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Failure is not an option! Strategy-led PMI planning using Roland Berger Business Essence April 2017

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Failure is not an option! Strategy-led PMI planning using Roland Berger Business Essence

April 2017

2 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

Management summary

Failed mergers and acquisitions are common to the point of cliché, but bad deals and poor strategic rationale do not explain the majority of failures. Instead, business leaders often blame poor planning and execution.

It is not that planning is absent or that execution is ignored, but in our experience, the cause is that compa-nies do not comprehensively and cohesively link the strategic rationale of the deal to integration planning and execution. Strategy-led post-merger integration (PMI) is needed to ensure that the deal's objectives are translated into the strategic, synergy and tactical activi-ties and priorities leading up to and after close.

This paper focuses on how to design a strategy-led post-merger integration. Core to the design and planning process is understanding the target and how best to inte-grate it to achieve the business' strategic goals. We show how the Roland Berger Essence Framework can be used as a foundation to comprehend the target model, the future business and guide the PMI along the integration process and in management of the strategic, synergy and tactical activities and priorities it must balance.

2 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

How can organizations set up M&A post-merger integration for success? We believe it starts with strategy. Better results can be achieved by linking the strategic logic of the deal to every part of the PMI plan. To do this, organizations should invest the time to fully understand the target and how it will integrate with the buyer to generate value is essential. Roland Berger's Business Essence framework is one tool to help frame and articulate what must be achieved strategically through the PMI. With this strategic foundation set the PMI team can develop a plan to execute successfully: meeting synergy targets, encountering fewer tactical pitfalls and working to establish the target state of the merged organization.

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 3

Contents

1. Stemming the stream of failed M&A deals .............................................. 4

Failed mergers are common to the point of cliché yet over USD 2 trillion is still spent on M&A each year. (Spoiler Alert: Successful outcomes demand better planning and execution)

2. Using strategy-led Post-Merger Integration (PMI) planning to reduce the risk of failure ............................................................................... 8

PMI planning must translate the deal's strategic intent and objectives into a blend of strategic and tactical activities and priorities. Thoughtful execution is essential.

3. Business Essence for strategy-led PMI planning ................................... 14

The Roland Berger Business Essence framework gives a clear articulation of the similarities and differences between buyer and target. The purposeful intertwining of internal and external competencies helps create value in acquisition and forms the basis of the PMI plan.

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Section 1:

Stemming the stream of failed M&A dealsFailed mergers are common to the point of cliché yet over USD 2 trillion is still spent on M&A each year. (Spoiler Alert: Successful outcomes demand better planning and execution)

4 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 5

Mergers and acquisitions fail. Most do not fail completely or devolve to cultural fights and high profile divorce; the vast majority, though, fail to meet expectations. For every Daimler-Chrysler there are hundreds of much quieter value-destructive or disappointing deals. The Harvard Business Review conducted a detailed literature survey1 to understand the reported success rates of mergers and acquisitions. The cautionary tale suggests that for the over 2 trillion US dollars spent on M&A each year, 70-90% of M&A deals fail to live up to expectations. Bad deals are responsible for some of this lack of suc-cess. For the most part, however, the strategic rationale for a deal is well-developed and reasonable. The deci-sion to buy another company is rarely taken lightly and significant intellectual and analytical horsepower goes into the evaluation of an acquisition target. Based on Roland Berger's experience and industry surveys, how-ever, that same level of scrutiny and care does not hold after the deal has closed. In fact, poor planning and exe-cution was seen as the biggest single driver of failed integrations. AThe reasons for this phenomenon are practical. Busi-nesses analyze more targets than they actually buy and it is hard for businesses that are not serial acquirers to have in-house expertise for a non-repeat event. Most businesses have a detailed process and structure around targeting and due diligence of a potential acquisition. They assign a team of consultants, accountants, bank-ers, lawyers and internal stars to develop a go, no-go decision. That same effort and discipline often wanes after close. The exciting, high-pressure evaluation phase is done, the stars go back to their day jobs and the third parties go home. Our hypothesis, however, is not that planning is absent or execution is ignored. It is that companies do not com-

1 Martin, Richard L. "M&A: The One Thing You Need to Get Right." Harvard Business Review, June 2016

prehensively and cohesively link the strategic rationale of the deal to integration planning and execution. M&A can be a stressful, complex and rushed process. Many stake-holders are moving at different speeds to achieve only marginally aligned objectives; it is not easy and the right-ful focus until a deal is signed is on the deal itself. Syn-ergy commitments are often a component of debt cove-nants; promises have been made to executives of the acquired company; the investor community must be updated. Decisions are made at a high level and given to the PMI team to figure out later and execute. There is a lot to do and many components to worry about during the switch from deal evaluation to deal signing and then to post-merger integration. PMI planning is reduced to a box-checking exercise and making sure the wheels do not fall off at close. In our experience, this can create a situa-tion in which it is easy to focus on the deal details and miss an opportunity to set the PMI up for success. Our solution is a strategy-led PMI. Deals will continue to be considered for companies large and small, and despite the best efforts, the reality is that very few deals are perfect at conception. It comes down to the manner in which integration occurs that ultimately controls whether the deal is a success or failure. Better results can be achieved by actively and consistently linking the stra-tegic logic of the deal to every part of the PMI plan. Spending the time to fully understand the target and how it will integrate with the buyer to generate value is essential. Roland Berger's Business Essence framework provides the frame and fundamental understanding of what must be achieved.

6 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

A: Reasons given for why M&As fail. According to recent research, 70-90% of M&A deals fail to meet financial expectations – Poor PMI is most often sited as a cause.

Source: Data from a 2012 Roland Berger survey of M&A managers

80%

50%

30%

30%

10%

Unprofessional integration and synergy management

Lack of cultural fit

Price/acquisition premium too high

Management egos, organizational deficits

Poor strategic logic

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 7

Planning and management cannot fix a bad deal but it can make sure that companies get the most out of what they have bought.

Section 2:

Using strategy-led Post-Merger Integration (PMI) planning to reduce the risk of failure PMI planning must translate the deal's strategic intent and objectives into a blend of strategic and tactical activities and priorities. Thoughtful execution is essential.

8 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 9

Overall coordination and integration management

Figure B outlines how these activities fit from Day 0 (signing) through the end of an integration process. To be successful, integrations must be managed to com-plete and balance the often conflicting priorities of each along various themes.

For most of our clients, post-merger integration (PMI) is uncharted territory that demands resources, time and structure outside of the normal day-to-day business operation. PMI projects blend the strategic and tactical in a time-critical challenge for any company. PMIs are a combination of three types of activities in one project.

B: PMI activity set.The approach is designed to prepare for a successful Day 1 and integration of the acquisition target.

1 Strategic integration

To transition from two distinct companies to a fully-integrated, optimized entity

2 Synergy management

To generate value from the combination of businesses greater than what could have been achieved separately

3 Tactical integration

To ensure successful change in ownership and sustain business continuity from Day 1

Source: Roland Berger

Day 0 Day 1 Day 100 Target state

Tactical integration

Synergy management

Strategic integration

10 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

come together even after close in some cases. This work translates the conceptual integration goals to a tangible execution team and set-up.

4. DETAILED PLANNING AND PMI MANAGEMENTWith the structure, objectives and priorities set, the PMI teams can go to work building and then working the integration plan. The execution usually involves team members from both companies at many different levels of the organization. The first three elements of PMI plan-ning provide the necessary foundation to give the PMI teams the necessary guidance and goals.

In practice, the deal cadence is not set by PMI planning. The agreed close date is very often negotiated and set by a different team than the PMI team. There is also the reality that as a deal moves forward there are a set of legal and regulatory requirements that must take prior-ity. Gaining deal approval, assuring right-to-operate the acquired business, paying employees, closing the books and other table stakes activities often and rightfully con-sume management time and mindshare in the thirty days before and after close. At best the fast pace and at worst the chaos of a close date pull attention from com-prehensive PMI planning. Figure D shows the work that must be linked together. PMIs can be challenging. Driving the work from the deal strategy and being purposeful about running the inte-gration to acknowledge the likely conflicts will help to set the deal up for success.

Developing a good plan is the first step towards improved M&A outcomes. A planning cascade that forces compa-nies to prioritize their PMI planning and align the plan with the deal's strategic intent and contextual environ-ment is required. C Each of the four stages has a set of critical activities that in practice are not always aligned with each other or moving at the same speed. Each of these elements has a set of outputs that will define the work and success of a PMI. At a high level:

1. DEAL STRATEGYThe PMI team needs a clear and aligned purpose. This purpose is typically an articulation of the deal strategy. It can be high level but must provide enough depth to allow for consistent and reinforcing actions from before close through the end of the integration.

2. PRIORITIZATION AND TOP-LEVEL OBJECTIVESThe PMI team must be able to translate the deal strategy to the three key PMI areas. A translation of the deal strategy is essential to the strategic integration, synergy management and tactical integration. There will be con-flicts and trade-offs. Working through these conflicts prior to deciding how to run, staff and measure the PMI will help avoid fire drills, frustration and poor perfor-mance after close. This work will translate the deal and executive teams' strategic vision for the deal to the working PMI team.

3. PMI SET-UP, STAFFING AND PRELIMINARY PLANNINGWith priorities set, it is time to organize the work and define PMI governance and planning. The team, report-ing structure, tool set and high level timeline are built in this phase. For complicated deals this can be in place a year before the deal closes. For small deals this should be complete approximately 100 days before close but can

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 11

C: PMI planning cascade. PMI planning must cascade from the strategy.

Source: Roland Berger

Deal strategy

Prioritization and top-level objectives

PMI set-up, staffing and preliminary planning

Detailed planning and PMI management

Why did we do this and what must we achieve for the deal to be a success?

What must we do first and how will we balance priorities?

What is the structure and team that gets us to success?

How will we manage the work to complete our plan?

12 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

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Strategic integration

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Synergy management

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D: PMI planning links. The deal strategy informs the PMI and provides coherence as the planning elements knit together to achieve the target state.

Source: Roland Berger

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Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 13

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Section 3:

Business Essence for strategy-led PMI planning The Roland Berger Business Essence framework gives a clear articulation of the similarities and differences between buyer and target. The purposeful intertwining of internal and external competencies helps create value in acquisition and forms the basis of the PMI plan.

14 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 15

The Essence is a link between planning elements and activity types that helps keep PMI efforts aligned to the deal's strategy. Roland Berger's Business Essence frame-work provides a basis for understanding how, where and why a company creates value. The Essence provides a deep view of a company along four areas: 1) Fundamen-tal Knowledge, 2) Physical Capabilities, 3) Market Trans-lation and 4) Market Knowledge. EThe most critical component of the Essence framework is how a company links and stacks its competencies to create sustainable advantage. The tool is exceptionally valuable for evaluating targets and clarifying value driv-ers for a business combination. And this feature of the Essence makes it particularly valuable in a PMI. If it has not been done prior to establishing the PMI plan, it is critical for the PMI deal team to construct it to guide their work. We have also found that the structure and process of constructing the Essence allow the PMI planning con-versation to happen even in the midst of deal activities within the M&A compressed timeframe. The first step in using the Essence for PMI is to articulate the Essence for the buyer, the target, and for the com-bined NewCo. The purpose is to create clarity around what has been acquired and how it will fit with the buyer. This exercise creates transparency around which parts of the business fits, what is useful and supportive of the deal strategy and informs where to prioritize effort. It also helps to highlight potential PMI challenge areas and parts of the acquired business that do not fit with the target for NewCo. The acquired company Essence can be difficult to artic-ulate during the deal process. There are two ways in which this can be managed: 1) create an outside-in Essence using the information available as part of the due diligence process and then vet this with the acquired team post-close or, 2) have a third party work with the target in a "clean room" exercise to develop their view of the Essence to form the basis of a discussion post-close.

About one failed transaction, a client remarked, "If we would have done [Essence] two years ago, we never would have bought [that company]." – Chemicals Manufacturer

Two examples of Business Essence results.

Industrial fittings and hose manufacturer Buy a similar business that serves a different market and combine operations entirely to yield cost savings and scale.

Keep businesses separate based on the realization that the market transla-tion and value creation is dissimilar from buyer.

Industrial tool manufacturerTuck in acquisition to expand portfolio and market access to achieve synergies tied to head count reduction and cross-selling.

Defined where and what actions needed to meet synergy targets as well as identification that head- count savings should be reinvested in R&D.

PMI CLARITY ADDED AFTER ESSENCE

CLIENT/ORIGINAL DEAL HYPOTHESIS

16 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

E-1: Business Essence framework.The Essence helps identify and articulate competencies with a clear linkage from value proposition to business model and finally to sustainable success.

Source: Roland Berger

Continued on next page

Company culture

Fundamental knowledge

"What we know"

Physical capabilities

"What we do"

Market translation

"How our value proposition

fulfills market needs"

Market knowledge

"Where we play"

Core competencies

Areas of technical or business

expertise vital to the business, e.g. natural polymer

science

Manifestation of knowledge into

product, service or business function,

e.g. sourcing, blending,

extraction/processing

Bridge between capabilities and

markets - what is the customer buying? e.g.

structure/physical stability, texture

Identification of the segments that pay

for the value proposition, e.g. oral care, dietary

supplements

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 17

Culture

E-2: Sources of sustained competitive advantage.On their own, these capabilities may seem unremarkable, but together they form a distinctive basis for differentiation.

Source: Roland Berger

Full in-house capability Limited, aspirational, or done with partners

Market A

Market B

Market C

Market D

Source of sustained competitive advantage

Knowledge area 1

Knowledge area 2

Knowledge area 3

Knowledge area 4

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Fundamental knowledge

Physical capabilities

Market translation

Market knowledge

18 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

In practice, it can be useful to gain both views. This start-ing point creates the fact set for the PMI team to work from and helps to prevent value destruction through ignorance of how the target generates profitability. The Essence is used as a reference throughout the PMI plan-ning cascade. It is most critical at the top F but must be understood by the teams working on the PMI well after the initial deal strategy is set. An example of how the Essence can guide a PMI strategic planning is in the definition of what not to integrate. There is generally a tendency in acquisitions to acquire and complete the integration quickly. For clearly defined and executable cost synergies this can be a positive and necessary approach. Momentum in this case is key. There are, however, times in an integration where benign neglect is needed. The Essence can help identify parts of the acquired business that should be avoided in cost syn-ergy planning and/or should be left to run alone.In one example, the acquisition premise was around consolidation of two similar businesses with a focus on reducing total cost to serve. The Essence, however, shows that while the physical products and the core manufacturing processes were very similar the way in which the two companies generated value was not. This fundamental difference in value generation provided a clear answer to the PMI team of what not to integrate. A consolidation of final configuration, logistics and sales would have been value destructive. Without purpose-fully identifying this before the PMI crank started to turn, the PMI team would have followed a checklist, identified overlapping services and resources, built a cost synergy plan and executed. They would have cut cost but destroyed the differentiated value generation mechanism of the company they just bought. An Essence evaluation before jumping into PMI planning can iden-tify cases like this. The Essence can guide planning for synergy manage-ment and tactical tasks as well. For instance, one client

acquisition was aimed at helping the business enter into an adjacent market. After constructing the Essence, the organization found that the acquisition would add a new critical knowledge base around the new product while the manufacturing and sales processes remained very similar. In defining the actions to meet synergy tar-gets, the team added a PMI work stream around manu-facturing and sales consolidation. The PMI team also called out the need to use some of the headcount reduc-tion to reinvest in R&D in the new knowledge area. Tac-tical aspects to support the synergies were then detailed in the PMI plan, including when the sales structure would be confirmed, product cross-training imple-mented, new R&D hires onboard, inventory built-up and production consolidated. The Essence can be used as a guide throughout the PMI for the various teams that touch and interact in the pro-cess from the buyer, the seller and third parties. The clear articulation of what is being bought and how these linked and stacked competencies will intertwine with the buyer to create a NewCo creates the foundation for a good PMI plan. As the acquirer and acquired embark on a journey to form a new company, the Essence also provides the groundwork on which both parties form a better understanding of the other, enabling better work-ing relationships, visibility around opportunities, and challenges for the future ahead G.

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 19

F: Essence use in the PMI planning cascade.The Essence framework is used in multiple levels of the PMI planning cascade.

Source: Roland Berger

Deal strategy

Prioritization and top-level objectives

PMI set-up, staffing and preliminary planning

Detailed planning and PMI management

> Understand the target company Essence

> Define the NewCo mid-and-long term Essence

> Articulate how, why and where the deal creates value

> Develop the target integration corporate structure to support getting to the NewCo Essence

> Align the priority of cost synergies v. strategic realignment

> Define a PMI governance model tailored to the Essence

> Assign PMI leadership and staffing to support the Essence-based priorities

> Tailor the PMI task list and focus areas to ensure adherence to the target Essence goals

> Refer back to the Essence for change management and communication tasks

> Perform course-correction checks against the target Essence

20 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

Buyer Essence

Target Essence

G: Case example.Essence articulation for an integration.

Source: Roland Berger

Fundamental knowledge

Physical capabilities

Market translation

Market knowledge

Industrials

High volume OEMs

Fittings

Fittings

Hoses

Hoses

Met

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Fitt

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and

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>The combination of two fittings and hoses companies seemed, on the surface, to be ideal for consolidation and cost synergies

>The Essence shows, however, that the market translation and knowledge are critically different and that a cost-based combination will destroy value

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 21

KEY QUESTIONS TO ASK BEFORE STARTING A PMI No company starts an integration believing it will end up on the wrong side of the failure statistics. To ensure that does not happen, it is helpful to think through a set of key questions before you start.

Have you done your own Business Essence on your organization, your target and the desired end state of the merged company?

Can you articulate a thorough and believable deal strategy that will resonate with both companies?

Have you defined achievable, but aggressive, targets and objectives that align with your strategy? And do you know how you will measure success?

Does your timeline and action plan take into account the scope of priorities and context identi-fied during the Business Essence exercise for this specific acquisition?

Do you have the right team and governance in place to manage and balance the strategic, synergy and tac-tical activities associated with this plan?

Successful PMI relies on thoughtful planning and execu-tion. With comprehensive and well-founded answers to each of the questions above your PMI team has the foun-dation necessary to build and execute the right plan for your integration – a plan that is strategy-led.

Think:Act BookletBeware the similar Delivering profitable growth – the elusive frontier

Roland Berger has introduced a trilogy of articles focused on the key challenges that companies are currently facing to deliver profitable growth. Following on from Part 1: Know Thyself, Part 2: Beware the Similar explores the dangers ofbusinesses being seduced by similarity when assessing inorganic growth options.

1

2

3

4

5

22 Roland Berger Focus – Strategy-led PMI planning using Roland Berger Business Essence

AUTHORS

Gillian MorrisPartner+1 312 [email protected]

Gareth HayesPartner+1 312 [email protected]

Rebecca MarciniakProject Manager+1 248 [email protected]

This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger LLC shall not be liable for any damages resulting from any use of the information contained in the publication.

© 2017 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.

WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS

Imprint

Strategy-led PMI planning using Roland Berger Business Essence – Roland Berger Focus 23

Roland Berger, founded in 1967, is the only leading global consultancy of German heritage and European origin. With 2,400 employees working from 34 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners.

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