amas newsletter v2b

8/12/2019 AMAS Newsletter v2b

1/20

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


2/20

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

2

7

10

2

8

6

12

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


3/20

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


4/20

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

2

By Michael Marzanno and Jonathan Hendrickson

Feature

M&A Leverage


5/20

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.


6/20

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.


7/20

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.

5Volume 1 Issue 1


8/20

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


9/20

7

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.

Volume 1 Issue 1


10/20

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


11/20

9

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.


12/20

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

M&A Leverage


13/20

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.

12

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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13

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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14

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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15

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


18/20

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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17

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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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

2012 Aon Consulting (Singapore) Pte. Ltd.

Co. Reg. No.: 198301764G

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