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An executive viewpoint on Risk
Risk Discussion Group
Sydney at Canadian Consulate House 19 May 2016
Welcome by Andrew Crawford, Founder of Group
Welcome: Andrew Crawford (Founder of Risk Group in 2010) Formal Welcome from Glenn Ahern, CPA President Lisa Gray and Deputy President Richard Sharpe Welcome to the 400 followers of this group and the 73 registered for tonight’s event Event management: Treasurer Helen Dong Lucky door prizes, presented by Helen Dong and her Cadet team Shan, Jenna, Lydia, Nabila and Rebecca Thanks to our sponsors GIA and CPA and our supporters, especially ACS, Sydney University Business School, Macquarie University, Institute of Chartered Accountants Speakers tonight Paul Kernaghan, Senior Executive Financial Services Saranne Cooke, Professional nonexecutive Director David Fenwick, HSBC Commodity Finance Risk Moderator: Mr Paul O’Brien Volunteer Awards: Lisa Gray, Divisional President of CPA
Supporters
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Value destruction by
acquisitions PAUL KERNAGHAN
MAY 2016
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What is value destruction in M&A?
Price paid is more than the changes in cash flow resulting from the
acquisition.
𝑃₀ > ∆𝐶𝐹1
(1+𝑖)+
∆𝐶𝐹2
1+𝑖 2 +Δ𝐶𝐹3
(1+𝑖)3 + ⋯Δ𝐶𝐹𝑛
(1+𝑖)𝑛
• Where P₀ is the acquisition price,
• ΔCF is the change in cash flow resulting from the deal in any year
• i - is the acquirer’s cost of capital
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Many studies indicate that the majority
of acquisitions destroy value for the
acquirer
HBR – 70% to 90% failure rate
KPMG – 53% destroyed value, 30% added no value
AT Kearney – 58% destroyed value
McKinsey – 60% to 80% destroyed value
Sirrower – 66% destroyed value
LEK Consulting – 60% destroyed value
The majority of value goes to the target’s shareholders!
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Some Australian Examples in Financial
Services:
• HIH + FAI
• AMP + GIO
• AMP + NPI (UK)
• NAB + Yorkshire & Clydesdale (UK)
• NAB + Homeside (USA)
• IAG’s UK Insurance Acquisitions • QBE’s 100+ Global Acquisitions
• Big 4 Banks Wealth Mgt Acquisitions?
Warning signs – if price represents…
High PE ratio relative to current multiples and similar deals in the relevant
sector
Big Premium to target’s pre deal share price
Large goodwill value (ie price paid minus net assets of the target)
Acquirer’s share price usually falls after an acquisition
announcement as value is transferred to target’s shareholders
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Six core reasons why value gets
destroyed?
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Strategic Fit & Rationale Price Paid Due Diligence
Integration Planning
Resourcing & Execution
Governance & Alignment
Why does too much get paid?
Over-estimate synergies.
Fail to take into account negative synergies
Loss of customers, talented staff and huge disruption to existing businesses
Fail to ID legal and financial issues during Due Diligence.
Under-estimate the cost, complexity and risks of integration.
Valuation errors, assumptions and models.
Management bias and ego.
Investment bankers!
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Due Diligence and Integration
Planning
DD Scope too narrow – legal and financial is not enough.
Fail to validate synergies and identify negative synergies.
No detailed integration plan on which to base one off costs.
Insufficient attention to people, culture and systems.
No clear integration blueprint, change and risk management model.
Inadequate resourcing plan for integration.
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Organising for M&A success?
Deal Team
Integration Planning Team
Due Diligence Team
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Role of M&A
In Strategy
Target
Selection
Criteria
Search
Process
Steer
Co
Steer Co
Integration
Executive
BU1
BU2
BU3
Comms &
Change Mgt
Systems
Human
Resources
Finance & Risk
Mgt BU4
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Risk – a view point from non executive director
and researcher Saranne Cooke
FCPA MComLaw MBus(Mkt) BCom GAICD AFAMI CPM
The transition from executive to non-executive director in managing risk
• Managing ‘high’ risks in executive roles
• Transitioning from management to oversight
• Board and committee responsibilities
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The delineation of board and management
• The board oversees risk , the executive manages risk
• Where is the line?
• The line is variable and moveable
Researching ASX200 directors
• The ASX Corporate Governance Council Principles and Recommendations
• What are directors saying?
• What keeps them awake at night?
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Risk and Innovation
• The National Innovation and Science Agenda
• Being innovative and managing risk
• Risk as a positive
Reflecting on risk
David Fenwick,
Commodities Finance Risk Management,
HSBC Australia
May 2016
PUBLIC
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Disclaimers • This presentation is general in nature on matters of general interest. It
is not intended to be comprehensive, is not advice, and does not take account of personal situations. Where appropriate you should seek professional advice.
• The material contains personal views of the author, is not sanctioned by HSBC and may not represent their views
• All information is in the public domain
PUBLIC
Reflect on my risk roles
PUBLIC
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PUBLIC
1: risks develop slowly, and then very quickly
Something else I learned through that time
PUBLIC
2 : to manage risks, rules and principles are needed
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Project Triangle
PUBLIC
time
cost
quality
RISK
time
cost
quality
3 : you can’t have it all - time vs cost vs quality…and RISK
PUBLIC
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PUBLIC
• Modelling • Stress testing • Scenario testing
4 : the map is not the terrain
Thoughts to leave you with:
1 : risks develop slowly, and then very quickly
2 : to manage risks, rules and principles are needed
3 : you can’t have it all - time vs cost vs quality…and RISK
4 : the map is not the terrain
PUBLIC
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What does that mean for today?
PUBLIC
To join the group contact Chair - Darren on [email protected] Treasurer – Helen Dong on [email protected] Founder – Andrew Crawford, https://au.linkedin.com/in/andrewcrawfordfmba Chair of Gosford Group – Richard Sharpe, [email protected] GIA representatives Lea Rushton, Peter McGee and Kerry McGoldrick
