Tri- PR-OM

Southern Bank Acquisition

PROJECT BRIEF

Private & Confidential

This document is an entirely fictional work, intended solely for use in an educational context. While some of its content is

based on real-life data, such as names of countries and currencies, the authors do not guarantee the accuracy of any of

this content and do not intend to convey any opinion whatsoever about the information that may or may not appear to

be based on fact. Any similarity between the names of individuals and organisations featuring in the work and those of

real-life individuals and organisations is entirely coincidental.

Academic Advisor: Maurizio Zollo, Ph.D., Chaired Professor in Strategy and Corporate Responsibility, Bocconi University.

Winner of “The Free Press Outstanding Dissertation Award” in Business Policy and Strategy (a division of the Academy of

Management). This work, entitled: "Knowledge codification, process routinization and the creation of organizational

capabilities: post-acquisition management in the US banking industry" forms the basis for the content of this simulation.

©Prendo Simulations Ltd

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Northern Bank • 1

INTERNAL MEMO

TO: Chris Wycliff, Integration Manager

FROM: Jon Pettinger, CEO

DATE: 6th November

SUBJECT: Southern Bank Acquisition

Following Southern Bank’s acceptance of our offer, I wanted to confirm the Board’s decision

to give you responsibility for the integration of Southern’s operations with our own over the

next few months.

As you know, we have been in talks with Southern Bank since early this year, and rumors

about some further regulatory changes merely accelerated the process. The main objective

is a consolidation of our operations, to leverage synergy opportunities from complementary

branch networks and customer bases, and strengthen our defences to the threat from

Eastern Bank, which has recently announced its merger with Western.

As we wait for regulatory and formal shareholder approval on this deal, it is essential that

we establish a clear integration plan, and build consensus on it with our colleagues at

Northern Bank, our shareholders, key Southern personnel, as well as relevant external

stakeholders. The deal is expected to be cleared in January. At that time, I have promised to

give the Board a finalized plan, as well as confirmation that the people I have identified as

stakeholders in this acquisition are in support of it.

I have great pleasure in giving you full responsibility for this mission, to be completed by

22nd December. I am sure you will be able to judge how to obtain everyone’s support; in

my view, a mixture of consultation, communication and appropriate modifications to the plan

will be key. The remainder of this document contains information on the deal, and what I

believe to be the key post-acquisition decisions that need to be taken. I have also added

some background information on the key people you will be dealing with.

A last point: Northern’s experience with recent acquisitions has taught us that building

consensus on the integration process is a pre-requisite for protecting value and growing our

revenue base.

Best of luck, and don’t hesitate to call me if you need any advice,

Jon

Northern Bank • 2

ACQUISITION OUTLINE

The following outline provides some basic information on the Southern Bank transaction.

Background:

Informal discussion of a potential merger started early this year, following an initial

approach by Northern. The first reaction of Southern management was quite cool, but it

evolved to be much more positive as nationwide M&A activity increased and rumors of a

possible combination of Western Bank and Eastern Bank emerged back in April.

The strategic logic of a possible transaction was fairly clear to both sides: it would be difficult

to compete against the scale advantages and the geographic coverage of a combined

Western and Eastern Bank (about twice as large as either Northern or Southern), should

their merger be finalized.

In addition, both Northern and Southern could clearly see opportunities for significant cost

savings and cross-selling activities from a combination of the two franchises. The main

arguments of contention were the usual ones: the governance structure of the combined

entity, the value of both franchises, the strategic approach to take in the eventual post-

combination period, etc.

Negotiation Process:

Formal negotiations started at the beginning of July, and a brief due diligence exercise was

conducted in the first week of August (for Northern) and the third week of August (for

Southern). The due diligence process was based on a letter of intent signed by Northern on

29th July which included a preliminary, non-binding offer in stock. Overall attitude was

relatively friendly. The bid was uncontested, no other bank was approached or involved in

the negotiation.

Date of signature of the agreement to merge:

12th October

Price paid:

$1.18 billion in stock, based on Northern Bank’s share price at close of trading on

11th October, implying a premium paid of $80m over the Southern stock value that day.

Northern Bank • 3

INTEGRATION PLAN DECISIONS

The 9 key decisions (and options) that make up the integration plan are:

Percentage of Managers laid off

0, 5, 10… , 35%

The banks have agreed that the % of Manager layoffs will be the same at both banks.

Percentage of Employees laid off

0, 5, 10… , 35%

The banks have agreed that the % of Employee layoffs will be the same at both banks.

Human Resource Practices

RETAIN: Both sets of practices retained

RATIONALIZE: Selected practices of both banks applied to all staff

REPLACE: Southern’s practices and policies replaced with Northern’s

Branch Networks

RETAIN: All branches retained

RATIONALIZE: Best branches retained in

each town, whether

Northern or Southern; if

equal, Northern branch is

retained

CLOSE: All Southern branches, in

towns where there is a

Northern branch, to close

An imaginary branch network is shown here; the numbers next

to the branches indicate example performance indices.

Northern Bank • 4

Product Portfolios

RETAIN: All products retained in new merged bank’s offering

RATIONALIZE: For each product category, ‘best of breed’ products identified and then offered across the combined bank’s business units

REPLACE: Merged bank to offer only Northern’s products

Loan Approval Processes

RETAIN: Both sets of processes retained. Southern procedures and decision- making autonomy preserved

RATIONALIZE: New processes for both banks to be designed to facilitate the full harmonization of the processes in the medium/long term

REPLACE: Southern’s processes replaced with Northern’s

IT Systems

RETAIN: Both systems retained and to be run as autonomous units

RATIONALIZE: Southern’s system to be integrated with Northern’s, requiring new protocols to consolidate the two infrastructures and, for example, to translate both sets of data outputs into a format understandable by

a unified system

REPLACE: Southern’s system replaced with Northern’s, with Southern’s database reformatted to be compatible with Northern’s system

Bank Name

RETAIN: Northern and Southern keep their names, signage and branding

NS BANK: Both banks re-named; new signage and branding for all branches

NORTHERN: Southern Bank and all its branches rebranded as Northern Bank

Period for Implementation of Integration Decisions

2, 3, 4 … , 9 months

Northern Bank • 5

MEMORANDA SENT TO STAKEHOLDERS

Internal Memorandum (sent by Jon Pettinger, CEO, Northern Bank, 6 November)

TO: Carla Feinberg, Luke Stanio, Hector Rice, Ivan Taylor, Sue Beckerman, Nick Liang, Tina

Yoshiro, Elaine Murphy

Southern’s Board recently accepted our friendly offer to acquire a controlling interest, with

Northern stock. We are now waiting for agreement from the regulator, as well as formal

shareholder approval, both of which we expect by the end of the year. All Northern and

Southern employees were informed last week of this provisional acceptance.

An acquisition raises some obvious and immediate concerns for everyone involved, and you

will all have received individually addressed letters confirming that you will be part of the

team of senior managers taking the organization forward.

Northern’s acquisition experience has convinced us of the need for a consultative approach

to integration planning, so I would like to take this opportunity to introduce Chris Wycliff,

our specialist Integration Manager, who will be leading the integration project over the next

few months, and also contacting you over the next few weeks in order to develop a plan that

reflects your concerns. The integration plan should be ‘set in stone’ before the end of

December; until that time, please use the opportunity of your discussions with Chris to share

your views on the various key decisions that need to be taken. I look forward to continuing

to work with you all over the coming years as part of our new, stronger bank, and thank you

in advance for your participation in this process.

External Memorandum (sent by Jon Pettinger, 6 November)

TO: Marie Calperra, American Banking Authority; Patrick Green, PeoplePower; Bill Johnson,

Sunrise Pension Fund

Southern’s Board recently accepted our friendly offer to acquire a controlling interest, with

Northern stock. We are now waiting for regulatory approval, as well as formal shareholder

approval, both of which we expect by the end of the year. All Northern and Southern

employees were informed last week of this provisional acceptance.

Northern’s acquisition experience has convinced us of the need for a consultative approach

to integration planning, so I would like to introduce Chris Wycliff, our specialist Integration

Manager, who will be leading the integration project over the next few months, and also

contacting you over the next few weeks in order to develop a plan that reflects your

concerns. Thank you in advance for your participation in this process.

Northern Bank • 6

STAKEHOLDER PROFILES: NORTHERN BANK

Jon Pettinger, Chief Executive Officer

Jon has a BA in Finance from the University of California. Jon has been with

Northern Bank for over 15 years and his past experience includes positions as CFO

and Head of Corporate Banking.

Carla Feinberg, Chief Financial Officer

Carla manages investor relationships, and was instrumental in obtaining support

for the acquisition from Southern’s shareholders. Carla tends to interpret

everything in terms of numbers; for instance, she will always look at the cost

implications of any proposal.

Luke Stanio, Head of Retail Banking

Luke's main responsibility is the profitability of the division. He spends most of his

time at HQ in Mesa. He launched a project recently to review the effectiveness of

the loan approval process.

Hector Rice, HR Director

Hector is a skilled ‘people’ person, and has played a pro-active role in moulding

Northern’s HR practices to be, at least in his view, in line with both the bank’s and

its employees’ interests.

Ivan Taylor, IT Director

Ivan is exploring the many opportunities presented by digital technologies, but not

many projects are beyond the prototype stage, in part because the recent

operating system upgrade took much longer than expected. Ivan tends to focus on

a narrow range of issues.

STAKEHOLDER PROFILES: SOUTHERN BANK

Sue Beckerman, Chief Executive Officer

Sue and Jon studied at college together. Sue was the main contact during the

acquisition negotiations, and in fact it was Sue who suggested the idea of a merger

last year. Sue always sees the wood and the trees, and will consider both the

details of the plan and what her colleagues think of it.

Nick Liang, Head of Corporate Banking

Nick has been Head of Corporate Banking at Southern for 3 years and during this

period the division has grown by nearly 30% to become an increasingly important

unit and profit generator for Southern.

Northern Bank • 7

Tina Yoshiro, Head of Retail Banking

Tina has recently been promoted to this role, having spent most of her career in

the division; given the weight of the retail loan portfolio, Tina has considerable

power at Southern. Tina is a hands-on manager, spending most of her time in the

branches.

Elaine Murphy, HR Director

Elaine has not been in her position long, and has not had time to change much

amongst the HR practices inherited from her predecessor. Elaine was not involved

in the takeover discussions, but has already expressed a number of concerns about

the risk of layoffs amongst Southern's personnel.

STAKEHOLDER PROFILES: EXTERNAL

Bill Johnson, Fund Director: Sunrise Pension Fund

Sunrise holds 14% of Northern shares, pre-acquisition, and is the biggest

shareholder in Northern. It has a team of internal analysts with a reputation for

interpreting accurately the impact on the share price of different strategic moves.

Bill is a hands-on investor, who won’t hesitate to push his weight around if he

feels it is necessary.

Patrick Green, CEO: PeoplePower

PeoplePower is the state’s largest online recruitment agency, and is technically

sophisticated. PeoplePower is Southern’s most important customer in terms of

revenue, and Southern has developed some customized products for them.

Patrick is likely to want to avoid any disruption to the bank's product lines, and

has given the Northern acquisition only cautious support so far.

Marie Calperra, State Representative: American Banking Authority

Marie’s main responsibility is to enforce National Banking Laws, which define the

legal framework under which Northern and other commercial banks operate. She

has hinted at forthcoming regulatory changes that could reduce hurdles to

consolidation. Marie will probably want regular contact.