MA & CR

Strategic Perspective

STRATEGIC PERSPECTIVE

Major Event Better Image Easy Funding Synergy Tax Benefits Exploiting Hidden Value Quick Expansion & Consolidation Licensing Quick Acquisition of Resources

MERGER PROCESS: FIVE STAGE MODEL

SUDI SUDARSANAM’S 5-S MODEL

Five Stages Stage I Corporate Strategy

Development Stage II Organising for Acquisition Stage III Deal Structuring & Negotiation Stage IV Post-Acquisition Integration Stage V Post-Acquisition Audit &

Organisational Learning

I CORPORATE STRATEGY DEVELOPMENT M&A is a part of Corporate Strategy Enhancing competitive advantage Optimising Current portfolio of business Gaining Economies of Scale Searching for Partners with Matching

Resources -continued……….

CON…I CORPORATE STRATEGY DEVELOPMENT

Difficulty of Quantifying competitive advantage of M& A

High Risk of Integration Failure Related Mergers likely to bring in better

operating performance, shareholder value and innovation than unrelated mergers

- contd………….

CON..I CORPORATE STRATEGY DEVELOPMENT

Industry Structure Driven view of Competition like gaining market power, cost leadership through vertical integration and product differentiation

Resource based View of Competition like financial, human, intangibles, physical, organisational and technological gains

STAGE II: ORGANISING FOR ACQUISITION M&A may be a separate function or a

part of the normal functions Acquirer must develop capability and

core competence Arrange for obtaining additional

resources Prepare a Road Map for Post Merger

Scenario of each department and functions

Standardise & internalise early warning signals

STAGE III: DEAL STRUCTURING & NEGOTIATION

Major Pitfalls in Deal Structuring & Negotiation - Overvaluation of target company (Hubris/Winner’s Curse) - Conflict of Interest of Advisors such as Investment Bankers,

lawyers, accountants and environmental consultants - Obtaining insufficient data - Defective due diligence - not determining the range of negotiation parameters -lack of clear negotiation regarding the positions of the senior

managers of both the firms - not developing defense strategies regarding regulatory

agencies -continued……..

CONTD III DEAL STRUCTURING & NEGOTIATION

For avoiding the pitfalls, the corporate should

- do proper valuation of the target - conduct in advance a thorough

investigation of conflict of interest of the advisors

- conduct an elaborate due diligence even by more than one agency

- negotiate clearly the absorption of the HR and their designations

STAGE IV: POST ACQUISITION INTEGRATION Change Management Project management capabilities Communication Plans Deadlines for execution of plans Performance benchmarks Reward for achievements Merger of information systems -

continued………..

CONTD.. IV POST ACQUISITION INTEGRATION

HR Problems - detailed meeting and discussion with

HR - reduce anxiety - assuring retention - no cultural shock - no downgrading of designations - no superior-inferior treatment

DUE DILIGENCE

“ A thorough investigation about the target company and its operations is called due diligence”

AREAS COVERED BY DUE DILIGENCE

[a] Commercial Aspects[b] Operational Aspects[c] Financial Aspects[d] Legal Aspects[e] HR Aspects[f] Organisational Aspects[g] Aspects of Information Systems

[A] COMMERCIAL ASPECTS

Competitive Position Customer Relation Patents/Copyrights Market Share Brand Portfolio

[B] OPERATIONAL ASPECTS

Production Processes Technology used Production Systems Channels of Distribution Outsourced Operations Sub-contracting

[C] FINANCIAL ASPECTS

Capital Structure Lending Agencies Accounting Systems Audit Systems Tax Liability

[D] LEGAL ASPECTS

Contractual Obligations Product Liability Class Action Suits Environmental Liability Cases Pending with Regulatory

Agencies like RBI, SEBI, and other Government Departments

[E] HR ASPECTS

Competence Compensation Training Employee Relations Disputes Outstanding Contracts

[F] ORGANISATIONAL ASPECTS

Structure Delegation of Authority Leadership Bureaucracy

[G] INFORMATION SYSTEMS

Performance Cost Complexity Compatibility