Financial Daily from THE HINDU group of publications
Friday, Feb 10, 2006
Mergers & Acquisitions
Corporate - Insight
The way to build strengths through M&As
K. V. Ramesh
A variety of acquisition stories are doing the rounds in the media. Here are a few thoughts that could be handy in understanding the M&A domain.
The facilitators of the M&A process spend more time on the financials and projected cash flows to arrive at a value to complete the transaction. The acquiring company is interested in non-financial facts that could impact the performance of the acquired company. It is thus equally desirable to spend quality time on such non-financial parameters.
There are a variety of reasons for engaging in acquisitions. The integration of the acquired unit leads to success only when our actions match these intents. These are:
What are we seeking with the acquisition? Many a time, the acquisition yields results through improved capabilities, technology, brand position, and so on. It is worthwhile for the acquiring entity to ask some questions before deciding on any unit:
Where does value come from? Is it process efficiency, asset turnover, ability to expand (financial leverage) in new areas, or a combination?
It is desirable to have answers on the what, why, where, when, and how questions to find a strategy fit with the proposed acquisition.
What: Value generation and delivery infrastructure
Why: Maslow's Hierarchy of Needs security and/or recognition needs
Where: Leadership in demanding markets
When: Towards portfolio balance
How: With value fit, integration, and institutionalisation
Identifying target companies is normally done through accounting firms as they are considered to have a broader knowledge of the markets. However, before engaging them, a framework needs to be developed to filter the lists generated by them. A sample of filters worth looking into are:
This is an area the views and issues are varied. Typical parameters for evaluation include customer, capital, brand, financials and liabilities. In addition, a few more parameters on the intangibles would add value:
There are many experts one can consult with to obtain legal and environment clearances, arrive at transaction value based on EBITDA/WACC vs. Market-cap, book-value, etc., structuring the transaction in terms of cash, stock, swap, etc., and negotiating for equitable gains to both the parties.
M&A in the economies that are comparable to India are as good as domestic acquisitions, and the issues are fewer. While venturing into acquisitions in the developed economies, the challenges are psychological and not just business-related.
Many would resist a new boss (parent company) from an economy that is not at par with their economy. Often, businesses are bought based on brand, technology and, importantly, by future cash flows.
If half (or a significant number) of the management team decides to leave, what value will remain with the business?
The challenges of making it work multiply with the acquisition as the expectations run high from every corner. The role of the integrating agent will remain under the microscope until the objectives are met to everyone's satisfaction.
To ensure single-point accountability, the acquired unit should be viewed as a subsidiary of the parent, and one business head should be appointed from the parent company. Communication with the members of the acquired unit should be structured and measured to get the best synergies from the teams.
A quick audit should be done to reach the members of the management team and ensure consistent performance and effective people management.
Reassurances must be given (maybe in writing, with the necessary caveats) to retain them through the integration process.
High-performing employees would typically expect independence and continued respect. Guaranteeing this, within the framework of the overall strategy, would go a long way in making the integration process smooth.
The members of the management team who do not fall under the above category should be eased out at the earliest to minimise/eliminate the spread of negative energy. This activity should be done in one go and not spread over time. Nobody likes to have bitter medicine more than once!
Share with the team (remaining members of the management) the objectives of the acquisition, set the expectations, the measures, and develop the timetable with milestones to track integration. Involving them in creating the timetable would secure buy-in.
The synergy of the acquisition will be decided by the communication to the markets, customers, and other stakeholders.
Often, internal acceptance is faster than the external acceptance. For example, HP acquired Compaq but the market sees the products differently.
The Compaq products that competed with HP prior to the acquisition are viewed a notch below by the market, leading to value erosion.
To gain market acceptance on the value delivered, joint positioning of the brands (basically kill one of the two brands) is needed, with changes to product design, ergonomics, and support systems.
If mergers are on the cards, then compensation parity and management team rotation between the acquirer and the acquired is a must to gain synergy and bring about a unified culture.
Often, the experience gained from one acquisition is not captured or documented as part of knowledge management to leverage at the time of future acquisitions.
Just like post-implementation audits on projects, audits on acquisitions would highlight the lessons learned and add value to the organisation and ensure the prevention of the same mistakes being committed.
After all, a learning system is not expected to make the same mistake twice!
(The author is CMD, ECHC Management Services, Chennai.)
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