M&A Process

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M&A Process
The Acquisition Process: Pre-purchase decision

activities
Business
Plan
Acquisition
Plan
Search
Screen
First
Contact
Due
Diligence
&
Negotiatio
n
Phase 1: Business Plan

Industry/market
definition
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styles (Where have we chosen to compete?)
Example: Automotive industry (a collection of markets)
Passenger car market by size and by geographic area
Truck market by size and geographic area
After-market
Even for an established player already operating in a certain space, this exercise
can be conducted every couple of years or so to determine whether to refocus /
disengage from a particular segment

Industry/market definition
External analysis (customers, current competitors, potential entrants, substitute
products, and suppliers): Five Forces Framework
Key objective: Identification of industry trends and whether they constitute opportunities or
threats
Example: Automotive industry
What is changing with respect to
Customers by vehicle size and geographic area
Current competitors include Toyota, Daimler, GM, Ford, etc.
Potential entrants include China Cherie and Indias Tata Motors
Substitute products/technologies for internal combustion engine include hybrids, all
electric car, hydrogen car, etc.
Suppliers include material vendors, lenders, labor, etc.
How will these changes impact my business?
Industry Analysis
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Competition
among
Existing Firms
Bargaining
Power of
Customers
Degree of
Government
Regulation
Potential for
New
Entrants
Potential for
Substitute
Products
Bargaining
Power of
Suppliers
Industry
profitability
Global
Exposure
Bargaining
Power of
Labour Force

External analysis (customers, current competitors, potential entrants, substitute products, and suppliers)
Internal analysis (strengths and weaknesses as compared to the competition)
Key questions:
Do our strengths enable us to pursue opportunities identified in the external analysis?
Do our weaknesses make us vulnerable to the threats identified in the external analysis?
Example: Automotive industry
If our targeted customer values fuel efficiency, do our strengths enable us to produce high quality fuel
efficient cars better than our competition?
To what extent do our strengths help us satisfy our customers needs better than the competition?
To what extent do our weaknesses make us vulnerable to losing customers?

Opportunities/threats (from external and internal analyses)
Summarizing strengths and weaknesses versus opportunities and threats using a SWOT matrix
Example: Amazon.in
Opportunity is to be perceived as the preferred online retail department store by 100 crore
Indians
Threat is the existence of online retailers like Flipkart, Snapdeal and increasing consolidation from
offline retailers


External analysis (customers, current competitors, potential entrants, substitute products, and
suppliers)
Business vision/mission (Defines direction and provides means of communicating succinctly with
key stakeholder groups)
How do we wish to be perceived by key stakeholders?
What quantifiable objectives will be used to determine progress in achieving vision/mission?
(e.g., market share, customer surveys indicating how we are perceived, etc.)
In 2009, Apple renamed itself from Apple Computer to Apple Inc why?

External analysis (customers, current competitors, potential entrants, substitute products,
and suppliers)
Business vision/mission
Business Strategies (cost, differentiation, focus, or some combination)
Which of these generic business strategies best enables to firm to achieve its
vision/mission and objectives?

Business vision/mission
Business Strategies (cost, differentiation, focus, or some combination)
Implementation strategy (selected from a range of options)
Solo ventures or go it alone
Merger or acquisition
Alliances (including JVs, partnerships, and licensing)
Minority investments and
Asset swaps
Hypothetical Amazon.in SWOT Matrix

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Opportunity: To be perceived by Indian

stylesinternet users as the preferred online
retail department store
Threat: Stiff competitors in India and

possibly from China as well;
Consolidation from offline retailers
backed by reputable business houses
Strengths
Relative to the opportunity:

Existing brand recognition in online
space
User friendly and convenient interface
Scalable IT infrastructure
Years of expertise and products in other
markets which can be ported to India /
other countries
Relative to the threat:

Extensive experience in online
marketing, advertising, and fulfillment
Rapidly growing and profitable Cloud
Infrastructure business which online
competitors lack
Weaknesses
Relative to the opportunity:

Inadequate warehousing and inventory
management systems to support
quantum sales growth
Limited experience in merchandising
non-core retail products (e.g. grocery)
Limited local knowledge and regulatory
know-how
Relative to the threat:

Limited name recognition outside
urban markets
Lack of retail management depth in
new markets
Lack of distribution capability like the
offline players
Strategic Options
Solo venture
Partner
Acquire
Solo venture
Partner
Acquire
Exit business
Adobe Acquires Omniture Case Study

In 2009, Adobe announced the acquisition of Omniture for $1.8 billion in cash
Adobe: Makes web design tools (e.g., Acrobat, Flash, and Creative Suiteincl. Photoshop and
Illustrator) and sells customers perpetual licenses
Targeted Markets/Spaces1: Web designers, online retailers, and media firms (e.g., News Corp)
Omniture: Makes software capable of tracking how users utilize web sites (e.g., tracking page
views); users pay monthly fees to subscribe to service
Targeted Markets/Spaces: Online retailers, advertisers, and media firms
At $3 billion in annual revenue, Adobe 10 times larger than Omniture
Both firms losing revenue
Adobe faced difficulty in upgrading existing clients and adding new clients due to recession
Omniture revenue erosion reflected introduction of free analytical software by Google and
reduced advertising spending due to recession
Note markets or spaces consist of customers with homogeneous needs
Adobe External Analysis Continued

Key to
Trends:
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Renting software online
Customers buying multiple software capabilities from a single vendor
to ensure compatibility
Business model/strategy based on perpetual licensing of software
highly cyclical (i.e., customers can postpone upgrades to new
products)
Adobe Internal Analysis

Adobes
skills
focused on developing website design software
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Sales concentrated on only one segment of the value chain (i.e., create
content)
Limited experience in how to develop a subscription-based business
model/strategy
Adobes Business Model, and Implementation

Strategies
Adobe's
To revolutionize how the world engages with ideas and
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information
Business Strategy/Model: To move from selling customers perpetual software licenses

and increasing revenue by upgrading current clients and attracting new clients
To a monthly subscription model
Implementation Strategy1
Acquire a vendor targeted at a different phase of the customer value chain whose
revenues are based on the subscription model
1
Alternative implementation strategies include solo venture, partnering, or acquisition.
Phase 2: Acquisition Plan

Plan
(support
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styles the realization of key business plan objectives)
How will the acquired firm enable the acquiring firm to better realize its vision/mission and
business plan objectives?
Plan has to address 3 different types of risk that any acquisition brings:
Operating risk Higher the amount of diversification, higher the operating risk
Financial risk Risk posed by the acquisition to shareholder value, credit rating
Overpayment risk - dilution of EPS or a reduction in its growth rate resulting from paying
significantly more than the economic value of the acquired company.
Linkages Between Business and Acquisition

Plans
Business Plan Objective
Acquisition Plan Objective
Financial: The firm will

Achieve ROI that will equal or exceed its cost of equity or
capital by 20xx
Maintain a debt/total capital ratio of x%
Size: The firm will
Be the number one or two market share leader by 20xx
Achieve revenue of $x million by 20xx
Growth: The firm will achieve through 20xx annual average
Revenue growth of x%
Earnings per share growth of y%
Operating cash-flow growth of z%
Diversification: The firm will reduce earnings variability by x%.
Financial returns: The target firm should have

A minimum return on assets of x%
A debt/total capital ratio y%
Flexibility: Achieve flexibility in manufacturing and design.
Flexibility: Target should use flexible manufacturing techniques.
Technology: The firm will be recognized by its customers as a

technology leader.
Technology: The target firm should possess important patents,

copyrights, and other forms of intellectual property.
Service: The firm will be recognized by its customers as the

industrys service leader.
Warranty record: The target firms customer claims per million

units sold should be not greater than x.
Cost: The firm will be recognized by its customers as the

industrys low-cost provider.
Labor costs: The target firm should be nonunion and not subject
to significant government regulation.
Innovation: The firm will be recognized by its customers as the

industrys innovation leader.
R&D capabilities: The target firm should have introduced at least

x new products in the last 18 months.
Size: The target firm should be at least $y million in revenue
Growth: The target firm should

Have annual revenue, earnings, and operating cash-flow
growth of at least x%, y%, an z%
Possess excess annual production capacity of x million units
Diversification: The target firms earnings should be largely
uncorrelated with the acquirers earnings.

Plan
objectives
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the realization of key business plan
objectives)
Timetable
Defined by activity completion dates, deliverables (what is to
be achieved), and individual (s) responsible for satisfying
objectives

Plan objectives (support the realization of key business
plan objectives)
Timetable
Resource/capability review
Determine maximum size of acquisition in terms of P/E. sales, cash flow, purchase price, etc.
Assess internal management capabilities (Can acquirer continue to manage current businesses as well as
integrate the acquired firm?)

Plan objectives (support the realization of key business plan objectives)
Timetable
Management preferences (Senior management guidelines to acquisition team)
Examples:
Prefer an asset or a stock purchase
Use cash only
Will consider competitors as potential targets
Want controlling interest
Limit EPS dilution to two years following closing

Plan
objectives
(support
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the realization of key business plan objectives)
Timetable
Management preferences
Search plan
How the search process will be initiated and carried out
Key search criteria include industry/geographic area and maximum
size of acquisition
Relatively few criteria used to avoid limiting list of potential targets

Plan
objectives
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the realization of key business plan
objectives)
Timetable
Search plan
Financing plan (acid test)

How will you pay for acquisition?
Will someone lend you the money?
Will acquirer shareholders tolerate EPS dilution?

Plan objectives (support the realization of key business plan objectives)
Timetable
Search plan
Financing plan
Integration plan
Objective: Combine businesses as rapidly as practical
What projects offer the greatest likelihood of realizing synergy?
How flexible can policies be in order to retain key people?
What investments must be made to keep businesses operational?
What is the appropriate communication plan?
How will the corporate cultures be best integrated?
Phase 3: Initiating the Search
Twotostep
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Establish primary selection criteria (e.g., industry and maximum size of

transaction)
Develop search strategy to identify potential targets using computerized
databases; directory services; legal, banking, and accounting firms; and the
Internet.
Brokers and finders:

A broker has a fiduciary responsibility to either the seller or buyer.
A finder introduces both parties without representing either party.
Fee structures are normally negotiated and may include a basic fee, a closing
fee, and an extraordinary fee (i.e., fees paid if closing delayed due to
obtaining antitrust approval, a hostile takeover, etc.)
Brokers can either be Sell-side or buy-side
Phase 4: The Screening Process

As atorefinement
of the
search process, screening involves increasing the number of
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selection criteria to reduce the list of potential candidates.
At this stage, buyers are normally presented with a bare-bones teaser document
which provides high level business and financial details about the target
In addition to the industry and maximum size of transaction used in the search
process, additional criteria could include:
Market segment
Product line
Profitability
Degree of leverage
Market share
Cultural compatibility (e.g., AOL/Time Warner)
Phase 5: First Contact

The
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strategy depends on
Size of target
Whether target is publicly or privately held
Acquirers timeframe for completing transaction
Trust and relationship building when time is not critical
Discussing value
Preliminary legal documents:
Confidentiality agreements
Term sheets
Letter of intent
Phase 6: Due Diligence and Negotiation as a Process

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Profiling
Target
Market &
Firm
If Not
Interested,
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Walk
Away1
First
Contact
Perform Due Diligence
Structuring the Deal

Form of Acquisition
Develop
If
Form of Payment
Refine
Financing
Interested,
Tax Considerations
Initial
Plan/
Initiate
Accounting Considerations
Valuation
Structure
Negotiations
Acquisition Vehicle
Post-Closing Organization
Legal Form of Selling Entity
Decision:
Proceed to
Closing or
Walk Away
Negotiation Process
Alternatively, the potential buyer could adopt a more hostile approach such as initiating a tender offer to achieve a majority stake in the target firm.
Phase 6: Due Diligence and Negotiation

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Concurrent activities:
Refining valuation
Deal structuring
Conducting due diligence (buyer, seller, and lender)
Developing the financing plan
Due Diligence
Exhaustive review of records and facilities and typically continues throughout the negotiation phase
DD is typically a cross-functional exercise involving participation from different teams across Sales, HR,
marketing, engineering, finance, legal and senior management oversight
The purpose of due diligence is
Eliminate possibility of fraud
Ascertain the correctness of information already furnished by the seller
Validate assumptions made in the business case
Get finer understanding of the synergies possible post acquisition
Refine communication and outreach plan for customers / suppliers / employees per interaction with senior
management
Understand and minimize any cultural differences between the firms
Buyers can require sellers to address any issues uncovered during due diligence or provide
representations and warranties in legal documents so as to protect the buyers from any future fallout
Due Diligence
Objectives:
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Validate preliminary valuation assumptions (e.g., growth, cost,
productivity, etc.)
Identify additional sources/destroyers of value (i.e., those
providing upside potential & fatal flaws)
Activities:
Detailed legal (e.g., contracts) and financial record reviews
Management interviews (consistency in questions asked)
Site visits (e.g., inspect equipment, inventory, etc.)
Customer and supplier interviews
Terms
Non Disclosure Agreement (NDA): a legalcontractbetween at least twopartiesthat outlines
confidential material, knowledge, or information that the parties wish to share with one another for
certain purposes, but wish to restrict access to or by third parties
Letter of Intent (LOI): A short contract which usually signifies intent of the acquirer to proceed
with a transaction and is usually non-binding on both parties
Term Sheet: Term usually used in the Venture Capital world where it outlines conditions for
financing a start-up firm, including:
(a) amount raised, (b) price per share, (c) pre-money valuation, (d) liquidation preference, (e) voting rights,
(f) anti-dilution provisions, and (g) registration rights
Data Room
Data Room is a virtual or a real conference room where all financial, business and asset related
records of the target are maintained and made available to the buyers agents during the due
diligence process
In case the data room is made available online or via a website Virtual Data Room (VDR)
Typical contents of a VDR include:
Business plans
Financials for the last few years and past completed quarters
Typical contracts customer, supplier, employee
Shareholder agreements
Billing records
Tax paid certificates
Statutory compliances etc.
Key Deal Structuring Considerations

Form of Acquisition

Asset Sales
Share Purchase Agreement
Form of Payment
Tax Considerations
Accounting Considerations
Acquisition Vehicle
Post-Closing Organization
Legal Form of Selling Entity
Sales and Purchase Agreement

Purpose of the share purchase agreement (the SPA) is to record the detailed terms on which the shares in a
company are sold and purchased

Key terms of the SPA
Sale and purchase of shares
Conditions precedent
Consideration
Warranties and indemnities
Business terms
Pre-completion covenants
Completion
Protective/restrictive covenants
Tax and environmental indemnities
Sales and Purchase Agreement

Types of consideration
Cash in the current market, cash is king

Shares
Assumption or repayment of debt
Consideration structures
Debt free/cash free deals
Deferred consideration
Earn-outs
Locked box structures
Typical SPAs also include language around Conditions Precedent, representations & warranties,
damages for breaches of warranties, indemnities, non-compete agreements etc.
Determining the Purchase Price

Total consideration (TC):
PVTC = C+ PVS+ PVND
Where C, PVS and PVND represent Cash, PV of acquirer stock, and PV of acquirer debt issued to seller
Total purchase price (TPP) or enterprise value (EV):

PVTPP = PVTC+ PVAD
Where PVTPP, PVTC, and PVAD = PV of total purchase price, PV of total consideration, and PV of assumed debt
Net purchase price (NPP):

PVNPP = PVTPP+ PVOAL- PVDA
= (C+ PVS+ PVND+ PVAD) + PVOAL- PVDA
Where PVOAL and PVDA represent PV of other assumed liabilities and PV of discretionary assets.
Case Study: HPs failed due diligence

In 2011, HP agrees to acquire British software firm, Autonomy for ~$11 billion
Decision to acquire Autonomy, which focused on intelligent search and data analytics solutions, was
announced along with a strategic shift to abandon HPs tablet computer and consider getting out of the
personal computer business
HP CEO Leo Apotheker wanted to use Autonomys business to transform H.P. from a low-margin producer of
printers, PCs and other hardware into a high-margin, cutting-edge software company (essentially follow
IBM and Dells lead)
Deal valued Autonomy at around 13 times 2010 revenue
September 2011 - HP board fires Apotheker amid reports of growing unpopularity and rumours of
a spin-off of its PC business
Meg Whitman is appointed as CEO
April 2012 - Autonomy boss Mike Lynch leaves, along with a number of other Autonomy employees
November 2012 HP announces a write-down of $8.8 billion related to the acquisition, with over
$5 billion due to alleged accounting irregularities
Case Study: HPs failed due diligence

What happened here?
Autonomy had been extensively shopped around till HP took the plunge
Oracle had taken a closer look earlier, had decided that even at $6 billion, the company was overvalued
Oracle had passed on the deal since questions were raised about the accounting and authenticity of the
revenue figures
Questions remain as to whether the HP board had even sanctioned a fairness opinion or whether
the most basic form of valuation, a DCF, was done and if so, using what assumptions
In fact, it later emerged that Catherine Lesjak, the then CFO of HP, had opposed the deal internally
and tried to persuade the board that the deal was not in the best interests of the shareholders
So the question remains, why did HP massively overpay on an acquisition and fail to do due
diligence given that the target was well-known for having financial issues?
Phase 7: Developing the Integration Plan

Use due diligence to determine post-closing sequencing of events necessary to realize potential savings
and revenue enhancements
Resolve contract-related transition issues in purchase agreement

Employee payroll and benefit claims processing
Seller reimbursement for products shipped before closing for which payment not received
Buyer reimbursement for vendor supplies/services received before closing for which payment had not
yet been made
Ensure contract closing conditions include those necessary to facilitate integration (e.g., employee
contracts, agreements not to compete)
Develop post-merger integration organization consisting of both target and acquirer managers to
Build a master schedule of what should be done, by whom and by what date
Establish work teams to determine how each function and business unit will be combined
Establish post-closing communication strategy for all stakeholders
Phase 7: Developing the Integration Plan

Critical
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Choosing the right person as integration manager or lead
Identifying key managers, vendors, and customers, and determining what is needed to retain them
as valued assets
Determine the operating norms or standards required for continued operation of the businesses:
executive compensation, labour contracts, billing procedures, product delivery times, and quality
metrics
Communication plan for all stakeholders
Phase 8: Closing
Obtain all necessary consents:
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Shareholder
Regulatory (e.g., state and federal)
Third party (e.g., customer, lender, and vendor)
Assigning Customer and Vendor Contracts
Complete definitive agreement
Purchase price
Payment mechanism of the purchase price, modalities, timelines for payment etc.
Allocation of purchase price
Used in a asset sale, where purchase price is allotted to the assets being
purchased, as a result of which the assets are revalued and buyer can record a tax
gain from the resulting increased D&A
Phase 8: Closing
Assumption of liabilities
Buyer normally assumes all known and unknown liabilities in a share purchase deal unknown liabilities are
covered by reps & warranties
Representations and warranties

provide for full disclosure of all information that is germane to the transaction
Areas commonly covered include financial statements, corporate organization and good standing,
capitalization, absence of undisclosed liabilities, current litigation, contracts, title to assets, taxes and tax
returns, no violation of laws or regulations, employee benefit plans, labor issues, and insurance coverage
Covenants
Covenants are agreements by the parties about actions they agree to take or refrain from
taking between signing the definitive agreement and the closing. For example, the seller may
be required to continue conducting business in the usual and customary manner
Phase 8: Closing
Closing conditions

Conditions that must be satisfied (e.g. reps and warranties and satisfaction of
covenants etc.) for the deal to go ahead and be completed
One common condition is that there is no material change in the business or outlook
for the business after the deal is signed
Indemnification
Reimbursement of the other party for a loss incurred following closing for which they
were not responsible. The definitive agreement requires the seller to indemnify or
absolve the buyer of liability in the event of misrepresentations or breaches of
warranties or covenants. Similarly, the buyer usually agrees to indemnify the seller
Loan documents
Agreements may also contain language stating that agreement is void if buyer
cannot arrange for financing of the transaction, although a breakup fee is usually
involved in that case
GE Capitals Growth Through Acquisitions

Between the period 1993 1998, GE Capital Services made over 100 acquisitions
Resulting in increase of ~30% in its workforce

Rapid globalization of the business
Doubling of its net income
By 1998, around half of the businesses that formed the erstwhile GE Capital had come from acquisitions
The acquisitions could be

Portfolio or asset purchase that adds volume to a particular business without adding people
Consolidating acquisition in which a company is purchased and then consolidated into an existing GE
Capital business
GE Capital Vendor Financial Services bought Chase Manhattan Banks leasing business
Acquisition in a completely new area, creating an entirely new GE Capital business
Acquisition of Travelers Corporations Mortgage Services business
Hybrid acquisition - parts of which fit into one or more existing businesses while other parts stand alone or
become joint ventures

Lessons
Learnt
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Integration is not a discrete phase of a deal, but is a process that begins with due diligence
For e.g., during final stages of due diligence of a British leasing equipment company, two business leaders
from GE Capital had a working lunch with the CEO and CFO of the target, to discuss how the merged
company would be run
During lunch, significant differences in basic management styles and values became clear
GE Capital took a harder look at the management culture of the target company and realized that
integration could be difficult and contentious
On that basis, despite very favorable financials, GE Capital walked away from the transaction
Integration management is a full-time job

When GE Capital acquired Gelco, Larry Toole, who was involved in the DD, was asked to stay on as the
integration manager since he had gained good insight into Gelco and also knew first hand what GE
Capital wanted to do with the business

Lessons
Learnt
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Make and implement decisions quickly
Creeping changes, uncertainty, and anxiety that last for months start to drain value from an acquisition
When GE Capital acquired a finance company in Europe, it retained the targets highly hierarchical and
high cost structure organization for well over a year until it was forced to cut costs and reduce bureaucracy
by the poor performance and profitability of the firm
Pay attention to the cultural aspect of integration

Ensure the management team from both sides meet and get oriented with each other
When GE Capital acquired Minebea Financial, a Japanese financial-services company, the business leader
commissioned a number of joint GCF-Minebea teams to accomplish critical business goals in the first 100
days
The teams not only worked together to solve these issues, but also learned about each others culture and
organization much quicker than they would have otherwise
Phase 9: Implementing Post-Closing

Integration
Communication
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An effective communication plan will address employees, customers, vendors
Communication is best done face to face
Employee retention (e.g., retention bonuses)
Senior managers of the target company that the buyer chooses to retain are asked to
sign employment agreements as a condition of closing
Use of Bonuses, stock options, and enhanced sales commission schedules
Satisfying cash flow requirements (e.g., deferred maintenance expenditures)

Disruptions to the business have to be minimized so that expected cost savings or
benefits are realized
Employing best practices of each others businesses

Cultural issues (e.g. joint work teams, co-location of acquirer and target employees)
Phase 10: Conducting Post-Closing

Evaluation
Dont change performance benchmarks
Ask the difficult questions
Learn from mistakes
Honeywell and GE both have a structured post closing evaluation process involving a 30 day, 90 day and 360 day
presentation to the executive management board which consists of the CEO
Factors Affecting Successful Integration

The pace of integration
Integration planning
Effective communication
Customer focus
Making the tough decisions early
Focusing on the highest leverage issues
Viewing Integration as a Process

Integration planning
Developing communication plans
Creating a new organization
Developing staffing plans
Functional integration
Integrating corporate cultures
Albertson Acquires American Stores:

Underestimating Integration Costs
Albertsons acquired American Stores (owners of the Lucky supermarket stores) for $12.5 billion
Deal made it the nations second largest supermarket chain, with more than 1,000 stores
However, the corporate marriage stumbled almost immediately
Escalating integration costs caused profits to tumble almost following closing
In the first quarter of operation, combined operating profits fell 15% to $185 million, despite an increase in sales of
1.6% to $8.98 billion
Albertsons proceeded to update the Lucky supermarket stores that it had acquired in California and to combine
the distribution operations of the two supermarket chains
Albertsons substantially underestimated the complexity of integrating an acquisition of this magnitude
Spent about $90 million before taxes to convert more than 400 stores to its information and distribution systems as well as to
change the name to Albertsons
By the end of the year following closing, Albertsons stock had lost more than one-half of its value.
Developing Communication Plans

Employees:
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Address the me too issues immediately

Communicate frequently and honestly how the merger will affect employees
Customers:
Under-commit and over-deliver
Acquisition-related customer attrition
Meet commitments to current customers
Suppliers: Develop long-term vendor relationships
Investors: Maintain shareholder loyalty by presenting a compelling vision.
Communities: Build strong, credible relationships
Functional Integration
Due diligence data revalidation: Verify assumptions
Performance benchmarking: Compare actual performance with industry best practices
Functions
Manufacturing and operations (facility consolidation)
Information technology (90% of acquirers combine operations)
Finance (implement internal controls and financial reporting)
Sales (implementing cross-selling frequently a challenge)
Marketing (avoid brand confusion)
Purchasing (potential 10-15% reduction in purchasing costs)
Research and development (set priorities consistent with strategy)
Human resources (decentralizing hiring & training; centralize benefits administration,
management systems and planning)
Integrating Corporate Cultures

Cultural issues: Differ by
Size and maturity of company (start-ups versus mature)
Industry (high tech versus finance and retailing)
Geographic location (domestic versus foreign)
Cultural profiling: Using employee surveys and interviews, identify

How the target and acquirer cultures are alike and how differ
Characteristics of both cultures that are to be encouraged
Techniques for integrating corporate cultures: Establish shared
Goals to foster desired behavior
Standards based on best practices
Services such as accounting, legal, public relations, internal audit, benefits planning, R&D, and
information technology
Space by co-locating employees
Overcoming Culture Clash: Allianz AG Buys Pimco

Advisors
Allianz AG, the leading German insurance conglomerate, acquired Pimco Advisors LP for $3.3
billion
Boosting assets under management from $400 billion to $650 billion, making it the sixth largest money
manager in the world
Cultural divide separating the two firms represented a potentially daunting challenge
A major motivation for the acquisition was to obtain the well-known skills of the elite Pimco money
managers to broaden Allianzs financial services product offering
Pimcos money managers stated publicly that they wanted Allianz to let them operate independently, the
way Pimco existed under their former parent, Pacific Mutual Life Insurance Company
Allianz had decided not only to run Pimco as an independent subsidiary but also to move $100 billion of
Allianzs assets to Pimco.
Moreover, most of the top managers have been asked to sign long-term employment contracts and have
received retention bonuses
Joachim Faber, chief of money management at Allianz, played an essential role in smoothing over cultural
differences. Led by Faber, top Allianz executives had been visiting Pimco for months and having quiet
dinners with top Pimco fixed income investment officials and their families
The intent of these intimate meetings was to reassure these officials that their operation would remain
independent under Allianzs ownership.
Case Study: Alcatel Lucent

In 2006,
Alcateltext
and
Lucent decided to merge to form a Paris based telecom
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equipment giant
Deal was worth ~$13.4B (stock swap basis)
On paper, deal was highly complementary since Alcatel (a Paris based company)
derived most of its business from Europe, Latin America, the Middle East, and
Africa while Lucent (US based) got 2/3rds of its revenue from US
Cost savings were expected majorly from a 10% reduction in its staff of 88,000 and
also from eliminating overlapping functions cost reduction target of $1.7B
annually within 3 years
Company would be listed in Paris and headquartered there as well
Case Study: Alcatel Lucent

The merger was not a success
Company posted six quarterly losses and took more than $4.5billion in write-offs, while its stock
plummeted more than 60%
Heavy competition from the Chinese, especially Huawei, prompted heavy discounting and further hit to
profitability
Most of the damage was because of the wide difference in the cultures of the two companies
Alcatels entrepreneurial culture as opposed to Lucents centrally controlled cultures
Also, the company had miscalculated the ease with which layoffs and cost cutting could be
achieved in France, which is highly protective of its workforce and has tougher labour laws
As a result, Lucent employees went on the defensive assuming that they would be fired first, since the
French employees could not be touched
This combined with a slowing economy, rabid competition and rapidly changing industry landscape
ensured that the Alcatel Lucent merger was never a success
In April 2015, Nokia acquired Alcatel Lucent for an all stock deal worth ~$16.6B
Things to remember...
Post-closing integration is a critical phase of the M&A process
Integration can be viewed as a process consisting of six activities
Except in highly complex situations, combining companies should be done quickly to
Minimize key employee, customer, and supplier turnover
Eliminate redundant assets, and
Achieve returns expected by shareholders
Successfully integrated M&As are those whose management candidly and continuously
communicate a clear vision, set of values, and unambiguous priorities to all stakeholders
Unlike M&As, integrating business alliances is usually a lengthy process because of shared
control and the overarching need to gain consensus on key decisions

M&amp;A Process

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M&amp;A Process

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The Acquisition Process: Pre-purchase decision

Phase 1: Business Plan

Phase 1: Business Plan

How will these changes impact my business?

Phase 1: Business Plan

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Phase 1: Business Plan

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Phase 1: Business Plan

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Phase 1: Business Plan

Phase 1: Business Plan

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Hypothetical Amazon.in SWOT Matrix

Opportunity: To be perceived by Indian

Threat: Stiff competitors in India and

Relative to the opportunity:

Relative to the threat:

Relative to the opportunity:

Relative to the threat:

Adobe Acquires Omniture Case Study

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Adobe External Analysis Continued

Adobe Internal Analysis

Adobes Business Model, and Implementation

Business Strategy/Model: To move from selling customers perpetual software licenses

Alternative implementation strategies include solo venture, partnering, or acquisition.

Phase 2: Acquisition Plan

Linkages Between Business and Acquisition

Acquisition Plan Objective

Financial: The firm will

Financial returns: The target firm should have

Flexibility: Achieve flexibility in manufacturing and design.

Flexibility: Target should use flexible manufacturing techniques.

Technology: The firm will be recognized by its customers as a

Technology: The target firm should possess important patents,

Service: The firm will be recognized by its customers as the

Warranty record: The target firms customer claims per million

Cost: The firm will be recognized by its customers as the

Innovation: The firm will be recognized by its customers as the

R&D capabilities: The target firm should have introduced at least

Size: The target firm should be at least $y million in revenue

Growth: The target firm should

Phase 2: Acquisition Plan

the realization of key business plan

Phase 2: Acquisition Plan

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Phase 2: Acquisition Plan

Phase 2: Acquisition Plan

the realization of key business plan objectives)

Phase 2: Acquisition Plan

the realization of key business plan

Financing plan (acid test)

Phase 2: Acquisition Plan

Phase 3: Initiating the Search

Establish primary selection criteria (e.g., industry and maximum size of

Brokers and finders:

Brokers can either be Sell-side or buy-side

Phase 4: The Screening Process

Phase 5: First Contact

Phase 6: Due Diligence and Negotiation as a Process

Perform Due Diligence

Structuring the Deal

M&A Process

M&A Process