CHAPTER 1 THEORETICAL BACKGROUND ON M&A CONSULTING
1.2. Theoretical background on Post-merger
1.2.3. Post-merger Integration tasks
Coordination Control Conflict
Resolution Procedural Design accounting
systems and procedures
Design management controlling system
Eliminate contradictory rules and procedures
Rationalize systems Physical Encourage sharing of
resources
Measure and manage the productivity of resources
Resource allocations
Asset
redeployment Managerial
and
Sociocultural
Establish integrator roles
Change organization structure
Design
compensation and reward systems
Allocate authority and responsibility
Stabilize power sharing
Table 1.1: Post-merger Integration tasks
(Source: Journal of Business Strategy) Integration is necessary because large organizations operate through functionally different departments that perform a narrow set of specialized tasks such as production, marketing, accounting, and finance. Integration across departments involves Coordinating activities to achieve overall organizational goals, Monitoring and controlling individual department activities to ensure that they are complementary and are being performed at adequate levels of quality and output, and Resolving conflicts between the fragmented, individuals, and their inconsistent subgoals.
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Each merging firm has its own systems and procedures. Combining disparate systems and procedures requires abandoning some old ways in each firm, transferring assets and systems from one firm to another, and creating new management leadership.
To achieve successful integration after a merger, it is necessary to understand the different types of integration. There are three types of post-merger Integration:
Procedural Integration, Physical Integration, and Managerial and Sociocultural Integration.
Procedural Integration
Procedural Integration involves combining systems and procedures of merged companies at the operating, management control, and strategic planning levels. The objective of such integration is to homogenize and standardize work procedures.
Standardization of procedures facilitates communication between acquiring and acquired companies. It also improves productivities and reduces the cost or processing information.
Legal and Accounting Integration
The most basic procedural task involves integration legal entities of the merging partners through transfer the ownership title and integrating the companies’
accounting systems. Two optional procedures – the pooling method and the purchase method – are available for integrating the balance sheet and the profit and loss accounts of merging firms. The choice of procedures is guided by the objectives of the merger, terms of merger, nature of purchasing arrangements, and the desire to improve the balance sheet structure through the appropriate use of price-earning multiples, and leveraging.
Functional Integration
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In addition to the accounting systems, other management control systems and procedures may also be transferred from one firm to the other. This occurs within functional areas. If one of the merging firm s possesses highly developed, effective, and transferable systems for performing functional tasks like inventory control, production scheduling, material requirements planning, sales analysis, order processing, costing, etc., these systems can be implemented in the partner firm.
Transferring systems at the functional level is sometimes disruptive. It may necessitate the collection of new data, changes in report format, redesign of work procedures, structural adjustments, and even changes in personnel.
Strategic business unit Integration
Strategic business unit (SBU) Integration involves treating the acquired business as an autonomous profit center and integrating it into the corporate strategic planning system. This involves providing the new acquired SBU with broad guidelines for its role in the corporate portfolio and its goals for the coming years.
The new SBU is expected to develop strategic plans and propose specific strategic programs to achieve goals. The corporate management approves these plans and allocates resources for their implementation. SBU integration does not warrant changes at the operating level. Most production and marketing operations continue as they did before the merger.
Physical Integration
Physical Integration of resource and assets usually accompanies procedural integration. It involves the consolidation of product lines, plant, equipment, and real estate assets. Physical integration of assets is a laborious and time-consuming task.
A problem typical of post-merger integration is redeployment of assets in the process of resource-sharing. Merger often occur between firms that have some asset continuity. This means that merging partners possess some common assets and some
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mutually exclusive assets. Asset continuity ensures that firm have enough in common to be able to use each other’s resources. The mutually exclusive assets form the basis for synergistic operations if used jointly to benefit the combined firm.
Some common assets, on the other hand, become redundant and need to be redeployed. These assets include physical assets like product lines, production systems, R&D facilities, and raw material inventories or reserves. Nonmaterial financial assets include tax credits, cash flows and reserves, and human assets (skilled workers, management personnel and technical staff). Each form of asset redeployment requires addressing the three fundamental elements of integration (coordination, control and conflict resolution) while simultaneously achieving merger objectives.
Another problem typical of post-merger situations deals with achieving the synergistic objectives of the mergers. Mergers are often motivated by the potential for the synergistic operation between merging partners. The potential for sharing resources is implicit in many mergers. However, sharing and mutual exploitation of joint resources does not occur without concerted effort. A long-term strategy for exploiting synergies must be communicated to all relevant organizational members.
This strategy should describe specific action programs, like consolidating raw material inventories, cooperating marketing efforts, coordinating production schedules, combining financial power, etc. These programs must be supported by adequate resources. But resources are often inadequate because of a lack of communication and short-term pressures for company profitability.
Product Line Integration
This involves the assessment of whether the products of acquired business fit with the strategy of the acquirer. Two types of product lines may be discarded on the basis of this evaluation. First, those products that are already being produced in sufficient quantities at lower cost by the acquiring firm may become redundant and, therefore, eliminated from the consolidated product line. Second, product lines or
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divisions that do not fit the acquiring firm’s strategic needs may be divested. This unbundling of the acquired firm’s product lines often enhances the value of the acquisition.
Integration of Production Technologies
This is more complex than product line integration. A simple type of production integration may involve screening and divesting redundant production facilities, but a more difficult type of integration involves the transferring of production systems across divisional and firm boundaries. Failure to integrate technological systems can be anathema to the entire acquisition.
The integration of immovable real estate assets primarily involves revaluation of properties and their allocation to appropriate functions. Pre-merger analysis and valuation of real estate assets very often do not take into account the rapid escalation of property prices, especially properties located in urban areas. The undervaluation of acquired property could be substantial enough to make a significant depressive impact on the stock prices of the merged company. True market valuation of real estate assets is necessary before these assets may be assigned for production uses.
Managerial and Sociocultural Integration
Managerial and sociocultural integration is perhaps the most difficult and least examined post-merger integration problem. It involves a complex combination of issues related to the selection or transfer of managers, the changes in organizational structure, the development of a consistent corporate culture and a frame of reference to guide strategic decisionmaking, the gaining of commitment and motivation from personnel and establishment of new leadership.
Personnel Transfer and organizational Structure
At the most basic level, managerial integration involves the transfer of some top personnel from the acquiring company to the acquired company to ensure
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control of the acquired business. It may also involve appointing new members to the board. Once a new CEO or president is appointed, he or she represents the acquired business by reporting to the parent. The president may bring along a team of trusted managers to ensure continued smooth operations and to facilitate the transfer of systems and procedures to the new business.
The transfer of personnel may extend several levels below top management to middle management line and staff personnel. Transfer of personnel, from the acquired to the acquiring firm, may also help in cross-fertilizing the two firms.
Managerial transfers across firms and departments are not always easy because many managerial skills and experiences are not transferable. This may necessitate encouraging some managers to retire. By the same token, retaining good technical personnel is also a major problem. Retention can be facilitated by good clear communications to avoid misunderstandings, granting reasonable autonomy to managers of the acquired firms and avoiding unnecessary interference in operational affairs. The transfer of key managers alone does not ensure complete managerial integration for strategic decision making in the acquired business. It must be supplemented by integration of social norms and cultures of the merging organizations that act as key influences on strategic decision making.
Sociocultural Integration
This strategy involves managers from several levels and sometimes includes operational personnel. It is guided by the basic assumptions that managers hold about their organization and its environment. The overall cognitive framework that guides strategic decisions can be described using the concept of Organizational Frames of Reference (OFOR).
OFOR consists of assumptions, information, and mental maps that managers use in decision making. Assumptions are the taken-for-granted beliefs about the organization and its environment that are never questioned by managers. Often,
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managers are not fully aware of all the assumptions they make. Managers also show preference for certain types of information. Some prefer to use subjective information taken from personal sources, like the opinions and judgments of close business associates and subordinates. Others prefer to use hard objective data taken from well-documented sources.
Mental maps or causal maps constitute another element of OFOR. They represent managers’ beliefs about cause-effect relationships influencing organizational performance. For example, in many industries, managers believe that higher market share causes profitability and that lower production costs cause increased market share.