bangalore and Chris Gilbert

A merger or acquisition (M&A) transaction Supply chain executives can play a pivotal Executives should expect that their focus presents both opportunities and challenges role in delivering synergies that can help and priorities will shift as they progress for supply chain executives who are tasked achieve deal objectives. To meet synergy through three phases of the M&A lifecycle: with integrating the best of both legacy goals, executives should proactively identify pre-close planning, the first 100 days sprint, organizations while keeping business potential supply chain sources of value and post-deal transformation and growth. running on all cylinders. M&A can generate during a transaction’s due diligence and sustainable – and potentially, game- pre-close phases, and take early advantage changing – cost and operational synergies, of Clean Rooms and external advisors to but executives need to navigate inherent support the launch of synergy projects post-close complexities to fully deliver those immediately following Day 1. Despite the synergies and achieve anticipated deal high stakes, an M&A transaction provides value. Now, more than ever, supply chain executives with a powerful platform to executives are under pressure to: transform two disparate supply chains into an integrated operation that can create a 1. Identify, capture, and deliver deal-related competitive advantage in the marketplace. synergies; 2. Invest in operations to support end- During the M&A process, supply chain state business growth objectives; leaders will need to address a number of 3. Integrate legacy supply chains with important issues, among them: minimal impacts to customers, partners, and employees; and • Redefining the supply chain operating 4. Make critical decisions quickly to keep model and organizational structure; pace with transaction deadlines. • Leveraging the combined talent, While supply chain synergy targets vary by technology, and leading practices of each industry, Deloitte experience shows that the supply chain; supply chain typically is responsible for half • Standardizing processes, systems, policies, of announced deal synergies (Figure 1). and performance metrics; and

• Making investments to build and scale the supply chain to support the expanded business.

Figure 1. Supply chain synergies as percent of overall deal synergies, by industry

Consumer and Life sciences Technology, Financial Energy and industrial and health media, and services resources products care telecomm 10%–20% 45%–55% 50%–60% 30%–40% 40%–50%

Source: Deloitte Consulting Global Benchmark Center

53 M&A Making the Deal Work | Supply Chain

Pre-close planning 2. Synergy opportunity Identification Case study Situation: An important first step in the pre-close • What are the major sources of value As part of a $10 billion merger, a global planning process is to establish a strong across the supply chain? governance structure and dedicated supply industrial manufacturing company required chain integration team to set Day 1 priorities • What are the quick wins to accelerate assistance with Day 1 integration planning and lead decision-making. Including value capture? across business functions including Supply & Operations from pre-close through Day representatives from the core supply chain • What are the resources, costs, and timing 1000. functions and each of the geographies is to achieve supply chain synergies? critical to planning a successful Day 1 launch 3. Risk mitigation and change • Client leadership had limited experience and designing an end-state organization management in planning and executing a global to support the newly-merged entity. acquisition. Other pre-close planning priorities include • How do we coordinate and communicate retaining talent and “tribal knowledge,” and changes with customers and strategic • Supply chain synergy targets comprised managing integration risks to enable post- suppliers? the major portion of synergies to support the deal economics. Day-1 business continuity. Many companies • What is our approach to retain top talent going through a merger face uncertainties and operational tribal knowledge? • The target company was in aggressive and cultural tensions, but well-structured, cost-reduction mode and provided limited “two in a box” joint planning teams can help Getting Day 1 planning right requires a resources for the integration. smooth the transition. Coordinating with disciplined approach and clear guiding other functional integration teams to resolve principles to direct the supply chain Approach & impact: interdependency issues should help enable integration team; keep the organization efficient Day 1 execution. • The company used external Clean Teams focused on Day 1; identify bottom-up to conduct synergy analyses to identify synergies and other sources of value; and As part of their Day 1 preparations, supply +$90 million in synergies (150 percent of manage potential risks associated with chain leadership will need to address several target). customers, partners, and employees. strategic questions: Establishing a Clean Room to jump-start • The planning team coordinated 70+ global supply chain resources across business 1. Day 1 readiness planning synergy planning allows the team to develop quick-win opportunities and mobilize functions to prepare and execute for • What is our supply chain integration execution immediately following the close of Day 1. strategy? What are our guiding principles? the transaction. Figure 2 depicts examples • The team developed negotiation strategies • What are the supply chain ‘must do’s’ to of supply chain sources of synergy value. for overlapping suppliers and conducted support a seamless Day 1 transition? rapid renegotiations to deliver 30 percent The pre-close planning phase’s primary of synergies in the first 30-60 days. • What activities require coordination with outputs are a detailed supply chain Day 1 functions such as R&D, Commercial, checklist, an integration and synergy plan, Finance, IT, HR, and Legal? and a project roadmap. These are critical deliverables required for Day 1 success; they also identify and prioritize projects, timing, and resources to support the first 100 days Figure 2. Supply chain sources of value sprint.

Material & operations cost synergies Productivity & asset optimization

• Rapid supplier contract renegotiations • Demand & supply planning

• Strategic sourcing • Inventory & working capital

• Carrier consolidation • Distribution network optimization

• Design for cost & manufacturability • Manufacturing network optimization

• SKU rationalization • Plant & warehouse productivity

Source: Deloitte Consulting LLP

54 M&A Making the Deal Work | Supply Chain

First 100 days sprint The transition to a combined supply chain Case study During the first 100 days after deal close, organization should engage employees Situation: supply chain executives’ focus should turn and strategic suppliers in what is changing. • A specialty chemicals company sought to cashing in quick-win opportunities to Roadshows are often conducted to facilitate outside advisory support to plan and capture synergies and build integration interaction with employees to inform and execute a supply chain merger for a $6 momentum. High-priority projects should to gather feedback on the transition. It is billion acquisition. The integration included address the wide range of integration important to pay attention to the people- three legacy company environments with and synergy opportunities across the related impacts of integrating two supply operations in 10 countries. supply chain. For example, rapid contract chain organizations. Too often, executives renegotiations with suppliers serving both fail to adequately address these issues, • The organization had no structured legacy companies to move purchases to which can result in productivity loss, approach or governance to identify and best price and terms can generate cash to employee attrition, and difficulty meeting deliver supply chain synergy targets. meet synergy goals and help fund future synergy goals. Executives should consider • In addition, the right data was not readily transformation. which aspects of each organization can available from multiple ERP systems be used to create a new function that will across legacy organizations and 25 legal The new supply chain leadership team support the supply chain strategy (Figure 3). entities. typically is announced during this phase, and the organizational transition to future In addition to managing staff integration Approach & impact: state begins. Integration activities that issues, executives will need to consolidate address headcount redundancies are supply chain processes and technology • In the first 100 days after close, the client/ implemented, along with required interim platforms to successfully position the new advisory team launched 30 out of 100+ work-around processes. Implementing organization for the third phase in the M&A supply chain projects to capture $60 these changes in a timely manner can help lifecycle, post-deal transformation and million in supply chain synergy benefits. to free-up critical resources to drive synergy growth. Executives should begin planning • The team captured $4 million in arbitrage projects that increase the speed to value for this transformation by deploying the new synergies for direct raw materials. realization. supply chain strategy so that it supports business growth, improves collaboration • The supply chain organization launched with external partners, and drives the first of a multi-wave strategic sourcing operational excellence. program that delivered $2 million in synergies in the first 100 days.

Figure 3. Supply chain people integration challenges

How will supply How will How will the new supply How to align supply chain chain leaders employee chain culture be culture with supply chain create and behaviors reinforced by supply strategy? shape the new supply sustain the new supply chain systems? chain culture? chain culture?

Source: Deloitte Consulting LLP

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Post-deal transformation and growth In many cases, the acquiring company Case study Following initial integration activities, supply implements its standard policies, practices, Situation: chain leaders should focus on positioning and processes across the new organization; operations for long-term growth and however, in doing so, it may miss out on The world’s leading producers and optimization. The challenge for executives capturing value from the target’s legacy marketers of concentrated phosphate and during this phase is maintaining Day 1 operations. In addition to leaving money potash crop nutrients required assistance momentum and not reverting to ‘business on the table, simply adopting the acquirer’s with Day 1 integration planning across as usual’ too soon. This is especially true approach may have a negative impact business functions including Supply & if the deal is transformational in nature. on change management efforts with the Operations. There is often significantly more upside in acquired company’s employees. Conducting • The acquirer needed to substantiate driving transformational changes versus a rigorous “stare and compare” analysis opportunities for operational synergies incremental ones. Continued focus on across both legacy companies’ supply owing to the proximity of the target’s larger-scale initiatives, such as sales and chain processes may yield significant phosphate rock mines to existing operations planning (S&OP) harmonization, opportunities that should be captured operations. strategic sourcing, or distribution network before too much change is instituted. optimization, can unlock significant deal • The project team conducted a leading value. Finally, collaborating across the new process assessment to evaluate 12 key organization is critical when executing a supply chain functions across the three Incremental synergy gains may be realized phased transformation plan. Harnessing mines and three plants to incorporate by adopting and institutionalizing leading the best of both supply chains can help the leading practices from both legacy supply chain processes from each legacy minimize risks and capture value throughout operations. company. The framework depicted in Figure implementation. • The team used an opportunity 4 uses an alignment analysis of current prioritization matrix to map processes processes and comparisons to leading across core operations and support practices to help supply chain executives functions, and to categorize them based identify high-value integration opportunities. on process alignment and synergy benefits. Figure 4: Supply chain synergy prioritization framework

Approach & impact: How similar are the buyer and target processes in each • The project team identified and compared supply chain function? Additional Capture best 21 high-value opportunities to leading Criteria: Business reporting research processes practices across 11 supply chain functions. required lines, level of centralization,

Weakalignment Insourced/outsourced, process • A current-state maturity and alignment commonality assessment, layered with detailed, data- driven dashboards and performance What is the synergy value metrics, helped build the business case for Minimal Leverage best transitioning to the leading processes. changes of both from transforming this process? • Change management risks during the Criteria: Improved transition were mitigated by the acquirer performance, efficiency or adopting a number of supply chain Strong Strong alignment cost reduction Supply chain alignment(Buyer covs. Target) Low High practices from the smaller legacy target, which added significant scale benefit. Synergy benefits

Source: Deloitte Consulting LLP, 2016

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Conclusion

As stated earlier, supply chain executives competitiveness. By including supply minimize post-M&A operational risks; and play a pivotal role in achieving M&A-related chain executives in M&A planning, the deliver differentiating results to achieve deal business objectives. Not only are supply other deal team members can access value and potentially, long-term competitive chain synergies a significant source the expertise and insights they need to advantage. of potential deal value, a transformed identify potential deal synergies; integrate supply chain can be a critical enabler of legacy supply chains with minimal impacts long-term corporate growth and market to customers, partners, and employees;

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Informed IT integration Three-phase approach can boost M&A synergy capture By Olivier May and Barry Chen

When a company integrates a large One of the biggest challenges during a three-phase M&A IT integration lifecycle acquisition or engages in a merger of equals, IT integration is to quickly deliver on a approach (Figure 1) can help head-off the sooner IT leadership is involved in pre- transaction’s strategic business objectives potential issues and boost post-deal deal planning, the smoother the integration while making sure that both companies’ day- synergy capture. is likely to be. While every M&A transaction to-day operations continue uninterrupted is unique, they all involve rationalizing during the rapid countdown to Legal Day and integrating portfolios of IT systems, 1 (LD1) and any subsequent consolidation platforms, and applications that have critical or transformation. Early planning, ongoing impacts on products, services, customers collaboration between IT and business and suppliers. functions, and efficient implementation of

Figure 1: M&A IT integration lifecycle Legal Day 1 M&A Integration Life Cycle

IT Due Diligence Pre-close Planning & Prep IT Integration Execution

• Understand and analyze technology • Create a comprehensive plan to • Plan and manage the integration components that have a material maintain business momentum during process to capture the anticipated impact on the value of the Target the transaction and achieve strategic value and mitigate risk goals without negatively impacting key • Identify key opportunities and • Frame and execute the IT integration stakeholders challenges to the transaction across IT projects based on business aspects ( people, processes, platforms • Set up the framework and approach requirements and through the process and contracts) for detailed IT synergy tracking and/or of capturing synergies set up Transition Services Agreements (TSAs)

Managing Organizational Disruption

Synergy Capture

Security and Compliance

Deloitte’s Integration Report 2015, a survey most common barriers to successful Chief Technology Officers (CTOs) to have a of middle management through C-suite integration were unexpected challenges clear perspective on how to 1) balance the executives in <$100 million to >$5 billion arising from the speed and various phases complexities of integrating IT assets and companies from various industries, of integration; and from communicating sustaining business momentum; and 2) showed that a smooth transition from a with employees, customers, and suppliers engaging internal and external stakeholders merger’s beginning through Legal Day 1 before, during, and after the merger. early and often. correlated very highly with overall deal These challenges illustrate how crucial it success. Survey respondents said the is for Chief Information Officers (CIOs) and

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IT due diligence: Buyer basics

The IT function is an integral part of business In addition, conducting diligence on operations, yet it is often overlooked in M&A outsourced and third-party vendors can planning because some senior executives help uncover further financial risks and view it as an internal service provider rather opportunities by reviewing: than a key stakeholder. However, given the • Contracts to identify cost-saving connective tissue of IT and other internal opportunities (e.g., increased volume and external business functions, it is critical ERP discounts) and risks (e.g., licensing that IT executives be included on the deal violations); team and lead IT due diligence during the target screening process. • Vendor health and risks to highlight potential product support issues or IT diligence can uncover operational and vendor rationalization opportunities; financial risks that may impact the deal’s • End-of-life scenarios to reveal potential overall accretive value (e.g., EBITDA) and quick technology rationalization wins or to identify key cost drivers for current and move to a more robust cloud solution. future-state IT environments by examining:

• Business and IT strategy alignment Finally, the diligence process allows an • Business processes and supporting IT acquiring company to assess the target’s systems/applications organizational structure, cultural fit, potential skill-set gaps or redundancies, and • Infrastructure footprint areas for immediate synergies. Evaluating • Applications and physical assets inventory the span of control within the company can quickly help identify redundant areas and • Detailed IT cost analysis (including synergy feed directly into the overall synergy target, opportunities) as long as culture and business stability are • Data management platforms and analytics not disrupted. capabilities Case Study: A global manufacturer • Operating model and employee skill sets planned to acquire a global leader in • Impact on customers and suppliers turbine-based power systems with a large shared services contingent. The IT diligence • Critical operational risks process identified key gaps in technology • Potential security and compliance risks. resources, infrastructure, and applications prior to deal close, thereby minimizing This analysis should also serve as a key business continuity disruption. Diligence input to the deal’s top-down cost synergy also provided interim and future-state IT targets. For example, it is important to organizational strategies, as well as a 100- understand the operational health of a day roadmap for a target-state application target’s data centers and connectivity landscape. providers, as both could increase overall IT operational expenses (e.g., remediating the LAN/WAN, security violations). It’s also wise to review the target’s primary business systems, proprietary technologies, and level of business enablement, automation, organizational support, and skill alignment to determine the feasibility of capturing functional cost synergies.

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Pre-close planning: Start with the end in mind

Information Technology is a major driver of As part of IT’s participation in the deal M&A benefits, enabling a significant portion team, the acquiring company’s CIO or CTO of identified cost1 synergies across the should assess whether the deal objectives’ business enterprise (Figure 2). According to estimated cost and time impacts are clearly Deloitte’s Integration Report 2015, roughly articulated in the deal sheet. This will most 18 percent of executives surveyed said they likely pay dividends when making critical fell short of their initial synergy targets. decisions around strategic platforms and Given overall deal synergy opportunities, setting end-state expectations. it is apparent that if IT integrations are not properly executed, organizations may end up with lower synergies and higher realized costs than they anticipated.

Figure 2: Drivers of deal synergies

IT is a key driver of integration benefits, accounting for over 50% of all synergies2

IT

IT

Corporate and admin Operations Total functions

1 This article will focus on cost synergies only as growth synergies are generally deal specific 2 Source(s): Deloitte Consulting analysis of over 30 prior merger of equal transaction; Gartner IT Primer on Mergers and Acquisitions, Ansgar Schulte, February 2015

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Defining business and IT priorities When all strategic decisions have been A. Legal Day 1 IT requirements While the IT function’s overarching goal made and aligned to, it is helpful to conduct For Legal Day 1, IT should focus on providing during M&A integration is to rapidly connect a pre-LD1 workshop aimed at developing basic services such as connecting wide-area both entities and prevent business and a comprehensive end-state roadmap that networks (WANs) and email platforms, operational disruptions on Legal Day 1, IT will serve as the integration guide. The and enabling select users access to each leaders should also focus on helping to workshop should include IT leaders from other’s critical applications or platforms (e.g., quickly achieve the integration’s strategic both organizations; discussions should be Finance may need access to both sets of objectives. Engaging with business structured around three phases, each with a financial systems to generate consolidated leadership during diligence and planning set of distinct IT requirements: earnings reports, etc.). These tasks can be should help align and prioritize optimization achieved by moving functional and business • Legal Day 1 objectives, project scope, and integration leaders at both companies through a series timeframe(s). As part of this process, IT • Post Legal Day 1 (What can be achieved of speed-dating exercises, during which IT should balance strategic priorities with the within three to six months after LD1) leaders ask them to quickly identify “must “art of the possible,” and clearly articulate its have” requirements for LD1. The list of must- • End State (typically 12 to 18 months post delivery capability based on the proposed haves should be kept short, both because of LD1). timeframe. In a 2015 survey, Deloitte found the typical time constraints associated with that over 50 percent of integrations were M&A transactions and because long-term completed in less than six months (Figure Figure 3: Duration of integration phase solutions to achieve end-state objectives 3);2 a compressed timeframe may limit the generally require different solutions and objectives that can be realized prior to LD1, approaches. IT should drive the LD1 list- while a longer timeframe may increase making process to enable the “art of the costs, as the IT program will continue possible” and address key IT activities such supporting integration efforts before as: realizing organizational synergy targets. • Defining network connectivity requirements (e.g., customer data, internal To accurately define the IT program scope messaging solutions, FileShare access) and set expectations around department capabilities, it is critical that IT executives • Accommodating new legal entity and document and communicate to business branding changes for systems producing leadership the integration options, timing, customer-facing documents and risks. These conversations should be • Providing application access (e.g., time data-driven, collaborative discussions about tracking, expense, talent portals) prioritizing key capabilities. The goal is to clearly define a manageable IT integration • Enabling customer-facing applications to roadmap that is supported by the business. support sales and marketing strategies.

Once the initial scope is defined, IT should Note that the communication channels continue to use the “three-legged stool” between IT and the deal team’s governing approach (scope, speed, and cost) to bodies (e.g., Corporate Development, illustrate potential impacts and risks of any Legal) should remain open throughout proposed changes to the LD1 execution integration to minimize security risks for plan. Any increase in scope may strain IT both organizations. resources and impede the delivery timeline, as they likely will require additional capital and/or resources to execute.

2 Deloitte Integration Report 2015

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B. Post Legal Day 1 IT requirements presents an opportunity for CIOs and (typically three to six months following LD1) CTOs to revisit strategic technology This a period in which the newly combined investments (e.g., infrastructure as a service, organization typically rolls out significant data analytics, and cloud) and assess operational changes. IT should focus on whether this event could spur broader IT three concurrent objectives: transformation. Given the current trend of moving applications from on-premises • Capturing “low-hanging fruit” synergies locations to cloud solutions, it may be by quickly consolidating IT services and possible to simplify the existing technology software license contracts for common stack and detangle technical complexities vendors which the organization may have delayed • Supporting basic functionality that quickly due to a diminishing IT budget. allows the two entities to operate more effectively as a combined organization Application rationalization Application rationalization is a major cost • Enabling the various lines of business to synergy opportunity that typically yields begin realizing the integration’s strategic a 20–50 percent IT footprint reduction, value by cross-selling goods and services largely accomplished by reducing the to the newly combined customer base or number of overall applications, underlying launching new products and services into infrastructure, and support and licensing the market place. costs. That being said, the level of IT and business integration will directly As soon as the first round of organization influence the magnitude of rationalization changes has been announced, IT leadership opportunities. should engage with functional and business leaders to determine the level of integration The process should start with a current- that will be achieved within each area. state view of all applications (e.g., ERP, (This can vary greatly between back-office HR, CRM, product lifecycle management, and front-office functions.) In addition, IT financial management, and financial should further advance the integration reporting) and their respective processes project roadmap with detailed work plans and supported customers. Defining an that include milestones, start and finish application decision framework in advance dates, task owners, and inter-organizational (Figure 4) can allow the integration team to dependencies. While executing these work quickly identify rationalization opportunities plans and reporting progress on a weekly and a recommended end state for the basis, IT leaders should begin planning how application portfolio. Potential criteria to be to achieve end-state objectives. weighted for the trade-off analysis include business value, technical condition, total C. End-state IT requirements (typically cost of ownership, growth enablement, and achieved 12 to 18 months post LD1) M&A readiness. This is the “holy grail” for IT and the most difficult of the three objectives to achieve. When properly executed, end-state integration can help IT leaders rationalize the entire application landscape and consolidate data centers, WAN, help desks, and other IT resources. Working towards end-state integration

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Figure 4: Application decision framework

• Compile and categorize • Regularly gather and update • Track costs, resources, strategic application information using a application information using a alignment, benefits, … for the common standard standard template application rationalization and transition program

Understand Monitor business Deploy and Assess current Monitor application strategy and execute application Changes portfolio imperatives portfolio Collect Project InformationInformation • Execute portfolio • Understand business • Define rationalization transition based on objectives and criteria/scoring model application roadmap expectations • Compare and evaluate • Understand high level current application business portfolio Develop to-be requirements and • Identify and document state resulting IT application portfolio roadmap • Finalize application implications pros/cons Analyze portfolio • Identify “At risk” recommendations Portfolio applications • Develop high level Prioritize transition roadmap Define to-be • Obtain stakeholder review application and sign-off • Map each application with to-be business portfolio objectives and strategy • Develop to-be state application recommendations • Assess the value, risk, and strategic alignment for • Determine to-be application portfolio transition dependencies each application based on rationalization • Define transition initiatives to achieve to-be state criteria/scoring model at the portfolio level • Confirm transition sequencing evaluation criteria • Develop application transition sequencing, timeline and resource estimates

Post-project phases

Project phases

Rationalization opportunities will vary and Once the LD1 dispositions are established, Infrastructure consolidation should be vetted with the business functions the integration team will need to build and Based on Deloitte’s experience, to align on timing and potential operation finalize the roadmap that details major infrastructure consolidation represents impacts. For example, the redundancy execution milestones for application additional cost synergy opportunities, synergy targets may drive consolidation of rationalization as well as cross-functional often time independent of applications back-office operations into a single shared dependencies. rationalization opportunities. services organization; however, this may Figure 5 illustrates typical consolidation have to wait until after LD1 and synchronize Case study: A global travel provider and opportunities and average reduction with back-office consolidation timing. investment company formed a joint venture benefits. Typical outputs of application rationalization (JV) and rationalized their financial systems analysis include: by moving directly to a cloud solution. By partnering with a cloud ERP provider, the JV • Consolidated application inventory developed a common model that reduced • Key end-state application decisions 15 financial systems in less than 16 months, lowering maintenance costs and improving • Application rationalization projects overall operating efficiency. (including charters, teams, and timing).

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Figure 5: Infrastructure consolidation reduction categories

Category Source of savings Benefits (reduction)

LAN/WAN/Voice and • Cost reduction through consolidation, sourcing, and reduced band width requirements 10%–30% Data Network • Increased performance and reliability

Storage • Cost reduction through increased efficiency/utilization of new and existing technology 20%–50% • SAN, Virtual Storage Management deployments • Increased business continuity/disaster recovery

Server • Cost reduction resulting from platform consolidation and contractor reduction (or 10%–40% expanded service without head count increases) • Increased efficiencies through technical standardization

Data center • Cost reduction through consolidation (cost avoidance, improved real estate costs, 10%–25% operational efficiencies reduced capital investment, etc.)

Mainframe • Cost reductions and cost avoidance resulting from capacity planning, system 10%–20% consolidation and centralization, resource reduction

PC Management • Hardware/Software and support process standardization 10%–30% • Increased efficiencies from leveraging remote tools • Maintained or improved security service levels

Maintenance • Cost reduction by validating inventory against billings 10%–30% contracts • Extend reach and reduce technology cost via 3rd parties

Help desk • Additional outsourcing opportunities 10%–20% • SLA mgmt (align SLAs with end-user needs) • Cost evaluation against industry benchmarks

Leveraging findings from the planning In many scenarios, application workshop mentioned earlier can help the rationalization and infrastructure integration team understand the scalability consolidation have a cause-and- of the infrastructure environment and effect relationship, as the application minimize the amount of throwaway work rationalization opportunities may also and misinformed short-term investments. translate into infrastructure consolidation Focus areas typically include data center wins. When pursuing either avenue, CIOs locations, networking, telecommunications and CTOs should develop a fast and infrastructure, core infrastructure services, programmatic approach to select the go- and infrastructure management tools forward environment or platform. (e.g., authentication devices, and business applications (Figure 6). The challenge will reside in maintaining focus on revenue-generation activities, It is important to note that not all of the and supporting day-to-day business target acquisition’s core infrastructure transactions, while pursing cost-saving components should be considered in scope opportunities. In some instances, running for potential consolidation. For example, if two independent IT applications and the target’s core business is eCommerce, it infrastructure environments might be may make sense from a security perspective necessary to help continue revenue to keep infrastructure components for the streams, until a joint go-to-market strategy external sites separate from infrastructure and customer cross-selling strategy has components for corporate applications. been developed by the business leadership.

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Figure 6: IT infrastructure consolidation opportunities

Business challenges

M&A integration opportunity Examples Application Integration/consolidation of business • Custom and packaged applications hosting applications onto reduced server footprint • Application server software • Virtualized stacks of like apps Database Integration/consolidation of database • Standard database software and hosting applications onto reduced server footprint versions onto database “Farms” Utility Integration/consolidation of “on-demand” • Active directory integration; Email applications application services integration • File sharing and KM/collaboration Core services Integration/consolidation of core • DNS servers; Domain controllers infrastructure services and data storage • Storage—SAN, NAS, Virtual storage Platforms Integration/convergence of operating • UNIX, WinTel standard versioning (servers by OS) systems control; • Virtualized hw stack “farms” by OS Consolidation Networking Standardization and consolidation of • Integration of two corporate WANs, hierarchy network infrastructure (WAN); telecom with different IP Addressing strategic sourcing schemes IT facilities Rationalization of technology facilities and • Data centers; Call centers; operations centers Command centers; • NOCs (Network Operating Centers) Technical challenges

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Managing transaction execution

Deloitte’s Integration Report 2015 found that Focus areas for Legal Day 1 and billing to avoid unexpected cost “having executive leadership support” was Depending on the new company’s branding overruns. It is imperative to educate the the most important factor in a successful strategy, IT should plan to spend a great IMO and executive team on cost and integration. All functional areas rely heavily deal of time with Marketing/Branding timing implications for any decisions that on IT to execute for daily operations, and or Communications teams leading up may increase scope. On the flip side, while during a merger these interdependencies to the LD1 cutovers. Rebranding efforts reducing scope can provide an opportunity are heightened. Sales, HR, Finance, typically go into full swing on LD1 and IT to reduce short-term integration costs, if Marketing, Real Estate, etc., cannot execute will play a vital role in launching a new an activity is a prerequisite to drive greater their integration plans without IT first laying website, synchronizing email addresses consolidation and value into the business, the foundation. and potentially redirecting traffic from then it is probably not a good choice for old websites or rebranding web sites in elimination. According to the report, enabling cross- coordination with other marketing activities. functional and executive visibility into Also, there are several important timing Balance business and integration integration interdependencies and issues to consider, such as deploying priorities establishing effective oversight and announcements via external business When two companies merge they should governance (e.g., Integration/Project websites before activating the company’s proactively and carefully address the Management Office) were valuable to overall new website, and documenting/distributing cultural aspects and differences that may integration success in over 85 percent of an Appropriate Use policy to all employees. exist between IT organizations at both deals.3 By operating under an effective companies. Establishing a set of guiding governance model, the integration team can Controlling costs principles can help to bridge cultural gaps, adjust plans, mitigate risks, and execute with On average, IT typically accounts for a align on priorities, and set expectations for full alignment. Without it, business functions significant portion (over 20%) of a merger’s integration execution. These principles may may commit IT to perform tasks that may total integration budget, depending on be as simple as “do no harm” to the business not be feasible by LD1 or may impact the the deal’s size and complexity. Holding or include additional guidelines such as integration program’s overall success. the line on transaction execution costs focusing on optimization or delaying non- Business and IT functions should open a requires vigilance and ongoing monitoring. revenue-generating activities. communication channel early in the M&A It helps to assign an IT team member to lifecycle and maintain it throughout the take ownership of cost tracking and provide Keep in mind that prior to the M&A integration process. a regularly updated dashboard view into transaction, executives in both the financial health of the integration. organizations may have approved and set in By this point in the lifecycle, IT executives This will be especially important in areas motion a number of large-scale IT projects. and the integration team should have using contractors, as the majority of these With the merger, some of these projects clearly defined and mapped the scope resources likely will be paid hourly and may no longer be relevant or they may and resource requirements for all projects susceptible to time/effort overruns. If the be counterproductive to the integration selected for LD1 and to achieve the post- IT department doesn’t have a dedicated strategy. An early step in establishing transaction End State. finance person, leadership should request governance structure and cross-company that someone be assigned from the Finance team alignment is the consolidation and This plan should include both internal and team. assessment of all active global technology external requirements, given that significant projects and their continuation based on dependencies on third-party applications Approval for IT integration scope changes the current business climate. IT should and environments will exist. The Integration that impact project cost should follow coordinate closely with the business units Management Office (IMO) should existing internal processes for project on stop/delay decisions and, in some cases, continuously evaluate progress, resource financial management. Implementing a a project disposition may need to escalate constraints, and re-prioritize critical projects weekly governance cadence will allow to the IMO for final approval. The goal is to as required. the IT team to closely monitor activities keep the IT resource pool as focused on the integration effort as possible and avoid 3 Deloitte Integration Report 2015 consuming resources in areas that do not clearly align with the go-forward strategy.

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Underlying integration issues

As the integration lifecycle progresses, 1. Managing organizational disruption A clear, detailed, and honest communication each phase presents challenges and Employee uncertainty and organizational plan can ease M&A-related employee opportunities. Those organizations that disruption are natural outcomes of an anxieties. An IT communication leader can quickly plan, adapt, and react are often M&A announcement. IT executives should closely aligned to the overall enterprise better-positioned to execute a successful manage concerns within the IT workforce integration team should work with IT integration and end state. Three underlying as employees begin to churn on rumors executives to create function-specific issues require IT executives’ attention during and turn to social media platforms and communication milestones and messages the integration lifecycle: analyst reports to clarify their future with to share with IT staff to proactively manage the company. Minimizing organizational their teams. As well, IT-related messaging 1. Managing organizational disruption disruption calls for: should be included in the merger’s overall 2. Synergy capture communication plan to help customers • Implementing a robust communication 3. Security & compliance (both internal and external) understand the strategy transitional stages of technology platforms, The amount of required effort in these • Defining and aligning to a future-state IT help chains, and processes. The following areas will vary from pre-announcement operating model framework provides guidance to address through post-LD1 execution, but all are key challenging questions. • Developing a transition plan. contributors to overall deal success.

Answers are known, but Answers are not known, but there Answers are leaked to the legal constraints prohibit is a need to reassure workforce media and/or employees immediate communicating to workforce

• Describe the integration planning • Ensure communications SWAT • Clearly communicate when more process to answer open questions. team is trained and in place. information will be available.

• Promote increased leadership • Implement contingency • Keep staff focused on day-to-day work; visibility; prepare IT leaders and communication plan. reinforce the importance of staying on ask them to spend time with their task while merger integration continues. direct reports. • Work closely with the enterprise- level integration team to make • Don’t make promises but be sure approach and messaging are generally positive and upbeat aligned. about the deal.

Source: Deloitte Mergers and Acquisitions Communications Playbook

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Undoubtedly, M&A-driven organizational model design into steps (Figure 7). Once the senior IT leadership team is change can be significant; it requires on board, the next step is to bring mid- executive focus and commitment to Integration provides an opportunity for a level managers and supervisors into the manage employee uncertainty within the company to evaluate and modify its existing conversation and communicate their value two organizations and select the most IT organization design to reduce costs, to accomplishing a smooth integration. The appropriate target operating model. realign roles and responsibilities, reduce entire IT management team should then Employee flight risk is a top concern, and redundancies, and hire talent to achieve the work with HR to create transition guides added pressure from synergy targets may desired end state. However, every action to use during one-on-one conversations force IT leadership to make some tough impacts current employees so senior IT with employees. Hosting an IT town hall can retention decisions. The more successful leaders should be enlisted to develop and also help set a positive tone and articulate IT organizations have a unified vision and implement a clear transition plan to help leadership’s commitment to IT staff. communicate that to employees as soon as their teams manage and navigate change. possible after deal announcement. A common platform to align IT leaders is to host workshop sessions to discuss key IT executives should work with HR and topics such as: overall integration program leadership to • New company strategy and mission identify critical IT roles and staff for short- and longer-term retention as the new • The vision for IT in the new company company moves towards its targeted end • Key integration timelines across the state. There is no “secret sauce” to designing enterprise a future-state IT organization; however, it may be helpful to divide the target operating • Quick wins for the organization.

Figure 7: Organizational design and selection methodology

Organization Design Step Description • Review due diligence collected on the acquired company Conduct a current state Step 1 • For both organizations, assess the drivers of IT performance, including things such as organization assessment spans of control, number of staff in certain positions, clarity of job descriptions, talent/talent gaps, etc. • Establish decision guidelines such as using the new company’s business strategy to Define design principles and Step 2 drive IT design, willingness to challenge the status quo, and criteria you will use to guidelines assess your final IT organizational design

Review and Assess • Define all major processes and sub-processes to be performed by IT Create the high-level operating Step 3 • Group processes and sub-processes model • Draw top layers on organization chart to reflect grouped processes and sub-processes • Draw next several layers on organization chart • Evaluate workload requirements and associated resource requirements • Define positions and associated competencies (selection criteria) for future IT leaders Create the more detailed Step 4 and employees organization design • Work with HR to conduct job grading and banding • Define proposed governance and cross-functional touch points

Review and Assess • Work with HR to identify all IT employees to be considered for future-state positions Define employee slates and Step 5 select employees • Work with HR and IT leaders to select employees based on future-state positions and skill requirements

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2. Cost synergy capture Operating model A major component of application Identifying IT synergy opportunities should One of the first areas likely requiring rationalization is renegotiating vendor begin early in the M&A lifecycle’s diligence rationalization is each company’s IT contracts and subscriptions. The end phase and remain a focus throughout operating model. It is important to goal should be the establishment of transaction execution. The process requires understand how things work today to support models which match deployment aligning on and communicating synergy formulate how they should work in the requirements and remove costs for targets, and implementing an execution future to optimize both service delivery products no longer in use after integration. structure that can actively manage and track and spending. A model map typically This process includes uninstalling efforts towards these synergy goals. defines how each organization delivers legacy and unused software followed by IT services; its staffing/organizational decommissioning or consolidating server Top-down synergy targets structure; insourced versus outsourced hardware, ideally freeing-up licenses IT is one of a company’s largest cost centers. capabilities; and execution model. For for other projects. An immediate focus area A merger creates potentially duplicative example, defining a Legal Day 1 and target- should be critical applications and vendors assets, people, processes, and technologies state operating model is vital to aligning identified as high risk to successful – a situation ripe for synergy capture. the right staff to the right roles. Expect integration or those with a high degree of However, each company’s structure, conversations on headcount rationalization redundancy. This approach should extend organizational maturity, business processes, and staff synergies to start well before LD1 to optimizing server resources and taking and vision for service consolidation may and to execute within 60-90 days of the advantage of licensing terms for virtualized drive value capture. Analyzing these driving event depending on the expected level of environments. forces will help IT leaders define which integration consolidation. top-down synergy targets will be used to Vendor contracts determine the merger’s overall success and Applications Early identification of contracts across both guide integration through program planning Merging two organizations typically organizations, proactive planning, and and execution. illuminates redundant IT solutions and ongoing communication can aid contract application rationalization opportunities. negotiations. A dedicated contracts team Bottom-up synergy planning Decisions to retain, starve, or sunset should develop a comprehensive list of Translating top-down synergy targets applications should be prioritized in contracts focused on realizing maximum into tangible opportunities begins with a partnership with business units/functional synergies based upon the overarching comprehensive current-state assessment of areas. IT application rationalization can contract strategy. The dedicated team both organizations’ IT assets. This inventory reduce future licensing, maintenance, should quickly analyze and align on contract spans infrastructure, applications, staffing/ staff, and hardware/data center costs – strategies across existing software licenses, organization, service providers, and more. integrating financial and other business required new purchases, and synergy The resulting analysis should align the systems can further optimize the company’s identification and realization plans. integration strategy to synergy goals. cost structure. The team can use a “clean room” to optimize this process and to legally and quickly share and analyze sensitive contract data between organizations (Figure 8). The team should also make sure that proper escalation and support is available for high- impact contracts or for vendors pushing back on contract terms (e.g., vendors using the opportunity to monetize the event, requesting re-buying of licenses already owned).

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Figure 8: Clean room framework

Clean team definitions Clean team information flow

Clean rooms • A secure data environment, both physical and electronic, used to collect and analyze sensitive data Customer/ Company A Company B Customer/ • Enables integration planning within the boundaries of Supplier functional functional Supplier the law data teams teams data Clean team • Works with Buyer to coordinate internal and external operations resource effort in the Clean room leadership • Oversees analysis, timelines and development of deliverables, providing quality control, decision support and status checks Company A Company B • Manages parlor room and communication sessions legal legal for communication of deliverables before and or at close

Clean team • Administers clean room working procedures administration • Works with operations leadership to populate status reports/operations updates Clean rooms • Facilitates data collection and organization for clean Clean room administration teams Revenue Cost Employee Functional • Analyze data, evaluate results, prioritize opportunities synergies synergy clean team clean teams and develop final deliverables clean team clean team • Prepare and deliver final recommendations

Commoditized technologies There can be many hidden costs in these Synergy capture should remain top-of-mind Commoditized technologies such as relationships, such as term length, early as the IT organization executes towards data centers, computer hardware, exit penalties, minimum fee structures, and Legal Day 1 and beyond. Most, if not all, telecommunications and IT networks, other potential expenses. Fortunately, the IT synergy realization will not occur until typically are the last big buckets of new company’s larger size should enable after LD1. There is a little breathing room, synergy value capture that IT will need to greater per-unit discounts with vendors but executives should build a culture of rationalize. Both companies likely have based upon buying volume. opportunity identification, assessment, and different data center geographies, rack tracking so that IT can deliver its piece of footprints, hardware relationships, and Executing against synergy goals the financial pie for the new company. Steps communications partners: the integration As part of IT project planning for Operational include developing a common business team should assess the current landscape, Day 1, Legal Day 1, and post-Legal Day 1, process framework; collecting cost/revenue develop a consolidation strategy that will IT should establish controls to identify, synergy plans and end-state business eliminate duplicative costs in these areas, track, and monitor synergy realization. capability needs for each work stream; build the requirements and contracts Not all projects will have an associated identifying process and IT-related initiatives behind each vendor relationship, and synergy capture goal, but it is IT leadership’s to achieve end-state plans; prioritizing share them across the borders of the two responsibility to prioritize efforts for IT initiatives based on expected synergy organizations at Legal Day 1 to build the synergy capture to achieve the M&A capture; and leveraging a series of use cases plan. transaction’s goals. to design future-state processes that enable each priority initiative.

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3. Security considerations In many organizations, the Information With more organizations moving to cloud Security function integrates in tandem with providers and Bring Your Own Device the Privacy Officer (data privacy) and Legal (BYOD), IT security becomes an ever-growing (confidentiality). Close alignment of these concern. Today’s cyber threats extend areas during a merger is essential to confirm beyond an organization’s walls to include that legal lines are not crossed before hosted data, e-mails, and mobile devices. it is appropriate to do so. For example, For organizations that retain large volumes sensitive data such as customer lists or of customer/personal data, it becomes even vendor contracts cannot be shared prior more important to understand the maturity to Legal Day 1. Providing clear guidance of a target’s security governance and to enterprise integration teams on how oversight capabilities. to maintain security and privacy controls, and establishing an integration governance Integration will expose the combined body to review questionable scenarios can company to a new IT environment and, help minimize risk exposure throughout the with that, new security considerations integration lifecycle. and potential regulatory or compliance requirements. Security teams from both Moving forward organizations should quickly align and create CIOs and their teams should engage early an effective governance model to confirm and often in a deal in order for IT to play their involvement in decisions impacting the a pivotal role for organizations striving to security of the new IT landscape. Ultimately, maximize the value of the transaction. From the goal is to protect both organizations’ managing organizational disruptions to interests and build confidence that no synergy capture to security and compliance, unnecessary risks will be taken as part of IT should remain actively involved to bring the integration activities. a clear perspective on how to balance the technology complexities with deal objectives Developing a collaborative relationship while maintaining business continuity. between the security and infrastructure Organizations that embrace IT as a key teams is imperative. As IT begins connecting stakeholder and integral part of the deal will the respective networks, each company likely be better positioned for a smoother will be taking on the risk of any inadequate transition and successful end-to-end controls at the other entity. Major decisions integration. made by IT leadership should answer questions including: “How does this align to our integration security expectations?” “Will this change impact our ability to maintain compliance? If so, what is the possible impact or mitigation approach?” Pre-LD1 activities such as testing potential network penetration and testing pre-LD1 connections between the companies tend to pay dividends in minimizing security vulnerabilities that require post-deal remediation.

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Driving M&A value through HR integration Get it right from the start By Mike Fuchs, Tom Joseph, Cliff Mansfield, Tom Seliga and Matt Usdin

The evidence is overwhelming: Acquiring structure of the deal, effective timing for key Plan well: Understanding deal structure companies can neither focus too much nor decisions and milestones, and development and HR’s role too early on an M&A transaction’s people of strategies to support a smooth What should the “New Co” future state implications. Chief Human Resources integration. HR leadership also can lead the look like? Officers (CHROs) as leaders and the Human organization’s efforts to identify potential No two M&A deals are alike – each Resources (HR) function as a whole play business and human capital risks, and shape transaction’s strategic and HR-related critical roles in determining whether a the strategy and integration plan. With HR objectives may vary based on many factors. potential deal realizes its strategic, financial, playing a leadership role from the beginning In general, most M&A transactions fall and operational goals. As soon as an of the M&A process, it is more likely that the into one of four strategy classifications – organization begins the M&A process, organization will optimize a deal’s financial transformation, expansion, assimilation, and HR can share vital business information and operational synergies. add-on – according to deal objectives and and expertise that may influence the the relative sizes of the acquiring company identification of potential partners, the and its target (Figure 1).

Figure 1: M&A strategy classifications

Large Expansion Transformation Pace: Cautious/Moderate Pace: Moderate Style: Coordinated Style: Collaborative Target size Change in key areas Enterprise change relative to acquirer Add-on Assimilation Pace: Fast Pace: Fast Style: Selective coordination Style: Directive Minimal change Significant change at target Small Low High Integration

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Transformation: Large target with high Assimilation: Smaller target with high integration needs (i.e., merger of equals or “fish integration needs (e.g., target is assimilated swallowing the whale”). into the acquirer’s strategic plans, systems, In a transformative transaction, significant programs, and culture). effort is made to consolidate HR systems, Assimilation-focused M&A usually includes benefit plans, programs, and policies aggressive synergy goals for eliminating for the newly combined company (“New a certain portion of the target’s systems, Co”). Typically, executives take the most benefit plans, and redundant resources effective processes and solutions from (including senior leadership). Assimilation each organization or implement new, transactions tend to create significant best-in-class solutions for the combined change management and cultural issues entity. When executing a large scale for the target organization; however, the HR transaction, HR leaders may face significant department should not underestimate the challenges, such as meeting aggressive impact of the transaction on the acquiring synergy targets for systems, benefit organization. plans, and redundant resources; gaining leadership and organizational alignment; Add-on: Small target with low integration handling employee engagement and needs (e.g., the target is bolted on to the retention concerns; and addressing cultural acquirer with limited integration). differences. In a typical add-on transaction, the acquirer is bolting on a new business that will not Expansion: Large target with low integration be fully-integrated into the acquirer’s other needs (i.e., large target that will maintain business. These transactions are generally separate systems and/or programs with limited very fast paced, with selective integration integration). between the organizations. It is important to In a typical expansion-focused transaction, understand and plan for the long-term goals the acquirer is widening its global footprint of these types of transactions to determine or adding a separate business that will not the right Human Capital strategy to support be fully integrated into its other business. the deal. Some effort may be required to meet synergy targets for systems, benefit plans, and redundant resources, including senior leadership; however, with limited integration, synergy opportunities also may be limited. For example, the existing HR organization may not possess the competencies to deal with the risks and needs of the new businesses and/or geographies. In addition, the expanded organization may need to rethink its leadership structure, operating model, and talent strategies, which adds complexity.

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HR’s role in an M&A transaction with getting its own house in order. The redesigning HR systems and services. A Regardless of deal structure, it is imperative acquirer should not only perform due strategic HR implementation plan should that HR leaders be members of the diligence on the target, but also conduct a take into account, among other things, leadership team that is identifying synergy self-assessment to understand the issues the leading practices for the combined opportunities, assessing potential financial and limitations of its own HR systems organization (including cost analysis) and operational risks, and developing and processes: Has the acquirer closed and an understanding of the supporting deal terms. By involving HR early in past deals that have not been integrated? infrastructure (e.g., communication, culture, the transaction lifecycle, the function’s Does the current transaction provide the leadership, staffing, etc.). executives can provide analysis and insight opportunity to fully integrate past deals to help achieve the following deal objectives: or improve current processes? Can the In developing a strategic integration acquirer’s systems and processes (e.g., HRIS strategy, the HR team should address the Pay the right price for the business and Payroll) scale to integrate the target? following priorities: being acquired These are just a few of the potential issues • Redesign or harmonize HR policies and • Provide input on the purchase agreement facing HR in any deal. procedures – Inventory all existing compensation and • Assist with performing due diligence and Using a side-by-side, global and country-by- benefit plans and programs for both the identifying and quantifying integration country comparison of the acquirer’s and acquirer and target, including service risks target’s similarities and differences (e.g., providers/vendors used; identify key • Help to mitigate identified risks structure, demographics, compensation differences (compensation, health and and benefit plans, and HR policies, systems welfare, retirement, paid time off [PTO], • Capture people-related integration costs and processes), the HR integration team can etc.). develop an effective integration strategy. – Identify transitional incentive and Achieve growth and cost-saving targets This should include guiding principles, retention needs, including: • Retain key employee populations estimated complexity, timing, and costs, and » Broad-based compensation and potential synergies and dis-synergies. employee job leveling • Maintain employee engagement and » Incentive compensation – short-term, morale Based on the transaction’s size and scope, long-term, equity, and other programs • Stabilize and optimize the workforce as well as the acquirer’s current state, the » Executive compensation and deal team should also determine if this employment agreements, as needed • Assist with quantifying one-time costs and is an opportunity for HR transformation. » Retention and severance plans. ongoing savings Whether it’s a change in culture, systems – Define future-state global total rewards • Enable productivity improvements implementation, or a harmonization strategy and philosophy of HR policies, procedures or benefit – Perform gap analysis against the • Help to restructure the business plans, M&A transactions can provide the inventory of existing benefits opportunity to upgrade or transform the plans to determine plan design In addition to providing input to the deal way HR supports the overall business. recommendations by country– team, the acquirer’s HR organization This may include adopting the acquirer or including cost implications and vendor will need to immediately execute on the target’s HR practices; combining the best requirements. HR integration strategy – and this starts approaches from each organization; or fully

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– Develop strategy to harmonize HR – Define relocation strategy, policy, vendor RFPs), including interfaces with policies and procedures, including and costs, including expatriate general ledger (GL) systems and other performance management and training responsibilities. enterprise resource planners (ERPs). and development. – Identify HR interventions to support – Estimate HR synergy savings and – Develop communications strategy for organizational design (e.g., talent any dis-synergies from migrating to changing compensation and benefit management priorities: job design, consolidated HR operations, technology, plans, policies, and procedures (e.g., performance management, leadership and vendors (HRIS, payroll, time and Frequently Asked Questions [FAQs], development, learning and training, attendance, learning management, Summary Plan Descriptions (SPDs), career mapping, succession planning). recruiting, etc.) employee handbooks, intranet sites, etc.). Obviously, there is a lot to consider from • Harmonize and/or transform HR an HR perspective when developing an operations (payroll and HRIS systems, effective integration strategy. By taking a • Manage talent shared services, etc.) leadership role from the beginning of the – Develop detailed, future-state – Develop country-by-country inventory of transaction, HR will be able to influence organizational structure in collaboration current payroll operations, vendors, pay and gain a thorough understanding with business leaders. calendars, HR data management, and of the deal’s goals and objectives and – Review the future-state organizational HRIS tools/systems, including time and develop an effective short- and long- structure and staffing model based on attendance systems and shared services term integration plan that aligns with deal objectives and adjust as necessary. support structure. and supports the organization’s overall – Review the current employee census – Identify country-specific data privacy efforts. against the future-state staffing laws that impact payroll function and HR model and organizational structure data management. to determine where talent gaps or – Coordinate with the legal department redundancies exist. on legal entities and country-specific – Define the talent assessment and payroll registration process, and with selection criteria, considering existing the finance department on banking and quality, productivity, and responsiveness general ledger requirements for the measures. payroll function. – Assess the selection process, including – Develop high-level integration roadmap title/band mapping process and for HR operations, technology, and relocation opportunities. vendors. – Identify global employment issues – Determine implementation timing including unions, works councils, and any required Transition Services transfer of Undertakings (TUPE), Agreements (TSAs), including service acquired rights, notice requirements, delivery requirements and costing. and potential redundancy payments. – Develop and implement go-forward – Identify potential reductions in force, HRIS/HR operations approach (HR including severance costs. people, processes and technologies, and

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HR value impacts: may reveal potential “deal killers” in these HR operations-related risks: This is a Integration and transformation areas, as well as other factors that could bit of a catch-all topic, but it can still be During an M&A transaction, HR significantly hamper the long-term success significant. It is critical that an acquirer ask professionals are often expected to work of the transaction. Some of these key the target about the number of open Equal across the enterprise to drive significant discoveries include: Employment Opportunity Commission synergies through headcount reductions. (EEOC) claims, active employment This traditional view of HR’s role is often Executive leadership risk: An acquiring litigation, current Office of Federal Contract overstated and, in some cases, myopic. company’s HR and executive leadership Compliance Programs (OFCCP) audits, and When two organizations are combining, should partner to review the target’s current Department of Labor investigations. operations are often complementary development and succession planning A preponderance of these issues can rather than redundant. Sometimes, these for the C-suite and other executives. This provide significant clues as to the target organizations also have optimized their analysis can identify if there is significant company’s HR’s governance, its position on administrative functions to the point risk or weakness in the governance of risk avoidance, and its corporate culture. where the additional scale of the combined the business. Also, many executives This area tends to be “feast or famine”: In organization does not provide much have “change of control” clauses in their most cases, there are no significant issues, opportunity for synergy realization. That is employment contracts that can drive large which would seem to indicate a properly not to say that HR cannot drive value in a cash outlays upon deal close. In addition to managed HR risk position. When trouble is transaction; however, HR should understand risk and cost identification, C-suite analysis uncovered early, however, the acquirer may the value that can be realized through both can help the acquirer’s leadership team be better-positioned to mitigate or avoid traditional and non-traditional means. The determine priorities for organizational associated risks and costs. key is to dig deep from the beginning of the changes at deal close. transaction and follow through well beyond NOTE: It is very important to involve internal deal close. HR operating model misalignment: or external employment legal counsel during Does the target have multiple HRIS or these activities to ensure that the analysis is Deeper diligence: HR-driven value in payroll systems? Has it executed a number accurate and follows all legal guidelines. pre-close planning & preparation of acquisitions but not had the time or Prior to an M&A transaction, both acquirer resources to do a full HR integration? Finally, M&A team members should and seller routinely conduct thorough Does the target have multiple HR business acknowledge that human capital due diligence. This process is vital for partner structures, or multiple shared opportunities and risks exist in every deal, the acquirer to fully realize the strategic service centers? How many benefits regardless of scope. Giving HR an active expectations set forth in the initial deal programs does it have? Bottom line, there voice early and often during a transaction valuation, and is critical for the seller to are many reasons why misalignment may may lead to significant cost savings and a determine that the acquirer is viable and exist in an HR model, any of which could reduction in employee-related risks. capable of executing the transaction. sidetrack successful deal execution. An Given that many deals are executed to acquirer should assess challenges and gain operational economies, market risks early to determine the potential share, technology, or geographical scale, cost of misalignment and proactively due diligence often centers on meeting develop a strong integration roadmap. regulatory requirements, financial This assessment also might highlight statement implications, and basic business potential delays in achieving some of the functionality. There are significant HR- deal’s strategic, operational, and financial related value drivers in this diligence phase, targets, and influence the overall deal price such as analyzing retirement funding (the accordingly. lack of which could add significant costs at deal close), and proper valuation of health and welfare plans. Thorough due diligence

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Keeping the lights on throughout may cause disruptions in downstream Separate cleanly. Creating and executing integration: HR’s value as a business HRIS and payroll systems. It may sound a consistent and concise severance steward obvious, but ensuring that everyone process can drive significant value during As explained in this paper, strategic HR in the new organization receives an integration. HR can strengthen employee leadership can provide significant value error-free, first post-close paycheck goes trust and protect the company’s reputation during the M&A lifecycle. However, a a long way in helping employees at all by implementing a separation process number of tactical HR actions, when levels settle in to the new organization. that meets local legal and regulatory proactively implemented, can also add requirements and is guided by firm business value by “keeping the lights on,” Headcount synergies milestones, clear communication, and strict particularly during integration. As stated earlier, a well-known HR rigor. responsibility during M&A is facilitating the HR Day 1 focus areas realization of headcount synergies. Often While Day 1 is a significant milestone in a this is seen as identifying and eliminating new company’s life, it typically requires few, organizational redundancies. For many if any, noteworthy HR operational changes, companies this is where the exercise begins such as benefits integration or payroll and ends. However, strong HR leadership adjustments. That said, employees who are can transform the pursuit of headcount joining the new organization are likely to synergies from a pure cost play to true have questions and concerns that HR can organizational alignment. There are a help to address. Important HR Day 1 focus number of ways that HR can add business areas include: value during this process: 1. Clarifying leadership structure: Facilitating organizational design Understand retention. Well-planned changes that become effective Day retention strategies can have significant 1 means going beyond the typical impact and make every dollar paid count. announcement of who is in what HR staff should understand who the key leadership position. Using meetings and employees are, why they should be retained, select strategic materials, HR should aid and what it will take to make retention employee understanding of what the meaningful. new leadership roles might mean down and across the organization, therefore Match the organization structure to alleviating some anxiety. the business model. HR should work with 2. Managing and communicating C-suite executives and department heads to change: HR should work with match the expanded organization structure Communications, Marketing, and other to the combined company’s operational functions at both the acquirer and target needs. The degree of alignment between companies to develop and communicate operations and organization structure a change management strategy and directly drives optimal cost reduction and implementation plan for Day 1 and operational efficiency. beyond. The plan should address reporting structure changes, process Select talent wisely. Talent selection is redesign, technology changes, corporate fertile ground for inconsistent decision- branding, and more. making among hiring managers and senior 3. Striving for zero “breakage”: HR, IT, executives. HR can help to drive logical, and other departments should strive business-based employee selection by to make sure that any Day 1-related optimizing the process design, extracting changes do not “break” existing systems. the right data, and providing consistency Even limited organizational changes throughout the hiring process.

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HR integration Communicate clearly and often. HR synergies and HR integration synergies Combining two HR functions is not easy; integration often brings a significant arrive on time and in the expected sometimes, it may be the most prolonged amount of change for employees and amounts. In other words, HR developed portion of post-deal integration. While the their dependents. The biggest stumbling and implemented its plan so smoothly that overall concept is not necessarily complex, it block in this scenario is lack of information. the integration was a non-issue and the requires flawless execution. HR Integration Rumors, innuendo, frustration, and even expected value was created or exceeded. value is driven in a few straightforward ways: anger can quickly fill the vacuum created by no information. Even if there is little of Identify the value. What are the goals of significance to share at a particular point in the integration? What value is realized by the integration process, telling people when combining vendors and systems? What are they can expect an update may be all it takes the risks? All of these questions will help to assuage fear and reduce misinformation. shape the HR integration’s strategy and Bottom line: have a plan, communicate the purpose, and help the new organization plan, and execute the plan. achieve its expected value. Test, test, and test again. Testing is a Do it once, do it right. Just because an critical yet frequently overlooked step in organization can integrate one part of the HR integration. By creating a robust testing HR function quickly doesn’t always mean plan for HRIS, payroll, benefits, and other that it should. Minimizing the number of processes, HR leaders can help to deliver an times a “change” occurs and having clear issue-free integration. milestone dates when multiple changes will take place may help the HR team The value of boredom avoid integration burnout and employee When is employee boredom a good thing? confusion. When it happens during HR integration. By providing consistent processes, clear Sweat the small stuff. Effective HR communication, and goal alignment, HR integration, specifically HRIS, payroll, and can make sure that employees know what benefits cutovers, requirespaying great to expect and when, so they can focus their attention to the smallest details. Payroll attention on their daily responsibilities. deductions, payroll tax registrations, Boredom means that employees who are garnishments, reporting relationships, transitioning out of the organization are transition of deductibles and out-of-pocket treated with respect and transparency. (OOP) maximums, and payback of 401(k) Boredom means that no one misses a loans are just a few examples of incredibly paycheck or a payroll deduction. Boredom detailed items that – when not properly means the day after benefits integration managed – can produce significant an employee walks into a pharmacy and disruptions and costs. When it comes to HR obtains their child’s medication without integration, no detail is too small. issue. Boredom means all people-related

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M&A as a catalyst for HR pipeline (acquisition, development, and transformation succession) is fractured and does not have The amount of upheaval involved with M&A- a clear line of sight through the employee generated HR integration can be substantial. lifecycle. An acquisition could add scale For many organizations, navigating this and momentum to jump-start a program level of change can seem overwhelming, to optimize the talent pipeline. Integration but within that transition, momentum versus transformation is a sliding scale for longer-lasting change can be created. of possibilities. Executives should select Take, for example, a CHRO who has been the area(s) where the most value may be seeking opportunities to reduce HR costs realized, create a compelling business case by moving transactional HR activities into for their decision, and move forward with a shared services environment. During purpose. project planning, the CHRO’s company acquires another business of substantial Arrive early, work the room size. The initial priority would appear to If HR is not involved from the beginning of be completing the transaction prior to the M&A process, information vital to the the HR shared services transition. From a transaction and subsequent integration strategic perspective, however, using the may be omitted or underutilized. By transaction as a change agent to merge both understanding and assessing the value of organizations into an HR shared services specific deal drivers, HR can help to identify environment could create more value for the and prioritize people-related strategies, deal and the new company. Additional value risks, and opportunities, and express an organization can realize by transforming potential options to the leadership team HR during an M&A transaction includes: in relation to deal terms and objectives. Arriving early and working the room during • Accelerating and increasing cost synergy an M&A transaction can elevate HR’s value realization role to one that will create value for the • Reducing the “us” versus “them” cultural organization well beyond Day 1. dynamic as both organizations move into a new model together

• Leveraging deal budgets to accelerate optimization of the new HR model

• Avoiding perpetuation of outdated or inefficient policies, processes, or technology.

There are many levers that executives may pull to help turn M&A HR integration into HR transformation. Understanding the current state of each HR function is critical in selecting the areas of greatest potential impact for the function and the organization as a whole. For instance, perhaps the HR operating model is optimized but the talent

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Lead with a winning hand Positioning leaders for integration and transformation By Davi Bryan, Tom Joseph, Don Miller and Matt Usdin

A merger or acquisition (M&A) is one of to engage stakeholders in fulfilling the • Lead differently. Post-M&A the biggest game-changing opportunities vision for the new organization. Both the transformation often calls for new people available to an organization and its executive leadership and transaction management skills, especially if the deal leadership. M&A can open doors to leadership teams must be committed combines organizations with dramatically new markets, fill talent gaps, improve and patient throughout the deal lifecycle. different cultures. Executive and functional operational performance, grow shareholder Transactions require a steady hand, so leaders should be coached on what to say value, and even allow the expanded it’s imperative to find leaders who won’t and do to help move their organization organization to shape a new culture. To get flustered during this uncertain and in a positive direction. Training support fully realize anticipated deal synergies, dynamic time. should include establishing a collaborative the management team needs to lead with environment with transaction planning • Engage: Define each leader’s role in a winning hand: Achieving the desired that is transparent and synchronized; the new organization and address their results often hinges on executives’ ability to encouraging leaders to talk candidly with individual questions or concerns. You can’t engage the workforce and lead proactively, their people at every level and promote engage your workforce with a disengaged positively, and enthusiastically throughout idea-sharing; and asking leaders to leadership team; leaders need to know the transaction lifecycle–including communicate specific ways their people what is expected of them and have no post-deal integration and organizational can contribute to the new organization’s confusion about their roles if they are to transformation. goals and how they will be rewarded for achieve the desired result. those contributions. Stacking the deck: Preparing the • Communicate: Tailor messages to • Cultivate patience while driving leadership team address the concerns of each leader’s performance. M&A-related Experienced CEOs know that a component key audiences. Employees notice when a transformation is an iterative process of an effective M&A transition includes message has been carefully crafted with that for many employees may seem insulating customers from the uncertainty their specific issues in mind. chaotic or disorganized. The resulting that a proposed deal may present. For • Practice: Provide rigorous training anxiety and frustration can interfere this to occur, leadership should rigorously and practice sessions to help leaders with effective day-to-day performance. prepare to guide employees through the polish their deal management and Leaders should set realistic expectations deal process while keeping it “business as communication skills. for employee performance, allowing usual” for customers. Preparation begins them time to adjust to new ways of doing with selecting an operating model and Upping the ante: Engaging leaders for business. When leaders inspire and leadership team to take the helm during the success model positive behaviors, they can help transaction. Smart first steps to consider Identifying capable individuals to lead the to ease employees’ concerns resulting include: organization through an M&A transaction from deal ambiguity, thus allowing them • Design: Define the new operating model, is an important step forward; however, to concentrate on delivering an excellent overall organization structure, and effectively engaging these leaders to customer experience. leadership roles that will support it. transform the post-M&A organization can make or break the deal. Preparing leaders • Select: Choose top-tier, transformative for this important role may require that they: leaders–those who are able and willing

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Play it forward: Aligning the team • What’s required to realize the deal Double down: Building a high- It’s easy to spot a well-aligned leadership strategy? Project into the future. What performing culture team by observing what they say and do. needs to be done and how long will it take A company’s culture can be described as Acting as a unit, they share a consistent, before the new organization achieves “why things work the way they do around clear vision of the future organization and anticipated deal synergies? here.” Building or reshaping culture as a the value it can provide to all stakeholders, • How will the team execute a seamless result of M&A takes planning and time. including employees. With everyone transaction? Has anyone on the leadership Transformational leaders can help to mold playing the same game, the organization team been through an M&A previously, the future organization’s culture through can attain the stability and direction it or does everyone need to sharpen their their words and actions–the way they treat needs to undergo an effective post-M&A abilities and expand their skills to lead stakeholders and where they focus their transformation. Unfortunately, there’s no through the transformation? energy and attention. Table stakes for a straight path to alignment. The process positive company culture include a clear begins with a hypothetical future-state Turn the tables: Creating positive buzz operating model that each stakeholder vision; one that changes and evolves as the understands; an organizational structure It typically takes weeks, sometimes months, leadership team debates ideas, concerns, that shows people where they fit and of thorough due diligence and skilled and alternatives. provides them with the proper resources negotiations to arrive at mutually agreeable and reporting relationships that they need M&A deal terms. It’s no wonder that An effective way to develop and test various to be successful in their jobs; leadership leadership teams sometimes forget that hypotheses is for senior executives to that’s aligned to support common principles certain stakeholders–including employees– sponsor a leadership summit to explore and objectives, and that is committed to may be caught off guard when they hear operating models, cultures, and structures “walking the talk”; rigorous standards for about a pending deal. Controlling the flow of that may allow the combined company to how leaders communicate; and talent information is critical to gaining and keeping deliver more synergistic value. Observing strategies that are focused on retaining key the trust of the workforce. As mentioned how the participants conduct and express competencies and engaging employees. previously, this means that news should be themselves during the summit can also communicated with clarity and enthusiasm. give senior executives insights to select the Split the pot: Everybody wins go-forward leadership team. The goal of the An M&A deal can provide a rare opportunity Leaders should strive to move beyond summit isn’t to gain consensus. Rather, it’s to bring together the very best people, effectiveness to become influential to extract sharp thinking that can drive the products, and operations into one communicators who create positive organization forward. To that end, leaders organization; to create more value in months “buzz” around the deal. Effective leaders should aim to answer questions such as: than in-house development can in years. control potential rumors and speculation However, delivering on this opportunity by considering the perspective of their requires leaders to demonstrate skills that • Where are we going, and how can we stakeholders—analysts, shareholders, go beyond those needed for business as get there? Start a conversation with the employees, vendors, and customers—as usual. By aligning, acting and speaking as leadership team about how the new they respond to each group’s concerns. one, they can help create a compelling organization will create future value. Influentialleaders go beyond control; vision for the future company and provide The exciting thing about an M&A deal is they build stakeholder excitement and the support and resources to achieve this that the place the new company is going anticipation by communicating the vision. A successful M&A deal requires doesn’t exist yet–leaders and employees anticipated value that the combined entities transformative leaders who will empower get to invent it. Collaboratively developing will generate in messages tailored to specific and inspire employees to pull together and a clear end-state vision and an actionable groups’ interests. strategy for how to get there are key steps collectively achieve more than they ever to fostering an engaged transformation imagined possible. leadership team.

• How will the new organization operate? Defining how the organization will satisfy customers requires a thorough understanding of the people, processes, and technologies that are required to do so. Are the right capabilities and resources in place? Can they be adapted? If not, how and from where will they be sourced?

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Regulating the pulse of an M&A transaction from announcement through Day 1 By Davi Bryan, Tom Joseph, David Russ and Matt Usdin

Effective employee communication is to support development of a messaging key to stability strategy and high-level communications From water cooler whispers to manager plan. Integration team members, and HR hints to executive announcements, an and communications staff should have M&A transaction produces a steady stream easy access to facts such as deal size, of information (and misinformation). The number of employees, company acquisition pulse of a deal lies in the timing and mix of history, headquarters location, executive corporate messages; the challenge for an biographies, and annual revenue. integration team is to regulate this pulse by providing message clarity and consistency, Relevant questions: Which deal parameters and promoting understanding among both are team members likely to reference existing and new employees. throughout deal transaction and Effective communication is key to integration? What non-confidential maintaining organizational stability in the information is available about the deal face of M&A-driven change and ambiguity. strategy and rationale? What projections To create a cohesive and compelling have executives made about the value that messaging strategy, Human Resources (HR) the transaction will deliver? and communications staff and integration team members should focus on: Deal type M&A deal type can influence the messaging • Sharing the facts strategy. For instance, If the target company • Talking to leaders is being acquired as an independent subsidiary, consider how to introduce its • Setting the stage for a positive employee goals, principles, history, and successes to experience the buyer’s employees (e.g., create a “getting • Establishing communications governance. to know you” feature series and post on the buyer’s intranet). Additionally, be mindful Sharing the facts of sensitive topics that might create friction The period between deal announcement and cause business disruption. For a stock and deal close can be an anxious time for deal, the expected integration level and employees. A good way to reduce anxiety timeline can vary greatly. Focus on providing is to promote understanding. First and consistent and accurate messages, and foremost, share the facts as early and fully addressing employee concerns and avoid as possible. Use initial communications to prematurely setting expectations by promote employee understanding of deal overpromising before leaders have reached strategy, rationale, and terms, keeping final decisions on integration terms. in mind that specific deal terms likely will influence communications content, tone, Relevant questions: How does the purchase and timing. agreement impact terms of employment? Specifically, how do deal terms dictate Deal strategy and rationale impacts to employment, compensation, Compile a reference library of deal facts benefits, equity, and retirement? What are and leadership quotes/announcements the target employees’ concerns?

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Talking to leaders Create core communications themes Acknowledge employee nervousness In addition to sharing the high-level deal Talk to company leaders about integration about the future strategy and terms with employees, another objectives and consider how they can be An unfortunate hallmark of the post- integration priority is to set the stage for consistently and thoroughly addressed announcement-to-pre-close period is an employee experience that corresponds through appropriate communications employee unease. Brainstorm potential to leadership expectations and goals. vehicles. Best-in-class programs often employee concerns among integration and Uncertainty is an implicit component of include communications themes around communication team members. It is likely change; in uncertain times employees employee engagement and retention, that competitors are poised to poach key look to company leaders for direction. If improved productivity, innovation, scale, and talent, so head-off a potential employee the integration team’s communications operational effectiveness. exodus by providing tailored leadership and change management efforts do not communications that engender trust. correspond to the “straight talk” emanating Relevant questions: Which terms, phrases, from leadership, it will be challenging to and themes are used frequently by leaders? Relevant questions from employees: Will I maintain credibility with the employee body. Has the integration team considered have a job? Will my role change? Will my a sentiment analysis pre- and post- day-to-day work (laptop, commute, business Meet with leaders to understand integration announcement? What are the terms to avoid card, email) change? Will my manager objectives and use these to construct when discussing productivity, effectiveness, change? Will I have to switch offices? Will my a foundation of core messages and and synergies? compensation or benefits change? communications programs that align to and support the deal architecture and Setting the stage for a positive Prepare leaders with talking points leadership strategy. employee experience about outstanding decisions Following initial deal communications, Arm leaders and managers with talking Note: See the “Critical People Must-Haves” sharing leadership perspectives, and points on outstanding decisions; this section for further guidance on establishing developing core themes and messaging enhances credibility by driving a cohesive, a combined leadership team that is visible, vehicles, the integration team may face consistent message across the organization. accessible and aligned with one another on some troubling questions: How do we Be sure to include talking points on the vision, strategic objectives and values. communicate when we have nothing new potentially sensitive questions that leaders to say? How do we ease employee concerns may receive during integration planning Understand the audience when we can’t answer their questions? meetings. Categorize employee groups in a way These issues may become particularly that makes sense for the new business. important when an estimated deal Relevant questions: What is the timeline Whether the designation is by function, completion date is delayed, for example, for communicating organizational geography, business unit, employee level, or while the M&A team obtains all necessary announcements and decisions? How is a combination of various factors, it is critical regulatory approvals. leadership committing to this timeline? Is to understand who each key audience group there a chance that company headquarters trusts as well as how their leaders want Case in point: When a healthcare provider will be relocated? How will employee them to feel about the journey ahead. experienced a delay in closing a deal benefits and providers be consolidated and impacting over 100,000 employees in 30 what is the timeline? Relevant questions: How often should countries, its communications team hosted communication take place? What weekly calls with country leads, partnered communication style is most effective? with the employee experience team to What is the appropriate vehicle? Who is the distribute delay FAQs to both buyer and most appropriate person to deliver these target employee groups, and provided messages? Which employee groups have the talking points and key messages for leader- highest flight risk? What is the process for led team meetings at manufacturing sites. identifying key talent? When an integration team is hard at work on pre-close planning and there is no new information to share, focus on setting the stage for an effective Day 1 employee experience and easing employees through what can be an unsettling transition period.

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Outline work council/regulatory body message content, the integration team also Establishing communications considerations performed an analysis of the mediums that governance On deals with significant international reach, most effectively engaged employees on A structured communications and remember that work council and regulatory both sides of the deal and harnessed the change management program provides body considerations may exert considerable power of those platforms to control and a foundation that can flex to manage influence when determining access to regulate pre-Day 1 messages. ambiguity and respond to changes personnel data (e.g., employee email throughout post-deal integration. addresses for communications), the timeline Relevant questions: How are target employees Choosing the integration team, designing for organizational decisions, the sensitivity accustomed to receiving news? Does the comprehensive plans to regulate the flow of communications approvals, and the target company have an intranet page for of information, and generating a positive sequence of messages in communications integration-specific communications? Would company culture can accelerate and cascades. employees respond well to a joint message actualize the integration. from the leadership of each organization? Relevant questions: Which integration team Is the target organization accustomed to Pick the right team members are managing work council/ receiving surveys? Pick buyer and seller integration team regulatory body relationships? What is the members who have relevant expertise and work council approval process for employee Facilitate functional integration a commitment to collaboration. Develop communications? Does the organization Develop targeted communications that champions and change agents in both have a strong working relationship with local functional leadership can use to explain organizations to promote positive employee work councils? Are work councils aware of integration objectives to their employees. participation. The team should include and aligned to the organization’s high-level For example, the communications team collaborative, consensus-driven leaders decision timelines? can support the sales function by designing who are dedicated to the effort and who sales handbooks to promote cross-selling, understand the critical importance of Connect with target employees creating a tailored sales communications communications and change management pre-Day 1 plan, and featuring the function in broader to engage employees and realize post-deal Build strong relationships with target integration communications as an employee synergies. company communications counterparts group that is successfully adopting a “best of to understand the types of messages both” strategy. Plan key activities that resonate with their employees. Use Partner with leaders to communicate tough this understanding to effectively connect Relevant questions: How will functional strategic decisions such as office closures with target employees prior to deal close expectations change? Will targets and or separation notification timelines as early and employee Day 1 – this can help lay metrics change? What does success look like as possible. These key activities are not only the groundwork for a positive employee in the new organization? critical to meeting synergy capture timelines; experience. they represent significant change for employees and require extensive planning Case in point: During a recent multi-billion and preparation to execute successfully. deal at a technology company, messaging Planning key activities goes hand-in-hand was distributed across a diverse range of with monitoring effectiveness: Establish communication platforms including blogs, targeted and measureable metrics to live webcasts, traditional newsletters, evaluate the impact of change management and an internal company social media efforts on integration. site. In addition to developing compelling

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Control the message Finally, help to ensure that frontline Keep stakeholders informed by providing employees have the right information consistent, accurate, and up-to-date and tools to prepare them for their future information, and stay on message to help in the new organization. Regardless of minimize the proliferation of rumors and the outcome of operating model and speculation. Without properly controlled organizational design, each employee messaging, employees can easily become should feel engaged, supported, and consumers of misinformation. appreciated to avoid business disruption and provide a smooth transition. A positive Case in point: During the integration of a employee experience requires months small technology company into a larger of proactive, structured, sustained, and technology company, an HR employee measured efforts that begin long before provided details about benefit changes to deal close. an employee prior to their scheduled date. The information was forwarded throughout the company and led to premature attrition, as the actual benefit plans had yet to be finalized. This underscores the importance of cascading messages through a limited number of trusted sources.

Enhance execution Generate excitement throughout a sustained integration campaign to create a positive company culture. Hold leaders accountable for engagement and retention. Build a strong community and support network (e.g., by establishing a buddy program).

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People-related “must do’s” for the first 100 days By Davi Bryan, Eileen Fernandez, Tom Joseph and Matt Usdin

The Watercooler Conversation The deal has closed and you are welcoming 1. Provide a positive and seamless the target company employees into your employee onboarding experience- “Did you hear the news? We’ve been acquired.” organization. What happens after “Day address the “what’s in it for me” factor 1”? How do you engage with this group of 2. Be visible, accessible and aligned-the “I just heard, and I’m not surprised. We were all employees and help them integrate into combined leadership team must share expecting it, I just didn’t know it would happen their new organization without disrupting the same vision, strategic objectives and so soon.” the business? How do you deal with the values watercooler chatter? 3. Actively engage with employees-get “So what happens next? Do we all still have a them excited about the future of the job and do we still report to Bob? He’s been a In the Deloitte 2015 Integration Report,1 combined organization great mentor for me and I know how close you almost 30 percent of respondents said 4. Be mindful of the longer-term future- both are even outside of work. Do you think that their integration fell short of success, deal with the present while moving we’ll be able to sell the acquirer’s products with the top reasons being the inability toward the future state along with our own? That would be a plus for to deal with unexpected challenges and lack my career aspirations.” of preparedness. In this same survey, In this article, we will examine key drivers respondents also concurred on the key for successful integration and offer lessons “Just be happy you have a job for now–if I drivers for successful integration: executive from client experiences about how they guessed we will probably have less than more leadership support, involvement of addressed people-related challenges in the as a result of this integration, and let’s be clear, management from both sides and a robust first 100 days of integration. it’s an acquisition–not a merger.” communications program.

“True. I hope that I maintain my job, title, pay, Regardless of which approach a company continue reporting to Bob, and keep all my selects, ensuring a smooth transition from benefits. I also can’t afford to move locations the beginning of the integration has a and I hope I can keep using my Mac laptop.” high correlation with overall success of an integration1.Below are some critical people- related should-haves in the first 100 days of an integration to support success:

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Provide a positive and seamless Day 1 is your biggest recruiting day. This is • Day-to-day job functions–Provide employee onboarding experience- when you recruit and re-recruit your people. information required for employees to address the “what’s in it for me” factor Set the tone effectively by considering the continue operating effectively in their roles following: One reason that M&A transactions may – How to use newly required systems • Deliver inspiring messages about the fail is poor preparation for the critical post- – How to collaborate with employees future company vision, talent, and benefits merger period1. Issues often overlooked in throughout the organization using to employees for both the acquirer and the planning phase of an integration include technology target not only onboarding acquired employees – How to access new facilities so they can be successful in their new day- • Utilize multiple communications vehicles – How to locate information about to-day roles, but also preparing for difficult to reinforce excitement cross-company product lines for the conversations with employees by being as salesforce if cross-selling is applicable • Conduct celebration-related events to transparent as possible. highlight Day 1 as a significant milestone While these tactical steps seem easy enough A successful onboarding program can make • Provide people leaders and managers to complete, they also have potential to go a complicated process feel simple and with expectations, tools, and resources to wrong. A coordinated, well-planned and effortless. It starts with acknowledging that share information and feedback well-executed integration is critical for there is no such thing as “business as usual,” success. and it’s not necessary to pretend otherwise. The following checklist can help the Start by addressing the elephant in the onboarding team to onboard employees room: What’s happening to people’s jobs, during the first 100 days. roles, titles and reporting structures? To the extent possible, address these questions • Policies–Provide sufficient before Day 1 and reinforce the message communications, documentation and during the first 100 days. Also, create a training, as appropriate. For example, positive–and seemingly effortless-employee policy changes in the first 100 days could onboarding experience coordinating across include information about insider trading, the organization with a dedicated team code of conduct, gifts & entertainment, focused on onboarding. This team will play travel, etc. an integral role in supporting employees by providing the tools and resources they need • Offer letters–Provide reminders for to perform their jobs in the new company employees to review and acknowledge and environment. receipt of their offer letters

• Payroll–This must work flawlessly so Employees will need to know basic employees are paid on time information, such as where to go, how to access the building, where to sit, and • Benefits–Assist employees to understand how they will be paid. Simple enough, but new benefit options so they enroll by the beyond this there’s a collection of additional deadline. Successful organizations have transitions that employees will need to hosted a series of benefit information make. These include: transitioning to a new sessions with employees who will be benefits plan, being trained on corporate required to enroll in new benefit plans. policies, using new IT systems, aligning to Give enough lead time to process benefit changes in performance expectations and enrollments to begin coverage on time; management processes, and systems. keeping in mind the nuances between These transitions may require a change regions for organizations that have a in behavior as well. For example, the global presence way employees will be evaluated may change and it’s critical for an employee to understand performance expectations to eliminate surprises at year-end. A successful onboarding program will account for these changes and proactively address them.

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Be visible, accessible and aligned - the managers have more information than their Continuously monitoring employee combined leadership team should share employees about what the road looks like engagement through mechanisms such as the same vision, strategic objectives ahead, and are often more approachable pulse surveys and focus groups will give and values for employees than senior leaders (it’s not companies insight into trending issues and often that employees will ask senior leaders employee concerns. Successful companies Leaders can influence and manage how about job security or how to access new may implement a two-way feedback organizations are integrated. Successful IT systems). Not all leaders and managers mechanism and a demonstration that integration may require leadership to accept know how to lead well so be prescriptive leadership is willing to listen to concerns and commit to the new organization before about how they should act and what and engage in a dialog with employees. the employees – then set an example and they should say. It’s important to provide According to the Human Capital Trends expectations for the employees to follow enough resources, tools and support to report2, there is a new generation of “pulse” their lead. drive the integration and make it stick with survey tools and open anonymous feedback employees. systems that can allow employees to share To ensure leaders are prepared to achieve their experience on a near-real-time basis. integration priorities, the combined The Watercooler The thoughtful use of such tools can create leadership team should be aligned on the a true “listening environment” for employees strategic vision and path forward for the “Who is going to lead our function? Will we still while giving leaders critical insight into new organization early in the process. have enough influence and authority over our what’s working and what’s not working Organizations often host leadership products and sales approach? And what do you throughout the integration. This helps summits bringing their combined leadership think of our new CEO? Does he/she ‘get us’ and leaders to adjust their communications teams together to align on the combined how we operate?” approach accordingly. company vision, strategic objectives, and values as well as other important business “I guess we’ll have to wait and see. I just hope The Watercooler topics. These are then cascaded throughout our leaders have enough courage to stand the organization. In addition to a leadership up and help preserve our values and pride “I can’t decide if being acquired is a good or summit, business leaders should engage in and ownership over our products. I hope the bad thing.” tactical execution planning that focuses on acquiring leadership team understands what how to influence and support the first 100 matters to us most.” “It’s usually a bad thing, but let’s give it a days as individual leaders and collectively as chance and see what leadership says and more a leadership team. Actively engage with employees - get importantly does. Let’s see what type of tone them excited about the future of the they set.” Employees want to hear from their leaders combined organization just like the media wants to hear from athletes following a win at a sporting event. More and more, it is critical to pay attention Sharing specific information and being as to the employee experience, and even transparent as possible, will go a long way more so during times of change, such as an to inspire and motivate employees who integration. The Human Capital Trends 2016 are wondering about their opportunities in report2 found that employee engagement the new organization. Employees want to is a business imperative for leaders at all understand the combined company vision, levels – above all, the CEO – and no longer stay informed through regular updates something to be measured just once a year about the integration progress, and receive by taking a look in the rear-view mirror. direct, tactical communications from their Engagement is an aspect of workplace life functional leaders regarding actions that that should be continuously monitored in directly impact employees. While it is a proactive way. It is about the future of important to have leaders champion the an organization; a measure of corporate change, mid-levels managers are important health and a key window into the potential influencers as they can hold the key to for future issues and workers’ support for whether employees will stay or go. Mid-level change.

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Be mindful of the longer-term future The Watercooler - deal with the present while moving toward the future state “We heard a lot on Day 1 from the CEO and leadership team, but where have they been?” Is Once you reach Day 100, you are just everything that they said on Day 1 still going to getting started. It’s important to take the happen? momentum that you have built with an eye toward the longer-term future. A great deal “I haven’t seen much change since Day 1. It was of focus is put on Day 1 and the first 100 probably just a “feel good” speech to create days, as it should be. However, employees excitement. Who knows what might happen will decide if they want to stay or go. Those next.” who stay will likely expect to see how the vision and goals set in the first 100 days actually come to life. Completing the entire integration often takes months beyond the First 100 Days. A longer term transition plan, “Day 2” is essential for moving toward the end state. Identifying owners and timelines for future efforts, such as fully integrated HR services, will continue the integration process over the longer-term and create a new, combined organization that realizes the vision and goals announced on Day 1.

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End Notes 1. The Integration Report, “Putting the Pieces Together”, Deloitte LLP, March 2015, www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-integrations/us- ma-integration-report-030415.PDF

2. Global Human Capital Trends, “The New Organization: Different by Design”, Deloitte LLP, March 2016,www2.deloitte.com/content/dam/Deloitte/global/Documents/ HumanCapital/gx-dup-global-human-capital-trends-2016.pdf

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Safeguarding M&A deal value Managing culture clash

By Sarah Hindley, Ami Rich and Matt Usdin

The culture-performance connection The bottom line is that culture is inextricably Cultural issues may derail integration Company culture can have a significant linked to performance, especially in an planning impact on company performance. Indeed, M&A context. The question is not if—but A mismatch in the values and resulting decades of research support a direct link how—companies should manage culture to behaviors that companies consider core between culture and indicators of financial safeguard the value of an M&A deal. to their existence can create challenges and nonfinancial performance.1 While during integration planning and, possibly, the exact formula relating culture and Managing culture clash deep-six integration efforts. Consider the performance has proved elusive, it is clear While business leaders generally recognize case of an American company that decided that companies should consider culture as the importance of assessing and managing to acquire one of its Japanese competitors. one of the key levers they can pull to sustain culture during M&A, many apparently do The integration process was expected to and improve performance. By effectively not feel equipped to make culture-related be fairly straightforward. Executives at the understanding and shaping their culture, strategic decisions. According to one study, acquiring company were used to setting and companies can drive business strategy 54 percent of leaders believe that neglecting achieving targets fluidly by making quick and achieve their operational and financial to audit non-financial assets such as decisions and rapidly iterating on those objectives. organizational culture increases the danger decisions. Substantial, cyclical restructuring of making the wrong acquisition; however, of large swathes of the workforce typically Performance is always a top-of-mind issue only 27 percent of them made cultural was part of the process. for executives; even more so during a compatibility a priority during due diligence.2 merger and/or acquisition (M&A) because Executives at the Japanese target had a M&A transactions are subject to increased Yet, it doesn’t have to be this way. By very different approach to decision-making. investor scrutiny. Moreover, M&A introduces recognizing cultural differences and applying They believed it was important to carefully an element of uncertainty and potential a structured, objective approach to work build consensus to achieve buy-in and volatility into financial results, even for through the barriers created by misaligned alignment across the organization. During consistently profitable companies. As a cultures, merging entities may mitigate integration planning, some key decisions sat result, there is an imperative for executives the risks of a culture clash on the way to a on the table for more than a year while all to carefully manage their company’s culture successful, value-generating integration. stakeholders engaged in the discussion. throughout a transaction. In addition, Japanese company executives’ Failure to address culture during M&A deals understanding of the employer-employee can impact a company’s performance in relationship differed. To them, a corporation subtle ways. Delayed integration due to existed first and foremost to employ people. cultural inhibitors can lead to opportunity Many employees expected to work at the costs or breakup fees if the deal stagnates company for their entire career, with an or gets called off. Productivity and average tenure of over 25 years. Leaders innovation can decline if employees begin believed that reductions in force were simply to question if the culture they “signed not an option. up for” will change. Employees of the acquired company may experience a sense Together, these cultural factors—the of alienation when confronted with the magnitude of which was not fully perceived dominant culture of the buyer, appreciated during due diligence— leading to turnover. The departure of key combined to prolong, complicate, and talent with unique, high-value skill sets can frustrate integration planning efforts. erode profit margins as hiring managers Ultimately, the failure to consider culture scramble to fill gaps. hindered the companies’ ability to preserve the transaction’s short- and long-term value.

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Culture: A key to effective integration to the performance management system A merger or acquisition is founded on an are certainly important. However, leaders investment thesis—a definitive statement of should also inspire employees toward how the deal will create value for the buyer. the social value they will create with this It’s often backed by projected revenue new strategy—how they can help solve synergies and cost savings to justify the new kinds of problems for people. When deal to investors. Whether the goal is to employees have purpose and an emotional consolidate power in an existing market stake in the company’s success, they will or to enter a new line of business, the typically push through a new strategy investment thesis becomes the backbone of despite obstacles.”3 the deal’s integration strategy. In an M&A context, this likely means that However, if the strategy does not culturally it is more important than ever for leaders resonate with the people who are expected to make sure their integration strategy to make it a reality, integration may falter. resonates emotionally with the employees Effective strategies often inspire employees who will bring it to life. This starts with to go above and beyond, forging emotional storytelling. For a health plan, for example, connections that motivate people to “go the it might mean framing the integration as extra mile” throughout the deal life cycle. an opportunity to improve the health and well-being of more members at lower cost. Emotional connections catalyze and It is important to define a deal narrative sustain integration that employees will want to support. Purely While many leaders recognize the critical rational deal objectives like increasing role that culture plays during post-deal efficiency to deliver greater returns to integration, the actual mechanics of shareholders are unlikely to motivate and transforming culture are much less widely inspire, no matter how many times leaders understood. However, emotions may trumpet them. A powerful deal narrative hold the key. As Deloitte observed in a that draws on emotional connections can recent report: “Emotional connections are help to transform the natural emotional especially important for getting people to response to a merger announcement—a change their behaviors because habits are mixture of excitement and trepidation—into tough to break with reason alone … Rational a commitment to a higher purpose. appeals, monetary incentives, and changes

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Global deals: Unprecedented a similar focus on the customer, they pull Global deal’s communication complexity and cultural variability different cultural levers to achieve their breakdown Today’s cross-border deals present goals of efficiency and innovation. Cultural As cross-border M&A becomes more tough choices for leaders, even those variability also may be observed in regional common, business leaders will need to who make culture a priority. In a review and country-level nuances and norms. account for the cultural realities of where, of complex global organizations, James Commonly accepted beliefs about how why, and how the deal participants do Heskett observes, “In many cases, a ‘one business is conducted can play a major role business. A merger involving two American company’ culture is very difficult, and may in global mergers and acquisitions. Attitudes companies illustrates the challenges of be uneconomic, to achieve. A common set about the social impact of restructuring and managing culture in a global deal. Regional of values may be the most that a global how decisions should be made are among and country-level cultural nuances were organization can hope to achieve. But the common cultural differences that can not initially considered to be limiting same value may be interpreted in different directly affect an integration team’s ability to factors in this deal, as both companies ways depending on local assumptions deliver on a deal’s projected value. were headquartered in the United … what does it mean to managers on an States. However, the target company everyday basis in similar jobs around the Geographic boundaries are not the only had a significant workforce population in world? How do they interpret it in practice?”4 hallmarks of cultural divides in modern Germany, while the acquiring company did organizations. Differences may also exist not. As integration work began, country- It can be difficult to manage cultural nuances within organizational subcultures–functions, level differences in business norms and in deals that span multiple countries or subsidiaries, and prior acquisitions. In a attitudes began to undermine the cultural regions. During integration planning, deal health plan example, one company may integration of what appeared to be two teams should account for both companies’ have an Information Technology (IT) function American companies with similar interests. geographic and cultural variabilities, and where the top priority is innovation while the For example, some of the target’s German use them to develop integration strategies other company’s IT department is primarily employees felt that from the time the deal to bridge any gaps. However, integrating focused on mitigating cybersecurity risks. was announced the buyer’s CEO had an company cultures is not the same as Failure to recognize and manage influential overly bold leadership and communication integrating business processes—it is not subcultures can undermine integration style. The CEO quickly earned a reputation possible to simply select best practices and efforts and, ultimately, the ability to achieve for being brash, which delegitimized his rationalize workflows. Organizational culture synergy targets. role in leading the integration process and spans borders and functional boundaries, hindered the two companies’ ability to work and is of profound importance to employees together to realize deal value. and leaders alike. Cultural integration should The CEO’s style was just a symptom of a be handled with care, given the volume of fundamental cultural issue: American and simultaneous changes occurring during German workers tend to communicate and a deal. Leaders need to take into account collaborate in different ways. Recognizing both companies’ distinct cultures and this, the deal team developed cultural subcultures, which likely have developed interventions for both organizations’ organically over time, and select positive leaders and integration team members. aspects from each to incorporate in the new By educating them about the differing company’s culture. work styles, cultural norms, and employee perceptions, the team was able to help When two companies merge, the most the companies establish a foundation for apparent cultural differences typically are cultural understanding and integration. This at the corporate level, where shared beliefs enabled everyone to work together more about the company’s mission, collective effectively and created a tangible financial values, and work processes are common impact by averting a prolonged integration foundations of organizational culture. In process. the health plan example, the buyer might Cases like these show that failing to frame its mission as a commitment to be address culture early and often in an M&A as efficient as possible to reduce costs transaction may have disastrous results, for members; the target, meanwhile, including jeopardizing leaders’ ability to might place a premium on innovation and meet immediate commitments to the integrated care to improve health outcomes investment community when synergy for members. While both companies have targets are missed.

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Managing cultural issues throughout Pre-close preparation: Developing a In some cases, companies may decide the deal lifecycle cultural Integration strategy to conduct a culture assessment before While almost all executives recognize the A cultural integration strategy should align selecting an integration strategy so that they value of managing culture in M&A deals, it is with leaders’ future-state vision and support better understand the cultural attributes not easy to turn that understanding into a the deal’s value proposition and targeted of each company – what each values and viable and actionable integration approach. business objectives. Merging entities may believes and how each behaves. This Part of the challenge is that some leaders choose to maintain separate and distinct assessment can provide early input into do not address culture early enough in the cultures with little or no overlap; synthesize what the high-level cultural integration deal lifecycle. Many of the most successful an entirely new culture; combine the existing strategy may be. In the vast majority of acquisitions will identify each company’s cultures by incorporating the best aspects cases, however, leaders typically select core cultural strengths and acknowledge of both; or adopt the dominant, status quo the strategy based on deal due diligence. cultural differences early on – preferably as culture (Figure 1). For instance, if a holding Companies that delay selecting a cultural soon as the due diligence stage, given the company acquires a smaller company integration strategy and implementation deal constructs. with the goal of bolting it onto the existing plan risk undermining the potential long- portfolio of companies, it might make sense term value of the deal. For culture change to be sustainable, for the buyer and target to maintain and issues must be managed throughout the respect their distinct cultures. Conversely, if deal’s lifecycle, starting before the merger the deal rationale is to achieve economies of is announced, accelerating during the first scale through consolidation, the preferred 100 days of post-deal integration, and strategy may be to combine cultures or continuing even after the integration is well adopt the dominant culture to maximize underway. This vigilant approach requires operating synergies. that the integration team develop a cultural integration strategy to enable the desired business outcomes based on the deal’s investment thesis.

Figure 1: Cultural integration options

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First 100 days: Assessing cultural Culture assessments are not solely for systematic communications and actions variability and opportunity areas identifying risks or differences. They also to reinforce key behaviors of the desired It is critical that cultural integration teams may be used to identify the underlying culture. To illustrate this point, if a culture develop an objective understanding of the strengths of the existing cultures so leaders of courage is desired, leaders from both cultural variability that exists both between can preserve, reinforce, and leverage them companies should consider modeling and within consolidating companies so for competitive advantage. this behavior by demonstrating courage that cultural interventions can be targeted throughout the course of the deal. The when and where they will be most effective. Finally, diagnostics can be used to measure degree to which leaders from the acquired Cultural assessments use qualitative results and reassess cultural fit over time. company demonstrate courage and activities, such as interviews and focus Starting with a baseline at the beginning of maintain focus on business as usual will go a groups, and quantitative diagnostic tools a merger, diagnostics can be deployed in long way towards calming target employees’ to provide the information needed to multiple iterations to understand if cultural nerves. Similarly, if the combined company understand and act on cultural variability. reinforcement mechanisms are successfully does not perform financially as expected bringing the two cultures into alignment. The after deal close, how leaders respond may Deploying a diagnostic tool such as results of the assessment should be used prove to be a watershed moment for the Deloitte’s CulturePath™ facilitates an to develop short- and long-term integration new company. objective assessment of the organizations’ action plans and prioritize the focus for current state and helps define culture ongoing cultural implementation. At the employee level, it is important to in tangible and measurable terms. A create goals, metrics, and performance diagnostic tool analyzes core indices that are Year one and beyond: Sustaining the management processes to incentivize foundational to organizational culture and new culture desired behaviors that may help sustain differentiating indices that can ultimately Sustaining a changed or new company the cultural change over time. Systemic drive differentiated business performance.5 culture is not a one-time project that ends reinforcements can be ingrained in In the first 100 days after deal close (or at Day 100; it requires ongoing action plan the company’s talent infrastructure, before close, if possible), it is important to execution and reinforcement during year including hiring strategies, performance identify where each company falls on the one and beyond. Based on the results of management system, training programs, spectrum of core and differentiating indices the cultural diagnostic assessment, the and compensation and benefits schemes. to make the decisions needed to achieve integration team should develop short- and For instance, if a culture of ownership business synergy targets. long-term plans to drive alignment to the and accountability is desired, then it is combined company’s end-state vision. important to build these qualities into the The ability to leverage differentiating Effective culture plans typically include competencies required for recognition and indices of culture can be a critical enabler quick-win projects as well as long-term promotion. Consider, too, a company that is of cost and revenue synergies, especially strategies that provide the infrastructure focused on promoting product cross-selling during the first 100 days. For example, an and processes to drive and sustain the in the new entity’s first quarter to signal organization with a courageous, committed desired behaviors. Similarly, effective culture strength to investors. A sales incentive culture may face adversity more confidently, plans are targeted. Tools like CulturePath™ plan can be structured to reward teams overcome resistance to aggressive synergy allow leaders to identify which divergent that collaborate to close deals, rather than targets more easily, and be less reluctant to groups should be focused on and which reward individuals with commissions that make tough decisions such as headcount aligned groups can serve as role models. could increase competition. reduction. An organization with an inclusive Like any major initiative, these culture culture may be more open to accept all plans require strong and visible executive By embedding cultural reinforcements into ideas, no matter how out-of-the-box, to sponsorship. enterprise-wide value events and processes, identify potential synergies that could it is possible to influence a greater number increase the overall deal value. Implementing high-impact quick wins often of employees in a meaningful way and signals that cultural integration is a business reinforce desired behaviors across Cultural diagnostic tools like CulturePath™ priority, helps address key issues quickly, countries, sites, and functions. help empower leaders by providing the and provides momentum for the transition. cultural data points they need to identify Efforts could include adopting revised unanticipated risk and opportunity areas. cultural symbols such as logos, badges, They also allow leaders to get to the and uniforms; redesigning the workspace; heart of what is needed to make an M&A or migrating to a common e-mail format. deal successful and lay a foundation for Longer-term cultural interventions start differentiated performance in the future. with executive leadership and focus on

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Use culture to take integration to the Early alignment with the desired future-state no easy task, especially in the context of a next level cultural vision and integration strategy, global deal. However, it is something that Companies should skillfully manage the and smooth translation of the vision into leaders should and need to do—and do cultural aspects of global and regional action plans can better enable companies well—to deliver on promised deal value. M&A to meet immediate commitments to safeguard the short- and long-term value to the investment community and build of their deals. The ultimate goal is for a new a sustainable foundation for the future. company to emerge from the integration By addressing culture early in the deal process with a high-performing, sustainable lifecycle, consolidating companies have a culture with employees who are committed greater chance of realizing the transaction’s to growing and succeeding against the anticipated value. organization’s strategic priorities. This is

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End Notes 1. Sackmann SA, 2010. “Culture and performance.” In: Ashkanasy N, Wilderon C and Peterson M (eds) Handbook of Organizational Culture and Climate. Thousand Oaks, CA: SAGE, 196.

2. “Dangerous liaisons; Mergers and acquisitions: the integration game,” Hay Group, 2007.

3. “Take Your Corporate Culture off Cruise Control,” Deloitte, 2016.

4. Heskett, James. The Culture Cycle: How to Shape the Unseen Force That Transforms Performance. Chapter 10. Upper Saddle River, NJ: FT Press, 2012

5. CulturePath™ website, Deloitte, 2016. http://www.deloitte.com/culturepath

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Using integration to catalyze HR transformation By Tom Joseph, Steve Schultz and Matt Usdin Merger and acquisition (M&A) transactions Integration typically includes a detailed often place significant stress on an analysis of current-state HR activities at both organization and its employees. Recurring legacy organizations and, as a result, sheds themes typically include resource light on areas of inefficiency. HR leaders can shortages, competing priorities, an inability capitalize on this period of “self-reflection” to meet deadlines… the list goes on. The and conduct a non-biased inventory of idea of adding human resources (HR) what’s working (and what’s not). transformation to post-deal integration activities may be daunting but its omission Harmonizing versus optimizing may prevent the new organization from A common goal of integration is to realizing its full potential. harmonize HR programs and processes across the legacy organizations. In many HR transformation can quickly become cases, the focus is on maintaining business an imperative during M&A. Whether continuity throughout the transaction the transaction is a small bolt-on or a and achieving the “new normal” as quickly large “merger of equals” the number of as possible. However, when HR leaders employees served by HR will increase. The undertake transformation as part of newly combined population, coupled with integration, they can expand the focus HR’s M&A-related synergy expectations, beyond harmonization to optimization. For often makes transformation a necessity. example, a typical integration may include In the simplest terms, HR will be expected consolidating legacy HR shared services to do more while also spending less. Yet, with centers. A transformative integration, on the proper mix of planning, process, and the other hand, may identify opportunities execution, HR leadership can harness the to more efficiently deliver HR services, integration’s momentum to transform the including technology-enabled improvements function, optimize HR’s service delivery and process redesign. model, and better support the business and its employees. Funding transformation Integration provides a number of funding Justifying transformation opportunities for selling, general and At first glance, there appears to be a administrative (SG&A) functions. Given that number of reasons to avoid a sweeping integration requires significant investments HR transformation on top of an already in contract resources, consulting spend, and challenging integration. However, many system upgrades; executives, therefore, integration activities can be a launch pad typically carve out budgets specifically for transformation efforts, as long as each for the integration. This can present an activity is viewed through a transformative opportunity for HR leaders to request lens. funding for transformation activities, especially if the transformation is aligned Identifying weakness with potential synergies. By classifying While it’s true that completing the laundry transformation activities as a one-time list of integration activities may strain time integration expense, HR can concurrently and resources, integration also provides fold the costs into the integration budget opportunities to revisit HR programs and potentially benefit from a large return and processes that may not be efficient. on this initial investment.

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Transformation opportunity: HR service • HR shared services efficiencies–How Process, system, and data consolidation delivery do shared services support the HR challenges typically center on project size, When identifying M&A-related HR service delivery model? Even mature complexity, and scope. Making service transformation opportunities, it is important organizations can find ways to gain delivery model and technology selection to consider changes that create business efficiencies through simplified and decisions early will drive other consolidation value. An initial focus area should be the standardized processes and policies. decisions, such as business process and overarching HR service delivery model–how Additionally, organizations can segment system design. Some activities critical to HR serves its business customers. The transactional HR activities into low-cost the success of process, system, and data service delivery model incorporates many areas, realizing savings from labor consolidation are: of HR’s most critical (and costly) activities. arbitrage. An optimized model can not only improves • Technology–Do current HR information • Data clean-up–Thorough clean-up HR’s support of the business, it can also systems (HRIS) enable efficient HR efforts can increase data accuracy prior improve the effectiveness of both internal services? Advancements in HRIS may help to system consolidation. As part of the HR and external resources. the HR function move beyond master data functional transformation, there may also management and payroll processing into be opportunities to improve existing data A Chief Human Resources Officer (CHRO), a new realm of employee and manager tracking and reporting processes. supported by his or her leadership team, self-service. New systems may allow HR to may consider assessing the end-to-end • Data standardization –HR data should achieve technology-enabled efficiencies, processes within the HR function. This be business-driven, standardized, especially since organizations often are includes a functional self-assessment, and aligned with other aspects of the faced with both an expanded employee as well as candid conversations with budgeting process, financial planning, and base and budget limitations. customers. As HR service gaps are position management. identified, the team can formulate a plan • Controls & accountability–Who really • Single source of truth–Building a solid to address issues and better utilize HR owns the HR function? By realigning foundation of consolidated company resources. Oftentimes, leaders decide to budget ownership and reporting data will be important to sustain the new either expand the existing service delivery relationships, HR leaders may more organization and its future initiatives. model or engage in a full redesign of HR effectively drive activity across global Storing data in one system may reduce the processes. High-impact HR service delivery regions. Additionally, clearly-defined amount of required future maintenance transformation opportunities may include: reporting relationships (both direct and and enable better data management, indirect) can improve leadership’s line-of- reporting, and business performance sight across the function and verify that • HR business partner (HRBP) monitoring. the global organization is operating in optimization–How do HRBPs add unison. • Business process design –The new strategic value to the business? Many organization’s business processes will organizations provide HRBP services Transformation opportunity: HR have a direct impact on forms, workflow, reactively and do not strategically align process & data management and security, and should be prioritized them to the business. Integration offers Often/Typically one of the most challenging and aligned with the scope of the system the opportunity to review the HRBP talent post-Day 1 initiatives is integrating and consolidation. pool, the level of service provided by each consolidating business processes, systems, individual (and as a whole), and ways to and data. These activities are integral to an more proactively and strategically partner organization’s ability to function as a single with customers in the future. enterprise. One of the initial activities in any • Talent management–Do the talent system consolidation is to define the effort– strategies of the two entities align? what does consolidating processes and data Rather than force alignment to an mean to the organization? How will it impact existing strategy, integration is a good existing or planned initiatives? Once leaders opportunity to review and improve define the consolidation effort, they should performance management, career pathing identify and align key stakeholders and set and leadership development, topics that expectations for the scope of consolidation are generally sensitive and often not activities to support Day 1 and beyond. strategically aligned to business outcomes in large organizations.

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Transformation opportunity: HR Managing transformative change new strategies for the combined entity. technology Getting senior executives to acknowledge Differing salary ranges, titles, and Consolidating and integrating HR technology and align behind the need for an HR benefits can be a hot-button issue. A with other operational systems during an transformation can be challenging, given good approach to successfully execute M&A transaction is a large and complex the other issues and priorities associated employee mapping is to research and process. By considering technology with M&A-driven integration. Some common evaluate industry standards and leading consolidations in tandem with service hurdles include: practices. Retaining both entities’ current delivery, an HR organization may better compensation structures until the new achieve anticipated deal-related efficiencies year may provide enough time to complete • Competing business priorities–While the and synergies. Executives should select necessary due diligence. HR team may recognize the importance of technology that aligns with and supports investing in post-close HR transformation, • Endless “to-do” list– Completing myriad strategic objectives such as talent strategies other organizational initiatives may also M&A-related tasks may feel overwhelming and other business-driven requirements. require funding. HR leadership should to HR staff members, especially since Another key consideration is the time and prepare a business case for senior they must do so while also conducting cost to deploy a consolidated, integrated HR executives detailing the importance of regular business activities. To help ease system. The longer an organization takes HR transformation and its impact on the the integration process, staff should first to consolidate, the higher the cost will be entire enterprise. tackle the tasks that align with the new to support multiple systems and business business strategy and have the most processes. Common questions during a • Post-Day 1 uncertainty–M&A often significant impact on employees across technology assessment include: generates a lot of uncertainly: Employees the entire organization. wonder if they will have a new job, a new manager, a new office, etc. HR, in tandem • Returning to business as usual–Once a • Can an existing investment be leveraged with Communications, is responsible deal closes, many employees will no longer for the new organization? Or does the for managing this uncertainty. Typically, view the integration as a critical focus area organization need to go through a vendor organizations focus on pre-close and return their attention to business as selection process for a new technology communications; however, post-close usual. While deal close represents the investment–one that can support the communications should be a priority, legal transfer of ownership, integration is consolidated entity’s size and complexity, as well. Creating a transparent, two-way not complete. HR leaders should charge including possible expansion into new communications process will likely help their team with carrying out post-close regions or rapidly-changing markets? ease post-Day 1 employee anxiety and aid responsibilities for both HR functional • Do the skill sets and experience needed in retaining talent. Furthermore, a clear changes and enterprise-wide initiatives. to implement a system consolidation governance and decision- making model Designating an integration leader to reside in house? How about long-term should be established to reduce role handle pre- and post-close responsibilities operational support? ambiguity among leaders. can help keep all processes moving forward. • Does the technology have global coverage • Departmental roles and and scale to support current and future responsibilities–Integration is an As a company’s primary liaison with current business requirements? important time for all functions to and new employees, HR leaders and team work together. While HR typically leads • Is the technology flexible enough to members may feel they have more than people-related change management, support legal, union, or regulatory enough responsibilities on their plate communications, and organizational requirements if the delivered functionality during an M&A transaction. However, with design, it requires significant input from cannot accommodate them? Will the the proper mix of planning, process, and all areas of the business. Engaging with consolidated entity be able to support execution, HR leadership can harness the functional leaders early in the M&A ongoing compliance and regulatory integration’s momentum to transform the lifecycle will give HR an opportunity to updates? function, optimize HR’s service delivery understand their needs and consider model, and better support the new business their input on how employees should be and its employees. managed pre- and post- close.

• Employee mapping–Combining two organizations requires comparing HR processes and policies and determining

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M&A-driven organization design Seven practices to help lock-in deal value

By Davi Bryan, Tom Joseph, Stephen Redwood and Matt Usdin

Stakeholders and Wall Street typically greet Phase 1: Set the stage with strategic Example of stretch thinking the announcement of an M&A transaction planning The CEO of a major consumer products with excitement and energy around the company sought broad advice on “any creation of a new business entity and the Leading practice #1: Agree on what you and all” leading practices to improve the growth opportunities it provides. However, can afford company’s enterprise and functional once the deal is finalized and the dust Companies that begin post-deal HR structures as it integrated new businesses. settles, management usually is left with organization design by clarifying integration He wanted to create a climate of fresh the highly complex task of implementing synergies and people-cost assumptions thinking and big ideas at the start of the numerous operating model and help set the stage for an effective end-state the organization design process, before organization changes required to realize transformation. Establishing cost envelope everyone focused on the nuts and bolts of expected deal value. Often this process targets early in the design process helps integration. This approach helped the firm begins by getting “down and dirty” in increase the likelihood that the transaction’s infuse the design process with innovative organization design, where many companies financial goals will be met and provides a ideas to drive greater deal value, ultimately find they can attain substantial accretive basis for comparison with external leading resulting in a nearly $2 billion increase in deal value through human resources (HR) practices as the organization design market capitalization. synergies. progresses.

So how does a company lock in deal value? Identifying clear cost targets also can Seven leading practices have been shown help leadership understand and align on to consistently drive value from post-Day what part they will need to play in meeting 1 organization design. These activities are those targets. This early clarity may drive applicable in virtually all industries and deal faster decision-making and provide greater types, from traditional mergers to small transparency to the investor community. integrations to full-scale separations. Our experience and research from the The following seven leading practices Deloitte Global Benchmarking Center provide focus for the HR organization design suggests that these cost targets should be process and emphasize critical components a “stretch” and based on the organization’s for each phase – strategic planning, design, operational needs, leadership’s aspirations, and implementation – that may help the new and commitments to shareholders, as set in organization avoid common organization the deal valuation. Starting with low targets design pitfalls and realize projected deal tends to produce even lower outcomes. value.

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Leading practice #2: Evaluate transition Case study options We see many companies engaged in Transaction: A global consumer products M&A that are faced with making an early company with over $7 billion in annual organization design decision: Should they revenue split into two, equally sized, move quickly and implement a “big bang” standalone legal entities. integration, take a more measured approach to the transition, or opt to keep the new Issue: In this full- scale separation, both business separate? While a range of reasons future-state leadership teams had a unique may influence the selection, our experience opportunity to develop an entirely new go- shows that, in general, slow transitions that to-market strategy. However, the executives may seem to be more manageable and needed a clear plan to successfully humane tend to result in design decision transition existing resources to the new backtracking, talent attrition, and failure business models. to meet cost-savings goals. Maintaining separate operations, meanwhile, may Impact: Determining early which functions still require integrating some duplicative were in and out of scope created a corporate functions, such as HR, legal, and straightforward path to begin the design marketing. process. For example, by deeming all manufacturing positions as out of scope, Integrating a new business may provide an management was able to focus on how opportunity to establish or expand the use best to position the marketing and product of shared services, outsourcing, and centers development teams at the helm of the new of excellence (CoEs). Typically, these options organizations while transitioning other are neither easy nor quick to implement – functions into a business partner support the process may be complicated by location model. Initial cost envelopes provided a choices and technology and data issues. The mechanism to achieve the valuation targets likelihood of integration complexity makes and early leadership selection created early organization design choices essential; internal champions for these changes. procrastinating may cause delays that increase transition expenses down the line.

Leading practice #3: Determine which positions to transition, and when Organization design success depends greatly on early identification of qualified people to lead the effort. Typically, companies begin by prioritizing which high- value positions to transition, and when to do so. Retaining key individuals and motivating them to champion the remainder of the integration process can provide highly visible, quick wins. Once these individuals are transitioned, it is important to spend the necessary time to clarify the organization’s end-state strategy, make sure everyone is aligned, and confirm that the integration plan is properly set up, sequenced, and resourced.

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Phase 2: Build a solid foundation with Case study thoughtful design Transaction: A global provider of Leading practice #4: Keep it efficient products and solutions to the food, energy, A post-M&A operating model should healthcare, industrial and hospitality match the future-state organization with markets set out to reshape its go-to-market its intended market strategy. An effective strategy through two acquisitions. operating model will show the relationships between an integrated company’s different Issue: With an ambitious goal to increase parts; how the market channels will operate; its presence in new high-growth markets, enterprise-wide versus department-level the firm’s management faced the daunting activities and functions; and the boundaries task of simultaneously implementing a new between organizational entities. Leveraging strategy, shifting the current operating the operating model early in the HR design model to fit the new plan, and integrating process can help mitigate role redundancy two new businesses. and provide a framework to assess the cost or benefit of moving certain functions to Impact: Comprehensive discussions new service delivery models, such as shared gave leadership clarity on a preferred services or a CoE. operation design and implementation plan The operating model should be the basis to achieve the company’s goal of creating for asking challenging questions to test a unified, global firm capable of adapting how the new organization will operate and to a changing marketplace. Design and how effective it will be in meeting strategic operating principles promoted executive goals. Pertinent questions might include: alignment and addressed challenges Should we drop the long tail of unprofitable such as determining whether product/ customers? Reduce or redeploy certain solution leaders or country leaders would products or services? Move to a single cross- own the sales force; whether sales forces selling sales force model? Who owns specific from different businesses could cross-sell profit and loss (P&L) items? Who gets the technical solutions; and how enterprise call when something isn’t performing business owners and local markets would as planned? Once the leadership team share responsibility for planning and has developed the operating model and performance. answered important questions, the actual organization design can move ahead with a clear idea of how what works on paper will need to work in practice.

Leading practice #5: Get ahead of the transition Time is of the essence in M&A transaction activities and post-deal organization design is no exception. A proactive approach enables management to make early decisions about the future-state organization structure and fully align strategy with design. The HR team should begin the design process prior to Day 1 and use a clean slate. The goal is for management to match talent to roles, rather than roles to talent. This produces an efficient and effective process that is able to optimize value creation and minimize design drift.

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Phase 3: Leverage leaders and rules to Putting practices into action help maximize return on organization These seven leading practices can provide design a roadmap for effective HR organization design in virtually any M&A environment. Leading practice #6: Solidify To make sure that the design team fully leadership early leverages these practices, senior executives Early selection and announcement of should establish project parameters to the new company’s senior leadership assist team members throughout the design can provide a set of organization design process. Suggested guidance includes: champions who are aligned behind the • Embedding key decision-making proposed structure, committed to seeing milestones within the project timeline; the design process through to completion, and have the authority needed to institute • Seeking business leaders’ input during structural change that can help realize deal the planning phase rather than jumping value sooner. straight into design;

• Remembering that HR organization Leading practice #7: Establish the rules design is a process. Team members A good way to avoid getting bogged down should specify objectives and appropriate in person-by-person negotiations is to effectiveness measures for all project develop and apply clear and replicable stages – planning, design, and execution – staff retention and performance policies. for Day 1 and beyond. Uniform employee selection policies can pave the way for timely completion of even Incorporating leading practices into the most complex organization design organization design planning and project. Finally, it is important that HR staff implementation can help corporate and members consider the potential impact of HR leaders find the right balance between survivor syndrome. How the company treats locking in short-term deal value and departing employees affects the morale of positioning the future-state organization for those who remain. long-term success.

Case study

Transaction: A global multinational information technology company publicly announced the separation of its core business units, which led to the creation of two new future-state companies.

Issue: This highly complex separation included the disposition of more than 280,000 employees. In addition, management needed a full future-state design completed within a six-month timeframe.

Impact: Creating an organization design separation CoE to support HR business partners facilitated the successful transition of over 250,000 employees across more than 100 countries and aligned to more than 100 legal entities. The creation of clear guidelines and strong leadership teams to champion the change resulted in an on-time transition of all resources by the go-live date.

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Finance integration Fine-tuning reporting capabilities for long-term M&A value By Will Tarry and Mike Willkin

Mergers and acquisitions (M&A) continue global enterprise resource planning (ERP) The chosen reporting method for the first to be a preferred growth strategy for system, more nuanced requirements may consolidation after deal close depends, companies stymied by sluggish organic be overlooked until too late in the game: in large part, on the answers to the expansion. Often lost in the optimistic, combined-company management reporting above questions. Typically, it is possible pre-deal discussions of synergy plans by business line, product, and service to maintain the acquired organization’s and accretive earnings, however, is the offering; and interactions with human consolidation system and processes as a ability of company leaders to concurrently resources (HR), payroll, procurement, and sub-consolidation, and then route data to the deliver projected short-term synergies and travel and expense (T&E) systems. parent company’s consolidation system via a position the newly combined company for high-level mapping process and technology long-term success. Early financial gains Priority One: Consolidating external solution. This approach provides ample time from headcount reductions, procurement reporting for the integration team to work towards advantages, and information technology (IT) When planning the integration process, a a more comprehensive financial systems consolidations can be negated later on if public company’s CFO and Finance team integration, including general ledgers, while rationalization decisions are not made with should first determine the acquisition’s fulfilling short-term reporting requirements. an eye towards the future. For example, potential effect on its external reporting Note, however, that achieving potential post- acquirers rushing to integrate operations process. deal synergies may dissuade management often aggressively reduce employee from choosing this approach, as maintaining • Does the acquired organization fit neatly headcount, only to incur significant training redundant systems and processes utilizes within an existing reporting segment of and staff development costs because early- valuable resources and may hinder the the legacy business? If so, changes can be stage staffing needs and projections often deal’s targeted synergies if aggressive minimized; however, proper focus should fail to account for how the new organization timelines have been established. be maintained during the initial post-deal- will operate and what the combined baseline close consolidation. financial results will look like. • Will the acquired organization span A tightly formed plan for accurate, multiple externally reported segments of integrated financial reporting post-close the company? If this is the case, mapping can provide the foundation for data and and aligning the acquisition’s business cross-organizational visibility that executives financial systems for seamless external need to comply with post-transaction reporting takes on additional importance. external reporting requirements and • Is the acquisition significant and support long-term synergy goals. The heterogeneous enough to spur acquiring company’s Chief Financial Officer reorganization of the legacy business (CFO) and the Finance team typically lead and its management reporting lines? If financial reporting integration, working so, leadership should decide whether closely with the M&A deal team. The or not a restatement of past segment- combined reporting capabilities should fulfill level financials is acceptable. If not, the standard M&A requirements – enabling integration team should be aware of external reporting continuity, closing the leadership’s decision while designing the books in a timely manner to meet SEC and updated reporting structure. investor expectations, and others –For others, particularly organizations lacking a

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We satisfied external reporting Company business leaders will want requirements… now what? prompt and unfettered access to financial After designing, testing, and executing on data related to the acquired organization. the first post-deal-close reporting period, Meeting each stakeholder’s expectations will the Finance integration team should shift its require that the Finance team understands focus to addressing the following questions: what information they need, when they need it, and where they want to go to • How will the company’s business access and analyze it – all of which should and functional leaders receive the be determined and documented as part of information they need to make solid, designing, mapping, and implementing the fact-based decisions in line with the new end-state reporting solution. Companies organization’s goals? with an established ERP system and a well- • What are the timelines for reducing defined set of financial feeder systems will or eliminating the use of the acquired likely be able to streamline this process, company’s systems, particularly general as the “to-be” is typically aligned with the ledger, payroll, T&E, and others? current state for the acquiring organization.

• How will finance integration affect For those companies without a true ERP, company support functions such as requirements gathering and documentation shared services, transaction processing, may be a more challenging exercise: business finance teams, etc., and how can that impact be mitigated? • Does the acquisition have multiple, existing data warehouses and business Viewed together, these considerations intelligence tools to analyze information? may appear overwhelming; however, a • Do these systems and tools use a well-managed reporting integration effort consistent codeblock structure? What can prepare internal stakeholders for the elements are constant and critical across changes to come and help bridge typical each platform? post-Day 1 information gaps. Indeed, effective reporting integration planning • Does each entity and geographic market and execution may improve stakeholder transact on the same general ledger satisfaction and accelerate synergy platform? realization. Focusing on the end state and maintaining a well-defined master data program may help to mitigate some of these challenges.

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Pulling it all together The documented stakeholder requirements Once Finance has defined internal should guide the integration’s design and stakeholders’ individual and collective execution, and planning needs to take into reporting requirements (Figure 1), the account the integration’s impact on various process of aligning the acquired organization parts of the organization. For example, how within the new reporting structure can will the HR team be affected? Will shifting begin. It is important that the integration acquired employees to new legal entities team employs strong project management and HRIS systems drive significant change to throughout this process and communicates the master data within the ERP? regularly with all stakeholders. The end-state goal is to establish Targeted synergies may drive (or force) an inclusive, responsive integration many of the integration timelines. However, program that meets near-term reporting project leaders should be aware that requirements and longer-term synergy synergies can be lost if the integration effort targets. The CFO and Finance organization and transition are rushed and the company are uniquely positioned to drive and incurs significant costs on issue resolution support the visibility and transparency that and cleanup. will promote integration success – with the reporting requirements and associated execution plan clearly defined as an underpinning.

Figure 1: Stakeholders’ financial reporting requirements

• Avoidance of restatement • Minimize/eliminate impact on close External • Impact on consolidated reporting • Training requirements reporting • Segment reporting modifications • Staffing considerations

• GL codeblock modification • Management reporting systems IT • Adoption of acquired systems • T&E/HR/Purchasing systems • Data warehouse linkage • Subledgers for FA,AR,AP

• Org change adjustments • Journal entry process changes Business support • Data warehouse training • Allocation process updates finance • Updated mgt report needs • Impact on YoY comparisons

• Purchase order transition • Fixed assets accounting Ancillary • HR process changes • Amortization of intangibles groups • Tax reporting impact • Shared service/outsourcing impacts

107 M&A Making the Deal Work | Tax

Tax considerations during M&A integration Shaping the new organization

By Pam Beckey, Robert Call, Chris Houser and Steve Tarrant

Tax executives should lobby for a seat at the Although every M&A transaction is different, botched tax provision in the first quarter table with their C-suite counterparts during the focus areas for tax executives usually fall after the deal closes—could have immediate M&A integration planning, for they can offer into three categories: and severe consequences for the company important insights and recommendations 1. Deal-related tax technical aspects and its tax department members. In our to accomplish strategic tax goals associated 2. Tax department operational needs; and experience, many tax executives focus with the transaction. Their involvement 3. Business process changes. exclusively on tax technical issues in the should begin early, extend through the beginning, but quickly divert their attention integration lifecycle, and address key Many tax executives and department to tax department operations when they business decisions, synergy prioritization, professionals find managing a transaction’s realize the potential consequences and legal entity readiness, and countdown to tax technical aspects to be particularly visibility of failure in this area. Day 1. interesting and rewarding. Issues may include determining the deductibility of The third category involves business process First 100 days sprint transaction costs, addressing executive changes that are inherent to strategic Prior to and after the announcement of an compensation, and strategically placing deals. In an M&A transaction, the acquiring M&A transaction, tax executives can play a acquisition debt to maximize the tax benefit company usually does not buy the target valuable role in helping senior management of the future interest expense. The tax just to hold on to it passively and collect determine synergies, identify pre-and department can grapple with these and dividends. Someone at the executive level after-tax benefits, and improve business other tax technical topics in an ad hoc determined that the two companies would processes. To be effective, tax department manner, outside of the context of the overall be worth more combined than as separate leadership should consider focusing on two business transformation. entities. This implies the existence of certain things: the clear-cut business tasks that synergies, mutual support capabilities, need to be addressed and the fuzzier (but However, tax technical issues are just and complementary traits that should be equally real) human ramifications of the the beginning of the process. A tax identified and assessed for their potential transaction. This is easier said than done, as department’s broader operational needs tax impacts. tax executives must also manage their day- also have to be addressed. Issues include to-day responsibilities and plan for the first changes to the ASC 740, Accounting for combined financial statements. Income Taxes, compliance needs (including data, process, and technologies), completion The first area, M&A-related tax business of necessary stub-period tax returns, tax tasks, involves checklists, memos, work department design, tax authority audit plans, and other tax technical details. The management, and information technology second, taking care of people, requires needs. managing the uncertainty that inevitably ensues when an M&A transaction is Managing operational category issues announced–employees at all levels likely are represents the minimum table stakes for anxious about their future and their new or a company’s post-transaction survival. changing responsibilities. Overlooking an issue in the tax technical category—perhaps failing to place the acquisition debt in the optimal subsidiary— will not prevent the sun from rising tomorrow. However, overlooking an issue in the second category—for example, a

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Shaping the new organization choice was made, but before staff increases tax department operations, and business M&A transactions typically follow a logical were announced, the tax department could process changes. This disciplined approach rhythm and sequence. With proper help negotiate certain incentives or assess will prioritize the department’s efforts over planning, tax departments can use these overall tax impacts associated with strategic the coming months and highlight, early transactions to advance certain strategic decisions. Furthermore, the tax executive on, any tasks that it does not have the initiatives that may have been on hold. could advise the operations group on how proper resources to address. This way, the During the months immediately following the proposed facility shutdowns might executive can obtain external assistance, a deal’s announcement, it will be crucial to impact the company’s global transfer and such as temporary staff, as needed. Indeed, know what the operational and financial advance pricing agreements. since overstaffed tax departments are a groups will be expecting from the tax rarity today, calling for external assistance executive — and what they might not think This situation illustrates why tax executives for the heavy post-transaction workload to ask, but should. need to make sure that they have a seat may be critical to the tax staff’s well-being. at the M&A planning table alongside their Tax executives likely will, and should, be peers as early as possible – certainly before Take care of department employees called upon to contribute to the most the transaction closes – if such process As previously noted, tax department important initiatives shaping the new synergies are crucial to deal metrics. employees may be more concerned about organization. It’s critical, then, that the Strategic companies begin to plan for and the outcome of the transaction than the executives and their staff proactively implement business process changes executive. Because they have much less address the issues, challenges, and immediately, and unless tax executives are access to information, they may assume opportunities that an M&A deal may bring. aware of them from the start, they may not that the executive is withholding bad This may require them to venture outside be able to add value. news; for example, that a move to the their comfort zone of dealing with day-to- other company’s location is imminent, that day, department-specific tasks. Tax executives should expect that keeping a top lieutenant may be demoted below tabs on M&A-related business process someone from the other company, or that Keep tabs on changing business changes while simultaneously dealing with there might be wholesale layoffs. This stress processes tax technical issues and tax department is often amplified by headhunters calling It stands to reason that existing, underlying operational requirements may be a department staff and, sometimes, spreading business processes usually must be challenge. Many executives are tempted rumors of disaster. changed to achieve post-transaction to just leap into the fray, working later and synergies. The tax department can play later each night to handle the multitude Once a deal is announced, most companies an important role in this transformation, of responsibilities. We have frequently have their integration teams quickly running particularly by helping to reduce the tax cost seen this approach fail. At a minimum, at top speed in order to expedite the of the process changes. Yet tax executives the executive will lose the opportunity to realization of announced and anticipated commonly underestimate the speed and thoughtfully weigh the competing merits synergies. Accordingly, a tax executive’s first scale of business process changes. As a of proposed business process change step is to promptly identify key integration result, these changes often are implemented options. More importantly, the executive team members and present to them without considering the tax consequences, may struggle with prioritizing and executing the business case for tax department sometimes with devastating impact to the key tasks. This can make for a very long and participation. Step two for the executive is business. uneasy first few months post-transaction to identify tax resources that can be fully with the executive worrying that something dedicated to the integration effort. Once it Consider this hypothetical example: As part important was missed. is underway, it is sink-or-swim. Therefore, of an M&A transaction, two of three facilities the executive’s third step is to invest will be closed; the third will stay open and Our experience suggests that rather than department resources in the integration add employees. The company’s operations jump in feet first, tax executives should program. One cautionary note: Meeting group may be moving forward on business take time at the outset of the deal lifecycle the goal of proactive participation may decisions without taking into account to develop a detailed work plan. This will be impaired if the individuals assigned to possible tax ramifications or opportunities. require extra time and effort at a stage the integration team still have to spend The tax executive could offer ways that the when time is a very precious commodity; considerable time on the tax provision or department could add value. For instance, however, every hour spent planning in other operational support duties. What if the operations group was trying to decide advance can eliminate numerous hours of to do? The executive should provide tax which of two facilities to keep open, the tax rework or wasted effort later. department employees with as much department might be able to quantify the information as possible, as soon as possible, relative tax burdens of the two locations A detailed, actionable work plan should in an open and frank manner. to support deliberations. As soon as the cover all important aspects of tax technical,

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Legal entity rationalization Company leadership will often request an pre-tax cost savings, most companies that One potential M&A-related issue is estimate of potential cost savings before conduct a legal entity simplification effort combining and simplifying two legal entity authorizing legal entity simplification. In in conjunction with or shortly after a major structures. These complex structures tend the past, many companies have relied on transaction can potentially benefit in some to drive up costs enterprise-wide, so it’s a cost-savings threshold before moving or all of the following areas: little wonder that cost reduction is perhaps forward on each potential simplification the most common driver of legal entity step. However, such high-level estimates simplification efforts. But to achieve these are often poor predictors of actual results. cost savings, a company should embark Below is a more rigorous method for upon an entity rationalization project, which estimating the cost savings that are possible can cost considerable time and money. with entity reduction efforts. With respect to

Legal Entity Rationalization Savings Opportunities

Business Unit Summary of Potential Savings

Reduction in fees and costs relating to redundant minimum taxes, Legal and regulatory licensing, permitting, registration, registered agent, public notices filing, record maintenance, state legal, tax compliance, and other filings.

Reduction in bank account service fees, transaction charges, capital Finance and treasury costs associated with minimum deposit requirements, debt covenant compliance, and cash forecasting.

Reduction in fees and costs relating to statutory audit, redundant and inefficient shared services resources, monthly/quarterly/annual Accounting reporting, intercompany accounting (e.g., streamlining voluminous intercompany journal entries and reconciliations), statutory filings, and IFRS implementation.

Reduction in costs from duplicative administrative/shared services, misaligned operating model, duplicative insurance policies/premiums, Operations and intercompany accounting. Reduction in lost sales/revenue resulting from artificial barriers to doing business.

Reduction in costs relating to general ledger input/coding, system Information technology configuration, and incremental system capacity.

Reduction in costs relating to administrative and shared services, insurance/premium, vendor rationalization, and redundant compensation Human resources and benefits programs. Managing loss of employee mobility.

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Other derived potential benefits may • Entity location—US-based entities tend Factors for effective integration include: to have lower costs to maintain compared Certain factors are important to achieve with other jurisdictions, which may have effective M&A integration: • Risk reduction—Aligning the legal statutory audit and other entity-based entities with the company’s business • Having executive leadership support; requirements. model may increase the likelihood of using • Involving management from both the the correct legal entity for contracting, • Entity activity—Dormant entities can be acquirer and target; employment, etc. Having fewer entities easier to eliminate than operating entities, may also make it easier to generate but dormant entities typically have a trivial • Developing a detailed project plan that accurate separate-company legal entity cost to maintain compared to operating optimizes internal and external resources; financial statements, which are necessary entities. • Assigning a dedicated integration team; to produce correct tax provision amounts. • Simplification level—Greater cost and • Ease of doing business—Having fewer savings are possible when an eliminated • Communicating transparently and legal entities can make it easier for both entity’s activities are completely absorbed consistently with employees. customers and vendors to do business into another entity’s routine activities, with the enterprise, especially if any rather than continuing to exist separately Our experience suggests that companies particular customer or vendor must in the surviving entity. For example, add another factor to this list: Including routinely transact with multiple entities larger cost savings are possible when the tax department among the functional within the group. an eliminated entity’s bank accounts are groups participating in strategic decision- closed, rather than simply being renamed • Tax reduction—Additional legal entities making around post-deal integration. Active with the surviving entity’s name. can trap tax losses and other attributes, tax department involvement across the causing the overall group to have a higher- • Prior integrations/restructurings— integration lifecycle may significantly impact than-expected tax rate. For example, if the Many complex legal entity charts are the and improve overall synergy realization. group’s third-party debt is at the parent result of prior M&A transactions. To the company and the profitable operations extent that the prior integration work are at the subsidiary level, many states will was successful at achieving synergies (for not allow the parent’s interest expense to example, the enterprise previously moved offset the subsidiary’s profits, resulting in to a single ERP platform), there generally loss carryforwards at the parent level and will be less cost saving available. full taxation at the subsidiary level. Entity simplification projects can yield One danger to estimating cost savings on a substantial benefits, but they also can per-entity basis is that the amounts can vary involve substantial costs. Before embarking so widely as to be meaningless. For example, on such an ambitious project, it is prudent the annual cost to maintain a dormant US- to estimate not only the cost, but the based entity might be only a few hundred likelihood of financial success, as well. The dollars a year. On the other hand, the cost to data, tools, and processes listed above can maintain a duplicative operating entity that support enterprises as they attempt to does business in a European country might quantify potential savings from an entity be more than several hundred thousand simplification project. As the project moves dollars per year. So, attempts to estimate forward, tax executives should consider cost savings based solely on the number setting up a rigorous tracking process to of legal entities eliminated usually end in identify and capture identified savings. frustration. The critical dimensions of cost Remember, the goal is not the reduction of savings are: entities per se, but the elimination of excess cost associated with the entities that are eliminated.

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Eight keys to a successful treasury integration

By Chi Yun Lee, Carina Ruiz Singh and Gaurav Sharma

Treasury’s evolving role in M&A This is in addition to new regional and global 1. Take the lead on deal financing and Traditionally, the Treasury function’s main footprints that will likely require adjustments debt responsibilities have revolved around to funding models, cash concertation pools, In the preliminary stages of an M&A protecting a company’s liquid assets and and an increased focus on cash visibility to transaction, Treasury is often asked to work helping Finance perform its core functions support the newly combined businesses. with the CFO and other stakeholders to effectively. In recent years, however, these assess and identify a preferred financing responsibilities have been evolving and There are eight keys ways that Treasury can structure for the deal. This activity places expanding. C-suite executives expect today’s solidify its role as a strategic advisor and Treasury in a critical position to later enable Treasury organization to serve as a strategic showcase its value during M&A integration: an effective post-deal integration. advisor to Finance, the Chief Financial Officer (CFO), and the overall business. Now 1. Take the lead on overall deal financing Low interest rates have made debt more than ever, Treasury executives and and debt management considerably cheaper in recent years, driving professionals should stay in front of rapidly 2. Collaborate with external groups, significant and sustained M&A activity. shifting business requirements to support including banks, vendors, and outside Figure 1 shows the importance of readily growth, company liquidity, financial risk consultants available, cheap debt for companies looking management, and marketplace expectations 3. Collaborate with internal groups such as to acquire other firms. Expected interest for performance. Tax, Legal, IT, and the broader Finance rate increases have further encouraged organization M&A, with companies raising $290 billion in Included in Treasury’s evolving role is 4. Prepare treasury systems for Day 1 debt to finance acquisitions in 2015 (roughly providing strategic support for M&A readiness and beyond triple 2014’s level).1 transactions, especially post-deal 5. Prepare for potential regulatory changes integration. This support can be extensive 6. Maintain and improve core treasury In the current leveraged deal environment, and complex. For example, an acquiring operations throughout the integration the Treasury function can map out funding company likely will be taking on debt to 7. Advise on integration management mechanisms for a potential acquisition, finance the deal, raising equity, changing its 8. Plan for post-Day 1 organization examining available cash, equity, and working capital requirements, and adding optimization debt instruments to create an optimal liquidity risk that the Treasury team will need capital structure. Furthermore, Treasury’s to manage going forward. involvement in due diligence related to acquiring company debt and risk exposures Figure 1: How today’s deals are financed is critical to meeting the organization’s post- If your company plans to issue debt, acquisition debt obligations and risk profile. how strongly correlated are those plans with a favorable interest rate environment? 2015

Not at all correlated: 4.6% Somewhat uncorrelated: 3.8% Neutral 16.5% Somewhat correlated: 46.3% Extremely correlated: 28.9%

Source: Deloitte 2015 M&A Trends Survey

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Deal financing Typical Day 1 milestones for debt, funds team leads) allows executives to control When mapping out deal financing, flow, and solvency may include: conversations about the company’s Treasury cannot work in a bubble. Effective long-term position. In particular, Treasury • Debt covenant reporting procedures collaboration is essential to perform organizations should stay in front of financing activities in the most tax-efficient • Third-party debt/derivatives updates in discussions about credit rating changes manner. For example, Treasury’s capital treasury system and market perceptions throughout an markets group should work in tandem with integration to mitigate third party views that • Journal entries for all Day 1 activities Finance, Tax, Legal, and others to outline that increase in debt negatively impacts the the timeline of integration activities. This • Step plan including funds flow and journal company. collaboration can provide strategic support entries to the CFO and help identify the investment 2. Collaborate with external groups • Intercompany loans in treasury system capacity needed to fulfill the new company’s Third-party service providers can be major business and financial strategies. • Aligned practices for in-house banking, contributors to the success of Treasury including changes to financing company integration. Engaging third party service It is important that Treasury establish early structures providers early provides more time to communication with external parties (e.g., discuss potential execution paths and banks, institutional investors, credit rating Debt management enables the Treasury team to leverage agencies, investment bankers) that are Many of today’s acquisitions are heavily the collective knowledge bases of these key players in financing processes such as leveraged, which may complicate raising external groups. Viewing external service cash forecasting for the combined entity, funds, managing debt, and maintaining providers as part of the company’s identifying synergies, and setting post- credit ratings. Companies should determine integration execution team can create a merger margin expectations. Doing so may quickly and accurately what their fund flows more fluid integration environment and avoid potential issues or late adjustments will look like after integration to facilitate potentially strengthen their commitment that can arise from misalignment between debt discussions. After identifying and to a company’s successful integration. Key the company and these outside groups. helping to secure the financing mix, the external providers typically include banks, Additionally, if the acquiring and target Treasury team’s focus should shift quickly rating agencies, vendors and Treasury companies have different or overlapping to debt and covenant management. Early specialist consultants (Figure 2): financing partners, integration could provide planning (e.g., creating templates to finalize an opportunity to reduce that total. covenant calculations and identifying

Figure 2: External partners’ roles in Treasury integrations

Banks Rating Agencies Key banking partners should be notified Treasury leadership should assign a lead early on of the process, and the company to work with rating agencies during the should request that project teams for key integration process so that there is a banks are established. Treasury will work central management of rating agency with banks to gain control of all accounts, relationships. This reduces the chances of update account signers, and modify divergent expectations existing between existing user rights/limits for the new the business and the agencies. company. External Partners

Vendors (systems) Treasury Specialist Consultants Depending on the system landscape, there could Treasury consultants with experience in be a need for personnel on the ground from major integration management can add tremendous vendors for system in use. There will be work on value in planning, scoping, and executing the data migration and system interfaces that benefit project. Deep technical experience along with from the expertise of vendor contacts working experience in treasury integration management is with treasury technology team, ideally live in key in mitigating risks and success person. of the project.

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3. Collaborate with internal groups Finalizing the new legal entity (LE) structure perspective, the LE structure may have the Collaborating with internal stakeholders is a significant area for organization-wide greatest impact on the existing financing across Finance, Tax, and Legal can coordination. Treasury should work with companies and in-house banks that either streamline critical integration processes. both companies’ Tax and Legal functions to company has. Cash pools will have to be Integrations tend to go off the rails when assess how the LE structure of the acquired reassessed to legally comply within the new teams are siloed – they focus only on company will affect existing processes and structure, and new bank accounts may be milestones and activities that directly impact policies. For instance, the target company’s needed to support any future LEs that arise. their work and don’t pay adequate attention global footprint, current tax structure, and Furthermore, any changes to the structure to interdependent areas and downstream Treasury operational structure may not (e.g., incorporating other entities) should impacts. By communicating early and often, fully align with the acquirer’s current model. be closely coordinated with overall treasury teams can identify potential dependencies The new LE structure also may generate systems and data migrations. Examples of and gain buy-in from impacted groups additional regulatory requirements including internal collaborations that may aid Treasury before decisions are made. cash pool locations, thin-cap rules, and during M&A integration are: repatriation limitations. From a Treasury

Internal Group Sample Activities

Bank account openings/country requirements, legal entity structure, Legal resolution documents, pooling structures

Coordination/execution of local funding needs, cash movements, Tax intercompany financing model

AR/AP payment and receipt requirements, working capital alignment, Finance/Accounting reporting/recording

Go Live coordination, data migration, system issue identification and IT resolution

4. Prepare treasury systems for Day 1 Enterprise Resource Planning (ERP) Treasury should foster strong relationships readiness and beyond systems, TMSs, and other sources from with internal IT resources, vendor Gaining value from Treasury department both companies to aid forecast modeling representatives, and implementation/ technologies requires a comprehensive and reporting. integration specialists to determine whether implementation plan that is aligned with • Overall ERP integration: Treasury should existing systems can be configured to broader strategic initiatives that drive define interdependencies and any data support operations or if a full-scale TMS organization value. Treasury Management sourcing issues that may arise from implementation is necessary to reach the System (TMS) integration requires carefully multiple ERP instances. target end state. assessing considerations that involve dependencies and groups inside and • Standardized integration: The planned outside Treasury: systems integration framework should be as standardized as possible to streamline • Strong understanding of overall system cutover and data consolidation (e.g., architecture: Overlapping system integration tools). functions may require system architecture and business decisions aimed at • Exposure reporting strategy: Treasury rationalizing data and process capabilities. should determine the consolidated company reporting requirements • Data warehousing: The combined needed to support exposure and hedge companies likely will need a central data management. repository to support key treasury system requirements (e.g., cash forecasting). The repository should include data from

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5. Prepare for potential regulatory There are several BEPS impacts at a Visibility over cash–positioning and changes company level, including areas that pertain forecasting The ever-changing regulatory landscape specifically to Treasury: Treasury should establish a cash has the potential to disrupt a smooth M&A • Entity financing–debt pushdown, management structure that provides a integration, requiring integration teams instrument types, interest rates, funding combined view of the new company’s to spend significant time positioning the structures liquidity and cash needs. The time horizon new company to comply with current and for required visibility varies based on pending regulations across the globe. • Local banking requirements company liquidity and funding strategies. Examples of recent changes include • Working capital management–pooling, This is important for daily visibility (through increases in central bank reporting, Report factoring, intercompany lending bank portals or MT940s) and longer-term of Foreign Bank and Financial Accounts cash forecasting. Interim manual solutions (FBAR), and base erosion profit sharing • Repatriation–timing and manner of may be required to provide full visibility if (BEPS). moving funds the legacy companies’ technology platforms are still being integrated to enable an Increasing the amount of central bank 6. Maintain and improve core Treasury automated long-term solution. reporting around capital control and anti- operations money laundering (AML) regulations may Sooner rather than later, Treasury leaders To strengthen security around daily cash require the Treasury team to maintain clear should determine what core operations needs during integration, both acquirer visibility into cash flows at a country level can be combined by Day 1. The project and target companies should establish across entities old and new. The Treasurer’s plan should include integration execution effective cash positioning processes. All office also should prepare for the increased and tracking for each of the key functions cash movements should be monitored effort and time needed to gather, aggregate, (bank accounts, cash management, risk daily; this will aid overall understanding of analyze, and maintain data for Securities management, regulatory, etc.). Foreign Exchange (FX ) exposures during the and Exchange Commission (SEC) reporting. integration period, help identify additional Neglecting these responsibilities may Control of bank accounts and cash capital needs, and provide insight into future severely impact the combined company’s On Day 1, the buyer’s Treasury department covenant management requirements. performance and regulatory standing. should take control of the acquired company’s bank accounts, banking portal Detailed mid- to long-term cash forecasting BEPS – an initiative involving almost 90 access, signatories, and subsequent cash. is important during integration to give nations – lays the foundation for a modern This requires board resolutions, bank visibility into the combined organization’s international tax framework aimed at taxing acceptances, and updated signature cards. cash movement and needs. This will help profits at the point of economic activity Cash access should be enabled through Treasury understand each company’s cash and value- creation. BEPS is expected to technology, bank portal access, or account management strengths and weaknesses drastically affect the ways that liquidity set-up in TMS, to make sure that appropriate so it can effectively support the combined models are structured, while significantly control is provided to the acquiring business. Depending on integration altering repatriation laws and requirements company. Note that the number of the requirements, Treasury may attempt to on local banking. At its core, the BEPS acquired company’s banking partners and create a combined cash forecast prior to project intends to: geographic locations can have a significant Day 1. However, expenses may be volatile • Eliminate tax mismatches so that all impact on the level of effort required to during integration due to overall project income is taxed complete this process. costs, which may lead to more significant deviations than usual. Treasury should • Align profits with value creation regularly follow up with input groups to • Increase consistent levels of transparency review these variances. Driving a dialog with tax authorities with other business functions to explain large variations will help further Treasury’s • Implement tax law change in a coordinated knowledge and provide an additional fashion communication channel during and after integration.

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Risk management Industry-specific risks framework for session participants to Early in the M&A process, the Treasury M&A Specific industry requirements may impact follow and engaging in active listening and team should develop a clear understanding how Treasury prioritizes tasks during the collaboration should produce a blueprint of what the combined company’s treasury integration process: that focuses on what is best for the risk profile may look like after integration combined company in both the short and • Oil and gas– Ensuring the accuracy of to aid risk mitigation planning. Combined long term. In addition, Treasury leadership short-term forecasts is essential, as drastic companies can have a very different risk should empower the Treasury integration swings in oil prices can affect a company’s profile than either would as a standalone management team, which typically is led cash levels and needs entity. by the treasurer or the assistant treasurer, • Technology – Companies may encounter to keep the integration on time and within It is important to review which daily risk intellectual property (IP) location scope. management tools are being used to challenges, causing trapped cash issues confirm proper coverage during and after that require tighter cash management Operating model the transition. Examples of liquidity risk are: • Health care – High R&D costs may Oftentimes, companies go through an integration with the mindset “we can always • Credit facilities, overdraft lines, and other constrain working capital, creating change ‘X’ (process, people, technology) sources of credit such as commercial covenant management challenges later.” However, potential operating model paper programs should be reassessed to • Financial services– Regulatory capital improvements often fall by the wayside if provide additional short-term liquidity as and liquidity requirements can change they are not planned in advance. To increase needed drastically based on the integrated integration effectiveness, team members institution’s size increase • Bank guarantees for the new company should prepare both an interim operating may have additional requirements, such • Private Equity (PE) – Increasing debt-to- model to support Day 1 readiness and a as the need to have leases for local earnings ratios obtained in PE-backed desired end-state model for post-Day 1 properties in certain jurisdictions buyouts exerts pressure on improving optimization. Every effort should be made • FX lines may have to be adjusted or the company’s operating matrix to repay to reach the desired end state during activated due to potentially irregular debt. Treasury should keep a close eye on integration but it shouldn’t come at the payment volumes and currencies during liquidity ratios to manage debt covenants. expense of a successful Day 1. integration In addition, managing working capital is of paramount importance, as financial Treasury department size and sophistication Reassessing the new company’s foreign sponsors look to achieve returns as early should factor into the integration process. currency and interest rate aggregate as possible An early-stage company may have only exposure is critical in managing the a basic cash management function to company’s overall financial risks. Once 7. Advise on integration management incorporate, while a well-established exposure has been identified the Treasury Establishing goals company is likely to have detailed pooling team can determine which changes may Treasury executives should clearly outline structures, cash management strategies, be needed to risk management strategies Day 1 and end-state integration goals. For debt, FX management, treasury technology, or hedging executions to satisfy the new Day 1, function leaders should use internal or even a fully functioning in-house bank. company’s risk appetite. Changes related to and external resources to make sure that Company size also affects the number of full FX risk may include: integration activities do not disrupt regular time employees (FTEs) that will be needed business operations Specific attention to support the combined business. While • Adjusted hedging limits should be paid to the combined company’s FTE requirements can vary depending • Updated authorized traders or trading liquidity needs so that obligations can be on the complexity and scope of Treasury limits met. Treasury leaders also should develop operations, a company typically needs • New or revised ISDAs a strategy and implementation plan to two FTEs per $1 billion before reaching capture potential post-Day 1 synergies; $10 billion in revenue; and one FTE per $1 M&A integration is an optimal time to for example, identifying and rationalizing billion after reaching $10 billion in revenue. refresh policies and procedures to align with duplicative roles and processes. Integration provides an opportunity to an evolving risk profile, market standards, streamline Treasury operations and drive and regulatory requirements. Creating Planning and blueprinting greater efficiencies.2 The project plan should a standard and repeatable process for During integration visioning sessions, identify which Treasury activities (and identifying, aggregating, and managing tension may be high as both acquirer and positions) are the most critical to achieving company risk should be a Day 1 focus. target teams see their Treasury processes Day 1 readiness and the end-state operating as correct. Creating a clear and actionable model.

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IMO/governance groups during the integration process Finally, the Treasury integration team will Senior executives should give acquirer to help expedite the flow of information need to develop budgets to track overall and target companies’ Treasury leaders among various departments and functions. Treasury integration costs against projected clearly defined integration roles and Through regular meetings and partnerships amounts. There likely will be expenditures responsibilities, leveraging their treasury with Treasury process owners, the for outside consultants and vendors expertise and company-specific knowledge. IMO should establish a clearly defined involved with systems migration and cutover A Treasury integration management office governance model that outlines how the activities. These expenses should be (IMO) should provide project oversight, project will be handled from a milestone and monitored and reviewed on a periodic basis manage integration work streams, and log, risk perspective. to verify that there is enough value-add to track, and resolve key risk items that may justify costs and that overall project risk arise (Figure 4). The IMO should serve as the management is sufficient. central point of contact for non-Treasury

Figure 4: IMO value

How valuable was the IMO or PMO to the overall success of the integration?

1.60% 7.50% 52.00%

5.10% 33.20% 0.50%

Not at all valuable Somewhat not valuable Neutral (neither aligned nor not valuable) Somewhat valuable Very valuable Don't know/Not sure

Source: 2015 Deloitte M&A Trends Survey

8. Post-Day 1 optimization These and other metrics can help the Assessing the organization Treasury team evaluate how its performance After Day 1, it is important to maintain compares to industry leading practices focus on future-state Treasury goals and to and the desired future state. For example, develop key performance indicators (KPI’s) lenders provide deal financing with the for the business. Among typical metrics: expectation that M&A will increase the acquiring company’s synergies and add • Forecasting variance analysis value. This debt exposes Treasury on • Percentage of ACH payments covenant management and debt repayment • Bank fee analysis if the company is unable to follow through with a successful integration. This increases • Debt to capital ratio the need for Treasury to proactively • Free cash flow manage deal risk. Managing debt well by • Debt maturity schedule setting up covenant schedules, identifying key providers, and diligently monitoring the integration process can provide an opportunity to showcase Treasury’s strategic value to the business.

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Plan for post-Day 1 organization communication (e.g., weekly team meetings or over representation in certain regional optimization and monthly newsletters), and regular areas, which can create the need to right- It is important to remember that integration management outreach tends to boost size the organization to fit the planned occurs at a fast pace that not all team morale and productivity. In addition, future state. These dis-synergies should members may be accustomed to. Treasury including valued team members in be quickly identified and eliminated to leadership should watch for team fatigue discussions about Treasury’s future state is gain immediate value from the integration and work to maintain employee engagement an effective way to gain buy-in and enhance process. Treasury can look at different and productivity. This can be aided by employee loyalty. operating models – such as taking on showing employees that they are valued, new strategic activities – that can support with frequent interactions and touchpoints Integrating two companies may lead to employee retention (Figure 5). to solicit feedback. Transparency, clear dis-synergies such as duplicative processes

Figure 5: Organization optimization

What was done, if anything, to retain key employees? (please select all that apply) Key employees identified early in the process Key employees identified earlyin the process 62.40% Personal outreach by managers Personal outreach by managers and leaders to and leaders to key employees 52.90% key employees

ClearClear and and transparent transparent communications communications 48.20% throughoutthroughout the the integration integration phase phase

Retention agreements (including for example, Retention agreements 40.00% (including forcash example bonuses), cash bonuses)

Other (please specify:)Other 1.00%

Nothing was done toNothing retain key was employees done to 4.90% retain key employees

Don’tDon’t know/Not know/Not suresure 5.40%

Source: 2015 Deloitte M&A Trends Survey

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Post-deal synergies opportunities to increase the accounts To reach desired levels of post-deal For Day 2 and beyond, the Treasury team payable (AP) cycle wherever possible. synergies and cost effectiveness, companies should focus on stabilizing and optimizing Partnering with different finance leads and should focus on: the new company’s infrastructure by overall project management teams will completing tasks such as bank account help them stay abreast of company-wide rationalization and bank fee analysis, and cost-cutting plans and synergy savings. managing debt. Post integration there Also, maintaining awareness of the is likely to be an overabundance of bank company’s financial status will help produce accounts – a well-executed analysis can lead accurate forecasts to prepare for covenant to cost savings. management. Areas where Treasury should be involved include: Treasury should set target working capital • AR/AP management requirements for the combined company, both to achieve forecasted figures and • FP&A plans to unlock excess working capital. In • Changes to payroll and real estate highly leveraged transactions, it’s even operations more important, as the cost of capital for this unlocked working capital is much • Post-integration project management higher. Efforts should be made to look for statuses on synergies

Figure 6: Post-deal synergies

Awareness of targeted costs with path to get there

Maintaining governance model from integration to drive activities forward

Evaluation of groups to identify areas operating efficiently and areas in need of improvement Successful optimization Working capital management processes having a target working capital in mind to unlock value

Strict governance on reporting to financiers on debt covenant compliance

Ability to forecast future compliance/actions to stay within predetermined terms

Moving forward Both during and after M&A integration, Treasury leaders should position their organization as a strategic partner to the CFO – a partner that can aid operational effectiveness and help drive inorganic growth. Showcasing Treasury’s ability to manage debt, unlock cash, and drive cross- functional alignment during an integration can lay the groundwork to expand the function’s footprint and support continued value creation.

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End Notes 1. Jackson, Gavin, and Joe Rennison. “Bond Issuance to Finance M&A Deals Swells to Record High” Financial Times, 4 Aug. 2015

2. 2015 Deloitte Treasury Survey

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Don’t drop the ball Identify and reduce cyber risks during M&A By David Mapgaonkar and Arun Perinkolam

As if M&A deal teams didn’t have enough transaction execution, and integration – is balls to juggle during a transaction’s subject to heightened risk for cyber threats lifecycle, today’s complex and porous and attacks which, if not discovered and digital marketplace is tossing in one more defused, could harm both the acquirer and – increased cyber risk. Every stage of target…and even scuttle the deal. M&A – strategy, screening, due diligence,

Figure 1: Cyber risks in the M&A lifecycle

Integration or Announcement Deal closing divestiture

Risks Risk gap

Time Source: Deloitte & Touche LLP, 2016

Cyber risks vary from one M&A lifecycle • Reaching a deal price that does not Engaging the cyber risk management team stage to the next, and may be generated accurately reflect the cyber health and prior to initiating the M&A process can both internally and externally. Common risks robustness of the seller’s networks and provide strategic value at each stage in the include: systems that will form the basis for a new deal lifecycle. division of the acquiring company; • Targeting from a cyber threat actor leading to damaged reputation with Wall Street • Unknowingly exposing the acquirer’s and potential stock devaluation; enterprise network to threat of cyber attack when integrating potentially • Failure to understand and mitigate deep antiquated and unpatched systems and IT cyber shortcomings (including legal and assets of the target company regulatory risks) in the target company;

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Figure 2: Cyber risk due diligence

Assesses cyber health Assesses the buyer and target Leverages standards companies’ individual and Aligns the new company’s collective cyber security health cyber risk compliance program with industry-leading standards

Companies can’t afford to drop the ball on cyber risk, which is why conducting cyber risk due diligence has become an essential part of the M&A process. A dedicated cyber risk management team comprised of company security and IT experts and external advisors enables the deal team to focus on business- related M&A activities while it:

Mitigates cyber risk Identifies and mitigates specific cyber security risks Matures cyber program prior to deal close Develops a consistent, scalable cyber security program to safeguard future operations

M&A strategy and identify a core team of subject matter Screening and due diligence Prior to launching an M&A transaction, experts for each deal. The timelines and Once a potential acquisition target has the cyber risk management team should milestones should be flexible enough to been identified, the next phases typically develop a corporate risk assessment recognize variable deal complexity (e.g., a involve target screening and in-depth strategy and playbook to guide cyber complete merger of overlapping business due diligence. Target screening identifies risk-related due diligence consistently for functions between two highly-regulated potential acquisition candidates, or potential each potential M&A target, with defined companies is likely be more complex and acquirers for a company wishing to sell itself requirements and expectations for cyber multidimensional than a straightforward entirely or in part. Due diligence provides risk controls. This playbook can help reduce purchase of IP assets in a non-regulated the opportunity for the acquirer to conduct the level of ad hoc and deal-specific project industry). discovery on the acquisition target, including planning and increase the speed and analyzing or financial stability and health, reliability of the company’s overall cyber due The tools and templates section of the review of cyber risk and infrastructure, or diligence process. Once this pre-planning is playbook should identify and include interaction with acquisition target leadership complete, acquisition targets can be sought documentation and reference materials to gauge interest in an M&A transaction. out and compared to the existing strategy. for executing the approach, including a cyber assessment framework, checklists A number of tools and methodologies Playbooks are typically comprised of two to enable and track information requests, are available to support target screening. major components: the cyber risk due sample questions, and project management Activities often include conducting high-level diligence approach and the associated tools templates. research to create a target company’s threat and templates. The due diligence approach profile, identifying instances of historical identifies organization-specific drivers cyber risks (e.g., published examples of to align the cyber risk due diligence with breaches), and providing industry-level broader corporate strategy. To enable the insights. The resulting report should be most effective results, the approach should helpful in driving and/or scoping follow-on lay out high-level timelines and milestones due diligence efforts.

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Once a target has been selected and The second core method is the onsite Based on knowledge gleaned from the passed through the initial screening, workshops, which typically take place reconnaissance and threat profile, the due diligence is fully initiated, and the at the acquisition target’s corporate acquiring company may wish to perform cyber risk management team should facilities, including data centers, where a gap analysis and cyber diagnostic coordinate the due diligence activities appropriate. The cyber risk management to determine if the target is already related to cyber risk. At a foundational level, team meets directly with leadership, compromised. Advanced attackers cyber risk assessment activities typically management, and subject matter experts specifically evade the cyber risk tools employ a custom-designed framework to identify and discuss risks, findings, and and technologies companies traditionally that leverages industry leading practices, remediation opportunities. In some cases, leverage. With this in mind, a diagnostic globally recognized standards, and unique the acquiring company will send additional can review the target’s environment to requirements that reflect the acquiring representatives. When this occurs, the risk identify active or dormant threats present company’s deal drivers. The framework management team will typically operate as on its computer systems and networks. The should facilitate a holistic review of a target’s a central project management office (PMO) review assesses endpoints and network cyber risk, including an in-depth analysis of to coordinate schedules, align content traffic transiting between the target its IT governance, operations, information to reduce overlap, and lead workshop organization’s networks and the Internet. It security, business continuity, physical activities. deploys agent-based endpoint technology security, and overall risk posture. to all desktops, laptops and servers to The final assessment method – cyber search and review for potential Indicators of The assessment generally consists of risk profiling – includes two avenues: Compromise to identify anomalies, malware, three core methods that may be used cyber reconnaissance and compromise vulnerabilities, or other conditions that in parallel: offline document and system diagnostics. With the acquisition of the would pose a threat to the organization. review (typically handled via a virtual data target company’s assets, the acquiring room), onsite workshops, and cyber risk company also receives certain aspects of the Once the risk management team has profiling. One or more of these methods target’s threat profile. Cyber reconnaissance completed assessment activities, it may may not be appropriate or necessary in and threat profiling can assist in identifying compile a cyber risk mitigation plan that all contexts, however, as every deal has its techniques, tactics, and procedures that includes a detailed review of each risk with own nuances and complexities. The offline threat actors employ against companies prioritized tactical steps for remediation. document and system review includes experiencing large-scale, organizational The plan also identifies suggested owners analyzing documentation, resources, change. Cyber reconnaissance provides a for remediation activities, forecasts costs, and artifacts (e.g., system architecture company undergoing a transformation a and may even recommend a preliminary documents, information assets) to develop point-in-time assessment of its exposure to end-state IT infrastructure to support cyber an understanding of the acquisition target’s cyber threats by assessing the company’s risk-related integration activities. environment and identify preliminary assets across relevant intelligence findings and remediation opportunities. In sources. Reconnaissance typically includes addition to the document review, the cyber conducting threat assessments that risk management team may determine leverage ethical hacking and penetration it appropriate to conduct vulnerability testing techniques, and that use open, assessments and penetration testing on closed, and proprietary sources and the target’s IT systems. While this testing underground criminal forums. The resulting typically focuses on perimeter weaknesses, cyber threat profile provides insight into the the scope and scale can be readily adjusted criticalities that threat actors may target and to fit the situation. how.

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Figure 3: Acquisition target framework

Acquisition target framework

Governance and risk management Notice

Sample privacy Choice and consent Value Drivers due diligence Access, correction amendment and deletion domains Transfer and disclosure Value drivers determine Data quality structure Breach notification of the acquisition/ integration and Network and infrastructure define the Application and database security nature and the Sample User access and identity management scope of due security due diligence Threat and vulnerability management diligence domains Third party risk management BCM and disaster recovery

Security, governance and architecture

In some cases, this remediation plan may Finally, the remediation plan may also be subtracted from the overall valuation of require mitigation activities prior to Day 1, used as leverage in the deal-making process that company. This process requires careful but usually after the deal is signed. These itself. The costs associated with remediation coordination between company leadership mitigation activities are tailored to address of significant cyber risks may be used as and cyber risk management subject matter the highest severity risks, especially those a lever to reduce the overall acquisition experts in order to convey the appropriate that may lead to issues. When identifying costs. For example, if the acquisition messaging to the acquisition target, these activities, the risk management team target requires the development and syndicates and attorneys involved. should account for additional activity and implementation of a network demilitarized interest from threat actors that can occur zone (DMZ) to be stable on Day 1, some once the acquisition is publicly announced. or all of the costs of that project may be

Figure 4: Remediation timing

Remediation timing

Pre-sign activities Pre-announcement Pre-close activities 30-60-90 activities Day plan

Sign Announcement Close

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Transaction execution be developed and revised, with foundational integrity (EAI) services help promote data The cyber risk management team’s technologies and devices implemented as security across the application ecosystem involvement in an M&A transaction does needed. and within related business processes. not end after target screening and due diligence. The acquirer’s prime objective Once the 30-day milestones have been Managed Threat and SIEM in this phase is to facilitate an uneventful, addressed, the 60-day and 90-day activities Organizations must remain ever-vigilant to issue-free Day 1. During this phase, the deal should include re-testing and re-assessing cyber security threats. This means having team may ask for assistance with cyber solutions implemented as part of the earlier overarching visibility and pre-emptive threat risk remediation activities and advise on plan, and performing additional remediation insights to detect known and unknown integration plans for network architecture, for medium- and low-risk findings and adversarial activity. To be able to accomplish and support technology (e.g., e-mail vulnerabilities. Issues vary greatly from this, the cyber risk team should work with servers, human resources systems). Tasks company to company and typically are internal and external resources to develop may include reviewing the asset inventory prioritized based on factors unique to managed threat services (MTS) solutions developed during the due diligence phase that environment. Finally, the cyber risk that enhance in-house capabilities and to outline recommendations for logical and management team should play a key role in increase the value of Security Information & physical access provisioning, and identifying, safeguarding the new company’s IT systems, Event Management (SIEM). developing, and implementing controls and applications, and online presence. Common processes to support Day 1 activities. Other responsibilities include: Threat intelligence analytics relevant activities include reviewing critical A company’s ability to manage cyber threats system redundancies, planning for back-up Identity and access management and have a trusted SIEM operation depends and storage requirements, creating incident M&A typically spawns reorganization and heavily upon its ability to operationalize response procedures, and ramping-up restructuring, which require heightened an organization’s cyber threat intelligence cyber threat monitoring and vulnerability identity and access supervision. Ongoing program. During and after M&A activity, management capabilities. identity and access management (IAM) mitigating business risk should be a services facilitate administration throughout priority that requires timely, insightful, and Integration the user lifecycle, from on-boarding to off- predictive analysis tailored to the company’s An issue-free integration starts long before boarding enterprise users (e.g., employees, changing environment. Effective, actionable an M&A deal closes. Both companies contractors, vendors, customers). Along threat intelligence analytics provides participate in the integration process, where with identify management comes the need the context and prioritization necessary the two entities are merged according to to administer and monitor access privileges to support recommendations for risk the terms of the deal and the overall M&A and roles. Access management is critical mitigation. strategy of the acquirer. The cyber risk to organizations that may be shifting large assessment results may prompt the newly amounts of enterprise resources. Services Don’t drop the (cyber) ball combined company’s IT and cyber security include access control and configuration Conducting cyber risk due diligence staff to address a number of findings, support, and maintaining user profiles, has become an essential part of the improvement opportunities, and integration entitlements, and application access rules. M&A process. A dedicated cyber risk activities. To drive this effort, remediation Familiarity with the leading IAM technology management team can provide strategic and integration activities are typically vendors, such as Oracle, IBM, CA, SailPoint, value at each stage in the deal lifecycle summarized in a prioritized “30-60-90 plan,” EMC/RSA, CyberArk, Lieberman, is also key by assessing, identifying, and reducing with target milestones laid out at 30-days to effectively implementing an IAM solution. potential cyber security risks prior to and post-close, 60-days post-close, 90-days after deal close. post-close, and beyond. Enterprise application integrity A company merger can present a challenge Within the first 30-days post-close, the IT to managing and protecting critical assets and security teams should address critical due, in part, to evolving threats that or high risk remediation activities, especially accompany the integration of business in cases where onsite remediation cannot environments. A portion of this challenge occur prior to Day 1. Activities usually is related to enterprise resource planning include developing strong perimeter (ERP). When expanding and extending security, addressing substantial gaps in beyond traditional corporate IT borders, business continuity, and closing critical or it is critical to address ERP system high-risk vulnerabilities. Additionally, the security, privacy, control, and compliance end-state cyber risk infrastructure should requirements. Enterprise application

125 M&A Making the deal work M&A Making the deal work

Authors

Mike Armstrong Robert Call Jonathan Goodman Director, Monitor Deloitte Partner Partner Deloitte Consulting LLP Deloitte Tax LLP Monitor Deloitte Canada [email protected] [email protected] [email protected]

Iain Bamford Barry Chen Sarah Hindley Principal Senior Manager Principal Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Consulting LLP [email protected] [email protected] [email protected]

Srini Bangalore Nik Chickermane Chris Houser Principal Principal Partner Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Tax LLP [email protected] [email protected] [email protected]

Brett Beckett William Engelbrecht Steve Joiner Senior Manager Principal Partner Deloitte Consulting LLP Deloitte Consulting LLP Deloitte & Touche LLP [email protected] [email protected] [email protected]

Pam Beckey Eileen Fernandez Tom Joseph Partner Principal Principal Deloitte Tax LLP Deloitte Consulting LLP Deloitte Consulting LLP [email protected] [email protected] [email protected]

Bruce Brown Mike Fuchs Chi Yun Lee Principal Principal Senior Manager Deloitte Consulting LLP Deloitte Consulting LLP Deloitte & Touche LLP [email protected] [email protected] [email protected]

Davi Bryan Chris Gilbert Gavin McTavish Senior Manager Senior Manager Senior Manager Deloitte Consulting LLP Deloitte Consulting LLP Monitor Deloitte Canada [email protected] [email protected] [email protected]

126 M&A Making the deal work M&A Making the Deal Work

Steve Maddox Raghav Ranjan Tom Seliga Senior Manager Senior Manager Senior Manager Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Consulting LLP [email protected] [email protected] [email protected]

Steve Mangal Stephen Redwood Tanay Shah Senior Manager Principal Senior Manager Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Consulting LLP [email protected] [email protected] [email protected]

Cliff Mansfield Ami Rich Gaurav Sharma Senior Manager Senior Manager Senior Manager Deloitte Consulting LLP Deloitte Consulting LLP Deloitte & Touche LLP [email protected] [email protected] [email protected]

David Mapgaonkar David Russ Carina Ruiz Singh Principal Managing Director Partner Deloitte & Touche LLP Deloitte Consulting LLP Deloitte & Touche LLP [email protected] [email protected] [email protected]

Olivier May Joel Schlachtenhaufen Mark Sirower Principal Principal Principal Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Consulting LLP [email protected] [email protected] [email protected]

Don Miller Kurt Schmid Steve Tarrant Managing Director Principal Partner Deloitte Consulting LLP Deloitte Consulting LLP Deloitte Tax LLP [email protected] [email protected] [email protected]

Arun Perinkolam Steve Schultz Will Tarry Principal Senior Manager Principal Deloitte & Touche LLP Deloitte Consulting LLP Deloitte Consulting LLP [email protected] [email protected] [email protected]

127 M&A Making the deal work M&A Making the deal work

Matt Usdin Principal Deloitte Consulting LLP [email protected]

Mike Willkin Principal Deloitte Consulting LLP [email protected]

Nate Windom Senior Manager Deloitte Consulting LLP [email protected]

128 Integration Leadership Integration Service Offerings Leaders

Global M&A Consultative Advisory MACS M&A Growth (Sales & M&A Finance Services Leader Carina Ruiz-Singh Marketing) William Tarry Larry Hitchcock 225 West Santa Clara Street Nik Chickermane 30 Rockefeller Plaza 111 S. Wacker Drive San Jose, CA 95113-2303 555 Mission St. New York, NY 10112-0015 Chicago, IL 60606-4301 +1 408 704 2158 San Francisco, CA 94105-0920 +1 212 618 4821 +1 312 486 2202 [email protected] +1 415 783 6266 [email protected] [email protected] [email protected] M&A Digital M&A Supply Chain & National M&A Service Leader Olivier May M&A Human Capital Manufacturing Jeff Weirens 111 S. Wacker Drive Chicago, IL Matthew Usdin Kurt Schmid 50 S. 6th St., Ste. 2800 60606-4301 30 Rockefeller Plaza 50 S. 6th St., Ste. 2800 Minneapolis, MN 55402 +1 312 486 2677 New York, NY 10112-0015 Minneapolis, MN 55402 +1 212 436 4671 [email protected] +1 212 618 4884 +1 612 397 4440 [email protected] [email protected] [email protected] M&A Strategy Managing Principal M&A William Engelbrecht M&A Human Capital Due Tax Leader Consulting Services 695 Town Center Drive Diligence Pam Beckey Trevear Thomas Costa Mesa, CA 92626 Dan Rudin 200 Berkeley Street 1111 Bagby Street +1 714 436 7619 30 Rockefeller Plaza Boston, MA 02116 Houston, TX 77002-4196 [email protected] New York, NY 10112-0015 +1 617 437 3284 +1 713 982 4761 +1 212 618 4365 [email protected] [email protected] M&A Commercial Due [email protected] Diligence National Managing Partner Mark Sirower M&A Information Technology M&A Services 30 Rockefeller Plaza Asish Ramchandran Russell Thomson New York, NY 10112-0015 695 Town Center Drive 30 Rockefeller Plaza +1 212 313 1595 Costa Mesa, CA 92626 New York, NY 10112-0015 [email protected] +1 714 913 1220 +1 713 982 4761 [email protected] [email protected] M&A Operational Due Diligence M&A Information Technology Shashi Yadavalli Due Diligence 127 Public Square James “Mark” Andrews Cleveland, OH 44114-1291 1700 Market Street +1 216 830 6727 Philadelphia, PA 19103-3984 [email protected] +1.215.789.2757 [email protected]

129 Industry Integration Leadership

Aerospace & Defense, Financial Services, Banking & Investment Management Public Sector, State & Local Industrial Products & Services Securities Sridhar Rajan Mark Price Bhuvanesh Abrol Paul Legere 30 Rockefeller Plaza 200 Berkeley St. 555 West 5th Street, Ste. 2700 111 S. Wacker Drive Chicago, IL New York, NY 10112-0015 Boston, MA 02116 Los Angeles, CA 90013-1010 60606-4301 +1 212 3131653 +1 617 585 5984 +1 213 593 3783 babrol@ +1 312 486 2289 [email protected] [email protected] deloitte.com [email protected] Media Technology Automotive, Chemicals & Health Plans Iain Bamford Joost Krikhaar Specialty Materials Ollie McCoy 200 Berkeley Street 555 Mission St. Tom Williamson 191 Peachtree St., Ste. 2000 Boston, MA 02116 San Francisco, CA 94105-0920 111 S. Wacker Drive Chicago, IL Atlanta, GA 30303-1749 +1 617 437 2930 +1 415 783 6860 60606-4301 +1 404 220 1582 [email protected] [email protected] +1 312 486 2659 [email protected] [email protected] Providers Telecommunications Healthcare & Life Sciences Clark Knapp Marco Sguazzin Consumer Products, Retail, Susan Dettmar 191 Peachtree St., Ste. 2000 555 Mission St. Wholesale & Distribution 1750 Tysons Blvd. Atlanta, GA 30303-1749 San Francisco, CA 94105-0920 Shashi Yadavalli McLean, VA 22102-4219 +1 404 631 2811 +1 415 783 4091 masguazzin@ 127 Public Square +1 703 251 1620 [email protected] deloitte.com Cleveland, OH 44114-1291 [email protected] +1 216 830 6727 Real Estate Travel, Hospitality & Services [email protected] Insurance Francisco Acoba Shashi Yadavalli Boris Lukan 30 Rockefeller Plaza 127 Public Square Energy 111 S. Wacker Drive Chicago, IL New York, NY 10112-0015 Cleveland, OH 44114-1291 Trevear Thomas 60606-4301 +1 212 618 4432 +1 216 830 6727 1111 Bagby Street, +1 312 486 3289 [email protected] [email protected] Houston, TX 77002-4196 [email protected] +1 713 982 4761 [email protected]

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129 About the Deloitte M&A Institute The Deloitte M&A Institute is a community of clients and practitioners focused on increasing the value derived from M&A activities, powered by Deloitte’s M&A Services capabilities. The Institute serves as a platform to build connections, showcase thought leadership, and accelerate experience and learning for those involved.

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