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Transcript of Aon
The Transformative Role of Human Capital in Mergers, Acquisitions, and Divestitures
The 6th Annual Conference on Mergers and Acquisitions
July 2012
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 2
Aon Hewitt: A Snapshot
Aon Corporation
Aon Risk Solutions
• Retail Brokerage
• Captive Management
• Affinity Programs
• Select Personal Lines
• Premium Finance
• Treaty Reinsurance
Brokerage
• Facultative Reinsurance
Brokerage
• Capital Markets
• Financial Advisory
• Analytics &Technical Services
• Claims Management
• Corporate Transactions
• Talent and Rewards Consulting
• Employee Communication,
Engagement, and New Media
• HR Business Process
Outsourcing
• Total Rewards
#1
90
330
29,000
$8.5 billion
Human capital consulting and outsourcing firm in the world
Number of countries in which Aon Hewitt operates
Number of Aon Hewitt offices around the world
Number of Aon Hewitt colleagues around the world
Aon revenue (2010 corporate)
Aon Hewitt Aon Benfield
Aon Hewitt Overview Core Strengths Valued by Our Clients
• Aligning complex situations to strategy
• Balanced and holistic approach across IT,
people, process, and organization
• World-class consultants and methods
• Best-in-class change management and
engagement through transitions
• Aon Mergers & Acquisitions Solutions
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 3
Aon’s M&A Solutions: Capabilities Summary
Aon is the leading provider of HR-related M&A services globally and manages over 200 transactions per year including the largest and the most complex and successful business combinations over the past 5 years.
Our Experience and Expertise
Overall� On average, our consultants have
over 20 years experience working with some of the world’s most sophisticated organizations including GE, HP, Nokia, UPS, IBM, Abbott, Cisco, Wal-Mart, among others
� Worked on 500+ transactions in past 5 years, including some of the most complex acquisitions in recent history
Depth and Breadth of Services � Provide services throughout the
transaction lifecycle – Due diligence, integration planning, post-merger integration and restructuring
� Integrated set of expertise across a broad range of HR domains including benefits, compensation, communications & change management, HRIS, HR operations, HR policies, leadership selection and staffing, organization design, payroll, training & development
Methods, Tools and Technology� Leverage proprietary methods,
tools and technology to deliver consistent M&A solutions across all domains and around the world
� Dedicated group of M&A specialists – M&A and restructuring are all we do; focused on delivering end-to-end capability for major organizational change events
� Industry leading experts –Practice-leader level consultants formerly with largest competitors, joined together to deliver distinctive value
� Global expertise – Worked on transactions involving every region of the world; specialize in addressing human capital issues in complex global deals
� Industry Expertise – Expertise in a multitude of industries including transportation, media, financial services, healthcare, high technology, manufacturing, retail
� Holistic Skill Set – HR technical (e.g., benefits, employment law, compensation), organizational (e.g., culture, change management, organization design), and business strategy/operations (e.g., business strategy, operational process design)
Our People Our Market Presence
Acting as HR M&A partner to Cisco providing support for multiple transactions, including $3.2B acquisition of Tandberg (35+ countries); working directly with HR M&A Leader
Hired as ongoing global HR M&A partner. Provided due diligence and integration support for multiple transactions as well as HR M&A training for GE employees globally
Providing strategic support for global expansion, specifically growth in Latin America (Brazil); working directly with Global Business Integration executive within Finance organization
Provided due diligence and integration support for multiple transactions in addition to providing HR M&A training for Philips employees globally
Leading HR due diligence efforts for Comcast‘s 51% ownership stake in NBC Universal (joint venture with GE). $30B transaction involving 45+ countries; working closely with SVP Comp & Benefits and business strategy leader
Leading transition efforts to stand up HR programs and operations for the joint venture entity; working directly with EVPHR from NBCU and executives from GE and Comcast
Hired as ongoing HR M&A partner for HP MADO and have provided due diligence and integration support in multiple transactions, including $13B acquisition of EDS (320,000 employees in 60 countries)
Led global compensation & benefits integration support for Abbott’s $7B acquisition of Solvay’s pharmaceutical unit, one of the largest pharmaceutical deals completed in 2009
Provided HR M&A integration support on multiple transactions in addition to HR M&A training and HR partner for numerous joint ventures
Hired as Joint Venture HR M&A partner for Ricoh/ Global Infoprint joint venture in addition to providing HR M&A training for IBM employees globally
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 4
About AKT
� The largest HR Consulting firm in Israel
� In business since 2001
� +90 associates and partners
� Growing and profitable
� Customer base include +150 of Israel’s leading companies
� Strategic partnerships include:
– AON-Hewitt
– SuccessFactors
– LHH (DBM)
and DBM (LHH
Expertise
• Talent Management
• Total Reward
• Corporate
Transaction &
Transformation
• Learning
• HR Excellence
• Career Transitions
• HR Technologies
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 5
M&A Environment Through First Quarter 2012
Source: 2012 Merrill datasite/monthly M&A Insider Mark 2012, we expect activity to increase during the year
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 6
Sustained Shareholder Value Creation Remains Challenging
39%
19%
20%
22%
Significantly value-creating deal(TRS greater than 20%)
Value-creating deal(TRS greater than zero)
Value-destroying deals(TRS less than zero)
Significantly value-destroying deals(TRS less than -20%)
Distribution of Total Return to Shareholder versus Industry Benchmark(TRS measured 24 months after deal announced)
Source: Accenture analysis
Factors Contributing to Deals not Meeting Goals
Frequently Rated High Frequently Rated Low
� Cultural integration issues� Inconsistent/ unclear
communication of synergy objectives
� Integration/ implementation took longer than expected
� Insufficient attention/ priority to workforce/ people issues
� Insufficient/ incorrect employee communications
� Payroll integration/implementation issues
� Compensation integration/implementation issues
� Benefit integration/implementation issues
� HR operations integration/ implementation issues
� Staffing selection issues
Were all Transaction Goals Achieved?
78%
22%
No
Yes
Source: 2008, Aon Hewitt/ M&A Transaction and the Human Capital Key to Success – Global Report
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 7
One Possible Explanation
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 8
Human Capital Issues Remain a Huge Tripwire in Global Transactions
41%
33%
32%
30%
28%
26%
26%
22%
20%
18%
0% 10% 20% 30% 40% 50%
25%
20%
20%
10%
10%
5%
10%
Percent of time spent on each function during due diligence
Sales andMarketing
Integration took longer than expected
Cultural integration issues
Inconsistent communication of synergy objectives
Insufficient attention/ priority to workforce/ people issues
Poor/ misinformed strategy
Risks/ liabilities not identified during due diligence
Insufficient execution capability/ competency
Leadership “infighting” and/ or buy-in
Price paid for target was too high
Failure to implement an appropriate org. structure
Source: 2012 Aon Hewitt/ Culture Integration in M&A, Survey Findings
Top 10 drivers of deal failure(% of respondents)
Source: 2009 Aon Hewitt/ The Deal Human Capital Study
Finance
Business Line/Operations
Legal
HumanResources
Communications
Other
The top drivers for deal failures
are Human Capital issues,
but only 15% of time in due
diligence is spent on HR & Communications.
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 9
Cost and Growth Synergies Always Involve Human Capital
Value ofAcquirer
+ +
Value of Synergies
(Assumed)
– –=
Value ofTarget
TransactionCosts
IntegrationCosts
MaximumPrice For
Enterprise
Growth
…dependon businessstrategy and
workforceability/
willingnessto execute it
+
Costs
Metrics of Success
Objectives Methods to address HR issues
� Identification of HR and Risk Liabilities� Purchase price adjustment� Obtain protection for HR/ Risk liabilities and cost
� Retain key talent� Retool workforce� Minimize disruption� Improve processes and efficiency
� Identify HR/ Risk cost savings� Estimate severance and restructuring� Capture economies of scale in purchasing goods/ service� Minimize litigation
Growth synergies are almost exclusively driven by Human Capital — physical assets, process reengineering, or tech infusion are enablers of growth.
The “winners” are those firms that can build execution capabilities and measure outcomes around growth synergy capture
Pay the RightPrice
Achieve Growth Synergies
Manage Cost
Due Diligence Snapshot
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 11
Sources of Human Capital Risks
� Evaluation of a properly calibrated risk environment that encourages leaders and employees to make business decisions that maximize the risk/return trade offs within the risk tolerance of the company
� Due diligence on risk environment and governance focusing on assessment, monitoring, and control environment and likelihood for reckless behaviors
� Analysis of internal policies and practices and governance model e.g., does management demonstrate active commitment to risk management policies and practices? Does the company culture and pay practices support the operational risk management environment that is appropriate?
Culture Risk
� Evaluation of individual leaders from CEO down against competencies critical to success in post-deal environment
� Application of range of valid, sound, and target-appropriate tools delivered by highly experienced, professional global team. Fact-based talent value assessment on which to base compensation and retention offers
� Due diligence of team effectiveness of leadership team; Assessment of depth of bench strength and succession risk
� Identification of performance and retention risk, lending results to quantification of potential retention considerations in transaction value
� Analysis includes a competency profile of each individual along with recommended actions to address lacking areas and drive results
Talent Risk
Compliance Risk
� Due diligence of business entities, owners and management teams, potential board members and key hires, and JV partners.
� Proxy fight and hostile takeover defense support
� Results translate into real benefits including prevention of reputational damage, increase in critical negotiating leverage, and reduced financial losses resulting from misrepresentations.
� Identify and avoid financial losses resulting from misrepresentations.
� Identify possible trailing litigation or regulatory issues
� Gain a more complete understanding of involved parties
Reputational Risk
� Evaluation of compliance programs across all functional areas that is appropriately documented, communicated, implemented and reported.
� Due diligence on compliance related policies and procedures, compliance communications, ethics and compliance training, whistle blower programs, compliance hotlines, processes for treating alleged incidents; risk assessments; and business and compliance review processes.
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 12
Global Due Diligence: Focus on Key Workforce and Compliance Issues
People Assets Adverse Margin Impacts People Costs Workforce Flexibility
� Profile key management
� Organization chart
� Skill profile
� Demographic characteristics
� Understatement of ongoing program costs
� Severance payments
� Commitments to future cost increases
� Collective agreement commitments
� Expatriates
� Relocation expenses
� Benchmark jobs and people costs
� Benchmark staffing levels
� Goodwill issues/morale
� Procedure steps
� Legal barriers
� Union/Work Council issues
� Temporary/contract workers
Asset Liability Impacts Adverse Revenue Impacts Organizational Fit Compliance
� Change of control triggers
� Pension, welfare liabilities understated
� Contracts with executives may contain future liabilities
� Book accruals understated, e.g. vacation, sales commission
� Sales incentive design
� Likely employee turnover
� Retention plans
� Pending industrial disputes
� Cultural barriers
� Incompatible job definitions
� Incompatible reward structures
� Incompatible process and structure
� Duplicate jobs
� Programs and processes
� Illegal payments
� Discrimination
� Acquired rights
� Payroll & HRIS
� Collective agreements
� Employee commitments
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 13
Address Country-Specific Labor and Compliance Issues
� Many countries have local laws and practices that can have a significant effect on the price of a deal
Brazil
� Pension underfunding
� Plan tax status
� Minimum health benefits
� Termination indemnities
� Small group insurance costs
China
� Employment laws vary by province
� Some benefits are set by law
� Unrecognized benefit costs and liabilities
� Constraints on severance practices
France
� Triggering of Individual and union rights
� Post-retirement medical and life
� Termination indemnities
� Early retirement incentive plans
� Formal and informal severance plans
� Employee housing subsidies
� Complex labor environment
� Individual employment contracts
Germany
� Triggering of acquired rights
� Variation in pension valuation methods
� Restrictions on asset transfers
� Eliminate pension discrimination policies/practices
� Implementing retirement plan mergers
� Complex labor environment
Japan
� Complex compensation programs
� Variation in pension valuation methods
� Restrictions on retirement plan changes
� Restrictions on asset transfers
� Employee housing subsidies
� Minimum legal benefit levels
� Legal limits on reductions in benefit levels
Israel
� Complex labor laws
� Increasing duties for social security
� General trend over the last decade of “legalization” of the workplace
� Recent legislation increasing protection of employees
Integration Drill Down
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 15
Company ADominance
Define an Overarching Integration “Philosophy”
Limited Integration Dominant Player Absorption
Mutual Best of Both Integration Transformation to New Company
Very little integration of A & B
Full merger of best practices from A & B to create a new entity
B’s assets are fully integrated into A
Best of Both integration that also incorporates external and new company best practices
IntegratedNew
Company
Best of Company A
Best of Company B
Company B
HoldingCompany
CompanyA
CompanyB
IntegratedNew
Company
External Best Practices
Best of Company A
Best of Company B
New CompanyBest Practices
POSSIBLE INTEGRATION “PHILOSOPHIES”
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 16
� Utilize leadership practice strategies and approaches on a consistent and sustained basis than underachievers
73%
58%
50%
62% 63%
57%60%
56%
94%
81%
71%
82%80%
75%
68% 68%
20%
40%
60%
80%
100%
Selection and placement of leaders/key talent
Having leaders/key talent participate in ongoing leadership development programs
Having leaders and key talentlead participate in integration teams
Assessment of leaders/key talent
Onboarding of leaders/keytalent
Identification and retention of leaders/key talent
Use of formal leadership competency model for transactions
Coaching/mentoring leaders and key talent
*Responses of 4 and 5 was considered where 5 indicate “Always”
Extent* to which the leadership practices are utilized
Integration Success is Linked to Sustained Focus on Leadership and Key Talent
Underachiever
Overachiever
Source: Aon Hewitt M&A Research Database
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 17
Leadership Assessment and Selection
� Limited or questionable data is provided about key leaders from the acquired organization
� Early assessments are often inaccurate –especially when provided under severe time constraints
� Political considerations may play a key role (e.g., would target CEO’s assessment be the same as yours?)
� Business objectives and strategies may be different requiring a different type of leadership (e.g., transformational vs. transactional change)
� Engagement begins with orientation, but requires continued conversations and engagement by the acquirer
� Executives require more than retention packages (e.g., competitive compensation and benefits, career development, strategic vision)
� Targeted development and reward strategies for key technical and functional experts
� “Mentoring” relationships between acquired leaders and peers in the business who have been “acquired”
� GE Best Practice: Performance-based retention targeted at achieving business financial targets (including synergies) plus non-financial actions such as mentor or IDP
Key drivers for leadership assessment and selection in acquisitionsKey drivers for leadership assessment and selection in acquisitions
Best practices to engage and retain leadersBest practices to engage and retain leaders
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 18
Acquirers are Increasingly Using More Comprehensive Leadership Assessment Tools and Methods
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 19
Understanding National Cultural Differences Is Essential to the Success of the Transaction
Africa
Arabs
Iran and Turkey
INDIA
Indonesia and Philippines
Korea
China
Italy and Spain
Russia
France
BELGIUM
Australia and Denmark
Netherlands and Norway
U.S.A.
Switzerland Vietnam
Hispanic America
U.K. Sweden Finland CANADA Singapore Hong
Kong
Japan
Germany
MULTI-
ACTIVE
LINEAR-
ACTIVEREACTIVE
Source: When Cultures Collide, Richard Lewis, Third Edition.
Linear-Active, Multi-Active Reaction Variations
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 20
National Culture Recognizing differences - Israel
Source: Richard D. Lewis
Values :Obsession to surviveCourageEnergyOpinionated viewsImpatienceMoralityModernityPractical & pragmaticInformal peoplePoor listenersFriendly atmosphere but business like.Full use of high technologySeeking innovation and improvementsstraightforward
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 21
LeadershipWhat they attend to, measure, reward and control; role modeling and coaching
Mission, Objectives, Values and Strategies. Formal statements, charters, creeds
Customer Experiences
Shareholder Value
Business PartnerRelationship
Business ResultsE
mp
loye
e E
xpe
rie
nce
Addressing Organizational Culture is Highly Correlated with Success
Work Environment
Design of physical space; Socialization Patters
Programs, Policies, PracticesCriteria for recruitment, promotion & exit
Brand Promise
Organizational Structure
WhatWhat defines defines
cultureculture
HowHow it isit is
demonstrateddemonstrated
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 22
Culture Must Align With Strategic Priorities and Drive Value
Customer Service Company ImageEfficiency Quality Innovation
� Safety focus� Structure/process
efficiency� Training� Coordination� Data orientation� Performance
management� Focus on priorities� Involvement� Workload/resourcing� Physical conditions� Customer
understanding
� Shared understanding of company direction/ brand
� Shared values/pride� Integrity� Leadership� Belief in P/S quality
� Teamwork/BP sharing� Process quality focus� Empowerment � Training� Long-term orientation� Understanding
customer’s quality expectations
� Data orientation
� Diversity of thought� Supervisor relations� Stimulating
environment (physical)
� Stimulating environment (interpersonal)
� Information sharing� Collaboration/
teamwork� Support for risk taking� Rewarding innovation� Bias for action� Anticipating customer
needs� Flexible work
arrangements� Credible leadership
� Career development� Performance
management� Local flexibility� Positive working
relationships� Supportive service
environment� Customer knowledge� Service orientation� Values� Learning/information
sharing� Belief in P/S quality
Cultural differentiators* by strategy in financial high-performance companies
Major Strategic Priorities
*Differentiators derived from employee research into the survey questions and topics on which financially successful companies excel versus their peers.
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 23
9%
7%
20%
35%
42%
51%
29%
7%
0% 20% 40% 60% 80% 100%
Low Culture Alignment
Strong Culture Alignment
Highly Engaged Moderately Engaged Passive Actively Disengaged
25%
51%
36%
30%
19%
5%
3%
1%
18%
13%
0% 20% 40% 60% 80% 100%
Low Culture Alignment
Strong Culture Alignment
I have no plans to leave Would consider another job offer
Actively looking for another job Made plans to leave
Plan to retire in the next few years
44% more employees are engaged
in companies where culture is aligned with strategy
71% of employees in companies
with misaligned cultures are either passive or actively disengaged
2X the number of employees will stay
with companies where culture is aligned with strategy
75% of employees are likely to
leave companies where culture is not aligned with strategy
Source: Aon Hewitt’s Engagement 2.0 Study
Aligning Culture with Strategy Leads to Better Engagement and Retention Outcomes
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 24
What are M&A Overachievers Doing Differently?
78%
78%
67%
78%
89%
89%
89%
85%
90%
90%
100%
75%
70%
75%
50% 60% 70% 80% 90% 100%
Communicate Regarding Culture
Conduct Team Building Interventions
Redesign HR programs
Make Organization Structure Changes
Analyze Current/Future Culture Gaps
Define Future State Culture
Assess Current State Culture
Overachievers Underachievers
Answer: Less analysis, more action!
SOURCE: Aon Hewitt’s Culture Integration in M&A Study
Underachievers
spend more time
assessing culture
Overachievers
spend more time
Managing culture.
Ie, the “How”
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 25
Culture Integration to Aim Towards a High Performance Culture
In the longer term, the success of culture integration is does not lie in the similarity of merging businesses, but in building a High Performance Culture.
Following activities should be included in culture integration plan
� Leadership role modeling of desired behaviors
� Communication of performance expectations
� Talent and skill development
� Reinforcement with formal mechanisms
� Often integration leaders not held accountable for culture integration
� Lack of urgency in addressing culture
� Executives do not see the need to address culture at all
� Leaders (often managers/supervisors) not skilled at leading change
� What employees experience does not match what they’re told
� Relegating culture to HR; treating it as “soft” stuff
� Conduct assessment but ignore ongoing change process
� Ignoring subcultures, which invariably exist
Indicators of a successful culture integrationIndicators of a successful culture integration
Mistakes to avoid during culture integrationMistakes to avoid during culture integration
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 26
Reduce Risk and Cost of Disengagement and Accelerate Financial Value of Changes
ResistanceOver-
Confidence
Disengagement“valley of despair”
Letting Go
Testing
Rationalizing
Integrating
The Individual Change Path
(shortest duration possible)
Behavior=
The “change curve” is unavoidable and expected as employees learn and grow through the change event. The depth and duration of disengagement can be managed and minimized.
Understanding AdoptionValuePreference
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 27
My Company
In Transactions, Employees have a Raft of Pressing Questions about how They are Impacted Personally
My Team
What will happen to me?
What will happen to opportunities for my career … long term?
How will my day-to-day work change … short term?
What will happen to the people I work with?
My Work
My Career
My Future
My Money
What will happen to my ability to earn money … short- and long-term?
What will happen to my Company?
Employee communication should
address these concerns.
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 28
Amiad – Arkal Integration – Israeli Case study
Dec.Dec.Dec.Dec.Nov.Nov.Nov.Nov.Oct.Oct.Oct.Oct.Sept.Sept.Sept.Sept.Aug.Aug.Aug.Aug.JulyJulyJulyJulyJuneJuneJuneJuneMayMayMayMayAprilAprilAprilAprilAreaAreaAreaArea
General PlanningGeneral PlanningGeneral PlanningGeneral PlanningIIII
CommunicationCommunicationCommunicationCommunicationIIIIIIII
Key People Key People Key People Key People
retentionretentionretentionretentionIIIIIIIIIIII
Gap AnalysisGap AnalysisGap AnalysisGap AnalysisIVIVIVIV
Vision, Structure & Vision, Structure & Vision, Structure & Vision, Structure &
ManagementManagementManagementManagementVVVV
Customers Customers Customers Customers
retentionretentionretentionretentionVIVIVIVI
Cultural MergerCultural MergerCultural MergerCultural MergerVIIVIIVIIVII
QC & Mid process QC & Mid process QC & Mid process QC & Mid process
conclusionsconclusionsconclusionsconclusionsVIIIVIIIVIIIVIII
Amiad – Arkal PMI Case Study
PMI Planning & approval
Leading teams assignment
Comm.planning
D-Daycomm.
Vision & strategic planning
High level Organizational structure
Management assign.
Identify KP KP retention meetings
EE OrientationProfessional
Trainings
Streams check lists + Gap analysis report
Ext. leading team Orientation
R of O-Org. structure
company Values
Global Re-Branding
Early suppliers unification
On-going communication
Co-meetings Focus on effective Customer Service
Identify Key Customers
Mix. Business teams
KP retention activities: Dialog, Engagement, Professional challenges, Risk mgt.
Assign. Working processes design
Employee survey
Aon Hewitt | Global Aon Mergers and Acquisitions SolutionsProprietary & Confidential 30
Thank You!