M&A Integration · deal. More often than not, mergers and acquisitions fail to deliver because of poor post-deal integration. Failure comes in many forms: an inability to secure the

M&A Integration

In association with:

A mergermarket report on issues surrounding post-deal integration for European companies

February 2007

ContentsIntroduction 1

Forewords 3

M&A Integration Survey Findings 6

M&A - A Game of Skill not Chance – IBM 14

Unlocking Potential – CMS Cameron McKenna 17

Investor Relations Survey Findings 23

Hedge Funds – A worrying Factor in the

M&A market? – Georgeson 30

Contacts 33

80 StrandLondonWC2R 0RLUnited Kingdom

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t: +852 2158 9700f: +852 2158 [email protected]

www.mergermarket.comPart of The Mergermarket Group

M&A Integration, February 2007 – �

Introduction

With M&A activity so pronounced in Europe over the past two years following a decline in the early part of the decade, the spotlight has fallen once again on the need to conduct post-deal integration quickly and effectively, and to demonstrate a protection and enhancement of business and shareholder value. A significant difference between the current and forecasted M&A market and the ‘M&A bubble’ of the late 90s is the performance of the capital markets: in the past, a bullish global market all but guaranteed a rise in shareholder value, in many ways disguising how effectively integration served to build a strong underlying foundation for the business. This is no longer true - and the market is more aware than ever of M&A that does not deliver value.

In light of this increased attention, we are delighted to

publish M&A Integration - in association with CMS Cameron

McKenna, Georgeson and IBM. The aim of the report is

to provide the reader with an insight into the integration

experiences and views of senior European corporates who

have carried out M&A programmes in recent years. We

explore their rationale for and approach to M&A integration,

and hope to illuminate some key factors in determining a

successful merger.

We interviewed 80 C-level corporates for our survey: 20

CEOs; 20 CFOs; 20 COOs; and 20 IT and HR Directors. All

had undertaken M&A transactions in the past 3 years.

Furthermore, we conducted a survey of 20 heads of Investor

Relations regarding proxy solicitation on M&A transactions,

and how pre-deal shareholder issues impact on post-deal

success.

CMS Cameron McKenna, Georgeson, IBM and

mergermarket hope you find this report both interesting and

insightful, and would welcome any questions, comments or

feedback you might have. Full contact details are available at

the back of the report.

Something tells usyou’ll want to fill in the blanks. Get The Global CEO Study 2006 at ibm.com/special/uk/ceo

what makes you special?

IBM, the IBM logo and ‘What Makes You Special?’ are registered trademarks or trademarks of International Business Machines Corporation in the United States and/or other countries.Other company, product and service names may be trademarks or service marks of others. ©2006 IBM Corporation. All rights reserved.

Two-thirds of the CEOs we interviewed expect their organisations to be

inundated with ———————————— over the next two years. Some writers and analysts,

like Tom Friedman, view the world as ————————. Others, like —————————————————————————,

assert that it’s spiky. But virtually everyone agrees that the topography is

fundamentally —————————————.The forces overturning the status quo are many

and varied. At the top of their list, CEOs mentioned market forces such

as ————————————————————————— and unexpected market shifts. But there were more.

CEOs told us that workforce issues, ———————————————————————————————————, regulatory

concerns and ———————————————————— are all bearing down on their organisations,

forcing significant change. We believe that their views are justified.

11280 IBM Strategy Change A4_V1 10/13/06 11:52 AM Page 1


Foreword

It was late Friday evening, and, rather than leave for his usual round of golf, Simon was still at his desk fighting fires. For one of the few times in his career, he was stumped. The friendly acquisition by his company of their closest competitor, completed three months ago, had gone extremely well. Everyone from outside investors to his top management team had commented on how thorough the due diligence and negotiations had been.

The two groups had a complimentary range of products and skills, opportunities for cost-cutting were spotted early, and now everyone were doing what was key – staying focused on the business. Why was it then that almost every day some new problem cropped up? The first month’s data showed an alarming drop in on-time order fulfilment. On Wednesday he had been told that, rather than being easy to integrate, the IT department was going to need an extra £500,000 and twelve months to sort out the mess. And now, to top it all, his long-standing FD had just resigned, saying somewhat cryptically that he ‘just couldn’t carry on working this way’, and could no longer see a long-term future for himself in the new firm. That makes the fifth senior resignation since the merger, four of whom were in fact prior employees of his own company.

It remains an established fact – a majority of all mergers or acquisition fail to reach the value goals set by top management. While the figures are improving, this survey clearly demonstrates that there remains some way to go – many respondents stated for example that their most recent deal did not significantly improve factors such as operating cost, customer satisfaction, staff turnover, or share price, reasons often cited pre-deal in support of the acquisition.

What is clear is that a majority of deal ‘failures’ are not due to poor selection of business partner, nor ineffective negotiation of the deal. More often than not, mergers and acquisitions fail to deliver because of poor post-deal integration. Failure comes in many forms: an inability to secure the cost savings anticipated, loss of customers, a reduction in combined shareholder value, or even an embarrassing de-merger twelve months on. In some cases poor integration of an acquisition has been directly responsible for the ultimate collapse of the business. Recent high-profile examples of troubled mergers abound, from HP Compaq to AOL Time Warner to DaimlerChrysler. In all of these cases, it is now widely recognised that success or failure was determined largely by their ability to integrate quickly and effectively.

So why is successful integration so elusive? Several obvious trouble spots tend to quickly appear – loss of business focus, difficulties with IT, defection of key talent, conflicting working practices, and unaligned HR policies, especially in the area of staff remuneration. But these are only symptoms of deeper issues, and to deal with them, an understanding of root causes is necessary.

This post-merger integration survey provides some interesting insights and benchmarks into what management found key to integration success, both before and after deal closure. It highlights areas where management effort is typically focused during the process, who is typically involved at each stage, and when key activities such as combined business blueprinting are typically conducted. In line with other research, the largest problem areas continue to centre around people, specifically around ‘softer’ issues such as culture, executive leadership, clarity across the business of the future vision and strategy, and insufficient communication of specific objectives to be delivered through the acquisition. On the ‘harder’ side, the survey also tells us that some management teams fail to take sufficient time up-front to fully understand the way in which integration impacts all facets of an organisation, how to deal practically with this complexity, and how to prioritise the truly important vs integration distraction. Comprehensive, advanced planning and structured execution continue to rank highly as critical success factors.

Acquisitions are once again playing an increasingly major part in the growth strategy of most businesses. This trend is likely to accelerate over the coming few years due to factors such as the relative availability of cheap debt, the rise of private equity activity, and the consolidation and global expansion of businesses within emerging economic areas including Brazil, Russia, India and China. What differentiates this recent surge from the M&A boom of the late 90’s is the fact that today’s more volatile stock markets cannot be guaranteed to hide the impact of a poor integration. For some, the increasing financial transparency brought on by Sarbanes-Oxley also requires a more open view of acquisition and integration performance.

Successful acquirers always remember that the benefits of mergers and acquisitions do not come automatically once a deal is closed. Completing an acquisition only buys you the opportunity to generate value in your business, integration is what delivers it.

Carlos Keener Post Merger Integration Specialist

In fact, understanding is what sets us apart. It grows from the great relationships we have with our clients, and it means we can respond in a clear and focused way. And the result? We deliver better legal solutions to your commercial problems.

We call it the power of understanding.www.law-now.com

A key strength is the way CMS CameronMcKenna gets to understand our business by getting to know us.”

Commercial Director,leading construction firm

CMS Cameron McKenna LLP

“ They were very knowledgeable, very responsive.Great people to deal with.”

General Counsel,financial services

“

RemarkAdvert.qxd 3/8/06 4:41 pm Page 1


Foreword

Lawyers are no strangers to the merger process. For some law firms, a merger of their own business provides a route to increased opportunity, growth and profit As professional advisers, M&A is not an occasional activity, it’s our bread and butter.

At CMS Cameron McKenna, we invest a lot of time and

effort in getting to know our clients and their businesses.

We build up an understanding of their industries and their

organisations, and grow to like their people. We become

attuned to the particular styles of individuals. We develop

a nose for the directions that problems come from. All this

makes relationships more rewarding, and more productive.

Sometimes a merger means we lose a client. Suddenly,

after days spent at each other’s side around the negotiation

table, a couple of scrawled signatures can spell the end of a

long and close collaboration, expressed in trust, respect and

even friendship. But just as often, it heralds the start of new

relationships, new collaborations, new adventures. Who says

M&A is just a transaction?

It is not just the hours spent drafting, or in data rooms, or

in meetings, that help us to help our clients. We know the

need to face compliance issues early, not to use money as

a substitute for treating people fairly, not to forsake existing

business and customers while becoming immersed in an

exciting new project. Above all, we know that mergers need

leaders, with a clear vision of where they want to end up, and

the courage to spell it out and to persuade people to follow.

And we know it will not all be plain sailing. We know this

because the lawyer’s job is to take care of difficulty and

detail, and to provide thought-through, workable solutions.

We will be involved in all sorts of areas: jumping through

regulatory hurdles, arranging funding, crafting internal

communications, terminating agreements with suppliers,

licensing new software, assessing environmental risk,

harmonising employee terms and conditions, merging

pension schemes, and many others besides. We work

in teams across different legal disciplines, all centred

on our clients.

Some mergers produce an awkward tension between two

seemingly irreconcilable forces: on the one hand, the clear-

eyed assessment of opportunities for profit and growth; on

the other, an emotional response to the threats of change,

and loss, and difference.

At CMS Cameron McKenna, we understand the need to

address the emotional, human side: the part that views

integration as a contest between ‘them’ and ‘us’, or a cultural

crusade to impose ‘our’ way of doing everything. We also

recognise the conflict of loyalties when hard-headed plans to

release synergies, efficiencies and cost-savings mean saying

goodbye to blameless suppliers or workers. And we know

the effect on morale when a reliable, if outdated, IT system is

upgraded to something newer and every bit as unpredictable

as it is unfamiliar.

We know too that all the upheaval can ultimately bear

fruit. Sooner than anyone expects, the merged entity will

emerge in a different, altogether better place. The bottom

line benefits come through. Change becomes a friend;

and uncertainty becomes the old word for exciting new

possibilities. Hope breeds success: mergers prove that being

bigger is good because it provides a chance to become better

too. Anyone who wants things to stay as they were will very

soon fall short of rising standards.

As we help to integrate and improve our clients’ businesses,

the pay-off is in strengthened relationships - and a little

reflected glory too. As we advise, we also learn. We meet

new people; and we get a chance to show what we can

do. We push ourselves to achieve new goals, backing our

judgement and experience. All this makes us better advisers.

It can even be fun, despite the long hours.

The results of the mergermarket survey provide fascinating

reading. They recognise not simply the bottom line by which

any merger’s success or failure will be judged but also that

the bottom line does not invent itself: success is the product

of exhaustive preparation, detailed planning, careful research,

agonising allocation of priorities, sensitive handling of difficult

decisions and above all, unwavering vision and leadership

from the top. At CMS Cameron McKenna, we recognise

this recipe for a successful merger because we have helped

make it happen, time and again.

Dick Tyler Managing Partner CMS Cameron McKenna LLP

� – M&A Integration, February 2007

M&A Integration Survey Findings

How many entities has your firm partly or fully integrated into your business over the last two years?

• The largest share of respondents interviewed – 48% –

have integrated either two or three companies with

their businesses in the last two years. However, a

narrow minority have only completed one integration

in this time period.

• A further 28% have handled between four and

nine integrations within this timeframe, whilst 13%

of respondents have completed a significant ten or

more acquisitions.

“There are serial buyers that are good at integration and there are serial buyers that are not so good at integration, and that

comes to light with the passage of years. There are people who may be doing a deal of the size that they have not done in the past, and may not fully appreciate the integration challenges.

With the increase in cross-border deals in Europe, there will be a waiting period before we know how successful certain companies

are at overcoming various cultural and language challenges.”mergermarket

“EU accession in 2004 has served as a badge of respectability for Central and Eastern European markets and encouraged

many smaller Western European companies to look at ways of penetrating these markets. The motives for making acquisitions

include unlocking value, buying lower cost manufacturing capacity and, increasingly, being able to exploit growing

consumer demand in these markets.”Iain Batty, Head of CEE Commercial Group

CMS Cameron McKenna


“We have seen a significant shift in the last three years from purely cost driven objectives towards the desire to

grow revenue. However, delivering revenue synergies often proves much more challenging than acquirers anticipated.”

IBM

When considering your most recent merger or acquisition, to what degree do you believe the following were important measures of overall success?

• The overall rationale most used by respondents to measure

or justify a recent merger is ‘Increased potential for growth’.

This is selected by 52% of respondents as being ‘Crucial to

integration outcome’. The second most important measure

of success for respondents is ‘Increased profit’, which is

deemed crucial by 44% of respondents.

• Looking within different respondent groups, these two

leading drivers – ‘Profit’ and ‘Growth potential’ – are

also top rated by CEOs, CFOs, and COOs. However,

interestingly, among IT directors ‘Improved efficiency

of internal ways of working’ is second most important,

pushing ‘Increased profit’ some way down in their

consideration. Meanwhile, in a similar fashion, HR directors

place ‘Increased share price’ above both Increased profit’

and ‘Increased potential for growth’.


� – M&A Integration, February 2007

Considering your last integration, please rate the following factors in terms of importance for the integration outcome:

• The ‘Establishment of the right management team’

is the most important overall factor for respondents

– rated crucial by 59% of respondents. Meanwhile, a

‘Structured execution of integration’ is important for 51%

of respondents. Tied in equal third are ‘Integration planning’

and ‘Leadership & accountability for integration’.

• Among the different respondent groups, HR and IT

directors again differ slightly from CEOs, CFOs and

COOs. HR directors place ‘Integration planning’ as first

consideration. Meanwhile, IT directors place ‘Leadership

& accountability for integration’ in first place.

“It is not surprising that HR directors rate ‘Integration planning’ as the most important factor, given the mass of practical and legal issues they have to deal with in an integration. New laws, like the ICE regulations, increasingly require employees to be given much

earlier insights into corporate planning. Such early outline disclosure can be a constructive device both for managing expectations and

smoothing the eventual disposal process.”Simon Jeffreys, Employment Partner, CMS Cameron McKenna

“In our experience the one critical success factor is to have a structured integration planning process. This ensures you put in place the right leadership and governance, develop appropriate

communication plans, and have accountability for execution. The risks are substantially reduced if integration planning is started

well before deal completion.”IBM

Considering your last acquisition or merger, please select the areas that attracted most integration effort:

M&A Integration, February 2007 – 9

• Information technology is the area that requires the

most integration effort according to 58% of respondents.

• Also requiring significant attention are the areas of

‘Sales, marketing & business development’ and ‘Financial

management & supporting functions’ – both selected

by 49% of respondents.

• Next placed are the less business function related,

more intangible areas such as ‘Corporate values,

principles, culture & behaviour’.

“It is understandable that IT is perceived to attract the most effort on integration – many of the IT issues are extremely

complex and the consequences of any change in IT can have a significant impact. The key is how quickly and effectively IT

integration can be achieved in order to achieve additional savings or efficiencies – and understanding the consequences there may be

of not getting it right.” Isabel Davies, TMT partner, CMS Cameron McKenna

“IT often consumes significantly more effort than it should. This effort can be reduced by starting IT planning early and ensuring IT planning is tightly integrated with the

overall programme management.”IBM


�0 – M&A Integration, February 2007

Considering your last acquisition or merger, in what way was your business different two years post-deal?

• Respondents are broadly very positive about the

acquisitions they have made in recent years. In not

one area does a majority feel there has been less than

a perceivable improvement.

• The top three leading areas of improvement are

‘Increased market share’, ‘Increased potential for

growth’, and ‘Increased turnover’.

• ‘Improved financial security’ and ‘Staff turnover’ garner

the weakest endorsement, but even here over half of

respondents believe there has been at very least a

perceivable improvement.

“Employment law increasingly forces employers to make an early announcement about redundancies and the new right for employee representatives to be informed about takeovers (The

Takeover Directive Regulations 2006) only adds to this. British employers will need to adapt their approach to become more

nearly like that of their continental counterparts. Many of them have legal environments where deals cannot be concluded or

restructurings implemented until information and consultation processes have concluded with an agreement.”

Simon Jeffreys, Employment Partner, CMS Cameron McKenna

“Considering planning is rated as the most important driver of success it is surprising how many start their detailed planning

so late in the process. Our experience is that acquirers often underestimate the scale of change required to deliver synergies.

Once the deal is done they want rapid results but delivering these without proper planning can be risky and potentially destroy

value in other areas of the business.IBM

M&A Integration, February 2007 – ��

At what point in the process did each of the following activities begin to take place at a detailed level?

• Perhaps unsurprisingly, respondents prioritise the

‘Development of an outline blueprint for the combined

business’. Two thirds of respondents attended to this

task during due diligence.

• Of least relative priority is the ‘Development of formal

acquisition & integration measures of success’, which

only 30% of respondents attended to during due diligence.

Instead, a greater 38% preferred to deal with this shortly

pre-deal, and somewhat alarmingly, 7% have not felt any

need for such an activity.

“As external advisers on many transactions, the benefits of getting a greater understanding of the acquisition issues and integration strategy earlier on are without question. We would much rather our clients understood and addressed the problems early on – even if that puts them off the deal – than have to deal with an unsuccessful transaction. ” Isabel Davies, TMT partner, CMS Cameron McKenna

Which of the following individuals or groups played a leading role in each of the following steps in the process?

• Unsurprisingly, according to respondents, the CEO/MD

takes a pre-eminent role in all but one of the steps in the

integration process above. In ‘Integration execution’, it is

the COO who is deemed most likely to lead, with the CEO

second most likely.

• Meanwhile, in the area of ‘Measurement of integration

success’ it is the CEO who leads, but very closely followed

by the CFO. This is not surprising considering that the

majority of these measures will be based on financial KPIs.

“In transactions involving the separation of related and complex businesses, the time and effort it takes to determine the best way to split, terminate and transfer customer and supplier contracts, or to address procurement or change of control issues should not be underestimated. Developing and implementing a coherent strategy in this regard can be critical to the successful sale of the relevant businesses.”David Bresnick, Corporate Partner, CMS Cameron McKenna

Did you nominate a dedicated Integration Manager? If “Yes”, when did he or she assume responsibility?

• Almost three quarters (74%) of respondents nominated

a dedication Integration Manager as part of their M&A

process.

• Among these respondents, 62% did so pre-deal, and a

further 15% on announcement of the deal. A relatively

sizeable 23%, however, were prepared to wait until after

sale completion.

“Successful acquirers appoint their integration director pre-deal. This enables them to start planning earlier and hit the ground running on day one, giving them a head start in delivering synergies.”IBM

What, if anything, would you have done differently with regard to integration management?

The following key themes emerged from respondents’ answers:

�. Quicker Integration: start early; pay particular attention to IT issuesFor a quarter of respondents their M&A integration process

could have been quicker. As one respondent remarks: “Give the

integration process more speed and targets at the beginning.”

For a couple of respondents it is not just a case of a speedier

integration process, but also about “starting the process earlier”.

The area of information technology emerges as a particular

area of concern. Two respondents in particular mention the

requirement to have “earlier involvement of IT people”, or

“start earlier evaluation of IT compatibility.” Meanwhile, another

respondent laments: “We should have been much more

challenging of our IT team who turned out to be very weak.”

“Whilst a number of respondents suggested that things could have been done more quickly, speed is speed is not a panacea. Take for example the IT integration. The consequences of getting that wrong can be significant damage to the existing businesses. Whilst not being totally efficient, it may be possible, and indeed better, to run two IT systems in parallel until an optimum solution is found than to attempt an early IT transition onto the wrong platform.” Isabel Davies, TMT partner, CMS Cameron McKenna

“For many acquirers IT is a key enabler of synergies. This should put it at the heart of synergy planning.”IBM

Survey Findings



2. Nothing – it went smoothlyA sizeable 19% of respondents feel that their integration

process could not have been improved. In the words of one

respondent: “We have a lot of experience with M&A activities in

the last ten years. Therefore we are convinced that we made no

substantial mistakes in our last business integration projects.”

�. More CommunicationAnother recurrent theme is the need to prioritise and ensure

strong lines of communication between employees and

management, coupled with the cultural meshing required. As

one respondent says: “We would have exerted more effort

to explain the reasons behind the acquisition, established a

common vision between the merging companies and shown

more respect for the culture and business model embedded in

the acquired company.”

“More communication is a theme that runs throughout all the EU-derived new laws on workplace information and consultation. Companies need to do as much as they can to carry staff with them, as well as to comply with their heightened legal obligations. Notification and consultation with employees can, and will, drive deal timetables.”Simon Jeffreys, Employment Partner, CMS Cameron McKenna

People are at the heart of any merger. At the same time many staff are at best nervous and at worst already dusting off their CVs. The more you communicate the more people are reassured and can engage in delivering the desired outcomes.IBM

4. Better PlanningPerhaps inevitably, planning also emerges as an area that

could be improved upon. As one respondent says: “Begin

earlier with planning (during due diligence process); be more

strict and focussed on origin planning while excecuting; more

detailed integration controlling and reporting; define earlier

concrete responsibilities of integration team members.”

“The mergermarket survey supports our experience of corporate clients carrying out strategic acquisitions or buy and build programmes. Generally, those clients who put the most resource into forward integration planning and prioritise, in particular, the integration and management of head count tend to be in a position to push through the synergy/growth benefits they seek far more quickly than those who see this as an optional due diligence activity which can be left and dealt with later.”David Bresnick, Corporate Partner, CMS Cameron McKenna

“Most acquirers expect high value synergies from M&A deals; there are a number of enablers and ‘must do’ projects; and existing business must be protected. Whilst these projects are underway the business structure is changing around them. This requires careful coordination and needs dedicated resource to deliver value.”IBM


Introduction

Once again, deal activity hits an all time high; the revered

failure statistics trotted out and the old integration chestnut

paraded as the chief culprit. Do we never learn? It is not about

integration. In fact the mere presumption of integration is

enough to cause failure.

Is it a surprise that bringing together two former competitors is

fraught with difficulty? The sheer scale and complexity of the

challenge means that things will inevitably go wrong. And if

your enthusiastic ‘Integration’ team is diligently executing the

wrong plan, is it a surprise that you spend money instead of

making it?

One investment banker likened the challenge to replacing the

wheels on an aircraft in mid flight. If that’s all it involved, the

job would be easy. Try moving the passengers at the same

time, but with all the seats rearranged. How about replacing

the pilot with one trained on a different plane? The CAA wants

your engines to be quieter and more fuel efficient before you

land. And a cheap carrier just cut prices on the same route by

40%. You begin to get the real picture.

So if not integration, then what?

In our experience three things:

1. A brutally honest exposition of the real reasons for

undertaking the journey.

2. An unwavering focus on the destination objectives.

3. Relentless execution of the right Transition Strategies.

�. Exposition

Even in the biggest most complicated transactions there are

only ever a handful of true value drivers. And in the faithful

application of such fundamentals to the Transition Strategy lies

the secret of success. But between the euphoria of closing the

deal and the shock of running it, this vital connection is almost

always missed. Nature hates a vacuum and the ‘Integration

Plan’ rushes in. We’ve all seen them, dozens of projects,

hundreds of Gant charts, thousands of activities, all based on

the presumption of integration and, by design, doomed.

It is only by focusing with laser sharp clarity that you can

maintain purpose through the disruption that is a true merger.

And here’s the rub - 50% of ‘Integration’ activities destroy

value. In contrast, building the right Transition Strategy is as

much about what you stop as what you do.

Over the years we have established a structural approach

similar to finite element analysis that first exposes the true

value drivers and then uses them to build the Transition

Strategy. The rigour of this approach maintains design

integrity through legal, financial and operational due diligence,

negotiation, and closure to ensure synergy delivery.

Importantly, it puts you on top of the day one mountain. It

positions you for immediate deployment of key work streams.

It directs you straight into the single most vital phase - doing it

all again or Regeneration. Why is this so essential?

M&A - A game of skill not chance


2. Focus

50% of synergies evaporate the instant you sign the deal. Is all

that expensive due diligence worthless? Not necessarily, but it

does have severe limitations. Asking a competitor to disclose

sensitive information which will be used to exercise control

over them is a strange contortion and in a Sarbox world, there

are real penalties for getting it wrong. The result is at best a

murky picture.

Moreover, up to the point of ownership yours is the dominant

perspective, often limited, always vulnerable to blind spots.

Time to engage the other side and root out synergies that

won’t survive contact with reality. In one of M&A’s strangest

ironies it is not the list that got the deal done in the first place

- you have to go much deeper and regenerate the list.

Framing the targets with the new leadership team is the

first challenge. It is a rare group that even when in heated

agreement on the strategic rationale, have hammered out

the practical consequences for Transition. Equipped with

this revised insight, the next step is to mine the business

with the people who know where to look. This is where the

real discoveries are to be made - especially with revenue

synergies.

What gets measured gets done, so all synergy projects must

have clear business cases. The Transition Director measures

benefits realisation right through to the post implementation

review. The same benefits are also built into revised business

plans and, in parallel, tracked through the line. With this vital

triangulation, we ensure delivery.

Regeneration, Reframing and Mining typically identify

synergies well in excess of the original plan. It is in the

exploitation of these discoveries that we set out to beat

expectations.

�. Execution

With synergy regeneration comes the ability to prioritise

radically those Transition activities that will deliver the

promised value and ensure that you are not deflected from

this purpose. Radical Prioritisation formally engages the most

senior leaders in deciding what Transition projects will be

done, and is the mechanism by which a huge amount of costly

‘Integration’ activity is simply stopped.

So knowing the departure points and key destination

objectives, it remains to chart the migration paths of all

essential elements, both tangible and intangible. This is

where our structural design approach flushes out critical

interdependencies and binds the whole Transition Strategy into

a cohesive programme, focused and prioritised on delivering

the money.

Despite this hard won focus many synergies will be lost

without the right Governance. It is easy for the senior team

to be distracted designing the new organisation and making

essential appointments with inevitable delays and disruption.

Another vacuum, and in its presence, people will make

things up in the name of ‘integration’ squandering value

as they go. Transition Governance, derived from Radical

Prioritisation puts the best and brightest leaders at the head

of critical programmes - fast. At the same time the original

flight plan must be maintained until the new one takes over,

also demanding your best and brightest - exposing by far the

biggest headache - scarce expertise.

�� – M&A Integration, February 2007

M&A - A game of skill not chance

Transition expertise

Would you submit to the ministrations of a surgeon whose

only experience is you? Unlikely, yet many executives bet the

farm on little or no Transition experience because they know

their business. Of course they do. Transition is another matter.

The more you do it, the better you get. You wouldn’t hesitate

to get the best deal advice or due diligence. Why would you

risk it all in the maelstrom of ‘integration’?

Summary

In a phrase, ‘Follow the Money’. All deals are the same. There

are only ever a few value drivers. All deals are different. Your

drivers will be unique. Structural Analysis* gets to the point

and stays there - so much so that we’ve patented it. It can

help you beat the odds. So can we.

* IBM’s Component Business Modelling process applied to

M&A Transition

Steve Wood Mergers & Acquisitions Global Leader IBM Global Business Services [email protected]

Paul Price Mergers & Acquisitions UKISA Leader IBM Global Business Services [email protected]

For further information visit ibm.com/gbs/uk


This was Carly Fiorina’s view shortly after completing the

Hewlett Packard / Compaq merger. Others had misgivings,

both at the time and subsequently. It was these misgivings

which ultimately cost Ms Fiorina her job, and the merged

company US $21.4m in compensation.

What was the merger all about? Is success simply the

fulfilment of a merger’s original rationale and objectives, or

does it always depend on increased revenue, profitability or

other metrics? Is there a right and a wrong way to measure

success? How long does it take before a valid judgment can

be made?

Rationale

The mergermarket survey reflects CMS Cameron McKenna’s

own experience that there has been recent buoyancy in the

M&A market, and shares our confidence that M&A activity

will stay high for a while yet. In particular, since EU accession

served as a badge of respectability, many smaller western

European companies have started to look at ways to grow in

central and eastern Europe.

In the UK when we look at M&A activity we often look at

it in comparison to activity in the US and other traditional

western European markets. However we should also compare

activities in other parts of Europe. Companies have continued

to look for targets in the more ‘traditional’ CEE markets such

as Hungary, Poland and the Czech Republic, but we have also

seen a massive increase in interest in countries further south

and east, across Europe. Our Bulgarian and Romanian offices

have seen greatly increased levels of demand for assistance in

the purchase of companies across a wide range of sectors.

The survey also demonstrates that, whatever their geography,

businesses buy or merge with other businesses to make

money. Rated measures of success are about growth: growth

potential, turnover growth, profit growth, share price growth,

customer base growth, market share growth, product range

growth, IP asset growth. The buyer has seen something that

they believe to be undervalued in the seller’s business they

think they can improve on or they see some “added value”

from the combination of their existing business with that of

the target. This can often turn negotiation and due diligence

into tense affairs, as buyers try not to reveal where they think

the unrealised value is, in case the price starts going up.

The survey also examines the timing of key activities. Ignoring

a tiny minority of respondents claiming not to have addressed

these issues at all, it is reassuring to see that businesses are

bringing forward the moment they start facing up to the main

potential headaches of integration, whether they be employee

issues, pensions, IT or other business drivers. It is the

responsibility of the senior management of both the acquirer

and the target to work together to address these issues, aided

of course by their professional advisers. They also need to

put aside any mixed personal feelings they have about the

transaction and, in some cases, differences of both style and

substance with the other party.

The traditional role of lawyers in business integration is as

executors of a pre-defined strategy decided on by the acquirer

or merging companies. However, our experience indicates

that this is not always the optimum approach. Lawyers are

usually brought in during the pre-deal stage, perhaps to finalise

a term sheet or heads of agreement before full contract

negotiations. However, rather than confining us to this role we

can contribute experience, analysis and insights which go far

beyond mere legal guidance, for instance, in developing the

strategy for integration as well as its implementation.

Unlocking Potential

“This was a great quarter. By any measure, we hit our stride and demonstrated what the merger was all about.”

�� – M&A Integration, February 2007

Key drivers

Mergers and acquisitions take place for a variety of reasons.

They can enable companies to achieve scale and revenue

beyond that which can be achieved organically, open up a

closed market or plug a gap in an existing portfolio. They can

also catapult companies into a different league: so-called

‘step change’ acquisitions, such as Morrison’s acquisition of

Safeway or RBS’s acquisition of NatWest. They can also be

defensive, to keep the target out of a rival’s hands, maintain

market position or kill off a new competitor. They may also

occur for “cost saving” where the sheer scale of the new

business can drive cost savings and efficiencies.

There are other drivers too: the technology sector experienced

a surge of activity in the late 1990s, predominantly driven by

companies looking for new technology and solutions for their

existing businesses. The dotcom boom led to huge premiums

being paid for companies with technology which was

perceived to be leading edge but which was often unproven

or still in development.

An acquisition can even be driven by other factors. During the

dotcom boom Nortel Networks, a long established company,

acquired internet start-up company Bay Networks. Nortel

identified the target company for its technology and its new

‘Silicon Valley’ culture and business methodology to enable

Nortel to adapt its corporate culture. Today companies also

acquire for reasons such as speed to market or a new type or

geography of customer (eBay and Skype). The acquisition of

MySpace by News Corp gave News Corp an immediate leap

into the internet to rival both Google and Yahoo.

As the survey shows, a range of strategies drives mergers; but

acquisitions to increase profitability may only achieve a short-

term spike unless the acquirer can ensure a ‘pull-through’

transfer of the target’s experiences and practices to its own

organisation. Other acquisitions, say to increase market share,

may seek a ‘push-through’ transfer of an existing business

practice to the target. Either way, the key measure of success

is whether the desired benefits can be realised within a

sufficiently short timescale to prevent the destruction of value

through a protracted and problematic integration process.

Problem issues

There is a whole host of issues that need to be addressed if

the value sought from any merger is to be released, whether

in markets, products, customers, technology or some other

aspect of the business.

A number of the key issues in any merger integration strategy

relate to the human element. There will be a due diligence

and verification process involving a thorough investigation of

the target’s workforce in terms of headcount, payroll cost,

statutory and contractual rights but the real value lies in a

separate exercise: addressing the wider strategic and business

impact of employee issues at an early stage.

Loss of morale or loss of key employees, either within the

acquiring company or more particularly within the target,

can seriously undermine the integration process. There are

those who will automatically think that their career prospects

are limited or that there will be changes they will not like.

It is imperative to establish a positive and encouraging

environment that will incentivise the doubters, and allow the

full benefits of the merger to be realised.

This requires early assessment of whether the cultures of the

two organisations are compatible. It also requires effective

leadership to ensure that morale and drive is maintained

throughout the integration process. Good and regular

communication can go a long way towards giving people the

reassurances they need. Most difficulties are better faced

than feared; and most rumours expand to fill a vacuum.

There may be commercial, regulatory or confidentiality

considerations which make it difficult to reveal the full

underlying logic of the transaction. On the other hand, painting

a picture of a profitable combined future could be exactly what

is needed to quell employee insecurity and unrest. Sell them

the benefits, as the marketers would say.

Unlocking Potential

M&A Integration, February 2007 – �9

Some kind of communication may anyway be required

as part of workforce consultation or as part of regulatory

requirements. This should generally be started at the earliest

opportunity. Across Europe, there is a wide variation in the

extent to which employee representatives (trade unions or

works councils) have rights to be informed and consulted

about mergers and acquisitions. Some benchmarks have been

laid down by the European Union, principally the Acquired

Rights Directive (“ARD”) which has been around in various

forms since 1977 and applies to asset deals, but the European

Works Council Directive may apply in some cross-border deals,

and more recently we have had the Takeovers Directive of

2004 which applies to share deals.

There is a wide divergence in the way in which member

states have implemented requirements of the ARD such

as the information and consultation aspect. For example,

in France the transfer of ownership does not take effect

until the necessary process of informing and consulting the

representatives has taken place; but in the UK, the deal can

be completed whether or not representatives have been

consulted but a default penalty of up to 90 days pay is payable

to the affected employees.

Irrespective of the differences at national level, ensuring good

relations with the current and future workforce can sometimes

not just be a matter of best practice but of vital commercial

importance. Some aspects of the consultation process may

have to be carried out with a view to reaching agreement.

However, avoid putting yourself in a position where the

whole transaction is conditional on employee negotiations.

If more than a few redundancies are contemplated, there

are statutory timescales that must be observed, which may

also affect the progress of the transaction. There may also

need to be a harmonisation of terms and conditions. The law

does not always make this easy to achieve. Upwards-only

harmonisation could be prohibitively expensive. Downwards

harmonisation could lead to a barrage of claims.

A related – and equally significant – area is pensions. As

much time can be spent on pension issues in a merger and

acquisition process as can be spent on the acquisition itself.

This is not surprising given the figures involved: the cost

of addressing pensions issues can comprise a significant

proportion of the overall transaction value. Deals can fold due

to the impact of pension deficits.

For example in the sale of the business of Marconi to Ericsson

in 2005, the treatment of the £2.7 billion fund was a prime

consideration and the sale was only approved by the Pensions

Regulator once arrangements for protection of the scheme

were agreed. These involved a substantial initial contribution

in the scheme and a £500 million escrow account which

could only be distributed after any further amount required by

the pension scheme had been paid. Expert advice is always

needed to understand the full pensions implications of a

transaction, from future funding requirements to scheme

closure. Last minute negotiations may help to round the

edges but pensions can easily make or break a deal and

cannot be ignored.

Arrangements with customers of the target also need detailed

investigation. Contracts with customers of the target may

include provisions that allow the customers to terminate or

renegotiate their supply arrangements following a change

of control. Often, when the target is not a company but the

underlying business, then the transfer of the contract with the

customer may require the consent of the customer. If such

consent was not to be forthcoming, the loss of the contract

or key customer could greatly affect the profitability of the

business being acquired so it is essential to make a realistic

assessment of any potential impact on top line revenue

through the due diligence process and then to formulate a

mitigation strategy.

20 – M&A Integration, February 2007

Unlocking Potential

Ensuring that customers are comfortable with the

prospective transaction, while working within the boundaries

of confidentiality and disclosure requirements, can be an

enormous challenge. Some customers can feel offended if

the first they hear of the acquisition is in the media, which

means that discussions get off on the wrong foot and may be

difficult to retrieve.

It may be perceived that lawyers have less to contribute to

customer and market issues but it is impossible to overstate

the importance of detailed investigation and analysis by those

with broad and deep experience of the commonly-occurring

issues affecting the particular market sector and transaction

type. The due diligence process will cover all the key aspects

of the business, including supply arrangements, sales or

business contracts, intellectual property rights and IT, many of

which have a large market-facing element.

As the transaction proceeds and the experts are scouring

the paperwork, it is important to ensure that the existing

businesses of both acquirer and target are not left

unattended. This can often happen in large transactions where

management has such a job of integration that the existing

business may suffer. The acquisition of Safeway by Morrisons

was so significant that initial results following the merger

suggested that not only was the target business affected, but

so was the underlying Morrisons’ business. The merger was

impacting the core business. The main lesson to be learnt

is the compound effect this can have, not just in immediate

loss of sales and morale, but in market jitters and longer-term

damage to the integration itself. More recent results are

encouraging, suggesting that the merger, after a sticky start,

may be beginning to pay dividends.

Equal care and attention must be shown where the target is

dependent on a particular supplier for a key component or sole

source arrangement. Although a supplier will not want to walk

away from a significant revenue stream, it may be in the same

or similar business as the acquirer and reluctant to supply to a

competitor. These situations are not insoluble, but they need

to be identified and dealt with decisively.

The survey identifies IT as the issue needing the most

integration effort, even though it is not necessarily viewed

as an important driver of the transaction. In our experience

at CMS Cameron McKenna, it is more important to get the

IT integration right than to get it done quickly. There is often

no reason why two or more IT systems cannot be run in

parallel for a while. This may not be the most efficient way

of operating but it can be a lot less risky and expensive than a

hasty and botched implementation of a poorly thought-through

IT integration strategy. It may be that the acquirer is working

on one financial accounting system whereas the target has

just implemented another. What is the best long-term solution

for the combined group? It may be that the target has more

efficient systems which it would be sensible for the acquirer to

adopt, even though this would involve the tail wagging the dog.

Where IT is outsourced, there may be other considerations.

There may be two different outsource providers. The acquirer

may be looking to exit one of the arrangements, or to bring

them both under one roof. Careful consideration should be

given to the consequences and implications of doing so.

In addition to IT audits in corporate transactions an Intellectual

Property (IP) audit can provide a springboard to the

understanding, integration and rationalisation of IP within the

merged organisation. This not only relates to IP in the context

of IT but across the board, not least as highlighted by the

survey in the area of corporate branding.

Compliance can also create unexpected problems. In a recent

acquisition, the acquirer put its own regulatory compliance

into question simply because the target was not compliant

with Sarbanes Oxley reporting requirements. It is necessary

to understand the processes and procedures of the target

because wholesale changes may be needed to ensure that

the acquirer remains compliant with regulatory requirements.

Early planning and action will invariably save more time and

expense than they create.

M&A Integration, February 2007 – 2�

The survey also reveals some interesting views about where

integration brings success, and where it doesn’t. The findings

indicate that the financial/growth drivers for integration are

generally achieved within a couple of years but at an obvious

human cost of job losses, job insecurity, lower morale and

new ways of working. This may be what made the target

attractive in the first place: the growth opportunity existed

because the business was poorly managed, with too many

unproductive staff and insufficient technology. Mergers can

keep the HR and IT functions extremely busy in thankless,

under-recognised roles. Businesses can suffer considerable

reputational as well as financial damage if they fail to handle

systems migration properly. The same is true of workforce

reductions, especially given the protections available under

redundancy, unfair dismissal and discrimination laws, to

name but a few. These issues can also become a significant

distraction for senior management.

The survey clearly demonstrates the importance of leadership.

The drive for integration has to come from the very top, or

the difficult tasks will not be given enough priority. Facing

up to the most difficult issues is what leaders are there for.

According to the survey, the CFO achieves a heightened

importance at results time: success is clearly based on

financial metrics, not hygiene factors such as headcount, sales

volumes or systems improvements. The other members of

the leadership team are less conspicuous: like the lawyers,

they are often hard at work behind the scenes, doing a series

of thankless tasks that won’t grab the headlines but still need

to be done. Indeed, this is often where increased growth

or profit comes from: it doesn’t just magically appear out of

thin air, it is achieved through systems integration, customer

focus, overheads reduction, workforce realignment and other

unglamorous activities.

And lessons learned? The 19% of survey respondents

claiming they would do nothing differently next time round

are not to be believed. The more popular experience is that

integration needs to be planned earlier and an execution

strategy identified sooner rather than later. The call for better

communication also rings true: people are naturally resistant

to change and will fight integration unless they are shown a

positive vision of what their own future will look like and are

persuaded to welcome it rather than adopt guerrilla tactics to

spoil it and slow it down.

Finally, as we lawyers would say, capital invested in a well-

planned integration is money well spent. Of course, it must

be kept under control because it impacts on profitability and

therefore on success. However, experience tells us that the

most important aspects of business integration are usually

the most difficult. Expect these to cost money and take time.

Experience also tells us that the smartest money is often spent

earliest – on strategy, on planning and on thorough due diligence.

Detailed work at the outset may well identify the “hidden

costs” of the transaction. These “hidden costs” can include

the cost of closure of competing product lines, IT costs for

continuing to run parallel systems, regulatory compliance costs

and many others. If these costs and risks are uncovered at the

right time, they can be reflected in the purchase price. It is not

until you know the worst about what you are buying that your

hard work can really begin.

OMA COMPUTERSHARE C PANY

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Cas SydorowitzManaging Director > Corporate AdvisoryGeorgeson Shareholder68 Upper Thames StreetLondon EC4V 3BJ UK

Phone: +44 (0) 870 703 0302Mobile: +44 (0) 7810 750 442Fax: +44 (0) 870 702 [email protected]

Proxy Solicitation > Asset Reunification > Information Agent > M & A Advisory Services

A4_georgeson_ad.qxd 4/1/07 15:16 Page 1

Which party in your average M&A transaction makes the final selection of a proxy solicitor?

• According to 41% of our survey group of investor relations

directors, the selection of the proxy solicitor1 is typically

made by the Corporate broker. That said, this selection

process may also be made directly by someone in the

company, either in the guise of CEO (24%), Investor

relations officer (24%) or Company secretary (18%). 1 A specialist (firm) hired to gather proxy votes.

“The evidence that in many cases the corporate broker recommends the proxy solicitor, and that the decision is made at a very senior level highlights the importance of the role in an M&A transaction.”Cas Sydorowitz

Georgeson, Managing Director > Corporate Advisory

How important is it for you to communicate with the following stakeholders?

• Given the dominant share of company ownership that

Institutional shareholders usually hold, it is perhaps

not surprising that respondents are unanimous on one

thing: the primacy of communicating with institutional

shareholders. Indeed, every single respondent believes it is

crucial to communicate with this group.

• By contrast, other stakeholders are given markedly less

importance by respondents. Nevertheless, a sizeable

60% of respondents believe communication with ‘Foreign

shareholders’ is either ‘Crucial’ or ‘Very important’.

Employee shareholders are crucial or very important

with 55% of respondents.

“The survey results confirm that issuers agree on the overwhelming importance of reaching out to their institutional shareholder base, with a particular focus on the foreign component. This is commensurate with Georgeson’s experience with the relative weighting of institutional ownership as part of the issued share capital in most companies, and with the complexities of cross-border voting.”Cas Sydorowitz


Investor Relations Survey Findings



24 – M&A Integration, February 2007

To assess the position of your shareholders on the offer, have you used the proxy solicitor/information agent to communicate with either institutional or retail shareholders?

• Respondents are evenly divided over using proxy solicitor/

information agents when communicating with either

institutional shareholders or retail shareholders.

If so, who appoints the proxy solicitor/information agent at the pre-deal stage?

• If a proxy solicitor/information agent is appointed for

communication with shareholders at the pre-deal stage,

it is often a collaborative decision, with most likely the

IR department taking a decision – 58% of cases, or a

Corporate broker – in 50% of cases. Meanwhile, in a

quarter of instances a financial PR agency will have input.

Do you know which hedge funds are buying/selling your stock during a transaction?

• The largest share of respondents (40%) are aware of

which hedge funds are either buying or selling their stock

during an M&A process. As one respondent explains, this

awareness comes through “our share registrar, the broker

and also direct contact with the hedge funds themselves.”

• A further 40% of respondents, however, feel that

awareness of hedge funds’ buying activity is incomplete

at times. One respondent in particular says: “yes and no,

it depends on which hedge funds are involved; whether

we have a relationship with the hedge funds and the size

and level of dealings.” Meanwhile, another respondent

adds that “It depends how their stock is registered, if it’s

via a CFD it is difficult to trace transactions via the register.”

• Otherwise, a quarter of respondents do not know which

funds are trading. As one respondent says: “No, we don’t

care. It’s more important to get involved with institutional

and retail shareholders.”

When do you actively engage your retail holders or private client brokers?

• Half of respondents actively engage retail shareholders or

private client brokers during the year. A further 20% do

engage these parties, but only during an M&A transaction.

Meanwhile, 30% of respondents leave these groups alone.

“Georgeson has seen a marked rise in the importance attached by issuers to retail shareholder sentiment on transactions. As a result, we have been retained on numerous occasions to flank an institutional solicitation campaign with an information agent role geared towards private investors.”Cas Sydorowitz



2� – M&A Integration, February 2007

What are the key determining factors when considering an information agent/ proxy solicitor?

• The most important determining factor for respondents

when selecting an information agent/proxy solicitor is the

‘Level of acceptances required’. 88% of respondents select

this as either ‘Crucial’ or ‘Very important’.

“Determining factors in the decision over whether to use a proxy solicitor are key elements that show a direct linkage to the transaction itself, and to the shareholder base in question; in most cases, there is a clear, quantifiable rationale for the role.”Cas Sydorowitz


During an M&A transaction, under what circumstances would you consider selecting a Receiving agent other than the incumbent Registrar to the target?

• A majority of 63% of respondents are most inclined to

employ a Receiving agent when an M&A situation is

hostile.

• Otherwise, 56% of respondents would select a Receiving

agent if there was no incumbent Registrar to the target.

“This finding supports the logic behind adding the considerable resources of a proxy solicitor to augment services provided by the incumbent registrar for shareholders with questions. There is a clear differentiation between service level and type offered to holders with questions regarding their shares, and those relating to the transaction at hand.”Cas Sydorowitz


Corporate actions questions


On M&A transactions where the target company will remain listed, how important are the following factors in your selection of a Receiving agent?

• The leading considerations when selecting a Receiving

agent are cost based: the ‘Receiving agent fees’ or the

‘Annual register maintenance fees’. That said,’Value added

services’ that a Receiving agent can offer, such as proxy

solicitation, are also important for respondents.

If a bidder from abroad targets a listed UK company and the offer consideration includes shares, how would you rate the importance of the following factors in the selection of a Receiving agent and ongoing Registrar?

• When an overseas bidder is targeting a UK company, the

core consideration in the selection of Receiving agent and

ongoing Registrar is ‘Price’ – 33% of respondents rate this

as crucial.

• The second most important consideration – with 25% rating

it crucial – is ‘Depository interest expertise’. ‘International

presence’, whilst very important for 58% of respondents, is

deemed crucial by only 17% of respondents.


2� – M&A Integration, February 2007

In a contested bid situation, how comfortable would you feel in engaging a Receiving agent that is already acting for one of the bidders, and has a track record of working on more than one side of a transaction?

• Respondents are somewhat divided over whether they

would engage a Receiving agent that is already acting

for one of the bidders. Almost half of respondents (46%)

would be uncomfortable in such a scenario. However,

the remaining 54% would be either quite comfortable,

comfortable, or very comfortable if this were to happen.

At what stage in the preparation of an M&A transaction would you typically think about engaging the Receiving agent?

• Respondents would not appear to prioritise the

employment of a Receiving agent. Indeed, the largest share

(37%) would choose to engage a Receiving agent is during

the due diligence period. A further quarter would do so

during the early drafts of the offer document.

• However, a quarter of respondents would employ a

Receiving agent somewhat earlier – around the time of the

Rule 2.4 announcement.


How open are you to allowing for a ‘beauty parade’ amongst the Receiving agents?

• Three quarters of respondents are ‘Quite open’ or ‘Open’ to

conducting a beauty parade amongst Receiving agents. A

quarter, however, are ‘Not keen’.

During an M&A transaction, how valuable do you believe is the packaging of data that a Receiving Agent compiles for a Financial PR company you select to employ?

• Respondents are somewhat divided over the value of the

data that a Receiving Agent compiles for the financial PR

during an M&A transaction. A third believe such data is

valuable, whilst a further third are indifferent to it.

How valuable do you feel it would be to include the Receiving agent in daily ‘all adviser’ telephone conference calls on an M&A transaction?

• The majority of respondents (72%) are indifferent to

including the Receiving agent in the daily all adviser’

telephone conference calls during an M&A transaction.

A minority of 21%, however, believe such a high level

inclusion would be ‘Valuable’ to the M&A transaction.

M&A Integration, February 2007 – 29

Over the past few years, hedge funds have entered the

realms of common parlance, with even the uninitiated

investor being aware of the term, even if they’re not

completely sure what it means.

It has been argued that the upsurge in mergers and

acquisitions seen over the past 2 years has been due to

the influence of hedge funds – which are able to use their

immense power and resource to help push deals through.

Such funds are estimated to have resources in the region of

$1.1 trillion globally, and this figure is expected to grow by

around 300 per cent over the next 5 years. With such vast

sums under hedge fund control, it is not surprising that their

impact in the M&A arena is becoming increasingly apparent.

One of the key differences with a hedge fund is its time

horizon – its aim to make its investors richer now rather than

in 20 years time. That means that they are often likely to exert

pressure on companies to act for the short term, while in

actual fact company strategy may have a longer term horizon.

Hedge funds take advantage of market anomalies which may

make more money if a company fails, which is not in the best

interest of all shareholders. Their bet may be that a particular

M&A fails, because then the stock involved may go down and

the fund’s short position may make them more money than if

they were long on the stock and the M&A went through.

Sometimes a hedge fund is able to amass enough stock

themselves or alongside similar funds to prevent or frustrate

a deal from going through. A recent example was seen with

Polygon preventing Telent from completing their intended

scheme of arrangement. The M&A was pulled as Polygon (an

American hedge fund best-known for the aggressive positions

it has taken during corporate restructurings at British Energy

and Monsoon) thought that Telent’s stock was being picked up

too cheaply.

In this kind of situation, hedge funds are not necessarily only

holding out for a big payout just for themselves, but rather

trying to use their shareholding and ability to block a deal

and get a better price for everyone. In other cases they do

manage to achieve concessions that just benefit themselves.

The hedge fund may manoeuvre to a position where they get

to buy an asset that has to be sold off for competitive reasons

or as a pre-set agreement to get a particular shareholder

onside. Effectively the fund may be acting like a private

equity firm and buying an asset for less than market value in

exchange for support.

In another recent situation North Sound called an EGM to

remove the chairman of African Platinum plc:

‘At an extraordinary general meeting called by hedge fund manager North Sound Capital yesterday, African Platinum non-executive chairman Charles Hansard was ousted despite a unanimous recommendation by the board to the contrary. Director Mark Bristow, CEO of Randgold Resources resigned “on principle” shortly thereafter. North Sound Capital owns a 10.10% stake in Afplats…’

Source: Resource Investor

The US-based hedge fund refused to talk to the company

while the existing chairman was in place, but once they had

succeeded in removing him, they agreed to talks. Many view

this power as too all-encompassing, feeling that hedge fund

managers are able to ride roughshod over a company while

not truly understanding its long-term prospects.

Worse still is when hedge funds don’t own the underlying

stock, but instead own a derivative instrument, like a contract

for difference (CFD). They are able to buy the CFD for

less than the stock; can buy on margin AND avoid stamp

duty. They are purely betting on the company’s stock price

moving in one direction or another with no economic or legal

entitlement of ownership. The fund peddles their influence

using these derivative instruments. In the Polygon Telent

example; the US hedge fund had some shares and a larger

position in CFDs.

Hedge funds – a worrying factor in the M&A market?


Hedge funds aim to make their investors richer every year, never mind in the long-term – and use a wide variety of investment techniques to achieve this goal. They enjoy great freedom to invest in almost any financial instrument, and do not need to confine themselves to any particular market place or type of investments.


They simply had to convert the CFDs into the ordinary shares

for them to block the proposed transaction. However, this

conversion does not always happen in practice, and instead

the hedge fund through their CFD position gets their prime

broker, whom they bought the CFD from, to vote on the

underlying shares according to the fund’s wishes, as if they

were the owners of the stock.

A big incentive to do business in this way is that buying CFDs

is stamp duty exempt. HM Treasury is currently missing

out on a huge opportunity to close a loophole that issuers

are paying for. Additionally, there is no disclosure on these

derivative instruments when issued with a 212 letter, which

requires ordinary investors to disclose how many shares they

own in a particular company. Why can these hedge funds

influence issuers and the corporate actions they engage in

and yet not have to provide the same disclosure that ordinary

owners are required to?

It appears that from the proliferation of hedge funds

and indeed the websites set up for the sole purpose of

undertaking recruitment for such companies, that this

aggressive approach to making money is here to stay,

whether or not it benefits the companies who are the

subject of the attention. The M&A market place has been

considerably affected by hedge fund practices and this

is set to continue apace.

Cas Sydorowitz Managing Director > Corporate Advisory

London Office Vintners’ Place

68 Upper Thames Street

London UK EC4V 3BJ

Phone: +44 (0) 870 703 0302

Mobile: +44 (0) 7810 750 442

Fax: +44 (0) 870 702 0158

[email protected]

www.georgeson.com

New York Office Tom Kies 17 State St. 10th Floor

New York, NY USA 10004

Phone: 1-212-805-7000

[email protected]

Paris Office Matthieu Simon-Blavier 38, Rue de Bassano

Paris, France 75008

Phone: (+)33 1 44 31 20 22

Fax: (+)33 1 44 31 20 79

[email protected]

Rome Office Stefano Marini Via Emilia 88-00187

Roma, Italy

Phone: (+)39-06-421711

[email protected]

Madrid Office Pedro F Saá Zubarán 18, 5a pl

Madrid 28010, Spain

[email protected]

CERTAINTY INGENUITY ADVANTAGE

CASE STUDY

FACING THE MUSICSanctuary Group weathers a potentially contentious vote

FACTS

The Sanctuary Group Plc, theinternational music companyresponsible for managing renownednames including Guns ‘N’ Roses and James Blunt, recently wentthrough a period of tradingproblems, aborted takeover talksand increasing debt levels.

As a result the Company share price fellrapidly and the alternative to breakingup the Group was to restructure andrefinance by way of a Placing, and anOpen Offer. This fundraising and relateddebt restructuring was to be put toshareholders at an EGM to seek theirsupport in what was a critical proposalfor the future of the company.

CRITICAL ACTION

A successful outcome wasdependent on at least 75% ofSanctuary’s shareholders voting in favour of the resolutions. It wasimportant to contact as manyshareholders as possible for the best chance of success.

Georgeson Shareholder worked closelywith the Sanctuary Group to produce areport detailing shareholders holding200K shares or more, including detailsof underlying shareholdersadministered by their brokers.

Once compiled, letters were sent to the shareholders advising them of theforthcoming EGM and inviting them to vote on each resolution.

RESULTS

Of the roughly 371 million shares inissue at the time, over 30% votedand Sanctuary had all of theirresolutions passed by a resounding99.47%.

“The speed and efficiency displayed by Georgesonallowed us to achieve our objectives in full. A bigthank you to all involved”Philip Ranger, Managing Director, The Sanctuary Group Plc

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Contacts

CMS Cameron McKenna

Isabel Davies, Partner CMS Cameron McKenna LLP (London) Technology

T: +44 (0) 20 7367 2156 [email protected]

Iain Batty, Partner CMS Cameron McKenna LLP (Warsaw) Central & Eastern Europe

T: +48 22 520 5505 [email protected]

Simon Jeffreys, Partner CMS Cameron McKenna LLP (London) Employment

T: +44 (0)20 7367 2783 [email protected]

David Bresnick, Partner CMS Cameron McKenna LLP (London) Corporate

T: +44 (0) 20 7367 2729 [email protected]

Georgeson

Cas Sydorowitz Managing Director > Corporate Advisory Georgeson

T: +44 (0) 870 703 0300 x7002M: +44 (0) 7810 750 442F: +44 (0) 870 702 [email protected]

www.georgeson.com

IBM

Sara Longworth Managing Partner, Strategy and Change Consulting, UK, Ireland and South Africa IBM Global Business Services [email protected]

Paul Price Mergers & Acquisitions UKISA Leader IBM Global Business Services [email protected]

Steve Wood Mergers & Acquisitions Global Leader IBM Global Business Services [email protected]

mergermarket

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