Karolina Kuta

Post Merger Control - an examination of tools for success measurement

Seminar paper

Dokument Nr. V151806 http://www.grin.com/ ISBN 978-3-640-63743-0

9 783640 637430

Zeppelin University
Department Corporate Management and Economics Controlling

Paper

Post Merger Control An examination of existing tools for success measurement

Name: Degree program: Semester: Deadline:

Karolina Danuta Kuta Corporate Management and Economics, 3rd Semester Fall Term 2009 May 28, 2010

Content

1. Introduction- Why do mergers fail? .............................................................. 3 2. The challenge of merger control and success measurement If you cant measure it, you cant manage it.... ............................................ 4 3. The Integration Balanced Scorecard .............................................................5 3.1 The Integration Dashboard.................................................................... ...8 3.2 7 C Model .............................................................................................. 10 4. Conclusion ...................................................................................................11 5. Bibliography......... ....................................................................................... 13

1. Introduction- Why do mergers fail?

The fourth Mergers & Acquisitions (M&A) wave1 is characterized by the extensive use of dept capital to finance merger deals and a very strong orientation on capital markets. During this development stakeholders became very influential and demanding actors- with great expectations of high returns and the accomplishment of transactions in an enormous speed. This causes a strong concentration on overestimated synergies and high yields2, but lead to an underestimation of functional and sustainable controlling systems, although they play a very important role in reimbursing expenses and capturing integration costs. These shortcomings are the main reason for mergers failure. But for many managers this fact still remains unrecognized and explanations are frequently seen in exogenous, environmental factors. Rather costs caused by coordination, agreement and inflexibility often reach an unpredicted height3. Their overwhelming impact on economic and integration success is the explanation why synergies projected for M&A are not achieved in 70-80 percent of the cases4. This proves why especially mergers and acquisitions require a higher degree of systematic controlling arrangements than other transactions. The Integration Balanced Scorecard is known as a multidimensional controlling system and includes the relevant factors for mergers, which shows the interdependencies that have the most striking impact on the effective and profitable utilization of supposed synergies and corporate advantages. This paper deals mainly with the Integration Balanced Scorecard as an approach to performance management with controlling and strategic elements by providing a balanced view of the organization and integration process. After this short overview I will additionally present the Integration Dashboard and the 7 C Model, which include critical aspects for Post Merger Control. Focusing on the difficulty of the localization, separation and final definition of ratios they will finally

1 2

1984-1989 Jansen, 241 3 Jansen, 153 4 Mitleton-Kelly 2006, 36-37

be examined on their strengths and weaknesses concerning their practical use in dynamic and sensitive Merger processes. Having regard on the extend of this paper, an in- depth analysis of this issue is left for further research.

2. The challenge of merger control and success measurement

If you cant measure it, you cant manage it

The challenge of post-merger integration is to carry out the transformation process from two different companies into one as smooth as possible. Therefore it is really surprising that about 14% see the necessity for the consolidation of documentation systems, further 9% for the formulation of common planning tools and finally 7% of a ratio-based post-merger audit system, but do not implement even one of them as a result of comparisons with other merger arrangements5. The missing transformation in indicators that function as critical key issues provoke an unsatisfactory performance. Even if problems and misleading developments are recognized, many arrangements do not solve the problem because of the absence of a depentful flow of information and statements about cause and effect coherences. But a full localization of critical key issues is in case of the difficult separation of endogenous and exogenous influences rarely dependable. Using them as decision making basis either leads to stagnation or incrementalizm. Further reasons for non implementation are high costs and the time intensive architecture of a controlling system, although it avoids unpleasant and irreparable results for the newly merged company and ensures a foundation for business management. So having regard on the altitude of investment and transactions costs, the introduction of such a system should not be based on benefit- costs analysis. On the other hand, one major problem can arise: many key ratios for integration success are hard or even impossible to measure quantitatively6. Therefore, if quantitative indicators are used for integration success evaluation, it is
5 6

Jansen, 203 Drews, 91

critical to make sure that they really reflect the qualitative side and indicate largescale changes. To reach a high degree of reliability, they must be primary based on the most important aspects for sustainability: the degree of goal achievement of integration, temporal aspects of integration and integration costs. At this point, different types of integration costs can be distinguished: coordination, complexity and inflexibility costs7, which are even harder to quantify as restructuring, consulting and adaptation costs. All of them can reach very high levels, so that it is indispensable to observe them in order to find out whether there are possibilities for rationalization. Characterizing them as time and resources consuming factors, post merger control represents an essential component for financial merger success. In sum there is a high practical need for methods that help do increase the plausibility of the developed key factors. The following part deals with the examination of typical models, which are known as instruments for post merger controlling. After showing up the problems of reliable measurements, it is necessary to have a closer look at their internal construction in order to find out if they are nevertheless useful as a decisionmaking foundation and if there were gaps, which could be fulfilled by certain analysis methods.

3. The Integration Balanced Scorecard After the transaction stage has been taken it is time to look at what has actually been done. The aim is to evaluate the purely economic success of the merger transaction in general and of the post- merger integration in particular. The connection of both are essential for clarifying the effectiveness as the degree of goal achievement by taking specifically determined periods of time and available resources into consideration. The main goal of integration control is to measure how productive the integration activities are. The pre- condition for this is the

Drews, 91

indemnification of consistence common targets and a functional process auditing8. The Integration Balanced Scorecard presents an approach to performance management and provides a balanced view of organization and integration process. It describes the integration of business strategy, vision of merger logic, objectives, measures, indicators, and adjustment actions with respect to the four merger perspectives: finance, organization and innovation, employees and customers. The financial perspective shows how the economic success of the company looks like by using such indicators as operating income, profits, the ability to raise funds, etc. Organization and innovation perspective is about ways for the improvement of overall post merger integration process and innovation potential. Employee perspective shows whether all capacities are used and what postmerger development means for the employees. Whether the merged company meets expectations of the customers and how the public opinion looks like is described by the customer and public perspective. The four perspectives need to be balanced with respect to internal and external, financial and non- financial, past and future performances9.
Financial/economic perspective How does economic success look like?

Customer and public perspectives Do we meet the expectations of our customers? How does the public opinion look like?

Strategy vision, merger logic

Organization and innovation perspectives How can we improve the overall PMI process and innovation potential?

Employee perspectives What does post- merger development mean for employees?

Figure 1. The Post-Merger Integration Balanced Scorecard Source: Jansen (2001, 238)

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Picot, 387 Drews, 164

But during the conception one major problem can arise: many components of integration success, for example the employees adaption, are hard to measure quantitatively. Therefore it is critical to ensure that they reflect the qualitative side of their impact. The measurement of committed organizational behavior could be realized by consequent monitoring arrangements, primarily for the minimization of principal- agent problems, driven by the aim of securing that all delegated duties and responsibilities are located in the working unit of the actors and that they operate on full capacity utilization10 to raise the degree of efficiency of the transaction11. The operational capability could be ensured by developing a gap analysis, which determinates the differences between present achievements and arranged objectives concerning intended goals and gives the needed information for setting up a problem- oriented strategy for minimizing this gap. One further challenge is the separation of key ratios from intervening variables, in order to establish dependable factors that cause value enhancement and value destruction12. This could be done by the value chain analysis13, which gives information for developing operative improvements in strategic decision-making processes. Hence the construction of the Integration Balances Scorecard requires detailed and separable information, which cannot be achieved with interviewbased total analysis, whose results are subjective self- declarations14. Instead of this the use of normative reporting and documentation systems15 ensure a high level of objectivity and could be seen as the only reliable method. Taking this challenges and the variety of integration aspects under consideration, the evaluation of integration success should have the requirement to reach high valid and probable results, which can function as a reasonable judgment about integration effectiveness. In summary, the Integration Balanced offers a great system of checks and balances, but also has some gaps which have to be fulfilled
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Wall, 101 Picot,9 12 Huch, Behme, Ohlendorf, 259 13 Gleiner, 127 14 Jansen, 111 15 Drews,175

in order to provide time based comparisons of actual results and the planned outcome with regard on clearly stated objectives appointed in the Pre- Merger phase16.

3.1 The Integration Dashboard In comparison to the presented merger controlling system above, the integration dashboard gives a four dimensional view on resource transfers, that function as the most important factors for the control of synergy realization17.The focus here lies on the cultural integration because this element shall be deemed to be the most critical factor for the failed realization of supposed synergies and financial benefits18. Being centralized positioned it is closely linked to following hard issues:

Figure 2. The Integration Dashboard Source: Bark (2002, 156)

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Picot,14 Bark,143 18 Bark, 153

The Integration Dashboard is the only controlling instrument that includes most measureable criteria in reciprocation with factors as know- how and cultural transfer. So planning and controlling seems to be easily possible by giving information about misleading developments that enable corrective arrangements. Having in mind that the compositions of measures include factors which cannot be localized and transformed into data19, such as the impact on intangibles20, an oversimplification of facts with a high loss of information occurs. Even the use of business planning systems21 give no information about their level of influence, but support the continuous modification caused by the rapid change of parameters that appropriate the validity of the ratios. An additional advantage is given by the integration of warning systems in order to control transfer processes22: if hard rations reach a certain altitude, mistakes are recognized immediately, so that reactive arrangements could be developed as a contribution to the continuous process improvement. Summing all this up the application of the Integration Dashboard guarantees a low influence of subjectivity, because of its strong financial-related intention and the analysis of the majority of changes and dynamics right along the added value chains.

19 20

Drews, 126 Drews,89 21 Wall, 86 22 Huch, Behme, Ohlendorf, 240

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3.2 The 7 C Model of Integration All the critical aspects of the post merger management can be gathered together to form the so called 7 C model of integration controlling. The seven core elements constitute different fields of post- merger management that directly influence costs of integration:

Figure 3. The 7 C Model of Integration Source: Jansen (2001, 230).

One further role of this model is the determination of integration costs by comparing them with the added value of synergies in order to examine if the merger deal is valuable in long terms23. Regarding post merger audit as an element in between all internal interdependencies determining the overall success of mergers, the negligence of other factors would show up contorted experienced data and no reliable state of the merged company that could have disastrous effects for the decision making process.

23

Jansen, 229

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4. Conclusion Mergers are accompanied by influences, that differ very strong form each other and cause difficulties in multidimensional sizes and intensities. Nevertheless the primary focus lies on the transaction itself, while integration is often left aside, although the synchronization of all dimensions of the corporate architecture is crucial for the realization of synergies and value improvement potentials. So even if the merger phase went on smoothly the transaction can still fail to yield expected results if firms chose to merger but not to integrate. Consequently, the nonharmonization of common targets leads to a lack of information and a high degree of uncertainty in decision- making. The Integration Balanced Scorecard with the intention of maximizing multidimensional targets can finally be seen as a direction select, but it does not function as an established controlling instrument. The Integration Dashboard concentrates on internal resource transfers, which is the most important element for ensuring functional operative processes and increasing the companys` value, having impact on the target output and finally on stakeholders contributions. The 7 C Model illustrates upcoming interdependencies and functions as a framework for integration cost controlling, but cannot be seen as an all round tool, because every merged company stresses and defines in consideration with internal, available resources and external parameters the own action- wise by emphasizing some elements, ignoring others and adding absent ones. Above all the latter controlling tools for M&A should find with respect to the rising environmental complexity more attention. In view of the overall economic success, therefore, administrative influence on the financial space to move could play an important role, why scenario planning with working out action- alternatives in aim of cost and uncertainty minimization must be an active part in merger controlling as a political component. That is the reason why the introduced models represent great basic approaches, however, they still are enlargement- destitute and must be defeated with regard on their application as each individual case. Nevertheless, it must be kept in mind that there is no best practice method in general, as a consequence of mergers being a subject of irregular, dynamic

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changes which make individual modifications indispensable.

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5. Bibliography

Drews, Hanno (2002). Instrumente des Kooperationscontrolling. 2. Aufl. Wiesbaden: Universittsverlag GmbH. Gleiner, Werner (2004). Future Value- 12 Module fr eine strategische wertorientierte Unternehmensfhrung.1. Aufl. Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler/GWV Fachverlage GmbH. Huch, B., Behme,W., Ohlendorf, T (2004). Rechnungswesenorientiertes Controlling- Ein Leitfaden fr Studium und Praxis. 4. Aufl. Heidelberg: PhysciaVerlag Heidelberg. Jansen, Stephan A. (2001). Mergers & Acquisitions- Unternehmensakquisitionenund kooprationen.4. Aufl. Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler/GWV Fachverlage GmbH. Jansen, Stephan A. (2004). Management von Unternehmenszusammenschlssen- Theorien, Thesen, Tests und Tools.1. Aufl. Stuttgart: Klett- Cotta Verlag Mitleton-Kelly,Eve (2006). Coevolutionary Integration: The Co- creation of a New Organizational Form Following a Merger and Acquisition.Coevolutionary Integration 8 (2):36-48. Picot, Gerhard (2002). Handbook of international Mergers and Acquisitions. 3. Aufl. New York: Palgrave Macmillan. Wall, Friedrieke (1999). Planungs- und Kontrollsysteme. Informationstechnische Perspektiven fr das Controlling. Grundlagen- Instrumente- Konzepte.1. Aufl. Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler/GWV Fachverlage GmbH.