Success and failure of Mergers, Acquisition and divestiture process

According to the Cambridge’s Internationals Dictionary of English, a Merger is when two or more companies join together, Acquisition is buying of a business by another company and finally divestiture is a process when a company takes back its investment from a less profitable company. Actually MA&D (Merger, Acquisition and divestiture) is a common process these days. The main motive behind is to increase profits and decline losses for the company.

Say for instance if a company finds buying another company to be very beneficial in its upgradation process, increasing profitability or declining costs than that company can go for Acquisition or taking over of that company. Similarly due to high competition when some companies of same field, find it difficult to reduce the cost of production, logistics and marketing than few companies can come together in a contract or merge themselves in one big unit. Thus merger helps the companies to reduce their costs and increase the profitability. Divestment is another common process these days.

Actually those companies, which are not yielding enough of profits to the Parent Company or may be proving to be a big loss for the parent company, can be divested by the Parent Company. Thus by selling its shares from a weak or loss incurring unit a company can save its money. MA&D process. MA&D process and its success: The present research shows that nearly 65 percent to 85 percent of corporate MA&D process fails. This process results in well short of expectations. The features of MA&D in the present day scenario are as follows. he deals made are getting bigger thus increasing the scale of risk and reward.

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To attain immediate gains from the big deals made by the companies, the opportunities gets missed that could capitalize on synergies that will deliver sustained, long term financial improvements and stake holders value. The announcement of MA&D results many times in confusion both inside and outside the company, when the executives are a unable to institutionalize a governance process that can maintain momentum through integration. Government institutions creates hurdle in the way of those MA&D process which could prove monopoly of a basic need products that could later on effect the price fixation monopoly by that company.

Thus, today MA&D process is moving towards higher risks, lower productivity, confusion and government intervention. Success in the MA&D process: MA&D process. The possible methods of getting successful in the MA&D process are suggested below. Post merger integration, business re-engineering and post divestiture separation present such an opportunity by which a person can estimate all the fields that could effect the business profitability in future. MA&D process needs to be planned and managed as well-structured hierarchical set of activities from beginning to the end.

System Integration and outsourcing can help in leveraging MA&D activity to deliver results-driven, sustainable operational transformation. Define and deploy a course of action appropriate for the type of MA&D like consolidation, combination, transformation or preservation. Plan and implement the transition to an optimized business model and infrastructure. Manage, operate and evolve the new applications and infrastructure.  Identifying potential synergies in terms of people, process and IT and delivers these to plan. Ensure seamless separation of systems and data. Rationalizes and streamlines infrastructure and processes. Thus from the above the following critical factors for success can be evaluated.

1. Clear intent
2. Perseverance
3. Leadership
4. Accountability
5. Leverage
6. Coordination
7. Experience
8. Focus
9. Decisiveness
10. Communication

Present day scenario: The present figures state that nearly 65 percent of the failed in the MA&D process. Reason was overlooking of some features. The success and failure of the MA&D depends on the following facts that need to be dealt carefully. MA&D process. That is if the following facts are taken into consideration than only the MA&D process can prove to be beneficial for the company. Otherwise MA&D process can prove to be big mistake. IT integration efforts make MA&D difficult: ERP or Enterprise resource planning applications like SAP has become ubiquitous in large organizations today. The promise is business process simplification, enhanced productivity and seamless information transfer. However these applications also require that businesses be wired together, typically through a single, unified database and other infrastructure.

This of course, means individual businesses are far more difficult to separate. For instance , when Pfizer divested its Adam and Schick units, significant effort went toward figuring out how to separate data of the entities while blocking access to each other’s information. Support services and facilities are hard to unravel: Achieving scale through shared support services and joint facilities is a broad trend in the business community. The more successful a company has been at this the greater difficulty it will face unwinding these collaborations. One big part of this is staff allocation.

The trend toward shared support services has extended through general and administrative functions, call centers, account payable and receivable, payroll administration, and compensation and benefits plan management. MA&D process. Carving out pieces of these integrated functions carries real challenges. Outsourcing adds third party issues to MA&D: Not only are organizations centralizing they are outsourcing as well. In some way this may ease the process of separation, as the organization no longer owns the employees, systems and processes. Outsourcing firms are also very good at splitting workflow.

If only it were that simple. In addition numerous perhaps hundreds of vendor relationships, outsourcing generally involves processes that are critical to a company’s core businesses. Therefore divesting a unit with significant outsourcing substantially increases the need for a rigorous review of services agreements to understand change of control provisions and to assess how service will continue going forward. The divested business may require long term support: Until the divested business is prepared to stand on its own or is fully supported by the buyer it likely will need support from its former parent.

Establishing clear service level agreements or SLAs between the buyer and the seller is critical. For highly integrated global businesses this can leas to country by country agreements, each involving dozens of services such as facilities management, back offices support and sales and manufacturing. MA&D process. Conflicting interest can complicate the SLA process. For example depending on the situation the selling organization may have incentive to either prolong or limit the time frame on which these services will be provided.

Disruption threatens both seller and divested entity: Like a merger in reverse, a MA&D done right requires a plan detailed across every function, carefully monitored and adjusted as execution unfolds. This is a major project. Developing the separation plan often requires three-way collaboration between the seller and its remaining businesses, the divested unit itself, in some cases the buyer. The complexity of managing this separation planning across every function of the business and across the globe can rapidly absorb all attention of the businesses.

The real danger here is underestimating just how much effort this will require.  The MA&D can impact the seller’s cost structure: Once the seller has carved out the divested business, it may well need to take another look at its own cost structure. In some cases, there can be loss of scale in areas where work was combined with the divested business. In the earlier, Pfizer example, customer service employees who had supported the divested Adams businesses were rationalized because the buyer, Cadbury Schweppes, did not require their services.

However this did not fully make up for the loss of scale. It took additional work with the customer service model, automating orders and other improvements to get the cost structure back in line. Regulatory requirements can force your hand: Regulatory requirements on both local and global levels often create additional complexities. For example, MA&D may be required to resolve anti-trust concerns for a merger transaction. In these situations an organization may have to give up capabilities it would otherwise no elect to relinquish.

As part of the Linde-Boc merger, regulators required that Northern American business be divested and operate as a stand-alone business, forcing Linde-BOC to part with both capabilities and people it would otherwise want to retain. Similarly in MA&D with European components, negotiation with world’s councils on a country by country basis can lengthen the MA&D process and create additional constraints.

Conclusion:

Mergers, acquisitions and divestiture (MA&D) can make or break your business. And more and more organizations are looking to these initiatives to deliver quick and dramatic financial returns. 006 clocked up a staggering $4 trillion worth of deals, representing an average 30% growth, while the average deal size is also rocketing.

As the merger wave rolls on, it is clear that many companies are taking this opportunity to divest non-core businesses. After all were in an active markets and there’re plenty of buyers- financial and strategic –sitting on hordes of cash and looking for attractive deals. However before moving to cash in on businesses you think will be attractive it is worth taking a hard look at the process of MA&D. Whether its an out fright sale or even a spin off to shareholders.

Does all these means MA&D is a bad idea? Of course not . I many cases they are absolutely the right things to do. The trick is to be aware of the seven challenges in advance, and all seven are equally valid for MA&D of every size and use that knowledge when assessing any proposed transaction. There are many assessments to be made.

1. How much of the business to sell?
2. Could a strategic buyer more appropriate than a financial buyer?
3. Which is better an MA&D or a spin off?

Truly understanding answers to these questions can help a seller get the very best deal in the broadest sense of the term.

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