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C R O S S P O L L I N A T E

HOW HARDWORKING COMPANIES REAP THE BENEFITS OF SMART POST-MERGER INTEGRATIONS.

T H E D E A L M A Y be sweet, the acquisiBY JOHN R. QUAIN P H O T O G R A P H B Y H O L LY L I N D E M

tion price attractive and the benefits of new markets or new products obvious. But, say the experts, even a honey of a deal can come back to sting you if you don't tend to a new acquisition with care. "There are times when the best deals you do are the deals you don't do," admits Warren Kanders, CEO of Armor Holdings Inc. (AH). "Only 28 percent of individual acquisitions valued at over $250 million create substantial shareholder value," insists Sam Rovit, coauthor with David Harding of Mastering the Merger (Harvard Business School Press, 2004). But, Kanders points out, even the most seasoned corporate leaders know that mergers and acquisitions (M&A) are a necessary fact of business life. Kanders says he has conducted more than 20 acquisitions since 1996, raising Armor from a small protective-vest business to a top provider of Up-Armored Humvees, body armor and other equipment to the military and law-enforcement community; the company

reports projected 2004 revenues of more than $830 million -- more than double that of two years ago. Catalysts to mergers are myriad. "Regulations that once created clear boundaries for financial services companies, for example, have crumbled, creating a mad scramble for of customers," says Manulife Dominic Corp. D'Alessandro, president and CEO Financial (MFC). "Globalization means a competitor can be next door or on the other side of the world." D'Alessandro says such global forces inspired the $13.6 billion allstock merger of John Hancock Financial Services and Manulife in April 2003. Dubbed the largest crossborder transaction in Canadian history, it created the second largest

TO HAVE A DEAL BEST ACHIEVE ITS POTENTIAL, SAYS WARREN KANDERS, CEO OF ARMOR HOLDINGS, "PATIENCE IS THE MOST IMPORTANT CONSIDERATION."

processes and how they might form an even better match with a potential target," Cavuoto says. "It's our philosophy that integration begins the moment you start doing due diligence," says Anne Madden, vice president of corporate planning and development, who oversees M&A activities at Honeywell International Inc. (HON). "We're looking for synergies and opportunities and how we would integrate the target company from the start." Consequently, any proposed acquisition at Honeywell requires an integration plan that spells out issues such as whether plants have to be moved and how new distribution channels will work, Madden explains. She says this approach was developed in 2002 after her company closely examined its acquisitions over the previous decade and then applied lessons learned from Honeywell's Six Sigma quality-control efforts. Since then, she says, each of the company's 15 to 20 completed acquisitions is meeting or exceeding its original goals. "Before we sign our deals, we have a review with Dave Cote, our chairman and CEO, and during that process he reviews the preliminary integration plan," explains Madden.

THE SENIOR MANAGEMENT ISSUES UP FRONT, THE RANK AND FILE CAN GET ON WITH BUSINESS."

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C R A I G B R O M L E Y, S E N I O R V I C E P R E S I D E N T, M A N U L I F E

"IF YOU CAN SETTLE

life insurance company in North America and the fifth largest in the world, according to Manulife. But all deals have at least one thing in common: "After the transaction is closed, that's the day we have to begin our work," says Kanders. Rovit adds the good news is that the more acquisitions you do, the more you know and the more likely your chances for success. "More frequent acquirers are more successful at a rate of about two to one," he says. To gain insight into what makes mergers work, nyse magazine spoke with analysts, consultants and acquisitive executives. Together, they suggested eight elements that lead to successful post-merger integrations.

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MAP INTEGRATION BEFORE CLOSING THE DEAL Think about key integration elements before the deal is inked, says Dominick Cavuoto, corporate vice president and president of global financial services at Unisys Corp. (UIS). Cavuoto, who advises

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CUSTOMIZE THE INTEGRATION PROCESS "A lot of people focus on

financial services companies on integrations and business processes, points to a tier-one financial services client that has asked Unisys to "blueprint its business," because the firm is looking to make an acquisition. "To ensure that the deal goes well, the financial services firm wants first to understand their own business

due diligence, thinking that if they can make the numbers work" on paper before the purchase takes place, "the acquisition will be fine," points out Cavuoto from Unisys. "But as we've learned, it doesn't work that way at all." Cavuoto says the lessons of the 1980s and 1990s demonstrate that companies need to

more carefully examine the ramifications, which affect its systems, culture and organizational chart, that an acquisition will have on the existing business. Toward that end, Cavuoto led the development of Unisys' 3D Visible Enterprise (3D-VE), a methodology and set of tools and practices that shows how various levels of an organization interrelate, from the infrastructure level through the operational and business processes levels, and up to the corporate vision. Unisys, he explains, uses its 3D-VE methodology to deploy Web-based software in "3D Blueprints" that map a company's procedures across all layers and helps it better understand cause-and-effect relationships between a corporate vision and the technology and business processes that support it (see "The Unisys Motto," next page). "If you just depend on cost synergies to make it work, the acquisition will fail," warns Richard Heckmann, chairman and CEO of ski maker K2 Inc. (KTO). "You have to look for revenue synergies." By his count, Heckmann has conducted more than 280 acquisitions over the course of his career. He became K2 CEO in October 2002, a year when the company reported a net income of $12.1 million. K2 projects its net income to be approximately $40 million for 2004. According to Heckmann, a month after he stepped into the CEO's office, K2 acquired baseball-equipment maker Rawlings Sporting Goods Co. for $72 million. That, continues Heckmann, was followed by an aggressive set of acquisitions, ranging from fishing-tackle icon Shakespeare to Tubbs Snowshoes. The company reports it has gone from 2,000 employees in 2002 to 4,700 currently.

A WINDOW ON THE ORGANIZATION TO UNDERSTAND WHERE IT IS AND WHERE IT NEEDS TO GO."

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D O M I N I C K C AV U O T O, P R E S I D E N T, GLOBAL FINANCIAL SERVICES, UNISYS

"YOU NEED

Heckmann says companies need to be receptive to different integration strategies. In some cases, he explains, K2 discovered technology synergies. He mentions an example in which the company used Shakespeare's advanced fishing-pole designs to create better K2 ski poles. In another recent case, Heckmann says, the anticipated synergy should enable newly acquired snowshoe maker Atlas to take advantage of K2's manufacturing facilities in China. This past summer K2 acquired Volkl Sports Holding AG. "Volkl just went from 20,000 to 300,000 snowboards a year," says Heckmann, "because they have the K2 distribution system now." The type of integration you should focus on "depends on the nature of the business," agrees Armor's Kanders. "The value might be financial, it might be in purchasing, it might be in R&D." One example Kanders cites is his company's acquisition of safety-technology company Simula in December 2003. "When we purchased Simula, we picked up 55 engineers. So this acquisition afforded us the opportunity to consolidate our R&D, which we did in Phoenix, where Armor already had its R&D staffers."

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TA P T H E R I G H T PEOPLE Assembling the right team is crucial, CEOs and merger

analysts agree. "One of our best practices is to commit the very strongest people we have to an acquisition integration," underscores Cote, Honeywell's CEO. "That, coupled with our robust review process, maximizes the likelihood that our acquisitions will be successful." "If you don't have a good integration team and a good integration culture," agrees Heckmann flatly, "it's not going to work." He says K2 creates its teams from one of six business platforms based on specific product areas to ensure that the people on the team under-

stand the particular business they are acquiring. "The Volkl acquisition is only being done by K2 and Volkl people [who have backgrounds in ski and snowboard equipment], so that the integration is being done by people who know the industry." Otherwise, Heckmann points out, the wrong decisions will inevitably be made. "Companies used to bring in outsiders because they felt nobody inside would be unbiased," explains Cavuoto. "But integration committees really need `the keepers,' the people who can basically reinvent their business so that they have a stake in it and are committed to it."

HAVE A GOOD INTEGRATION TEAM AND INTEGRATION CULTURE, IT'S NOT GOING TO WORK."

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R I C H A R D H E C K M A N N , C E O, K 2

"IF YOU DON' T

Kanders agrees: "Typically Armor relies on people internally and from the company we've acquired. We don't have a SWAT team because when they leave they also take that knowledge with them," he says. Using your own employees also helps smooth the transition, he adds. "We use our people to talk about who we are and what we're about," Kanders says.

THE MOTTO

UNISYS :

Madden notes that Honeywell takes a similar approach. When acquiring a security company, for example, an employee from an existing Honeywell security business leads the integration effort, she says. "We make the commitment to get the best person possible to be the full-time integration leader," says Madden. She also suggests that an M&A team cut across all aspects of the company, from finance to systems integration to manufacturing. "We work in cross-functional teams," explains Madden."A corporate HR integration person, a legal integration person and an IT person will be involved, so businesses are by no means on their own."

ident of business development, "and Manulife was set up around products." That structure, says Bromley, meant Manulife could not simply merge life insurance groups, for example. He says one culture had to be adopted over the other and that Hancock is currently migrating to the product model. Kanders warns against underestimating the time-consuming human part of the equation. "It's a lot of meetings and a lot of discussion," he emphasizes, "and understanding that everybody has different styles and you don't change cultures overnight." Rovit describes "scope deals" as the riskiest proposition because the acquirer is venturing into new products, customer segments or markets -- areas beyond the scope or existing

KNOW THYSELF

"It's easy to see things that are tangible and on the balance sheet," says Ralph Welborn, managing partner of Unisys Corp.'s global business transformation practice. "But a lot of what makes an integration work is the tacit knowledge or the organizational wisdom that represents how businesses are actually stuck together." Understanding a business's interrelationships is critical to making the right choices during the integration process, insists Dominick Cavuoto, Unisys vice president and president of global financial services. Cavuoto says three key factors are important for a successful integration: visibility, traceability and flexibility. "In terms of visibility, you need a window on the organization to understand where it is and where it needs to go," he notes. Traceability, he says, helps foretell how a change in one area -- say, infrastructure -- might affect other areas, such as business processes. Cavuoto adds that traceability also helps explain why a business process may change during a merger. Flexibility, he concludes, allows adjustments based on what the team learns from visibility and traceability. "This is the idea of an agile corporation, which we believe is critical to any corporation's success," Cavuoto says. Unisys uses Web-based tools to develop 3D Blueprints that help companies achieve these goals. By conducting employee workshops, Welborn explains, Unisys creates a blueprint that captures knowledge from each aspect of a business, from retail to IT. That data, he explains, is incorporated into a 3D software model representing four levels of a business: the company vision at the top, the operational map and business processes underneath it, the key functions and applications necessary to make the business work and, finally, the bedrock infrastructure supporting the business. The result of capturing intellectual capital, says Welborn, "is we can see the impact of a single change throughout all layers of the organization."

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DON'T IGNORE THE C U L T U R E WA R S "Culture really does matter," says Rovit. "You should

expertise of the acquiring company. "More often than not, retaining the target company's culture is the right call in a scope deal," he adds. Heckmann notes, "I made 260 acquisitions in nine years as chairman, president and CEO at US Filter, and we never bought anything outside of the water business." Heckmann says the buyer should always intimately

screen out huge cultural misfits." Rovit emphasizes that companies should also determine how to handle small differences in corporate cultures. To pinpoint potential

CAPTURING INTELLECTUAL CAPITAL ALLOWS COMPANIES TO "SEE THE IMPACT OF A SINGLE CHANGE THROUGH ALL LAYERS OF THE ORGANIZATION."

RALPH WELBORN, MANAGING PARTNER, UNISYS

problem areas, he suggests surveying mid-level executives at both companies. "For example," Rovit explains, "is the target a voice-mail culture and you're an e-mail culture? Is it team oriented and you're individual oriented?" Once cultural differences have been identified, he says, the company can decide how to mitigate them, perhaps by offering rewards for conforming to newly adopted policies. Take the John Hancock and Manulife merger. "Hancock was set up functionally," says Craig Bromley, Manulife senior vice pres-

understand the business he's acquiring, which is why at K2, "you won't see us owning a food company."

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COMMUNICATE E A R LY A N D O F T E N As any marriage counselor will advise, communication

is key. It's no different when it comes to a corporate marriage, says Manulife's Bromley. The

best way to communicate clearly during an acquisition is to establish the leadership and goals early on, he explains. The point, says Bromley, is to prevent a merger from distracting employees from the business at hand. "If you can settle the senior management issues up front," he points out, "then the rank and file don't have to think about them and can get on with business." Rovit agrees: "Resolve people and power issues fast." He stresses that the senior team can then articulate new business goals to the rest of the company. This, he insists, is a critical aspect of any integration. At Honeywell, "a lot of work goes into making employees comfortable with what's going on and explaining what opportunities they will have going forward," Madden says. She notes that Honeywell often taps established employees to communicate how the company works to acquired employees. "It can sometimes mean doing a road show [to branch offices and different divisions] with senior leaders to explain what's going on." Adding another wrinkle, Madden points out that communicating with customers during an integration period can be just as important. "You want to reassure current customers and tell them where the business is and where it's going," she says. "Otherwise you may lose important clients during an integration."

included in fact-finding experiential workshops that Unisys conducts in the initial stages of an M&A integration. The people working with the technological infrastructure are important, he says, to completely understand a business process. "IT integration, if you don't get it right, can completely derail an integration," confirms Madden. She warns that "something as basic as getting the invoicing right" is essential to a seamless transition. Failing to get the basics right could mean the loss of a key customer critical to the successful economics of the acquisition. Consequently, she says, IT people are always a part of any integration team at Honeywell.

"Reviews of integration progress," says Madden, "are done against the initial integration plan after 30 days, 60 days, 90 days and then quarterly." At each step, she says progress is assessed against a large series of metrics that include the integration of IT, valuation goals and sales synergies. According to Madden, "These integration plans go into excruciating detail and are the size of phone books. But without them, people lose focus." To underline how important this process is to Honeywell, managers have to review the results with the CEO. "It gives them a lot of religion when they know they have to show up in front of Mr. Cote to report on their progress," says Madden. Obvious signposts mark the progress of an integration, says Heckmann. "When it's wrong, you see it in the numbers," he points out. "If the integrated company starts missing

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KEEP THE MONITOR ON Setting priorities is one thing; measuring progress is

numbers, either your strategy is wrong or your integration's not working."

another. That's why, according to Madden, companies that track specific integration goals are more likely to create measurable value. Some companies, such as Honeywell, say they have codified the monitoring process.

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B E PAT I E N T "As I say to the lawyers after the transaction closes," recounts Kanders, "I will only

know whether the contract is a good contract or a bad contract in five to 10 years' time." Kanders looks to create value over time and expects that any acquisition or merger requires a measure of perseverance. At Manulife, Bromley offers a spe-

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DON'T FORGET TECHNOLOGY "If you have to

cific example of just how long one piece of an integration can take. "We've got a Hancock service center with 2,000 people servicing all the products," he explains, "and we've got to carve these people up to go with individual products. The plans are in place on how to get from here to there, but it will take a year to 18 months."

HONEYWELL CONSIDERS IT A BEST PRACTICE TO ASSIGN ITS STRONGEST P E O P L E T O M E R G E R I N T E G R AT I O N , S AY D AV E C O T E , C E O , A N D A N N E M A D D E N , VICE PRESIDENT OF CORPORATE PL ANNING AND DEVELOPMENT.

change the entire technology," warns Unisys' Cavuoto, "the associated cost and risks are quite high." So understanding the technological infrastructure -- of both the acquiring and the acquired companies -- is essential, he says. Cavuoto notes that both business and IT personnel are

To have a deal best achieve its potential, says Kanders, "patience is the most important consideration."

nyse M A G A Z I N E IS PUBLISHED BY THE NEW YORK STOCK EXCHANGE IN CONJUNCTION WITH TIME INC. CUSTOM PUBLISHING. © 2004 NEW YORK STOCK EXCHANGE, INC. ALL RIGHTS RESERVED.

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