Royal Philips
Risk Management and Due Diligence Support Prepares Royal Philips Electronics for Merger Confidence in Global Joint-Venture.
In this age of acquisitions hardly a day goes by without an announcement of a merger. Yet many deals are based on big-picture assessments of value, without all the parties involved knowing all the details.
When Royal Philips Electronics of the Netherlands, and LG Electronics of South Korea planned to merge their respective cathode ray tube (CRT) businesses into a new joint venture company, Philips Senior Management approached Capgemini for support in the then imminent Due Diligence process. Due Diligence is the process of examining the financial underpinnings of a corporation as one of the first steps in a pending merger with the goal of understanding the risks associated with the deal.
The Due Diligence process was organised along the lines of functional disciplines. Key issues requiring detailed investigation/confirmation were collected and analysed by the Philips teams during the site and central data room visits. The 50-50 joint venture in display technology concerned all CRT activities, and key components. The resulting new company, LG.Philips Displays, is now a global leader in the CRT market. According to senior Philips management the Due Diligence process resulted in an effectiveness that Philips would not have been able to achieve without Capgemini.
Client Profile
Royal Philips Electronics of the Netherlands is a leading global supplier of cathode ray tubes (CRT). It is first in television tubes, and fifth in computer monitor tubes with significant market shares in Europe, China, and the Americas. It employs approximately 24,000 people and has 12 CRT manufacturing sites throughout Asia, Europe and the Americas. Philips Components’ CRT business posted revenues of US$ 3 billion in the year 1999, and EBIT (Earnings Before Interest and Tax) of US$ 157 million.
LG Electronics of South Korea (LGE) is also a leading supplier of CRTs, both in television and monitor tubes, where it holds third position globally. Already producing the highest yields in the industry, LGE has 5 CRT manufacturing sites, mainly in Asia, and employs approximately 12,000 people. LG’s CRT business had revenues of US$ 2.2 billion in 1999, and EBIT of US$ 357 million.
When Philips and LGE signed a Letter of Intent to merge the CRT businesses in a joint company, the projected benefits from the highly complementary strengths of the two companies were reliant on LGE’s industrial and manufacturing expertise and Philips’ global marketing and technological innovation.
Business Requirements
Quite often a proposed merger gets ‘valued down’ or halted following conflicts over intellectual property rights, personnel, accounting discrepancies or incompatibilities in integrating IT systems. The process of researching, understanding and in some cases avoiding these risks is known as Due Diligence.
Philips senior management approached Capgemini for support in the then imminent Due Diligence process. The rationale for calling on external support was fourfold:
- because of the importance and size of the proposed merger and the world wide presence of both companies, the Due Diligence process could not be handled by Philips personnel alone while also continuing business as normal
- the foreseen complexity resulting from Due Diligence investigation would require a more structured preparation and execution then had been required by Philips in previous situations
- the expected large amount of information gathered during the Due Diligence process would require the creation of an information system to control and make accessible the large amounts of information.
- the global setting and the large number of disciplines (and people involved) would require the creation of a central project office to gather the information collected by the Philips Due Diligence teams from all over the world and to keep track of information passed to LGE.
Previous involvement of Capgemini at Philips and satisfactory experience in comparable situations resulted in the engagement for this project.
The Solution
After considering various options on how to organise the Due Diligence process, Philips management expressed a strong preference to organise the process along the lines of functional disciplines. All in all 12 discipline teams were formed with in total approximately 80 Philips employees. The disciplines were: Sales & Marketing, Tax, Legal, Business Financials, Treasury & Accounting, Manufacturing, ICT, Environment & safety, Purchasing, HRM, Real Estate and R&D.
Using Philips’ experience from previous Due Diligence processes and the information available on LGE, key issues that would require detailed investigation/confirmation during the Due Diligence were collected.
’ Per discipline’ team workshops were organised to analyse the issues in advance of the data room and site visits. This resulted in detailed list of questions per issue. These issues and related questions proved to be very valuable to the information gathering process during the Due Diligence site visits. The issues and related questions were entered in a spreadsheet tool, which was specially made for this purpose.
A comprehensive procedure was developed to centrally collect, distribute and analyse the information gathered by the Philips teams during site visits, as well as visits to the central data room. In addition all questions posed by LGE during its visit to the Philips data room were collected together with the answers provided by Philips.
The above-mentioned spreadsheet and e-mail facilities were the tools used to collect, organise and distribute the information. Special attention was given by the central project office to analyse incoming discipline information for cross reference with other disciplines and the subsequent notification of the other teams.
Before the teams left to carry out the Due Diligence, each team member was provided with a booklet containing the issues/questions relevant to his discipline, and all teams were instructed in the procedural aspects mentioned above.
The Benefits
The extensive preparation for the Due Diligence process and the subsequent central office control provided to the discipline teams resulted in the following benefits to Philips:
· the analysis of the Due Diligence issues by means of the workshops forced every team member to carefully think about what needed to be investigated at the central data room and the sites, before the visits took place. This resulted in well-prepared teams that were able to focus directly on the issues at hand.
· the central project office control proved to be very useful in analysing cross- disciplinary issues and involving the right disciplines. The central project control was of considerable help in the preparation of a comprehensive final report according to a pre-determined standard.
· registration of questions posed by LGE during its Due Diligence process at Philips proved extremely useful in supporting Philips strategy during their visit at LGE. The availability of an information system in which all data was collected was not only extremely useful during the Due Diligence process itself, but also provided a comprehensive reference after the event.
According to senior Philips management the Due Diligence process resulted in effectiveness that Philips would not have been able to achieve without Capgemini .
At the request of Philips, the Capgemini team has made available all the procedures and tools used in this Due Diligence process in a structured digital way for use in future Due Diligence projects
Written in co-operation with Royal Philips Electronics N.V.
