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March2002Merger IntegrationIntellectual Capital CollectionGeneric ProposalA.T.Kearney4/1375C/MergerIntegration108319_Macros2Table of contentsnExecutiveSummarynOurUnderstandingofYourSituationnA.T.KearneysPerspectiveonMergerIntegrationnProposedOverallApproachnRealizingIntegrationSynergiesnIntegrationManagementnA.T.KearneyQualificationsA.T.Kearney4/1375C/MergerIntegration108319_Macros3Executive SummaryThis section is tailored to the client situation and summarizes the approach proposed in the documentA.T.Kearney4/1375C/MergerIntegration108319_Macros4Our Understanding your SituationThis section is tailored to the client situation and summarizes the key drivers of the merger.It should highlight relevant quantitative and qualitative analysis that demonstrate our insight into the clients particular challenges and drivers of success for the integrationA.T.Kearney4/1375C/MergerIntegration108319_Macros5A.T.Kearneys Perspective on Merger IntegrationA.T.Kearney4/1375C/MergerIntegration108319_Macros6The best value-builders combine organic growth with mergers and acquisitionsSource:A.T.KearneyMonographonValue-BuildingGrowth 2001RevenueGrowthValue GrowthUnder performersProfit SeekersSimple GrowersValue GrowersGrowth Matrix(CAGR 1988-2000)Value Growers Follow Conscious,Constant Process To Growth A.T.Kearney4/1375C/MergerIntegration108319_Macros7Mergers and acquisitions are key growth driversWhat really matters in“acquisition for growth”strategies is executionSource:A.T.KearneyMonographonValue-BuildingGrowth 2001Sources of Growth40%of Growth Is From Acquisitions Value Growers Manage Both WellA.T.Kearney4/1375C/MergerIntegration108319_Macros8Few mergers actually create shareholder valueSource:A.T.KearneyAnalysis2001,SDCdatabase,GlobalWorldscopeAcquirers Value Growth Following a MergerTop performing mergers create significant shareholder valueValuegrowth3%8%12%27%21%16%3%Underperformance compared to industry averageOverperformance compared to industry average-100%-60%-30%30%60%150%-15%15%0%Average:2.8%49.5%50.5%Top-PerformingMergers10%A.T.Kearney4/1375C/MergerIntegration108319_Macros9Business Integration issues require“usual”management decisions while four main factors add another level of considerable complexity ScopeHighnumberofdecisionstobemadeinalloperationalandfunctionalareasDozensofprojects/initiativesandriskstobemanagedTime pressureAllstakeholdersexpectrapidexecution(shareholders,employees,management,regulationcommittees,government,)DecisionsneedtobemadewithoutdelaySimultaneityCo-existenceofstrategic,tacticandoperationaldecisionsStronginter-dependenceofthedecisionsShorttermandstrategicdecisionsmayseemincompatibleHuman componentHighnumberofpeoplepotentiallyinvolved(operational,functionalandexecutivepeople)RiskofculturalmismatchScarceresourcestobridgebetweenmergedcompaniesUsual Management decisionsStrategy&IPODefinethescopeofcombinedentityConfirmeachcountrysscopeofactivityformobilesDesignstrategyleveragingonbroaderglobalpresenceDefinefinancialandoperationaltargetsaswellastimingofexpectedbenefitsPreparetheIPOOrganisationChoosethebestorganisationalmodelattheEuropeanmanagementlevelIdentifythecentral/localfunctionsevolutionscheduleDefineorganisationalchartsandmanagementnominationDefinekeydecisionprocesses(committees,procedures,)InfrastructureReducetotalcostofexternalpurchasesthroughbestpriceevaluationvolumeconcentration,competitivebiddingSharebestpracticesSupport functions Rationalisesharedsupports(AlignandselectInformationSystemsfortheintegrationAlignprocessesandsharebestpracticesCommunicationDefineexternalcommunicationstrategyDefineinternalcommunicationstrategySelectcommunicationrulesandproceduresChoosemedia(intranet,documents,speeches)Integration mgnt IntegrateoverallplanningandmilestonesDetailplanningbytopicandcountryManagetransitionphaseTrackandexecutefinancialsynergiesManagerisksA.T.Kearney4/1375C/MergerIntegration108319_Macros10 explaining why only few mergers and acquisitions succeed fully Note:(1)Shareholderreturnsfrombuyerdividedbyshareholderreturns(industryaverage)afterthemergerSources:A.T.Kearneyanalysis,GlobalPMISurvey,1998;DatastreamHigherNochangeLower100%=230 companiesOnly 29%of Companies Realize an Increase in Aggregate ProfitabilityPerformance relative to industry average10%11%21%18%17%23%-15%-25%+15%+25%Top PerformingMergersUnder performance Outperformance Number of companiesIndustry averageOnly 42%of Companies Outperform Their Peers in Shareholder Value(1)42%58%A.T.Kearney4/1375C/MergerIntegration108319_Macros11Top performers across most industries can create significant shareholder valueCreation ofShareholderReturnsErosion ofShareholderReturnsNote:(1)Totalshareholderreturnspercentageover/underperformancerelativetoindustryindexinthetimeframebetween3monthsbeforeand24monthsaftermergerannouncement;totalshareholderreturnsdefinedasthetangiblereturnsinvestorsreceivethroughdividendsandstockpriceappreciationsSources:Datastream;A.T.KearneyAnalysis2001Retailers62.5%64.5%32.3%44.2%26.6%49.9%34.2%26.6%36.1%25.1%16.0%43.3%26.0%27.5%17.2%17.4%31.9%22.4%18.0%40.4%17.4%14.8%4.0%-6.5%-31.5%-38.9%-10.8%-25.9%-11.0%-35.0%-20.6%-17.6%-28.8%-18.0%-9.7%-39.6%-22.7%-24.9%-17.4%-20.3%-35.3%-26.7%-24.1%-46.8%-26.5%-27.2%-19.4%-24.1%RecreationChemicalsMetal ProducersPaperTransportationDiversifiedDrugs,Cosmetics&Health CareUtilitiesAutomotivePrinting and PublishingElectronicsFinancialBeveragesMetal Products ManufactureFoodTobaccoMachinery&EquipmentElectricalMiscellaneousOil,Gas,Coal&Related ServicesConstructionTextilesAerospaceIndustry Specific Ranges of Value Creation(1)A.T.Kearney4/1375C/MergerIntegration108319_Macros12Once the deal is closed,the principal problems relate almost entirely to failures in merger management,rather than to the underlying strategic rationaleProblems Identified inMerger IntegrationUnder-communicationFinancial/synergy Expectations Unrealistic/UnclearNew Org.Structure With Too Many Compromises“Master Plan”MissingMissing MomentumMissing Top Management CommitmentUnclear Strategic ConceptMissing Pace of ProjectIT Issues Addressed Too LateSource:A.T.KearneysGlobalMergerIntegrationSurvey1998Percent of RespondentsA.T.Kearney4/1375C/MergerIntegration108319_Macros13To manage inherent risks,“critical success factors”can be distilled from successful large-scale mergers to guide value creationCritical Success Factors from Large-Scale MergersSource:A.T.KearneyMergerIntegrationCreateasenseofurgencyandreduceuncertaintythroughcleareventmilestones,andmovequicklySelecttop-levelleadershipquicklyandfairly;avoid“two-in-the-box”leadershipforintegrationplanningandexecutionunlessabsolutelynecessarySetoutsynergygoalsandobjectives,toprioritizeactivitiesandprovideabaselineforperformancetrackingManagemarketexpectationscarefully.SetconservativedollartargetswithatimeframethataccommodatesunforeseencircumstancesKeepstrong,explicitfocusonkeycustomerretentionandservicewithteeth(i.e.,measurementandtracking)MaintainopenandtimelycommunicationswithemployeestoensureunderstandingandretentionConductdecentralized merger IntegrationguidedforciblyviaClearguidingprinciplesOverallframeworkandtoolsforintegrationReportingstandardsEstablishastrongcentralIntegrationofficeanddecentralizedIntegrationteamswithcorporate-wideperspectivesonResultsProjectstatusRiskLeadroleoninternal/externalcommunicationsInstillrobust,well-definedprocessestoensureobjectiveandtimelyriskandinterdependencytrackingSense of UrgencyTop-Level Leadership Selected QuicklyClear Synergy GoalsManage Market ExpectationsExplicit Focus on CustomersOpen,Timely and Consistent CommunicationsDecentralized Merger IntegrationStrong Central Integration OfficeWell-Defined ProcessesA.T.Kearney4/1375C/MergerIntegration108319_Macros14Source:A.T.KearneysglobalPMIsurvey98Value Capture of Top Performers Over Time15%Year 1Year 2Cumulative ValueCapture After Two Years85%TimeClosingthe Deal12345678910-10-8-6-4-20246ValueCapture/Loss($MM)Year in Which Synergies Are RealizedTiming of Synergy Realization Is Also CriticalSource:MarlLSirower:TheSynergyTrap.Calculatedbasedona$10MMacquisitionpremium,representing50%ofmarketvalueIn our experience,the most critical element in achieving targeted benefits is speedA.T.Kearney4/1375C/MergerIntegration108319_Macros15Proposed Overall ApproachA.T.Kearney4/1375C/MergerIntegration108319_Macros16A.T.Kearney has a flexible merger integration framework with a comprehensive toolkit to support planning and implementation throughout the merger process to ensure value captureA.T.Kearneys Merger Integration FrameworkDevelop StrategyEstablish Structure and PlanMerger/AcquisitionoptionsCreate/articulate/validateMarkets/customersCompetitionResourcesSourcesofvalueUnderstandtypeofmergerEstablishtheintegrationprogramBuildintegrationcapabilityAssesssourcesofvalueDeveloporganizationstrategy&designDevelopITintegrationstrategyDesign/harmonizeHRpoliciesCreatemasterplanandprioritizeValidatesourcesofvalueImplementquickhitsDevelopSOVITenablersImplementHRplanMonitorprogressandriskExecutetheplanRealigntheorganizationImplementITintegrationplanMerger Manage-mentSourcesof ValueMergerEnablersChange of ControlShareholder ApprovalMOUIntegrated Planning and Initial RolloutFull-Scale RolloutDayOnePhase 0Phase IPhase IIPhase IIIMultiple ToolsExist for All CellsA.T.Kearney4/1375C/MergerIntegration108319_Macros17This allows merging entities to rapidly capture available sources of value by focusing on operational synergies,as well as seamlessly merging the organizationsMerge the Organizations as Seamlessly as PossibleDevelopandcommunicateasharedstrategicagendaDefineOrganizationstructures/leadershipKeybusinessprocessesTechnologyplatform/architectureChangeintegrationrequirementsDrivetoplinegrowthNewvaluepropositions/productsCrossselling/salespullthroughEnsurecustomerfocus/retentionIntegrate day-to-day operations Ensure sustainable changePosition for growthAchieve$XXmillion(annualrate)ofsynergysavingswithin1218monthsSalesOperationsProcurementCorporateoverlapandduplicationCostofdistributionTechnology/R&DOtherstobeidentifiedEliminate/minimizesourcesofriskDrive the short-term valueExceed the markets expectationsMI Sources of ValueAchieve Growth Synergy and Cost Synergy Targets as Quickly as PossibleA.T.Kearney4/1375C/MergerIntegration108319_Macros18The program structure supports focused value capture teams working across all SBU/Geographic teamsIllustrativeIntegration Office OthersSteering Committee Business Develop-ment TeamCorporate CenterTeamGlobal OperationsTeamGlobal SourcingTeam Technology/R&DTeamHuman ResourcesTeamInformation TechnologyTeamSBU A or N.AmericaSBU B or Latin AmericaSBU C or EuropeSBU D or Asia PacificBU driven integration to set prioritiesFocused on value capture across the businessesMarketFacingTeamsValueCaptureTeamsEnablerTeamsSetoveralldirectionMakecriticaldecisionsDevelopguidingprinciplesProvideintegrationmanagementleadershipandsupportA.T.Kearney4/1375C/MergerIntegration108319_Macros19Implementation Full-Scale Rollout Integrated Planning and Initial Rollout Establish Structure and PlanBy launching the integration effort prior to change of control,significant progress is made in identifying sources of value,while also developing the high-level organization models to capture that value Integration Management IT Requirements/Alignment High-Level OrganizationDataRepositoryComm.PlanningOversight/Visibility RmAnalysisOpportunitiesInitial PrioritizationInitial SequencingData Collection/AnalysesOperations/Asset ConsolidationDiagnostic PackPP 1PP 2PP 3PP 4HMLHMLInitQ1 Q2 Q3 Q4PP1PP2PP3PP4Data Collection/AnalysesBusiness Unit(e.g.,Services)Diagnostic PackCS 1CS 2CS 3CS 4HMLHMLInitQ1 Q2 Q3 Q4CS1CS2CS3CS4Phase I(“Clean Team”)Hypotheses 1Hypothesis N Hypotheses 1Hypothesis N Master CalendarDay/Week/Month 1 PlansSources of Value IdentificationBaseline Dev./TrackingA.T.Kearney4/1375C/MergerIntegration108319_Macros20During the critical period prior to change of control,the engagement team assumes the role of a“clean team”to enable critical pre-merger integrationRole of Clean TeamQuantifysavingsgeneratedfromidentifiedopportunitiesfromteamsofmergedcompaniesActasathirdpartyconduitforproprietaryinformationofbothcompanies(protectionshouldmergerbeaborted)ValidateandchallengeinitialassumptionsofopportunitiesmadebymergingcompaniesHighlightbestpracticesinexistingcompaniesandexternalknowledgeandrecommendongoingmergedoperatingpracticesDetermineriskfactorsinmergerforongoingriskmanagementduringimplementationData CollectionOrganization assessmentHypotheses developmentPreliminary planningCompany ACompany BOpenJoint Client Team MeetingsA.T.Kearney“Clean Team”Merger SynergyHypothesesPre-Change of Control Post-Change of ControlValidated InitiativesAcceleratedecisionmakingbyprovidingaccesstocomprehensivedatabasesanddetailedanalysisShareandvalidatefindingswithjointclientteamsFinalizeinitiativesbasedonvalidatedhypothesesDevelopimplementationplansAssistinlaunchinginitiativesandprovidecontinuedimplementation,riskandfinancialtrackingsupportThe up-front work efforts of the“clean team”enables accelerated launch of implementation activities and value capture“Clean Team”Process LimitedJointClientTeamMeetingsA.T.Kearney4/1375C/MergerIntegration108319_Macros21After change of control,the teams quickly finalize not identify synergy opportunities and gain consensus Results Tracking/Risk Assessment Begin ImplementationInitial Prioritization and SequenceMaster Plan SequencingFull Team MeetingsDiscloseandValidateModifyandRefineFinalizeSavingsOpportunitiesandPrioritizationIdentifyInterdependenciesHMLHMLOverall Prioritization/Executive Committee Buy-InInitQ1 Q2 Q3 Q4MD1ST3SC6PP4SC6 WorkplanST3 WorkplanMD 1 WorkplanStep1234Investment RequirementsTiming of ResultsMaster Plan Detail Day/Week/Month 1 ExecutionPhase IIInitQ1 Q2 Q3 Q4PP1HMLHMLInitQ1 Q2 Q3 Q4PP1HMLHML IT Requirements/EnablersMaster Plan Detail Communication Full-Scale Rollout Integrated Planning and Initial Rollout Establish Structure and PlanA.T.Kearney4/1375C/MergerIntegration108319_Macros22MD 1 WorkplanActivityTask 1Task 1Task 1Task 1Q1Q2Q3Q4The transition to full-scale rollout and implementation of initiatives is supported by a clear tracking process Program Risk ManagementTop 10 Program Risks as of 06/24Organization announcement timing still unclearIT requirements not fully understoodNo plans to address cultural misalignmentSuccess of communication not currently planned to be measuredIllustrativeInitiative Status ManagementSize=$Saved61218GreenYellowRedRiskTime to Complete ImplementationInitiativeCurrent QuarterCum.Qrtly.BreakdownJan.Feb.Mar.4Q97 1Q98 2Q98Cost Saves and Growth AchievementImplementation CommunicationPhase III Full-Scale Rollout Integrated Planning and Initial Rollout Establish Structure and PlanA.T.Kearney4/1375C/MergerIntegration108319_Macros23Source:A.T.KearneyMergerIntegrationThroughout the effort,managing risk is a formalized methodology;adherence facilitates a fair and robust decision making processProject Risk PrioritizationRisk IdentificationRisk CategorizationProject Prioritization Business Criticality And SizeBusiness Criticality howmuchdoesitmatteriftheprojectdoesnotmeetitsobjective?A=Incrementalbenefitbutcurrent processeswillsufficeB=Supportsstrategybutmanageableimpactifproject fails/delayedC=Importanttothestrategywithsignificantimpactifprojectfails/delayedD=Criticalimpact/mustkeepupwithcompetitors/cannotcontinuebusinessComplexityHighLowHighDCBAABCDBusiness CriticalityProject2Project3Project6Project1Project4Project5ManyissuesareclosedbymakingassumptionsRisksAssumptionsIssuesProjectPlansRisk PlansIssuesareopenquestionsUnstable/sensitiveassumptionscreaterisksSignificantrisksneedtobemanagedIssues,Assumptions And Risks Are Inherent In The Project PlansRisk ReductionRedAmberGreenMerger Risk ProfileNowFutureGreenAmberRedTimeCriticalityIllustrativeChallengesDecision MakingPlanning/ExecutionReportingBenefits of Proactive Risk ManagementCrossorganizationalinputanddedicatedfacilitationensuresobjectiveinputMilestonerisksassociatedwithdecisiontimingarederivedfromprocess-wideinitiativesRiskprocesshighlightsresourcevulnerabilities.SenseofurgencyassociatedwiththeprocessforcesdiscussionsandactionsProactivemanagementandfacilitationobjectivelyevaluatesallcommunicationrisks.ForumoffersparticipantsachancetoagreeordisagreeConciseupdatesfocusedoncross-organizationalrisksdirectattentionwhereitisneededClearassignmentofriskownershipandactionresponsibilitieseliminateconfusionA.T.Kearney4/1375C/MergerIntegration108319_Macros24Realizing Integration SynergiesA.T.Kearney4/1375C/MergerIntegration108319_Macros25To assess and achieve their synergies,all teams can leverage a number of A.T.Kearneys proven methodologies and tools as appropriateStreamlining the OrganizationReducing Purchased CostsObjectives:Focus Areas:Methodology and ToolsDeterminemanagementandgovernancestructureIntegrateofficesAlignHRpoliciesandproceduresFinance/AccountingLegal/RegulatoryITHRCorporateCenterRationalizationLeveragecorporatespendLeveragepurchasingvolumesDirectmaterialsPurchasedservicesIndirectmaterialsCapitalexpendituresStrategicSourcingE-Sourcing(eBreviate)Marketexchangestrategy(LSN)Supporting Methodologies and ToolsIncreasing Sales Force EffectivenessIncreaserevenueproductivityofsalesforceIncreaseknowledgeandvalue-addedsellingcapabilitiesExplorechannelleverage(i.e.,Dealer/Resellernetwork)SalesforceeffectivenessCross-sellingSalesForceEffectivenessMethodologyCustomerRetentionMethodologyIllustrativeLeveraging AssetsMaximizeassetutilizationBottlingplantconsolidationWarehouseconsolidationRealizenetworksynergiesFixedassetsCapitalexpendituresInventoryProcurementSupplyChainTransformationOperatingAssetEffectivenessStreamlining Product Portfolios and NetworksRationalizeproductofferingandcustomerbaseEvaluateandimplementoptimalnetworkstrategyProductOfferingCustomerrequirementsNetworkcostandcapacityProductPortfolioandNetworkRationalizationMethodologyOperatingNetworksIntegrationA.T.Kearney4/1375C/MergerIntegration108319_Macros26Rapid benefit delivery is feasible through integrating the operating networkManufacturingCapabilitiesWhatcanbeproducedWhereHowdoesthroughputvarybylocationandplantcapabilityWhatarethecapacityconstraintsNetworkConfigurationWhicharethecostsoftransportation,handlingandinventoryWhichisthemostcostefficientnetworkconfigurationAretherecostsynergieswithotherDannonproductsManufacturing CapabilitiesNetwork ConfigurationSeveral IterationsLocal MarketRequirementsWhatarethemarketrequirementsWhatisthecurrent/futurecompetitivepositioningWhatdistributionchannelsaregrowingfastestMarket Requirements1A.T.Kearney6/Document#/I.D.Sample PreliminaryScenarioSKU tree1SKU 2SKU 3ProliferationLevelABCDEEFGHI 111111111111111111111111111612 18 24612 18 24612 18 24612 18 24612 18 24612 18 24612 18 24ResealableClassicBlueGBHClassicResealableCompactBlueGBHCompactResealableClassicWhiteEBHClassicResealableClassicWhiteMechanicalResealableCompactWhiteEBHCompactResealableCompactWhiteMechanicalResealableClassicWhiteGBHClassicMenthol/Euca11128412232113NumberofVariantsPortfolioWhichSKUsareofferedWhichspecificproductcharacteristicsWhichemergingtechnologies/competitiveofferingsHowisproductbundledandpromotedSKU Tree36CurrentSites:4FutureSites:3CurrentSites:8FutureSites:5CurrentSites:2FutureSites:1CurrentSites:1FutureSites:1CurrentSites:3FutureSites:2CurrentSites:2FutureSites:1CurrentSites:2FutureSites:1CurrentSites:1FutureSites:1SKU 1Key Assessments for Integrating Operating NetworksA.T.Kearney4/1375C/MergerIntegration108319_Macros27Which entity in the supply chain should develop a capability is determined by the business scale and strategic objectives Strategic AllianceDevelopstrongrelationshipswithkeysupplychainpartnersthathavetherequiredcapabilitiesMaintainveryhighlevelsofcross-functionalinvolvementIn-HouseInvestinresourcesandpeopletodevelopworld-classcapabilitiesOutsource OutsourceactivitytocapableproviderOrganizerelatedactivitytominimizetransactioncostswithoutsourcedproviderRationalize Dependingontrueswitchingcostsandinvestmentrequirementseith