draft draft for review only developing and delivering successful m&a capability research august...

DRAFT FOR REVIEW ONLY

Developing and Delivering Successful M&A Capability

Research

August 26, 2008

DRAFT FOR REVIEW ONLY - 2 -- 2 -

1. Executive Summary

2. Background

3. Approach

4. Research Results

5. Recommendation

6. Next Steps

7. Appendix


• Cultural change from a reactive to a proactive, value-oriented environment with clearly defined walk-away points

• Sophisticated knowledge of business structures (i.e., multiple holding companies)

• Comprehensive financing plan before pursuing M&A related activity

• Efficient corporate governance process allowing for rapid decision-making

• Acknowledgement that corporate strategy equals M&A strategy

• Proactive identification of targets coupled with specific approach strategies

• Transaction professionals, highly experienced in:– Valuation– Deal structuring– Financing (transaction-related)– Negotiation

XXX’s move to holding company structure via “project XXX” signals a dramatic shift from an operationally driven business to a deal driven organization, which requires…

To assist XXX in strengthening its pre-deal M&A process, xx has researched many organizations that are facing or have overcome similar challenges to XXX. This document summarizes that research.

NOTE: Please reference the supporting research deck for additional detail on research and findingsNOTE: Please reference the supporting research deck for additional detail on research and findings

External research:• Pre-deal M&A execution models• Factors impacting model selection

Pre-deal M&A playbook:• Processes• Roles and responsibilities• Governance• Templates


6

2

15

9

0

4

8

12

16

< $1B $1B - $5B $5B - $10B > $10B

Gross Profit

# o

f C

om

pan

ies

9

5

1

1011

0

4

8

12

< $100M $100M -$500M

$500M -$1B

> $1B N/A

Typical Deal Size**

# o

f C

om

pan

ies

75 4

20

0

4

8

12

16

20

24

0 - 5 6 - 10 11 - 20 > 20

Avg # of Deals Closed / Year*

# o

f C

om

pan

ies

9

7

54 4

7

0

4

8

12

TMT FS Oil & Gas CPG Life Sci Mfg

Industries

# o

f C

om

pan

ies

Our findings and recommendations draw on xx’s expertise in executing best in class deals and primary research of over 35 companies who are…

…comparable size to those of XXX

in industries with high levels of M&A activity…

actively executing deals…

of relevant size (gross profit) to XXX…

= comparison category for XXX= comparison category for XXX

Source: CapitalIQ, MergerStat, xx AnalysisNotes: * Average is of deals in 2005-2007, except for Wellpoint (2001-2004)

*“Typical” is an average over years 2005-07 with major outliers excluded




Finding #1: M&A groups structure their organizations using one of four models, with nearly 60% centralized and nearly 30% hybrid

BU BU BU

Corp

Centralized

• Corporate and BUs share responsibility for setting M&A strategy, M&A related resources, and activities

• BUs typically lead, manage, and execute smaller deals• Parent-level M&A group leads larger “game-changing” deals

Hybrid

DescriptionStructure

• External resources perform M&A activities on an ad hoc basis• Senior advisors provide expertise in pre-deal activities and are

generally familiar with the organization and specific industry

Virtual

Corp

BUExternal Resources

BU

• M&A practitioners are located in each business unit (BU)• BU(s) defines strategy and conducts all pre-deal activity• Approvals may still be required from corporate depending on

corporate governance processBU BU BU

Decentralized

Corp

• Western Refining• NCR

• Integrated Oil & Gas Company

• BP (moving to a centralized model)

• Oil Refining Co. A• Oil Refining Co. B• Family-Owned

Consumer Goods Business

•LG Electronics•SK Energy•Viacom

Corp

BU BU BU

Examples

= location of M&A capabilities

• M&A group resides at Holding Company• Holding Company drives overall M&A process, including setting

strategy across all BUs• Central team works closely with relevant specialists as required• Central team involves relevant BU for diligence and synergies

assessment to create buy-in and accountability for the transaction

85%

of

com

pani

es r

esea

rche

d<

20%

of

com

pani

es r

esea

rche

d

58%

27%


Finding #2: Regardless of the structure employed, nearly all M&A groups studied, lead and manage 100% of M&A-related activities from minority investment to divestiture

Increased control, risk, cost, and resources

•Limits risk exposure•Includes licensing, co-marketing, supply agreements, etc.


Contractual AgreementContractual Agreement

Strategic Alliance

Strategic Alliance

Minority Investment

Minority Investment

Joint Venture

Joint Venture

Acquisition/DivestitureAcquisition/Divestiture

• Expresses a more serious commitment between the parties

• Exchange of managerial talent, resources, and capabilities



• Creates a separate entity in which two companies invest

• More serious commitment

• Allows for knowledge transfer and experiences learned




• Gain assets of strategic value

• Mitigate risk of defection

• Reduce competitive threat




• Direct investment in another company

• Creates an option for future strategic uncertainty



A vast majority of M&A groups lead all deal activity related to minority investments, joint ventures, and acquisitions/divestitures

Contracts are typically executed by business units

While business units typically drive strategic alliances, M&A groups

are often consulted; some M&A groups lead

strategic alliances

Informed or

uninvolved

Consulted or

Responsible

Responsible

Invo

lvem

ent o

f M&

A g

roup


23

21

10

0

4

8

12

16

20

24

Virtual Decentralized Centralized Hybrid

Structure Type

# o

f C

om

pan

ies

85% of companies* employ centralized or hybrid models…

Finding #3: M&A teams predominantly have 3-5 dedicated professionals

Notes: * of companies in sample set

* Number of M&A practitioners at the BU-level in a hybrid structure could not be determined

Source: xx primary research and analysis




1

9

24

21

4

21

0

4

8

12

16

0 - 2 3 - 5 6 - 10 11 - 15 > 15

# of People in M&A Group#

of

Co

mp

anie

s

Hybrid - # atCorporate **

Decentralized

Centralized

… and most commonly have 3-5 people


Finding #4: Focus on growth through acquisition, culture of strong corporate control, and/or substantially similar business units indicates a centralized model

DecentralizedVirtual

• Divisions operate in different industries

• Little or no overlap in customer segments

• Wide variation in products or services

• Strategy dramatically varies by division

• Business units are geographically dispersed

Similarity of business units / divisions

• Divisions operate in same industry

• Similar or overlapping customer segments

• High degree of commonality or complementing products / services

• Similar divisional strategies

• NO IMPACT in adoption of virtual model

• M&A activity complements organic growth

• M&A performed on reactive / ad hoc basis

M&A activity as a core competency

• Growth fueled primarily through M&A-related activities

• Frequent M&A activity using repeatable, rigorous processes

• Portfolio approach

• M&A not a core competence

Culture of control

• Divisions empowered to set strategy

• Corporate retains approval authority but does not actively determine division strategy

• Corporate actively participates in or sets divisions’ strategies, whether by direct influence or via economic incentives (e.g., capital distributions)

• High reliance on external expertise

Hybrid Centralized


Finding #5: Greater scale of deal activity, in terms of both volume and value, suggests selection of centralized over hybrid model

DecentralizedVirtual Hybrid Centralized

Average number of deals*

0

10

20

30

40

50

60

Virtual Decentralized Hybrid Centralized

M&A Structure

Avg

# o

f D

eals

• Low deal volume

Deal Activity

• High deal volume

• Larger deals• Smaller deals

Note: due to sample size, this is indicative, however not statistically significantNote: due to sample size, this is indicative, however not statistically significant

median

maximum

minimum

75th percentile

25th percentile

Source: CapitalIQ, MergerStat, xx primary research and analysisNotes: * Average is of deals in 2005-2007, except for Wellpoint (2001-2004)




Deal Value as % of Gross Profit

0%

10%

20%

30%

40%

50%

60%

70%

Virtual Decentralized Hybrid CentralizedCorporate Development Structure

Avg

Ann

ual D

eal V

alue

as

% o

f A

vg A

nnua

l Gro

ss P

rofit

(20

05-2

007)


Recommendation: Hold Co. portfolio management strategy suggests XXX adopt a centralized M&A structure, staffed with 2-4 M&A professionals


• M&A is not currently a core competency, but through Project X, XXX intends to move toward a portfolio approach in which M&A is necessarily a core competency

Culture of control

• Hold Co. retains significant control over BUs through capital allocation

Deal Activity

Decentralized Hybrid CentralizedVirtual


• XXX’s divisions largely operate at different points in the value chain of the same industry

= Less dominant factors for XXX

• XXX intends to become more active in M&A and execute larger more transformative deals

= More dominant factors for XXX = Recommended structure


Implication #1: XXX’s M&A group leads and coordinates all acquisitions regardless of deal size; BU provides operational and integration planning expertise

Bold = M&A group activities

Pro

cess

Fo

cuse

dK

no

wle

dg

e / E

xper

tise

d

rive

n

Typ

e o

f ac

tivi

ty

Business UnitHolding company/ Corporate headquarters

• Company-wide and BU M&A strategy

• Screening criteria• Universe of candidates

definition and selection• Methodology of approach• Due diligence management• Financial forecast

assessment• Deal structuring• Diligence results summary• Synergies analysis• Integration assessment• Deal negotiation

Location of activity

External Advisor

• Legal: Diligence, deal execution, approvals, close deal

• Deal structuring • Financing options• Tax implications/strategy

• Candidate profiles• Target screening• Valuation Modeling• Due diligence: IT• Due diligence: HR• Due diligence: Market and

financial• Management of process

execution

• BU M&A strategy• Potential acquisition

candidates identification• Due diligence: Market• Synergies analysis• Financial forecasts

assessment• Integration assessment

• Due diligence: Accounting• Due diligence: IT• Due diligence: Environmental• Due diligence: HR• Target valuation

• Due diligence: IT


Implication #2: The corporate M&A group focuses Hold Co management on long-term portfolio management strategies and fosters an unbiased approach in determining transaction pursuits

Benefits Comments Observations

• Enables assessment and execution of acquisitions in markets in which the company currently does not operate while BUs address specific sectors

• The corporate group of a consumer goods manufacturer consistently identifies new product lines in unexplored sub-sectors and executes transactions that become new subsidiaries

• Large, game-changing transactions affect multiple BUs and hence enabling execution by a central team avoids bias in evaluation from individual BUs

• One serial acquirer uses a central M&A group in place of BU leaders to originate game-changing deals; as one M&A executive said, “…our job is to find the new ideas…to get transformative, game-changing growth”

• Ensures that acquisitions and investments are executed as part of a portfolio approach as well as for integration with existing operations

• Defines divestiture points

• Central M&A groups of PE firms allow them to take an objective view of acquisitions from an investment perspective: continuous portfolio review enables development of clear exit strategies that create value rather than to free up cash

• Allows M&A group to consider a longer time horizon (5-10 years), while business units (BUs) retain focus on shorter-term operational activities (2-5 years)

• J&J developed a corporate group to focus exclusively on long-term strategic options in emerging technologies unrelated to its decentralized operating companies; the emerging technologies are not within the 2-5 year time horizon of the BUs, but may become of strategic value to them in the future

Focus on longer time horizons

Expansion into new markets

Completion of larger, transformative transactions

Investments for financial vs. strategic purposes


Implication #3: A corporate M&A group improves control of confidentiality in large, transformational deals and mitigates over-exposure to financial risk


• A corporate group limits the likelihood that information about a potential, game-changing transaction will be leaked, due to tighter control of documentation, and less widespread involvement of employees

• Leak of company’s interest in target can lead to higher prices paid for acquisitions

• Confidentiality is of particular importance for divestitures

• An insider leaked to five news agencies details of Interbrew’s discussions to acquire SAB

• Immediately after the leak, SAB’s stock price increased dramatically, while Interbrew’s tumbled

• Interbrew ended its discussions and could not execute the transaction

• Decentralized or hybrid structures may result in approval of deals that are on the borderline of acceptable risk tolerance

• In aggregate, approval of multiple borderline deals can increase overall risk profile to unacceptable levels

• A corporate level group can ensure that the overall risk for all deals does not exceed a company’s risk tolerance

• In 4 yrs, Metavante made 17 acquisitions, using a significant amount of its parent company’s, capital, leading to the parent’s board forming a “Metavante Acquisition Review Committee” to keep informed of Metavante’s acquisition plans

• The pressure on M&I’s capital reduced both M&I and Metavante’s ability to use cash to fund acquisitions; it was also largely responsible for a sponsored spin-off of Metavante with private-equity firm Warburg Pincus LLC

Control of confidentiality

Limits over-exposure to risk


Implication #4: A corporate group allows development of M&A expertise, ensures BU adherence to M&A strategy and process, and allows efficient execution of deals


• Building a concentration of deal experience allows more rigorous strategic assessment of strategic targets resulting in a value creation plan that identifies:– Major risks– Further opportunities– Cost improvements– Walk-away points

• A dedicated corporate M&A group can provide fast track employees valuable experience leading to GM or career corporate development

• Expertise of a health insurance provider’s centralized group was built over several years - when the company was then acquired, the group was recognized as a center of excellence and retained as the core M&A function

• Ensures that all transactions further the M&A strategy for both the overall company and its individual business units

• Smiths’ Group’s centralized M&A group builds business cases for opportunities identified by BUs to test adherence to a well-defined M&A strategy

• Allows for quicker approval process due to centralized decision making and consistency in the M&A process

• PE firms with centralized M&A groups typically complete the M&A process in 2-8 weeks while a “typical” strategic buyer without a centralized process averages 6-18 weeks

Build M&A transactional expertise

Maintain control over M&A strategy

Faster execution of large transactions


Implication #5: Cultural considerations strongly impact successful deal execution requiring active management by the corporate development group

Risks Leading Practices Observations

Limited or no integration between M&A strategy and corporate strategy

M&A strategy should be an integral part of the overall corporate strategy

Western Refining:

• Did not consider M&A an integral part of its growth strategy

• Lacked M&A experience and was hasty in executing the $2 billion acquisition of Giant Industries

• Now experiencing integration and leverage challenges, and promised revenue synergies are at risk

Rigidity of parameters

While a detailed M&A playbook is important to develop repeatable processes, each transaction is unique, and the M&A group must have the authority to alter the criteria as necessary

Major integrated oil and gas company:

• Inability to change divestiture parameters set by corporate

• Parameters sometimes fail to include all factors that could determine metrics and price

• Often leads to protracted time to completion of deal

Slow approval process

Well-communicated and commonly understood deal objectives enable the M&A group to research and present information relevant to the board and senior executives when approving a transaction. This allows for a more efficient approvals process

Beverage manufacturer:

• Lack of clear objectives and executive involvement in deal process

• Results in slow approval process, after M&A group presents the business case and diligence findings to executive board

• Frequently causes a longer timeframe to execute transactions and potential loss of opportunities especially in auction process

Risk aversion Companies must be ready to move fast and aggressively and be willing to “step on toes” to execute transactions

Chemicals manufacturer:

• Identified target that was vital to growth strategy

• Board was reluctant to approach the target in an unconventional manner

• Caused the decision to be so delayed that three transactions occurred during the time for a decision to be made



2. Background

3. Approach

4. Research Results

5. Recommendation

6. Next Steps

7. Appendix


XXX has completed a number of acquisitions, strategic alliances, and divestitures to date Smaller scale and asset purchases rather than large acquisitions with company-wide implications Frequently reactive regarding targets (i.e., waits for an auction) Evaluation and negotiation processes primarily owned by business units Divestitures occur opportunistically to generate cash without continual assessment of portfolio Decisions are not made within context of an overall portfolio but on ad-hoc basis

More recently, XXX attempted larger scale, game-changing acquisitions but found many challenges No formally stated M&A strategy against which to evaluate fit Minimal documentation of processes putting knowledge transfer at risk Pursuit of deals for perceived benefits as opposed to fulfillment of pre-defined criteria Unclear roles and responsibilities due to lack of core deal team

As XXX implements “Project X” and moves to a new business model, successful deal execution requires sophisticated and efficient transaction processes

Need for greater emphasis on growth through acquisition, divestiture, and alliances Move to a holding company structure with greater separation between divisions Need for comprehensive financing plan before pursuing M&A-related activity Need for greater certainty of deal’s ability to add value or address strategic need

XXX’s move to a holding company structure via “Project X” signals a dramatic shift from an operationally driven business to an M&A driven organization

To assist XXX in strengthening its pre-deal M&A process, xx has researched many organizations who are facing or have overcome similar challenges as XXX, to understand:• Options for organization of pre-deal M&A capabilities• Factors impacting which option is most suitable for an organization

An M&A playbook will follow the research. The playbook will detail processes, roles and responsibilities required to execute pre-deal M&A activities.



2. Background

3. Approach

4. Research Results

5. Recommendation

6. Next Steps

7. Appendix


We have focused our research on pre-deal activities in the M&A lifecycle

= pre-deal activity= pre-deal activity

= out of scope of research= out of scope of research

KeyKey

Target Screening• Proactively identify potential

targets• Develop screening criteria to

assess fit• Evaluate against screening criteria

Due Diligence • Develop an understanding of a

target’s strategy, operation, and organization through a comprehensive repeatable process for evaluating fit, value, and risk of target

• Validate acquisition economics• Assess potential revenue and cost

synergies

M&A Strategy• Define goals for M&A activity• Establish the role of M&A as part

of the organization’s growth strategy

Divestiture• Plan and manage the divestiture

transaction • Capture divestiture value • Complete post-divestiture activities

for a clean separation

Integration• Develop detailed integration

plan• Plan and track synergy

achievement

Transaction Execution• Draft letter of intent• Determine final valuation of target• Facilitate development of deal

structure• Negotiate and close the deal

Transition Planning• Develop integration strategy• Establish Integration Management

Office

M&A Strategy

Definition

Target Screening

Due Diligence

Transaction Execution

TransitionPlanning

Integration

Divestiture


We appraised the M&A functions of 36 companies through discussion with Subject matter experts and individuals with experience from M&A or Corporate Development groups Individuals with direct M&A experience from 30 xx clients

The profile of the companies considered in our research is: 7 oil and gas companies, including, Valero, Tesoro, Western Refining, BP, and Sunoco 1 – 50 transactions completed per year $1 billion - $400 billion in annual revenue Companies from the following industries:

o Technology, media, and telecommunicationso Financial serviceso Oil & gaso Consumer packaged goodso Life scienceso Manufacturing

We reviewed literature to include 17 business journal papers and articles 5 xx Research articles Corporate Dealmaker, Harvard Business Review, McKinsey Quarterly Various other publications and industry observers

We considered results from 3 surveys which, in aggregate, studied: Activity of 1,800 companies Responses to interviews with 85 senior execs of prolific acquirers 24 private equity firms who completed 490 acquisitions and 225 divestments in aggregate

We have based our research and findings upon primary and secondary sources


6

2

15

9

0

4

8

12

16

< $1B $1B - $5B $5B - $10B > $10B

Gross Profit

# o

f C

om

pan

ies

9

5

1

1011

0

4

8

12

< $100M $100M -$500M

$500M -$1B

> $1B N/A

Typical Deal Size**

# o

f C

om

pan

ies

75 4

20

0

4

8

12

16

20

24

0 - 5 6 - 10 11 - 20 > 20

Avg # of Deals Closed / Year*

# o

f C

om

pan

ies

9

7

54 4

7

0

4

8

12

TMT FS Oil & Gas CPG Life Sci Mfg

Industries

# o

f C

om

pan

ies

Our findings and recommendations draw on xx’s expertise in executing best in class deals and primary research of over 35 companies who are…

…comparable size to those of XXX

in industries with high levels of M&A activity…

actively executing deals…

of relevant size (gross profit) to XXX…

= comparison category for XXX= comparison category for XXX







2. Background

3. Approach

4. Research Results

A.An internal M&A group confers multiple benefits upon XXX

B.Potential organizational models for M&A groups

C.Factors impacting the selection of a particular model

5. Recommendation and Implications

6. Next Steps

7. Appendix



2. Background

3. Approach

4. Research Results





6. Next Steps

7. Appendix


Nearly all M&A groups studied lead and manage 100% of M&A-related activities from minority investment to divestiture

Increased control, risk, cost, and resources



Contractual AgreementContractual Agreement

Strategic Alliance

Strategic Alliance

Minority Investment

Minority Investment

Joint Venture

Joint Venture

Acquisition/DivestitureAcquisition/Divestiture





















A vast majority of M&A groups lead all deal activity related to minority investments, joint ventures, and acquisitions/divestitures

Contracts are typically executed by business units

While business units typically drive strategic alliances, M&A groups

are often consulted; some M&A groups lead

strategic alliances

Informed or

uninvolved

Consulted or

Responsible

Responsible

Invo

lvem

ent o

f M&

A g

roup


Possessing in-house M&A capability enables XXX to conduct the right transactions with greater efficiency and lower risk…

• Employs an efficient, repeatable process executed by trained resources• Makes efficient use of experts, reducing impact on the business operations• Provides opportunity to incorporate key lessons learned from previous deal experience

Increases speed of transaction lifecycle

• Employs strict deal metrics and objectives that the organization must meet • Reduces likelihood of over-payment from over-eagerness to complete transactions• Reduces dependency on outside advisors who may be incentivized to complete a deal

Reduces subjectivity in decision making

• Strengthens reputation as a sophisticated and serious acquirer with ability to execute• Enhances ability to obtain future deal financing based on proven track record• Creates a more positive view for target employees through a standardized and efficient M&A

process and generates greater respect from target’s leadership and management

Strengthens credibility as acquirer

• Improves quality of proactive or auction based bid• Provides clear accountability for successful close• Allows post-deal value tracking• Creates clear mechanism to communicate to integration team / BU synergies identified during

diligence

Increases likelihood of transaction success

• Allows adoption of an “always on” approach and continual evaluation of potential deal• Ensures compatibility between M&A strategy and overall corporate strategy• Allows for consideration of all M&A opportunities when approving transactions• Increases likelihood of dispassionate, objective approach

Ensures selection of most suitable targets


…and will bring the required skills to M&A activities

•Applies rigorous financial screening criteria•Develops valuation models, synergy estimates, earnings forecasts, and value-creation analyses

•Tests validity of business case and commercial viability of projections

•Requires general understanding of business drivers and industry trends to facilitate and manage meaningful commercial diligence process

•Assesses strategic fit of potential targets

•Develops negotiation strategy, trade-offs and walk-away points•Frequently acts as lead negotiator in a frequently complicated, high-stakes, and combative negotiation

• Leads the deal team, co-ordinating input of external and internal resources

• Mitigates risk by monitoring all activities and ensuring progress to plan• Manages overall deal execution

Financial analysis

Industry expertise

Negotiation

Process management

•Requires ability to motivate and obtain input from others even when no formal reporting line exists

•Needs to be able to work with target’s management teams in potentially hostile environment

Political savvy

A Life Sciences Manufacturer staffs M&A group primarily with ex-

investment bankers

Members of a Healthcare Company’s M&A team

focus on a BU to become familiar with the industry

Thermo Fisher Scientific M&A group members are

directly involved in the negotiations

“an in-house team provides a higher level of

customization of the process”

“even scheduling a deal meeting can be difficult

given the seniority of the people involved”

•Prioritizes functional diligence requirements based on deal objectives•Summarizes risks arising from any functional area•Identifies need for involvement of functional experts in high risk areas

High level functional knowledge

“The M&A group presents deals for approval and

must clearly understand and describe the results of

all due diligence”



2. Background

3. Approach

4. Research Results





6. Next Steps

7. Appendix


M&A groups structure their organizations using one of four models, with nearly 60% centralized

BU BU BU

Corp

Centralized

• Corporate and BUs share responsibility for setting M&A strategy, M&A related resources, and activities

• BUs typically lead, manage, and execute smaller deals• Parent-level M&A group leads larger “game-changing” deals

Hybrid

DescriptionStructure

• External resources perform M&A activities on an ad hoc basis• Senior advisors provide expertise in pre-deal activities and are

generally familiar with the organization and specific industry

Virtual

Corp

BUExternal Resources

BU

• M&A practitioners are located in each business unit (BU)• BU(s) defines strategy and conducts all pre-deal activity• Approvals may still be required from corporate depending on

corporate governance processBU BU BU

Decentralized

Corp

• Western Refining• NCR

• Integrated Oil & Gas Company

• BP (moving to a centralized model)

• Oil Refining Co. A• Oil Refining Co. B• Family-Owned

Consumer Goods Business

•LG Electronics•SK Energy•Viacom

Corp

BU BU BU

Examples

= location of M&A capabilities

• M&A group resides at Holding Company• Holding Company drives overall M&A process, including setting

strategy across all BUs• Central team works closely with relevant specialists as required• Central team involves relevant BU for diligence and synergies

assessment to create buy-in and accountability for the transaction

85%

of

com

pani

es r

esea

rche

d<

20%

of

com

pani

es r

esea

rche

d

58%

27%


23

21

10

0

4

8

12

16

20

24

Virtual Decentralized Centralized Hybrid

Structure Type

# o

f C

om

pan

ies

85% of companies* employ centralized or hybrid models…

M&A teams predominantly have 3-5 dedicated professionals







1

9

24

21

4

21

0

4

8

12

16

0 - 2 3 - 5 6 - 10 11 - 15 > 15

# of People in M&A Group#

of

Co

mp

anie

s

Hybrid - # atCorporate **

Decentralized

Centralized

… and most commonly have 3-5 people


Virtual Model: Characteristics

• Adds “virtual breadth” through selected use of partners familiar with the organization and with specific subject matter expertise

• After identifying a specific target of interest, partners may assist in developing the M&A strategy, and/or selecting specific targets or may be included after target selection

• Partners are experts in pre-deal M&A activity and/or the relevant industry

Characteristics

Bold = Activities generally provided by internal M&A group in other models

Rep

etit

ive

/ Tra

nsa

ctio

nK

no

wle

dg

e / E

xper

tise

d

rive

n

Typ

e o

f ac

tivi

ty



External Advisor

• Legal: diligence, deal execution, approvals, close deal

• Deal structuring • Financing options• Tax implications/strategy• Corporate and BU M&A

Strategy• Screening criteria• Universe of candidates

definition and selection

• Due diligence: IT• Due diligence: HR• Due diligence: Market and

financial


candidates identification• Due diligence: market• Synergies analysis• Financial forecasts


• Candidate profiles• Target screening• Target valuation• Due diligence: Accounting• Due diligence: IT• Due diligence:

Environmental• Due diligence: HR• Target valuation


• Approach methodology• Due diligence management• Financial forecast


• Corporate and BU M&A Strategy


definition and selection• Methodology of approach


Virtual Model: Pros and Cons

• Greatest flexibility / use of resources• Skilled resources can be added “on

demand” which can be more cost effective than having dedicated internal resources

• External resources provide new perspectives

• Organizational knowledge may be lost if virtual resources are not well managed

• A single view may result with little internal validation

• External advisors may bring bias towards deal completion rather than strategic fit of target due to compensation mechanisms

Pros Cons

• NCR wanted to acquire several companies in the short-term but did not have a long-term M&A strategy. The virtual model allowed NCR to gain temporary M&A experts without adding permanent resources

• Investment bankers and other external advisors rarely have deep industry knowledge in comparison to a company’s employees

• External advisors are less familiar with the business model and strategy than employees, which may impede the M&A process


Virtual Model: Examples

Company NCR Western Refining

Industry Information Technology Services Oil and gas refining and retail

Revenue $5 billion $4 billion (pre-Giant acquisition); $7 billion post-acquisition

M&A activity # of deals executed annually = 2

Typical deal size = $10 million

Deal value range = $10 million

Completed the $2 billion acquisition of Giant Industries in May 2007

Description / how it works

NCR developed a short-term acquisition strategy and did not want to add permanent resources. xx staffed 4 people at the client site to act as the M&A group. An average of 10-15 deals are in the pipeline at any given time

The Giant deal was sourced by Western executives who had previously served as senior executives at Giant. Western extensively used external advisors to execute the acquisition of Giant Industries

Rationale / Observations

The Giant acquisition occurred largely because of the geographic proximity and close relationship between the companies (many executives at Western were previously executives at Giant)


Decentralized Model: Characteristics

• BUs drive their own M&A strategy and target screening• BUs move at their own timeline and pace, creating teams as necessary, primarily drawing from BU staff• BUs execute transactions using M&A SWAT teams with staff from corporate for functional expertise and BUs for

industry and operational expertise

Characteristics

M&A Strategy

Screening Criteria

Target screening & selection

Methodology of Approach

Valuation

Due diligence

Deal execution

Negotiation

Integration

Entirely Parent-driven

Entirely Division-

driven

Transaction process

0% 25% 50% 100%75%

Level of divisional ownership

Large (transformational) deals

Small (transactional) deals


Decentralized Model: Characteristics

Bold = M&A Group activities

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External Advisor

• Legal: diligence, deal execution, approvals, close deal


• BU M&A strategy• Screening criteria• Potential acquisition

candidates identification• Due diligence: market• Synergies analysis• Financial forecasts

assessment• Deal structuring• Diligence results summary• Integration assessment• Deal negotiation

• Due diligence: Accounting• Due diligence: IT• Due diligence:

Environmental• Due diligence: HR• Target valuation



execution

• Due diligence: IT• Due diligence: HR


Decentralized Model: Pros and Cons

• M&A strategy tuned to the unique needs of BUs

• Enhances BU ability to respond quickly• Consistency of approach and resources

from pre-deal to integration relative to BUs particular needs

• Ensures early involvement and communication with BUs to plan integration

• Less central ‘overhead’ required

• No centralized coordination of M&A strategy• Potential duplication of M&A capabilities

across businesses• Lack of knowledge retention / sharing across

units• Smaller BUs may not be able to staff up as

needed• Increased risk exposure• Raises potential confidentiality concern

Pros Cons

• A major integrated oil and gas company’s decentralized structure allows for the M&A group to unemotionally execute transactions – strict guidelines for deal metrics provided by Strategy Group ensure that M&A group objectively executes transactions

• BP’s M&A groups became “too big for their own good” and there was no communication between the BU M&A groups leading to a reorganization into centralized model

• Prior to a reorganization to a centralized model, a global financial services center utilized a decentralized model in which BUs executed their own deals without standardized processes and corporate approval


Decentralized Model: Examples

Company Integrated Oil & Gas Company BP

Industry Oil & Gas Oil & Gas

Revenue $400 billion $285 billion


Typical deal size = $500 million - $1 billion

Deal value range = $18 million - $3 billion

# of deals executed annually = 10




Strategy Group:• Develop M&A/divestiture strategy• Develop strict metrics to determine

M&A/divestiture strategy• Determine strict metrics and deal prices

for deal teams to follow• Develop detailed planning documents for

deal teams to follow• Identify members of deal teamDeal Teams:• Perform due diligence• Structure and execute transactions

• M&A function part of Strategy, Planning, and Economics

• M&A groups report to respective BU President• Approximately 5 people focused on strategy and

M&A in each Business Unit • Staffed with people who have experience in the

business

Non-M&A Activities: • Annual budget• 5-year strategy plan• Portfolio managementM&A Activities: • Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions


• Very proactive, unemotional approach to M&A

• M&A process can be very long due to unchanging deal parameters

• Business units are in the same industry but in very distinct parts of the value chain

• BP is in the process of moving to a centralized M&A group at the North American subsidiary level


Centralized Model: Characteristics

• Corporate level M&A group drives overall pre-deal M&A process, including M&A strategy setting, target identification and screening, due diligence, transaction structuring and deal execution

• Maintains standardized tools and repeatable processes• Depending on scale may have in-house SMEs who are aligned with specific BUs• Involves BU management and other corporate functions for industry and functional expertise, respectively• Works as a networked team by drawing expertise from multiple sources

Characteristics

M&A Strategy

Screening Criteria



Valuation

Due diligence

Deal execution

Negotiation

Integration

Entirely Parent-driven

Entirely Division-

driven

Transaction process

0% 25% 50% 100%75%

Level of divisional ownership




Centralized Model: Characterisitics


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External Advisor





execution







Centralized Model: Pros and Cons

• Builds in-house expertise that can be shared and leveraged

• Provides ability to manage and control M&A strategy, ensuring consistency of portfolio

• Enables faster transaction execution• Allows greater focus on longer time

horizons• Enables expansion into new markets and

execution of larger, transformative deals• Allows for investments for financial

purposes• Reduces risk exposure through holistic view

of approach and targets

• Requires deep understanding of each BU• Requires BUs to cede M&A strategy• Potential tension between BU and M&A group

requires open and clear communication to mitigate any risk

• Often different groups accountable for evaluation and delivery of synergy targets

• Central team regarded as ‘overhead’

Pros Cons

• Cisco’s M&A group, which is regarded as a core function of the company, completed 110 acquisitions between 1993 and 2006 to enter into new product categories or improve its existing products with newer technology

• J&J developed a centralized group to focus exclusively on long-term strategic options in emerging technologies unrelated to its decentralized operating companies; the emerging technologies are not within the 2-5 year time horizon of the BUs, but may become of strategic value in the future

• A beverage manufacturer’s centralized M&A group assesses deal synergies and develops forecast financials without the involvement of the BUs that would ultimately achieve synergy and financial targets

• A public consumer goods company’s centralized structure creates tension with the BUs. Both BUs and the M&A group perform target screening with little communication between them


Centralized Model: Examples

Company Oil Refining Co. A Oil Refining Co. B Family Owned Consumer Goods Company

Industry Oil & Gas Oil & Gas Consumer Packaged Goods

Revenue $100 billion $24 billion $8 billion

M&A activity # of deals executed annually = 1-2

Typical deal size = $1-$2 billion

Deal value range = $13 million – $8 billion

# of deals executed annually = 1-2


Deal value range = $33 million – $1.4 billion

# of deals executed annually = 2-3 (sporadic)




• Centralized M&A group reports to CEO

• Develops corporate strategy• Identifies and screens targets• Performs valuation and financial

analyses• Leads and performs due diligence• Structures and executes transactions• Corporate staff performs functional

diligence as needed• External advisors involved as needed• Deals mostly sourced by senior

executives

• Centralized M&A group reports to CEO

• Develops corporate strategy• Identifies and screens targets• Performs valuation and financial

analyses• Leads and performs due diligence• Structures and executes transactions• Corporate staff performs functional

diligence as needed• External advisors involved as needed• Deals mostly sourced by senior

executives

• Centralized M&A group reports to CFO

• Identifies and screens targets• Performs valuation and financial

analyses• Leads and performs due diligence• Structures and executes transactions• Involves BU team to develop

synergies and financial projections• Uses external advisors extensively for

capacity and capabilities


• Early strategy was to buy old refineries cheaply then upgrade to high yield refinery. Current CEO has stated the company will sell up to 1/3 of its refineries. Current strategy is to own and maintain high quality refineries.

• Strategy is a regional play; locates assets strategically

• Low capacity refineries• Retail businesses strategic to

company to lock up distribution

• Acquisitions are typically product line extensions

• About every 5 years, the company completes a large acquisition ($1 billion)

• Company is privately held, and strategy is very tightly controlled

• BUs operate in different markets with unique products and customers


Hybrid Model: Characteristics

• M&A groups at both corporate and BU level, both contribute to setting M&A strategy• Corporate M&A group sources and manages larger “game-changing” deals• BU M&A team(s) leads smaller BU-specific deals, drawing from expertise of centralized group as required• Collaborative approach to M&A strategy across organization, team rotation and sharing as required

Characteristics

M&A Strategy

Screening Criteria



Valuation

Due diligence

Deal execution

Negotiation

Integration

Entirely Corporate-

driven

Entirely BU-driven

Transaction process

0% 25% 50% 100%75%



Division of responsibilities reflect the scale and nature of the deal

Level of BU responsibility


Hybrid Model: Pros and Cons

• Builds in-house expertise that can be shared and leveraged

• Provides ability to manage / control M&A strategy and ensures consistency across portfolio

• Allows all BUs to be served effectively• Provides succession planning and job

rotation for staff• Ensures M&A staff have deep

understanding of industry and BU requirements

• Capabilities may not always be aligned with needs

• Risk of M&A strategy being dominated by one group / area

• Central team regarded as ‘overhead’ - may be costly to keep SMEs who are not fully deployed

• Requires critical mass to ensure M&A capabilities are not too fragmented

• Requires open and clear communication between corporate and BU M&A groups

Pros Cons

• Viacom’s hybrid model enables BUs to control their unique strategy. The corporate M&A group provides support on deals and also focus on larger, “game-changing” deals for the company

• SK Energy often misses out on deals because its hybrid structure is very bureaucratic


Hybrid Model: ExamplesCompany LG Electronics SK Energy Newscorp

Industry Consumer electronics, home appliances, mobile communications

Oil and gas, energy company Media/Entertainment

Revenues $54 billion $30 billion $32 billion

M&A activity # of deals executed annually = 1 -2


Deal value range = $300,000 – $56 million


Typical deal size = N/A

Deal value range = N/A

# of deals executed annually = 15-20




• BU M&A groups report to M&A group at corporate; corporate M&A group reports to CFO

• Corporate M&A group devises strategy and BU M&A group executes transactions

• Approximately 40 people across all the M&A groups

• 5 people in BU M&A groups• 2 people in M&A group at corporate• Corporate M&A group provides

support to the BU• BU M&A group identifies

opportunities, leads diligence, executes transaction

Corporate:•5 members at corporate•Leads and performs diligence for deals > $150 mm•Executes deals identified by Rupert Murdoch

BU:•3-5 members per subsidiary•Identifies and screens targets•Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions•Involves internal advisors as needed (external advisors never used for deals <$150mm)


• BUs manufacture disparate products and each develop unique M&A strategies to compete in their respective markets

• Misses out on deals because of bureaucracy

• Moved to holding company structure in 2007; SK Energy is a subsidiary of SK holdings

• Notification required for deals of any size

• Each subsidiary has its own deal budget



2. Background

3. Approach

4. Research Results





6. Next Steps

7. Appendix


Focus on growth through acquisition, strong corporate control, and/or similarity of business units indicates a centralized model

DecentralizedVirtual

• Divisions operate in different industries

• Little or no overlap in customer segments

• Wide variation in products or services

• Strategy dramatically varies by division

• Business units are geographically dispersed


• Divisions operate in same industry

• Similar or overlapping customer segments

• High degree of commonality or complementing products / services

• Similar divisional strategies

• NO IMPACT in adoption of virtual model

• M&A activity complements organic growth

• M&A performed on reactive / ad hoc basis


• Growth fueled primarily through M&A-related activities

• Frequent M&A activity using repeatable, rigorous processes

• Portfolio approach

• M&A not a core competence

Culture of control

• Divisions empowered to set strategy

• Corporate retains approval authority but does not actively determine division strategy

• Corporate actively participates in or sets divisions’ strategies, whether by direct influence or via economic incentives (e.g., capital distributions)

• High reliance on external expertise

Hybrid Centralized


Greater scale of deal activity, in terms of both deal volume and typical deal size, suggests selection of centralized over hybrid model

DecentralizedVirtual Hybrid Centralized

Average number of deals*

0

10

20

30

40

50

60

Virtual Decentralized Hybrid Centralized

M&A Structure

Avg

# o

f D

eals

• Low deal volume

Deal Activity

• High deal volume

• Larger deals• Smaller deals

Note: due to sample size, this is indicative, however not statistically significantNote: due to sample size, this is indicative, however not statistically significant

median

maximum

minimum

75th percentile

25th percentile





Deal Value as % of Gross Profit

0%

10%

20%

30%

40%

50%

60%

70%

Virtual Decentralized Hybrid CentralizedCorporate Development Structure

Avg

Ann

ual D

eal V

alue

as

% o

f A

vg A

nnua

l Gro

ss P

rofit

(20

05-2

007)


• Low deal volume • High deal volume

• Smaller deals • Larger deals

Factors impacting M&A group model employed:Oil & Gas Industry


= Western Refining = BP = SunocoKey:

M&A activity as a core competency• Non core activity

• M&A fundamental

Deal Activity

• Different industry, customer, product

Similarity of business units / divisions• Similar industry,

customer, product, strategy

Culture of control

• Divisions are empowered

• Control is held centrally

= SK Energy Integrated Oil & Gas Company

= Oil Refining Company B

= Oil Refining Company A




Factors impacting M&A group model employed:Companies averaging 0 to 2 deals


= SunocoKey: = Oil Refining Company B

= Oil Refining Company A

= SK Energy





• M&A fundamental

Culture of control



= Consumer Goods Company A

Deal Activity

= Beverage Manufacturer

= Western Refining

= LG Electronics




Factors impacting M&A group model employed:Companies with revenues of $10-$15B


= Beverage ManufacturerKey:

Deal activity





• M&A fundamental

Culture of control



= Thermo Fisher Scientific = Viacom




Factors impacting M&A group model employed:Companies with operating margin of 2-5%


Key:




= NCR Corporation= Oil Refining Company B

Deal Activity


Culture of control



• M&A fundamental

= Fidelity National Financial = Sunoco = SK Energy



2. Background

3. Approach

4. Research Results


6. Next Steps

7. Appendix


Hold Co. portfolio management strategy suggests XXX to adopt a centralized M&A structure, staffed with 2-4 M&A professionals


• M&A is not currently a core competency, but through Project X, XXX intends to move toward a portfolio approach in which M&A is necessarily a core competency

Culture of control

• Hold Co. retains significant control over BUs through capital allocation

Deal Activity



• XXX’s divisions largely operate at different points in the value chain of the same industry

= Less dominant factors for XXX

• XXX intends to become more active in M&A and execute larger more transformative deals

= More dominant factors for XXX = Recommended structure


Implication #1: XXX’s M&A group leads and coordinates all acquisitions regardless of deal size; BU provide operational and integration planning expertise


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Implication #2: The corporate M&A group focuses Hold Co management on long-term portfolio management strategies and fosters an unbiased approach in determining transaction pursuits


• Enables assessment and execution of acquisitions in markets in which the company currently does not operate while BUs address specific sectors

• The corporate group of a consumer goods manufacturer consistently identifies new product lines in unexplored sub-sectors and executes transactions that become new subsidiaries

• Large, game-changing transactions affect multiple BUs and hence enabling execution by a central team avoids bias in evaluation from individual BUs

• One serial acquirer uses a central M&A group in place of BU leaders to originate game-changing deals; as one M&A executive said, “…our job is to find the new ideas…to get transformative, game-changing growth”

• Ensures that acquisitions and investments are executed as part of a portfolio approach as well as for integration with existing operations

• Defines divestiture points

• Central M&A groups of PE firms allow them to take an objective view of acquisitions from an investment perspective: continuous portfolio review enables development of clear exit strategies that create value rather than to free up cash

• Allows M&A group to consider a longer time horizon (5-10 years), while business units (BUs) retain focus on shorter-term operational activities (2-5 years)

• J&J developed a corporate group to focus exclusively on long-term strategic options in emerging technologies unrelated to its decentralized operating companies; the emerging technologies are not within the 2-5 year time horizon of the BUs, but may become of strategic value to them in the future

Focus on longer time horizons

Expansion into new markets

Completion of larger, transformative transactions

Investments for financial vs. strategic purposes


Implication #3: A corporate M&A group improves control of confidentiality in large, transformational deals and mitigates over-exposure to financial risk


• A corporate group limits the likelihood that information about a potential, game-changing transaction will be leaked, due to tighter control of documentation, and less widespread involvement of employees

• Leak of company’s interest in target can lead to higher prices paid for acquisitions

• Confidentiality is of particular importance for divestitures

• An insider leaked to five news agencies details of Interbrew’s discussions to acquire SAB

• Immediately after the leak, SAB’s stock price increased dramatically, while Interbrew’s tumbled

• Interbrew ended its discussions and could not execute the transaction

• Decentralized or hybrid structures may result in approval of deals that are on the borderline of acceptable risk tolerance

• In aggregate, approval of multiple borderline deals can increase overall risk profile to unacceptable levels

• A corporate level group can ensure that the overall risk for all deals does not exceed a company’s risk tolerance

• In 4 yrs, Metavante made 17 acquisitions, using a significant amount of its parent company’s, capital, leading to the parent’s board forming a “Metavante Acquisition Review Committee” to keep informed of Metavante’s acquisition plans

• The pressure on M&I’s capital reduced both M&I and Metavante’s ability to use cash to fund acquisitions; it was also largely responsible for a sponsored spin-off of Metavante with private-equity firm Warburg Pincus LLC

Control of confidentiality

Limits over-exposure to risk


Implication #4: A corporate group allows development of M&A expertise, ensures BU adherence to M&A strategy and process, and allows efficient execution of deals


• Building a concentration of deal experience allows more rigorous strategic assessment of strategic targets resulting in a value creation plan that identifies:– Major risks– Further opportunities– Cost improvements– Walk-away points

• A dedicated corporate M&A group can provide fast track employees valuable experience leading to GM or career corporate development

• Expertise of a health insurance provider’s centralized group was built over several years - when the company was then acquired, the group was recognized as a center of excellence and retained as the core M&A function

• Ensures that all transactions further the M&A strategy for both the overall company and its individual business units

• Smiths’ Group’s centralized M&A group builds business cases for opportunities identified by BUs to test adherence to a well-defined M&A strategy

• Allows for quicker approval process due to centralized decision making and consistency in the M&A process

• PE firms with centralized M&A groups typically complete the M&A process in 2-8 weeks while a “typical” strategic buyer without a centralized process averages 6-18 weeks

Build M&A transactional expertise

Maintain control over M&A strategy

Faster execution of large transactions


Implication #5: Cultural considerations strongly impact successful deal execution requiring active management by the corporate development group

Risks Leading Practices Observations

Limited or no integration between M&A strategy and corporate strategy

M&A strategy should be an integral part of the overall corporate strategy

Western Refining:

• Did not consider M&A an integral part of its growth strategy

• Lacked M&A experience and was hasty in executing the $2 billion acquisition of Giant Industries

• Now experiencing integration and leverage challenges, and promised revenue synergies are at risk

Rigidity of parameters

While a detailed M&A playbook is important to develop repeatable processes, each transaction is unique, and the M&A group must have the authority to alter the criteria as necessary

Major integrated oil and gas company:

• Inability to change divestiture parameters set by corporate

• Parameters sometimes fail to include all factors that could determine metrics and price

• Often leads to protracted time to completion of deal

Slow approval process

Well-communicated and commonly understood deal objectives enable the M&A group to research and present information relevant to the board and senior executives when approving a transaction. This allows for a more efficient approvals process

Beverage manufacturer:

• Lack of clear objectives and executive involvement in deal process

• Results in slow approval process, after M&A group presents the business case and diligence findings to executive board

• Frequently causes a longer timeframe to execute transactions and potential loss of opportunities especially in auction process

Risk aversion Companies must be ready to move fast and aggressively and be willing to “step on toes” to execute transactions

Chemicals manufacturer:

• Identified target that was vital to growth strategy

• Board was reluctant to approach the target in an unconventional manner

• Caused the decision to be so delayed that three transactions occurred during the time for a decision to be made



2. Background

3. Approach

4. Research Results


6. Next Steps

7. Appendix


In summary: Our findings suggest XXX employ a centralized group to lead all acquisitions, adopting a portfolio management approach enabling control of confidentiality and enhanced risk management

FINDINGS

1. M&A Groups structure their organizations using one of four models, with nearly 60% centralized

2. Regardless of the structure employed, nearly all M&A groups studied, lead and manage 100% of M&A-related activities from minority investment to divestiture

3. M&A teams predominantly have 3-5 dedicated professionals

4. Focus on growth through acquisition, culture of strong corporate control, and/or substantially similar business units indicates a centralized model

5. Greater scale of deal activity, in terms of both deal volume and deal value, suggests selection of centralized over hybrid model

IMPLICATIONS

1. XXX’s M&A group leads and coordinates all acquisitions regardless of deal size; BU provide operational and integration planning expertise

2. The corporate M&A group focuses Hold Co management on long-term portfolio management strategies and fosters an unbiased approach in determining transaction pursuits

3. A corporate M&A group also limits potential for information leakages in large, transformational deals and mitigates over-exposure to financial risk

4. A corporate group allows development of M&A expertise, ensures BU adherence to M&A strategy and process, and allows efficient execution of larger, transformative deals

5. Cultural considerations strongly impact successful deal execution requiring active management by the corporate development group

RECOMMENDATION

• Adopt centralized M&A structure• Assign 2-4 dedicated M&A professionals

This enables Hold Co to:

• Develop required skills and expertise which will serve as a training ground for a larger team

• Build a critical mass of deals which will justify a larger M&A group

• Maintain control of capital allocations which impact BUs’ M&A strategies

BU BU BU

Corp

Centralized


Next Steps: Define formal processes, responsibilities and approval criteria and identify capability gaps

XXX NOW

Ad-hoc M&A group with multiple responsibilities

Smaller scale and asset purchases rather than large acquisitions with company-wide implications

Target or partner identification frequently reactive

Evaluation and negotiation processes primarily owned by business units

Divestitures conducted opportunistically to generate cash, without continual assessment of portfolio

Informal approval process

XXX FUTURE

Centralized M&A group with 2 - 4 members

Clear corporate strategy and integration with M&A strategy

Detailed target screening and selection processes

Both small scale and transformative acquisitions with company-wide implications

Governance structure with approval levels and processes

Long-term financing plan to support M&A strategy

HOW DO YOU GET THERE?

Determine and agree relevant M&A group model

Develop M&A processes (i.e., M&A playbook)‒ Strategy setting‒ Target screening criteria‒ Due diligence and deal execution

processes‒ Corporate governance guidelines

Detail roles and responsibilities‒ Responsibilities for each M&A group

member‒ Detailed interaction with internal and

external functional experts (e.g., tax, legal, and treasury)

‒ Role on deal team for business unit managers

Implement M&A specific training to develop financial, negotiation, and process management skills



2. Background

3. Approach

4. Research Results


6. Next Steps

7. Appendix


Summary of companies researched

One page summary for companies researched

Additional summaries

Interview excerpts/quotes

Factors impacting the selection of a particular model

TMT

Financial Services

Life Sciences and Pharmaceutical

Consumer Packaged Goods

Manufacturing

Secondary research sources

Appendices


We considered a wide range of acquisitive companies to identify both good practices and lessons learned

Company Name Industry CategoryRevenue (in $B)

Avg # of Deals

Avg Deal Size

M&A group Structure

# of Employees

Consumer Goods Company A CPG $59 10 $150 million Centralized 2-5

Consumer Goods Company C CPG $37 3-5 $1.5 billion Hybrid N/A

Beverage Manufacturer CPG $16 2 $300 million Centralized 6-8

Consumer Goods Company B CPG N/A 0-4 n/a Centralized 10

Family-Owned Consumer Goods Company

CPG N/A 3 $50 million Centralized 2

Deutsche Bank FS $132 29 $575 million Centralized 6-10

Large Global Financial Services Center

FS $92 20-25 $350 million Hybrid 2-10

Global Financial Services Provider

FS $78 20 $700 million Hybrid 30-35

WellPoint Health Networks FS $61 2 $600 million Centralized 4-5

American Express FS $32 3 $700 million Centralized 10-15

Fidelity National Financial FS $6 7 $275 million Centralized 2-5

xx LLP FS N/A 0-2 $20 million Centralized 5

Johnson & Johnson Life Sci $61 >6 $500 million Hybrid N/A

Chemicals Manufacturer Life Sci $44 20 $2 billion Centralized 30-50

Thermo Fisher Scientific Life Sci $10 20 $200 million Centralized 10-15

Life Sciences Supplies Manufacturer

Life Sci $1 4 $90 million Centralized 5-10


We considered a wide range of acquisitive companies to identify both good practices and lessons learned (continued)

Company Name Industry CategoryRevenue (in $B)

Avg # of Deals

Avg Deal Size

M&A group Structure

# of Employees

Major Integrated Oil & Gas Company Oil & Gas

$405 7 $500 million Decentralized

N/A

BP Oil & Gas $284 10 $800 million Decentralized N/A

Oil Refining Company A Oil & Gas $95 2 $1.5 billion Centralized 2-5

Sunoco Oil & Gas $45 0-1 $65 million Decentralized N/A

SK Energy Oil & Gas $22 0-1 $100 million Hybrid N/A

Oil Refining Company B Oil & Gas $22 1 $680 million Centralized 2-5

Western Refining Oil & Gas $7 0-1 $1 billion Virtual N/A

Vodafone TMT $71 3 $5 billion Centralized 10-15

LG Electronics TMT $57 1 $24 million Hybrid N/A

Newscorp TMT $29 15-20 $800 million Hybrid 5

Viacom TMT $13 7 $500 million Hybrid 8-10

Global Information Services Firm

TMT $7 24 $130 million Hybrid 3-4

Yahoo! TMT $7 10 $300 million Centralized 30

Clear Channel Inc TMT $7 14 $60 million Hybrid 3

NCR Corporation TMT $5 2 $10 million Virtual N/A

High Tech Company TMT $1 5 $30 million Centralized 2-5

General Electric Manufacturing $173 53 $800 million Hybrid N/A

Aerospace Manufacturer A Manufacturing $29 5-8 $500 million Centralized 3

Aerospace Manufacturer B Manufacturing $8 3 $100 million Centralized 5

Meggitt Manufacturing $2 2 $200 million Centralized N/A







TMT

Financial Services



Manufacturing


Appendices


Centralized Structure – M&A strategy developed almost entirely by corporate

Number of Employees:

Small team (2-5)

Reporting line Reports to CEO

Group Responsibilities

• Develops corporate strategy• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Corporate staff performs functional diligence as

needed• External advisors involved as needed

Deal Sourcing Deals sourced by senior executives or M&A Group; learn about refineries available for acquisition through personal networks

History/Other Comments

• M&A Group staffed with people who previously worked in operations with deep industry knowledge and experience

• Early strategy was to buy old refineries cheaply then upgrade to high yield refinery. Current CEO has stated the company will sell up to 1/3 of its refineries. Current strategy is to have high quality refineries.

Oil Refining Company A

Industry Oil and Gas

Annual revenue $95.3 billion

Gross Margin $13.7 billion

Market Cap $17.5 billion

M&A Activity Summary

Size of deals $13 million - $ 8 billion

Typical deal size $1 billion - $2 billion

# of deals completed annually 2

Lead Due Diligence, Execute Transaction

Executive Committee

Business Units

Determine Corporate Strategy, Identify

Acquisitions, Approve Acquisitions

Recommend Acquisitions

Support Diligence

M&A Group

Source: xx analysis, Hoover’s, CapitalIQ, MergerStatSource: xx analysis, Hoover’s, CapitalIQ, MergerStat


Centralized Structure – M&A strategy developed almost entirely by Corporate


Small team (2-5)



• Develops corporate strategy• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Corporate staff performs functional diligence as


Deal Sourcing Deals sourced by senior executives or M&A Group; learn about refineries available for acquisition through personal networks


• M&A Group staffed with people who previously worked in operations with deep industry knowledge and experience

• Strategy is to have a regional play and locate assets strategically; not high capacity refineries; retail businesses are strategic to company to lock up distribution

Oil Refining Company B

Industry Oil and Gas





Size of deals $33 million - $1.8 billion

Typical deal size $680 million



Executive Committee

Business Units




Support Diligence

M&A Group



Centralized Structure – all deal activities performed by central M&A Group


10-15(Sr. VP, Director, Associates, Analysts)

Reporting line Reports to CFO (dotted line to CEO)


M&A Related:•Identifies and screens targets•Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions•Business units perform operational diligence and synergy and projections analyses•Corporate staff performs functional diligence•External advisors involved as neededNon-M&A Related:•Market research and competitive analysis •Special projects/requests from executives

Deal Sourcing Deal ideas identified by M&A Group and business units; external sourcing provided by investment banks (typically public auctions). Corporate identifies deal ideas for companies unrelated to current businesses.

History Thermo Electron and Fisher Scientific merged in November 2007. Most of M&A Group is from Fisher. Both Thermo and Fisher were active acquirers before the merger. Thermo Fisher has recently added two in-house lawyers to assist with M&A transactions.

Thermo Fisher ScientificIndustry Life Sciences Supplies





Size of deals $1 million - $7 billion


# of deals completed annually 20-30 (includes divestitures)


Executive Committee

Business Units

Determine Corporate Strategy, Approve

Acquisitions


Identify OpportunitiesSupport Diligence

M&A Group



Centralized Structure – Dedicated group leads integration efforts


M&A: 5-10Merger Integration: 6

Reporting line Reports to CEO (dotted line to CFO)


M&A Group:•Identifies and screens targets•Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions•Business units perform operational diligence and synergy and projections analyses•Corporate staff performs functional diligence•External advisors involved as neededMerger Integration Group:•Leads integration for large deals

Deal Sourcing Deal ideas identified by M&A Group, Corporate, and business units

History/ Other Comments

• M&A Group is staffed mostly with ex-professional services practitioners (e.g. law firms, investment banks, consulting firms)

• Many are smaller deals to acquire IP or technologies

Life Sciences Supplies ManufacturerIndustry Life Sciences Supplies


Gross Margin $716 million



Size of deals $5 million - $382 million




Executive Committee

Business Units



M&A Group


Acquisitions

Integration Group

Lead integration

Execute Transactions



Chemicals ManufacturerIndustry Pharmaceutical


Gross Margin $21.9 billion (50%)

Market Cap $49 billion


Size of deals $500,000 - $16 billion

Typical deal size $2 billion

# of deals completed annually 15-20

Centralized Structure – Separation of strategy and transaction; specialists dedicated to work with sub-groups but at corporate level

Number of employees

CD – 20: M&A – 20

Reporting lineM&A Group headed by head of Corporate Strategy and Projects – reports to CEO; M&A reports to CD


M&A Related:CD Group:•Determines acquisition strategy•Develops target list and initial target screening•Approves acquisitionsM&A Group:•Values target•Leads and performs due diligence•Executes transactions

Non-M&A Related (CD Group):•Strategic alliances, JVs•Industry and competitor analysis

Deal Sourcing CD group determines target list; external advisors pitch deal ideas to M&A Group


Members within both CD and M&A are divided into 3 subgroups (3-5 members per sub-group for CD and M&A, remainder are generalists) to focus on one of the three holding companies; however, all members of both CD and M&A are at the corporate level

Positives of Structure

Lean organization, few decision makers, fast moving, good communication

Negatives/ Ways to Improve

Communication from CD to M&A could be improved; involving M&A earlier might speed up the process

Executive CommitteeDetermine Corporate

Strategy, Approve Acquisitions


Value targets, lead diligence, execute

transaction

Corporate Development Group

Develop acquisition strategy and target list

M&A Group

Sub-group

#1

Sub-group

#2

Sub-group

#3

Sub-group

#1

Sub-group

#2

Sub-group

#3

Source: xx analysis, CapitalIQ, MergerStatSource: xx analysis, CapitalIQ, MergerStat


Centralized Structure – BU Strategy Groups actively search for acquisition ideas

Number of employees

4 (3 deal, 1 legal)

Reporting line CEO, dotted line to CFO


M&A Related:•Identifies and screens targets•Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions•Involves business units, corporate staff, and advisors as neededNon-M&A Related:•Provides market research and competitive analysis to corporate and business units•Provides analysis on JVs, strategic alliances, licensing, divestitures, outsourcing, etc.

Deal Sourcing Identified by M&A Group and BU Strategy Groups


M&A maintains oversight in the integration and reports back to the Board periodically regarding the achievement of synergies and targets

Fidelity National Financial

Industry Financial Services









Executive Committee

Business Units


Acquisitions



M&A Group

Strategy Group

Strategy Group

Strategy Group



Centralized Structure – Division of pre-deal activities between Corporate Strategy, M&A, and Financial Planning & Analysis (FP&A) groups

Number of employees

4 – 8 in M&A Group10-15 Corporate Strategy Group

Reporting line CFO, dotted line to CEO


Corporate Strategy:•Identifies and screens targets•Sets overall strategy for the company

BU Strategy Groups:•Identify targets

M&A Group:•Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions•Involves external advisors in almost every deal

FP&A: •Reviews valuation models

Deal Sourcing Identified by Corporate Strategy Group and BU Strategy Groups


Approval from Executive Steering Committee required for deals >$50 mm; <$50mm approval from BU CEO required but valuation, diligence, and execution still performed by M&A Group

Deal teams comprised of 1 person from M&A Group, 1 person from BU, and external advisors

VodafoneIndustry Wireless Communications


Gross Margin $27.1 billion (38.3%)



Size of deals $10 mm - $400 billion

Typical deal size $4-6 billion



Executive Committee

Approve Acquisitions


M&A Group

Recommend Acquisition

Corporate Strategy GroupFP&A

Recommend Acquisition

Business UnitsStrategy Group

Strategy Group

Strategy Group

Review models



Centralized Structure – M&A Group heavily involved in developing overall corporate strategy

Number of employees

~5



• Develops overall corporate strategy (including M&A strategy)

• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Involves business units, corporate staff, and

advisors as needed• Acts as PMO for integration

Deal Sourcing Identified by Corporate, M&A Group, and business units

History/Other comments

Transactions <$5 million are primarily led by business units; M&A maintains oversight but the deal is typically not a priority to M&A

High Tech Company

Industry Technology / Data Storage Devices

Annual revenue $975.7 million

Gross Margin $319 million (30%)

Market Cap $300 million



Typical deal size ~$30 million

# of deals completed annually 3-5 (1 large - $200 million)

Executive Committee

Business Units


Acquisitions



Strategy & Corporate Development Group

Lead Due Diligence, Execute Transaction, Provide PMO

support for integration



Centralized Structure – M&A Group performs many non-M&A related activities

Number of employees

10-15 in Corporate Planning and Development

Reporting line Report to CEO


M&A Related:• Identifies and screens targets• Leads and performs due diligence• Structures and executes transactions• Involves business units, corporate staff, and

advisors as needed• Corporate Finance assists with valuations and

relationships with investment banks

Non-M&A Related:• Develops strategy plans and assess strategy plans

for BUs• Leads emerging technologies (R&D) projects• Leads non-M&A business development

opportunities (e.g., alliances, JVs)

Deal Sourcing Identified by Corporate Planning and Development Group, business units, and investment banks. Business units identified about 20% of deal ideas.


American Express was structured as a holding company with many diverse businesses. It has since moved to an operating company but maintained the deal process that was in place prior to the restructuring.

American ExpressIndustry Financial Services








Executive Committee

Business Units


Acquisitions



Corporate Planning and Development


Corporate Finance

Assists with valuations



Consumer Goods Company A

Industry Process & Packaged Goods


Gross Margin / market cap/ $28.9 billion





# of deals completed annually ~10 (1 large > $150 million)

Executive Committee

Business Units


Acquisitions


Identify OpportunitiesLeads Diligence

M&A Group

Identifies Opportunities, Supports Due Diligence,

Executes Transaction


Centralized Structure – Company is legally structured as a holding company, but Corporate actively manages businesses

Number of employees

4-5

Reporting line Reports to CFO


• Identifies and screens targets• Performs valuation and financial analyses• Supports due diligence• Structures and executes transactions• Business units lead the diligence process• Members of M&A Group are assigned to work on

deals for specific geographies

Deal Sourcing Identified by Corporate, M&A Group, and business units; M&A Group spends a significant amount of time in assigned region “originating” deals

Observations Pros:• Strong industry knowledge by assigning M&A

members to specific geographiesCons:• M&A Group tends to be very slow at moving

through a deal (process not in place, approvals are rigid)

• Unclear relationship between M&A and BUs


Centralized Structure – BUs heavily involved with diligence

Number of employees

5




advisors as needed• Monitors integration but not actively involved

Deal Sourcing Identified by Corporate, M&A Group, and business units


• Business units heavily involved in diligence• M&A members rotate out of group into other

(typically finance) positions in business units

Aerospace Manufacturer A

Industry Automotive and aerospace components


Gross Margin $554 million



Size of deals $250,000 - $ 2 billion




Executive Committee

Business Units


Acquisitions



M&A Group



Centralized Structure – BUs heavily involved with deal sourcing and diligence

Number of employees

3




advisors as needed

Deal Sourcing Identified by Corporate, M&A Group, and business unitsMost deals sourced by BUs


Business units heavily involved in diligence

Aerospace Manufacturer B

Industry Defense and aerospace systems


Gross Margin N/A





# of deals completed annually 5 - 8


Executive Committee

Business Units


Acquisitions



M&A Group



Centralized Structure – all deal activities performed by central M&A Group


10-12 globally dispersed; all report into Corporate



• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Business units perform operational diligence and

synergy and projections analyses• Corporate staff performs functional diligence• External advisors involved as needed

Deal Sourcing Deal ideas identified by M&A Group and business units; Strategy Group (not M&A-related) may sometimes develop acquisition ideas


The M&A team is globally dispersed throughout Europe and North America mainly due to personal reasons (not business-related). M&A Group members typically have strong finance backgrounds.

Consumer Goods Company B

Industry Processed and Packaged Goods

Annual revenue $25 billion

Gross Margin N/A

Market Cap N/A


Size of deals N/A

Typical deal size N/A



Executive Committee

Business Units


Acquisitions



M&A Group



Centralized - Corporate finance assists in valuations

Number of employees

30



• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Involves BU team to develop synergies and

financial projections• Uses external advisors extensively for capacity and

capabilities

Deal Sourcing • Identified by Corporate, M&A Group, and business units


• Corporate Finance assists in valuations• The group recently split into strategy and M&A

transaction functions – further details not available

Yahoo!

Industry Internet/Media


Gross Margin $4 billion (57%)

Margin Cap $31 billion




# of deals completed annually 12 publicly announced


Executive Committee

Business Units


Acquisitions



M&A GroupAssists

with valuations

Corporate Finance



Centralized Structure – M&A strategy integral to growth of company

Number of employees

4-5

Reporting line Reports to CFO; dotted line to CEO


M&A Related:• Identifies and screen targets• Leads and performs due diligence• Structures and executes transactions• Involves business units, corporate staff, and

advisors as needed• Corporate Finance assists with valuations and

relationships with investment banksNon-M&A Related:• Develops and assesses strategy plans for BUs• Leads emerging technologies (R&D) projects• Leads non-M&A business development

opportunities (e.g., alliances, JVs)

Deal Sourcing M&A Group and BUs sourced deals; approached very often by investment banks


• Went public in 1993 in order to make acquisitions (inorganic growth was key to strategy)

• Went from regional CA company to national reach through acquisitions

• Sold for $20 billion in 2004• Acquiring company adopted the M&A Group

structure and kept members of the group

Wellpoint Health Networks

Industry Insurance


Gross Margin N/A







Executive Committee

Business Units


Acquisitions



M&A Group



Centralized Structure – Weak oversight of deals led to creation of Steering Committee

Number of employees

6-8



• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Business units perform synergy and projections

analysis• Corporate staff performs functional diligence• External advisors involved as needed

Deal Sourcing Deals are mostly presented to the company by investment banks


• Group comprised mostly of ex-bankers• Poor decision making and lack of coordination led

to development of a Steering Committee to provide oversight to the process

• BU pulled in very late in the process and perform minimal market diligence

• Legal and tax issues drive integration decisions

Beverage Manufacturer

Industry Consumer Packaged Goods









Executive Committee

Business Units/Geography


Acquisitions


Support DiligenceAnalyze synergies and

financial forecasts

M&A Group



Centralized/Virtual Structure – Extensively uses outside advisors to execute transactions

Number of employees

2Senior VP and Associate (post-MBA-level)



M&A Related:• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Involves BU team to develop synergies and

financial projections• Uses external advisors extensively for capacity

and capabilitiesNon-M&A Related:• Evaluates alliances and JVs



• Acquisitions are typically product line extensions• About every 5 years, the company completes a

large acquisition ($1 billion)• Company is privately held and very tightly

controlled

Family-Owned Consumer Goods Company

Industry Consumer Packaged Goods


Gross Margin N/A

Margin Cap N/A


Size of deals $10million - $1 billion


# of deals completed annually 2-3 but very sporadic


Executive Committee

Business Units


Acquisitions



M&A Group



Centralized Structure – Strategy Group actively involved in determining M&A strategy

Number of employees

5



• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Negotiates transactions• Structures and executes transactions• Business units perform operational diligence and

synergy and projections analyses• Corporate staff performs functional diligence

Deal Sourcing Sourced by M&A Group and BUs


• M&A Group formed in 2007• Prior M&A function performed by M&A personnel • Transactions >$25 million require xx LLP Board

approval• All transactions require approval by the Strategy

Group to ensure they are in-line with overall strategy

xx LLP

Industry Professional Services


Gross Margin N/A

Market Cap N/A


Size of deals $20 million




Executive Committee

Business Units


Acquisitions



M&A Group



Hybrid Structure – Small deals completed by the business units, no dedicated M&A Group at BU level

Number of employees

30-35

Reporting line Reports to COO


M&A Related:• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Involves internal advisors frequently• Involves external advisors for specific areas of

expertise (e.g., HR, legal)Non-M&A Related:• Provides market research and competitive

analysis • Works on special projects for senior executives

when not staffed on deals


• M&A and Corporate identified large scale acquisitions

• BUs identified acquisitions to complement the existing portfolio


• Currently trying to expand globally• Deals <$50 mm are identified and executed at the

business unit level with corporate approval

Global Financial Services Provider

Industry Financial services



Margin Cap $40 billion




# of deals completed annually 20 -25


Executive Committee

Geographic Regions


Acquisitions



M&A Group

Execute transactions <$50 mm; no dedicated

M&A group



HYBRID – Currently streamlining process

Number of employees

N/A

Reporting line

Corporate: M&A and Strategy Groups report to CEO

Business Units: M&A and Strategy Groups report to corporate groups and business unit president


Strategy Group: •Develops overall corporate strategy (including M&A strategy)•Identifies synergies•Responsible for integration

M&A Group:•Executes transactions•Performs valuation and financial analyses

Business Unit Groups:•Mirror corporate groups•Provide support on larger deals•Source and execute smaller deals

Deal Sourcing Identified by Strategy and M&A groups and business units


Historically highly acquisitive, wants to streamline M&A groupsCorporate must approve all acquisitions

Consumer Goods Company C

Industry Consumer Goods – Food


Gross Margin / market cap/ $12.6 billion (34%)



Size of deals $50 million – $7.5 billion

Typical deal size $1.5 billion

# of deals completed annually 3 – 5


Executive Committee

Business Unit M&A &Strategy Groups


Identify Opportunities

Strategy GroupM&A Group

Identify Opportunities,

Identify synergies Lead

Integration

Lead Due Diligence, Execute transactions for smaller deals; provide support to

corporate groups for larger deals



Large Global Financial Services CenterIndustry Financial Services


Gross Margin N/A





# of deals completed annually 20 -25

Hybrid Structure – Governance procedures create a smooth process

Number of employees

Small groups (2-10 people ) at various levels of the organization

Reporting lineStrategy Group reports to Executive ChairmanM&A Group – part of finance team


• Target identification performed at BU level• Assessment of targets performed by Strategy

Group• Pre-deal due diligence performed by M&A Group

with the help of Bus

Deal Sourcing Sourcing done mostly at the business unit (geographical) level


Prior to reorganization, two people worked on M&A part-time, there was no strategy planning function; CEO developed ideas, but regions completed acquisitions without corporate approval. There was little pre-deal diligence and advisors were rarely used.

Growth is largely from acquisitions


Executive Committee

Business Units/Geographies

Approve Acquisitions Recommend Acquisitions


M&A Group

Strategy GroupAssess targets

Support Diligence

M&A Group

M&A Group

M&A Group



Hybrid Structure – Decentralized business with strong leader involvement

Number of employees

Corporate - 5Large subsidiaries – 5Small subsidiaries – 3

Reporting lineCorporate – CEOSubsidiaries – varies (CFO, COO, or Chairman of subsidiary)


Corporate:•Leads and performs diligence for deals > $150 mm•Executes deals identified by Rupert Murdoch

BU:•Identifies and screens targets•Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions•Involves internal advisors as needed (external advisors never used for deals <$150mm)

Deal Sourcing Identified by subsidiaries or Rupert Murdoch


Very decentralized businessSubsidiaries always reviewed valuations, assessed synergies, developed pro forma financials on deals >$150 mmEach subsidiary had their own legal department that provided legal support on dealsNotification required for deals of any size; each subsidiary had their own deal budget

NewscorpIndustry Media/Entertainment


Gross Margin $10 billion





# of deals completed annually 15 – 20

Provide support and review acquisitions

>$150mm

Executive Committee

Subsidiary M&A Groups

Identify opportunitiesLead diligence and execute transaction for

deals <$150mm; support for deals >$150 mm

M&A Group


Recommend Acquisitions >$150 mm


Acquisitions > $150mm



Hybrid Structure – Detailed approval process

Number of employees

3-4 people in each M&A Group; ~50 in each Strategy Group (corporate and business unit-level groups)

Reporting lineCorporate: Business Development reports to CSO; M&A Group reports into FP&A (CFO)Business Units: Report to BU CSO


Business Development: •Identifies and screens targets•Performs market and competitive analyses•Provides services for strategic alliances

M&A Group: •Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions

BU Strategy Groups: •Identify and screens targets•Execute transactions less than $25 million•Perform market and competitive analysis

Deal Sourcing Identified by Business Development and BU Strategy Groups

History/ Other Comments

Global Information Services FirmIndustry Business Services










Executive Committee

Business Unit Strategy Groups



Business Development Group

M&A Group

Lead Due Diligence, Execute transactions < $25 mm



Hybrid – BUs heavily involved in M&A process

Number of employees

8-10 per brand and 8-10 at Corporate

Reporting lineCorporate – CEOBU – President of BU


Corporate:•Mostly licensing and large acquisitions not related to any BU•Reviews for acquisitions >$50mm

BU:•Identifies and screens targets•Performs valuation and financial analyses•Leads and performs due diligence•Structures and executes transactions•Involves internal and external advisors as needed

Deal Sourcing Identified by BU


Owned by CBS then split off, recently moved to a holding company structureCorporate is not very involved in the operations of the business units due to the differing nature of the businesses

Viacom

Industry Media/Entertainment






Typical deal size $ 500 million

# of deals completed annually ~ 7

Review acquisitions

>$50mm

Executive Committee

Business Unit M&A Groups

Identify OpportunitiesLead Due Diligence, Execute Transaction

M&A Group




Acquisitions



Hybrid Structure – Centralized group with local M&A teams in 3 major divisions

Number of employees

Corporate M&A: 33 small local teams (# of members not available)

Reporting lineCorporate M&A Group reports to CFOLocal teams report to divisional finance head


Corporate M&A Team:• Develops metrics for all deals• Examines any deal >$100K; executes transactions

>$20 million• Provides each division with its own standard, 2-

page due diligence checklist

Local Teams:• Identify and screen targets• Execute transactions <$20 million• Due diligence• Synergies analysis• Financial projections

Deal Sourcing Deal ideas identified by central and divisional teams


Deals require approval of operational personnel.

3 local teams divided based on 3 major divisions – radio, outdoor displays, and entertainment.

Clear Channel Communications Inc.

Industry Broadcasting - Radio








Source: “A simple M&A model for all seasons”Source: “A simple M&A model for all seasons”


Executive Committee

Local Teams

(Divisional Units)




Support DiligenceIdentify targets

Corporate M&A

Lead Due Diligence, Execute transactions < $20 mm


Hybrid Structure – Centralized group invests in/acquires technologies not yet useful for BUs

Number of employees

Corporate M&A: n/aBU teams: n/a

Reporting line n/a


Corporate M&A Team:• Focuses exclusively on long-term strategic options

in emerging technologies unrelated to its decentralized operating companies

• The emerging technologies are not within the 2-5 year time horizon of the BUs, but may become of strategic value to them in the future

BU Teams:• Identify and screen targets• Execute transactions that are within the 2-5 year

time horizon• Due diligence• Synergies analysis• Financial projections

Deal Sourcing Deal ideas identified by central and BU teams


Johnson & Johnson

Industry Healthcare







# of deals completed annually >6

Source: “Strategy Paradox”Source: “Strategy Paradox”


Executive Committee

BU M&A Groups




Support DiligenceIdentify targets

Corporate M&A


Major Integrated Oil & Gas Company

Industry Oil & Gas









Strategy Group

M&A Teams

Determine Strategy, Identify Acquisitions, Approve Acquisitions

BU #1


Strategy Group

M&A Teams

Determine Strategy, Identify Acquisitions, Approve Acquisitions

BU #2

Parent Company/Corporate Headquarters

No involvement with BU M&A strategy








TMT

Financial Services



Manufacturing


Appendices


Additional Examples

Company Meggitt Deutsche Bank

Industry Aerospace components Financial Services

Revenue $1.8 billion $131.9 billion








• Centralized M&A Group• Portfolio approach• Acquisitions are not integrated• BUs not involved in the M&A process (including

diligence, synergies analysis, etc.)• Develops corporate strategy• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Corporate staff performs functional diligence as


• Centralized M&A Group reports to CEO• 6-10 people in M&A Group staffed with analysts

and MBAs with finance and strategy skills• Develops corporate strategy• Identifies and screens targets• Performs valuation and financial analyses• Leads and performs due diligence• Structures and executes transactions• Corporate staff performs functional diligence as



• Meggitt’s growth strategy is largely M&A-based• Strategy is to grow through acquisitions of small,

high-growth companies

• Typically the group executes transactions and then moves on to the next deal; there is no accountability or knowledge if synergies are achieved







TMT

Financial Services



Manufacturing


Appendices


Interview Excerpts / Quotes: Leading practices

The five playbook secrets of successful acquirers are:

1.Get into the game in good times and bad

2.Start small

3.Create a core deal team

4.Pull line management in early

5.Chill deal fever

The five playbook secrets of successful acquirers are:

1.Get into the game in good times and bad

2.Start small

3.Create a core deal team

4.Pull line management in early

5.Chill deal fever

At GE, the CEO requires all business units to submit a review of each deal. In addition to the financial justification, the review must articulate a rationale that fits the storyline of the entire organization and spells out the requirements for integration

At GE, the CEO requires all business units to submit a review of each deal. In addition to the financial justification, the review must articulate a rationale that fits the storyline of the entire organization and spells out the requirements for integration

…only 32% of low achievers chose defining the acquisition strategy as a crucial pre-acquisition task, whereas, for high achievers, it was 47%.

…only 32% of low achievers chose defining the acquisition strategy as a crucial pre-acquisition task, whereas, for high achievers, it was 47%.

Don’t follow a plan that hinges on a single set of business conditions

Don’t follow a plan that hinges on a single set of business conditions

Many of the ideas about which companies to acquire come from within

the divisions. At every divisional planning conference, there will be 10-15

acquisitions in the funnel – we’re assessing it all the time.

Many of the ideas about which companies to acquire come from within

the divisions. At every divisional planning conference, there will be 10-15

acquisitions in the funnel – we’re assessing it all the time.

… for a company that is planning to make strategic transactions, an in-house team is a worthwhile investment.

… for a company that is planning to make strategic transactions, an in-house team is a worthwhile investment.

We actively monitor the performance of acquired

companies. The M&A Group periodically reports synergy achievement and integration

to the Board.

We actively monitor the performance of acquired

companies. The M&A Group periodically reports synergy achievement and integration

to the Board.

The M&A Group must put a stop to bad deals.

The M&A Group must put a stop to bad deals.


Interview Excerpts / Quotes: Leading practices

Ensure that the staff doing the due diligence is also tasked with integration people – since they’ll be responsible for

the business post-close, they’ll give greater focus to the diligence process ; if something is missed, they’ll be the ones

cleaning up the mess.

Ensure that the staff doing the due diligence is also tasked with integration people – since they’ll be responsible for

the business post-close, they’ll give greater focus to the diligence process ; if something is missed, they’ll be the ones

cleaning up the mess.

The pro forma financial model is only as good as the data that feeds into it – namely, the financial and

operational due diligence, integration planning and projections.

The pro forma financial model is only as good as the data that feeds into it – namely, the financial and

operational due diligence, integration planning and projections.

The more you look, the more you find; the more you look the more you learn; the more you look, the more you test your strategies

The more you look, the more you find; the more you look the more you learn; the more you look, the more you test your strategies

Successful acquirers put more effort up front in the M&A life-cycle and gain business unit buy-in well

before integration.

Successful acquirers put more effort up front in the M&A life-cycle and gain business unit buy-in well

before integration.

The business units must be on-board with the deal since they are the ones executing the deal. BUs set all of the

synergy targets.

The business units must be on-board with the deal since they are the ones executing the deal. BUs set all of the

synergy targets.

M&A groups largely report to the CEO because the CEO’s perspective is

longer than others’ in the company. Transactions are often short-term dilutive but long-term accretive, so deals must be analyzed on a long-

term basis.

M&A groups largely report to the CEO because the CEO’s perspective is

longer than others’ in the company. Transactions are often short-term dilutive but long-term accretive, so deals must be analyzed on a long-

term basis.

Communication is vital. M&A groups, functional experts, and

BU managers need to work together and be aware of all

issues.

Communication is vital. M&A groups, functional experts, and

BU managers need to work together and be aware of all

issues.


Interview Excerpts / Quotes: Challenges

...most common challenge executives face are remaining involved with the deal and being accountable for its success from inception through to integration…

...most common challenge executives face are remaining involved with the deal and being accountable for its success from inception through to integration…

The M&A Group needs to avoid advocating for the deal instead of for the company

The M&A Group needs to avoid advocating for the deal instead of for the company

Failing to give line staff visibility to executive management lowers their incentive to work with you and support a deal

Failing to give line staff visibility to executive management lowers their incentive to work with you and support a deal

…keeping BU management out of belligerent portions of the negotiation, and hence giving them plausible deniability to “blame the M&A Group” for harsh stances or tactics taken, can prevent hostile relationships during integration

…keeping BU management out of belligerent portions of the negotiation, and hence giving them plausible deniability to “blame the M&A Group” for harsh stances or tactics taken, can prevent hostile relationships during integration







TMT

Financial Services



Manufacturing


Appendices




Key:

Factors impacting M&A group model employed:Technology, Media, Telecom Industry


= Global Information Services Firm

= Clear Channel Inc.= LG Electronics = NCR Corporation

Deal Activity




Culture of control




• M&A fundamental

= Vodafone = High Tech Co. = Yahoo! = Newscorp = Viacom




Key:

Factors impacting M&A group model employed:Financial Services Industry


Deal Activity




Culture of control




• M&A fundamental

= Fidelity NationalFinancial

= American Express = Deutsche Bank = Global FS Provider

= xx LLP

= Large Global FS Center

= Wellpoint Health Networks




Factors impacting M&A group model employed:Life Sciences & Pharmaceutical Industry


Key:


• M&A fundamental




Culture of control



Deal Activity

= Thermo Fisher Scientific = Johnson & Johnson = Life Sciences Supplies Manufacturer

= Chemicals Manufacturer




Factors impacting M&A group model employed:Consumer Packaged Goods Industry


Key:

M&A activity as a core competency• Non core activity • M&A fundamental

Deal Activity

Culture of control






= Consumer Goods Co. A

= Consumer Goods Co. B

= Family-Owned Consumer Goods Co.

= Consumer Goods Co. C = Beverage Manufacturer




Factors impacting M&A group model employed:Manufacturing Industry


Key:

M&A activity as a core competency• Non core activity • M&A fundamental

Deal Activity

Culture of control



Similarity of business units / divisions• Different industry,

customer, product

• Similar industry, customer, product, strategy

= MeggittAerospace Manufacturer B= Aerospace Manufacturer A= General Electric







TMT

Financial Services



Manufacturing


Appendices


Our secondary research includes the following sources:

Year Title Author / Publisher

2007 What public companies can learn from private equity Andreas Beroutsos, Andrew Freeman, and Conor F. Kehoe: McKinsey & Company

2008 Running a winning M&A shop Robert T. Uhlaner and Andrew S. West: The McKinsey Quarterly

2005 Reducing the risks of early M&A discussions Seraf De Smedt, Vincenzo Tortorici, and Erik van Ockenburg: McKinsey & Company

2006 Managing for growth: An interview with former Emerson CEO Chuck Knight R. Michael Murray Jr. and Warren L. Strickland: The McKinsey Quarterly

2007 Maintaining discipline in M&A Richard Dobbs, Hannu Suonio, and Vincenzo Tortorici: The McKinsey Quarterly

2006 Habits of the busiest acquirers Robert N. Palter and Dev Srinivasan: McKinsey & Company

2006 Creating value from mergers Richard Dobbs: The McKinsey Quarterly

2007 Better strategy through organizational design Lowell L. Bryan and Claudia I. Joyce: The McKinsey Quarterly

2006 M&A a new game as big players raise the bar Chris Gentle and Dwight Allen: Financial Executives International

2008 Key to success: Learning from best practice Dr. Elisabeth Denison: Internal xx Resources

2004 Do you need in-house dealmakers? Michael E.S. Frankel: Wiley Periodicals

2007 Avoiding M&A Disconnect Punit Renjen and Dwight Allen: The Deal

2007 Strategy Paradox Michael Raynor

2006 M&A a new game as big players raise the bar Chris Gentle and Dwight Allen: xx Research

2004 A simple M&A model for all seasons Sam Rovit, David Harding, Catherine Lemire: Bain & Co.

2006 Corporate Fightback: Five disciplines to win in M&A John Connelly and Chris Gentle: xx Research

2007 Strategic decisions amid business uncertainty: Charting a course for your company’s M&A

Dwight Allen: xx Research

draft draft for review only developing and delivering successful m&a capability research august...

Documents

ma activities

overall ma

ma groups

predeal ma process

ma related resources

high levels of ma

predeal activities

predeal activityapprovals