Change management in multinational corporations

Lecture 1
Lect. Univ. dr. Bogdan Cernat-Gruici
Change Management
"It is not the strongest or the most intelligent who will survive, but those who can
best manage change"
Charles Darwin
Change is
Natural and universal process

An inevitable necessity

A potential process of adaptation and evolution for every person, organization and
society.

The future of business change

In an era of ITC, organizational change is imminent for the survival of organizations

Change spans across

In principle, the process of change aimed at three levels:

society as a whole;

corporations as functional units;

people treated individually, as basic constituents of the first two

organizational levels.

But what changes fundamentally?

According to J. Kotter, "... change refers goals, plans, structure, motivation and
control systems"

Change vectors

Controlling the competitive environment:

A change management strategy has the following objectives:

a better understanding of the company's position against the competition;

expanding market segments, boundaries of action, etc..

continuous improvement of customer satisfaction;

production of innovations that strengthen the company's position in the

market.
Change vectors

Strengthening the human potential

Change strategy goals are:

active involvement of human resources in achieving the objectives;

adapt faster to threats and opportunities;

better sharing of expertise available;

clarify functional responsibilities.

Change vectors

Continuous improvement of processes

A change strategy aims to:

expand research and development to achieve technological excellence;

improve performance in terms of costs and lead times;

Improve the quality of goods and services;

Involve suppliers and customers in the selection of structures and processes.

The context of organizational change:

external pressures:

increasing the speed of information processing

rapid transfer of innovation in a market

internal environment of the organization:

staff turnover and lack of motivation

low productivity

But how do we manage change?

Managing change is itself a phrase that has at least two meanings:

1. adoption of changes in a planned, structured, organized. The aim is to

implement an efficient methods and procedures in an organization which is in
full swing.
 2. reaction, the response to the changes that the organization does not control
(e.g. changes in legislation, climate change, social or political, competition,
changes in economic relations, etc.)

There are issues

At the heart of change management lies the "problem of change":

It is uncertain when the future happens based on the current state tools

Did we use the right tools?

Large-scale or small-scale

Individuals or groups of individuals

Single directions or different departments

Throughout the organization or only on certain parts of the

environment in which the organization operates.

Raising the issue Why?"

The purpose of addressing questions like "why" is to reach the crux of the matter -
to find new and better ways of addressing issues.

Raising the issue What?"

What are we trying to achieve?

Which indicators will signal success?

Which standards will apply?

Raising the issue "How?"

The problem of change is often expressed, at least initially, as a question of "how?

Inside resources or outsource?

Choosing the right tools

Ask questions!

How do we get people to be more open, to assume more

responsibility, be more creative?

How do we make this organization become more innovative,

more competitive and more productive?

How do we raise more effective barriers to entry between us

and our competitors?

How do we draw our suppliers?

How we can reduce the life cycle of a product?

References

http://ec.europa.eu/enterprise/policies/innovation/policy/index_en.htm

http://ec.europa.eu/research/innovation-union/index_en.cfm?pg=intro

Toole, Andrew A. (2011) : The impact of public basic research on industrial

innovation: Evidence from the pharmaceutical industry, ZEW Discussion Papers, No.
11-063; http://www.econstor.eu/bitstream/10419/51353/1/672465248.pdf

Henry Chesbrough, Open Innovation Where Weve Been and Where Were Going

http://www.iriweb.org/Public_Site/RTM/Volume_55_Year_2012/July-
August_2012/Open_Innovation_Where_We_ve_Been_and_Where_We_re_Going.aspx

Change management in multinational corporations

Lecture 2

Dr. Bogdan Cernat-Gruici

Lecture: Organizational change

Organizational Change

A complex process calling for thorough managerial knowledge and skills aimed at
activities such as:

organizational analysis (with a view to identifying the present status and the
forces which may possibly cause the existing problems);
 analysis of the factors that are relevant to actually perform the required
change;

selection, based on the analyses conducted, of the most adequate strategy

for performing the change;

implementation process monitoring.

Organizational changes can be classified into:

Structural changes;

Behavioural changes ;

Technological changes.

Structural changes

Structural changes affect particularly the modality in which the organization and
its levels are conceived

Their impact is usually reflected upon the whole organization.

Undertaking certain actions, such as any changes brought to

plans or procedures and the control activities at various
hierarchical levels brings about a relationship of permanent
interaction among all the structural parts within the
organization.

Behavioural change:

Focused on the human resources within an organization, building into efforts

oriented towards their values, competences and skills.

Behavioural change techniques

Are mainly aimed at coordinating performances in order to reach the goals set.

The most important means used in order to reach this major

objective is enhancing employees skillfulness and knowledge,
while getting them highly motivated.

Behavioural change in a nutshell

Most methods applied are oriented towards behavioural changes groups of

individuals, so that they may become capable of rapidly making decisions
as well as of ensuring direct and efficient communication.
 Among the most frequently used modalities of approaching change: team
building; transactional analysis; neuro-linguistic programming (NLP)

Technological change:

In the current context of technologys extremely fast evolution also pointed out to
by the frequent collocation the information era the technological change concept
can no longer be limited to machines, equipment or installations, but it will also
refer to any application and techniques related to the new methods of turning the
resources into products or services.

Techniques

Technological changes allow for high potential tech to be used and are often
triggered by a corporations basic needs: lower production costs, higher
productivity, higher quality etc.

1. Strategic changes
brought about the intentional change (proactive attitude) or the forced
change (reactive attitude) initiated by the market leaders in the market trend
and / of the niche market;

2. Structural changes
are more often than not linked to strategic changes or come as a
consequence to them
adopting a new strategy can be correlated with replacing some structures by
others.

Structural changes in action

For example, replacing pyramid organizational structures by horizontal
ones:
the former are often appreciated by employees because they entail their
overburdening with professional responsibilities only to a small extent, while
the latter has the advantage of an open communication and of stimulating
creativity (which get inhibited with bureaucratic structures).
the transition to horizontal structures is a structural change often determined
by putting forth a new strategy based on teamwork, which is much easier in
the absence of bureaucracy.

3. Technological changes

Being some of the most frequently encountered modalities of organizational

change, technological changes are included into most of the classifications in
the specialized literature

4. Techno-structural changes
Are a hybrid type, resulting from the combination between the technological and
the structural changes occurred within an organization.

5. Socio-technical changes

Similar to techno-structural changes, socio-technical ones are also of the

hybrid type, resulting this time as a combination between changes involving
people (behavioural changes) and those involving technologies (technological
changes).

Outsourcing intro

Outsourcing entered the English-speaking lexicon in 1980s to designate a

business practice in which a company hires third-party service usually located
outside of the country. Initially, this was used to cut costs.

Also a strategic management option.

Outsourcing rationale

Outsourcing is the most talked topic these days often referred to as the most
important management development of the decade.

Based on a simple rule, if something is not the core competency of your

company then simply just takes the task and contract it out

Some controversy

Simple tool for world-class companies that allows them to improve their
product and services, increase the net profit and grow the businesses.
The positive aspect: It takes huge benefit for businesses in terms of cost
savings, better outcomes, increased productivity, improved accuracy and
efficiency, allow employees to do the things that they can do best.
The negative aspect: Citizen lose their jobs because either their company
fires them or outsourcing a part of their work and they have fewer resources
to earn.

Outsourcing motives
Why do companies outsource their work?
1) Get experts: Team of experts would be ready to handle the load of your
projects. They might have already experienced with your business niche and
can give you good quality, expert guidance and better exposure.
2) Release burden: If you outsource most of the tasks, you dont have to
worry about many employees separate desks, computers, life insurance,
vacation, personal problems, sickness, 15 plus holidays, retirement etc.
 3) Pay on Deliveries: You dont have to pay monthly wages similar to your
onsite employees you can pay them after the work!
4) Analyze day-to-day progress of work: Because of the time zone
difference between countries, you can get your work done while your
business closes down in the evening and you get complete report of your
outsourced non-core tasks the very next day.

Why Outsourcing is Increasing?

Most of the companies are launched by engineers or operations professionals. They

are able to grow at a certain level after that, a company may go stagnant and need
more professionals in order to achieve the next level of growth but it is not easy to
find the professionals quickly and on affordable wages.

Global outsourcing leders

 Active Areas in Outsourcing

Sales & marketing; 15%

All other; 22%
Human resources; 16%
Administrative; 9%
Finance ; 10%
IT; 28%

Role of Social Media

Social Media platform also support companies or industry experts to hire

individuals to take the part of their work.
 56% organizations stated that they currently use Social media, raised from
34% in 2008. In addition, 45% companies who dont plan to use social media,
dropped to 21%.

Linkedin came at first in Social Networking websites, used most often by

organizations with 95% followed by Facebook with 58% and Twitter with 42%

References

Aldo Srabotic, Mitja Ruzzier, 2012, Logistics Outsourcing: Lessons from Case
Studies, Managing Global Transitions, 10(2):205225

Marchewka, Jack T. and Oruganti, Shiva, 2013, A Combined Model of IT Outsourcing

Partnerships and Success, Communications of the IIMA: Vol. 13: Iss. 2, Article 6.
Available at: http://scholarworks.lib.csusb.edu/ciima/vol13/iss2/6

Grg, Holger; Hanley, Aoife, 2009 ,Services outsourcing and innovation: an

empirical investigation, IZA Discussion Papers, No. 4404

COMPANYS BUSINESS INTERNATIONALIZATION

Lecture 3

COMPANYS BUSINESS INTERNATIONALIZATION

Internationalization

the set of techniques, methods, practices, concepts which allow for certain
companys activities to be run outside the national borders of a country

a multiform process, the best internationalization formula depending on

numerous internal and external factors

the most complex modality of conducting a companys activity, a form

combining a multitude of legal- financial- and management operations

Business Internationalization

1. Components

2. Rationale

3. Advantages and limits

4. Internationalization strategy prerequisites

Elements of companys business internationalization

turning ongoing activities from domestic to international:

trough the internationalization of its scope or activity as a whole;

through certain departments that are going carry international

activities

Elements of a companys business internationalization (continued)

main component of the companys development policy

high risks involved

takes a thorough analysis:

of the resources the company has at its disposal,

evaluation of the rationale underlying such an action,

analysis of the environmental conditions in the country to host the

companys activities.

Internationalization rationale

Pro-active (or aggressive)rationale

mainly involves the companys attempt to control the external environment and to
tailor it to the current interests

Pro-active rationale

access to resources

strategic competitive edge

development of ITC networks

market diversification

product diversification

making the most of different economic growth rates

search of cheap resources on external markets;

 search of new markets for its products;

search for efficiency to optimize the branch network with a view to a

higher capitalization of the resources on the host markets
(sometimes also with a view to sharing the risks by various regions);

search of strategic assets, particulary for acquisitions abroad out of

various interests, for production or even to eliminate competition.

Reactive (defensive) rationale

reduced sales on home market

overproduction

predictible reactions from the competition

proximity to client

market potential as a result of population size and of consumers purchasing

power

excess of capacities

Business Internationalization pros and cons

Advantages

greater opportunities to sell products on foreign markets in a direct or indirect

way

both quantitative and qualitative growth

possibility of getting necessary information, both of a technological nature

and on clients, suppliers and competitors

more opportunities than on the home market, which makes it possible, at a

given moment, to share the risks entailed by unwanted evolutions on certain
segments of interest. Also, an alliance with a foreign partner may enhance
competitiveness on the home market, as a result of the technological edge

Business Internationalization pros and cos

Disadvantages
 foreign environment instability and, implicitly, the risks it entails

sometimes conducive to significant losses, which forces the company to enter

international alliances or cooperations in order to share risks

Internationalization strategy prerequisites:

The company should:

spot opportunities;

evaluate international risks;

conduct thorough analyses.

Opportunities and risks:

starting point: screening potential locations and activities in terms of

opportunity

grounding: ample information on the business environment

following steps to take:

analysis of requirements and of solvent demand (market structure,

potential, capacity and volume);

analysis of competition (competition type, leading companies on the

market);

determination of market accessibility- related restrictions etc.

Risk management tools

to be used:

internal and external information sources,

quantitative and qualitative data,

static and dynamic analysis, secondary information alongside

that on site,

information previous to formulating the strategy and

information resulting in the process of putting it into practice.
Diagnostic
analysis:

aimed at evaluating the companys resources and restrictions in

the perspective of internationalization

SWOT (strenghts, weaknesses, opportunities, threats)

has got different finalities and requirements according to the

internationalization stage it refers to.

Diagnostics conducted at three levels:

at the initial stage;

at the implementation stage;

at the multinationalization stage.

at the initial stage:

the analysis is aimed to evaluate the occasional or sustainable

development potential in order to tailor the supply as well as the operating
methods and techniques to the foreign market specific conditions.

At the implementation stage:

issues to consider:

the companys capacity to assess the risks and requirements in

terms of resources related to the selected markets;

capacity to mobilize the necessary resources - technological,

financial, managerial etc.

capacity to define and develop an international strategy in line

with the companys cultural values, the global competitiveness

At the multinationalization stage

target:

evaluate the companys capabilities to integrate the

various forms of presence abroad into a global system

SWOT analysis

Issues referring to the companys external and internal area, the micro- and
the micro-environment, giving thus birth to what is known today as the SWOT
Analysis that is the analysis based on the intercrossing between the companys
internal strengths and weaknesses and the opportunities and threats in the external
environment.

SWOT Analysis

Underlies the process of elaborating the internationalization strategy

Involves several aspects:

definition of objectives

basic options

localization and partners selection

selection of the modalities of entering the market, that is of the

internationalization forms.

Defining objectives
Determining basic options

extensive growth (market enlarging);

intensive growth (exploitation of resources, higher profitability);

internal growth (capital accumulation);

- external growth (implantations, acquisitions etc);

autonomous and in- partnership development;

short- and long-term orientation;

concentration and diversification of activities.

Besides SWOT other currently well known tools developed by this thinking
trend are also worth mentioning:

ADL Matrix

BCG Matrix

PESTEL Analysis

ADL Matrix

ADL Matrix (Arthur D. Little)

starts from the concept that the enterprise market strategy shall take into
account two coordinates:

the enterprise competitive position

the stage in the respective product life cycle.

The competitive position is assessed according to four qualificatives (weak,

medium, good or dominant), and the life cycle, according to the four classical
strategies (starting-up, growth, maturity and decline). There result thus sixteen
dials, each indicating the optimum strategy to be adopted.

BCG Matrix
PESTEL Analysis

PESTEL Analysis:

forms a unitary view over the macro-environment, taking into

account as relevant and exhaustive as possible points of interest.
From elements: P-political; E-economic; S-social; T-technological, the
transition was made to a more significant number, by adding: E-
environment; L-legal.

PESTEL Analysis
Ansoff Matrix

came as a result of globalization and of the extensive application of growth

strategies

there are 4 global action strategies which in turn are further classified into
much more specific ones

Market penetration;

Product development;

Market development;

Diversification.
 Current products New products

Current markets
Ansoff Matrix
Current products New products

Current markets

New markets

New markets

Michael Porters: Positioning School

in an increasingly competitive environment, it is important that the

economic entity should get most favourably positioned on the market. To this
end, it can choose among the low-cost variant, a focus or an innovative
differentiation

a large number of elements from this school of thinking are still valid because
the world we live in is increasingly competitive, with giant companies buying
up a much too high market share.

Concepts such as winning over a market, defence holding and value

chain check have become milestones in the current strategic thinking.
 Suppliers negotiating power
Penetration barriers

Degree of suppliers
Absolute cost advantages Clustering
Wide scale savings Vertical integration danger
Retail degree Importance of volume for
Access to distribution Suppliers
Brand identity Substitution possibility
Product / service
uniqueness

Strategic position
Degree of rivalry
Exit barriers
Degree of market clustering Buyers negotiation power
Market growth percentage
Fixed costs
Competition diversity Substitution potentialSensitivity to price
Information degree
Product differentiation
Product change- related costs
Importance of volume for buyers
Buyers tendency to changeIncentives for buyers
products

Generic strategies (Mintzberg)

Niche players strongly differentiated, usually through quality and design,

with a narrow focus of the basic business

Pioneers focused and highly innovative in terms of design, first movers by

definition
 Local producers differentiated strategies in geographical niches

Dominant firms absolute leaders in terms of costs, either upstreams

resource producers, or downstream sellers

Imitators / Followers imitate leading companies without being themselves

leading

Imitators at a global level

Professionals suppliers of established services such as consultancy and

accountancy

Producers on big occasional contracts

Rationalizers the so-called global firms

Network- type firms widely diversified, cu a large focus and a great

number of differentiated products

Conglomerates

Krzysztof Wach (2014) The Role of Knowledge in the Internationalisation Process: An

Empirical Investigation among Polish Businesses

http://www.visegrad.uek.krakow.pl/PDF/Graz2014_ch07_wach.pdf

http://www.visegrad.uek.krakow.pl/publications_cartagena.html

LECTURE 4

CORPORATIONS STRATEGIC DECISIONS vs THE ECONOMIC CRISIS

LA LECTIA ASTA E F COMPLICAT CU TOATE ALEA APLICATE ...ASTA O INVETI DE

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Change management in multinational corporations

Lecture 5

Dr. Bogdan Cernat-Gruici

The Corporation:

Independent legal entity, independent of the person and property of its owners:

property rights and contract law in its own name;

has a assets of its own, independent of its owners assets;

potentially unlimited lifetime;

its existence does not depend on the identity of its owners.

The Corporation:

Independent legal entity, independent of the person and property of its

owners:

property rights and contract law in its own name;

has a assets of its own, independent of its owners assets;

potentially unlimited lifetime;

its existence does not depend on the identity of its owners.

The nature of the corporation

"corporate nominalism" = corporations are nothing more than their owners.

"corporate realism" = corporations everything but their owners.

Real entity theory

associations and groups of people have an existence separate from that of

each member
 corporations are naturally occurring characteristics not present in members'

Some discussions even mention the political rights of corporations seen as

"citizens" of the state

corporations evenhave intention (and guilty intention - "mens rea") concept

of corporate manslaughter

Corporations and the challenges of globalization

(i) the relationship between states and corporations

(ii) the mutual inter-conditioning

globalization has changed the environment in which operators run their business,
causing changes in their strategy;

firms have contributed to the globalization of markets.

Relationship between states and corporations

Institutionalism

Bailey D., Harte G., Sugden R., (1994) Transnationals and Governments,

the idea of increased state intervention considered able to create a specific

competitive environment in which corporations must adapt.

national policies on corporations differ from U.Ss 'open door' to a favorable

attitude in the UK and one cautious and restrictive in Japan.

Relationship between states and corporations

Neo-Institutionalism

Kang, E., (1997), U.S. Politics and Greater Regulation of Inward FDI, International
Organizations, Vol 51.

rejects the contribution of interest groups and bureaucratic institutions in

shaping political decisions
 forwards the idea of decision-making role of the electorate.
"national preference model" - characterized by the assumption that the
elected government, seeking to remain in power, proposes packages of
measures to meet the voters needs.

Relationship between states and corporations

motivations in a particular market illustrated as OLI (ownership - location

- internalization)

emphasizes neoclassical theory of market imperfections speculated by

corporations but rejects the idea that these imperfections are exogenous to
corporations

basic idea is that while corporations can not vote in national markets
(neoclassical theory), they can vote in international markets by choosing
some countries over others

Basic corporations reaction

changes in the international business environment have led companies to

consider basic issues of efficiency and survival.

corporations have to face some major changes:

information revolution;

increased competition;

increasing risks;

emergence of key players;

developing partnerships in research;

volatility and increased refinery demand;

need for sustainable development.

In a nutshell

adoption of an integrated strategic vision of the company taking into account

both the internal and external factors .
 finding various forms of internationalization of business beyond the stage of
export-import.

struggle for survival and the ability to "reinvent" to refocus completely both in
terms of their own internal organization and on relations with the environment in
which it operates.

SOLUTION:

CORPORATE RESTRUCTURING

If a definition is necessary

Any change in the capital structure, operations or property that is outside

the ordinary course of business
James C. Van Horne, (1989), Financial Management & Policy

Involving at least one of the following:

ownership concentration in the hands of business managers or strategic

investors;

replacement of debt instruments with equity instruments;

redefining the companys borders through acquisitions, divestments, MBOs,

LBOs

use of new and complex financial instruments that create value.

Corporate restructuring methods

Property Restructuring

Expansion
acquisitions
mergers

Divestiture and reorganization

abandonment of assets
captive finance companies
repurchases
voluntary sell-off
 spin-off
equity carveouts

Corporate restructuring methods

Property Restructuring

open-market repurchases

market for corporate control

management buy-out MBO

leveraged buy-out LBO

going private

leveraged recapitalizations - LCO

Distress Restructuring

workouts (with creditors)

liquidation

reorganization

Levels of restructuring
Strategic investment process

Firms decide the location of productive assets abroad based on

different reasons, but the decision making process on investments implies the
meeting of three conditions:

competitive advantages (ownership advantages - O) technological and

managerial information;

advantages of internalization (I)

identification of location factors (L), related to the economic, legal and

institutional frameworks

OLI in Acquisitions
OLI in Mergers

Advantages of acquisitions :
 much faster way to establish operational presence in a host country , or
across an entire geographic market / regional ;

less exposure to currency risk through direct operation on a local market;

easy use "ownership advantages" (knowledge and products);

opportunistic type if investment in unfavourable economic conditions in

terms of pricing.

Disadvantages of acquisitions:

cultural differences may inhibit the combination between firms that differ
by nationality, customs, values, corporate culture;

the price paid by the acquiring company may be too high asset pricing is difficult
at times;

adverse political reactions may occur in the host country when the acquiring
company is a foreign company;

contractual arrangements, licensing, pricing and other aspects of the contractual

relations between the parties are more closely monitored and investigated by local
authorities.

References

GREENFIELD FDI vs. MERGERS AND ACQUISITIONS: DOES THE DISTINCTION

MATTER?

http://200.10.182.196/estudios/documentos-trabajo/pdf/dtbc173.pdf

Miao Wang, Sunny Wong, 2009, What DrivesEconomicGrowth?TheCase of Cross-

BorderM&A and Greenfield FDI Activities, KYKLOS, Vol. 62, no. 2, 316330
Change management in multinational corporations
Lecture 6
Mergers & Acquisitions meanings
Combining different companies (Mergers)
Buying companies (Acquisitions)
Selling companies (Disposals)
Splitting companies (De-Merger/Spin-offs)
What is a Merger?
In a MERGER, two (or more) corporations come together to combine and
share their resources to achieve common objectives.

The shareholders of the combining firms often remain as joint owners of the
combined entity.

A new entity may be formed subsuming the merged firms

What is an Acquisition?

In an ACQUISITION, one firm purchases the assets or shares of

another.

The acquired firms shareholders cease to be owners of that firm.

The acquired firm becomes the subsidiary of the acquirer.

Acquisitions usually take the form of a public tender offer.

Financial classification of M&As
 Strategic acquisitions:

Generate operating synergies (reduce competition, attain economies of

scale or scope, R&D synergies)

Most of them horizontal

Financial acquisitions:

Bidder thinks that target is undervalued (due to different information or

because of bad management)

Leveraged buyouts

Conglomerate acquisitions:

Motivated by financial synergies (taxes, diversification)

Motives behind Mergers & Acquisitions?

Sellers perspective

Strategic aspects

Lack of growth potential

High competition

Other focus

Financial aspects

Distressed sale

Realisation of earnings (Private Equity, Venture Capital)

Rationing of financial resources

Leading aspects

Succession planning

Incomplete / incompetent management team

Opportunistic / hidden aspects

Attractive offer

Anticipated market downturn

Peaks for cyclic businesses / markets

Motives behind Mergers & Acquisitions?

Buyers perspective

Strategic aspects

Synergies

Economies of scale

Technology/Know-how

Growth (horizontal / vertical integration)

Diversification (region / product)

Transformation

Access to (leadership) resources

Financial and Tax

Use of trapped cash, e.g. EMEA headquarters to avoid taxing in home countries

Avoidance of share buy backs

Opportunistic reasons

Asset stripping

Take advantage of financial difficulties of competitor

Irrational behaviour

Empire building

Re-investment of free cash flows

Motives behind Mergers & Acquisitions?

Management perspective

Pitfall:

Influence and prestige after the transaction?

Former owner downgraded to management level

Former management downgraded to employee level

Wins:
Financial

Capital gains (if shareholders)

Transaction bonus

Personal wins (CV)

Principal-agency problem

Low effort during the M&A process, sabotage of negotiations

Opportunistic behaviour, mental switch to preferred new owner

Management Buy-out

Independence:

Upgrading (e.g. new shareholders, management buy-in)

Why M&As fail?

Bad luck

When realization lower than expectations

Empire Building

Managers maximise own utility, not shareholders

This utility is typically linked with growth and size of assets

Gugler et al. (2003): Around 15% of all mergers and 35% of all failures

Hubris and bounded rationality

Being over-optimistic about efficiency gains (Booz-Allen & Hamilton,

1999).

Not foreseeing cultural conflict and post-merger problems (Weber and

Cameron,2003).

Interaction of synergies and agency conflicts can lead to coordination

problems

(Fulghieri and Hodrick, 2003) - Managers foresee good equilibrium,

but end up in bad equilibrium.

Gugler et al. (2003): Around 28% of all mergers and 65% of all failures
 Main challenges

Participants in the M&A process

BUYER SELLER

Lead Advisor Lead Advisor

Internal & Stakeholders Internal & external Stakeholders

external experts
experts Public Public
Strategy advisors
Strategy advisors Shareholder Shareholder
Tax experts
Tax experts Board of directors Board of directors
Legal experts
Legal experts Antitrust division Antitrust division
Accountants
Accountants Customer Customer
Financing partners
 Who are the potential buyers?

Strategic industrial buyers

Financial investors (Private equity, PE)

Existing management (Management buy-out, MBO)

New management (Management buy-in, MBI)

Public investors (Initial public offering, IPO

Potential buyers Strategic, industrial buyers

Short description

Largest category of potential buyers (may or may not operate in the

same market)

Objective: Acquisition of 100% of the shares (or assets)

Potential buyers are clients, customers, suppliers or direct competitors

as well as potential competitors

Dependent on size and industry: domestic or foreign buyers

Preconditions and challenges

Willingness of company owner to sell

Diligent sales process

Advantages

Typically highest transaction value potential

Likely to be premium buyer

Improvement of the strategic and financial positioning of the company

In general, fast and lean due diligence process and share purchase
agreements

Disadvantages

Disclosure of sensitive information (due diligence) required

Change of corporate/management culture

High transparency requirements in respect of quoted buyers

Potential buyers Financial investors, Private Equity

Short description

Clear investment focus (in terms of industry and company size)

Investment objectives: high-growth / restructuring / mature companies

Focus on financial optimisation (e.g. working capital)

Preconditions and challenges

Willingness and capability for change

Advantages

Realisation of high sales price (dependent on market environment)

Continuity of management

Sometimes the only group of interested buyers

Disadvantages

Complex sales process with extensive due diligence and complex and
extensive share purchase agreement (representations and warranties)

Synergies?

Confidentiality Agreement. Also known as Non-Disclosure Agreement

(NDA)

Main content:

Regulates under what circumstances, to whom, when and what information may be
circulated

Regulates how to deal with confidential information (e.g. mark the information as
confidential, obligation to return or destroy the information received)

Disclaimer

Prohibition of poaching

Follow-up time

Teaser. Also known as Blind profile

Short description of the target (2-3 pages) / Key investment

considerations

Provided by the sellers advisor to potential buyers to get an idea whether the buyer
has a general interest in the company (target)

Name of target remains undisclosed / Contact on a no-name basis

What is an Information Memorandum?

 Main goal: Providing potential acquirers with detailed information
(public and private) about the company to be in a position to issue an indicative bid

Main content:

1. Executive summary / Key investment considerations

2. Market and competition

3. Description of the business:

Products / Services

Customers

Operations / Production

4. Sales and marketing

5. Management

6. Employees

7. Financial information

What is an Indicative Bid/Offer?

Letter issued by the potential buyer to the seller, describing the terms and
conditions for carrying out the transaction:

Basically non binding

But: factual and moral binding effect

If offer is attractive to the seller, potential buyer will be invited to due

diligence

Content:

Purchase price (range) and assumptions

Premises for the execution (i.e. due diligence, committee approvals,

antitrust division)

Source of financing

Strategic rationale behind transaction

Management / employee

Time schedule
 Exclusivity clause

Contacts

Other declarations:

Heads of Agreement, also called Letter of Intent, Term sheet or

Memorandum of Understanding:

Typically prepared and agreed when an auction process is not pursued or prior to
granting exclusivity to the preferred buyer

Non-binding agreement setting forth the basic terms and condition under which an
investment will be made

Tactics seen in the past:

Making high indicative offers to get short listed, obtaining further information and
then reducing their offers

Objectives and results of a due diligence process

Due diligence performed by the buyer and its advisors

Market

Product margins

Market environment, competitors

Customers and suppliers

Market size and market share

Market/growth potential

Scalability of production

Operational

Plants and facilities

Production processes

Inventory and purchase

Supply management

Working capital management

Technical

Product pipeline

Innovations, research & development

Quality of products

R&D expenditures

Protection of intellectual property

Lifecycle of products

Quality control

Treasury and risk

Insurances

Currency risks

Cash management

Dunning process, trade receivables, doubtful debts

Credit facilities and financing structure

Real estate

Rate of utilisation

Required space

Locations

Market value of properties

Development and expansion plans

Environmental

Exposure to toxic elements

Medical risks

Waste management

Production restraints

Old environmental damages, contaminations

Claims from environmental issues

Management Presentation

Objective:

Opportunity for the management to present the company, its strategy and
themselves

Opportunity for the potential buyer to get a first impression of the management and
to ask questions on the business and the future performance

Main content:

1. Executive summary

What the business does

 What sets it apart from the competition / Investment highlights

Key people

2. Product and Services

Unique selling propositions

Future development

3. Customer / Competition / Market

4. Strategy for the business

5. Financial performance

Example: Pricing in an M&A transaction

Determination of the negotiation process

What is the negotiation position (relative strength) between seller and

buyer?

What is the tactic? Playing hard? Only suggested after careful thought and
discussion

Soft factors

One name one voice in the whole negotiation process

Order of the negotiation items on the agenda has an impact on the

negotiation outcome

Same hierarchy level on both sides of negotiation table

Who drafts the share purchase agreement? Amendments to be made

by whom (mark-up to the SPA)? Question of power?

Controlled auction process: seller is in the drivers seat, determines

the time schedule/next process steps and also conducts the negotiations with
one (or several) potential buyer(s)

Exclusivity agreement: seller is bound (until specified date or

milestone) to negotiate with one party only

Equal treatment of all potential buyers by the seller?

Important success factors for an M&A process - seller

Attractiveness of the company to be sold

Value of the company

Economic environment

Number and quality of potential bidders

Synergy potential with potential buyers

Reasons for the disposal (Selling story)

 Involvement of key people

Identification of key people within the company

Early involvement in the confidential process

Incentive/performance bonus for securing key peoples loyalty

Elaboration of career opportunities with new owner

Quality of Lead Advisor

Careful process preparation

Securing confidentiality

Identification and contacting of potential buyers

Willingness of potential buyers

Persistence while contacting potential buyers

Professional sales documentation (Information Memorandum) and well

prepared due diligence and management presentation

Structuring of a competitive bidding contest

Important success factors for an M&A process - buyer

Strategic fit / Due diligence

Plausibility of business plan

Tax, legal and environmental assessment

Controlling, financials

Synergy potential

Value of the company, pricing

Involvement of key people

Identification of key

Elaboration of career opportunities

 Integration concept

Early planning and communication

Maintain momentum from deal completion while ensuring day-to-day business

Availability of management and financial resources

Fast execution, especially during the first 100 days

Concentrate time and resources on value drivers and growth opportunities