Dear LinkedIn Connection, Despite uncertainties in the global stock markets, growth through acquisition is a viable option for MNCs seeking growth in Asia and for Indonesian companies keen on pursuing local and global opportunities. Globally, M&A deal values grew by 22% in 1H2011 compared to the same period in the previous year – an indication that corporate takeovers remain highly active. In contrast, transactions in Indonesia had more than doubled in value and volume in the ten-year period from 2001 to 2011 (Institute of Mergers, Acquisitions & Alliances). Yet, M&As are inherently risky. Hay Group’s studies have shown that nearly 60 percent of deals transacted between 1992 and 2006 left the buyers with eroded shareholder value. Clearly, the long-term value of M&As is not guaranteed.

1. 1
Harnessing
hidden strengths:
Touching the intangibles
May 2012 How can Indonesian companies retain shareholder value
throughout the M&A process?
Open for business
Despite uncertainties in the global stock markets, growth The reason for this lies in the fact that most buyers focus
through acquisition is a viable option for MNCs seeking only financial and legal due diligence but ignore the
growth in Asia and for Indonesian companies keen on intangible capital, i.e. the non-monetary assets that drive
pursuing local and global opportunities. deal profitability, which accounts for up to 75 per cent of
the value of any organization1.
Globally, M&A deal values grew by 22 per cent in
1H2011 compared to the same period in the previous year Why? Mainly because information on the target
– an indication that corporate takeovers remain highly companies’ intangible capital is considered too difficult to
active. In contrast, transactions in Indonesia had more obtain2. And in a typical dash-to-the-finish M&A
than doubled in value and volume in the ten-year period transaction, it is easy to overlook the intangibles. However,
from 2001 to 2011 (Institute of Mergers, Acquisitions & as this paper will show, the tricky issue of managing the
Alliances). intangibles is not insurmountable.
Yet, M&As are inherently risky. Hay Group’s studies have
shown that nearly 60 percent of deals transacted between
1992 and 2006 left the buyers with eroded shareholder
1 Ocean Tomo Research LLC
value. Clearly, the long-term value of M&As is not
guaranteed. 2 Hay Group research, ‘Dangerous Liaisons’, 2007
©2012 Hay Group. All rights reserved www.haygroup.com/id

2. 2
Harnessing the hidden
Satisfaction not guaranteed
Intangible capital refers primarily to the identifiable non-monetary
assets that cannot be seen, touched or physically measured, thus
making it hard to quantify and value. Unfamiliar to some, intangible
capital can exist in different forms, with examples ranging from
brand equity and client loyalty, to leadership attributes and corporate
governance.
To identify the elements of intangible How can intangible capital be optimized?
capital that deliver the greatest impact As can be seen from Figure 1, there are 17
on post-merger integration, Hay Group types of intangible capital that need to be
conducted a worldwide survey of 220 top taken care of. In M&A transaction, there
executives involved in major M&A are a million things to take care of –
activities across various business sectors. financial, legal, human resources, clients
and intangibles. What should executives
This is what we found: Companies do not focus on in the intangibles space to
adequately assess the value and ‘fit’ of a maintain value?
target’s intangible capital in the early stages
of a transaction. Most M&A activities fail
because of this. Consequently, mitigating
such risks at the post-merger stage becomes
difficult.
Figure 1: Hay Group’s model of intangible capital
Organizational capital Relational capital Human capital
Culture and market convergence Brand Leadership
ƒƒ Shared values, attitudes, beliefs and ƒƒ External and internal image and ƒƒ Clear vision established and
customs reputation communicated
Governance ƒƒ All that touches the customer ƒƒ Conflicts of interests coordinated and
ƒƒ Aligned business processes experience balanced for all stakeholders
ƒƒ Clear and effective governance Client intimacy ƒƒ Team commitment and employee
recognition
Agility ƒƒ Knowledge of the client
ƒƒ Market coverage Employees
ƒƒ Capacity to manage internal business
transformation ƒƒ High potentials identified, developed
Client loyalty and rewarded
ƒƒ React quickly to new market demands
ƒƒ Client satisfaction ƒƒ Demonstrate strong commitment and
Communication and teaming ƒƒ Low turnover and high rate of referrals loyalty and valued by the organization
ƒƒ Willing to share information
External networks Development and management
ƒƒ Simple channels/information flow
ƒƒ Strong relationships with suppliers, ƒƒ New skills, knowledge and
Energy and clarity distributors and other partners or leadership styles acquired with
ƒƒ Communicated and understood centers of influence training and coaching
business strategy
Internal networks Engagement
ƒƒ Clear direction for people to mobilize
ƒƒ Effective internal communication ƒƒ Employee empowerment and degree
their energy
ƒƒ High impact cross functional teams of attachment to the company
Organizational structure
ƒƒ Enabling relationships across Productivity
ƒƒ Effectiveness of the organization to organizational and geographic
deliver the strategy ƒƒ Efficient management of costs,
boundaries resources and time
Tacit ‘know-how’ and information
ƒƒ Willingness to innovate
ƒƒ Unpatented intellectual property
©2012 Hay Group. All rights reserved

3. 3
Figure 2: Intangible capital varies over time
Active Level of Intangible Capital
Healthy
The success of M&A largley depends on how
buyers manage intangible capital over time Unhealthy
Strategic planning Target screening Due diligence Pre-closing Post-merger integration
Timeline of M&A
Nothing is constant Candour
The common mistake is assuming that By relaying information to employees –
intangible capital retains its value even if it means revealing negative but
throughout the course of M&A truthful details about the merger and ad-
integration. In reality, it fluctuates with dressing immediate challenges – intangible
internal and external changes – typically capital is activated through the assurance
decreasing over the course of a that comes from managing with candour.
transaction (Figure 2). A target firm’s Thus employees develop a greater sense of
intangible capital is usually at its strongest trust towards management, and are more
at the start of a transaction and typically disposed to aligning their efforts with that
declines as throughout the process. of the executive team’s.
Our research shows that in essence, it is the What does this mean for us in Indonesia?
state and not the valuation of intangible In Indonesia, where the practice of “giving
capital that drives a successful M&A. In face” (menjaga gengsi) can run counter to
the multitude of tasks to be done during an frank discussions, managing with candor
M&A transaction, is there any catalyst that can be difficult for both employees and
can keep intangible capital in its active, management. This brings us to our next
value-creating state? What are the most point: courageous follow-through.
important drivers of intangible capital?
From Hay Group’s research into M&As
in Asia, we indentified identified four core
drivers that are responsible for activating
intangible capital:
• Candour
• Courageous follow-through
• Calculated risks
• Compatible Response
www.haygroup.com/id

4. 4
Harnessing the hidden
Courageous follow-through Calculated risks
Complexities and conflict are part and Both parties are taking calculated risks in
parcel of M&As. Leaders from merging an M&A situation. Clearly, risk appetite
entities must close ranks and not retreat differs between companies and individuals
from making tough decisions that – some being more aggressive and others
inevitably crop up in the course of the less so.
transaction. Not making a decision is also a
decision in itself. Regardless of scenario, the secret to
long-term gains and synergy in successful
Managers need to display flexibility in M&As resides sharing similar risk appe-
accommodating changes, a strong ability tite. Given that the most significant M&A
for rallying employees to face challenges, trend now is the move by an increasing
and resilience when favouring one party’s number of Asian companies into Western
service line over the other. They must markets through acquisitions, how can
demonstrate perseverance in adapting to knowing the risk appetite profiles help
new circumstances, adopting a common both buyers and target?
fighting stance towards overcoming
obstacles, and never taking “no” for an One way is to use Geert Hofstede’s
answer. Uncertainty Avoidance Index (UAI), which
we believe is a useful tool in measuring a
What does this mean for companies in nation’s or a group’s tolerance for uncer-
Indonesia? Fortunately, employees here are tainty and ambiguity – in other words, its
more accustomed to a top-down approach. appetite for risk.
As long as a difficult decision is sanctioned
by top management, employees will In Hofstede’s study, UAI scores can range
usually fall in line. But this does not mean from 0 (pure risk takers) to 100 (pure risk
that leaders should just issue edicts and avoiders). At one end, Americans ranked
ram changes through. Some appearance of lowest, preferring fewer rules and controls,
selling and explaining will still be necessary and greater tolerance for a variety of ideas,
for the long-term good of the transaction. thoughts, and beliefs. At the other end,
Japan ranked highest in its UAI score,
implying high levels of control in order to
eliminate or avoid the unexpected.
©2012 Hay Group. All rights reserved

5. 5
There was no getting through: Why BenQ and Siemens hung up
When BenQ decided to acquire Siemens’ loss-making mobile phone unit in exchange for
more than 600 patents, it was confident that the deal would increase its profit share and
open-up new markets in Europe. After all, BenQ was combining its strengths in consumer
markets with Siemens’ reputation for high-quality products.
However, the venture failed within a year, no thanks to clashes in decision-making frame-
works and the speed of execution between the two entities. BenQ’s informal culture, which
was flexible and entrepreneurial, collided head-on with the formality and processes at
the 100-year-old Siemens, which has a culture of adhering to strict procedures. This led to
critical delays in the decision to introduce a new phone model into the market – a missed
opportunity that caused the venture to suffer a huge loss.
They said it wouldn’t work: Nissan and Renault
It was widely believed that cultural differences between the Japanese (Nissan) and the
French (Renault) would destroy the merger.
Moreover, the fact that Renault and Nissan targeted the same market segments sparked
fears of cannibalization. Renault’s technical expertise resided in its flair for design, whereas
Nissan was renowned for bland but reliable models and strong engineering skills. In short,
there was a glaring difference in the intangible capital that existed in both firms.
Nonetheless, the merger turned out to be a success. This was largely due to the structural
similarity between both organizations, which were bureaucratic and highly hierarchical.
They shared similar approaches in “compatible response” – or general time-frame towards
execution – both being highly collective organizations where decisions were made based
on general consensus. Even though Nissan and Renault had different intangible capital,
their successful merger demonstrated that the right active drivers could result in better
value creation, overcoming geographical and cultural differences between the two.
www.haygroup.com/id

6. 6
Harnessing the hidden
So in a M&A transaction, parties that be quick in action, or agree to be
prefer to “wing it” and rely on “gut feel” methodical – as long as they are in tandem.
are going to conflict with those who
demand more analysis, higher conformity For example, we have seen conflicts arising
and strict adherence to rules. rapidly when a bureaucratic decision-
making process holds one party back,
The implication for Indonesian companies frustrating the other side, which has a flat
is this: in a deal, especially one that crosses organizational structure. Sadly, it is
multiple borders, the closer everyone’s common to see incompatible decision-
UAI, the better the outcome. making frameworks jeopardizing the
performance of a successful M&A
Compatible response transaction.
When it comes to successful M&As, both What does this mean for companies in
parties must respect the need for timely Indonesia? Unfortunately, Indonesian
and prudent response, so that decision- managers have a tendency to delay making
making does not become the Achilles’ heel decisions in order to gather more (or
for either party. better) information. If this decision-
making style is not shared by the other
By compatible response, we mean that party, then it will be perceived as
both parties ought to have a similar time- hesitation and ultimately, backfire on the
frame for execution. Both parties can either deal.
©2012 Hay Group. All rights reserved

7. 7
Ready, set, go!
The M&A process is a race against time. There are many challenges
to take care of, many difficult decisions to make, and often
simultaneously. It is next to impossible to assess all of the various
aspects of intangible capital during due diligence, and doing so
could delay the transaction and destabilize the intangible capital
even more.
Instead of devoting what limited resources M&A is intrinsically a risky business; there
we have to the valuation of intangible capi- is no safe bet. With increasing global
tal, companies going through M&A should M&A market activity, there are good deals
focus on these core drivers outlined here to be made to help companies in Indonesia
that ensure an active state of intangible achieve new growth.
capital, and not leave a successful outcome
to chance. Armed with the right insights to make the
best deal – a clear understanding of what
Despite glaring differences, mergers can you are buying and how it ‘fits’ with your
still succeed when both parties ensure that existing company though intangible capital
their intangible capital drivers are well driver analysis – M&A can be a winning
aligned and kept active. By unlocking this strategy for driving long-term growth for
vital component, M&A partners will dis- the future.
cover what keeps mergers afloat, and realize
the benefits of their respective intangible
capital.
Contact
Nidthia Chelvam, Managing Consultant for Hay
Group Indonesia, helps multi-national
companies and international organizations
transform their business strategies into results.
Nidthia also has extensive line and operational
management experience with global companies
across three continents.
e| Nidthia.Chelvam@haygroup.com
The content in this report is provided solely for informational purposes. This report does not establish any client, advisory, fiduciary or professional relationship between Hay Group and you.
Neither Hay Group nor any other person is, in connection with this report, engaged in rendering accounting, advisory, auditing, consulting, legal, tax or other professional services or advice.
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