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Actual vs. Expected Merger Results

Actual vs. Expected Merger Results. Presented by: Steve Lundregan Vice President Nationwide Insurance Presented for: CAS Valuation Seminar St. Louis, MO April 10-11, 2000. Actual vs. Expected Merger Results Presentation Objectives.

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Actual vs. Expected Merger Results

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  1. Actual vs. Expected Merger Results Presented by:Steve Lundregan Vice President Nationwide Insurance Presented for:CAS Valuation Seminar St. Louis, MO April 10-11, 2000

  2. Actual vs. Expected Merger ResultsPresentation Objectives • Discuss experiences with M&A and share some of the pitfalls, considerations and surprises encountered • Key points: • Value is in the “business model” • Validate • Implement • It’s all about people!

  3. Actual vs. Expected Merger ResultsBackground • In 1998 alone, there were 101 Property & Casualty Insurance deals totaling $42.8 billion with a median price earnings ratio of 28.5x. (per SNL Securities M&A Scoreboard) • The substantial premiums being paid require extraordinary diligence in all aspects of doing the deal. • Making the deal work becomes as important as getting a good deal. Know what you are looking for and what you will do -- The importance of the “Business Model”

  4. Actual vs. Expected Merger ResultsAcquisition Approach • Growth: • Geographic expansion • Distribution capabilities • Auto focus M&A Objectives (1997) • Profit: • Target ROR • No “Fix-its” • Integration bias ‘97 Aspiration =$ 1 billion from M&A

  5. Actual vs. Expected Merger ResultsAcquisition Approach Players: Nationwide Nationwide Insurance-- P&C Business Unit Finance-- Corporate Development General Counsel-- Legal Other Support: Systems Human Resources Investments Tax

  6. Actual vs. Expected Merger ResultsAcquisition Approach

  7. Actual vs. Expected Merger ResultsDeals We’ve Done... Total original premium= $1.4 b 1997 1998 1999 DistributionIndependent AgentsIndependent Agents Independent Agents Geography75% "Fit" 90% "Fit" 100% "Fit" Products Auto & Home Personal & Commercial Personal Auto & Farm

  8. Actual vs. Expected Merger Results1997 TIG Deal Business Model: Expected Actual • Consolidate staff functions • Grow Independent Agency business • Use Nationwide brand • Exit non-core businesses • Consolidate staff functions • Contracted IA business • Use Allied brand • Exit Battle Creek, MI Issues: 1. Changed direction 2. The Allied deal 3. Implementation plan ownership

  9. Business Model: Expected Consolidate staff functions Grow IA business Exit non-core businesses Use Nationwide brand Leverage claims/commercial expertise Actual vs. Expected Merger Results1998 Allied Deal Actual • Consolidate staff functions • Grow IA business • Exit non-core businesses • Use Nationwide brand • Leverage expertise Issues: 1. New Leadership 2. In-separable model 3. Changed view on integration bias Financial Benefits ($ millions/year): ExpectedActual Performance Improvements $40-$80 Undetermined Cost Avoidance $10-$25 $20 Total $55-$105 Low end of range

  10. Actual vs. Expected Merger Results1999 CalFarm Deal Business Model: Expected Actual • Consolidate staff functions • Consolidate operations • Use Nationwide brand • Leverage sponsorship • Consolidate staff functions • Consolidate operations • UseAllied brand ? Leverage sponsorship Issues: 1. Change in Allied Model 2. Discovered acquisition competence at Allied 3. Will model work in Allied culture?

  11. Business Model Design Checklist (Value Drivers) Separable (Will it still work if we take it apart?) Scaleable (How fast can we grow?) Transportable (Will it work in a new environment?) Deliverable (Will it deliver what you want? Can/will we do what we said we would do?) Flexible (Can the model change if the business environment and/or requirements change?) Actual vs. Expected Merger ResultsLessons Learned What did we learn about Business Model design?

  12. Actual vs. Expected Merger ResultsLessons Learned Continued • Business Model Implementation • Critical Success Factors: • Firm & consistent management direction • Business ownership of plans and results • Frequent & frank communication • Effective leadership for commitment (not just compliance) • 1. Managing • 2. Leading • 3. Knowing the difference What did we learn about Business Model implementation?

  13. Actual vs. Expected Merger ResultsConclusion # 1 Takeaway: “The bottom line is the front line” or… “It’s the people, stupid!” The “Butterfly Effect” applies...

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