May 18, 2004

1. May 18, 2004 Financial Executive InternationalM&A Issues Dealing With Plan Combinations and Integration Presenter: Len Gray 312 902 7646 len.gray@mercer.com

2. Agenda • Section 1 – M&A Overview • Section 2 – Pre-Deal Strategy & Planning • Section 3 – Due Diligence • Section 4 – Integration

3. M&A OverviewKnow key M&A frameworks and terminology

4. M&A OverviewWhy they fail – difficulty of addressing key employee issues M&A integration issues vary greatly in terms of importance to the organization and difficulty to achieve… Difficult but Less Important Difficult and Very Important High Linking IT/ systems support 1 Stabilizing the organization and addressing key employee issues Rationalizing processes Stabilizing and building support within the customer base 1.5 Identifying potential operational efficiencies and combining plants and/or locations effectively 2 Maximizing the advantage from accounting strategies 2.5 Not Difficult and Less Important Not Difficult but Very Important 3 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Low High Level of Importance Source: Mercer, Inc.

5. M&A Overview High level process Due Diligence Do by Close Integration Strategy and Planning CLOSE Human Resource Function Leadership Total Remuneration Project Planning Workforce & Staffing Alignment Integration Planning Sales Force Performance Management Compliance Organization Engagement Project Management

6. Pre-Deal Strategy & Planning Align action plan with merger rationale

7. Pre-Deal Strategy & PlanningAssessing human capital issues Strategy & Planning Strategic People Implications • Build understanding of the deal and potential targets • Build organizational readiness for business transactions • Build Human Resource function readiness for business transactions

8. Consolidation Geographic Expansion Extend Product Portfolio Add Intellectual Capital Industry Convergence Achieve Critical Mass Pre-Deal Strategy & PlanningMerger rationale and strategic objectives Strategic Objectives Acquirer - part of industry with excess capacity - eliminates capacity, gains market share, and creates a more efficient operation Successful company expanding geographically - operating units remain local Acquisitions extend a company’s product line or its channel coverage Acquisitions are used in lieu of in-house R&D to build a market position quickly Company bets on new industry emerging and establishes a position by calling resources from existing industries w/ eroding boundaries A company increases its size significantly to achieve minimal competitive size or to reduce the risk of “blockbuster” failure

9. Merger Rationale Geographic Expansion Added Intellectual Capital Extended Product Portfolio Industry Convergence Consolidation Critical Mass Critical People Issues Business & Organizational Design Leadership Resourcing Rewards Performance Management Cultural Integration Organizational Engagement & Communication Employee Relations Employment Legal Issues HR Organizational Infrastructure Merger Rationale adapted from Not All Mergers Are Alike, Joseph Brower, HBR, March 2001 Pre-Deal Strategy & PlanningPrioritizing critical people issues

10. Environment Strategy Actions Build understanding of business drivers the deal Facilitate alignment of business drivers with “people issues” and the HR organization Key steps to implement the strategy Pre-Deal Strategy & Planning Build M&A context Capture business leaders’ perspectives on… Barriers Winning Identify major impediments to achieving success Provide clear understanding of the outcomes of transaction

11. Due Diligence Understand important executive and employee issues

12. Due DiligenceGlobal self-audit • Identify and resolve own issues before integrating acquisitions • What programs do we have, and why? • Systems, processes and tools • Cost and liabilities • Where (and who) is our key talent? • What needs to change pre and post acquisition? • How easy will change be? • How does it vary by country? • Too often companies think they know themselves because they know themselves in their HQ country

13. Due DiligenceKnow thyself

14. Due Diligence Key topics to address Employment Agreements HR Function Payroll & Salary Grade Structure Retirement & Other Employee Benefits Organization Culture The “Deal” Perquisites Short-term Incentive Comp CIC Plans/ Parachutes Long-term Incentive Comp Deferred Compensation

15. Due DiligenceThree levels of thinking. . . Liability Scale Identify any potential “deal breakers” • Where each issue sits on this scale is influenced by: • Size of the deal • Risk tolerance of acquirer • Acquirer familiarity with specific risk Identify factors requiring adjustment to purchase price and/or deal terms Collect information to identify integration issues and begin planning

16. Due DiligenceResolution of potential issues Resolution of Potential Issues Employment Agreements Potential Issues • Large/excessive severance/change in control payments (e.g., as percentage of market capitalization) • Informal benefit promises • End negotiations/ do not do deal • Adjust acquisition price down • Large number of employment agreements • Large severance payment multiples • Broad application of severance plan • Awareness and timing of severance (e.g., staggered terminations) • Adjust acquisition price down

17. Due Diligence Resolution of potential issues Resolution of Potential Issues Payroll & Salary Grade Structure Potential Issues • Large payroll expense • Awareness/integration recognition • Large number of Union employees • Complex or different salary philosophy/structure • Awareness/understanding of Union contracts • Evaluate translation into acquirer structure prior

18. Due DiligenceResolution of potential issues Resolution of Potential Issues Retirement & Other Employee Benefits Potential Issues • Negotiate acquisition price and remedy compliance concerns via reps & warranties and/or indemnification • Negotiate with target’s actuaries; apply own assumptions • Unfunded or underfunded obligations • Inappropriate valuation assumptions • Noncompliance • Asset transfers • Change in control provisions • European Works Council • Review alternative approaches Negotiate acquisition price • Negotiate

19. Due DiligenceResolution of potential issues Resolution of Potential Issues Retirement & Other Employee Benefits Potential Issues • Significant exposure to risk due to inappropriate or lack of insurance • Get coverage in place by closing • Negotiate adjustment to acquisition price • Review potential liability exposure. Get coverage in place by closing if appropriate • Benefits triggered on sale • Unpaid claims • Policy or contract lapse on change in control

20. Due DiligenceResolution of potential issues Resolution of Potential Issues Short-term Incentive Comp Potential Issues • Guaranteed bonus payments • Awareness/lower acquisition price • Variance in bonus targets or measures between companies • Variance in eligibility between companies • Recalibrate upon integration using buyer’s plans OR rollover the target’s plan • Use buyer’s eligibility and phase out/in target’s participants over time

21. Due DiligenceResolution of potential issues Resolution of Potential Issues Long-term Incentive Comp Potential Issues • Large number of “in the money options” • Include options in share price calculation / adjust price per share • Large number of unvested options outstanding that are “out of the money” • Roll current outstanding options into acquirer company plan (e.g., exchange ratio) • Cancel options • Large number of unvested options outstanding that will vest and be exercised immediately following a change in control • Large number of restricted shares that will vest as a result of a change in control • Recognize and consider lost tail value in current options when making grants to continuing employees • Consider making retention grants for key individuals if significant turnover risk exists

22. Due DiligenceResolution of potential issues Resolution of Potential Issues Deferred Compensation Potential Issues • Large deferred compensation account balances with no funding or security • Purchase price should reflect payout of all account balances • Acquiring company does not have deferred compensation plan for current participants to roll-over account balances • Create deferred compensation plan at target (for current participants or larger group) • Payout balances to participants

23. Due Diligence Resolution of potential issues Resolution of Potential Issues CIC Plans/ Parachutes Potential Issues • Large cost exposure • Large number of “single trigger” change in control protections • Purchase price should reflect full cost of payments, including tax liability • Awareness/determine whether immediate turnover will be a significant issue, create need for retention strategy • Large number of employees with change of control gross-up provisions • Large number of “double trigger” changing in control arrangements • Awareness/potential purchase price adjustment

24. Benefits and Perquisites Executive/Director’s Life Insurance Company Car and Driver Executive Health Loans Vacation & Holidays Retiree Health Profit sharing Executive and Individual Retirement Promises Long service leave and bonuses Financial Planning Due DiligenceOther executive benefits and perquisites Perquisites Note also: Director’s Compensation (often administered by Corporate Secretary, Legal Department or CEO’s office)

25. Due Diligence Resolution of potential issues Resolution of Potential Issues Potential Issues Organization Culture • Executive level differences – “social issues” • Understand own culture; “strengthen strengths”; address shortcomings before deal • Differences in country/geography cultures • Substantial differences in human capital strategy or business model (labor-intensive v. capital-intensive) • Substantial differences in employee relations history and management/employee attitudes toward unions • Differences in attitudes and behaviors regarding achievement, environment, perspective, power & risk • Build employee and HR readiness for deals • Follow same approach for target DD as for self-analysis • Differences in expectations regarding transaction • Achieve alignment through change communication

26. Due DiligenceLearn from cultural differences

27. Due Diligence Resolution of potential issues Resolution of Potential Issues HR Function Potential Issues • Multiple, fragmented systems • Unreliable employee data • Plan administration compliance issues Significant difference in governance, service delivery model or HR competencies • Poor relationship with management, employees • No transaction experience • Ineffective ability to execute • Unlikely an HR operations issues would stop the deal or have a significant impact on price (possible exception: extreme non-compliance that cannot be quickly fixed) • Differences in staffing levels, processes and structure • Address issues in integration planning and execution

28. Integration Prepare for pre-close, “day 1”, immediate and extended integration

29. Integration Project Planning Value from an acquisition Project Planning The value realized from an acquisition is directly related to the success of the execution of the integration – the more successful, the more value; the less successful, the less value • Identify internal/external team • Build transaction context

30. Integration Project PlanningElements of integration Due Diligence Do by Close Integration Strategy and Planning CLOSE Human Resource Function Leadership Total Remuneration Project Planning Workforce & Staffing Alignment Integration Planning Sales Force Integration Performance Management Compliance Organization Engagement Project Management

31. Integration Project Planning Key steps Integration Pre-deal Doing the deal Know the process Know the target Assess situation Develop project charters Prioritize key areas Prepare your team Identify distinct projects Create detailed plan

32. Integration Integration process map DO BY CLOSE CLOSE IMMEDIATE INTEGRATION EXTENDED INTEGRATION • Design HR structure • Identify HR staffing • Develop technology transition / integration • Make insourcing / outsourcing / cosourcing decisions F O R M P R O J E C T T E A M S Human Resources Function Leadership • Identify leadership behaviors • Select/deselect leadership • Develop assessment and feedback • Develop transition arrangements Total Remuneration • Develop framework and philosophy • Review compensation and benefits with gap analysis • Design / Implement compensation and benefits program Workforce and Staffing Alignment • Develop understanding of target and current state • Perform initial employee selection / deselection • Develop retention / transition strategy • Develop performance management system • Perform customer analysis • Perform sales analysis • Design new sales program • Assess customer service / programs Sales Force Performance Management • Identify desired behaviors and achievements • Assess desired behaviors and achievements • Reinforce desired behaviors and achievements Compliance • Assess legal compliance – retirement, employment practices / contracts • Review HR policies and programs • Address employee relations issues – formal and informal • Review communication strategy and materials for key messages • Conduct preliminary assessment of communications channels • Develop media and audience matches • Specific plans – pre-close, “first 100 days”, longer term • Characterize current and desired cultures • Identify cultural gaps/differences • Understand business implications of cultural differences • Identify workout strategies to join cultures by engaging employees • Execute engagement events Organizational Engagement • Resolve tension between results, time, resources • Prioritization of issues/challenges • Integrated project plan and detailed plans for specific tracks • Track execution and achievement of goals • Capture learnings for continuous improvement ProjectManagement

33. Integration Total remuneration Total Remuneration • Main concerns • How do we retain and motivate key people in all parts of the merged organization? • What are the appropriate short and long-term reward packages which will help to achieve business and cultural strategic goals? • Base and variable compensation programs? • Retirement programs? • Health and Group programs? • Expatriate programs? • Miscellaneous programs?

34. Integration Total remuneration – do by close • Stock purchase – often nothing, everything comes with the deal, but not always. Need employee communication strategy and integration plan • Asset purchase: • works council consultation/negotiation • payroll (including expatriate administration) • employment contracts • insured contracts/ risk assessment • retirement plans (assets, liabilities, administration) • HR systems, tools and processes • HR function • transition services agreement (not available everywhere) • employee communications • integration plan

35. Integration Total remuneration – close • Global roll-out of employee communications • Due diligence on all transition activities • Manage any “delayed” closings as effectively as possible • Don’t let up on transition project management

36. Integration Total remuneration – post close • A thorough due diligence makes integration easy, but reality is that HR rarely has all the information needed, or sufficient time to have developed a full integration strategy, so: • Integrate rapidly, or don’t integrate at all! • Key integration challenge: harmonizing benefits without increasing costs Develop Perform Develop a global compensation and benefits strategy gap analysis between current practice(s) and strategy implementation plan (including grandfathering of existing programs, but keep grandfathering to a minimum

37. M&A Overview High level process Due Diligence Do by Close Integration Strategy and Planning CLOSE Human Resource Function Leadership Total Remuneration Project Planning Workforce & Staffing Alignment Integration Planning Sales Force Performance Management Compliance Organization Engagement Project Management

38. Q A & Q&A