post-closing integration issues in m&a: developing...

Post-Closing Integration Issues in M&A:

Developing and Implementing a PlanTransfer of Assets and Contracts, Workforce Adjustments, Corporate Structure,

and Tax Considerations

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WEDNESDAY, DECEMBER 11, 2019

Presenting a live 90-minute webinar with interactive Q&A

Zeid Barakat, Senior Director, Scimitar, Boston

Kate W. Hardey, Partner, McGuireWoods, Charlotte, N.C.

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FACULTY

Mr. Barakat brings over fifteen

years of experience in healthcare

and life sciences, driving cutting-

edge initiatives in new product

launch, ‘big data’ adoption,

mergers & acquisitions, portfolio

optimization, operational

enhancements and corporate

restructuring efforts.

Ms. Hardey advises healthcare and

life sciences clients on regulatory

and compliance matters and in all

types of transactions including sales

and acquisitions, joint ventures,

contractual affiliations, as well as

evaluating regulatory risks in cash

flow, asset- based and lending

transactions.

Zeid Barakat

Senior Director

Scimitar

Kate W. Hardey

Partner

McGuire Woods

5

✓ Competitive pressures ~48%*

✓ Portfolio diversification ~40%*, typically with

compatible product pipelines and supply chains

✓ Patent expiry ~20%*

✓ Access to disruptive new products

✓ Affordable cash

✓ Tax advantages based on geography

Key Drivers of Recent M&A Activity

* Economist Intelligence Unit 2018 survey, broad cross

industry survey; participants selected all areas that applied6

Healthcare M&A Activity

Closely tracking 2018 Activity

Source: Kaufman Hall M&A Quarterly Activity Report Q2 2019

Healthcare mergers and acquisitions increased 10 percent from Q1 to Q2 2019 and outpaced

Q2 2018 activity by 18 percent.

7

• Key Sectors where transactions have increased

• Behavioral health

• Healthcare IT

• Home health

• Autism

• Other sectors remain steady

• Hospice

• Laboratory

• Home health

• Physician practice/ASC

• Pharmaceutical/Device/Life Science

Healthcare M&A Activity

Key Sectors

Source: Hammond Hanlon Camp LLC Q2 2019 Maintains Strong Pace for Healthcare M&A (Aug. 2019)

8

Asset vs. Stock

• Asset

• More ability to leave

behind potential

liabilities and historical

risk so long as

practices that were

potentially an issue

are changed

immediately

• Stock

• Buyer gets everything,

positive and negative

• Successor liability

• Employee relationships

remain intact

Transaction Structure Considerations – Impacts Post-Close

No One Size Fits All: Consider the Key Components

9

• Expenses

• Employee

• Litigation

• Contractual

• Go forward capital requirements

• General Revenue Considerations

• Understanding key coding issues during diligence

− risk of over-coding issues and subsequent potential revenue decrease.

• Additional monitoring and auditing expenses

• Overpayment liability

• Reputational Risk Considerations

Transaction Structure Considerations – Impacts Post-Close

(cont.)No One Size Fits All: Consider the Key Components

10

1. Over-Optimistic/ Non-Discounted Financials – Often based on insufficient diligence.

2. Under-estimation of the Details – Tight deadline pressures cause key inter-dependent

details to be overlooked, e.g. supply chain issues or IP/ technology threats.

3. Late Start – Financial due diligence pre-empts timely start of the operational aspects of

the merger/integration.

4. Lack of Expertise – Common issues, e.g. regulatory compliance issues, flexibility, and

lack of competencies to manage external partners require specialized skill-sets.

5. Lack of Alignment Across Constituents – Suppliers, customers and employees not

involved early, hampering rapid decision-making and communications.

6. Inadequate Tools – Integration specific project/financial monitoring and management

tools/forums not implemented early, but only after crisis.

7. Inadequate Resourcing – Assumption that M&A can be a ‘day job’ activity for staff

Historically, a Number of Factors Typically Work Against

Effective Integration Efforts

11

Historically, a Number of Factors Typically Work Against

Effective Integration Efforts (cont.)

Xquadrant 2018 survey12

A Robust Integration Methodology Emphasizes

Delivery of Shareholder, Customer, and Employee Value

▪ Reduce the risk of not realizing acquisition synergies

▪ Reduce the costs of integration

▪ Increase the additional revenue stream projected from the acquisition

▪ Reduce operating costs within the acquisition

▪ Increase the additional net income stream as a result of the acquisition

Operations Continuity

Integration Activities

Value Delivery

Day 1 Day 100 Month 6 Month 12 Month 18

13

• Common areas of integration that are underestimated or overlooked:

• Losing focus after the signing of a deal

• Failing to properly assess the resources to integrate and operate two businesses

• Not addressing employees and “people issues”

• Overloading management with integration responsibilities outside their scope

of expertise

• Simple mistakes lead to a significantly slower integration effort that tends

to compound these and other mistakes.

− Lack of due diligence leading to surprises

− Delay in planning for integration (all effort put into closing the deal, not

digesting it)

− Too much (or too little) focus on short-term “cost synergies”

− Uncoordinated integration

− Unrecognized (or ignored) differences in risk profiles and cultures

Additional Complexities of Integration

14

Additional Factors Impacting Integration Value Capture

Source: Deloitte, The State of the Deal, M&A Trends 2019

15

Creating a Timeline and Checklist for Integration

16

Integration Lifecycle and Major Steps

Pre-Deal Due

Diligence &

Acquisition

Integration Readiness

& Capability-Building

Readiness for

Post-Close

Integration

Post-Close

Integration

▪ Target-setting

▪ Creation of M&A strategy

and targets

▪ Integration playbook

development

▪ Value chain and network

analysis

▪ Enterprise value

creation/ Core vs. non-

core analysis

▪ Target ‘short list’

development

▪ Target Identification

and investment thesis

▪ Core diligence

(operations, supply

chain, product

development and

commercial)

▪ Future state design

▪ Final and confirmatory

diligence and deal

negotiation

▪ Formation of a unified

pre-merger integration

team

▪ Definition of clear

decision-making

guidance and targets

to reduce confusion

▪ Baseline vs. Future-

state: Detailed

description of current

state operations and

operating plans, future

state design and

transition plans

▪ 100-day plan

development and

execution

▪ Creation of detailed

integration plans and

value-capture roadmap

▪ Execution of integration

strategies

▪ Management of

communication plans

▪ Monitoring of

implementation vs.

business case

This framework has been applied to companies during all stages of

integration, and in nearly all functional areas

17

Key Pre-Close Priorities and Activities

# Objective Key Activities Outputs

1Pre-merger Integration

Team

▪ Rapidly identify members and kickoff team▪ Define team’s operational cadence to finalize pre-

close decision-making and operating norms▪ Facilitate mitigations for key issues as needed▪ Coordinate sub-teams or functional teams▪ Manage information flow from team to functions

▪ Newly-created team▪ Pre-merger checklist ▪ Information and decision

request process

2

Decision-making and Operating

Norms

▪ Create clear decision-making model to guide pre-close and immediate post-close activities

▪ Develop clear issue escalation pathways between staff and pre-close integration leadership, as well as across functions

▪ Pre-merger decision-making model

▪ Documented decisioninventory

3Current State Description

▪ Develop current state description of operations across key functions (programs, org., performance, systems, governance, …)

▪ Identify 2020 and 2021 plans and underlyingassumptions as part of the on-going operating plan (budget) efforts

▪ Identify integration guiding assumptions by area to avoid confusion and risk to operations

▪ Departmental overviewsacross key operating model dimensions

▪ 2020/2021 budget▪ List of critical

assumptions by ET member

1

2

3

18

Objective #1: Pre-Merger Integration Team (pMIT)

1

Establish a Pre-Merger Integration Team (pMIT) to provide senior level guidance for coordinating decision-making and information exchange

EXECUTIVE TEAM (ET)

PRE-MERGER

INTEGRATION TEAM (pMIT)

Program SupportR&D

Research

Clinical Science / Biometrics

Quality

Tech Ops

Global Regulatory Affairs

Clinical Development

Program Leadership

Scientific Affairs

Program Management

Fu

nctio

nal S

ME

Finance

TreasuryProcurement

Accounting

IT

Tax

Facilities

G&AFunctional SME

Commercial

Franchise B

APAC

Business Analytics

Latin America & Canada

New Products / Commercial Access

Franchise A

Reimbursement, Value, and Access

Product Strategy

EU

Fu

ncti

on

al S

ME

R&D

Lead(s)

Commercial

Lead(s)

G&A

Lead(s)

Extended Team

LegalPublic Affairs

Corp Dev’l

HR

Communication & Change Management

▪An efficient, effective team is normally <10 members with sufficient representation across all functions

▪During Implementation: PMOw/Bi-weekly Meetings Should be Used to Drive Progress

19

Objective #2: Decision-making and Operating Norms

2

Develop clear operating and decision-making principles and a defined escalation

path to allow day-to-day operations and projects to continue as appropriate

Functions

Functional

Heads

Department Heads /

Pre-Merger

Integration Leads

Executive Teams

▪ Empowered to make

recommendations to

functional leads

▪ Escalate as appropriate

▪ Accountable for

function-specific

decisions and direction


▪ Accountability for

department decision-

making

▪ Resolve escalated

functional and cross-

functional decisions as

required


Serve as the final

decision-maker for

pre-merger

requests

20

Objective #3: Current State Description

3

Partner Networks and

Collaborations

Process, Standards, &

Metrics Architecture

Global Assets &

Footprint

Decision Making

&Governance

Organizational

Effectiveness

Technologies & Tools

Strategy and vision

Current State Description:

Quickly develop departmental descriptions

of current state operations with an

emphasis on using what already exists

2020 & 2021 Operating Plan:

Use content under development as part of

the budget process to provide a summary

of plans for the next two years

2015 (by quarter)

2014 (by month)

Revenue

COGS

Headcount

OpEx

CapEx

View 1: By ET Departments (primary focus)

View 2: As reported per GAAP

View 3: By product/franchise

View 4: By region

Primary Operating Plan Content*:▪ Functional Strategy and Goals▪ Key Initiatives and Projects▪ Resources Required ($, HC, …)▪ Primary Risks▪ Base, Gated, and Over-Target figures

Onyx-wide and Targeted Views

Fin

anci

al A

reas

Operating Plan Dimensions

Current volume, scale, …

2020 (by month)

2021 (by qtr)

21

Clear Transition Plans must be in Place for Asset Transitions

and Supply Chain Continuity

Complex integrations can benefit from adopting a few fundamental principles

• Require alignment from both organizations on specific transition goals

• Establish a time horizon to motivate managers and staff to finalize transition

activities by a specified date

Close

Planning and Deal Closure 100 Days Transition & Execution

Target Selection

Strategy Development

and Corporate Plan

Financial Analysis Due Diligence

Pre-Close Plan &

Execution

Governance and Leadership

LT Kickoff

Implementation K/O

Objectives and Goals

Governance and Leadership

Project Team Structure

Workstream Leads

Project Managers

Team Members

Templates / Tools

Oversight and Program Management

▪ Establish forums for cross-functional

engagement (e.g., program meetings,

integration workshops, Steer Co, etc.)

▪ Define an operational dashboard based on

key objectives and implement as a tool to

communicate status

▪ Cultivate effective behaviors (e.g. report

issues, escalate obstacles, etc.) without

fear of punishment or consequences

Operational and System Integration

▪ Consistent approach via template for work

stream goals, project planning, core team

structure, resources required, etc.

100

Days

22

Longer-Term: Highly Effective Oversight and Escalation

Bodies should be Formed to Manage Integration Efforts

Team 1:

Demand &

Distribution

Planning

Team 2:

Supply

Planning &

Systems

Team 3:

Packaging &

Labeling

Team 4

Distribution &

Cold Chain

Team 5

External

Networks &

Comparators

Global Clinical Supply

Integration Core Team

Manufacturing

Alignment

Quality

Systems

Alignment

Network Management

Organization Integration, Training, and Roles

Process and Operating Model Refinement

Metrics and Additional Synergy Savings

Cutover Planning and Execution

IT Alignment

Communication and Change Management

Finance and Resource Planning

Often a matrix of vertical and horizontal teams must be formed to manage the integration workload…

Oversight Council

Operating Committee

Supply Planning and Systems

Manufacturing Packaging Distribution

External Network Management

Clinical Supply Regional Leads

Early

Development

Demand Planning

Late Development

Demand Planning

Quality

…and a new, two-tiered governance structure should be deployed to oversee strategy and execution of the integration efforts

23

Integration Team Use a Range of Dashboards, Analytics and

Solutions to Fit the Project and Team Needs

Program-Wide Cross-functional

Integrated Scorecard (11 teams)

Program Milestone/

Deliverables Schedule

2009

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

BP/SAP

Demand

to Supply

Procure to

Pay

Maintain

to

Improve

Hire to

Retire

Genentech

Informatics

Quality

Finance

EHS /

Security

LBXS Program Milestones Overview12-mth Schedule

Avastin Qual Lot Start

Avastin Qual LotsComplete

Avastin Start-Up CompleteEng Run Start

Avastin Eng RunComplete

L1

Plan

L2

Plan

L3

(25%)

L3

(50%)L3

(100%)

Initial

Budget TSA

Final Budget

Program

Milestones

Option Close

Comprehensive Lonza policy

review completed

Quality Strategy

Policy gap assessment completed

All team strategies completed

Learning from Events & STARI deployed

Complete access control converted

1-2 local EHS staff hired

Begin EHS post-close procedure implementation plan

HazOps study completed

Oper. Permits to GNE

WCS Gap Assessment

CSR ApprovedSchedule drafted

CIT Resource Plan complete

CIT Strategy

Equipment Ordered

Design Doc Complete

Lonza Environment

Complete MTI Integration Roadmap

Conduct Maintenance Integration Workshop

Devl Scope Document

Devl PrototypeComplete Data Migration Req

Complete DesignLoad Data

Complete Training Plan

Final Post Go-Live Support Plan

Complete Gap Assess and Remediation Plan

Complete Bus Proc Review

Define Training Req

Define Security Role Trans

HRIS Data Mapping

HRIS Selection

HR Strategy

Decision onPPSFT 8.8

Complete Data Definition

Complete SOP Review

Badges Issued

ACS software mapped to card readers

Identify new to GNE vendors and materials

Complete Data Conversion Design

Design tracking ECP1 & LBX Bal Sheets after 7/6

IT Testing

SC Approver Set-up

Integration Budget

Comp & Ben Harmonization

/ Total Rewards Approval

Review open LBX contracts

.

Finalize approval flows

Define post-Integration PRO Organization

Define Day 1 Business Process Hand-off Flows

Vendor agreements for HER critical items Outline agreements

for long lead items

Wave 1 H2R processes

Business Readiness Pilot

Complete Business Documentation

Execute / Complete Training

Also

Apply to

P2P & M2I

Policy-level risk assessment complete

GNE & Lonza QS shown as “substantially equivalent”

WE ARE HERE

Network Infrastructure Cutover Complete

PROP Applications Deployed

Enterprise Applications Deployed

LonzaComputers

Retired

AcctsLIMS-PT Deployed

LIMS-RM Deployed

QP52, 22, & 75 Deployed

QP76Deployed

Identify POs to be open post acquisition

Create GNE POs to replace LBX POs

Execute new service contracts

Disburse Payroll

Combine entity

FIN training

Value Assets

Phys. Inv.

Tag AssetsCost Stnds Approved

OnboardingJob

Mapping

Job Offers

HRIS/Payroll ready

Focal & PP&R Process in place

Other Wave 2-H2R processes

Talent Review for S’pore Org

ExtranetLaunch

Benefits Enrollments

Complete BRP

Execute LBX Maint. Transactions in GNE SAP

Complete MTI Business Process

Training

Red-Lined

SOPs to Doc

ProcessingLBX / ECP-1

Warehouse

Consolidation

Pre-close Training Completed

LIMS-EM Deployed

LBS Transition / Integration Program Scorecard

LBS

Sub-Team Lead Team Status Comments (for yellow / red or key risks)

Business

Process and SAPMatt Kenning Green

Demand-to-

SupplyDan Hagewiesche Green

Procure-to-Pay Matt Kenning Green

Maintain-to-

ImproveKim Huat Poh Green

Hire-to-Retire Virginia Vega Green

GNE Informatics Sean McMillen Green

Quality John McShane Green

Finance Peter Andrews Green

EH&S Mike Ratelle Green

Security Daniel Brasse Green

Training Suzanne Behnke Yellow See dashboardLegend: Overall Status

On track Green

Potential delay Yellow

Behind Red4GENENTECH CONFIDENTIAL

LBS Transition

and Integration

Green = work on track and milestone to be achieved on schedule; Yellow = some activities are off track but end date of milestone not impacted; Red = activities are off track and project team likely to miss a milestone

Recent Accomplishments (1-week back)

▪ Completed distribution of medical cards to employees

▪ Successful Day One/Week One Execution!!! (2 All Hands/4 Onboarding Sessions

from 31-Aug to 1-Sep) – onboarded 223 employees + TSAers!

▪ Conducted employee support tables w/cross functional teams conducted throughout

Week One (1-Sep to 4-Sep)

▪ Received LBS employee performance ratings spreadsheet, and hard copies of LBS

2008 performance appraisals and 2009 LBS Employee Objectives

▪ Conducted 6 Comp & Ben Induction sessions for B10 colleagues; total 9 sessions

▪ Conducted 8 ProSoft eLeave training sessions for B10 colleagues; total 9 sessions

▪ Held combined HR team meeting with new Bldg 10 colleagues on 9-Sep-09

▪ Scheduled Resumix Webex training for new HR staffing colleague on 11-Sep-09

▪ Scheduled Prosoft training for new HR colleagues from Bldg 10 (23 & 24-Sep-09)

▪ Scheduled New Managers/Supervisors Orientation & PP&R training for B10

Managers/Supervisors on 15/16/17 Sept-09

▪ Scheduled PP&R training for B10 employees starting 18 Sept; total 12 sessions

▪ Transferred Leave balances from PaySonnel and loaded them to ProSoft

Upcoming Activities: 1-week forward

▪ Continue final HR Compensation & Benefits sessions for B10 collegaues

▪ Conduct Resumix Webex training for new HR staffing colleague on 11-Sep-09

▪ Conduct New Managers/Supervisors Orientation & PP&R training for B10

Managers/Supervisors on 15/16/17 Sept-09

▪ Conduct PP&R training for B10 employees commencing 18 Sept; total 12 sessions

▪ Detail out the “post-close/integration wave 2/3” H2R/HR project plan

▪ Conduct LBS H2R Integration Debrief/Lessons Learned session on 15/16-Sep-09

▪ Fully transition project leadership from GNE SSF HR Lead to GNE Singapore HRD

▪ Acquire / transfer Paysonnel Payroll balances by 18-Sep (w/ Brenda & Siew Lee)

Upcoming Activities: 2-week forward

▪ Continue PP&R training for B10 employees starting 18-Sep; total 12 sessions

▪ Conduct Prosoft training for new HR colleagues from Bldg 10 (23 & 24-Sep-09)

▪ Refine “post-close/integration” Wave 2/3 H2R project plan

▪ Prepare H2R materials for the program wide LBS Lessons Learned (30-Sep) and

post-close Wave 2/3 workshop (1-Oct)

▪ Load Payroll balances to ProSoft by 1-Oct

Key MilestonesMilestone / Date - Status / Change this period?

Job Mapping Completed 13-Aug-09 N

Job Offers Extended 19-Aug-09 N

TSAer Onboarding 27-Aug-09 N

Onboarding Execution 31-Aug-09 Y

Employee Support (tables) 4-Sep-09 Y

Comp & Ben / eLeave Sessions 14-Sep-09 N

Action Plans for any yellow / red milestones:

Top 3 Risks Action Plan / Status

Data transfer/data migration complexity Ongoing testing and validation by

GNE HR Ops w/Lonza Rep & Vendor

Resource Planning Adjustments to resources w/back-up

plan based on revised project plan

Employee Retention GNE/Lonza collaboration-recruitment,

communication, cross-training

SGP Travelers (1-week forward)

Name Dates Approved (Y/N)

Virginia Vega 9-Aug - 10-Sep Y

Period Leader Project Manager Workstream Overall Status

10/11-Sep-09 C. Cheng / V. Vega M. Sepulveda Hire-to-Retire Green

Transition and Integration - Status Update

Project Dashboards

and Budgets by Team

Weekly Status Reports & Detailed

Project Gantts (MS Project)

# Risk ImpactP

rob

ab

.

Fa

cto

r

Se

ve

rity

Fa

cto

r

Ris

k

Ra

tin

g

Response

1▪ Limited BP/SAP resource

availability (SSF & SGP)

▪ Delay: Success integration of

business processes8 8 64

▪ Identify key resources early, get

commitment, and allow for contingency in scheduling

2

▪ Restricted window for

detailed HR employee information

▪ On-boarding experience and

payroll continuity for LBXS may not flow smoothly

8 8 64

▪ Increase resources in SGP at opt. exercise

▪ Get access to HR employee information prior to opt. exercise

3

▪ Lack of approval of design

and accompanying requirements for Day 1

processing by either Lonza

management or SGLT

▪ Successful Day 1 processes 6 8 48

▪ Provide adequate lead time for BPOs,

SGLT, Functional Leads and Lonzacounterparts to review and discuss design

options

4▪ The GNE Quality System

will not be fully deployed at LBXS prior to the PAI. The

lengthening of the QS

rollout - as necessitated by the shortening of Avastin

and Herceptin windows -exacerbated this risk.

▪ Operations: Potential confusion on extended usage

of two parallel Quality Systems

▪ Cost: Increases TSA costs for IT systems and risk of needing

Lonza staff longer▪ Staffing: Increases resource

load required from GNE CQSS

8 6 48

▪ Developing clear Quality Transition Plan▪ Developing Day 1 Quality operations plan

▪ Leveraging CQSS resources to provide

support for LBXS operations▪ Pre-training GNE mgmt. on LBXS QS

▪ Developing detailed staff training plans▪ Extend Lonza TSA IT syst. & staff if

required

5

▪ PAI: Potential impact to FDA approval depending on

regulatory sensitivity4 10 40

▪ Demonstrate "substantial equivalence" of Quality Systems through QP review

▪ Deploy QP's prior to Herceptin qual runs.

▪ Impl. for critical Quality Standards prior to PAI (Herceptin runs in some cases)

▪ Gap assessments and remediation plans in place for lower criticality QS's prior to PAI

Team Risk Management Plans

(with Severity/Probability and Mitigation Strategies)

# Decision

Fu

nc

tio

na

l

Te

am

Le

ad

SS

F/

SG

P

Co

un

terp

art

Wo

rkin

g

Te

am

Imp

ac

ted

Fu

nc

tio

na

l

Le

ad

(s)

LB

XS

Inte

gra

tio

n

Le

ad

er

BP

O

ES

C

1

▪ Affects function onlywith no material*

impact to overall timelines, deliverables, or resources)

D A R I

2

▪ Affects function only with material*

impact to overall timelines, deliverables, or resources)

R A I D

3▪ Affects timing of interdependent

functions (e.g., CIT, HR, quality, …)R A I A D

4▪ Requires change to GNE established

Global Business Processes (GBP’s)R A A** I D

5

▪ Affects integration strategy . . .

▪ . . . with impact to tech transfer, quallots, or licensure goals

R

R

A

A

A**

A**

D

I

I

D

* Refer to following page for “material impact” guidelines ** If applicable

RACI Type (RAPID) Decision

Making Framework

• Increases in TSA and

consulting offset by

decreases in nearly all other

areas

2009 LBXS Integration Spending (US$K)

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Travel Employee Exp Repairs &

Maint

Equipment TSA Consultants Contractors Temp Help Service Cont Other

May Fcst

Current

2009 2009 % 2010

May Fcst Current Inc/Dec Change Current

Travel 2,480$ 2,026$ (454)$ -18% 1,099$

Employee Exp 264$ 279$ 16$ 6% 192$

Repairs & Maint 498$ 518$ 20$ 4% -$

Equipment 733$ 733$ 0$ 0% -$

TSA 3,219$ 4,069$ 850$ 26% 284$

Consultants 5,056$ 5,461$ 404$ 8% 128$

Contractors 1,616$ 1,139$ (477)$ -30% 625$

Temp Help 1,709$ 1,239$ (470)$ -27% 1,040$

Service Cont 893$ 773$ (120)$ -13% 0$

Other 147$ 94$ (53)$ -36% 315$

Total 16,616$ 16,333$ (283)$ -2% 3,682$

24

• Assets and liabilities

• (transaction structure)

• Material contracts

• Licenses/Permits

• Regulatory/Fraud & Abuse

• Litigation

• Workforce/employment

• Tax

Identifying Post Acquisition Tasks: Legal Lens

Key Areas of Focus

25

• Understand low, medium and high-risk areas and resources

needed to address each

• Initial plan and steps:

• Goals

• Regulatory requirements: licenses, surveys, permits

• Material Contracts/Contract oversight

• Transition Services Agreements

• Technology

• HIPAA/Privacy Security

• Employment/People: employee defection

• Ongoing claims or litigation matters (indemnity/escrow)

Acquisition Roadmap: Legal Lens

Before Day 1

26

• Pre/Post Close: What contracts licenses and permits were

completed pre-close and what is outstanding post close.

• Post-Close Checklist

• Create a timeline and list for the following taking into

consideration the specific industry requirements, e.g., hospice,

home health, pharmaceutical, device, etc.

• Licenses and Permits

• Healthcare Service Providers

− License

− Permit

− Survey: are you aware of all prior deficiencies

• Life Sciences Pharma/Device

− FDA registrations, clearances, approvals

− Inspections: status of corrective actions

• HIPAA/Privacy gaps

Acquisition Roadmap: Integration Plan

27

• Post-Close Tracking as Important as Diligence

• Immediate plan to address any identified issues (e.g., HIPAA Security

Risk Assessment)

• Don’t file away the purchase agreement

− Indemnification

− Understand survival of representations and warranties, escrow

matters

• Potential Missteps

• Failure to assign workflow tasks

• Failure to ensure specialized expertise is part of integration

• Failure to develop integration plan pre-close

Key Integration Challenges: Legal Lens

28

Identifying Post-Close Acquisition Tasks

29

• Regulatory/Permitting Consents

• M&A transactions frequently trigger approvals, notices or waiting periods

from governmental authorities, including licenses and permits.

• The structure of the transaction may matter.

• Contract Counterparty Consents: Plan for Material Contracts

• M&A transactions may breach or change the rights and obligations of the

parties under certain contracts of the target without the consent of the

target’s counterparty.

− Anti-Assignment provisions – may be triggered by asset sales and certain

merger structures.

− Change in Control provisions – triggered in most M&A transactions.

− Termination for Convenience provisions – “triggered” in any event.

• Who is responsible?

Implementation Strategies: Regulatory & Third Party

Consents

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• Licensure/ CHOWs can impact

closing and post-close

implementation timeline

• Medicare/Medicaid typically post-

closing

• State licensure varies

• CON programs often biggest

timing impact

• Facilities, e.g., hospitals, ASCs,

SNFs, dialysis, hospice/HHA &

others

• Ownership changes

• Payors, too!

Post-Close Change of Ownership / Licensure

Certificate of Need States

Source: NCSL CON-Certificate of Need State Laws (Dec. 2019)

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• Relationships with healthcare professionals

• Compliance

• Culture

• Integration of policies, procedures and practices

• Compliance leader

• Leveraging best practices

Implementation Strategies: Key Relationships and Compliance

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• A robust compliance program teaches executives and employees to

recognize and avoid issues, ensures that questions can be answered

before they become problems, and allows existing problems to be

addressed.

• Compliance in “3D”:

− Deterrence

▪ Compliance programs can effectively communicate the risks to executives and employees and

arm them with the knowledge to recognize and avoid problems.

− Detection

▪ Effective compliance programs help companies to detect and address violations or problems at

an early stage, as well as take advantage of opportunities to reduce liability.

− Defense

▪ Effective compliance programs are integral to criminal and civil defense. For example, in

certain circumstances, if a company is found guilty, the sentencing guidelines will allow for a

reduction in a fine if the company has a compliance program in place. (See U.S. Sentencing

Guidelines section 8C2.5 (f)(1)).

Why Invest Post Close Compliance/Processes?

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• If you don’t know your information, you cannot protect against:

• Theft of IP

• Loss of competitive edge

• Data breaches / inadequate response

• Legal noncompliance

• Agency enforcement actions

• Reputational damage

Privacy/Technology – Post-Close Implementation Focus

• HIPAA Policies and Security Risk

Assessment (state privacy

requirements)

• Payment Card Industry Data Security

Standard (PCI DSS)

• All merchants who accept credit/debit

cards are required to comply with PCI DSS

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Technology Integration Key

Technology integration is a big risk factor. Recent survey notes the following

regarding three (3) key areas for potential issues for technology integrations:

1. Human error and configuration weakness (51%)

2. Connected devices (50%), and data

3. Management and storage systems (49%)

• 49% of respondents in a recent survey indicated they

encountered unknown or undisclosed cybersecurity incidents,

issues, or risks when integrating the acquired company’s

information and technology that delayed the integration timeline.

Source: Forescout, THE ROLE OF CYBERSECURITY IN MERGERS AND ACQUISITIONS DILIGENCE (2019) There were a total of 2,779 respondents from around the globe. Two audiences were chosen for

this study: IT Decision Makers (ITDMs; n=1283) and Business Decision Makers (BDMs; n=1496). The data was weighted to evenly represent audiences and regions.

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Corporate Restructuring

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• Addressing employment law issues identified during diligence

• Wage & hour issues seem to be most common (misclassification of

exempt/nonexempt, misclassification of employee/independent

contractor)

• Union

• Complaints/litigation

• Post-acquisition leadership selection

• Proper documentation

• Consistent communication regarding process

•

Employment

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• Reductions in Force

• Discrimination claims and proper OWBPA notices

• Disparate impact analyses

• The WARN Act (and similar state laws)

• Understanding offer letters, employment agreements, severance

plans, severance histories, etc.

• Understanding change-in-control agreements

Employment Implementation Issues

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• Merging Corporate Cultures & Aligning HR Policies

• Policies

− How company policies will be handled during post transition?

When are policies were effective, when they be revised?

• Leave policies

• Adhering to new state and local laws

• Comparing and combining benefit plans

• Addressing inconsistencies in restrictive covenants (and analyzing

successorship issues involving same)

• Identifying employees with performance problems and evaluating

documentation of issues and go forward plan

Employment Implementation Issues

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• Consider overall business objectives

• What entity is the going forward employer for employees

• Retention of key employees

• Payouts of or significant changes to wages/vacations/bonus/commission

• Transition of employee benefits: will different packages be maintained or will all

employees transition.

• Contracts assumed or assigned

• Employee onboarding

• Job titles and employment responsibilities

• Duplicative positions

• Confidentiality requirements

• Non-Compete enforcement

• Employee release/severance

• Maintain employment counsel to help oversee transition

Employee Integration Considerations

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• Key tax considerations conducted pre-close

• Tax consequences will be impacted by the structure of the

transaction and tax status of the Target

• Strategy may depend on structure (asset/stock), industry and

future strategic plans, e.g., future acquisitions or divestiture

• State law considerations

• Tracking/monitoring key during integration

• Continue to involve tax counsel during integration process

Tax

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Best Practice: utilize operational levers tied directly to the P&L

to identify EBITDA opportunity and capture it (1 of 3)

P&L Impact Global Operations Levers (representative list)

▪ Buying Power Leverage

▪ Low Cost Country Sourcing

▪ Design For Manufacturability

▪ Value Eng./Standardization

▪ Long Term Agreements

▪ ….

▪ Strategic Make vs. Buy

▪ Labor rate restructuring

▪ Plant rationalization

▪ Load realignment

▪ Lean Operations

▪ Overtime Reduction

▪ Plant Capital Investment

(Equipment, Tooling)

▪ ….▪ Network Optimization

▪ Service Level Segmentation

▪ Fleet Rationalization

▪ Strategic Procurement

▪ Scheduling Improvements

▪ 3PL Utilization

▪ ….

▪ Span of control adjustment

▪ Mfg SG&A (procurement,

planning, logistics)

▪ Indirect sourcing

▪ Facilities management

▪ Sales force realignment

▪ HR, Finance restructuring

▪ MIS Program Control

▪ Outsourcing

▪ ….

▪ Competitive T’s & C’s

▪ Compliance Management

▪ Supplier Warranty Recapture

▪ Remote Diagnostics

▪ Self/Remote Service

▪ Six sigma

▪ ….

▪ Inventory Obsolescence

▪ Service Parts Pricing

▪ ….

EBITDA

Raw Material

Manufacturing Conversion

Freight and Logistics

Other Non-Manufacturing

Warranty

Other

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R&D Expense

Cost of Goods Sold

R&D Non-labor Expense

Warranty

▪ Revenue acceleration

(time-to-market)

▪ Product/Market strategy

(revenue growth)

▪ VoC (product/customer value)

▪ ….

▪ Engineering efficiency/lean

engineering

▪ Low cost country sourcing

▪ Co-development and alliance

management

▪ Technology/IP leverage

▪ Span of control

▪ Licensing

▪ ….

▪ Complexity reduction

▪ Technology standardization

(enables buying power leverage)

▪ Platforming/Technology re-use

▪ Design for cost

▪ Value Engineering

▪ ….

▪ Engineering services

sourcing

▪ Facilities sourcing

▪ LCC site development

▪ ….▪ Design for six sigma

▪ Complexity reduction

▪ Technology standardization

▪ Design for serviceability

▪ ….

Revenue GenerationRevenue

EBITDA Margin

EBITDA


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Selling Expenses

G&A Expenses

▪ Optimize use of direct and indirect

channels

▪ Channel cost-to-serve / expenses

optimization

▪ Sales force span-of-control and

delaying

▪ Sales effectiveness

▪ Sales compensation plan retuning

▪ Territory optimization

▪ Outsourcing of select sales funnel

activities

▪ ….

▪ Service effectiveness (utilization,

cycle times, etc.)

▪ Service delivery outsourcing

▪ Contact center consolidation and

outsourcing

▪ Remote diagnostic

▪ Parts management optimization

▪ ….

▪ Sales support / operations

consolidation

▪ Low-cost country service centers

▪ Outsourcing

▪ Span of control / de-layering

▪ ….

Revenue / Margin

Cost of Services / COGS

Revenue

EBITDA Margin

EBITDA

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Zeid Barakat

[email protected]

Kate W. Hardey

[email protected]

Thank You

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post-closing integration issues in m&a: developing...

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