M&A Integration: Deal Killers and Best Practices

Mark Herndon, President Parkwood Advisors, LLC mark.herndon@parkwoodadvisors.com 214-296-9248

Some background . . . Why are we here?

M&A is back, and in a big way!
Lots of private equity money now being deployed Economic confidence triggers deals

Most executives have been theredone that!

Many times unpleasant experiencesor worse Diverse experiences should be leveraged through a common framework

What we can learn from M&A Best Practices

M&A is a process versus an event M&A is a skill that must be developed M&A capabilities must be in place before the train leaves the station

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

This session will cover. . .

What can go wrong? Key principles and best practices to really get it right
Primary focus today will be on integration More company leaders involved at this stage More potential complications at this stage

Case study: Can This Merger Be Saved?

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Lets start with the realities . . .

Deal Announced

70% of M&A deals fail to achieve anticipated synergies 50% report overall drop-off in dropproductivity in first 4-8 months 4 47% of acquired company executives leave in the first year 75% leave within the first three years Just 23% of all acquisitions earn their internal rate of return On average, management grade the financial performance of their acquisitions as a C minus 58% of mergers fail to create substantial returns to shareholders (A. T. Kearney)

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Sources: The Wall Street Journal, Forbes, Fortune, CFO Magazine

Failure Can Occur in Any Phase of the Process!

Strategy & Targeting

Lack of Compelling Strategic Rationale Lack of Rigorous Target Decision Criteria Lack of Disciplined M&A Process Inadequate and Incomplete Due Diligence

Due Diligence

Unrealistic Expectations or Excessive Price Not Thinking About Integration Until Too Late Overconfidence In Ability To Change Or Turn-around

Acquisition Integration

Delay and Ambiguity Lack of Shared Vision and Strategy Conflicting Corporate or National Cultures Inadequate Resources Bad Execution

Uncontrolled And Inadequate Integration Plan / Process Failure to Pay Attention to Customers and Operations Lack of Attention to Alignment and Change
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Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Customers / Channel Partners Wont Forgive Your Mistakes

Competitors have a ripe grapevine

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Employees have heard it all before . . . .

. . . And, STILL only care about ONE thing

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

The Big Lies

This will be business as usual. We dont anticipate any major changes. This will be an autonomous, stand-alone division. This will be good for all of us. This will be a merger of equals. Well take some time to get to know everyone, and then well get back to you. But dont worrytheres plenty of opportunity
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Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Change is a good concept . . .

. . . until it comes to my door

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Acquirers often create their own obstacles to change

Barrier to Change
We /They Attitude . . . . . . . . . .

Typical Employee Perceptions

we do it this way . . . the right way

Arrogance. . . . . . . . . . . . . . . . . . if you guys are so good, why didnt you buy us Process Change Confusion. . . . . where are these new forms supposed to be anyway? Delay Deficit. . . . . . . . . . . . . . . . theyve been saying we dont know yet for so long - I think theyre just not telling us Ambiguity/Indecision. . . . . .. . . . . this is the third time theyve changed their minds this month
Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Frankly, their efforts to keep me were too little, too late. . . . I cant stick around forever just wondering.

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Marriages of Convenience Seldom Last

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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When people are anxious and scared about their futures, they are focused on themselves not on customers, quality service, costs and speed.
EXPECT productivity to drop by 50%.

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Ten Principles for Integration Success

1. Start with strategy 2. Focus on what matters most 3. Best practices are where you find them 4. Move fast 5. Re-recruit before you have to

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Ten Principles for Integration Success, continued

6. Over-communicate 7. Culture matters 8. Structure the chaos 9. Deal with the me issues ASAP 10. M&As must be led, not managed
Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Without a clear strategy, integration will quickly dissolve into conflicting, incompatible projects

General Strategic Rationale Consolidation / overcapacity Product line or geographic expansion Acquire R&D / talent Industry convergence

Integration Strategy Framework Structure and staffing Level of integration / governance Brands / products Operations IT / service delivery

Essential Value Drivers?

Performance and metrics Process redesign HR alignment Culture and knowledge transfer

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Ruthless prioritization and relentless accountability prevent distraction

Keep your customers

Capture synergies

Build integrated systems

Hit performance expectations

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Beware the Not Invented Here syndrome . . .

10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 Best Superior Average Inferior

Willingness to Accept Best Practices

Self Perception of Business Unit Performance

. . . And aggressively search out best practices regardless of whos buying who
Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Source: Harvard Business School Study

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The speed of integration is critical to success

Percentage of respondents that reported improvement in these measures through a fast integration process
Employee Commitment Employee Turnover Customer Focus Clarity of Company Direction Technological Progress Speed to Market
Sources: Management Review

76% 76% 76% 71% 71% 62%

10

20 30

40

50 60

70

80

90 100

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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At the time it seemed like we were going too fast, but for employees and customers, it must have seemed like forever.

SPEED OUTWEIGHS ACCURACY

USE THE 80/20 RULE

DELAY CREATES UNCERTAINTY

KEEP IT STRICTLY SIMPLE

CUSTOMERS DONT TOLERATE DISRUPTIONS

THE LONGER IT TAKES THE MORE IT COSTS

Why emphasize speed over precision? Because the costs of delay exceed the costs of mistakes. Percy Barnevik, former CEO, ABB Quoted in Harvard Business Review
Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Re-recruiting means: show me MORE than the money

Top 10 Reasons High-Performing Employees Resign

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Lack of opportunity for advancement Dissatisfaction with company management Dissatisfaction with compensation Conflict with co-workers or manager Lack of recognition or appreciation Uncomfortable work environment Inadequate opportunities to develop career skills Lack of respect or fairness Conflict with family or personal needs Dissatisfaction with benefits
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Source: Strategic Rewards 1999/2000, Supplemental Survey of Top-Performing Employees

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

Communication is consistently rated the most important factor, yet most dont do it well

Why does this gap exist?

Top reasons communications were ineffective

Inadequate resources Too slow Inadequate senior management attention Not all groups were communicated to The messages were inconsistent Launched too late Not well planned Not frequent enough Ended too early

90% 43%

Communication Is Important

Communication Is Successful

Source: Watson Wyatt Worldwide, Global Survey of Experienced Acquirers

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Culture issues are rated among the top failure factors, yet rated last in the type of information gathered during due diligence
Hard assets Market share, distribution Technological and business competencies Financial aspects of HR function Management capabilities and willingness to cooperate Major shareholders HR policy matters Workforce potential Organizational culture and dynamics of change

90% 86% 78% 75% 71% 56% 56% 49% 46% 0 10 20 30 40 50 60 70 80 90 100

Percentage of companies citing the type of information gathered during due diligence

Source: Watson Wyatt Worldwide Study: Assessing and Managing Human Capital: A Key to Maximizing the M&A Deal Value

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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All integration activities must be coordinated though a program management approach to structure the chaos
USE RUTHLESS PRIORITIZATION PURGE THE NICE-TO-HAVES NICE-TOBUSINESS AND INTEGRATION MEASURES

DEDICATE THE RIGHT INTEGRATION LEADER AND TEAM RESOURCES

EXECUTE THE HAVE-TO-DOS HAVE-TOEXTREMELY WELL

JOINT TASK FORCES TO PLAN AND EXECUTE

DISCIPLINED PROJECT MANAGEMENT AND ACCOUNTABILITY

Success is never final. Failure is seldom fatal. Its execution that counts.
Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Under-managing the me issues will destroy value even in the most strategic and reasonably priced deals
Staggered Experiences

Productivity

Senior Mgmt. Middle Mgmt.

Employees

Time management must address these issues from where the organization is at, not from where they are at
Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Integration Manager Quote: Nothing much happens until the organization is set.
DEL N MO IO IZAT ANIZ IGN ORG ND DES A
MAKE M AKE THE T OUGH DECISIONS TOUGH DECISIONS

ION LE CT SE F AIR ESS P ROC

WO R PO KFO L IC RC I ES E S AN TAB D PR I LI ZA OG TI RA O N MS

AG CRE AT G T IM RE S E EL SI V INE E S

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Survey results: The complexities of acquisitions require bold and decisive leadership
Percentage of companies citing reason for success
Leadership Well planned communication throughout the deal process Early resolution of What will happen to me? employee issues Expedient integration Cultural compatibility Mutual agreement of road map by partners Shared responsibility of costs involved 9% 0 10 20 30 40 50 60 70 80 90 100 51% 44% 41% 35% 32% 73%

... to help the organizations focus, coordinate and implement

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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Ten Principles for Integration Success

Start with strategy 2. Focus on what matters most 3. Best practices are where you find them 4. Move fast 5. Re-recruit before you have to 6. Over-communicate 7. Culture matters 8. Structure the chaos 9. Deal with the me issues ASAP 10. M&As must be led, not managed
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Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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About The Presenter

Mark Herndon serves as President of Parkwood Advisors, LLC, a diversified professional services firm focused on merger and acqusition strategy and integration; investment banking and private equity financing; and the development of early-stage technology-oriented companies. Mark specializes in a broad range of strategic and business effectiveness initiatives, including:

M&A strategy, due diligence and integration management Strategy formulation and execution Strategic communications of large-scale change; culture assessment and integration Financing and capital formation for early stage companies Business development and strategic planning for technology oriented start-ups Stategic marketing and positioning of new products and technologies

Mark formerly served as U.S. Region Leader for Merger and Acquisition Services with Watson W yatt Worldwide, a global consulting firm with approximately $750 million in annual revenue, where h is clients included: American Express Financial Advisors, Amoco, Boeing, British Petroleum, Cessna Aircraft, Chevron, Dell Computer, Dow Chemical, Equistar Chemicals LP, First Interstate Bank, General Electric, Hoechst-Celanese, J C Penney, Komatsu -Dresser, Lyondell Petrochemical, Magma Copper, McNeil Consumer Products, Northern States Power, Occidental Chemical, Quaker Oats, Shell Oil, The Toledo Hospital, TRW, and Willamette Industries among others. Mark is the co-author of The Complete Guide To Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level, (John Wiley / Jossey-Bass Publishers), which has been translated into five languages and is used as a foundational guide for various consulting firms and university programs. A S econd Edition of this book is scheduled for release in 2007. Mark earned the distinction of Top Ten Graduating Seniors at Oklahoma State University where he completed a Bachelor of S cience degree. While in college Mark served as the National President of the Future Farmers of America, a 500,000 member educational organization funded by the United States Department of Education. He subsequently earned the Executive Masters of Business Administration degree from the University of Texas at Dallas, where he currently serves as Executive in Residence for the Graduate School of Management.

Parkwood Advisors, LLC Office / Fax: 214-296-9248 Mobile: 214-280-3486 mark.herndon@parkwoodadvisors.com

Copyright 2005 Mark Herndon, Parkwood Advisors, LLC

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