VALUE CREATION IN MERGERS & ACQUISITIONS

1. VALUE CREATION INMERGERS & ACQUISITIONS BYK S SRINIVASA MURTYHead - Corporate Knowledge ManagementHindustan Lever Limited

2. STRUCTURE OF PRESENTATION • Role & Relevance of M&A • Value Capture during Transition Management : The case of HLL and TOMCO Merger • Strategic case for the merger • Key steps in transition management • Value capture during and post Integration

3. ROLE & RELEVANCE OF M & A • Mergers & Acquisitions add value through • strengthening the core businesses • expanding product - market scope • capitalizing on economies of scale • benefiting from technology / skill transfer

4. SOME FUNDAMENTAL ISSUES • What are the expected benefits immediately and in the longer term • What are the expected costs for the acquisition as well as the resources to be committed for securing all the benefits visualized • what is going to be the likely environmental fall-out

5. Strategic fit: • Is it consistent with the business strategy? • Will it significantly change the way you do business or compete in that product category? • How will it add or develop your core capabilities? • Quality of strategic and economic analysis. • Effective due-diligence. • Ability to capture synergy, improve operations, or both. • Managing the process of integration. THE CRITICAL SUCCESS FACTORS

6. Over 60% of the mergers & acquisitions end in failure • key reasons for failure: • Failure to capture the merger synergies, improve the company's operations or both, • Poor management of post merger integration

7. Value Capture During Transiton Management A Case Merger Of HLL And TOMCO

8. 75 year old company Excellent brands (Hamam, 501,OK) Declining sales High operating losses Excessive overhead costs Low productivity of assets Severe liquidity crisis TOMCO IN 1992/93 Serious problem of viability !

9. TOMCO VS. HLL-- KEY DATA RsCrores TOMCO HLL Mar ‘93 Dec ‘92 Turnover 312 2100 PBT 1* 183 Equity 21.5 140 Employees 5225 10000 Sales (Tonnes) 132500 689000 Manufacturing Units 10 14 (*Not adjusted for profit on sale of investments)

10. STRATEGIC CASE FOR THE MERGERHLL’S PERSPECTIVE • Strengthen core business through : • Strong ethnic brands - Hamam / 501/ OK • Brand complementarity / Positioning

11. STRATEGIC CASE FOR THE MERGERHLL’S PERSPECTIVE • Geographical complementarity • Strong market position in South • Manufacturing base in South • Saving of future capital expenditure

12. STRATEGIC CASE FOR THE MERGERTATA / TOMCO’S PERSPECTIVE • TOMCO business not a core priority area for the TATA’s • Significant funds needed to revive / restructure TOMCO business • Need to strengthen marketing / technology for TOMCO business • Need to identify a partner with a compatible corporate culture

13. TRANSITION MANAGEMENT KEY ISSUES • Leadership & functional support through an empowered senior Integration Team / Transition Management Team • Turnaround Strategy - setting out priorities • Managing the integration • Full fledged communication plans - both internal & external, backed by a statement of corporate vision / corporate misson • Cultural issues

14. HLL team Head of Integration Team Finance & Commercial Advisor Technical Advisor Marketing and Sales Advisor Human Resources Advisor TOMCO team Key senior officers , each assisted by a few officers TRANSITION MANAGEMENT TEAM (‘INTEGRATION TEAM’ )

15. TRANSITION MANAGEMENT TEAM KEY TASKS • Contain losses and expedite the turnaround of TOMCO • Maximize the realization of the synergies • Introduce systems, procedures and controls to facilitate smooth integration

16. TRANSITION MANAGEMENT TEAM KEY TASKS • Structure TOMCO operations for integration with HLL • Address key strategic issues in each of the functional areas - marketing / sales, commercial, manufacturing and personnel

17. TURNAROUND STRATEGY PRIORITIES • Margin improvement • Liquidity management • Rationalize overhead costs by • Avoiding duplication in sales & distribution system • Developing a long term manufacturing strategy

18. MARGIN IMPROVEMENT KEY STEPS • Souring economies • Oil buying / imports • Rationalization of 3P Contract Manufacturers • Reduction in manufacturing costs • Technical efficiencies • Optimization of formulations • Rationalization of support expenditure

19. INTEGRATION MANAGEMENT THE APPROACH • Fully involve TOMCO management in preparing and implementing the revival plans • Mutual trust & respect create long term foundation for successful marriage • Set in place MIS to review the progress • Organize review meetings and functional conferences • Create a learning environment

20. INTEGRATION MANAGEMENT KEY ISSUES • Manage transition without loss of morale • Understand and bridge cultural differences • Invest in development and retraining of retainable managers / staff • Capture the synergies in the combined operations • Prepare and implement the restructuring plans • Protect the key assets- brands, key personnel, key customers and key suppliers - during the transition period

21. INTEGRATION MANAGEMENT CONTROL ISSUES • M&A is already a structural discontinuity for both the participants - avoid introducing ambitious systems alien to both companies ( too much too soon) • Competition / customers /employees can take advantage of confusion / control weaknesses in transition period: • MIS is vital, systems provoke / condition behavior • focus on possible leakages ( e.g. debtors, stock flows & cash flows) • Necessary to over resource the organization in terms of experience / skills to manage discontinuities.

22. HLL TOMCO Factories 53 C&FAs 37 2976 RSs 2050 502000 Wholesalers Retailers 358000 Consumers INTEGRATION MANAGEMENT SALES & DISTRIBUTION SYSTEMS

23. INTEGRATION MANAGEMENT SALES AND DISTRIBUTION SYSTEMS KEY STEPS • Optimization of sales & distribution network • Joint evaluation of 5000 RSs & 90 C&Fas • Territory realignments (coverage plans) • Identification of personnel for retention & training inputs • Harmonization of invoicing & banking systems

24. INTEGRATION MANAGEMENT MARKETING KEY STEPS • Reposition/ relaunch key brands with • Improved product features • Focussed brand positioning • Effective advertising

25. INTEGRATION MANAGEMENT TECHNICAL & MANUFACTURING KEY STEPS • Harmonization of operations and upgradation for • Manufacturing flexibility • Optimization of product formulations • Productivity & efficiencies • Training & skill upgradation • Rationalization of sites

26. INTEGRATION MANAGEMENT COMMERCIAL KEY STEPS • Institute proper controls & reporting systems • Harmonize systems & procedures to facilitate smooth integration • Conduct an internal audit study to review the internal controls environment • Integrate buying & logistics management

27. INTEGRATION MANAGEMENT HUMAN RESOURCES KEY STEPS • Bridge the cultural gap • Training & development of TOMCO employees identified for retention • Harmonization / fitment • Counter the opposition of the unions to the merger • Design suitable voluntary separation schemes

28. COMMUNICATION STRATEGYTHE KEY TO SUCCESS • Establish role clarity / expectations • Consistency, openness, frankness • Effective dialogue with union leadership

29. COMMUNICATION STRATEGY KEY STEPS • Informal communication through • Task forces • Periodic review meetings / functional conferences • Formal communication sessions ( immediately after legal merger) • Communication kit / audio visuals • Familiarization courses

30. CULTURAL ISSUES • Cultural differences arise due to many reasons: • Management style • Standards of performance evaluation • Remuneration practices • Employee relations practices • Value systems

31. Multiplicity of interactive skills Tremendous patience Perseverance Sensitivity to human feelings BRIDGING THE CULTURAL GAP -- HOW ? Without loosing sight of the objectives of the merger / acquisition

32. LESSONS LEARNT • It is essential to capture real synergies , realize restructuring opportunities and improve the operations through transfer of skills / know-how • Task forces incorporating members of both companies should be empowered to realize these opportunities • MIS should be used to continuously monitor progress

33. LESSONS LEARNT • Success in transition management will depend on how well thepeoples’ issueshave been handled

34. LESSONS LEARNT • Understand andbridgethe cultural differences • Communicate effectively and involve people • Establish credibility , transparency, honesty, fairness in all actions

35. LESSONS LEARNT • Invest in training and skill upgradation of retainable employees • Bring latent problems to the surface. Face them squarely and handle them • Manage the transition without any loss of morale

36. CONCLUSION M&A are exciting, sexy and a quick road to growth, but they can turn into nightmare if not well thought out before hand and not well managed afterwards”.