Integrating Mergers and Acquisitions

1. Integrating Mergers and Acquisitions Joan Brown, Matt Burden, Clyde Choi, Aimee Hartono, Noam Kleinman, John Maziarz

2. Team Members Joan Brown • BS Biomedical Engineering Boston University • MBA Boston College • 5 years experience in clinical engineering Matt Burden • BA English Butler University • MBA/MSF Boston College • 8 years experience in finance and accounting Clyde Choi • BA Philosophy Minor in Theology and Economics Boston College • JD Boston College

3. Team Members • BA Anthropology, concentrations in Southeast Asian Studies, Asian American Studies • JD Boston College Aimee Hartono • BA Social Science and Government Harvard University • MBA Finance and Global Management Boston College • 11 years experience in the real estate industry Noam Kleinman • BS/MS Mechanical Engineering, Northeastern University • MBA Boston College • 7 years experience in consumer goods and aerospace John Maziarz 3

4. Agenda Why a merger and acquisition (M&A)? What is a M&A? Integration stages and steps Types of M&A integrations “Insert Chinese Text Here” 4

5. Agenda Details of each type of M&A integration Synergy potential: benefits of the M&A type Goals: Why choose this type of M&A integration Challenges of the integration Case example of the M&A type Recommendations Summary and Conclusion 5

6. Why M&A Mergers and acquisitions Faster to execute Acquire valuable strategic assets Efficiency increase Self expansion Only when an appropriate target is unavailable 6

7. A Key Point Mergers are “marriages” between firms They can be dysfunctional, unequal Can result in expensive break-ups To have a successful merger Choose your partner wisely Communicate goals Be flexible to changes 7

8. M&A Process Stages Transition Stage Strategic Financial Objectives Integration Stage Transaction Stage Evaluation 3

9. Strategic & Financial Objectives Enter a new geographic market Consolidate within a geographic area Extend product or service line Vertically integrate value chain Enter a new line of business 9

10. Synergy The combinations of two elements create a greater value then just the sum of the two 1 + 1 = 3 10

11. Transaction Stage Analyze all possible information about the target Anticipate roadblocks to effective integration Environment that preserves the value of both companies 11

12. Transition Stage Strategic and financial objectives drive transition decisions Comprehensive and effective integration plan is developed Collaboration and commitment of key contributors 12

13. Integration Stage Merger integration officer Teams for each area of the business Retaining key contributors 13

14. Evaluation Stage Process for ongoing assessment Long-term transition teams Organizational flexibility 14

15. Mergers & Acquisitions (M&A) Types of M&A Horizontal Vertical Diagonal Conglomerate How is this different? 15

16. Horizontal M&A Company A Merged Company A&B Company B Merging companies produce similar products in the same industry 16

17. Horizontal Goals • Consolidate industry capacity • Enhance research and development • Geographic expansion 17

18. Horizontal Synergy Potential • Cost synergy • Revenue synergy • Intangible synergy 18

19. Horizontal Challenges • Management groups may fight for power • Integrate company values, management styles, and company cultures • Speed and degree of employee integration from acquired company • Retaining talented employees • M&A’s of similarly sized companies will be more challenging 19

20. Horizontal Recommendations Consolidate industry capacity • Be careful not to assume your resources are better than the target company's resources • Do not expect people to destroy something they have spent years creating • Improve your own company’s integration process quickly • Early agreement on management processes is necessary • To be successful, processes and values should be the same 20

21. Horizontal Recommendations Research and development • Understand capabilities • Cultural due diligence is important • Quick cultural integration necessary • Place key successful executives in charge of integration • Balance personal and organizational goals 21

22. Horizontal Recommendations Geographic expansion • Retain important employees and customers • Create practical timeline for cultural transformation • Establish monitoring and training program 22

23. Horizontal ExampleBMW’s Acquisition of Rover Rover acquisition driven by industry consolidation • Expansion necessary to maintain independence • BMW seen unlikely to survive consolidation period • Toyota aggressively attacking luxury segment 23 http://www.bmw.com http://www.landrover.com

24. Horizontal ExampleBMW’s Acquisition of Rover Rover acquisition driven by industry consolidation • Management wanted to protect BMW brand • Did not want to weaken the image of BMW • Land Rover and MINI segment most famous brands • $2.6 billion (USD) purchase included Rover brand • Rover’s troubles hidden by glamorous other brands 24 http://www.bmw.com http://www.landrover.com

25. Horizontal ExampleBMW’s Acquisition of Rover Challenging acquisition throughout • Difficult to fix operations and reduce costs • Volatile currencies and labor agreements with Britain increased costs • Rover added thousands of employees prior to finishing transaction • After acquisition, BMW found that Rover had not emphasized cost control for decades 25 http://www.bmw.com http://www.landrover.com

26. Horizontal ExampleBMW’s Acquisition of Rover Challenging acquisition throughout • Rover consumed vast BMW resources • First large acquisition doubled BMW’s size • Rover problems pulled resources away from BMW • Language and cultural barriers encountered • BMW sold Rover and Land Rover in 2000, kept MINI • Acquisition incurred a net loss of $7 billion (USD) 26 http://www.bmw.com http://www.landrover.com

27. Horizontal ExampleBMW’s Acquisition of Rover Some possible lessons learned from this case • Due diligence necessary for integration strategy • Passive approach resulted in substantial losses • Management consultants identified fatal flaws 2 years later • Significant resources consumed to improve operations and restore profits 27 http://www.bmw.com http://www.landrover.com

28. Horizontal ExampleBMW’s Acquisition of Rover Some possible lessons learned from this case • Significant risks in trans-national acquisitions • Currency volatility can impact cost savings • National history can affect trust between firms • Cultural / language differences negatively impact integration 28 http://www.bmw.com http://www.landrover.com

29. Horizontal Integration Activities Horizontal integration checklist: • Consolidate and standardize organizational functions • Resolve cultural differences quickly • Minimize excess management and employees 29

30. Vertical M&A Two firms, each working at different stages in the production of the same good Supplier Manufacturer Distributor 30

31. Vertical Goals Value Chain Backward integration – supply chain Forward integration – distribution chain Supplier Manufacturer Distributor 31

32. Vertical Synergy Potential Cost synergy Revenue synergy Intangible synergy 32

33. Vertical Challenges Integrating company values, management styles, and company cultures Educating organization on new functional areas Retaining talented employees 33

34. Vertical Recommendations Integrate different company entities in moderation Structure organization to maximize value chain For forward integration – maintain or improve the quality of relations with customers 34

35. Vertical ExampleConsolidating Coca-Cola’s Bottlers Market forces as a primary driver • Pepsi successfully eroded Coke’s market share in 1970’s • “Pepsi Challenge” convinced consumers to switch • Independent bottler network restricted flexibility • Retail price increases difficult to push through network 35 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

36. Vertical ExampleConsolidating Coca-Cola’s Bottlers Market forces as a primary driver • Period of high inflation strained relationships with bottlers • 1978 contract renegotiated to provide pricing flexibility • Coke significantly increased raw material prices after contract signed 36 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

37. Vertical ExampleConsolidating Coca-Cola’s Bottlers Turbulent 1970’s strained Coke’s bottler relationship • Financially weakened bottlers uncooperative with Coke • Small independent franchised bottlers most affected 37 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

38. Vertical ExampleConsolidating Coca-Cola’s Bottlers Turbulent 1970’s strained Coke’s bottler relationship • Low margins across bottler network a result of: • High advertising spending • Product and packaging expansion • Widespread retail price discounting 38 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

39. Vertical ExampleConsolidating Coca-Cola’s Bottlers Turbulent 1970’s strained Coke’s bottler relationship • Bottlers resisted Coke’s persuasion to participate in: • Marketing and promotion programs • Upgrading of bottling plants and equipment • Support new product launches 39 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

40. Vertical ExampleConsolidating Coca-Cola’s Bottlers Restructuring reduced costs and improved control • Coke re-franchised bottling operations in 1980’s • Purchased several underperforming bottlers • Sold improved operations to best-in-class bottlers • Flexible pricing agreements replaced rigid contracts 40 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

41. Vertical ExampleConsolidating Coca-Cola’s Bottlers Coca-Cola enterprises (CCE) is Coke’s bottler • Capital-intense operation drove creation of subsidiary • Coke maintains significant influence on operations • Coke continually purchases bottlers, selling to CCE • CCE handles 70% of North American volume 41 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

42. Vertical ExampleConsolidating Coca-Cola’s Bottlers Coca-Cola Enterprises (CCE) is Coke’s bottler • CCE focuses exclusively on bottling operational costs • Investment in high capacity automated operations • Merged small territories into larger geographic regions • Renegotiated prices with suppliers and buyers 42 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

43. Vertical ExampleConsolidating Coca-Cola’s Bottlers Coca-Cola Enterprises (CCE) is Coke’s bottler • CCE focuses exclusively on bottling operational costs • Eliminated duplicate distribution and overhead systems • Reduced workforce by 20% 43 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

44. Vertical ExampleConsolidating Coca-Cola’s Bottlers Some possible lessons learned from this case • Vertical integration assisted by established bottler network • Increased control improved Coke’s competitiveness • Best bottlers led transformation of operations 44 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

45. Vertical ExampleConsolidating Coca-Cola’s Bottlers Some possible lessons learned from this case • Vertical integration assisted by established bottler network • Financial burden forced spin-off of bottling group • Re-franchised bottler delivered significant savings • Coke redefined industry operations, Pepsi followed 45 http://www.coca-cola.com/index.jsp http://www.pepsi.com/

46. Diagonal M&A Vertical Diagonal Horizontal Two firms in related industries, such as a merger between a bank and a leasing company

47. Diagonal Goals • Contain both horizontal and vertical goals in varying degrees • New opportunities for value creation • Expand networks and services • Streamline processes

48. Diagonal Synergy Potential • Cost synergy • Revenue synergy – new product mix • Intangible synergy

49. Diagonal Challenges • Integrating company values and cultures • Developing an action plan • U.S. government regulations

50. Diagonal Recommendations Refer to Horizontal and Vertical M&A recommendations Important concepts: Invest in thorough research Integrate in moderation Keep important employees 50