Risk Management in the Post-Integration Phase of an M&A Deal


Essay, 2020

13 Pages, Grade: 1,0

Anonymous


Excerpt

Table of content

Table of content

List of figures

1 Introduction

2 Conception of merger and acquisitions (M&A)
2.1 Explanation of terms and types
2.2 Procedure

3 Risk management
3.1 Key risks in post-merger integration
3.1.1 Synergy risk
3.1.2 Structure risk
3.1.3 Employer risk
3.1.4 Cultural risk
3.2 Risk management in the post-merger integration

4 Conclusion

Bibliography

Internet sources

List of figures

Figure 1: Multi-stage M&A process

Figure 2: Post-merger integration cascade

1 Introduction

Reaching new markets, new customer groups, expanding the product portfolio or reducing costs is not easily made in a saturated market. The alternative to reaching out with new products as a vital growth strategy is to buy a company. It acquires new customer groups, brings in the knowledge and experiences of the existing company in the owned firm. Additionally, it can benefit from adding value and realise synergies. According to a survey by Pricewaterhouse Coopers in 2017, two out of three acquisitions are destroyed by the value rather than creating it.1

The influencing factors which can lead to a disruption in a merger should be the subject of this essay. The essay is divided into two main parts. The first part includes a theoretical discussion of the term merger and acquisition and provides an introduction to the phases of M&A. It represents an explanation of the classification and the different versions. The second part reflects the risk management and the necessity of the prevention. In the end, there will be a summary with a conclusion of this scientific essay.

2 Conception of merger and acquisitions (M&A)

2.1 Explanation of terms and types

The term merger & acquisitions refer to the buying and selling of companies as well as the merging of companies. In contrast to financial investments, where primarily financial motives are in the foreground, M&A transactions pursue strategic goals. Mergers refer to the fusion of companies. Acquisitions are defined as the purchase, sale or partial ownership of a company. Combined, M&A's denote the takeover of companies, the restructuring of a group, the formation of a group, the transfer of property rights, the transformation of legal form and financing.2

In the case of acquisitions, a further distinction is made between an asset and share deal. In a share deal, the buyer acquires the shares in the target company and receives the associated rights and obligations. In an asset deal, on the other hand, the tangible and intangible assets are taken over. As well as the debtors, but without acquiring ownership of the shares in the company.3

2.2 Procedure

The company's inorganic growth strategy is divided into a multi-stage M&A process. This process is mostly divided into three parts.4

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Multi-stage M&A process

See, Pape U., Finanzierung und Investition, 2018, p. 500 et seq.

The pre-merger phase describes the first steps. It is often associated with the definition of the current situation, strategic plans, the settings of the own corporate goals as well as the formulation of the goals associated with the merger, which want to be realised in the future. This positioning provides a basis for determining the criteria and selecting suitable candidates. An evaluation of the candidates follows this. It is checked whether the objectives can be achieved with the selected company.5

After the pre-selection, the first contact with the target company is made in the merger phase. If the target company its management is optimistic about a possible transaction, the first information is passed on to the buyer company, in combination with a non­disclosure agreement. Subsequently, the buyer company declares its unconditional intention to acquire the target company in a letter of intent. In addition to pre-contractual rules, the letter of intent contains essential characteristics of the planned transaction, the further procedures and the exclusivity of the negotiations. In the next step, the seller provides the potential buyer with extensive information about the target company. This step includes financial statements as well as organisational and legal information. The buyer and his advisors review the information about the target company as part of the due diligence process. This audit includes financial, legal and tax audits. The purchase price negotiations are later based on it.6 This process is followed by the negotiation of the purchase price and the share exchange ratio. The agreement and subsequent negotiations are followed by the signing of the contract, which requires the approval of banks, authorities and shareholders. With the public announcement of the merger, the operating phase of the merger is completed.7

The post-merger integration includes all post-transaction activities related to the integration process. It involves various tasks and aspects that become relevant when the companies are merged or when the acquired company is integrated into the acquiring company. At this stage of the process, it is most important to define and implement the integration objectives and related plans, to strategically realign the company its organisation, to maintain the operational business and to support the employees in this process. The main focus should be on targeted coordination of strategies, systems, processes and cultures as well as the integration of the employees of both companies in the sense of building a united team characterised by a feeling of mutual acceptance. Further responsibilities will also be defined; project teams are often set up to carry out specific integration tasks. Additionally, it is essential to consider the adaptation of corporate cultures in order to ensure successful implementation.8

3 Risk management

3.1 Key risks in post-merger integration

The Harvard business school distinguishes the two-key risk of mergers and acquisition between miscalculation synergies and integration issues, which includes the employers and the management.9 The management consultancy company Roland Berger defines the critical risk as management egos, organisational deficit, unprofessional integration and synergy management.10 In consequence, the critical risk can be broadly summarised and categorised in synergy, structured, employer and cultural risk.11

3.1.1 Synergy risk

A synergy risk can arise from an incorrect determination of the synergy potential; this occurs if the transaction was initially estimated to be higher than actually achievable. It can occur because some of the integration costs were not taken into account at the beginning and were therefore not planned.12 The more incomplete the planning and shorter the time planned for implementation, the higher the synergy risk. In order to avoid this risk, all financial key figures of both companies must be available ultimately. This information transparency is the only way to ensure an appropriate synergy identification and succession planning of the post-merger integration.13 However, it should be noted that the financial data in the balance sheet are historical data, which only represent a forecast of future developments and are therefore always subject to uncertainty and risk. Likewise, this historical data must be adjusted for one-off effects, for example, new product launches or the costs for site closures, in order to determine the reliability of the data.14

3.1.2 Structure risk

Differences in structure and management entail great risk potential. It is essential to consider whether the corporate hierarchies of the merging companies are as similar as possible. If this is not the case, they must be aligned before the business transformation phase in order to avoid difficulties in the decision-making process. Also, a decision must be made as to which management structure is to be chosen or whether it makes sense to dovetail the management structure.15

Another exceptionally high risk is posed by the redesign or standardisation of business processes. This complex process is necessary in order to enhance the efficiency of corporate procedures and thus generate synergies. The risk increases with the number of processes to be standardised because more processes must be newly generated for the newly created company. In the best case, the target company can take over specific processes of the acquiring company, but in the case of a complete redesign, the risk increases. A complex reorganisation entails a high-risk potential, which should be considered at an early stage, because of the more significant differences in the depth of value-added, the more complex the necessary reorganisation measures and the higher the risk itself.16

3.1.3 Employer risk

As soon as employees become aware or learn through third parties that an M&A may be imminent, it can lead to uncertainty. However, this uncertainty is significantly increased in the post-merger phase and continues thru the whole process. After the merger, the employers experience changes in their daily work progress. Values and standards change or even lose their validity. Consequently, they no longer function as a point of orientation. Identification with the company can decline significantly, which can lead to lower motivation and dissatisfaction at the workplace. Changes can cause additional stress, and this can lead to a negative effect on integration. This stress causes additional organisational costs, and it can lead to the rejection of the superior corporate culture. In this case, the cooperation between employees is only possible to a limited extent. Employees do not communicate; conflicts and duplication of work steps occur. A big problem, which is caused by the uncertainty of the employees is the fluctuation of employees. These circumstances show that employees are a significant factor influencing the result of acculturation.17

[...]


1 See, Führer, C., Liem, R., Zwald, D., Success factors post-mergers, 2017, p.3

2 See, Pape U, Finanzierung und Investition, 2018, p. 500-501

3 See, Alickovic, V., Braunweiler H., Merger and Acquisitions, 2020, p. 233 et seq.

4 See, Pape U, Finanzierung und Investition, 2018, p. 500 et seq.

5 See, Grube, R., Töpfer, A., Post Merger Integration, 2002, p. 49 et seq.

6 See Grube, R., Töpfer, A., Post Merger Integration, 2002, p. 44

7 See, Pape U., Finanzierung und Investition, 2018, p. 502

8 See, Grube, R., Töpfer, A., Post Merger Integration, 2002, p. 44

9 See, https://online.hbs.edu/blog/post/mergers-and-acquisitions, access 07-11-2020

10 See, Hayes, G., Marciniak, R., Morris, G., Strategy-led PMI, 2017, p. 6

11 See, Gerds, J., Schewe, G., Post Merger Integration, 2011, p.76 et seq.

12 See, Fuhrer, C., Liem, R., Zwald, D., Success factors post-mergers, 2017, p.15

13 See, Gerds, J., Schewe, G., Post Merger Integration, 2011, p. 77 et seq.

14 See, Höhne, F., Operational Due Diligence, 2013, p. 7

15 See, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our- insights/building-the-right-organization-for-mergers-and-acquisitions, access 08-11-2020

16 See, Gerds, J., Schewe, G., Post Merger Integration, 2011, p. 101 et seq.

17 See, Cartwritght, S., Cooper, C.L., Managing Mergers, 196. p.52 et seq.

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Details

Title
Risk Management in the Post-Integration Phase of an M&A Deal
College
University of applied sciences Frankfurt a. M.
Grade
1,0
Year
2020
Pages
13
Catalog Number
V1026108
ISBN (eBook)
9783346428394
ISBN (Book)
9783346428400
Language
English
Keywords
M&A, post merger, deal, risk management, merger phases, merger, acquisition, merger and acquisition, key risks, employer risk, synergy risk, structure risk, cultural risk, post-merger integration, conception of m&a
Quote paper
Anonymous, 2020, Risk Management in the Post-Integration Phase of an M&A Deal, Munich, GRIN Verlag, https://www.grin.com/document/1026108

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