CIMA F3 Syllabus D. Business valuation - Integration of management - Notes ^{2 / 3}

Takeovers should pay attention to what happens after the takeover

Problem of integration

Failures of takeovers often result from inadequate integration of the companies after the takeover has taken place. 

There is a tendency for senior management to devote their energies to the next acquisition rather than to the newly-acquired firm. 

Approaches to the post-acquisition integration:

Drucker's Golden Rules

P F Drucker has suggested five Golden Rules for the process of post-acquisition integration.

Remember the mnemonic 'MATCH'.

1. Management in place

   Within a year, the acquiring company should put top Management with relevant skills in place.

2. Add value to the target 

   The acquiring company must ensure It can Add value to the target 

   (that is, ensure targets are set, communicated to customers and synergies are realised).

3. Target respect

   The acquiring company must show respect to the products, management and track record of the target.

4. Common core of unity 

   Ensure there is a Common core of unity 

   (for example take actions to ensure systems are compatible).

5. Happy staff 

   Strategies should be developed for Holding onto existing staff 

   (for example, loyalty bonuses).

Jones's Integration Sequence

C S Jones has proposed a five-step 'integration sequence'.

1. Decide on and communicate initial reporting relationships

   This will reduce uncertainty.

2. Achieve rapid control of key factors

   This will require access to the right accurate information.

3. Resource audit

   Both physical and human assets are examined in order to get a clear picture. 

   This includes examining the roles of each of the main stakeholders (staff, customers and suppliers) and evaluating the products sold.

4. Re-define corporate objectives and to develop strategic plans

   These should harmonise with those of the acquiror company as appropriate

5. Revise the organisational structure

   Successful post-acquisition integration requires careful management of the 'human factor' to avoid loss of motivation. 

   If redundancies are felt to be necessary, voluntary redundancies should be offered first.

Service contracts for key personnel

When the target company employs certain key personnel, on whom the success of the company has been based, the predator company might want to ensure that these key people do not leave as soon as the takeover occurs.

To do this, it might be necessary to insist as a condition of the offer that the key people should agree to sign service contracts.

Service contracts would have to be attractive to the employees concerned, perhaps through offering a high salary or other benefits such as share options in the predator company.

Merging systems

There are two extremes of integration:

• Complete absorption of the target firm 

  where the cultures, operational procedures and organisational structures of the two firms are to be fused together. 

  This approach is most suitable where significant cost reductions are expected to be achieved through economies of scale, and/or combining marketing and distribution effort can enhance revenues.

• The preservation approach

  where the target company is to become an independent subsidiary of the holding company. 

  This would be most beneficial for the merger of companies with very different products, markets and cultures.