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Volume 1 Issue 1
M&A Leverage
Volume 1 Issue 1
A bi-annual publication that presents seminal thinking and leading insights on M&A in the human resources and risk space.
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Feature:
Buying Opportunities in North America and Europe
2 7 10 15
Human Capital:
Doing Your Due Diligence: Understanding Potential Human Capital Considerations Decoding the Joint Venture Double Helix
Risk:
Overcoming Risk Roadblocks in Deals: Pulling the Transaction Liability Solutions Lever
M&A Leverage
Editorial
Sharad Vishvanath Asia Pacic M&A Market Leader, Aon Mergers & Acquisition Solutions, Aon Hewitt
Volume 1 Issue 1
Feature
Asian-based companies are likely to continue outbound transactions due to the continued buying opportunities in US and European markets, but not without riskand reward.
M&A Leverage
Summary
Asian-based companies are likely to continue outbound M&A transactions into the US and European regions between 2012 and 2017. Low valuations, signicant cash on hand, and attractive nancing rates are making it easier for them to acquire western companies at low post-recessionary prices. However, acquiring US and European companies can be risky if inexperienced rms are unskilled at talent retention, cultural integration and seamless integration execution. This article highlights the opportunities, risks and practical steps recommended for Asian-based acquirers to ensure they over-achieve their transaction objectives, particularly when entering US and European markets.
Lower Debt Ratios: Estimates by StarMine indicate that Asian-based companies sit at an average net debt/equity ratio of .49, which is roughly one-half of the European ratio and a third of the North American ratio. These low debt ratios, combined with extremely attractive nancing rates, suggest that Asian-based rms have the ability to nance transactions cost-effectively without taking on excessive risk via operating leverage.4 Stronger Currency Valuations: Finally, Japanese buyers are beneting from increased buying power, as the yen has strengthened considerably against the US dollar and the Euro over the last four years. According to Thomson Reuters, Japanese companies spent a record USD69 billion on foreign deals in 2011, including ~USD31 billion in the Americas and ~USD24 billion in Europe.5 These drivers suggest that outbound deals from Asia into the US and European markets are likely to continue with China, India, Japan and Australia leading the charge. However, they are not without risk.
Situation
Aon Hewitts Global M&A Pulse survey completed in Q3, 2011 found that 50% of Asia Pacic-based survey participants indicated that they were targeting North America and European markets for future transactions.1 These indications are proving true and are likely to continue in 2012 and beyond. In 2011, the pace of outbound Asianbased M&A transactions nearly rebounded to the levels observed before the recession. Between 2002 and 2007, the number of outbound deals from Asia skyrocketed, reaching close to 900 deals in 2007 (nearly six times 2002 levels). Despite a sharp drop in volume in 2008 and 2009, the pace has quickly recovered, exceeding 800 transactions again in 20112. This upward trend is likely to continue, driven by a few key factors outlined below: Lower Market Valuations: Low US and European valuation multiples persist when compared to prerecessionary levels. According to Capital IQ, while the median enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple for strategic transactions in the US climbed back to 11.4X in 2011 (compared to 8.1X during the trough of 2009), it remains below the 12.0x multiple experienced in 2007.3 The same ndings hold true for European ratios. Research by Robert W. Baird highlights a similar trend in the middle market, as median transaction multiples (EV/EBITDA) paid for US and European-based middle-market companies continue their recovery, but remain below 2007 levels.
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Upward trend of outbound deals from Asia are drive by lower market valuations, lower debt ratios and stronger currency valuations.
Opportunity
Most acquisitive Asian-based companies undertaking outbound transactions have traditionally adopted a portfolio approach to managing acquisitions by allowing the acquired company to operate independently. Over the past two decades, many acquisitive western companies (e.g., GE, Philips, and Siemens) also utilized this approach. However, most western companies have adjusted their integration approach as they found that it was difcult to reap signicant value from transactions, when the acquired organization(s) were not ultimately integrated into the parent company. A few Asian-based companies (e.g., Aditya Birla Group, M&M and the TATA group) have learned from the successes (and mistakes) of their western peers. While a few companies experiences have been positive, many outbound transactions have failed to achieve their objectives. Unfortunately, integration into larger corporate organizations is more complex and fraught with higher risk. Challenges that Asian-based outbound acquirers have experienced include: loss of executive and key talent, integration execution delays, and cultural assimilation hurdles. These risks are further outlined below: Leadership and Key Talent Flight: Organizations that tend to under-achieve their transaction objectives often do so because they lose leadership and key talent at an increasingly higher rate than other acquirers. This is increasingly prevalent in outbound Asian transactions. Differences in experience levels, decision-making approaches and communications make it exponentially more challenging for acquiring organizations to engage and retain the target companys leadership and key talent.
Integration Execution: Unsophisticated acquirers often lack a seasoned team and rigorous process for executing integration initiatives, particularly organizational harmonization and synergy identication and capture. Organizational harmonization and synergy capture initiatives are frequently de-prioritized (or outright ignored) by Asian-based acquirers as they seek to allow the acquired organization the autonomy to make decisions on synergies, growth plans, etc. This autonomy ultimately has the unintended effect of leaving synergies uncaptured and newer market opportunities unrealized. Cultural Dissonance: The risk of cultural dissonance is high between Asian-based acquirers and US and European targets, due to differences in national culture, leadership and communication styles, and decision-making approaches. Differing time zones, levels of leadership maturity, and language challenges exacerbate these challenges making the likelihood of cultural dis-integration more likely. For example, historically in US and European companies, decision-making authority is included in the roles and responsibilities of a particular position held by an individual. However, within Asianbased companies, decision-making authority is often unique to a particular individual or a small group of individuals. Consequently, decision-making can be hampered by the ambiguity surrounding decision authority. This is critical as the volume and pace of decisions increases exponentially during a deal. One large Chinese technology outsourcing company failed to consider cultural ramications during its acquisition of several telecommunications outsourcing employees based in Hong Kong. Because of generational gaps and differences in leadership style, employee engagement plummeted and turnover skyrocketed after they were hired. Communications: Communications are another area where differences can impede integration. In US and European companies, communications are often two-way with the opportunity for input and dialogue between executives and line managers. By contrast, executives in Asian-based companies (particularly in Chinese rms), often make decisions and communicate them to line managers and supervisors without their input or feedback. Such an approach to decision-making and communication can convey a lack of interest on the part of the acquiring company for the opinions of the target companys employees, hence, driving lower engagement and increased turnover at the point when retention is most critical. The bottom-line is that while organizations understand cultural integration is critical to deal success, they continue to struggle to translate this into actionable initiatives that drive cultural integration forward. Elizabeth Fealy, Global CoLeader of Aons Mergers and Acquisitions Practice.
Consequently, it is critical for Asian-based acquirers to increase their attentiveness and ability to lead outbound M&A transactions differently than previous efforts. This is particularly true for companies that dont have seasoned M&A executives who have been through various transactions. Aon Hewitts research on M&A transactions, based on a sample of 96 companies representing over USD$568 billion in total deal value over a two-year period, revealed that over USD$54 billion of deal value rides on the rate at which critical employees separate during or immediately following deals. With roughly 10% of overall deal value at stake, engagement and retention issues clearly have the potential to wipe out much of the synergy value sought in these transactions. Acquiring companies that prepare for these challenges are much more likely to achieve transaction success.
Practical Execution
Aon Hewitts research on the effectiveness of cross-border M&A transactions has found key differences between the practices of companies that over- or under-achieve their transaction aims. Specically, Asian-based companies that have successfully executed outbound M&A or expansion transactions have adopted several practices to ensure they over-achieve their transaction objectives. First, they proactively establish an M&A team and get them ready for deals, and they conduct rigorous due diligence on the target company to proactively understand the HR issues before they arise during the frenzy of the deal. Second, they establish an effective governance structure to drive integration activities, decisions and input from the acquiree. Finally, they spend far more time on cultural assimilation implementation activities. More on each of these points is outlined below.
M&A Leverage
Acquiring companies that prepare for challenges related to leadership and key talent ight, integration execution, cultural dissonance and communications, are more likely to achieve transaction success.
Preparing the Team: Companies that have successfully executed either large-scale, complex transactions or a small number of unique cross-border deals have done so by preparing a small senior team of business and HR leaders for M&A work. This preparation includes immersion in the language, risks, and processes of cross-border efforts from due diligence through integration execution. They provide proven, practical processes, instructions and cases for understanding M&A transactions and their associated risks. They simulate transactions well before the transaction materializes to allow the team to learn before doing. They acclimate the team to the laws, practices and cultures of the target company or country under consideration. Companies like Aditya Birla Group and others have invested heavily in dedicated M&A teams, training, and tools to enable seamless due diligence through integration execution.
Contextual Due Diligence: Basic due diligence on the human capital and risk-related issues often includes a rapid review of executive compensation, health and welfare plans, collective bargaining and works councils agreements and retirement plan designs/funding levels. This review is particularly important in European countries where labor laws, works councils and employment requirements vary by country and can be the most stringent in the world. The impact of items such as US change-in-control, pension funding, paid-time-off or European employment or severance-related costs can range in the millions for an acquirer who fails to build these calculations into their nancial model and purchase agreement language. Sophisticated acquirers seek an indepth understanding of the HR/labor market issues that exist on a local level in order to be well-prepared prior to negotiations.
Case Study
Chinese Global Telecommunications Firm Over the past three years, a large Chinese global telecommunications rm has made signicant strides in improving their capability to perform outbound M&A transactions into Europe and other developed nations. This company historically acquired targets in China, Malaysia and underdeveloped emerging markets. However, after a series of transactions under-achieved their expectations, they realized that a different approach to integration preparation and execution was warranted. They adopted a multi-pronged approach to improve their transactionintegration capabilities. The highlights of their strategy included several of the key elements described above, including: First, they created a corporate team with a mixture of HR and business resources exclusively focused on employee transitions and hired regional employee transition leaders with in-depth local knowledge. Next, the newly formed employee transition team worked with human capital acquisition integration small, medium, enterprises (SMEs) to create rigorous, repeatable processes, tools, and templates that were utilized on every transaction. At the immediate conclusion of each transaction, there was a profound emphasis on identifying and broadly sharing lessons learned. Third, they developed robust, experiential employee transition training designed for both HR and business resources and conducted the training at both corporate and regional locations. Finally, they created an Employee Transition Community of Practice in which HR and business professionals are encouraged to ask questions and share lessons learned. They invested heavily in the development of a human capital M&A toolkit with processes, instructions and content for conducting due diligence, integration planning and integration execution. This toolkit provided a common language and instruction set for integration leaders and team members during transactions to adhere to. This was especially important as Chinese resources worked abroad to execute transaction-related activities. A critical component of the improvement in transaction execution has been an increased emphasis on target local leadership involvement in integration. They have had success pairing local target company leaders with Chinese resources to not only more quickly understand the inner workings of the target, but also to share organizational operating methods with the target companys leadership. The implementation of this multifaceted strategy is still in nascent stages, but recent success in more complicated transactions has demonstrated signicant improvement and tremendous promise.
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Establishing Deal Governance: Sophisticated western acquirers and a selective number of Asian rms have realized that having an integration strategy, plan, and disciplined process for transaction execution is critical to achieving deal objectives. Prior to transaction announcement, acquirers are increasingly developing and validating integration hypotheses, alternative scenarios and plans to understand where and how synergies can be realized over various time horizons. These game plans allow executives to evaluate options well before the frenzy of deal activity hits post announcement. Acquirers and targets usually launch a global team to vet, implement and measure synergy realization throughout the lifecycle of a transaction. To track progress against plan, companies are increasingly using technology to execute transactions across time zones, workstreams and milestones.
used time-based retention bonuses that pay for remaining with the company a xed period of time. However, more recently, companies are incorporating performancebased requirements into them that encourage talent to stay and play over the next 18-24 months. These new approaches provide leadership continuity and allow the acquirer to evaluate leadership and high-potential talent for potentially broader leadership opportunities. Leadership engagement: Sophisticated acquirers sustain the involvement of acquired leaders and key talent in global corporate on-boarding processes, critical integration and operational initiatives, and leadership/ high-potential development programs to ensure high engagement levels. This involvement provides acquired executives with access to the parent company executives and the opportunity to become more informed regarding strategic direction, corporate culture, decision-making protocols, and key inuential leaders. Region appropriate communication: Increasingly, acquirers have realized that communications approaches that work within a country (e.g., China to China) will not work between Asia-based countries and western ones. Consequently, they are dedicating resources focused on line manager assimilation, seeking employee feedback, and providing proactive communications about organizational structure, leadership, and relevant HR policy changes. In a recent acquisition by an Indian automotive ancillary manufacturer communication of the rationale behind the deal was planned during the pre-integration phase which included identifying key employee groups, change ambassadors, and an integrated approach to the communications across various platforms and media.
Two-Way Assimilation: Companies that over-achieve their transaction objectives realize that its imperative to focus on leadership and line manager retention and assimilation. This is particularly true for companies that are heavily dependent on intellectual capital. Early in the due diligence process, acquirers need to quickly inventory the critical leaders and key talent and following transaction announcement, work to retain them via retention strategies. Historically, many companies have
Authors Michael Marzano, Partner, Aon Mergers and Acquisitions Practice (michael.marzano@aonhewitt.com) Jonathan Hendrickson, Aon Hewitts Global Strategy & Planning Leader (jonathan.hendrickson@aonhewitt.com) Acknowledgements Special thanks to: Brian Wade, Frederico Setti, Mark Oshima, Kurt Ewen, Sharad Vishvanath and Jaidev Murti for their ideas, insights and hands-on experience in drafting this article. Sources: 1. Aon Hewitts Global Pulse Survey, Cultural Integration in M&A, 2011 2. Capital IQ 3. Capital IQ 4. Thomson Reuters StarMine 5. Thomson Reuters
Practices adopted by Asian-based companies with successful outbound M&A transactions include: team preparation; contextual due dilligence; deal governance establishment; two-way assimilation.
Closing
Cash on hand, low debt levels and low enterprise valuations will likely continue to enable Asia-based companies to buy US and European-based companies at discounts to their prerecession levels. Asian-based acquirers who learn from the successes (and failures) of their peers will be better prepared to reap the value of their transactions by avoiding risks, achieving synergies, and spurring continued growth in the US and Europe.
M&A Leverage
Human Capital
As organizations focus on growth in 2012 and beyond, many are realizing that acquisitions and joint ventures are required to meet their growth objectives. The ability to be successful in acquisitions and joint ventures depends on the quality of the due diligence, particularly due diligence in human capital, which is core to the success of most transactions.
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increasing number of transactions are focused on growth and with that, there is an increasing need to focus on the talent within acquired organizations. As you consider the core elements of growth (e.g., new or improved technologies, increased sales), it is easy to understand the important role of talent in realizing synergies (e.g., research & development, sales personnel, management).
Top Two Areas of Focus in M&A Activity Over the Next Two Years (% of respondents)
100% 84% 80% 60% 40% 20% 0% Focus on growth in new geographic markets and revenue growth Focus on growth in new/adjacent products and revenue growth Focus on cost of acquisition and possible cost synergies Heightened due dilligence to identify liabilities and compliance issues Focus on acquisition and retention of leadership and key talent 79%
With the increasing importance of due diligence, specically human capital due diligence, there is an increasing need to focus on talent within acquired organizations.
58%
56% 38%
M&A Leverage
growth opportunities requiring additional stafng. Impacts on people might also appear as changes in objectives or strategies that require people to work in different ways than they have in the past. In short, due diligence is not only understanding how the company has operated historically, but how it might operate following an acquisition. In that sense, due diligence truly is the beginning of integration planning. A strong understanding of the potential impacts of integration is essential to an accurate nancial model (i.e., paying the correct purchase price) and a complete due diligence.
potential integration concerns) and an appropriate level of judgment and tact these individuals are, of course, potential representatives of your organization in a potential acquisition. One approach to building capabilities in human capital due diligence is the development of a sound set of supporting due diligence materials. These materials include items such as comprehensive data requests, reporting templates, detailed cost models, cultural assessment tools, and interview guides. These materials help to ensure a consistent approach to due diligence while providing resources for less experienced members of the due diligence team. In considering the development of a supporting set of tools, a number of organizations have also looked to the development of M&A Playbooks or even a web-based transaction management system (e.g., Aon Hewitts TransAction Manager) as a means to gather the available resources and provide a sound framework for executing transactions. These materials typically provide a broad range of resources organized either by subject matter or process phase to help support the due diligence process. It is often said that there is no substitute for experience. If this is true, how do organizations with a limited history of acquisitions gain this experience? One approach is through participation in M&A training programs. These programs can be incredibly valuable not only in providing some of the essential technical considerations for due diligence but also in building consistent processes. These programs can also afford insights into the best practices engaged in by other experienced acquirers. These programs can often be tailored to the specic needs of individual organizations whether its related to specic process expertise or geographic requirements. For many organizations today, the only way to achieve their growth objectives is through acquisitions. For those organizations, due diligence becomes a core requirement not only to identify the appropriate acquisitions and to pay the right price, but also to avoid making a bad acquisition that can have lasting consequences. With the increasing focus on growth in acquisitions, there is an attendant focus on the talent that is essential to that growth. By improving their capabilities in human capital due diligence, organizations are improving their ability to better understand that talent and, in turn, help to drive acquisition success.
With the changing nature of due diligence and the critical role of human capital in due diligence, there is a greater interest than ever in improving capabilities in human capital due diligence. Improved capabilities in human capital due diligence can be developed in a number of different ways. Organizations that recognize acquisitions as a core part of their growth strategy are also looking more carefully at how they develop internal HR team members. A number of organizations that focus on acquisitions include acquisition interest or experience as a key element of their talent identication and development processes. As you consider the skills required to be effective in a due diligence setting, it is often a blend of technical expertise, a sound understanding of the acquiring organization (to identify
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Capabilities in human capital due diligence can be improved through: development of internal HR team members; development of a sound set of support from due diligence materials; participation in M&A training programs.
Human Capital
Introduction
Corporates around the world continue to look at emerging markets for driving both revenue and protability growth. One of the vehicles of gaining entry or expansion in these markets is through the Joint Venture (JV) route. The JV route of expansion has many advantages over say an acquisition or Greeneld buildout, especially in Asia Pacic emerging markets. Aside from the fact that a JV partnership often times is the only way to enter a market due to regulatory realities, there are many other sound business arguments for the JV route. For example, local JV partners can help overcome any gaps in unfamiliar markets, and can provide a smooth runway for growth in complex markets, such as China or India. Furthermore, the JV partner can bring signicant distribution or after-sales reach. The JV partners experience in navigating the bureaucratic landscape is typically invaluable. JV partners also understand the talent landscape and typically operate off a low talent-cost base, which provides leverage (as well as some issues). These reasons make strategic alliances and JVs an increasingly popular vehicle for corporate development in emerging markets. According to a KPMG report entitled Joint Ventures a tool for growth during the economic downturn1, JVs were not rated as the most preferred route to growth due to difculties encountered in managing and delivering operations and strategies. This perception is now changing as JVs are delivering on their promises. JVs require a different mindset to M&A, which inherently involves posturing for the highest selling price and the lowest buying price. On the other hand, JVs require genuine collaboration to be successful. In that respect, trust is fundamental.
Other observations of the survey results include: Over 60% of the survey respondents considered access to new markets as the most popular motivation for a JV. 40% of the respondents stated that a JV helps reduce costs. While sometimes the JV route may be the only reality, and notwithstanding its advantages in emerging markets, its fair to forewarn uninitiated business leaders that it can present a mineeld of issues on the human capital front. In fact, these human capital issues ultimately can make or break the JV, even if all else falls into place. Given the strategic criticality and the time, money and effort investment in JVs, it is a burning platform for business leaders. Aons research and experience show that in successful JVs, the business leaders often lead the strategic initiative with their HR leaders, rather than looking to HR leaders to solve the issues for them. Lets explore the opportunities, challenges and a framework to build successful JVs in Asian emerging markets like China and India, focusing on both the common and unique issues.
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M&A Leverage
surface the possible HR operational considerations that are paramount to achieving these goals. There could be a myriad of key strategic goals that a JV may be driving. Some examples are new market or product expansion, localized product development and marketing, a critical link in the global supply chain for operational efciency and cost plays, a R&D play, a pricing play, etc. But whatever the goals, they can be distilled into some key business considerations and critical decisions that will ultimately dictate success. Some of these critical decisions are as follows: Degree of autonomy from the parent organization; Uniqueness of JV identity; Nature of the employment relationship for employees; Disruption tolerance; Duration of the JV agreement and exit strategy. Its critical to understand what some of the fundamental strategic issues and factors at play are, and the logic tree that connects them to HR implications, and the possible resulting HR operational issues. The chart below lays out an example of a probable framework.
Lets examine a few of the differences that our research and experience suggest MNC rms grapple with when they consider local JV partners in emerging markets (such as India and China). High appetite for risk by local partner; Lack of adherence to governance structures; Centralized and quick decision making; Incongruous and fluid organizational structure and roles; Possible maturity of business-linked processes, but limited maturity of e-enablement of HR systems; Wide variance in compensation and bands within the organization; High connect with leadership team and lack of leadership scorecards and delegation of KPIs; Frequent cross-functional career movements. These differences offer both an opportunity to leverage some great practices and DNA that the local partner will offer, and also the ability to create natural friction points. Its very important to leverage the strengths of the partner that your organization may lack and to proactively manage the potential frictional points. Resulting HR Operational Issues
Strategic Issues and Factors Partners have different strategic and business objectives for the joint venture
Implication on HR Systems and People Organization design Leadership and talent selection
Incorporating the best practices from both organization into JV Align leadership total rewards and perks Retention of key roles and position required for JV Dening an authority matrix agreed by both organization leaders Leadership scorecards design JVs own/parent companys HR Information System (HRIS), benets and payroll Redundancies related to overlaps in roles Common compensation and bands structure Incentive structure for high performance Service transition agreement (if required) HR HRIS/payroll systems for cost synergies Communications, culture and change management Key talents willingness to join the JV employer brand Tracking seconded and temporary transfers
Imbalance in levels of expertise, investment or assets brought into the venture by the different partners
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Lets examine some the areas where foreign partners can gain immensely from the local partners strengths.
1.
Strong local brand: This can be leveraged for both consumers and prospective employees. A recent example of this is the TATA-Starbucks JV where Starbucks China and Asia Pacic president, John Culver, acknowledged the strong asset the TATA brand brought to the table. Culver told the reporters of livemint.com, We will look at expanding this partnership as a long-term relationship....We are excited about building an enduring company that has a positive impact on India. He went on to describe this JV as a unique partnership which will launch some co-branded products under the Tata-Tazo brand. This is quite an accolade in view of the fact that Starbucks is already a highly visible global brand in its own right. Such global name recognition can be very critical for market and employer branding, especially if the foreign partners brand is relatively unknown in highly competitive talent markets.
2.
Strong supply chain and procurement skills: This can provide strong business leverage for a foreign player who is unfamiliar with the local market. This also extends to the talent supply chain, as this is most often a critical component of the success plan, but not always understood all that well. One caveat on the talent supply chain, however, is that an optimal balance between local prevalence and the foreign partners needs has to be architected. Otherwise, you run the risk of creating an imbalance between the talent quality and cost needed for the JV.
3.
Globally competitive project management and growth principles under considerable constraints: This is a unique strength that many of the Chinese and Indian private sector rms possess that has made them successful, and will now stand them in good stead as they go global. As an example, the book The Indian Way, written by Professors Peter Cappelli, Harbir Singh, Jitendra Singh, and Michael Useem from the Wharton School, beautifully articulates the constructs underlying the concept of how Indian businesses manage to succeed, often within severe constraints, suboptimal bureaucratic environments, and limited resources. They do this by drawing on improvisation, adaptation, and resilience to overcome endless hurdles. This book presents some great lessons that global organizations can learn to leverage as they partner with rms in India and China. Professor Harbir Singh, explains that in the Indian business landscape, rms are treated as organic enterprises where people are viewed as assets. Developing a working culture and sustaining employee morale are both critical to their success. The presence of a strong inclination towards improvisation, as well as an organizational receptivity to change with a social connotation, are Indias contributions to the global business landscape. A pertinent example is of the two Reliance groups and their inherent project management and execution skills that both have demonstrated across petrochemicals, telecom, and nancial services. Reliance Industries Limited (RIL), under the chairmanship of Mukesh D Ambani, has successfully built a strong foundation for greater future expansion and growth in the diverse lines of business that it operates. RILs interests range across petroleum, petrochemicals , power, and infocomm. On the other hand, Anil Ambani, chairman of Reliances ADA group, has been able to grow apidly and become a leading player across multiple industries in a very short span of time. The interests of the ADA group also range across telecommunications, power, and nancial services.
4.
Driving operational efciencies and the concept of frugal management: Both Chinese and Indian rms have strong management practices wherein they do more with less, as compared to their western counterparts. The concept of frugal management sometimes provides inherent competitive advantages that can be leveraged in a JV to drive future growth and protability. As an example, GVK Industries in India has a great track record for venturing into unfamiliar industry segments like infrastructure (airports, power etc) and now resources (the Hancock deal in Australia). They have delivered consistently on all strategic success parameters of these forays, while still maintaining the concept of optimal management frugality driving both growth and protability. They now rightly believe this to be a competence they want to leverage and embed in their new ventures, both in India and globally. Apart from operational goals and strategies, this concept is equally applicable to managing human capital assets and resources. It can be used to drive growth in the face of uncertainty and can foster a bigger bang for your buck, and with the same human capital costs.
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That said, there are also points of friction and issues that a foreign partner needs to evaluate and proactively manage. Some of these are as follows: Lack of data availability/standardization and data veracity; multiple stakeholders both from a data provision perspective and a decision-making perspective; Compliance issues: Gray areas are the norm as interpretation of the law can have a wide range. Foreign Corrupt Practices Act (FCPA) and anticorruption-led issues are a risk for US and European companies due to inherent corruption in some of the bureaucratic systems. Mindset issues against and a lack of oversight and governance along with centralized decision making. Culture alignment integration: Presence or lack of this can dene success or failure. Reward structures and pay level differences and rudimentary HR systems that dont enable efciency, lean HR and governance.
Prioritize your action plan: Successful clients prioritize the initiatives that will create maximum impact and have complexity that will impact the JVs end goals. Evolve 3rd culture and systems: Leading-edge clients understand that they cannot force one organizations culture and systems onto the other. Rather, they build a new organization with a new and distinctive identity that combines the best of both worlds. Once understood, they embed the partners strengths and their own strengths in the way that the new organization is structured, the operating model adopted, and the people systems. Its critical to move employees quickly to a stand-alone company mentality, while retaining a focus on program aspects that work well in either organization.
Focus organization design and governance focus: As a foreign partner, you may well have to rely on your local partners talent and market knowledge. However, its very critical to have a strong say and active involvement in the JV organization structure, stafng of key executive roles, and governance structures. Smart clients will institute a structured process for evolving the new organization structure and assessing leaders (from both organizations and/or externally) to t critical roles.
It is important to note that apart from strategy, the nancial model for the JV (e.g., are there other equity partners, how much debt are your raising, is the partner a State-owned/public sector enterprise), and the structure of the JVs operating model (e.g., is it an integrated market opportunity involving multiple business divisions/products) have profound effects on how you structure and build governance. Finally, we also nd that success is highly dependent on a strong focus on developing the right management governance structures and processes that evolve from the organization structure.
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Its very important to leverage the strengths of the JV partner that your organization may lack, and to proactively manage the potential frictional points.
Enabling reward and key HR systems: Successful clients tend to closely link rewards and other key HR systems, such as goal setting, performance management, and career development to enable the new structure and operating model, governance mechanism, and strategic goals. Over-communicate: Another aspect that differentiates successful JV partnerships is the degree of communication and transparency that characterizes all the major themes of the new organization, i.e., its unique identity, opportunities and challenges, new structure/operating model, and expectations of employees to enable the JV to succeed. It is pertinent to note that as a foreign partner, if you are at odds with your local partner on how to address many of the key issues that a value driver analysis throws up, it may well be prudent to even consider walking away. JVs in emerging markets are not easy to execute and we have seen many failures. But our experience and research clearly suggest that some genetic markers embedded early and appropriately in the JV design and setup, can dramatically increase its chances of success.
Author Sharad Vishvanath, Asia Pacic M&A Market Leader, Aon Mergers & Acquisition Solutions, Aon Hewitt (sharad.vishvanath@aonhewitt.com) Sources: 1. Joint Ventures fuelling growth during the downturn, KPMG, 2009
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It is critical for foreign partners to be in alignment with their local partners when addressing key issues emerging from a value driver. Otherwise, it may be prudent to consider walking away.
Risk
Overcoming Risk Roadblock in Deals: Pulling the Transaction Liability Solutions Lever
By Sharad Vishvanath and Jennifer Richards When an organization pursues a merger and/or acquisition (M&A) transaction, the euphoria of the deal and the need for speedy action can take hold, resulting all too frequently in risks being under evaluated, or worse, being overlooked entirely. Once identied, these transactional risks and liabilities may pose roadblocks to the smooth and successful completion of the deal or even prevent a deal from proceeding. Transactional risks emanate from multiple sources and often center around
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hidden or unknown issues such as inadequate disclosure or undisclosed losses or liabilities. Then again, transactional risks can stem from currently existing, known exposures, such as pending or threatened litigation, tax liabilities, environmental issues or other contingent liabilities. Both known and unknown risks create uncertainty in the purchase price and can impede, or prevent, successful negotiation of an M&A transaction. A question often asked by clients is Can we transfer such risks out of our purview, and if so, whats the value of such a solution? The answer to this query lies in the various Transaction Liability Insurance Solutions that are available in the marketplace today. These include Warranty and Indemnity Insurance (W&I), Tax Liability Insurance, Litigation Buyout Insurance, and Contingent Liability Insurance. These various insurance solutions can assist in transferring transactional risks from the buyer or the seller to the insurance markets, by accessing the insurance markets as an alternative capital source to facilitate transactions.
Case Study
Lets examine how W&I insurance has been used as a risk solution to achieve a clean exit for the seller, while providing adequate post-closing indemnication for the buyer. Issue In a US$150 million sale of a Hong Kong-based portfolio company by a private equity seller, the buyer was looking for US$20 million escrow to respond to breaches of warranties and indemnities over a two-year survival period. However, the seller was looking to structure a clean exit and would only agree to a very limited escrow of US$1.5 million for 12 months. The parties could not reach agreement on these disparate terms. Solution A buyer-side W&I policy was implemented whereby the seller retained liability only for the limited escrow. The buyer supplemented this escrow with W&I insurance with a limit of liability of US$20 million and a survival period of two years for all warranties other than tax and title, which customarily survive for seven years.
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M&A Leverage
Tax Liability Insurance. Tax Liability Insurance protects the parties against taxes (and associated defense costs) arising from identied tax exposures stemming from either the structure of the deal itself, or from the target companys historical or current operations. Litigation Buyout Insurance. Losses that may arise from existing or threatened litigation can be addressed by means of Litigation Buyout Insurance. Contingent Liability Insurance. Other contingent liabilities that may arise or be identied in the M&A context, such as successor liability or regulatory concerns, can be dealt with via Contingent Liability Insurance.
In mature APAC markets like Australia, our research indicates that the vast majority of private equity deals and an increasing proportion of trade sales are now baking in the Warranty and Indemnity Solution at the initial discussion stage. Clearly, deal participants are seeing the value of employing transactional insurance as a deal facilitation and risk management tool. A large global IT major known for its highly acquisitive nature insists on getting additional W&I cover whenever dealing with the sellers of rms that are relatively immature in risk management.
We all know that in Asia there are many unascertained risks in target companies, especially for local-founder promoted companies that may not have the most sophisticated risk management systems. We frequently learn from our clients about experiences where theyve had their ngers burned on prior deals.
Authors Jennifer Richards, Regional Director, Aon M&A Solutions (jennifer.richards@aonhewitt.com) Sharad Vishvanath, Asia Pacic M&A Market Leader, Aon Mergers & Acquisition Solutions, Aon Hewitt (sharad.vishvanath@aonhewitt.com)
Volume 1 Issue 1
Our research indicates that the vast majority of private equity deals and an increasing proportion of trade sales are now baking in the Warranty and Indemnity Solution at the initial discussion stage.
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2012 Aon Consulting (Singapore) Pte. Ltd. Co. Reg. No.: 198301764G