CFO meets M&A: Value creation in the digital age The Dbriefs Driving Enterprise Value series

CFO meets M&A: Value creation in the digital age The Dbriefs Driving Enterprise Value series Lukas Hoebarth, Principal, Deloitte Consulting LLP Nnamdi Lowrie, Principal, Deloitte Consulting LLP Carina Ruiz-Singh, Partner, Deloitte & Touche LLP June 22, 2017

Welcome to the next episode in Driving enterprise value Shareholder value Revenue growth Operating margin (after taxes) Asset efficiency Expectations Volume Price Realization Selling, General & Administrative (SG&A) Cost of Goods Sold (COGS) Income Taxes Property, Plant & Equipment (PP&E) Inventory Receivables & Payables Company Strengths External Factors Acquire New Customers Retain and Grow Current Customers Leverage Income- Generating Assets Strengthen Pricing Improve Customer Interaction Efficiency Improve Corporate/ Shared Service Efficiency Improve Development & Production Efficiency Improve Logistics & Service Provision Efficiency Improve Income Tax Efficiency Improve PP&E Efficiency Improve Inventory Efficiency Improve Receivables & Payables Efficiency Improve Managerial & Governance Effectiveness Improve Execution Capabilities Product & Service Innovation Product & Service Innovation Cash/Asset Management Demand & Supply Management Marketing & Advertising IT, Telecom & Networking Product Development Logistics & Distribution Income Tax Management Real Estate & Infrastructure Finished Goods Accounts, Notes & Interest Receivable Governance Operational Excellence Marketing & Sales Account Management Price Optimization Sales Real Estate Materials Merchandising Equipment & Systems Work in Process & Raw Materials Accounts, Notes & Interest Payable Business Planning Partnership & Collaboration Retention Customer Service & Support Human Resources Production Service Delivery Program Delivery Relationship Strength Cross-Sell/ Up-Sell Order Fulfillment & Billing Procurement (Excluding Production Materials & Merchandise) Business Performance Management Agility& Flexibility Business Management Strategic Assets Financial Management Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 2

Topics for discussion The CFO s evolving role in M&A: Driving value across the organization The power of digital solutions across the M&A lifecycle Leveraging M&A activity as a catalyst for digital finance transformation Closing thoughts and key takeaways Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 3

The CFO s role in M&A activity is evolving outside of finance CFOs are increasingly leading overall due diligence, deal thesis, and integration and separation efforts Traditional responsibilities Evolving responsibilities Functional value drivers & synergy capture Corporate strategy Finance & account for transaction Due diligence Strategic & financial plans CFOs Roles and Responsibilities in M&A Integration leadership End state finance function Cross-functional synergies Compliance Stakeholder management Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 5

Poll question #1 Within the evolving roles across the M&A lifecycle, where do you think the CFO can add the most value? Corporate strategy Due diligence Integration leadership Cross-functional synergies Stakeholder management Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 6

CFOs are now enabling value creation across the M&A lifecycle Their emerging roles allows them to drive key decisions that help create value across the organization How much value do we expect this deal to create? Corporate strategy What is needed to successfully complete this deal? Due diligence Due diligence How much should we spend on integration and restructuring? Integration leadership Integration Divestiture Strategy Target screening Transaction execution Crossfunctional synergies What are the right synergy targets? Stakeholder management What regulatory approvals are required? Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 7

Leveraging comparable data to develop a strategy on close date There are four critical drivers to setting a close date, with typical time to close ranging from 3-9 months Deal Size ($B) 80 70 60 50 40 30 20 10 0 How much time do we need to close the deal? Time from announcement to close for selected deals over $5B from 2014-2017 0 1 2 3 4 5 6 7 8 9 10 11 12 Source: Capital IQ and Deloitte Proprietary Information Key drivers Time to close (Months) Regulatory approval Board vote Financing Level of integration Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 8

Understanding benchmarks to set target synergies When setting target synergies it is important to consider key drivers such as integration strategy and deal size Total announced Synergies (% of deal value) 12% 10% 8% 6% 4% 2% 0% What are the right synergy targets? Total announced synergies for selected deals over $5B from 2011-2017 - 2 4 6 8 10 12 14 Source: Capital IQ and Deloitte proprietary information Key drivers Average: 2.49% Deal size ($B) Deal thesis Integration strategy Deal size Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 9

Applying data to determine an integration budget Several baselines can be applied to set a range of potential integration budgets How much should we spend on integration and restructuring? Integration cost comparison Median, 6.7% % of target revenue 25th percentile, 3.1% 75th percentile, 13.6% Median, 3.8% % of deal value 25th percentile, 2.1% 75th percentile, 8.7% Source: Capital IQ and Deloitte Proprietary Information Key Drivers Integration strategy Complexity of business model Deal size Speed of integration Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 10

Poll question #2 During what phase of the M&A lifecycle can additional data provide better insights? Strategy Target screening Due diligence Integration planning Integration execution Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 11

Solutions and accelerators used across the M&A lifecycle A variety of digital tools can accelerate the transaction and bring greater value to the organization Interdependency accelerator Divestiture financials Divestiture Strategy Target screening Due Diligence Integration Transaction execution Digital target screening Digital organization design Purchase accounting Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 13

Digital target screening Quickly narrow down and identify potential targets to inform deal strategies and negotiations Strategy Due diligence Target screening Divestiture Integration Transaction execution Digital target screening Functionality Review industry trends Compare growth paths Incorporate external data Approach Refine list of potential acquisition targets via user-defined data Simulate real-world acquisition scenarios to enhance discussion on growth pathways Compare financial profiles to facilitate deeper discussions on identified targets Impact Assisted a large biotech company by refining a list of 250+ companies down to <10 to then enable a value-driven discussion around viable acquisition strategies and scenarios Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 14

Interdependency accelerator Effectively manage dependencies across functions, regions, and business units Strategy Due diligence Target screening Divestiture Integration Transaction execution Interdependency accelerator Functionality Aggregate 100s of workplans Highlight risks & critical path Drill down on dependencies Approach Utilize data visualization of milestones to focus on critical path milestones Provide clear insight into key risks, issues & cross-functional dependencies, leveraging database of comparable industry roadmaps Decrease travel expenses while increasing overall engagement across functions Impact Assisted a large technology company by reducing setup time for interdependency discussions from days to hours and help visualize and aggregate 1,000s of milestones to efficiently identify gaps and focus on mitigation plans in complex, global transaction Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 15

Digital organization design Quickly analyze and design key organizational aspects of an integration Strategy Due diligence Target screening Divestiture Integration Transaction execution Organization analytics tool Functionality Design org structures dynamically Cleanse & analyze data Incorporate industry benchmarks Approach Design future-state organization & supporting structures Create custom org sizing & costing model, utilizing industry benchmarks for comparison of leading practices Facilitate leadership alignment on design principles that reflect the organization's goals, objectives, and desired attributes Impact Assisted a software company by modeling and implementing new RemainCo and SpinCo organization designs for 20,000 employees across 55 countries. These new structures are expected to drive 2x revenue growth within the next two years Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 16

Purchase accounting Streamlining the purchase accounting process through automation Strategy Due diligence Target screening Divestiture Integration Transaction execution Purchase accounting Functionality Data aggregation & mapping Calculate adjustments Financial reporting Approach Streamline financial integration process by calculating adjustments at required levels and keeping track of changes and impacts Automate with reviewable checks and reducing errors Decrease time to prepare journal entries including supporting documentation from weeks to hours Impact Assisted in the combination of two large pharmaceutical companies by automating the creation of periodic purchase price adjustment deferred tax, goodwill and currency translation adjustments s, supporting documentation, and footnotes; effectively reducing processing time from weeks to hours while reducing the potential for manual processing errors Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 17

Divestiture financials processing Enabling financial analysis and streamlining the audit process Strategy Due diligence Target screening Divestiture Integration Transaction execution Divestiture financials Functionality Data cleansing & baseline Financial reporting Analysis & decision support Approach Create a detailed view of historical financials to allow a clearer picture of the true drivers of the business Automate historical adjustment process to accelerate creation of adjusted financial results Provide Divestiture Financials and Analysis package to facilitate and streamline the audit, reducing time to close Impact Assisted a large pharmaceutical company through a complex multi-billion dollar divestiture by streamlining the creation of adjusted financial statements, automating the adjustment process, and facilitating the audit, which resulted in a reduction in turnaround time from data acquisition through audit from 6-8 weeks to 10 days Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 18

Poll question #3 What digital solution do you think could provide the greatest value within your organization during an M&A transaction? Digital target screening app Interdependency accelerator Organization analytics tool Purchase accounting Divestiture financials Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 19

The role of digital finance in the M&A lifecycle Executing a transaction can serve as a catalyst for digital finance transformation and long term value creation Divestiture Strategy Target screening Due diligence Integration Transaction execution Digital finance transformation Digital tools accelerate integration planning prior to day 1 Digital finance drives value post Day 1 through transformation Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 21

Finance transformation efforts post day 1 The CFO plays an integral role in digital finance transformation as both a strategic leader and a catalyst for change Maturing Emerging Complexity Time The digital finance transformation journey post Day 1 will be unique as adoption and appetite for change varies by organization Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 22

Finance in a digital world New digital finance tools focus on modernizing existing capabilities and delivering new ones Digital tools that modernize current capabilities Cloud computing Robotic process automation Visualization Digital tools that develop new capabilities Advanced analytics Cognitive computing In-memory computing Blockchain Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 23

Driving value from digital finance transformation Digital finance transformation helps create tangible value for companies following a transaction Examples of enterprise value enabled by digital finance transformation Cognitive computing Large US bank Enhanced fraud detection by 15% and increased total savings by 60% by improving capability and reducing operating cost Cloud computing Marketing technology and services company Enabled the retirement of more than 70 legacy systems, supported a major divestiture in 13 weeks, and achieved $4M in annual run-rate savings Robotic process automation Large health plan provider Reduced average time spent by 75% on membership reporting through automation of 6 processes which reduced staffing requirements by 50% Advanced analytics Global industrial manufacturer Achieved a 20% reduction in forecasting error and achieved inventory reduction annually by $1M per product with up to a $100M impact to bottom the line when rolled out across entire product portfolio Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 24

Poll question #4 What digital finance tool do you think could provide the most value if leveraged following an M&A transaction? Tools that modernize current capabilities (i.e. cloud computing, robotic process automation & visualization) Tools that develop new capabilities (i.e. advanced analytics, inmemory computing, cognitive computing & blockchain) Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 25

Join us July 19 at 3 p.m. ET as our Driving Enterprise Value series presents: The CFO as a strategist-catalyst partner to the CEO Copyright 2017 Deloitte Development LLC. All rights reserved. CFO meets M&A: Value creation in the digital age 27

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Contact information Lukas Hoebarth Principal Deloitte Consulting LLP lhoebarth@deloitte.com Connect with me on LinkedIn Nnamdi Lowrie Principal Deloitte Consulting LLP nlowrie@deloitte.com Connect with me on LinkedIn Carina Ruiz Partner Deloitte & Touche LLP caruiz@deloitte.com Connect with me on LinkedIn Copyright 2017 Deloitte Development LLC. All rights reserved. 29 CFO meets M&A: Value creation in the digital age

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