aon hewitt

The Transformative Role of Human Capital in Mergers, Acquisitions, and Divestitures

The 6th Annual Conference on Mergers and Acquisitions

July 2012

Aon Hewitt: A Snapshot

Aon Corporation

Aon Risk Solutions

• Retail Brokerage

• Captive Management

• Affinity Programs

• Select Personal Lines

• Treaty Reinsurance

Brokerage

• Facultative Reinsurance

Brokerage

• Corporate Transactions

• Talent and Rewards Consulting

• Employee Communication,

Engagement, and New Media

Aon Hewitt Aon Benfield

• Aon Mergers & Acquisitions Solutions

Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 2

• Select Personal Lines

• Premium Finance

Brokerage

• Capital Markets

• Financial Advisory

• Analytics &Technical Services

• Claims Management

Engagement, and New Media

• HR Business Process

Outsourcing

• Total Rewards

#1

90

330

29,000

$8.5 billion

Human capital consulting and outsourcing firm in the world

Number of countries in which Aon Hewitt operates

Number of Aon Hewitt offices around the world

Number of Aon Hewitt colleagues around the world

Aon revenue (2010 corporate)

Aon Hewitt Overview Core Strengths Valued by Our Clients

• Aligning complex situations to strategy

• Balanced and holistic approach across IT,

people, process, and organization

• World-class consultants and methods

• Best-in-class change management and

engagement through transitions

Aon’s M&A Solutions: Capabilities Summary

Aon is the leading provider of HR-related M&A services globally and manages over 200 transactions per year including the largest and the most complex and successful business combinations over the past 5 years.

Our Experience and Expertise

Overall� On average, our consultants have

over 20 years experience working with some of the world’s most sophisticated organizations including GE, HP, Nokia, UPS, IBM, Abbott, Cisco, Wal-Mart, among others

� Worked on 500+ transactions in past 5 years, including some of the most complex acquisitions in recent history

� Dedicated group of M&A specialists – M&A and restructuring are all we do; focused on delivering end-to-end capability for major organizational change events

� Industry leading experts –Practice-leader level consultants formerly with largest competitors, joined together to deliver distinctive value

Our People Our Market Presence

Acting as HR M&A partner to Cisco providing support for multiple transactions, including $3.2B acquisition of Tandberg (35+ countries); working directly with HR M&A Leader

Hired as ongoing global HR M&A partner. Provided due diligence and integration support for multiple transactions as well as HR M&A training for GE employees globally

Providing strategic support for global expansion, specifically growth in Latin America (Brazil); working directly with Global Business Integration executive within Finance organization

Provided due diligence and integration support for multiple transactions in addition to providing HR M&A training for Philips employees globally


Depth and Breadth of Services � Provide services throughout the

transaction lifecycle – Due diligence, integration planning, post-merger integration and restructuring

� Integrated set of expertise across a broad range of HR domains including benefits, compensation, communications & change management, HRIS, HR operations, HR policies, leadership selection and staffing, organization design, payroll, training & development

Methods, Tools and Technology� Leverage proprietary methods,

tools and technology to deliver consistent M&A solutions across all domains and around the world

� Global expertise – Worked on transactions involving every region of the world; specialize in addressing human capital issues in complex global deals

� Industry Expertise – Expertise in a multitude of industries including transportation, media, financial services, healthcare, high technology, manufacturing, retail

� Holistic Skill Set – HR technical (e.g., benefits, employment law, compensation), organizational (e.g., culture, change management, organization design), and business strategy/operations (e.g., business strategy, operational process design)

Leading HR due diligence efforts for Comcast‘s 51% ownership stake in NBC Universal (joint venture with GE). $30B transaction involving 45+ countries; working closely with SVP Comp & Benefits and business strategy leader

Leading transition efforts to stand up HR programs and operations for the joint venture entity; working directly with EVPHR from NBCU and executives from GE and Comcast

Hired as ongoing HR M&A partner for HP MADO and have provided due diligence and integration support in multiple transactions, including $13B acquisition of EDS (320,000 employees in 60 countries)

Led global compensation & benefits integration support for Abbott’s $7B acquisition of Solvay’s pharmaceutical unit, one of the largest pharmaceutical deals completed in 2009

Provided HR M&A integration support on multiple transactions in addition to HR M&A training and HR partner for numerous joint ventures

Hired as Joint Venture HR M&A partner for Ricoh/ Global Infoprint joint venture in addition to providing HR M&A training for IBM employees globally

About AKT

� The largest HR Consulting firm in Israel

� In business since 2001

� +90 associates and partners

� Growing and profitable

� Customer base include +150 of Israel’s leading companies

� Strategic partnerships include:

– AON-Hewitt

– SuccessFactors

– LHH (DBM)

Expertise

• Talent Management

• Total Reward

• Corporate

Transaction &


– LHH (DBM)

and DBM (LHHTransaction &

Transformation

• Learning

• HR Excellence

• Career Transitions

• HR Technologies

M&A Environment Through First Quarter 2012


Source: 2012 Merrill datasite/monthly M&A Insider Mark 2012, we expect activity to increase during the year

Sustained Shareholder Value Creation Remains Challenging

Distribution of Total Return to Shareholder versus Industry Benchmark

Were all Transaction Goals Achieved?

78%

22%

No

Yes


39%

19%

20%

22%

Significantly value-creating deal(TRS greater than 20%)

Value-creating deal(TRS greater than zero)

Value-destroying deals(TRS less than zero)

Significantly value-destroying deals(TRS less than -20%)

Distribution of Total Return to Shareholder versus Industry Benchmark(TRS measured 24 months after deal announced)

Source: Accenture analysis

Factors Contributing to Deals not Meeting Goals

Frequently Rated High Frequently Rated Low

� Cultural integration issues� Inconsistent/ unclear

communication of synergy objectives

� Integration/ implementation took longer than expected

� Insufficient attention/ priority to workforce/ people issues

� Insufficient/ incorrect employee communications

� Payroll integration/implementation issues

� Compensation integration/implementation issues

� Benefit integration/implementation issues

� HR operations integration/ implementation issues

� Staffing selection issues

Source: 2008, Aon Hewitt/ M&A Transaction and the Human Capital Key to Success – Global Report

One Possible Explanation


Human Capital Issues Remain a Huge Tripwire in Global Transactions

41%

33%

32%

30%

28%

Percent of time spent on each function during due diligence

Integration took longer than expected

Cultural integration issues

Inconsistent communication of synergy objectives

Insufficient attention/ priority to workforce/ people issues

Top 10 drivers of deal failure(% of respondents)

The top drivers for deal failures

are Human Capital issues,

but only 15% of time in due

diligence is spent on HR & Communications.


28%

26%

26%

22%

20%

18%

0% 10% 20% 30% 40% 50%

25%

20%

20%

10%

10%

5%

10%

during due diligence

Sales andMarketing

Poor/ misinformed strategy

Risks/ liabilities not identified during due diligence

Insufficient execution capability/ competency

Leadership “infighting” and/ or buy-in

Price paid for target was too high

Failure to implement an appropriate org. structure

Source: 2012 Aon Hewitt/ Culture Integration in M&A, Survey FindingsSource: 2009 Aon Hewitt/ The Deal Human Capital Study

Finance

Business Line/Operations

Legal

HumanResources

Communications

Other

Cost and Growth Synergies Always Involve Human Capital

Value ofAcquirer

+ +

Value of Synergies

(Assumed)

– –=

Value ofTarget

TransactionCosts

IntegrationCosts

MaximumPrice For

Enterprise

Growth

…dependon businessstrategy and

workforceability/

willingnessto execute it

+

Costs


Acquirer EnterpriseCosts

Metrics of Success

Objectives Methods to address HR issues

� Identification of HR and Risk Liabilities� Purchase price adjustment� Obtain protection for HR/ Risk liabilities and cost

� Retain key talent� Retool workforce� Minimize disruption� Improve processes and efficiency

� Identify HR/ Risk cost savings� Estimate severance and restructuring� Capture economies of scale in purchasing goods/ service� Minimize litigation

Growth synergies are almost exclusively driven by Human Capital — physical assets, process reengineering, or tech infusion are enablers of growth.

The “winners” are those firms that can build execution capabilities and measure outcomes around growth synergy capture

Pay the RightPrice

Achieve Growth Synergies

Manage Cost

Due Diligence Snapshot

Sources of Human Capital Risks

� Evaluation of individual leaders from CEO down against competencies critical to success in post-deal environment

� Application of range of valid, sound, and target-appropriate tools delivered by highly experienced, professional global team. Fact-based talent value assessment on which to base compensation and retention offers

� Due diligence of team effectiveness of leadership team; Assessment of depth of bench strength and succession risk

� Identification of performance and retention risk, lending results to quantification of potential retention considerations in transaction value

� Analysis includes a competency profile of each individual along

Talent Risk � Due diligence of business entities, owners and management

teams, potential board members and key hires, and JV partners.

� Proxy fight and hostile takeover defense support

� Results translate into real benefits including prevention of reputational damage, increase in critical negotiating leverage, and reduced financial losses resulting from misrepresentations.

� Identify and avoid financial losses resulting from misrepresentations.

� Identify possible trailing litigation or regulatory issues

� Gain a more complete understanding of involved parties

Reputational Risk


� Evaluation of a properly calibrated risk environment that encourages leaders and employees to make business decisions that maximize the risk/return trade offs within the risk tolerance of the company

� Due diligence on risk environment and governance focusing on assessment, monitoring, and control environment and likelihood for reckless behaviors

� Analysis of internal policies and practices and governance model e.g., does management demonstrate active commitment to risk management policies and practices? Does the company culture and pay practices support the operational risk management environment that is appropriate?

Culture Risk

� Analysis includes a competency profile of each individual along with recommended actions to address lacking areas and drive results

Compliance Risk� Evaluation of compliance programs across all functional

areas that is appropriately documented, communicated, implemented and reported.

� Due diligence on compliance related policies and procedures, compliance communications, ethics and compliance training, whistle blower programs, compliance hotlines, processes for treating alleged incidents; risk assessments; and business and compliance review processes.

Global Due Diligence: Focus on Key Workforce and Compliance Issues

People Assets Adverse Margin Impacts People Costs Workforce Flexibility

� Profile key management

� Organization chart

� Skill profile

� Demographic characteristics

� Understatement of ongoing program costs

� Severance payments

� Commitments to future cost increases

� Collective agreement commitments

� Expatriates

� Relocation expenses

� Benchmark jobs and people costs

� Benchmark staffing levels

� Goodwill issues/morale

� Procedure steps

� Legal barriers

� Union/Work Council issues

� Temporary/contract workers


� Relocation expenses

Asset Liability Impacts Adverse Revenue Impacts Organizational Fit Compliance

� Change of control triggers

� Pension, welfare liabilities understated

� Contracts with executives may contain future liabilities

� Book accruals understated, e.g. vacation, sales commission

� Sales incentive design

� Likely employee turnover

� Retention plans

� Pending industrial disputes

� Cultural barriers

� Incompatible job definitions

� Incompatible reward structures

� Incompatible process and structure

� Duplicate jobs

� Programs and processes

� Illegal payments

� Discrimination

� Acquired rights

� Payroll & HRIS

� Collective agreements

� Employee commitments

Address Country-Specific Labor and Compliance Issues

� Many countries have local laws and practices that can have a significant effect on the price of a deal

Brazil

� Pension underfunding

� Plan tax status

� Minimum health

China

� Employment laws vary by province

� Some benefits are set by law

� Unrecognize

France

� Triggering of Individual and union rights

� Post-retirement medical and life

� Termination indemnities

Germany

� Triggering of acquired rights

� Variation in pension valuation methods

� Restrictions on

Japan

� Complex compensation programs

� Variation in pension valuation methods

Israel

� Complex labor laws

� Increasing duties for social security

� General


health benefits

� Termination indemnities

� Small group insurance costs

� Unrecognized benefit costs and liabilities

� Constraints on severance practices

indemnities

� Early retirement incentive plans

� Formal and informal severance plans

� Employee housing subsidies

� Complex labor environment

� Individual employment contracts

� Restrictions on asset transfers

� Eliminate pension discrimination policies/practices

� Implementing retirement plan mergers

� Complex labor environment

methods

� Restrictions on retirement plan changes

� Restrictions on asset transfers

� Employee housing subsidies

� Minimum legal benefit levels

� Legal limits on reductions in benefit levels

� General trend over the last decade of “legalization” of the workplace

� Recent legislation increasing protection of employees

Integration Drill Down

Company ADominance

Define an Overarching Integration “Philosophy”

Limited Integration Dominant Player Absorption

Very little integration of A & B B’s assets are fully integrated into A

Company B

HoldingCompany

CompanyA

CompanyB

POSSIBLE INTEGRATION “PHILOSOPHIES”


Mutual Best of Both Integration Transformation to New Company

Very little integration of A & B

Full merger of best practices from A & B to create a new entity

B’s assets are fully integrated into A

Best of Both integration that also incorporates external and new company best practices

IntegratedNew

Company

Best of Company A

Best of Company B

IntegratedNew

Company

External Best Practices

Best of Company A

Best of Company B

New CompanyBest Practices

� Utilize leadership practice strategies and approaches on a consistent and sustained basis than underachievers

73%

58%

62% 63%

57%60%

56%

94%

81%

71%

82%80%

75%

68% 68%

60%

80%

100%

Extent* to which the leadership practices are utilized

Integration Success is Linked to Sustained Focus on Leadership and Key Talent

Underachiever

Overachiever


50%

20%

40%

Selection and placement of leaders/key talent

Having leaders/key talent participate in ongoing leadership development programs

Having leaders and key talentlead participate in integration teams

Assessment of leaders/key talent

Onboarding of leaders/keytalent

Identification and retention of leaders/key talent

Use of formal leadership competency model for transactions

Coaching/mentoring leaders and key talent

*Responses of 4 and 5 was considered where 5 indicate “Always”

Source: Aon Hewitt M&A Research Database

Leadership Assessment and Selection

� Limited or questionable data is provided about key leaders from the acquired organization

� Early assessments are often inaccurate –especially when provided under severe time constraints

� Political considerations may play a key role (e.g., would target CEO’s assessment be the

� Engagement begins with orientation, but requires continued conversations and engagement by the acquirer

� Executives require more than retention packages (e.g., competitive compensation and benefits, career development, strategic vision)

� Targeted development and reward strategies for key

Key drivers for leadership assessment and selection in acquisitionsKey drivers for leadership assessment and selection in acquisitions

Best practices to engage and retain leadersBest practices to engage and retain leaders


(e.g., would target CEO’s assessment be the same as yours?)

� Business objectives and strategies may be different requiring a different type of leadership (e.g., transformational vs. transactional change)

� Targeted development and reward strategies for key technical and functional experts

� “Mentoring” relationships between acquired leaders and peers in the business who have been “acquired”

� GE Best Practice: Performance-based retention targeted at achieving business financial targets (including synergies) plus non-financial actions such as mentor or IDP

Acquirers are Increasingly Using More Comprehensive Leadership Assessment Tools and Methods


Understanding National Cultural Differences Is Essential to the Success of the Transaction

Africa

Arabs

Iran and Turkey

Italy and Spain

Russia

France

Hispanic AmericaMULTI-

ACTIVE

Linear-Active, Multi-Active Reaction Variations


INDIA

Indonesia and Philippines

Korea

China

BELGIUM

Australia and Denmark

Netherlands and Norway

U.S.A.

Switzerland Vietnam

U.K. Sweden Finland CANADA Singapore Hong

Kong

Japan

Germany

LINEAR-

ACTIVEREACTIVE

Source: When Cultures Collide, Richard Lewis, Third Edition.

National Culture Recognizing differences - Israel

Values :Obsession to surviveCourageEnergyOpinionated viewsImpatienceMoralityModernity


Source: Richard D. Lewis

ModernityPractical & pragmaticInformal peoplePoor listenersFriendly atmosphere but business like.Full use of high technologySeeking innovation and improvementsstraightforward

LeadershipWhat they attend to, measure, reward and control; role modeling and coaching Customer Experiences

Em

plo

yee E

xperience

Addressing Organizational Culture is Highly Correlated with Success

WhatWhat defines defines

cultureculture

HowHow it isit is

demonstrateddemonstrated


Mission, Objectives, Values and Strategies. Formal statements, charters, creeds

Shareholder Value

Business PartnerRelationship

Business ResultsE

mplo

yee E

xperience

Work Environment

Design of physical space; Socialization Patters

Programs, Policies, PracticesCriteria for recruitment, promotion & exit

Brand Promise

Organizational Structure

Culture Must Align With Strategic Priorities and Drive Value

Customer Service Company ImageEfficiency Quality Innovation

� Safety focus� Structure/process

efficiency� Training

� Shared understanding of company direction/ brand

� Shared values/pride

� Teamwork/BP sharing� Process quality focus� Empowerment � Training

� Diversity of thought� Supervisor relations� Stimulating

environment

� Career development� Performance

management� Local flexibility

Cultural differentiators* by strategy in financial high-performance companies

Major Strategic Priorities


� Training� Coordination� Data orientation� Performance

management� Focus on priorities� Involvement� Workload/resourcing� Physical conditions� Customer

understanding

� Shared values/pride� Integrity� Leadership� Belief in P/S quality

� Training� Long-term orientation� Understanding

customer’s quality expectations

� Data orientation

environment (physical)

� Stimulating environment (interpersonal)

� Information sharing� Collaboration/

teamwork� Support for risk taking� Rewarding innovation� Bias for action� Anticipating customer

needs� Flexible work

arrangements� Credible leadership

� Local flexibility� Positive working

relationships� Supportive service

environment� Customer knowledge� Service orientation� Values� Learning/information

sharing� Belief in P/S quality

*Differentiators derived from employee research into the survey questions and topics on which financially successful companies excel versus their peers.

9%

7%

20%

35%

42%

51%

29%

7%

0% 20% 40% 60% 80% 100%

Low Culture Alignment

Strong Culture Alignment

Highly Engaged Moderately Engaged Passive Actively Disengaged

44% more employees are engaged

in companies where culture is aligned with strategy

71% of employees in companies

with misaligned cultures are either passive or actively disengaged

Aligning Culture with Strategy Leads to Better Engagement and Retention Outcomes


25%

51%

36%

30%

19%

5%

3%

1%

18%

13%

0% 20% 40% 60% 80% 100%

Low Culture Alignment

Strong Culture Alignment

I have no plans to leave Would consider another job offer

Actively looking for another job Made plans to leave

Plan to retire in the next few years

2X the number of employees will stay

with companies where culture is aligned with strategy

75% of employees are likely to

leave companies where culture is not aligned with strategy

Source: Aon Hewitt’s Engagement 2.0 Study

What are M&A Overachievers Doing Differently?

89%

89%

89%

75%

70%

75%

Analyze Current/Future Culture Gaps

Define Future State Culture

Assess Current State Culture

Answer: Less analysis, more action!

Underachievers

spend more time

assessing culture


78%

78%

67%

78%

85%

90%

90%

100%

50% 60% 70% 80% 90% 100%

Communicate Regarding Culture

Conduct Team Building Interventions

Redesign HR programs

Make Organization Structure Changes

Overachievers Underachievers

SOURCE: Aon Hewitt’s Culture Integration in M&A Study

Overachievers

spend more time

Managing culture.

Ie, the “How”

Culture Integration to Aim Towards a High Performance Culture

In the longer term, the success of culture integration is does not lie in the similarity of merging businesses, but in building a High Performance Culture.

Following activities should be included in culture integration plan

� Often integration leaders not held accountable for culture integration

� Lack of urgency in addressing culture

� Executives do not see the need to address culture at all

� Leaders (often managers/supervisors) not skilled at leading change

Indicators of a successful culture integrationIndicators of a successful culture integration

Mistakes to avoid during culture integrationMistakes to avoid during culture integration


� Leadership role modeling of desired behaviors

� Communication of performance expectations

� Talent and skill development

� Reinforcement with formal mechanisms

leading change

� What employees experience does not match what they’re told

� Relegating culture to HR; treating it as “soft” stuff

� Conduct assessment but ignore ongoing change process

� Ignoring subcultures, which invariably exist

Reduce Risk and Cost of Disengagement and Accelerate Financial Value of Changes

Rationalizing

Integrating

The Individual Change Path

Behavior=Understanding AdoptionValuePreference


ResistanceOver-

Confidence

Disengagement“valley of despair”

Letting Go

Testing

(shortest duration possible)

The “change curve” is unavoidable and expected as employees learn and grow through the change event. The depth and duration of disengagement can be managed and minimized.

My Company

In Transactions, Employees have a Raft of Pressing Questions about how They are Impacted Personally

My Team

My Work

My Career

My Money

Employee communication should

address these concerns.


What will happen to me?

What will happen to opportunities for my career … long term?

How will my day-to-day work change … short term?

What will happen to the people I work with?

My Future

My Money

What will happen to my ability to earn money … short- and long-term?

What will happen to my Company?

Amiad – Arkal Integration – Israeli Case study


Dec.Dec.Dec.Dec.Nov.Nov.Nov.Nov.Oct.Oct.Oct.Oct.Sept.Sept.Sept.Sept.Aug.Aug.Aug.Aug.JulyJulyJulyJulyJuneJuneJuneJuneMayMayMayMayAprilAprilAprilAprilAreaAreaAreaArea

General PlanningGeneral PlanningGeneral PlanningGeneral PlanningIIII

CommunicationCommunicationCommunicationCommunicationIIIIIIII

Key People Key People Key People Key People

retentionretentionretentionretentionIIIIIIIIIIII

Gap AnalysisGap AnalysisGap AnalysisGap AnalysisIVIVIVIV

Amiad – Arkal PMI Case Study

PMI Planning & approval

Leading teams assignment

Comm.planning

D-Daycomm.

Identify KP KP retention meetings

Streams check lists + Gap analysis report

Ext. leading team Orientation

On-going communication

KP retention activities: Dialog, Engagement, Professional challenges, Risk mgt.

Gap AnalysisGap AnalysisGap AnalysisGap Analysis

Vision, Structure & Vision, Structure & Vision, Structure & Vision, Structure &

ManagementManagementManagementManagementVVVV

Customers Customers Customers Customers

retentionretentionretentionretentionVIVIVIVI

Cultural MergerCultural MergerCultural MergerCultural MergerVIIVIIVIIVII

QC & Mid process QC & Mid process QC & Mid process QC & Mid process

conclusionsconclusionsconclusionsconclusionsVIIIVIIIVIIIVIII

Vision & strategic planning

High level Organizational structure

Management assign.

EE OrientationProfessional

Trainings

R of O-Org. structure

company Values

Global Re-Branding

Early suppliers unification

Co-meetings Focus on effective Customer Service

Identify Key Customers

Mix. Business teams

Assign. Working processes design

Employee survey

Thank You!


aon hewitt

Business

global aon

acquisitions

aon hewitt

due diligence

working directly

leadership

past 5 years

growth synergies