Post-Merger Integration as an Instrument for Improving M&A Efficiency Paul J. Ostling

Finance Academy Under the Russian Federation 14 February 2008

MERGER…

A combination of 2 corporations, in which only 1 corporation survives

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There are many types of “Mergers & acquisitions”; E.g.:

3 • Acquiring “assets only” (somebody has a “problem” • Acquiring “assets & liabilities” (the classic “corporate marriage”) • “Reverse Triangular Merger” (the acquired company has a “better brand”)

Classic in the CIS: “The Roll-Up”

In a market with a disaggregated (many small players) industry; where the disaggregated entities are sub-optimized standing alone; and/or where there are efficiencies of scale available; and/or where reductions of duplication will increase margins 4

Question Number 1

Is it a MERGER?

Or… Is it an Acquisition?

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The Ultimate “Merger”

1986

Sperry Rand (Computers, Defense Contractor) + Burroughs (Computers, Info Tech) = “UNISYS” A New Brand (but had a “so-so” business) 6

The Classic “Screw Up” (Mistake)

7 1998 Exxon + Mobil = Exxon Mobil Was described as a “Merger”, but it was really a “take over” acquisition.

Labeling is very important!

Maybe a better example:

British Petroleum (BP)+Amoco It was “called” a merger, but everyone understood the truth quickly, when no one from Amoco was really on the Management Board after 6 months.

So after 6 months, everyone understood the game; and, BP acted humanely (kindly) 8

What is the Problem with “Mis-Labeling”?

• The people inside are confused and de motivated… “you promised us that we would be a happy couple, and now you do not love me. So, why should I help you?” • Wasted time, effort and money. Why?

• Loss of credibility and clarity. Why?

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Mergers Can Be Traumatic

• Job loss • Impact on Health, Increased Stress • Absenteeism, Decline in Productivity • Decrease in loyalty All of these hurt people and cost money. Lost Money = Merger Failure!!

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M&A Last Year

Approx. $800 Billion Approx. 7000 serious deals But STATISTICS SHOW 1/3 Outright Failure 1/3 Miss economic & productivity goals but “survive” ONLY 1/3 MEET EXPECTATIONS 11

In the USA

• 60% of all mergers below $1 million go unreported • At best 50% of all M&A transactions “succeed” • Failure rate of mergers is equal to the divorce rate in the USA -- Most Fail 12

Studies demonstrate that, on average, M&A consistently benefit the TARGET’S (ACQUIRED COMPANY”S) shareholders, but NOT the acquiring company’s shareholders!

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On Average, M&A leads to NO GAIN or slight LOSS in both stock price and profit to the purchasing company. But the stock price to the ACQUIRED FIRM gains by an average of between 20% and 30%

(TAKE THE MONEY AND RUN!!)

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If Some M&A Creates Value But Most Do Not, How Do We Measure Value?

• Return on Investment should exceed the cost of capital for investment (ROIC) • What returns on investment are hoped for?

- Cash flow - Market Capitalization/Enterprise Value - Synergies in operation - Market Share or Entry 15

Critical Strategic Analyses BEFORE You Commit to the Deal: • Growing vs. Shrinking • Building vs. Buying • Keeping vs. Selling • Integrating vs. Managing Separately 16

Merger Types/Issues

TONE Friendly Hostile FOCUS Horizontal (combining competitors) Vertical (supply chain consolidation) Conglomerate (diversification) REGULATION Securities Anti-Monopoly Security “State Champions” 17

A Smart Company Carefully:

• Plans for the outcomes it expects • Creates metrics and measures to judge success and failure • Monitors every step of the process • Holds everyone accountable

Otherwise, we suffer “value leakage”

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An M&A Plan

1. Managing the Transaction Stages (Strategic Planning; Target Search; Corporate Development/Finance; Target Selection; Initial Contact/NDA; Negotiation and Agreements; Due Diligence; Establish KPI’s; 2.

Regulatory Processes; Deal Execution; Post Merger Integration) Assesing Key Target People (“taking hostages”) 3. Preparing Stakeholder Communications 4. Value Preservation Plan 5. Preparing for Integration (PMI Plan) 19

An M&A Plan (continuation)

20 6. Managing the “Transition Stage” (between announcement and execution) 7. Installing and Empowering the PMI Team 8. Communicate, Communicate, Communicate 9. Execute, Execute, Execute 10. Monitor, Measure, Reward

Does Every M&A Do PMI?

NO!!!

• Financial Culture: Like KKR – add value by imposing superior, top down management strategies in a short period of time, because you plan to “flip” the asset (treat the acquired company like “stock” for re-sale) • Strategic Culture: Like GE – each acquired company is made a member of the “corporate family”. Two way enhancement is expected and planned. Real integration is a key success factor. The acquired parts may lose their separate identity 21

Post Merger Integration (“PMI”)

22 The “art” of combining two or more companies (not just on paper, but in reality) after they have come under common ownership.

The combining of two or more companies elements that will enable them to function as ONE

PMI = Change Management (Creating “the Burning Platform”)

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PMI Can Be Used Other Than for Companies, and Other Than for M&A’s:

25 • Governmental entities • Not-for-profit • Joint Ventures • Strategic Alliances • Partial Acquisitions

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We will not talk about today

Corporate Finance; Securities and Corporation Law Process (notices, proxies, tenders, shareholder rights, etc.); Negotiation of Deals; etc.

TODAY, WE ASSUME A DEAL IS AGREED BETWEEN THE PARTIES (even after a “fight”, like Arcelor-Mittal), THE REGULATORS DO NOT OBJECT, AND THE COMBINATION WILL PROCEED

A Word About Due Diligence

A Merger is like buying a second-hand (used) car. We try to do our homework (“due diligence”), but the pre-acquisition analyses never tells us all we need to know about how the company was run. It is like kicking the tires, looking under the hood, and driving the car around the block. You will have a tough time seeing things about the car that the seller does not want you to see.” Price Pritchett After the Merger, 1997 27

Creating An Engine for Acquisition

28 A smart, acquisitive company makes M&A and PMI a permanent team function on the organization chart. This company is ALWAYS creating “products” that will “win” when they are evaluated against the systems and processes of another company that it might merge with, or acquire, or be acquired by (culture, vision, people process, production and quality, information and financial systems, supply chain management, customer relations management, etc.)

Creating An Engine for Acquisition

29 Nearly always, when a company has a strong engine for acquisition (i.e., it has something to “sell” during PMI), the parts of that engine will be the “winners” during the integration process. A strong, “built-to-last” corporate culture always dominates the “NEWCO” in the long run. And, this can “save” the entire M&A event

Smart Elements of a PMI Process

30 1. Membership from both sides 2.

“Teambuilding” for the teams/rules of behavior 3. Devote adequate human and financial resources to PMI 4.

Recognize the difference between the “quick fix” vs. “long term” solutions (you need some of each in good PMI) 5. Over-Communicate and CASCADE everything 6. Make decisions before your scheduled date

Smart Elements of a PMI Process

31 7. Transparency is always a better answer – the answer you create and share will almost always be better than what people will imagine if you do not communicate 8. Vision, Values and Culture ARE real and material systems, and cannot be ignored 9. No one side can or should win every decision 10. Take on the hardest decisions EARLY and with aggression, tough choices only get tougher

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Elements of a Smart PMI Plan

32 Strategy Development and Re-Check (from the Vision, right through to the “Balanced Scorecard” and Key Performance Indicators) HR & People Management (Strategic Choices; Leadership; Right Sizing; Attract; Retain; Reward; Develop) Keeping your customers (tough choices) Selecting/Keeping the Supply Chain Maintaining/Restructuring Production, Technology, Methodology & Quality Selecting/Building Systems & Processes – trench warfare of M&A

Elements of a Smart PMI Plan

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Managing Key Stakeholders (regulators, shareholders, media, competitors, “towns and countries”, retirees/pensioners, suppliers, employees) Developing a strategy and viewpoint on “how much integration”; and “how much centralization”; and “how much shared services” If you think you are communicating “too much”, you are probably not communicating enough – communications strategies are key success factors in PMI 10. You always lose more people than you think you will, so plan accordingly, and do not expect that you can or should save “everyone”

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Common Mistakes

If someone is an “enemy” of change, you should probably kill them –the sooner, the better If you do not have an outstanding team of M&A experts inside, then go hire them – you will pay much more from a bad plan or bad advice Take on the toughest jobs, the dirtiest jobs first – delay only makes worse If you are not mindful of your people, and you do not make good decisions, they eventually HURT you – nothing is harder to find and fix than someone standing at his or her post, smiling, but doing nothing

Common Mistakes

• • • Plan, plan, plan Execute, execute, execute Reward your PMI team’s PMI success – it is a real, “day” job 35

We will not talk about today

Corporate Finance; Securities and Corporation Law Process (notices, proxies, tenders, shareholder rights, etc.); Negotiation of Deals; etc.

TODAY, WE ASSUME A DEAL IS AGREED BETWEEN THE PARTIES (even after a “fight”, like Arcelor-Mittal), THE REGULATORS DO NOT OBJECT, AND THE COMBINATION WILL PROCEED 36