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Rubber Hits the Road
Ensuring Success in Post-Closing Integration and
Harvesting Intellectual Assets


  Firmex Webinar Series                                   Andrew J. Sherman, Esq.
  M&A Master Class                                        Jones Day
                                                          51 Louisiana Avenue, N.W.
                                                          Washington, D.C. 20001-2113
  December 8th, 2011                                      202-879-3686
  1:00 p.m. to 2:00 p.m.                                  ajsherman@jonesday.com




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED                                             1
About Firmex
                  Firmex is focused on providing the best virtual data room
                  solution for managing corporate transactions and financial
                  compliance

Joel
Lessem            Who uses Firmex?
CEO
Firmex            • Firmex community includes
                    over 200,00 users worldwide
                  • Conducted over 10,000 deals
                    in the last 18 months

                  Why offer an M&A Master Class?
                  • As part of our value-added service, we believe it is important
                    to offer educational resources to our expanding community


 ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED                             2
Andrew J. Sherman
              Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,500
              lawyers worldwide.
              He is the author of 23 books on business growth, capital formation and the leveraging of
              intellectual property. His eighteenth (18th) book, Road Rules Be the Truck. Not the
              Squirrel. (http://www.bethetruck.com) is an inspirational book which was published in the
              Fall of 2008. He has appeared as a guest and a commentator on all of the major
              television networks as well as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s
              “For Entrepreneurs Only,” USA Network’s “First Business,” and Bloomberg’s “Small
              Business Weekly. ” He has appeared on numerous regional and local television
              broadcasts as well as national and local radio interviews for National Public Radio
              (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of
              America, Talk America Radio Network and the USA Radio Network, as a resource on
              capital formation, entrepreneurship and technology development.
              He has served as a top-rated Adjunct Professor in the Masters of Business
              Administration (MBA) programs at the University of Maryland for 23 years and at
              Georgetown University for 15 years where he teaches courses on business growth
              strategy.
              He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO)
              since 1987. In 2003, Fortune magazine named him one of the Top Ten Minds in
              Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time
              champions and supporters of entrepreneurship.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED                                                   3
M&A Integration Strategies
                 and Best Practices




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   4
The Integration Challenge
  “Cultural & people issues present the biggest specific challenges
  during the post deal period…”
                                                                      Only 20% of respondents were well
    Top Post-deal Challenges                                          prepared to deal with cultures differences
   Complex integration
   of two businesses                                        32%   •    Cultural challenges
                                                                        – Differences in working styles,
   Dealing with different
                                                          30%
                                                                           leadership approach
   Organization cultures
                                                                        – National culture differences
   People issues                                      27%               – Behavioral differences
                                                                  •    People Issues
   IT                                             24%                   – Key members of management
                                                                           team leaving
                                                                        – Employee moral and motivation
   Customer retention                  10%
                                                                        – Retention of key staff
   Time and                                                             – Consultation with staff and
                                    4%
   management                                                              representative bodies
                             Proportion of respondents
Source: KPMG Global M&A survey

                      …yet two thirds of companies had not placed a great deal of emphasis on
                      addressing people and cultural issues in planning for the post deal period

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED                                                     5
Acquisition Integration: Surviving the “Day After”
Options for Integrating Acquired Business

Minimal – only selected corporate functions are merged (e.g.
HR/benefits), primarily to achieve staffing synergies or cost
efficiencies; acquired business remains decentralized with
autonomy for decision making and agreed-upon reporting
requirements to the “mother ship”
Moderate – certain key functions are consolidated (e.g.
marketing & sales, capital planning, procurement); strategic
planning and monitoring is centralized while most day-to-day
operations remain autonomous
Full – all processes, people and systems are consolidated
and management decisions are centralized into parent
company

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   6
Acquisition Integration: Surviving the “Day After”
Integration: Whats the Big Deal?

• A poorly executed integration plan can create or
  destroy shareholder value; the results are felt
  long after the deal closes
• Integration is a difficult, complex and sensitive
  process; it is not just an ad hoc “to-do” list
• There is no rigid or “one size fits all” framework
  for integration
• A typical integration process has many owners
  and constituents
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   7
Acquisition Integration: Surviving the “Day After”
Top Reasons Cited for Integration Failure
              “Integrating two organizations is like trying to build
              a rocket while its blasting off.”
                                       -- Anonymous
• People issues – e.g. losing talent; organizational
  exhaustion
• Cultural incompatibility
• Poor communication across all organizational levels
• Lack of leadership and change management
• Resource Constraints; concurrent pressures
• Poor planning / slow execution of integration tasks
• Pre-deal horse trading – not fulfilling early promises after
  deal closes
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC    8
Acquisition Integration: Surviving the “Day After”
Tactics for Retaining Key Players
• Provide financial incentive for successful (and timely)
  completion of integration action items
• Reinforce a positive vision of their role in future of
  merged company; answer the “me” questions in the
  merger
• Involve in integration task force activities
• Communicate regular updates; explain “why” decisions
  are made; provide a forum for venting
  questions/concerns
• Provide timely positive feedback and recognition when
  something is well done
• Follow up words with actions and be persistent
• Involve others to help “recruit” as needed
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   9
Acquisition Integration: Surviving the “Day After”
     Tactics for Determining the “Best Process”

            The “Process Maturity Model” – road map for process improvement
      •    Provides a context for evaluating specific processes with a goal of determining (or
           redesigning) the best process that delivers higher performance over time

      •    Built around five key “anchor points” which provide a common approach and
           common language among employees

                                                   Process Maturity Model
                                                      “Anchor Points”

   Design                       – understanding of how the process is to be executed
   Ownership                    – appointment of a key manager or group with responsibility for
                                   process implementation and execution
   Performances                 – abilities of the people who operate the process activities
   Infrastructure               – effectiveness of the information and management systems that
                                   support the process activities
   Metrics                      – quality of measures used to track process performance


                     Note: Adapted from the ”Process & Enterprise Maturity Framework,” created by Michael Hammer
                     See “The Process Audit” published in the Harvard Business Review, April 2007

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                                10
Acquisition Integration: Surviving the “Day After”
Common Tactics for Integration Survival
•     Concentrate on real value drivers –
      anticipate issues; plan appropriate responses

•     Maintain continuity across deal phases –
      from structuring to due diligence to implementation of integration plans

•     Coordinate resources/timing and assign responsibility –
      a lack of speed or accountability may kill potential benefits

•     Manage change proactively –
      take action to remove uncertainty while bridging any “cultural” gaps

•     Communicate with internal and external constituents –
      provide information early, often and carefully to build support and
      acceptance

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC              11
Acquisition Integration: Surviving the “Day After”
Concentrate on Real Value Drivers
Value Realization: Synergy action plans

• Identify and prioritize synergy opportunities (and
  related challenges) during due diligence and adjust
  throughout the transaction lifecycle – remember the
  “20/80 rule”
• Each synergy challenge should have an unique action
  plan with responsibilities assigned
• Synergy action plans should consider one-time
  transition/integration costs or capital outlays (as well as
  timing of cash flows) and be linked to financial
  forecasts
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   12
The Integration Challenge


                          Desired Outcome                          Typical Results
          • Rapidly capture                                         •   Synergies not achieved in
            cost & revenue synergies                                    70% of cases
          • Streamline organization and                             •   45% of executives leave by
            critical business processes                                 year 3
          • Minimize disruption to                                  •   Customers frustrated by
            employees and customers                                     change
          • Execute an issue-free Day One                           •   Employee uncertainty
          • Maintain focus on current                                   translates into disengagement
            business                                                •   First 4-8 months
          • Quantify progress and results                               productivity reduced by 50%



                                           Source: Deloitte Consulting LLP M&A Survey 2008



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                     13
The Integration Challenge
                                       How Do You Capture Synergies….

          Personnel Reductions                      Facilities Consolidation    Sourcing/Purchasing….



                                                 …..While Integrating….

                 Customers                         Management/Employees          Suppliers/Systems….



                                      …..Without Negatively Impacting….
                                                                                         Financial
           Customers                        Employees             Vendors/Suppliers
                                                                                       Performance…
          …All while relying on the same leaders/employees who are attempting to do
                   their “day job” and maintain current business momentum

                                                                                                         14
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                     14
Integration Management Office (IMO)
Integration Playbook: Typical Elements
                                       Planning                                                       Execution
                                                                        EXECUTION AND MONITORING PROCESSES
         PURPOSE
                                                                        Functional Integration Planning with Acquired Company Resources
         SCOPE
                                                                        Project Portfolio Management Processes
         Playbook Scope                                                 INTEGRATION PROJECT CLOSING
         Relationship between Playbook Elements                         End State Tracking Process
         INTEGRATION MANAGEMENT PLAN                                    Lessons Learned Process

         Organization                                                   COMMUNICATION MANAGEMENT PLAN (CMP)

         Governance                                                     Communication Schedule
                                                                        Communication Management Execution Processes
         INTEGRATION PLANNING PROCESSES
                                                                        Reusable Integration Message Products
         Integration Phases Overview
                                                                        SYNERGY MANAGEMENT PLAN (SMP)
         Pre-Close Processes and Tools
                                                                        Synergy Initiative Planning
         Integration Planning Discovery Phase
                                                                        Synergy Initiative Process Management
         Human Resources Data Requirements
                                                                        CULTURE/TALENT ASSESSMENT PLAN (CTAP)
         Accounting Data Requirements                                   Culture Assessment Tools
         Initial Integration Plan                                       Culture Analysis/Recommendations
                                                                        Talent Assessment Tools
                                                                        Retention/Separation Planning
                                                                                                                                     15
  ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                                               15
Post-Closing Challenges




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   16
Post-Closing Challenges
• The closing of a merger or acquisition usually brings a great sigh of
  relief to the buyer, seller, and their respective advisors. Everyone
  has worked hard to ensure that the process went smoothly and that
  all parties are happy with the end result. But the term closing can be
  misleading in that it suggests a sense of finality, when in truth,
  particularly for the buyer and the integration team, the hard work has
  just begun.
• Often one of the greatest challenges for the buyer is the post-closing
  integration of the two companies. The integration of human
  resources, the corporate cultures, the operating and management
  information systems, the accounting methods and financial
  practices, and related matters are often the most difficult part of
  completing a merger or acquisition.
• It is a time of fear, stress and frustration for most of the employees
  who were not on the deal team and may only have limited amounts
  of information regarding their roles in the post-closing organization.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC    17
Post-Closing Challenges (Cont’d)
• The seller must facilitate a smooth transition of
  ownership and management to the buyer's team without
  ego, emotion, or politics. The buyer must have
  procedures in place to prevent the seller undermining
  these transitional efforts and assume control of the
  company--also without ego, emotion, or politics.
• Post-closing challenges may arise in a wide variety of
  subject areas, e.g., operations, finance, personnel, and
  information systems and many other areas as set forth in
  the post-closing check list set forth below. In order to
  achieve desired synergies from a deal, an effective and
  rigorous synergy management with a constant eye on
  milestones is required.

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   18
Strategic Post-closing Issues

•       Who should lead the transition team?
•       Which changes should be made and how quickly?
•       How will the changes be presented and sold?
•       How can the seller’s transition from owner to employee
        status be managed?
•       How can “turfmanship” be avoided?




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   19
Common Post-Closing Problems
• Lack of Communication                                         •     Indecisiveness
• Weak Leadership
                                                                •     Inexperience Among Executives
• Mistakes Made In Due Diligence
  Process                                                             or Advisors
• Realization of Efficiencies and                               •     Post-Closing Synergies Over-
  Synergies Took Too Long (or Were                                    Estimated or Unrealistic
  Obsolete or Stale By The Time They
  Were Achieved)                                                •     Stakeholder Resistance Under-
• Unexpected Rapid Shift in Post-                                     estimated
  Closing Market or Economic
  Conditions                                                    •     Customer and Channel Partner
• Unexpected Post-Closing Third Party                                 Loyalty Over-Estimated
  Claims on Liabilities                                         •     Technology Integration or
• Cultural Differences Greater Than                                   Infrastructure Costs Well Above
  Predicted                                                           Budget
• Market Share or Valuation Failed To
  Be Accretive

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                     20
Communication is Hyper Critical
     • The primary tool for dealing with fear, and many of the other emotions
       that surface during the course of acquisition transition, is
       communication. If a merger is thought of as the beginning of a
       marriage, think of the amount of communication that is necessary in
       the first few weeks and months of such a relationship. As with any
       relationship, a lack of communication typically means a lack of
       success.
     • In a merger, the two keys to effective communication are to determine
       (1) the importance of the information and (2) who should communicate
       it. Information should be communicated in the order of its importance.
       This means that you want to first communicate that information that
       affects people directly, including changes in the organization,
       especially who is staying and who is leaving:
            • Reporting structures
            • Job descriptions and responsibilities
            • Title, compensation, and benefits
            • Job location and operating procedures


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC             21
Post-Closing Focus Area Check List

     Human Capital Issues
            •     Cultural Alignment
            •     Integration of Leadership Team
            •     Integration of Staff
            •     Termination Plan Due To Efficiencies and Overlap
            •     Overseas Workers
            •     Union Issues
            •     Regulatory Issues
            •     Temporary Workers and Part-time Employees
            •     Independent Contractors

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   22
Post-Closing Focus Area Check List
     (Cont’d)
     Relationship Capital Issues
            •     Integration of Customer Relationships
            •     Integration of Supplier Relationships
            •     Integration of Channel Partners
            •     Integration of Advisory Teams and Consultants
            •     Integration of Strategic Alliance and Joint Venture Partners
            •     Subcontractors and Teaming Relationships
     Infrastructure
            • Physical facilities
            • Warehousing and Logistics
            • Information Management and Computer Systems

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC              23
Post-Closing Focus Area Check List
     (Cont’d)
     Regulatory and Contractual Controls
        • Regulatory Approvals
        • Post-closing assignments and consents

     Branding and Marketing
        • Branding issues
        • Communications issues
        • Public relations strategy
        • Redefining the customer value proposition

     Operational Issues
        • Store/office trade dress and alignment
        • Community relations
        • Amendments to Real Estate and Operating Leases

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   24
Key Post-Closing M&A Employee Issues
• What’s going to happen to me?
• What’s expected of me?
• What’s in it for me?
• Be sure that post-closing planning and communication addresses
  these three fundamental human concerns. Take control of the rumor
  mill before it takes control of you and your transaction. Most rumor
  mills begin as a result of an information gap.
• It is the responsibility of senior management to fill this void with clear
  and consistent information at all levels, even if some of the data
  shared is bad news.
• Leaving the door open to water cooler-driven information channels
  will often lead to the best and the brightest people heading for the
  exits, when it is often those exact folks that need to be directly
  motivated, incentivized and retained.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED                    25
Dealing With Post-Closing M&A
     Customer Issues
• When a buyer acquires a business, one of the most
  valuable assets is the customer base.
• One of the post-closing challenges is to determine the
  profitability of the customers.
• Often the acquired company has legacy customers that
  they have been unwilling or unable to terminate if the
  customer is unprofitable or difficult to manage.




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   26
Dealing With Post-Closing M&A
     Customer Issues (Cont’d)
       • The acquirer should review all customers for profitability
         and sustainability.
       • It makes little sense to keep a customer if it is not possible
         to make a profit on the relationship, unless the customer
         enables the merged company to penetrate a new market
         or if the customer helps achieve scale economies, thereby
         enabling other customers to be profitable. However, even
         in these cases, there is a limit to the amount of losses that
         make financial sense.
       • In addition, the customer may be a direct competitor of the
         buyer or of one of the buyer's customers. As a result, it is
         important to evaluate the seller's customer base.



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC       27
Dealing With Post-Closing M&A
     Customer Issues (Cont’d)
     Perhaps more important, however, is for the seller to transfer
     the goodwill of its customers to the buyer. A disgruntled
     employee can very quickly destroy this goodwill and perhaps
     jeopardize a significant income stream on which the value of
     the acquisition was based.
     The key steps to transferring this goodwill are:
         • Personal introductions to customer contacts
         • Social events to acquaint customers with the new
           owners
         • Letters from both the seller and buyer that thank
           customers for their business and announce the new
           management and plans for the merged entity
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   28
Post-Closing M&A Issues:
     Physical Facilities
    • Often one of the larger expenses on the income
      statement, rent and/or lease payments are a natural
      place for a buyer to focus when evaluating the
      efficiencies to be gained by a merger.
    • When examining the space requirements of the
      combined entity, it is certainly helpful to consider the
      square footage.
    • The space should be evaluated to determine if the
      rent is more or less expensive than other company
      space and if the amount of space is more than is
      needed. This will go a long way toward helping to
      cut expenses in order to reach the target return.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   29
Post-Closing M&A Issues:
     Physical Facilities
     However, there must also be human considerations:
        • How long have the employees been in this space?
        • How does the commute compare to where they might be
          relocated?
        • How much interaction is required between the staff being
          relocated and staff in a different location?
        • How much reconfiguration of the office and facilities of
          each company will be required to accommodate additional
          staff or functions?
        • How much productivity can be expected from these people
          during the course of the move?




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   30
Post-Closing Integration
                   Best Practices Overview




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   31
Post-Merger Integration Key Challenges
     & Best Practices
       Here are some key lessons learned for developing an effective post-
       closing integration plan:

        1. Pick your poison. Many deals fail because a strategy for integrating
           (or not) the 2 cultures was never clearly defined.
              • Will the seller’s culture become dominant?
              • Will the buyer’s culture be absorbed by the seller’s team and
                  employees?
              • Or will, if feasible, the cultures allowed to “peacefully co-
                  exist?”
              • Or will it be a hybrid driven by compromise and merit (e.g.
                  they do that better, but we do this better, so let’s find ways to
                  truly combine the best of the best in each area)

               •     Buyers should not lose sight of the value of the culture that they
                     are buying, just because their ego or ignorance assumes that
                     their culture must be dominant on a post-closing basis

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                   32
Post-Merger Integration Key Challenges
             & Best Practices (Cont’d)
        2. Align cultural decisions with overall M&A goals and
           growth strategy.
          • Employees want to see a fit between the post-
              closing integration decisions made and the overall
              strategy which is driving the transaction.
          • If the CEO of BuyerCo talks about the need to cut
              costs, but then nobody is fired, then employees
              are relieved (for now) but confused.
          • If the BuyerCo CEO talks about the need for
              geographic expansion, but then closes offices and
              plants, the decisions do not appear aligned with
              the strategy which has been articulated.

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   33
Post-Merger Integration Key Challenges
     & Best Practices (Cont’d)
        3. Compatibility does not always mean an exact match.
           • Post-closing executives and consultants will often “force
             feed” a quest for “sameness” that is unnecessary.
           • Cultures can be compatible and functional even if they are
             not an exact mirror image of each other.
           • For example, both could be driven by merit-driven
             performance and rewards, even if the rewards are not
             exactly the same.
           • Both could be driven by customer service excellence, even
             if that manifests itself in very different ways, especially if the
             two companies are in different types of businesses.




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC               34
Post-Merger Integration Key Challenges
     & Best Practices (Cont’d)
        4. Communicate early and communicate often.

              • The more that can be done to reduce or eliminate
                the stress and fear of the typical employee, the
                better.
              • If the leadership is perceived as playing their
                cards too close to the vest or being fearful of
                making the hard decisions, both cultures will erode
                quickly, having a significant adverse effect on the
                value of the entity on a post-closing basis.



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   35
Post-Merger Integration Key Challenges
     & Best Practices (Cont’d)
        5.      Reach for the stars, but be realistic about post-closing objectives.
                •    The excitement and optimism expressed during the transaction is
                     wonderful and is energy which should be contagious but post-
                     merger goals should be realistic and attainable.
                •    Goals that are neither believable nor achievable will only
                     disappoint the investors, the employees, vendors and customers
                     and reflect poorly on the management team of the recently-
                     integrated company.
                •    I am sure that every CEO of BuyerCo believes in her “heart of
                     hearts” that getting this deal done will increase the value of the
                     company by tenfold or even twentyfold down the road …. but is
                     that realistic in the near-term?
                •    And if no, is it realistic to have employees believe that a tenfold
                     increase in value in the near-term is the actual goal, only to be
                     disappointed when it is nowhere even close.



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                        36
Post-Merger Integration Key Challenges
     & Best Practices (Cont’d)
            6. Meaningful systems need to be in place to set, measure
               and adjust the goals of the transaction.

                    • A clear set of 12/24/36 month “goals and objectives” to
                      be achieved as a result of this transaction should be
                      articulated as part of the post-integration plans.
                    • Yes, some portion of the results will be intangible and
                      difficult to measure (e.g. our customers just “feel
                      better” about us now), but even goodwill should
                      manifest itself in higher customer loyalty and increases
                      in sales that can be easily measured.
                    • Repeat sales, upsales, renewals to commitments,
                      lower turnover rates can all be measured and closely
                      monitored.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC              37
Post-Merger Integration Key Challenges
     & Best Practices (Cont’d)
            7.      Treat both sets of customers as gold.
                     At the end of the day, you can write-up all of the press
                       releases in the world, but if customers are not convinced that
                       this M&A deal is good for them, then the objectives of the
                       deal will not be met.
                     Take the time to explain the post-closing value proposition to
                       both sets of customers.
                     If the deal will result in lower costs or better pricing, then tell
                       them and show them how and why.
                     If the deal will result in higher prices but better service and
                       support, then be ready to justify and explain the value of the
                       trade-off.
                     If the deal will result in broader and better product lines or
                       service offerings, then have your cross-selling strategies and
                       tools ready to go.
                     Remember that your competitors will try to attack the deal
                       and market to your customers if they see the opportunity;
                       you need to be ready to push back.
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                         38
Post-Merger Integration Key Challenges
     & Best Practices (Cont’d)
            8.     Don’t hide the poop under the rug.

                         •     In an attempt to paint a rosy post-closing picture, buyers and sellers
                               may choose to defer problems and challenges identified pre-closing
                               to some undefined time period after closing.
                         •     This “we’ll get to it later” approach is a time bomb just waiting to
                               explode and the clean-up will not be pretty.
                         •     The failure to either unearth lurking problems, or worse, the
                               intentional decision to ignore them, is a recipe for disaster.
                  •       Problems in the area of human resources, environmental liabilities, lack of
                          clear ownership in intellectual property, poorly-drafted earn-outs, unpaid
                          taxes, unclear major customer commitments, underfunded pension plans, etc.
                          are not problems that will go away with the waiving of a post-closing magic
                          wand.
                  •       The parties may feel pressure from the marketplace or from their advisors or
                          from their sources of capital to “just go ahead and get this deal closed and
                          we’ll figure out these problems later,” which is bad advice and a bad strategy.
                  •       The delays in closing that solving these problems would create are viewed as
                          the evil, instead of the problems themselves.
                  •       Yes, momentum is important and there may be minor problems which are not
                          worth the derailing of a transaction, but material issues and challenges must
                          be resolved prior to closing.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                         39
Post-Merger Integration Key Challenges
     & Best Practices (Cont’d)
            9.      Do your due diligence the right way the first time.

                         •     Improper or hasty due diligence often results in post-merger
                               integration plans going awry.
                         •     Key issues that should have been discovered and dealt with pre-
                               closing wind up to be a source of tension and dispute post-closing
                               because due diligence was piecemeal or improperly staffed.
                   •      Due diligence staffing means the right number of people with the right skill
                          sets who are prepared to invest the time and effort to ask the right questions
                          and challenge the answers that don’t make sense.
                   •      Subject matter experts should be brought in when necessary, especially for
                          high-tech or biotech/life science transactions.
                   •      For example, if you are buying a government contractor and one of the key
                          assets is a long-term supply contract with the Department of Defense for
                          providing advanced technology and support, then those contracts had better
                          be reviewed by someone more senior and more knowledgeable than a 2nd
                          year general corporate practice associate of your local law firm.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                        40
Harvesting Intellectual Assets




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   41
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   42
Key Strategic Questions

                                                               • New book out in Fall of 2011
                                                               • We can learn many lessons about
                                                                 business growth and intellectual capital
                                                                 development from the best practices of
                                                                 our agricultural ancestors.
                                                               • We are all farmers. We mark our turf. We
                                                                 protect our property. We plant our seeds.
                                                                 We nurture the soil. We plow our land.
                                                                 We combat adverse weather and
                                                                 ecosystem conditions and overcome
                                                                 adversities. We prepare for our harvest.
                                                               • We hope for the best and prepare for the
                                                                 worst as the market sets a price for our
                                                                 efforts. We embrace the notion that our
                                                                 results will be directly tied to our levels of
                                                                 effort and expertise.
                                                               • “We reap what we sow.”
                                                               • We begin anew with each new season.



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                               43
Key Strategic Questions (Cont’d)
                                                               • Who will be on your team to assist you in
                                                                 these efforts?
                                                               • Who will you hire to help you raise,
                                                                 harvest and sell the produce at your farm?
                                                               • What tools, resources and expertise will
                                                                 you require to maximize the fruits of your
                                                                 harvest?
                                                               • What adverse weather or market
                                                                 conditions must you overcome to be
                                                                 successful?
                                                               • Who else is growing these same crops
                                                                 and how does their experience compare
                                                                 to your own?
                                                               • Do you have a keen sense for the cycles
                                                                 and timetables that will optimize your
                                                                 harvest?
                                                               • What is your game plan for bringing your
                                                                 crops to the marketplace? Will you do it
                                                                 alone or join with others?




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                           44
The Evolution of a Revolution
                  Agricultural                             Plant              Digital
                  Revolution                              Cultivate        Revolution
                    (Food)                                Harvest     (Intellectual Capital)




     • The picks and shovels of yesteryear have been
       replaced by the laptops and smart phones of today
     • Yet we must be committed to toiling in the fields for
       long hours to harvest productive and profit-driven
       assets (even if the venue and the crops have
       changed)


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                            45
Every Farmer Needs A Game Plan
                                                                •     Put an intellectual capital
                                                                      development and harvesting
                                                                      plan in place
                                                                •     Develop organizational charts
                                                                      and accountability for
                                                                      innovation (Chief Innovation
                                                                      Officer)
                                                                •     Alignment of seeds to be
                                                                      planted and demands of
                                                                      targeted market
                                                                •     Adjusting the plan in real-time
                                                                      around weather conditions and
                                                                      competitive trends



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                     46
Planting Seeds

                                                                •     What seeds will you plant
                                                                      today?
                                                                •     What crops is your land most
                                                                      capable of growing?
                                                                •     Have you assessed demand
                                                                      and competitive trends?
                                                                •     What adverse conditions will
                                                                      you face?
                                                                •     Establishing a genuine culture
                                                                      of innovation




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                    47
Irrigating the Field

                                                                •     Gathering the water, the
                                                                      nutrients and the fertilizer to
                                                                      make sure that intellectual
                                                                      capital can be harvested
                                                                      (human capital, financial
                                                                      capital, etc.)
                                                                •     Predicting the unpredictable
                                                                      (Mother Nature)
                                                                •     Too much vs. too little water
                                                                      (drought vs. floods)
                                                                •     Fire hose vs. garden hose
                                                                      (SME leaders spend too much
                                                                      time and precious resources on
                                                                      putting out fires instead of
                                                                      irrigating new ideas)


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                     48
Nurturing The Soil

                                                                • Finding the right mix of
                                                                  nutrients
                                                                • Know the needs of the soil
                                                                • Building the right team for
                                                                  nurturing and evaluating
                                                                  new ideas: which are ripe
                                                                  for picking and which need
                                                                  more time?
                                                                • Google’s 70/20/10 Rule –
                                                                  what’s yours???




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                             49
Monitoring Progress Carefully To Ensure
     A Timely Harvest
                                                                • Building effective IAM
                                                                  systems
                                                                • Accountability and internal
                                                                  controls
                                                                • R&D spending: Know when
                                                                  to say when
                                                                • Innovation metrics




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                             50
A Bountiful Harvest


                                                                • Systems and processes in
                                                                  place to ensure innovation,
                                                                  not just invention
                                                                • Understanding the different
                                                                  types of innovation
                                                                  harvesting strategies
                                                                • Proper rewards and
                                                                  incentives to encourage
                                                                  innovation and effective
                                                                  intellectual capital
                                                                  harvesting


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                             51
Bringing Crops To The Marketplace

                                                                • Developing efficient
                                                                  distribution channels (don’t
                                                                  try to do it all alone)
                                                                • Timing and balance issues:
                                                                  how and when to bring
                                                                  crops to market (The 8
                                                                  track tape store and the
                                                                  flying car)
                                                                • Impact of Web 2.0 and the
                                                                  developing E-marketplace
                                                                • Wisdom of Crowds/Custom
                                                                  Merchandise in Real Time



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                              52
Evolving Strategic Views Towards Intellectual
     Capital (IC) Assets
    Traditional View           Enhance the company’s competitive advantage and strengthen its ability to
                               defend its competitive position in the marketplace (IC as a barrier to entry
                               and as a shield to protect market share) (reactive and passive approach)

    Current                    Should not be used merely for defensive purposes but should also be
    View                       viewed as an important asset and profit center which is capable of being
                               monetized and generating value through licensing fees and other channels
                               and strategies, provided that time and resources are devoted to
                               uncovering these opportunities (especially dormant IC assets which do not
                               currently serve at the heart of the company's current core competencies or
                               focus) (proactive/systemic approach)

    Future                     Premiere drivers of business strategy within the company and encompass
    View                       human capital, structural/organizational capital and customer/relationship
                               capital. IAM systems need to be built and continuously improved to
                               ensure that IC assets are used to protect and defend the company's
                               strategic position in domestic and global markets and to create new
                               markets, distribution channels and revenue streams in a capital efficient
                               manner to maximize shareholder value (core focus/strategic approach)


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                                           53
Intellectual Asset Management (IAM)
     (The IP Discovery, Management and Mining Process)
     •   IAM is a commitment to building systems to create, organize, prioritize and
         extract value from a set of intellectual property assets. The intellectual capital
         and technical know-how of a company are among its most valuable assets,
         provide its greatest competitive advantages and are the principal drivers of
         shareholder value
     •   (Professor Lev – NYU, estimates that only 15% of a company’s “true intrinsic
         value” is reflected on its financial statements), yet rarely do smaller and growth
         companies have adequate personnel, resources and systems in place to
         properly manage and leverage these assets (“Finding and Harvesting The
         Rembrandts in The Attic”).


            Discussion Point:
            What other major body part are we estimated to only use 15% of
            its true capacity? Is there a correlation? When are our value-
            drivers “blindspots”?



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC                           54
Intellectual Asset Management (IAM) (Cont’d)


     • IAM systems facilitate collaboration and help break
       down silos in communications regarding new
       product development, the harvesting of intellectual
       assets and provides training to employees at all
       levels on the importance of the protection and
       leveraging of intellectual property.




                                                     55
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   #FirmexMC   55
Harvesting Process
                                                      Intellectual Asset                       Chief Innovation and
    Collaboration &                                     Brainstorming,                          Intellectual Asset
    Communication                                    Retreats, Facilitating,                    Harvesting Officer
                                                        Creativity, etc.                           (“CIIAHO”)
 • Software & Systems                                • Periodic Meetings & Retreats            • Accountability &
                                                     • IP Audit (take inventory as to            Resources for Identifying,
                                                       what already exists)                      Harvesting, & Leveraging
                                                                                                 Rewards
                               • Market Screens
                               • Customer Demand Screens
                               • Resources Screens
 Strategic Screens &              • Human (Who?)                                                 Product/Service
        Filters                   • Financial (How?)                                            Development Plan
                               • Resource Allocation Screens
                                  • Profitability/Prioritization
                                  • Shareholder Value



                               • Patent
                               • Trademark
      IP Protection            • Copyright                                                                 • Organic
                               • Trade
                                                                                        Harvesting         • External
        Strategy
                                 Secret
                               • Other


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED    #FirmexMC                                                 56
Questions & Answers




©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   57
Book Winners!

•    A. Hawkins – Rawlison Butler
•    D. Bastien - Deloitte
•    C. McKillop - Cogeco
•    M. Shimp – Venture Mgmt
•    J. Yoon – CNJ Captial

       Congratulations! We will be following up shortly
       to get your book preference and mailing address.



©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED   58
Thank You
                 Our next webinar is Jan 17th, 1pm Eastern

                 Alert to M&A Advisors:
                 What’s Ahead for 2012 and later?
                 Why are so many middle market M&A advisors not particularly successful? For
                 starters, this is not your father’s M&A world. In fact, there is a whole new
                 world out there. The realities of professional M&A practice have been
                 transformed during the 21st century. Know how to catch the right waves and
                 the right deals with the right techniques.


                 Featuring Dennis J. Roberts, author of the widely selling An Insider’s Guide to the
                 Purchase and Sale of Middle Market Business Interests.

                                                  www.Firmex.com/company/events

                     Today’s Recorded Webinar, Slides, and Complementary Checklists will be
                                   made available in a follow-up email shortly.


©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED                                                59

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Ensuring Success in Post-Close Integration

  • 1. @Firmex, #FirmexMC Rubber Hits the Road Ensuring Success in Post-Closing Integration and Harvesting Intellectual Assets Firmex Webinar Series Andrew J. Sherman, Esq. M&A Master Class Jones Day 51 Louisiana Avenue, N.W. Washington, D.C. 20001-2113 December 8th, 2011 202-879-3686 1:00 p.m. to 2:00 p.m. ajsherman@jonesday.com ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 1
  • 2. About Firmex Firmex is focused on providing the best virtual data room solution for managing corporate transactions and financial compliance Joel Lessem Who uses Firmex? CEO Firmex • Firmex community includes over 200,00 users worldwide • Conducted over 10,000 deals in the last 18 months Why offer an M&A Master Class? • As part of our value-added service, we believe it is important to offer educational resources to our expanding community ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 2
  • 3. Andrew J. Sherman Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,500 lawyers worldwide. He is the author of 23 books on business growth, capital formation and the leveraging of intellectual property. His eighteenth (18th) book, Road Rules Be the Truck. Not the Squirrel. (http://www.bethetruck.com) is an inspirational book which was published in the Fall of 2008. He has appeared as a guest and a commentator on all of the major television networks as well as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First Business,” and Bloomberg’s “Small Business Weekly. ” He has appeared on numerous regional and local television broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development. He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he teaches courses on business growth strategy. He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time champions and supporters of entrepreneurship. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 3
  • 4. M&A Integration Strategies and Best Practices ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 4
  • 5. The Integration Challenge “Cultural & people issues present the biggest specific challenges during the post deal period…” Only 20% of respondents were well Top Post-deal Challenges prepared to deal with cultures differences Complex integration of two businesses 32% • Cultural challenges – Differences in working styles, Dealing with different 30% leadership approach Organization cultures – National culture differences People issues 27% – Behavioral differences • People Issues IT 24% – Key members of management team leaving – Employee moral and motivation Customer retention 10% – Retention of key staff Time and – Consultation with staff and 4% management representative bodies Proportion of respondents Source: KPMG Global M&A survey …yet two thirds of companies had not placed a great deal of emphasis on addressing people and cultural issues in planning for the post deal period ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 5
  • 6. Acquisition Integration: Surviving the “Day After” Options for Integrating Acquired Business Minimal – only selected corporate functions are merged (e.g. HR/benefits), primarily to achieve staffing synergies or cost efficiencies; acquired business remains decentralized with autonomy for decision making and agreed-upon reporting requirements to the “mother ship” Moderate – certain key functions are consolidated (e.g. marketing & sales, capital planning, procurement); strategic planning and monitoring is centralized while most day-to-day operations remain autonomous Full – all processes, people and systems are consolidated and management decisions are centralized into parent company ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 6
  • 7. Acquisition Integration: Surviving the “Day After” Integration: Whats the Big Deal? • A poorly executed integration plan can create or destroy shareholder value; the results are felt long after the deal closes • Integration is a difficult, complex and sensitive process; it is not just an ad hoc “to-do” list • There is no rigid or “one size fits all” framework for integration • A typical integration process has many owners and constituents ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 7
  • 8. Acquisition Integration: Surviving the “Day After” Top Reasons Cited for Integration Failure “Integrating two organizations is like trying to build a rocket while its blasting off.” -- Anonymous • People issues – e.g. losing talent; organizational exhaustion • Cultural incompatibility • Poor communication across all organizational levels • Lack of leadership and change management • Resource Constraints; concurrent pressures • Poor planning / slow execution of integration tasks • Pre-deal horse trading – not fulfilling early promises after deal closes ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 8
  • 9. Acquisition Integration: Surviving the “Day After” Tactics for Retaining Key Players • Provide financial incentive for successful (and timely) completion of integration action items • Reinforce a positive vision of their role in future of merged company; answer the “me” questions in the merger • Involve in integration task force activities • Communicate regular updates; explain “why” decisions are made; provide a forum for venting questions/concerns • Provide timely positive feedback and recognition when something is well done • Follow up words with actions and be persistent • Involve others to help “recruit” as needed ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 9
  • 10. Acquisition Integration: Surviving the “Day After” Tactics for Determining the “Best Process” The “Process Maturity Model” – road map for process improvement • Provides a context for evaluating specific processes with a goal of determining (or redesigning) the best process that delivers higher performance over time • Built around five key “anchor points” which provide a common approach and common language among employees Process Maturity Model “Anchor Points”  Design – understanding of how the process is to be executed  Ownership – appointment of a key manager or group with responsibility for process implementation and execution  Performances – abilities of the people who operate the process activities  Infrastructure – effectiveness of the information and management systems that support the process activities  Metrics – quality of measures used to track process performance Note: Adapted from the ”Process & Enterprise Maturity Framework,” created by Michael Hammer See “The Process Audit” published in the Harvard Business Review, April 2007 ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 10
  • 11. Acquisition Integration: Surviving the “Day After” Common Tactics for Integration Survival • Concentrate on real value drivers – anticipate issues; plan appropriate responses • Maintain continuity across deal phases – from structuring to due diligence to implementation of integration plans • Coordinate resources/timing and assign responsibility – a lack of speed or accountability may kill potential benefits • Manage change proactively – take action to remove uncertainty while bridging any “cultural” gaps • Communicate with internal and external constituents – provide information early, often and carefully to build support and acceptance ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 11
  • 12. Acquisition Integration: Surviving the “Day After” Concentrate on Real Value Drivers Value Realization: Synergy action plans • Identify and prioritize synergy opportunities (and related challenges) during due diligence and adjust throughout the transaction lifecycle – remember the “20/80 rule” • Each synergy challenge should have an unique action plan with responsibilities assigned • Synergy action plans should consider one-time transition/integration costs or capital outlays (as well as timing of cash flows) and be linked to financial forecasts ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 12
  • 13. The Integration Challenge Desired Outcome Typical Results • Rapidly capture • Synergies not achieved in cost & revenue synergies 70% of cases • Streamline organization and • 45% of executives leave by critical business processes year 3 • Minimize disruption to • Customers frustrated by employees and customers change • Execute an issue-free Day One • Employee uncertainty • Maintain focus on current translates into disengagement business • First 4-8 months • Quantify progress and results productivity reduced by 50% Source: Deloitte Consulting LLP M&A Survey 2008 ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 13
  • 14. The Integration Challenge How Do You Capture Synergies…. Personnel Reductions Facilities Consolidation Sourcing/Purchasing…. …..While Integrating…. Customers Management/Employees Suppliers/Systems…. …..Without Negatively Impacting…. Financial Customers Employees Vendors/Suppliers Performance… …All while relying on the same leaders/employees who are attempting to do their “day job” and maintain current business momentum 14 ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 14
  • 15. Integration Management Office (IMO) Integration Playbook: Typical Elements Planning Execution EXECUTION AND MONITORING PROCESSES PURPOSE Functional Integration Planning with Acquired Company Resources SCOPE Project Portfolio Management Processes Playbook Scope INTEGRATION PROJECT CLOSING Relationship between Playbook Elements End State Tracking Process INTEGRATION MANAGEMENT PLAN Lessons Learned Process Organization COMMUNICATION MANAGEMENT PLAN (CMP) Governance Communication Schedule Communication Management Execution Processes INTEGRATION PLANNING PROCESSES Reusable Integration Message Products Integration Phases Overview SYNERGY MANAGEMENT PLAN (SMP) Pre-Close Processes and Tools Synergy Initiative Planning Integration Planning Discovery Phase Synergy Initiative Process Management Human Resources Data Requirements CULTURE/TALENT ASSESSMENT PLAN (CTAP) Accounting Data Requirements Culture Assessment Tools Initial Integration Plan Culture Analysis/Recommendations Talent Assessment Tools Retention/Separation Planning 15 ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 15
  • 16. Post-Closing Challenges ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 16
  • 17. Post-Closing Challenges • The closing of a merger or acquisition usually brings a great sigh of relief to the buyer, seller, and their respective advisors. Everyone has worked hard to ensure that the process went smoothly and that all parties are happy with the end result. But the term closing can be misleading in that it suggests a sense of finality, when in truth, particularly for the buyer and the integration team, the hard work has just begun. • Often one of the greatest challenges for the buyer is the post-closing integration of the two companies. The integration of human resources, the corporate cultures, the operating and management information systems, the accounting methods and financial practices, and related matters are often the most difficult part of completing a merger or acquisition. • It is a time of fear, stress and frustration for most of the employees who were not on the deal team and may only have limited amounts of information regarding their roles in the post-closing organization. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 17
  • 18. Post-Closing Challenges (Cont’d) • The seller must facilitate a smooth transition of ownership and management to the buyer's team without ego, emotion, or politics. The buyer must have procedures in place to prevent the seller undermining these transitional efforts and assume control of the company--also without ego, emotion, or politics. • Post-closing challenges may arise in a wide variety of subject areas, e.g., operations, finance, personnel, and information systems and many other areas as set forth in the post-closing check list set forth below. In order to achieve desired synergies from a deal, an effective and rigorous synergy management with a constant eye on milestones is required. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 18
  • 19. Strategic Post-closing Issues • Who should lead the transition team? • Which changes should be made and how quickly? • How will the changes be presented and sold? • How can the seller’s transition from owner to employee status be managed? • How can “turfmanship” be avoided? ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 19
  • 20. Common Post-Closing Problems • Lack of Communication • Indecisiveness • Weak Leadership • Inexperience Among Executives • Mistakes Made In Due Diligence Process or Advisors • Realization of Efficiencies and • Post-Closing Synergies Over- Synergies Took Too Long (or Were Estimated or Unrealistic Obsolete or Stale By The Time They Were Achieved) • Stakeholder Resistance Under- • Unexpected Rapid Shift in Post- estimated Closing Market or Economic Conditions • Customer and Channel Partner • Unexpected Post-Closing Third Party Loyalty Over-Estimated Claims on Liabilities • Technology Integration or • Cultural Differences Greater Than Infrastructure Costs Well Above Predicted Budget • Market Share or Valuation Failed To Be Accretive ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 20
  • 21. Communication is Hyper Critical • The primary tool for dealing with fear, and many of the other emotions that surface during the course of acquisition transition, is communication. If a merger is thought of as the beginning of a marriage, think of the amount of communication that is necessary in the first few weeks and months of such a relationship. As with any relationship, a lack of communication typically means a lack of success. • In a merger, the two keys to effective communication are to determine (1) the importance of the information and (2) who should communicate it. Information should be communicated in the order of its importance. This means that you want to first communicate that information that affects people directly, including changes in the organization, especially who is staying and who is leaving: • Reporting structures • Job descriptions and responsibilities • Title, compensation, and benefits • Job location and operating procedures ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 21
  • 22. Post-Closing Focus Area Check List Human Capital Issues • Cultural Alignment • Integration of Leadership Team • Integration of Staff • Termination Plan Due To Efficiencies and Overlap • Overseas Workers • Union Issues • Regulatory Issues • Temporary Workers and Part-time Employees • Independent Contractors ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 22
  • 23. Post-Closing Focus Area Check List (Cont’d) Relationship Capital Issues • Integration of Customer Relationships • Integration of Supplier Relationships • Integration of Channel Partners • Integration of Advisory Teams and Consultants • Integration of Strategic Alliance and Joint Venture Partners • Subcontractors and Teaming Relationships Infrastructure • Physical facilities • Warehousing and Logistics • Information Management and Computer Systems ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 23
  • 24. Post-Closing Focus Area Check List (Cont’d) Regulatory and Contractual Controls • Regulatory Approvals • Post-closing assignments and consents Branding and Marketing • Branding issues • Communications issues • Public relations strategy • Redefining the customer value proposition Operational Issues • Store/office trade dress and alignment • Community relations • Amendments to Real Estate and Operating Leases ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 24
  • 25. Key Post-Closing M&A Employee Issues • What’s going to happen to me? • What’s expected of me? • What’s in it for me? • Be sure that post-closing planning and communication addresses these three fundamental human concerns. Take control of the rumor mill before it takes control of you and your transaction. Most rumor mills begin as a result of an information gap. • It is the responsibility of senior management to fill this void with clear and consistent information at all levels, even if some of the data shared is bad news. • Leaving the door open to water cooler-driven information channels will often lead to the best and the brightest people heading for the exits, when it is often those exact folks that need to be directly motivated, incentivized and retained. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 25
  • 26. Dealing With Post-Closing M&A Customer Issues • When a buyer acquires a business, one of the most valuable assets is the customer base. • One of the post-closing challenges is to determine the profitability of the customers. • Often the acquired company has legacy customers that they have been unwilling or unable to terminate if the customer is unprofitable or difficult to manage. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 26
  • 27. Dealing With Post-Closing M&A Customer Issues (Cont’d) • The acquirer should review all customers for profitability and sustainability. • It makes little sense to keep a customer if it is not possible to make a profit on the relationship, unless the customer enables the merged company to penetrate a new market or if the customer helps achieve scale economies, thereby enabling other customers to be profitable. However, even in these cases, there is a limit to the amount of losses that make financial sense. • In addition, the customer may be a direct competitor of the buyer or of one of the buyer's customers. As a result, it is important to evaluate the seller's customer base. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 27
  • 28. Dealing With Post-Closing M&A Customer Issues (Cont’d) Perhaps more important, however, is for the seller to transfer the goodwill of its customers to the buyer. A disgruntled employee can very quickly destroy this goodwill and perhaps jeopardize a significant income stream on which the value of the acquisition was based. The key steps to transferring this goodwill are: • Personal introductions to customer contacts • Social events to acquaint customers with the new owners • Letters from both the seller and buyer that thank customers for their business and announce the new management and plans for the merged entity ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 28
  • 29. Post-Closing M&A Issues: Physical Facilities • Often one of the larger expenses on the income statement, rent and/or lease payments are a natural place for a buyer to focus when evaluating the efficiencies to be gained by a merger. • When examining the space requirements of the combined entity, it is certainly helpful to consider the square footage. • The space should be evaluated to determine if the rent is more or less expensive than other company space and if the amount of space is more than is needed. This will go a long way toward helping to cut expenses in order to reach the target return. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 29
  • 30. Post-Closing M&A Issues: Physical Facilities However, there must also be human considerations: • How long have the employees been in this space? • How does the commute compare to where they might be relocated? • How much interaction is required between the staff being relocated and staff in a different location? • How much reconfiguration of the office and facilities of each company will be required to accommodate additional staff or functions? • How much productivity can be expected from these people during the course of the move? ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 30
  • 31. Post-Closing Integration Best Practices Overview ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 31
  • 32. Post-Merger Integration Key Challenges & Best Practices Here are some key lessons learned for developing an effective post- closing integration plan: 1. Pick your poison. Many deals fail because a strategy for integrating (or not) the 2 cultures was never clearly defined. • Will the seller’s culture become dominant? • Will the buyer’s culture be absorbed by the seller’s team and employees? • Or will, if feasible, the cultures allowed to “peacefully co- exist?” • Or will it be a hybrid driven by compromise and merit (e.g. they do that better, but we do this better, so let’s find ways to truly combine the best of the best in each area) • Buyers should not lose sight of the value of the culture that they are buying, just because their ego or ignorance assumes that their culture must be dominant on a post-closing basis ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 32
  • 33. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 2. Align cultural decisions with overall M&A goals and growth strategy. • Employees want to see a fit between the post- closing integration decisions made and the overall strategy which is driving the transaction. • If the CEO of BuyerCo talks about the need to cut costs, but then nobody is fired, then employees are relieved (for now) but confused. • If the BuyerCo CEO talks about the need for geographic expansion, but then closes offices and plants, the decisions do not appear aligned with the strategy which has been articulated. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 33
  • 34. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 3. Compatibility does not always mean an exact match. • Post-closing executives and consultants will often “force feed” a quest for “sameness” that is unnecessary. • Cultures can be compatible and functional even if they are not an exact mirror image of each other. • For example, both could be driven by merit-driven performance and rewards, even if the rewards are not exactly the same. • Both could be driven by customer service excellence, even if that manifests itself in very different ways, especially if the two companies are in different types of businesses. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 34
  • 35. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 4. Communicate early and communicate often. • The more that can be done to reduce or eliminate the stress and fear of the typical employee, the better. • If the leadership is perceived as playing their cards too close to the vest or being fearful of making the hard decisions, both cultures will erode quickly, having a significant adverse effect on the value of the entity on a post-closing basis. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 35
  • 36. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 5. Reach for the stars, but be realistic about post-closing objectives. • The excitement and optimism expressed during the transaction is wonderful and is energy which should be contagious but post- merger goals should be realistic and attainable. • Goals that are neither believable nor achievable will only disappoint the investors, the employees, vendors and customers and reflect poorly on the management team of the recently- integrated company. • I am sure that every CEO of BuyerCo believes in her “heart of hearts” that getting this deal done will increase the value of the company by tenfold or even twentyfold down the road …. but is that realistic in the near-term? • And if no, is it realistic to have employees believe that a tenfold increase in value in the near-term is the actual goal, only to be disappointed when it is nowhere even close. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 36
  • 37. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 6. Meaningful systems need to be in place to set, measure and adjust the goals of the transaction. • A clear set of 12/24/36 month “goals and objectives” to be achieved as a result of this transaction should be articulated as part of the post-integration plans. • Yes, some portion of the results will be intangible and difficult to measure (e.g. our customers just “feel better” about us now), but even goodwill should manifest itself in higher customer loyalty and increases in sales that can be easily measured. • Repeat sales, upsales, renewals to commitments, lower turnover rates can all be measured and closely monitored. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 37
  • 38. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 7. Treat both sets of customers as gold.  At the end of the day, you can write-up all of the press releases in the world, but if customers are not convinced that this M&A deal is good for them, then the objectives of the deal will not be met.  Take the time to explain the post-closing value proposition to both sets of customers.  If the deal will result in lower costs or better pricing, then tell them and show them how and why.  If the deal will result in higher prices but better service and support, then be ready to justify and explain the value of the trade-off.  If the deal will result in broader and better product lines or service offerings, then have your cross-selling strategies and tools ready to go.  Remember that your competitors will try to attack the deal and market to your customers if they see the opportunity; you need to be ready to push back. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 38
  • 39. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 8. Don’t hide the poop under the rug. • In an attempt to paint a rosy post-closing picture, buyers and sellers may choose to defer problems and challenges identified pre-closing to some undefined time period after closing. • This “we’ll get to it later” approach is a time bomb just waiting to explode and the clean-up will not be pretty. • The failure to either unearth lurking problems, or worse, the intentional decision to ignore them, is a recipe for disaster. • Problems in the area of human resources, environmental liabilities, lack of clear ownership in intellectual property, poorly-drafted earn-outs, unpaid taxes, unclear major customer commitments, underfunded pension plans, etc. are not problems that will go away with the waiving of a post-closing magic wand. • The parties may feel pressure from the marketplace or from their advisors or from their sources of capital to “just go ahead and get this deal closed and we’ll figure out these problems later,” which is bad advice and a bad strategy. • The delays in closing that solving these problems would create are viewed as the evil, instead of the problems themselves. • Yes, momentum is important and there may be minor problems which are not worth the derailing of a transaction, but material issues and challenges must be resolved prior to closing. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 39
  • 40. Post-Merger Integration Key Challenges & Best Practices (Cont’d) 9. Do your due diligence the right way the first time. • Improper or hasty due diligence often results in post-merger integration plans going awry. • Key issues that should have been discovered and dealt with pre- closing wind up to be a source of tension and dispute post-closing because due diligence was piecemeal or improperly staffed. • Due diligence staffing means the right number of people with the right skill sets who are prepared to invest the time and effort to ask the right questions and challenge the answers that don’t make sense. • Subject matter experts should be brought in when necessary, especially for high-tech or biotech/life science transactions. • For example, if you are buying a government contractor and one of the key assets is a long-term supply contract with the Department of Defense for providing advanced technology and support, then those contracts had better be reviewed by someone more senior and more knowledgeable than a 2nd year general corporate practice associate of your local law firm. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 40
  • 41. Harvesting Intellectual Assets ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 41
  • 42. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 42
  • 43. Key Strategic Questions • New book out in Fall of 2011 • We can learn many lessons about business growth and intellectual capital development from the best practices of our agricultural ancestors. • We are all farmers. We mark our turf. We protect our property. We plant our seeds. We nurture the soil. We plow our land. We combat adverse weather and ecosystem conditions and overcome adversities. We prepare for our harvest. • We hope for the best and prepare for the worst as the market sets a price for our efforts. We embrace the notion that our results will be directly tied to our levels of effort and expertise. • “We reap what we sow.” • We begin anew with each new season. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 43
  • 44. Key Strategic Questions (Cont’d) • Who will be on your team to assist you in these efforts? • Who will you hire to help you raise, harvest and sell the produce at your farm? • What tools, resources and expertise will you require to maximize the fruits of your harvest? • What adverse weather or market conditions must you overcome to be successful? • Who else is growing these same crops and how does their experience compare to your own? • Do you have a keen sense for the cycles and timetables that will optimize your harvest? • What is your game plan for bringing your crops to the marketplace? Will you do it alone or join with others? ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 44
  • 45. The Evolution of a Revolution Agricultural Plant Digital Revolution Cultivate Revolution (Food) Harvest (Intellectual Capital) • The picks and shovels of yesteryear have been replaced by the laptops and smart phones of today • Yet we must be committed to toiling in the fields for long hours to harvest productive and profit-driven assets (even if the venue and the crops have changed) ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 45
  • 46. Every Farmer Needs A Game Plan • Put an intellectual capital development and harvesting plan in place • Develop organizational charts and accountability for innovation (Chief Innovation Officer) • Alignment of seeds to be planted and demands of targeted market • Adjusting the plan in real-time around weather conditions and competitive trends ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 46
  • 47. Planting Seeds • What seeds will you plant today? • What crops is your land most capable of growing? • Have you assessed demand and competitive trends? • What adverse conditions will you face? • Establishing a genuine culture of innovation ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 47
  • 48. Irrigating the Field • Gathering the water, the nutrients and the fertilizer to make sure that intellectual capital can be harvested (human capital, financial capital, etc.) • Predicting the unpredictable (Mother Nature) • Too much vs. too little water (drought vs. floods) • Fire hose vs. garden hose (SME leaders spend too much time and precious resources on putting out fires instead of irrigating new ideas) ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 48
  • 49. Nurturing The Soil • Finding the right mix of nutrients • Know the needs of the soil • Building the right team for nurturing and evaluating new ideas: which are ripe for picking and which need more time? • Google’s 70/20/10 Rule – what’s yours??? ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 49
  • 50. Monitoring Progress Carefully To Ensure A Timely Harvest • Building effective IAM systems • Accountability and internal controls • R&D spending: Know when to say when • Innovation metrics ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 50
  • 51. A Bountiful Harvest • Systems and processes in place to ensure innovation, not just invention • Understanding the different types of innovation harvesting strategies • Proper rewards and incentives to encourage innovation and effective intellectual capital harvesting ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 51
  • 52. Bringing Crops To The Marketplace • Developing efficient distribution channels (don’t try to do it all alone) • Timing and balance issues: how and when to bring crops to market (The 8 track tape store and the flying car) • Impact of Web 2.0 and the developing E-marketplace • Wisdom of Crowds/Custom Merchandise in Real Time ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 52
  • 53. Evolving Strategic Views Towards Intellectual Capital (IC) Assets Traditional View Enhance the company’s competitive advantage and strengthen its ability to defend its competitive position in the marketplace (IC as a barrier to entry and as a shield to protect market share) (reactive and passive approach) Current Should not be used merely for defensive purposes but should also be View viewed as an important asset and profit center which is capable of being monetized and generating value through licensing fees and other channels and strategies, provided that time and resources are devoted to uncovering these opportunities (especially dormant IC assets which do not currently serve at the heart of the company's current core competencies or focus) (proactive/systemic approach) Future Premiere drivers of business strategy within the company and encompass View human capital, structural/organizational capital and customer/relationship capital. IAM systems need to be built and continuously improved to ensure that IC assets are used to protect and defend the company's strategic position in domestic and global markets and to create new markets, distribution channels and revenue streams in a capital efficient manner to maximize shareholder value (core focus/strategic approach) ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 53
  • 54. Intellectual Asset Management (IAM) (The IP Discovery, Management and Mining Process) • IAM is a commitment to building systems to create, organize, prioritize and extract value from a set of intellectual property assets. The intellectual capital and technical know-how of a company are among its most valuable assets, provide its greatest competitive advantages and are the principal drivers of shareholder value • (Professor Lev – NYU, estimates that only 15% of a company’s “true intrinsic value” is reflected on its financial statements), yet rarely do smaller and growth companies have adequate personnel, resources and systems in place to properly manage and leverage these assets (“Finding and Harvesting The Rembrandts in The Attic”). Discussion Point: What other major body part are we estimated to only use 15% of its true capacity? Is there a correlation? When are our value- drivers “blindspots”? ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 54
  • 55. Intellectual Asset Management (IAM) (Cont’d) • IAM systems facilitate collaboration and help break down silos in communications regarding new product development, the harvesting of intellectual assets and provides training to employees at all levels on the importance of the protection and leveraging of intellectual property. 55 ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 55
  • 56. Harvesting Process Intellectual Asset Chief Innovation and Collaboration & Brainstorming, Intellectual Asset Communication Retreats, Facilitating, Harvesting Officer Creativity, etc. (“CIIAHO”) • Software & Systems • Periodic Meetings & Retreats • Accountability & • IP Audit (take inventory as to Resources for Identifying, what already exists) Harvesting, & Leveraging Rewards • Market Screens • Customer Demand Screens • Resources Screens Strategic Screens & • Human (Who?) Product/Service Filters • Financial (How?) Development Plan • Resource Allocation Screens • Profitability/Prioritization • Shareholder Value • Patent • Trademark IP Protection • Copyright • Organic • Trade Harvesting • External Strategy Secret • Other ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 56
  • 57. Questions & Answers ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 57
  • 58. Book Winners! • A. Hawkins – Rawlison Butler • D. Bastien - Deloitte • C. McKillop - Cogeco • M. Shimp – Venture Mgmt • J. Yoon – CNJ Captial Congratulations! We will be following up shortly to get your book preference and mailing address. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 58
  • 59. Thank You Our next webinar is Jan 17th, 1pm Eastern Alert to M&A Advisors: What’s Ahead for 2012 and later? Why are so many middle market M&A advisors not particularly successful? For starters, this is not your father’s M&A world. In fact, there is a whole new world out there. The realities of professional M&A practice have been transformed during the 21st century. Know how to catch the right waves and the right deals with the right techniques. Featuring Dennis J. Roberts, author of the widely selling An Insider’s Guide to the Purchase and Sale of Middle Market Business Interests. www.Firmex.com/company/events Today’s Recorded Webinar, Slides, and Complementary Checklists will be made available in a follow-up email shortly. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 59