by Gain or Loss to Stakeholders
In mergers and acquisitions it largely depends upon the terms and conditions of the merger and the track record of the transferee or acquirer company. Based on the cardinal principle, every buyer, in other words transferee or acquirer has to pay more than the book value of the transferor or target company. However, the terms and conditions of the transaction depend upon their present operations and past historical records.
Implementation of Objectives
We have so far discussed various objectives, motives, reasons and purposes which are to be achieved and accomplished by implementing them after completion of merger, amalgamation or acquisition. Much of the senior management’s attention must be focused on developing a ‘post-transaction’ strategy and integration plan that will generate the revenue enhancements and cost savings that initially prompted the merger or acquisition. After merger or acquisition, the resources of two or more companies should be put together for producing better results through savings in operating costs because of combined management of production, marketing, purchasing, resources etc. These economies are known as synergistic operative economies. Synergy is also possible in the areas of Research and Development function of the combined company for optimum utilization of technological development, which could not be taken up by the separate companies for want of resources.
A key challenge in mergers and acquisitions is their effective implementation as there are chances that mergers and acquisitions may fail because of slow integration. The key is to formulate in advance integration plans that can effectively accomplish the goals of the M&A processes. Since time is money and competitors do not stand still, integration must not only be done well but also done expeditiously.
To implement the objectives of mergers or acquisitions, there are various factors, which are required to be reorganized in the post merged or acquired company. Such factors can be grouped in the followed heads:
(i) Legal Requirements
Fulfilment of legal requirements in post-merger reorganisation of any amalgamating company becomes essential for an effective and successful venture. The quantum of such obligations will depend upon the size of company, debt structure and profile of its creditors, compliances under the corporate laws, controlling Integration of Businesses and Operations regulations, distribution channels and dealers network, suppliers relations, labour etc.
(ii) Combination of operations
The amalgamating company has to consolidate the operations of the transferor company’s operations with its own. This covers not only the production process, adoption of new technology and engineering requirements in the production process but also covers the entire technical aspects like technical know-how, project engineering, plant layout, schedule of implementation, product designs, plant and equipment, manpower requirements, work schedule, pollution control measures, etc. in the process leading to the final product.
Integrating two different technological systems for complex business entities while continuing to run the business can be a massive challenge. It requires proper planning for phased transitions, extensive preparation and intensive testing. It is necessary to define workable implementation plans as to what needs to be integrated, when it should happen and how it can be done successfully.
(iii) Top Management Changes
The takeover or merger of one company with another affects the senior managerial personnel. A cohesive team is required both at the board level as well as at senior executive level. The reorganisation would involve induction of the directors of the transferor company on the Board of the amalgamating company, or induction of reputed and influential persons from outside who have expertise in directing and policy planning to broad base the Board for public image as well as smooth functioning of the company. Selection of directors, finalising their term of holding the office as directors, managerial compensation and other payments or reimbursements of expenses etc. are issues to be sorted out.
At the senior executive level also, changes are required particularly in respect of compensation depending upon the terms and conditions of merger, amalgamation or takeover and to adjust in suitable positions the top executives of the amalgamated company to create a congenial environment and cohesive group leadership within the organisation. Understanding different cultures and where and how to integrate them properly is vital to the success of an acquisition or a merger. Important factors to be taken note of would include the mechanism of corporate control particularly encompassing delegation of power and power of control, responsibility towards accounting, management information system, to and fro communication channels, interdivisional and intra-divisional harmony and achieving optimum results through changes and motivation.
(iv) Management of financial resources
Takeover, merger, amalgamation or demergers facilitate the attainment of the main objectives of achieving growth of the company’s operations. Growth is dependent upon the expansion, modernization or renovation or restructuring. Generally, the management plans in advance about the financial resources which would be available to the company to finance its post-merger plans. Such preplanning is based on certain assumptions which might change post-merger depending upon the volatility of a variety of factors involved.
(v) Financial Restructuring
Financial restructuring becomes essential in post merger reorganisation. Financial restructuring is characterised by liquidity crisis, ‘abnormal’ balance sheets and negative equity. The ‘clean-up’ must happen fast. Replacement of costlier fundings by cheaper borrowings on a long and short term basis as per requirement is one of the several ways and means of financial restructuring for a company. This being an important aspect concerns most of the top management, creditors, bankers, shareholders, regulatory bodies like stock exchange, SEBI as well as the government where provisions of corporate laws are attracted and their permissions or approvals for planned changes are required. Generally, financial restructuring is done as per the scheme of arrangement, merger or amalgamation approved by the shareholders and creditors but in those cases where takeover or acquisition of an undertaking is made by one company of the other through acquiring financial stake by way of acquisition of shares, e.g. IPCL by RIL, reorganisation of financial structure would be a post-merger event which might compel the company to change its capital base, revalue its assets and reallocate reserves.
Post Merger Success and Valuation and Impact on Human and Cultural Aspects
Every merger is not successful. The factors which are required to measure the success of any merger:
- The earning performance of the merged company can be measured by return on total assets and return on net worth. It has been found that the probability of success or failure in economic benefits was very high among concentric mergers. Simple vertical and horizontal mergers were found successful whereas the performance of concentric mergers was in between these two extremes i.e. failure and success.
- Whether the merged company yields larger net profit than before, or a higher return on total funds employed or the merged company is able to sustain the increase in earnings.
- The capitalisation of the merged company determines its success or failure. Similarly, dividend rate and payouts also determines its success or failure.
- Whether merged company is creating a larger business organisation which survives and provides a basis for growth.
- Comparison of the performance of the merged company with the performance of similar sized company in the same business in respect of (I) Sales, (ii) assets, (iii) net profit, (iv) earning per share and (v) market price of share.
In general, growth in profit, dividend payouts, company’s history, increase in size provides base for future growth and are also the factors which help in determining the success or failure of a merged company
- Fair market value is one of the valuation criteria for measuring the success of post merger company. Fair market value is understood as the value in the hands between a willing buyer and willing seller, each having reasonable knowledge of all pertinent facts and neither being under pressure or compulsion to buy or sell. Such valuation is generally made in pre merger cases.
- In valuing the whole enterprise, one must seek financial data of comparable companies in order to determine ratios that can be used to give an indication of the company position.
- Gains to shareholders have so far been measured in terms of increase or decrease in share prices of the merged company. However, share prices are influenced by many factors other than the performance results of a company. Hence, this cannot be taken in isolation as a single factor to measure the success or failure of a merged company.
- In some mergers there is not only increase in the size of the merged or amalgamated company in regard to capital base and market segments but also in its sources and resources which enable it to optimize its end earnings.
- In addition to the above factors, a more specific consideration is required to be given to factors like improved debtors realisation, reduction in non-performing assets, improvement due to economies of large scale production and application of superior management in sources and resources available relating to finance, labour and materials.
Human and Cultural Aspects
The merger is a period of great uncertainty for the employees of the merging organizations. The uncertainty relates to job security and status within the company leading to fear and hence low morale among the employees. It is natural for employees to fear the loss of their revenue or change in their status within the company after a merger since many of these employees literally invest their whole lives in their jobs. Hence the possibility of a change in their position is likely to be viewed with fear and resentment. The possibility of a change in compensation and benefits also creates a feeling of insecurity and unease. The influx of new employees into the organisation can create a sense of invasion at times and ultimately leads to resentment. Further, the general chaos which follows any merger results in disorientation amongst employees due to ill defined role and responsibilities. This further leads to frustrations resulting into poor performance and low productivity since strategic and financial advantage is generally a motive for any merger. Top executives very often fail to give attention to the human aspects of mergers by neglecting to manage the partnership in human terms. By failing to give attention to the problems faced by their employees, they fail to fully develop their companies’ collaborative advantage.
The successful merger demands that strategic planners are sensitive to the human issues of the organizations. For the purpose, following checks have to be made constantly to ensure that:
sensitive areas of the company are pinpointed and personnel in these sections carefully monitored;
- Serious efforts are made to retain key people;
- A replacement policy is ready to cope with inevitable personnel loss;
- Records are kept of everyone who leaves, when, why and to where;
- Employees are informed of what is going on, even bad news is systematically delivered. Uncertainty is more dangerous than the clear, logical presentation of unpleasant facts;
- Training department is fully geared to provide short, medium and long term training strategy for both production and managerial staff;
- Likely union reaction be assessed in advance;
- Estimate cost of redundancy payments, early pensions and the like assets;
- Comprehensive policies and procedures be maintained up for employee related issues such as office procedures, new reporting, compensation, recruitment and selection, performance, termination, disciplinary action etc.;
- New policies to be clearly communicated to the employees specially employees at the level of managers, supervisors and line manager to be briefed about the new responsibilities of those reporting to them;
- Family gatherings and picnics be organized for the employees and their families of merging companies during the transition period to allow them to get off their inhibitions and breed familiarity.
