Download - AMAS Newsletter v2b
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8/12/2019 AMAS Newsletter v2b
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Doing your Due Diligence:Understanding Potential Human
Capital Considerations
Decoding the Joint VentureDouble Helix
Overcoming Risk Roadblocks inDeals: Pulling the Transaction
Liability Solutions Lever
M&A LeverageVolume 1 Issue 1
Buying Opportunities inNorth America and Europe
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Buying Opportunities in North America and
Europe
Doing Your Due Diligence: UnderstandingPotential Human Capital Considerations
Decoding the Joint Venture Double Helix
Overcoming Risk Roadblocks in Deals: Pulling
the Transaction Liability Solutions Lever 15
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7
10
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8
6
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M&A LeverageVolume 1 Issue 1A bi-annual publication that presents seminal thinking and leading insights on
M&A in the human resources and risk space.
Feature:
Human Capital:
Risk:
M&A Leverage
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Welcome to the first issue of Aons Mergers and Acquisitions Solutions (AMAS) Asia Pacific Magazine. This will be a semiannual
magazine covering topical issues and sharing insights from our experiences helping clients navigate through deals, as well as
pertinent research. As deal activity within Asia Pac and outbound from Asian economies picks up steam, we increasingly hear
our clients say they are grappling with human capital and risk challenges that have imperiled or sabotaged desired deal goals.
According to Bloomberg, global deal activity is down 26.77%. However, with China and India experiencing increased volumes
of 21% and 27%, respectively, APAC is seeing a very different picture. In 2011, there were nearly 2,500 M&A deals with total
values being US$400+ billion. Mainland outbound M&A deals climbed to a new record of 207 in 2011, up 10% year-on-year,
while the US$42.9 billion value of these deals, represented an increase of 12% from 2010 levels.
But in the flurry of such activity, M&A deals are even more prone to human capital and operational risks which can too
often be overlooked or underestimated due to deal-making euphoria and deal-closing haste. Having advised clients on
1,500+ transactions to date and having studied both mature and new deal makers, has given us a comprehensive and deep
understanding of best practices and the key drivers for deal success. At Aon Merger and Acquisition Solutions (AMAS), we
offer a unique perspective that combines both human capital and operational risks in a transaction, drawing on our expertise
in identifying and managing such risks for organizations. In this inaugural issue, we will focus on some key questions that our
clients often ask about the issues they are tackling.
With the instability of the US and European markets, the question on everybodys lips is Is now a good time for Asia Pacific topick-up a steal? Our feature in this issue, by AMAS leader Michael Marzanno, Buying Opportunities in North America and Europe,
will highlight some of the risks as well as the rewards. If you are thinking about a merger, an acquisition, or a joint venture (JV),
the due diligence process is crucial. AMAS Content Leader, Dave Kompare analyzes the critical role that HR needs to play in due
diligence and provides tips on how to improve your teams capabilities.
When looking at deals in emerging markets, the joint-venture route should always be considered. I have outlined for you the
challenges and the benefits a JV can provide and ways to ensure success.
Jennifer Richards, from Aon Risk Services, and I bring attention to an innovative risk solution known as a Transaction Liability
solution, which can be instrumental in ring fencing critical risks, resolving misalignment of risk quantification between buyer/
seller, and transferring the risk out. I hope you enjoy reading this launch Issue and find it insightful and pertinent to what you
are dealing with in your organizations. I look forward to your feedback and comments so we can further enhance the quality offuture publications.
Sharad Vishvanath
Asia Pacific M&A Market Leader, Aon Mergers & Acquisition Solutions, Aon Hewitt
The Launch Issue
1Volume 1 Issue 1
Editorial
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Asian-based companies are likely to continueoutbound transactions due to the continued buyingopportunities in US and European markets, but notwithout riskand reward.
Buying Opportunities inNorth America and Europe
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By Michael Marzanno and Jonathan Hendrickson
Feature
M&A Leverage
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SummaryAsian-based companies are likely to continue outbound
M&A transactions into the US and European regions
between 2012 and 2017. Low valuations, significant cash on
hand, and attractive financing rates are making it easier for
them to acquire western companies at low post-recessionary
prices. However, acquiring US and European companiescan be risky if inexperienced firms are unskilled at talent
retention, cultural integration and seamless integration
execution. This article highlights the opportunities, risks
and practical steps recommended for Asian-based acquirers
to ensure they over-achieve their transaction objectives,
particularly when entering US and European markets.
3
Lower Debt Ratios: Estimates by StarMine indicate that
Asian-based companies sit at an average net debt/equity
ratio of .49, which is roughly one-half of the European
ratio and a third of the North American ratio. These low
debt ratios, combined with extremely attractive financing
rates, suggest that Asian-based firms have the ability to
finance transactions cost-effectively without taking onexcessive risk via operating leverage.4
Stronger Currency Valuations: Finally, Japanese buyers
are benefiting from increased buying power, as the yen
has strengthened considerably against the US dollar and
the Euro over the last four years. According to Thomson
Reuters, Japanese companies spent a record USD69 billion
on foreign deals in 2011, including ~USD31 billion in the
Americas and ~USD24 billion in Europe.5
These drivers suggest that outbound deals from Asia into the
US and European markets are likely to continue with China,
India, Japan and Australia leading the charge. However, theyare not without risk.
OpportunityMost acquisitive Asian-based companies undertaking
outbound transactions have traditionally adopted a
portfolio approach to managing acquisitions by allowing
the acquired company to operate independently. Over the
past two decades, many acquisitive western companies
(e.g., GE, Philips, and Siemens) also utilized this approach.
However, most western companies have adjusted their
integration approach as they found that it was difficult to
reap significant value from transactions, when the acquiredorganization(s) were not ultimately integrated into the
parent company.
A few Asian-based companies (e.g., Aditya Birla Group,
M&M and the TATA group) have learned from the
successes (and mistakes) of their western peers. While a few
companies experiences have been positive, many outbound
transactions have failed to achieve their objectives.
Unfortunately, integration into larger corporate organizations
is more complex and fraught with higher risk. Challenges
that Asian-based outbound acquirers have experienced
include: loss of executive and key talent, integration
execution delays, and cultural assimilation hurdles. These
risks are further outlined below:
Leadership and Key Talent Flight:Organizations that
tend to under-achieve their transaction objectives often
do so because they lose leadership and key talent at
an increasingly higher rate than other acquirers. This is
increasingly prevalent in outbound Asian transactions.
Differences in experience levels, decision-making
approaches and communications make it exponentially
more challenging for acquiring organizations to engage
and retain the target companys leadership and key talent.
SituationAon Hewitts Global M&A Pulse survey completed in
Q3, 2011 found that 50% of Asia Pacific-based surveyparticipants indicated that they were targeting North
America and European markets for future transactions.1
These indications are proving true and are likely to continue
in 2012 and beyond. In 2011, the pace of outbound Asian-
based M&A transactions nearly rebounded to the levels
observed before the recession. Between 2002 and 2007, the
number of outbound deals from Asia skyrocketed, reaching
close to 900 deals in 2007 (nearly six times 2002 levels).
Despite a sharp drop in volume in 2008 and 2009, the pace
has quickly recovered, exceeding 800 transactions again in
20112. This upward trend is likely to continue, driven by a
few key factors outlined below:
Lower Market Valuations: Low US and European
valuation multiples persist when compared to pre-
recessionary levels. According to Capital IQ, while the
median enterprise value to earnings before interest, taxes,
depreciation, and amortization (EBITDA) multiple for
strategic transactions in the US climbed back to 11.4X in
2011 (compared to 8.1X during the trough of 2009), it
remains below the 12.0x multiple experienced in 2007.3
The same findings hold true for European ratios. Research
by Robert W. Baird highlights a similar trend in the middle
market, as median transaction multiples (EV/EBITDA) paid
for US and European-based middle-market companies
continue their recovery, but remain below 2007 levels.
Volume 1 Issue 1
Upward trend of outbound dealsfrom Asia are drive by lower market
valuations, lower debt ratios and
stronger currency valuations.
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4 M&A Leverage
Integration Execution: Unsophisticated acquirers often
lack a seasoned team and rigorous process for executing
integration initiatives, particularly organizational
harmonization and synergy identification and capture.
Organizational harmonization and synergy capture
initiatives are frequently de-prioritized (or outright
ignored) by Asian-based acquirers as they seek to allowthe acquired organization the autonomy to make decisions
on synergies, growth plans, etc. This autonomy ultimately
has the unintended effect of leaving synergies uncaptured
and newer market opportunities unrealized.
Cultural Dissonance: The risk of cultural dissonance is
high between Asian-based acquirers and US and European
targets, due to differences in national culture, leadership
and communication styles, and decision-making
approaches. Differing time zones, levels of leadership
maturity, and language challenges exacerbate these
challenges making the likelihood of cultural
dis-integration more likely. For example, historically inUS and European companies, decision-making authority
is included in the roles and responsibilities of a particular
position held by an individual. However, within Asian-
based companies, decision-making authority is often
unique to a particular individual or a small group of
individuals. Consequently, decision-making can be
hampered by the ambiguity surrounding decision
authority. This is critical as the volume and pace of
decisions increases exponentially during a deal. One
large Chinese technology outsourcing company failed
to consider cultural ramifications during its acquisition
of several telecommunications outsourcing employees
based in Hong Kong. Because of generational gaps and
differences in leadership style, employee engagement
plummeted and turnover skyrocketed after they were
hired.
Communications: Communications are another area
where differences can impede integration. In US and
European companies, communications are often two-way
with the opportunity for input and dialogue between
executives and line managers. By contrast, executives in
Asian-based companies (particularly in Chinese firms),
often make decisions and communicate them to line
managers and supervisors without their input or feedback.Such an approach to decision-making and communication
can convey a lack of interest on the part of the acquiring
company for the opinions of the target companys
employees, hence, driving lower engagement and
increased turnover at the point when retention is most
critical.
The bottom-line is that while organizations understand
cultural integration is critical to deal success, they continue to
struggle to translate this into actionable initiatives that drive
cultural integration forward.Elizabeth Fealy, Global Co-
Leader of Aons Mergers and Acquisitions Practice.
Consequently, it is critical for Asian-based acquirers to
increase their attentiveness and ability to lead outbound
M&A transactions differently than previous efforts.
This is particularly true for companies that dont have
seasoned M&A executives who have been through various
transactions. Aon Hewitts research on M&A transactions,
based on a sample of 96 companies representing overUSD$568 billion in total deal value over a two-year period,
revealed that over USD$54 billion of deal value rides on
the rate at which critical employees separate during or
immediately following deals. With roughly 10% of overall
deal value at stake, engagement and retention issues clearly
have the potential to wipe out much of the synergy value
sought in these transactions. Acquiring companies that
prepare for these challenges are much more likely to achieve
transaction success.
Practical ExecutionAon Hewitts research on the effectiveness of cross-border
M&A transactions has found key differences between the
practices of companies that over- or under-achieve their
transaction aims. Specifically, Asian-based companies that
have successfully executed outbound M&A or expansion
transactions have adopted several practices to ensure they
over-achieve their transaction objectives.
First, they proactively establish an M&A team and get themready for deals, and they conduct rigorous due diligence on
the target company to proactively understand the HR issues
before they arise during the frenzy of the deal. Second,
they establish an effective governance structure to drive
integration activities, decisions and input from the acquiree.
Finally, they spend far more time on cultural assimilation
implementation activities. More on each of these points is
outlined below.
Acquiring companies that prepare
for challenges related to leadership
and key talent flight, integration
execution, cultural dissonance and
communications, are more likely to
achieve transaction success.
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Case StudyChinese Global Telecommunications Firm
Over the past three years, a large Chinese global telecommunications firm has made significant strides in
improving their capability to perform outbound M&A transactions into Europe and other developed nations. This
company historically acquired targets in China, Malaysia and underdeveloped emerging markets. However, after
a series of transactions under-achieved their expectations, they realized that a different approach to integration
preparation and execution was warranted. They adopted a multi-pronged approach to improve their transaction-
integration capabilities. The highlights of their strategy included several of the key elements described above,
including:
First, they created a corporate team with a mixture of HR and business resources exclusively focused on
employee transitions and hired regional employee transition leaders with in-depth local knowledge.
Next, the newly formed employee transition team worked with human capital acquisition integration small,
medium, enterprises (SMEs) to create rigorous, repeatable processes, tools, and templates that were utilized
on every transaction. At the immediate conclusion of each transaction, there was a profound emphasis on
identifying and broadly sharing lessons learned.
Third, they developed robust, experiential employee transition training designed for both HR and business
resources and conducted the training at both corporate and regional locations. Finally, they created an
Employee Transition Community of Practice in which HR and business professionals are encouraged to ask
questions and share lessons learned.
They invested heavily in the development of a human capital M&A toolkit with processes, instructions and
content for conducting due diligence, integration planning and integration execution. This toolkit provided a
common language and instruction set for integration leaders and team members during transactions to adhere
to. This was especially important as Chinese resources worked abroad to execute transaction-related activities.
A critical component of the improvement in transaction execution has been an increased emphasis on target local
leadership involvement in integration. They have had success pairing local target company leaders with Chinese
resources to not only more quickly understand the inner workings of the target, but also to share organizational
operating methods with the target companys leadership.
The implementation of this multifaceted strategy is still in nascent stages, but recent success in more complicated
transactions has demonstrated significant improvement and tremendous promise.
Preparing the Team: Companies that have successfully
executed either large-scale, complex transactions or a
small number of unique cross-border deals have done
so by preparing a small senior team of business and
HR leaders for M&A work. This preparation includes
immersion in the language, risks, and processes of
cross-border efforts from due diligence throughintegration execution. They provide proven, practical
processes, instructions and cases for understanding M&A
transactions and their associated risks. They simulate
transactions well before the transaction materializes to
allow the team to learn before doing. They acclimate
the team to the laws, practices and cultures of the target
company or country under consideration. Companies
like Aditya Birla Group and others have invested heavily
in dedicated M&A teams, training, and tools to enable
seamless due diligence through integration execution.
Contextual Due Diligence: Basic due diligence on the
human capital and risk-related issues often includes a
rapid review of executive compensation, health and
welfare plans, collective bargaining and works councils
agreements and retirement plan designs/funding levels.
This review is particularly important in European countries
where labor laws, works councils and employmentrequirements vary by country and can be the most
stringent in the world. The impact of items such as US
change-in-control, pension funding, paid-time-off or
European employment or severance-related costs can
range in the millions for an acquirer who fails to build
these calculations into their financial model and purchase
agreement language. Sophisticated acquirers seek an in-
depth understanding of the HR/labor market issues that
exist on a local level in order to be well-prepared prior to
negotiations.
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Authors
Michael Marzano, Partner, Aon Mergers and Acquisitions Practice ([email protected])
Jonathan Hendrickson, Aon Hewitts Global Strategy & Planning Leader ([email protected])
Acknowledgements
Special thanks to: Brian Wade, Frederico Setti, Mark Oshima, Kurt Ewen, Sharad Vishvanath and Jaidev Murti for their ideas, insights and hands-on experience in
drafting this article.
Sources:
1. Aon Hewitts Global Pulse Survey, Cultural Integration in M&A, 2011
2. Capital IQ
3. Capital IQ4. Thomson Reuters StarMine
5. Thomson Reuters
6
Establishing Deal Governance: Sophisticated western
acquirers and a selective number of Asian firms have
realized that having an integration strategy, plan,
and disciplined process for transaction execution is
critical to achieving deal objectives. Prior to transaction
announcement, acquirers are increasingly developing and
validating integration hypotheses, alternative scenariosand plans to understand where and how synergies can be
realized over various time horizons. These game plans
allow executives to evaluate options well before the frenzy
of deal activity hits post announcement. Acquirers and
targets usually launch a global team to vet, implement
and measure synergy realization throughout the lifecycle
of a transaction. To track progress against plan, companies
are increasingly using technology to execute transactions
across time zones, workstreams and milestones.
used time-based retention bonuses that pay for remaining
with the company a fixed period of time. However, more
recently, companies are incorporating performance-
based requirements into them that encourage talent to
stay and play over the next 18-24 months. These new
approaches provide leadership continuity and allow the
acquirer to evaluate leadership and high-potential talentfor potentially broader leadership opportunities.
Leadership engagement: Sophisticated acquirers
sustain the involvement of acquired leaders and key
talent in global corporate on-boarding processes, critical
integration and operational initiatives, and leadership/
high-potential development programs to ensure high
engagement levels. This involvement provides acquired
executives with access to the parent company executives
and the opportunity to become more informed regarding
strategic direction, corporate culture, decision-making
protocols, and key influential leaders.
Region appropriate communication: Increasingly,
acquirers have realized that communications approaches
that work within a country (e.g., China to China) will
not work between Asia-based countries and western
ones. Consequently, they are dedicating resources
focused on line manager assimilation, seeking employee
feedback, and providing proactive communications
about organizational structure, leadership, and relevant
HR policy changes. In a recent acquisition by an Indian
automotive ancillary manufacturer communication of
the rationale behind the deal was planned during the
pre-integration phase which included identifying key
employee groups, change ambassadors, and an integratedapproach to the communications across various platforms
and media.
ClosingCash on hand, low debt levels and low enterprise valuations
will likely continue to enable Asia-based companies to buy
US and European-based companies at discounts to their pre-
recession levels. Asian-based acquirers who learn from the
successes (and failures) of their peers will be better prepared
to reap the value of their transactions by avoiding risks,
achieving synergies, and spurring continued growth in the
US and Europe.
Two-Way Assimilation: Companies that over-achieve
their transaction objectives realize that its imperative
to focus on leadership and line manager retention and
assimilation. This is particularly true for companies that
are heavily dependent on intellectual capital. Early in
the due diligence process, acquirers need to quickly
inventory the critical leaders and key talent and following
transaction announcement, work to retain them viaretention strategies. Historically, many companies have
Practices adopted by Asian-based
companies with successful outbound
M&A transactions include:
team preparation;
contextual due dilligence;
deal governance establishment;
two-way assimilation.
M&A Leverage
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Doing Your Due Diligence:Understanding Potential Human CapitalConsiderationsBy David Kompare
Human Capital
As organizations focus on growth in 2012 and beyond, many are realizing thatacquisitions and joint ventures are required to meet their growth objectives. Theability to be successful in acquisitions and joint ventures depends on the quality of
the due diligence, particularly due diligence in human capital, which is core to thesuccess of most transactions.
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The Changing Nature of Due DiligenceOver the years, the nature of due diligence has changed.
Years ago, it was common for all members of the due
diligence team to gather together in a room and review the
relevant documents. If you found something of interest, you
could walk across the room to your colleagues and share
your findings. If there were questions, you could walk downthe hall and have your questions answered through direct
conversations.
With the advent of electronic data rooms and a desire to
minimize costs, due diligence has become more of a virtual
exercise with diligence team members accessing documents
directly from their desks. The diligence team members
may not even meet each other in person and the chances
of effectively sharing their findings across the team have
become increasingly challenging.
As the global complexity and size of deals increase, so arethe attendant risks. Also increasing is the importance of due
diligence particularly human capital due diligence. An
increasing number of transactions are focused on growth
and with that, there is an increasing need to focus on
the talent within acquired organizations. As you consider
the core elements of growth (e.g., new or improved
technologies, increased sales), it is easy to understand the
important role of talent in realizing synergies (e.g., research
& development, sales personnel, management).
The Critical Role of Human Capital in DueDiligenceMany organizations are fond of saying that people are their
most important asset. Assuming this is true, it is important
to understand the critical role of human capital in due
diligence.
Initially, due diligence is about understanding the impact
of people on the transaction. In part, the people impact
can be understood in financial terms (e.g., annual payroll,
outstanding retirement obligations, pending employmentclaims). Financial terms, however, are only a part of the
impact of human capital. Perhaps the more significant
impact of human capital is the difference people make in
the value of the company. What are the track record and
prospects for the research & development team? What is
the nature and quality of the customer relationships with the
sales team? What is the experience and perception of the
management team? All of these questions require human
capital due diligence far beyond financial statements.
Due diligence is also an opportunity to assess the impact
of the proposed transaction on people. Will the transaction
result in operational changes that will affect people in
the target organization? These impacts could either be
operational synergies (requiring staffing and selection
decisions or potentially workforce reductions) or new
8
Top Two Areas of Focus in M&A Activity Over the Next Two Years (% of respondents)
Focus on growth innew geographic
markets and
revenue growth
Focus on growth innew/adjacentproducts and
revenue growth
Focus on cost ofacquisition andpossible cost
synergies
Heightened duedilligence to identify
liabilities and
compliance issues
Focus on acquisitionand retention of
leadership and key
talent
0%
20%
40%
60%
80%
100%
84%79%
58% 56%
38%
Source: Culture Integration in M&A, Aon Hewitt 2011
With the increasing importance of
due diligence, specifically human
capital due diligence, there is an
increasing need to focus on talentwithin acquired organizations.
M&A Leverage
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AuthorDavid Kompare, Partner, Aon Merger &Acquisition Solutions ([email protected])
growth opportunities requiring additional staffing. Impacts
on people might also appear as changes in objectives or
strategies that require people to work in different ways than
they have in the past.
In short, due diligence is not only understanding how
the company has operated historically, but how it mightoperate following an acquisition. In that sense, due diligence
truly is the beginning of integration planning. A strong
understanding of the potential impacts of integration is
essential to an accurate financial model (i.e., paying the
correct purchase price) and a complete due diligence.
potential integration concerns) and an appropriate level
of judgment and tact these individuals are, of course,
potential representatives of your organization in a potential
acquisition.
One approach to building capabilities in human capital due
diligence is the development of a sound set of supportingdue diligence materials. These materials include items such
as comprehensive data requests, reporting templates,
detailed cost models, cultural assessment tools, and
interview guides. These materials help to ensure a consistent
approach to due diligence while providing resources for less
experienced members of the due diligence team.
In considering the development of a supporting set of
tools, a number of organizations have also looked to the
development of M&A Playbooks or even a web-based
transaction management system (e.g., Aon Hewitts
TransAction Manager) as a means to gather the available
resources and provide a sound framework for executing
transactions. These materials typically provide a broad range
of resources organized either by subject matter or process
phase to help support the due diligence process.
It is often said that there is no substitute for experience. If
this is true, how do organizations with a limited history of
acquisitions gain this experience? One approach is through
participation in M&A training programs. These programs
can be incredibly valuable not only in providing some of
the essential technical considerations for due diligence but
also in building consistent processes. These programs can
also afford insights into the best practices engaged in byother experienced acquirers. These programs can often be
tailored to the specific needs of individual organizations
whether its related to specific process expertise or
geographic requirements.
For many organizations today, the only way to achieve
their growth objectives is through acquisitions. For those
organizations, due diligence becomes a core requirement
not only to identify the appropriate acquisitions and to pay
the right price, but also to avoid making a bad acquisition
that can have lasting consequences.
With the increasing focus on growth in acquisitions, there
is an attendant focus on the talent that is essential to that
growth. By improving their capabilities in human capital due
diligence, organizations are improving their ability to better
understand that talent and, in turn, help to drive acquisition
success.
Improving Your Capabilities in Human CapitalDue Diligence
With the changing nature of due diligence and the critical
role of human capital in due diligence, there is a greater
interest than ever in improving capabilities in human capital
due diligence. Improved capabilities in human capital due
diligence can be developed in a number of different ways.
Organizations that recognize acquisitions as a core partof their growth strategy are also looking more carefully
at how they develop internal HR team members. A
number of organizations that focus on acquisitions include
acquisition interest or experience as a key element of their
talent identification and development processes. As you
consider the skills required to be effective in a due diligence
setting, it is often a blend of technical expertise, a sound
understanding of the acquiring organization (to identify
Volume 1 Issue 1
Capabilities in human capital due
diligence can be improved through: development of internal HR team
members;
development of a sound set
of support from due diligence
materials;
participation in M&A training
programs.
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Decoding the Joint Venture Double HelixLeveraging Human Capital To Build Successful Joint Ventures in Emerging Markets
IntroductionCorporates around the world continue to look at emerging
markets for driving both revenue and profitability growth.
One of the vehicles of gaining entry or expansion in these
markets is through the Joint Venture (JV) route. The JV route
of expansion has many advantages over say an acquisition
or Greenfield buildout, especially in Asia Pacific emerging
markets. Aside from the fact that a JV partnership often times
is the only way to enter a market due to regulatory realities,
there are many other sound business arguments for the JV
route. For example, local JV partners can help overcome any
gaps in unfamiliar markets, and can provide a smooth runway
for growth in complex markets, such as China or India.
Furthermore, the JV partner can bring significant distribution
or after-sales reach. The JV partners experience in navigating
the bureaucratic landscape is typically invaluable. JV partners
also understand the talent landscape and typically operate
off a low talent-cost base, which provides leverage (as well assome issues). These reasons make strategic alliances and JVs
an increasingly popular vehicle for corporate development
in emerging markets. According to a KPMG report entitled
Joint Ventures a tool for growth during the economic
downturn1, JVs were not rated as the most preferred route
to growth due to difficulties encountered in managing and
delivering operations and strategies. This perception is now
changing as JVs are delivering on their promises.
JVs require a different mindset to M&A, which inherently
involves posturing for the highest selling price and the
lowest buying price. On the other hand, JVs require genuine
collaboration to be successful. In that respect, trust is
fundamental.
Other observations of the survey results include:
Over 60% of the survey respondents considered access to
new markets as the most popular motivation for a JV.
40% of the respondents stated that a JV helps reduce costs.
While sometimes the JV route may be the only reality, andnotwithstanding its advantages in emerging markets, its fair
to forewarn uninitiated business leaders that it can present a
minefield of issues on the human capital front. In fact, these
human capital issues ultimately can make or break the JV,
even if all else falls into place.
Given the strategic criticality and the time, money and
effort investment in JVs, it is a burning platform for business
leaders. Aons research and experience show that in successful
JVs, the business leaders often lead the strategic initiative with
their HR leaders, rather than looking to HR leaders to solve
the issues for them.
Lets explore the opportunities, challenges and a framework
to build successful JVs in Asian emerging markets like China
and India, focusing on both the common and unique issues.
The Contours of the ChallengeTo build successful JVs, we need to understand the contours
of the issue landscape. Its very important to begin at the
altar of business rationale. The second aspect is the right
framework to apply to uncover the issues that are relevant to
this particular JV, as well as the generic issues. Its critical to
clearly articulate the strategic and operational goals behind
the JV, then understand the linkage to HR systems, and
10
By Sharad Vishvanath
Human Capital
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surface the possible HR operational considerations that are
paramount to achieving these goals.
There could be a myriad of key strategic goals that a JV
may be driving. Some examples are new market or product
expansion, localized product development and marketing,
a critical link in the global supply chain for operationalefficiency and cost plays, a R&D play, a pricing play, etc.
But whatever the goals, they can be distilled into some
key business considerations and critical decisions that will
ultimately dictate success. Some of these critical decisions are
as follows:
Degree of autonomy from the parent organization;
Uniqueness of JV identity;
Nature of the employment relationship for employees;
Disruption tolerance;
Duration of the JV agreement and exit strategy.
Its critical to understand what some of the fundamental
strategic issues and factors at play are, and the logic tree that
connects them to HR implications, and the possible resulting
HR operational issues. The chart below lays out an example of
a probable framework.
11Volume 1 Issue 1
Lets examine a few of the differences that our research and
experience suggest MNC firms grapple with when they
consider local JV partners in emerging markets (such as India
and China).
High appetite for risk by local partner;
Lack of adherence to governance structures; Centralized and quick decision making;
Incongruous and uid organizational structure and roles;
Possible maturity of business-linked processes, but limited
maturity of e-enablement of HR systems;
Wide variance in compensation and bands within the
organization;
High connect with leadership team and lack of leadership
scorecards and delegation of KPIs;
Frequent cross-functional career movements.
These differences offer both an opportunity to leverage
some great practices and DNA that the local partner will
offer, and also the ability to create natural friction points. Its
very important to leverage the strengths of the partner that
your organization may lack and to proactively manage the
potential frictional points.
Strategic Issuesand Factors
Partners have different
strategic and businessobjectives for the jointventure
Organization design
Leadership andtalent selection
Incorporating the best practices from both
organization into JV Align leadership total rewards and perks
Retention of key roles and position requiredfor JV
Defining an authority matrix agreed byboth organization leaders
Leadership scorecards design
JVs own/parent companys HR InformationSystem (HRIS), benefits and payroll
Redundancies related to overlaps in roles
Common compensation and bandsstructure
Incentive structure for high performance
Service transition agreement (if required)
HR HRIS/payroll systems for cost synergies
Communications, culture and changemanagement
Key talents willingness to join the JVemployer brand
Tracking seconded and temporary transfers
Governance model
Roles and decisionmaking
Operating model
Total Rewards and
workforce strategy HR service transition
EVP, communication,culture and changemanagement
Employee secondments
and repatriations
Intended ownershiplevels
Intended exit strategy
Clash in managementstyles and cultures
Imbalance in levels of
expertise, investmentor assets brought intothe venture by thedifferent partners
Implication on HRSystems and People
Resulting HR Operational Issues
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Lets examine some the areas where foreign partners can gain immensely from the local partners strengths.
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Strong local brand:This can be leveraged for both consumers and prospective employees. A recent example of this is the TATA-Starbucks JV
where Starbucks China and Asia Pacific president, John Culver, acknowledged the strong asset the TATA brand broughtto the table. Culver told the reporters of livemint.com, We will look at expanding this partnership as a long-termrelationship....We are excited about building an enduring company that has a positive impact on India. He went onto describe this JV as a unique partnership which will launch some co-branded products under the Tata-Tazo brand.This is quite an accolade in view of the fact that Starbucks is already a highly visible global brand in its own right. Suchglobal name recognition can be very critical for market and employer branding, especially if the foreign partners brandis relatively unknown in highly competitive talent markets.
1.
2. Strong supply chain and procurement skills:This can provide strong business leverage for a foreign player who is unfamiliar with the local market. This also extendsto the talent supply chain, as this is most often a critical component of the success plan, but not always understood all
that well. One caveat on the talent supply chain, however, is that an optimal balance between local prevalence and theforeign partners needs has to be architected. Otherwise, you run the risk of creating an imbalance between the talentquality and cost needed for the JV.
Globally competitive project management and growth principles under considerable constraints:This is a unique strength that many of the Chinese and Indian private sector firms possess that has made themsuccessful, and will now stand them in good stead as they go global. As an example, the book The Indian Way, writtenby Professors Peter Cappelli, Harbir Singh, Jitendra Singh, and Michael Useem from the Wharton School, beautifullyarticulates the constructs underlying the concept of how Indian businesses manage to succeed, often within severeconstraints, suboptimal bureaucratic environments, and limited resources. They do this by drawing on improvisation,
adaptation, and resilience to overcome endless hurdles. This book presents some great lessons that global organizationscan learn to leverage as they partner with firms in India and China. Professor Harbir Singh, explains that in the Indianbusiness landscape, firms are treated as organic enterprises where people are viewed as assets. Developing a workingculture and sustaining employee morale are both critical to their success. The presence of a strong inclination towardsimprovisation, as well as an organizational receptivity to change with a social connotation, are Indias contributions tothe global business landscape.
A pertinent example is of the two Reliance groups and their inherent project management and execution skills thatboth have demonstrated across petrochemicals, telecom, and financial services. Reliance Industries Limited (RIL), underthe chairmanship of Mukesh D Ambani, has successfully built a strong foundation for greater future expansion andgrowth in the diverse lines of business that it operates. RILs interests range across petroleum, petrochemicals , power,and infocomm. On the other hand, Anil Ambani, chairman of Reliances ADA group, has been able to grow apidly andbecome a leading player across multiple industries in a very short span of time. The interests of the ADA group alsorange across telecommunications, power, and financial services.
3.
Driving operational efficiencies and the concept of frugal management:Both Chinese and Indian firms have strong management practices wherein they do more with less, as compared to theirwestern counterparts. The concept of frugal management sometimes provides inherent competitive advantages thatcan be leveraged in a JV to drive future growth and profitability. As an example, GVK Industries in India has a great trackrecord for venturing into unfamiliar industry segments like infrastructure (airports, power etc) and now resources (theHancock deal in Australia). They have delivered consistently on all strategic success parameters of these forays, while stillmaintaining the concept of optimal management frugality driving both growth and profitability. They now rightlybelieve this to be a competence they want to leverage and embed in their new ventures, both in India and globally.
Apart from operational goals and strategies, this concept is equally applicable to managing human capital assets and
resources. It can be used to drive growth in the face of uncertainty and can foster a bigger bang for your buck, andwith the same human capital costs.
4.
M&A Leverage
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That said, there are also points of friction and issues that a
foreign partner needs to evaluate and proactively manage.
Some of these are as follows:
Lack of data availability/standardization and data veracity;
multiple stakeholders both from a data provision
perspective and a decision-making perspective;
Compliance issues: Gray areas are the norm as
interpretation of the law can have a wide range. Foreign
Corrupt Practices Act (FCPA) and anticorruption-led issues
are a risk for US and European companies due to inherent
corruption in some of the bureaucratic systems.
Mindset issues against and a lack of oversight and
governance along with centralized decision making.
Culture alignment integration: Presence or lack of this can
define success or failure.
Reward structures and pay level differences and
rudimentary HR systems that dont enable efficiency, leanHR and governance.
Framework and Markers for JV SuccessThe backdrop laid out above on the landscape, key
opportunities and challenges underscores critical
considerations when crafting successful JVs. Now lets discuss
some of the markers for success that foreign firms should
embed as they look to select JV partners and set up JVs in
Asian emerging markets.
Do a thorough diligence/as-is assessment on both
complementary strengths and friction points:
Its imperative to do a structured diligence/assessment of
the as-is state for both organizations (yours and the local
partner). Our research and experience show that clients
who invest time to conduct a value driver tree analysis
and follow up with a thorough as-is assessment, ultimately
enjoy a much higher rate of success. The value driver
analysis has a three-step process:
start with business goals for the JV,
drill down to critical decisions needed to drive those
goals,
and finally, determine the HR strategy implications in
order to enable those decisions.
The second key differentiator is that these clients also focus
on quantifying these goals, establishing benchmarks, and
embedding them into their organizational and individual
leader scorecards. This aligns goals up front between the
various stakeholders.
Volume 1 Issue 1
Its very important to leverage the
strengths of the JV partner that
your organization may lack, and to
proactively manage the potential
frictional points.
Prioritize your action plan: Successful clients prioritize
the initiatives that will create maximum impact and have
complexity that will impact the JVs end goals.
Evolve 3rd culture and systems: Leading-edge clients
understand that they cannot force one organizations
culture and systems onto the other. Rather, they build a
new organization with a new and distinctive identity thatcombines the best of both worlds. Once understood, they
embed the partners strengths and their own strengths
in the way that the new organization is structured, the
operating model adopted, and the people systems.
Its critical to move employees quickly to a stand-alone
company mentality, while retaining a focus on program
aspects that work well in either organization.
Focus organization design and governance focus: As a
foreign partner, you may well have to rely on your local
partners talent and market knowledge. However, its very
critical to have a strong say and active involvement in the
JV organization structure, staffing of key executive roles,
and governance structures. Smart clients will institute
a structured process for evolving the new organization
structure and assessing leaders (from both organizations
and/or externally) to fit critical roles.
It is important to note that apart from strategy, the
financial model for the JV (e.g., are there other equity
partners, how much debt are your raising, is the partner a
State-owned/public sector enterprise), and the structure of
the JVs operating model (e.g., is it an integrated market
opportunity involving multiple business divisions/products)
have profound effects on how you structure and build
governance.
Finally, we also find that success is highly dependent on
a strong focus on developing the right management
governance structures and processes that evolve from the
organization structure.
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Enabling reward and key HR systems: Successful clients
tend to closely link rewards and other key HR systems, such
as goal setting, performance management, and career
development to enable the new structure and operating
model, governance mechanism, and strategic goals.
Over-communicate: Another aspect that differentiates
successful JV partnerships is the degree of communication
and transparency that characterizes all the major themes of
the new organization, i.e., its unique identity, opportunities
and challenges, new structure/operating model, and
expectations of employees to enable the JV to succeed.
It is pertinent to note that as a foreign partner, if you are at
odds with your local partner on how to address many of the
key issues that a value driver analysis throws up, it may well
be prudent to even consider walking away.
JVs in emerging markets are not easy to execute and we have
seen many failures. But our experience and research clearly
suggest that some genetic markers embedded early and
appropriately in the JV design and setup, can dramatically
increase its chances of success.
It is critical for foreign partners to be
in alignment with their local partners
when addressing key issues emerging
from a value driver. Otherwise, it may
be prudent to consider walking away.
AuthorSharad Vishvanath, Asia Pacific M&A Market Leader, Aon Mergers & Acquisition Solutions, Aon Hewitt ([email protected])
Sources:
1. Joint Ventures fuelling growth during the downturn, KPMG, 2009
M&A Leverage
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Overcoming Risk Roadblock in Deals:Pulling the Transaction LiabilitySolutions LeverBy Sharad Vishvanath and Jennifer Richards
When an organization pursues a merger and/or acquisition (M&A) transaction, the euphoria of the deal and the need for
speedy action can take hold, resulting all too frequently in risks being under evaluated, or worse, being overlooked entirely.
Once identified, these transactional risks and liabilities may pose roadblocks to the smooth and successful completion of the
deal or even prevent a deal from proceeding. Transactional risks emanate from multiple sources and often center around
Risk
Volume 1 Issue 1
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Case Study
Lets examine how W&I insurance has been used as a risk solution to achieve a clean exit for the seller, while
providing adequate post-closing indemnification for the buyer.
Issue
In a US$150 million sale of a Hong Kong-based portfolio company by a private equity seller, the buyer was
looking for US$20 million escrow to respond to breaches of warranties and indemnities over a two-year survival
period. However, the seller was looking to structure a clean exit and would only agree to a very limited escrow of
US$1.5 million for 12 months. The parties could not reach agreement on these disparate terms.
Solution
A buyer-side W&I policy was implemented whereby the seller retained liability only for the limited escrow. The
buyer supplemented this escrow with W&I insurance with a limit of liability of US$20 million and a survival period
of two years for all warranties other than tax and title, which customarily survive for seven years.
16
hidden or unknown issues such as inadequate disclosure or
undisclosed losses or liabilities. Then again, transactional risks
can stem from currently existing, known exposures, such as
pending or threatened litigation, tax liabilities, environmental
issues or other contingent liabilities. Both known and
unknown risks create uncertainty in the purchase price and
can impede, or prevent, successful negotiation of an M&Atransaction. A question often asked by clients is Can we
transfer such risks out of our purview, and if so, whats the
value of such a solution? The answer to this query lies in
the various Transaction Liability Insurance Solutions that are
available in the marketplace today. These include Warranty
and Indemnity Insurance (W&I), Tax Liability Insurance,
Litigation Buyout Insurance, and Contingent Liability
Insurance. These various insurance solutions can assist in
transferring transactional risks from the buyer or the seller to
the insurance markets, by accessing the insurance markets as
an alternative capital source to facilitate transactions.
What is W&I Insurance?W&I insures either a buyer or a seller against losses arising
from breaches of warranties or indemnity claims in respect
of the target company or target assets that are the subject
of the sale. This insurance based risk solution can be used
by a seller to backstop the warranties and indemnities that it
provides to the buyer (so called seller-side insurance) or it can
be used by a buyer to replace or enhance a sellers liability for
warranties and indemnities (buyer-side insurance).
Key Features of Warranty and IndemnityInsurance
W&I insurance solutions offer the following advantages. They:
Maximize distributable proceeds and optimize the value
of the deal by reducing or eliminating the need to hold
amounts in escrow or otherwise contingently reserved for
claims;
Enable a clean exit for a seller;
Enhance the amount and period of recourse for the buyer;
Facilitate transactions by breaking the impasse between the
parties related to the post-closing indemnification scheme
and specifying the amount of indemnity caps, thresholds,
duration of warranties, etc.;
Address collection concerns, e.g., acquisition from
a distressed seller or receiver or a disparate group of
individual sellers.
Other Transaction Liability Insurance SolutionsWhile W&I Insurance provides coverage for unknown risks
arising from the representations and warranties provided in
an M&A transaction, there is a suite of other transactional
insurance products that are designed to address identified
or ripened exposures. Insurance products can be utilized to
insure the full range of liabilities that exist or may arise in the
M&A context. These products enable the smooth completion
of a transaction by removing the sticking points and
transferring their associated risks to the insurance markets.
M&A Leverage
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Tax Liability Insurance. Tax Liability Insurance protects the
parties against taxes (and associated defense costs) arising
from identified tax exposures stemming from either the
structure of the deal itself, or from the target companys
historical or current operations.
Litigation Buyout Insurance. Losses that may arise fromexisting or threatened litigation can be addressed by means
of Litigation Buyout Insurance.
Contingent Liability Insurance. Other contingent liabilities
that may arise or be identified in the M&A context, such as
successor liability or regulatory concerns, can be dealt with
via Contingent Liability Insurance.
Practicality: Are These Risks Real?Our experience in working with a myriad of clients across
many industries in the region indicates that such risks are
not well understood, even though they are widespread in
Asia Pacific. Despite the need for, and the availability of, risk
transfer solutions to manage both known and unknown risks,
awareness of these solutions is fairly low in the region (except
in Australia).
AuthorsJennifer Richards, Regional Director, Aon M&A Solutions ([email protected])
Sharad Vishvanath, Asia Pacific M&A Market Leader, Aon Mergers & Acquisition Solutions, Aon Hewitt ([email protected])
In mature APAC markets like Australia, our research indicates
that the vast majority of private equity deals and an increasing
proportion of trade sales are now baking in the Warranty and
Indemnity Solution at the initial discussion stage. Clearly, deal
participants are seeing the value of employing transactional
insurance as a deal facilitation and risk management tool. A
large global IT major known for its highly acquisitive natureinsists on getting additional W&I cover whenever dealing
with the sellers of firms that are relatively immature in risk
management.
Claims: Does the Solution Work?Historical claims data shows that claims are in fact made with
relative frequency and that valid claims have been paid out.
If a claim is made on reasonable grounds with evidentiary
proof, an insurer is required to act in good faith and handle
the claim in a reasonable manner. If however the same claim
was brought against the seller rather than an insurer, it might
not necessarily be met with the same level of professionalism
and care. The sellers ability to pay out on the claim, especially
when the escrow has already run its full course, is also not as
certain as it would be with a well-capitalized insurance firm.
On balance, it is clear that there are convincing reasons
for these solutions to be rapidly accepted as norms in
managing the inherent risks in M&A transactions. The use
of transactional insurance products allows sellers to structure
clean, fast exits with limited post-closing contingent liabilities,
while at the same time providing buyers with adequate
protection and recourse to well-capitalized insurance
companies. Our belief is that such solutions offer a significant
first-mover advantage to clients who adopt them for theirdeals in Asia.
We all know that in Asia there are many unascertained risks
in target companies, especially for local-founder promoted
companies that may not have the most sophisticated riskmanagement systems. We frequently learn from our clients
about experiences where theyve had their fingers burned on
prior deals.
Volume 1 Issue 1
Our research indicates that the vast
majority of private equity deals
and an increasing proportion oftrade sales are now baking in the
Warranty and Indemnity Solution
at the initial discussion stage.
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b d
About Aon Hewitt
Aon Hewitt is the global leader in human resource
solutions. The company partners with organizations to
solve their most complex benefits, talent and related
financial challenges, and improve business performance.
Aon Hewitt designs, implements, communicates and
administers a wide range of human capital, retirement,
investment management, health care, compensationand talent management strategies. With more than
29,000 professionals in 90 countries, Aon Hewitt makes
the world a better place to work for clients and their
employees. For more information on Aon Hewitt, please
visit www.aonhewitt.com
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Co. Reg. No.: 198301764G