THE CRUCIAL EFFECTS OF MERGERS AND ACQUISITION ON RESEARCH AND DEVELOPMENT IN TECHNOLOGY FIRMS AND ITS CONTEMPORARY ISSUES AND CHALLENGES.
M. RATCHANYA, B.Com.,LL.B.,(Hons.) V Year SCHOOL OF LAW, SASTRA DEEMED UNIVERSITY
I. INTRODUCTION:
The issue analyzed in this paper for scrutiny is the corporate activity involving the merger and acquisition (M&A) of companies whether contriving in a local market based in a single country or in the form of cross-border mergers of local and foreign companies. The practical scenario is that such M&A activity occurred in waves often linked to the economic cycle. The frequency and economic value of cross-border mergers and acquisitions (M&A) has developed notably during the last decades. In the same time, research and development (R&D) capability has been progressively important for firms’ success. Current research on M&As is ample, and shows a sparingly high failure rate, which is often explained by merger integration predicament.[i] It was studied that for an M&A to bring such R&D synergies, it is important to have a competent mix of complementary and substitutive technological relatedness betwixt the merging parts. It is also significant to have a clear assimilation strategy that shows where divergent knowledge in the new entity exists and that focuses on R&D employee retention. It was also observed that there is a trend towards cross-border mergers and, from an international perspective, M&A have been spurred by increased foreign direct investment, and incentives rendered by economic integration of nations which have up surged questions about competition policy.
II. DATA ANALYSIS:
Within qualitative research, analytic inductions as well as grounded theory are the two general strategies applied for data analysis. Analytic induction is a framework relied on the research question put into a hypothesis which is then certified against the discovery of the research. If the discoveries in the research do not concur with the hypothesis, a new hypothesis has to be codified and tested until a hypothesis cannot be rejected by the cases and the research question answered. This method has the possibility of becoming time-consuming if the initial hypothesis should be abandoned several times. It also lacks guidelines of how many cases that has to be examined before a hypothesis is proven. Grounded theory is no more relied on setting up a hypothesis and then test if it cannot be jilted by findings from the cases, but is rather a theory where an interpretation or theory to the initial research question develops along the way of the study. As Strauss and Corbin (1998:12) puts it: “In this method, data collection, analysis, and eventual theory stand in close relationship to one another”.[ii] The main comparison from inductive analysis is that the theory is not to be proven, but the same need to be advanced or discovered through the research. In grounded theory, coding together with constant comparison are the central processes for analyzing data. Since perceptions of key component and patterns from the exploration might be subjective, it’s important to keep an open mind and try to avert adding personal values when using the principles from grounded theory.
III. HOW CAN POSITIVE SYNERGIES FOR R&D BE PROMOTED FOLLOWING AN M&A?
The economies of scale, economies of scope, benefits of increased size and synergies from a consolidation of different knowledge inputs all could be an outcome of an M&A. Synergies from different knowledge inputs has been most prominent, and was groupthink in all case studies. It can be counterfeit that such synergies are mostly found in M&As of technologically complementary firms since they should widen the knowledge more than M&As of technologically substitutive firms. However, it was found that M&As of technologically substitutive firms also could attain such synergies due to divergent levels of expertise in different areas of R&D. By consolidating the best parts from each subsidiary the entity as a whole, could achieve R&D efficiencies throughout. Such geographically dispersed R&D has the prosperity of capturing local tastes and gaining connection to local knowledge clusters. Thus, although coordination of the R&D in the new entity might be harder due to large distances, it seems ill-advised to move R&D centres following M&As. Also, if the R&D centres are to be moved following the M&A, the risk for losing key R&D employees is surpassing and therefore many of the possible synergies of the M&A are lost.[iii]
IV. WHAT ARE THE MAIN ISSUES FOR R&D POST M&A?
Harmonization of technical systems and R&D management procedures were the most outstanding problems generally occurred. Managing such problems is time consuming and a source of frustration for R&D employees. The disputes appear larger for M&As of technologically complementary firms when compared with technologically substitutive ones. Another problem is that it can be non-obvious where to find different sources of knowledge in the new entity. Such confusion effectively prevents the synergies from consolidating different knowledge. Another dispute following an M&A is that to allow efficient R&D collaboration between the different parts of the new entity, new personal relations need to be developed. Such personal relations are best developed face to face which is problematic if the geographical distance betwixt the merging firms is large. Lastly, since most synergies for R&D originate from consolidation of divergent knowledge, it is of vital importance to cling to key R&D employees in order not to lose such knowledge.[iv]
V. CREDIBILITY, DEPENDABILITY, CONFORMABILITY AND TRANSFERABILITY:
Credibility is the counterpart to legality and the gauge part referring to if the discoveries in the gathered data are credible or not. Transferability is a touchstone for into what extent the findings can be transmitted and used in a divergent environment. Transferability is also sectioned by the fact that only technology-oriented firms have been considered in this report. Dependability is the qualitative counterpart to authenticity. The idea is that all data secured in the research process should be kept and thereby audited by peer/peers. This is accomplished to retain the research trustworthy through each and every stage. Conformability is the criteria of objectivity. As it is not possible for a human being to stay entirely objective, subjectivity will affect how data is looked upon and analyzed. As with objectivity, this is not possible to completely attain but being aware of this main dispute with the inductive approach aid to avoid this to an as large extent as possible. Authenticity deals with the general fairness and the political impact will finally what the research might have. Fairness is achieved by representing viewpoints from different hierarchical levels.[v]
VI. WHY COMPANIES SINGLE OUT M&A?
Generally there are three types of M&As: Horizontal M&A, which is a accord betwixt two firms within the same industry. Vertical M&A, defined as a deal between two firms which are causing to function at different levels in the production line, and conglomerate M&A, where dual firms operating in different industries and/or at divergent levels in the production line. Economies of scale, company size, and market power are all reworked motives for entering an M&A. The favoured position of economies of scale is that costs per unit can be abridged with a larger unit output. Size could be “Critical mass”, i.e. size needed be withstand to survive in a market, e.g. a certain percentage of the market share is imperative to be able to compete in a long term view. Size could also be the probability of getting listed on the stock market. Market power could be used for forcing competitors to exit the market and to create an oligopoly or monopoly. Financial motives could be e.g. to diminish taxation by restructuring a firm to be able to exploit differences in tax laws between countries, or up surged debt possibilities because of the increased revenue for the new firm. Entryway to new market is a strategy where green field investment is seen as too risky and M&A seems as the best alternative. In some countries, such as China, M&A might be the only option to secure access to a market. To evolve a new product could be twain expensive and time-consuming. Thus, a company with a large budget and possibly a protracted time perspective might revamp the odds to a successful product development. The motive of enhanced growth includes companies in hibernate markets or markets expected to stagnate and look to develop further through M&A.[vi]
VII. THE CHARACTERISTIC PRODUCT ADVANCEMENT PROCESS:
Product development is an interdisciplinary movement where in particular three business functions calibrate; marketing, design / engineering and manufacturing. The generic PD process can be divided in 6 steps:
1. A planning phase in which opportunities are single out and development goals, impulsion and assumptions are set;
2. A concept development phase, often called the “front end process”. In this aspect customer needs are identified and numerous product concepts are generated and funnelled down to the most promising one;
3. A System level design phase where the architecture of the product is enhanced, and an initial production process;
4. A detailed design phases in which all parts of the product are developed and apt for manufacturing;
5. Testing and refinement of the design is carryout before the start of production in order to ensure that the goals of the product are full tilt and shortcomings are improved;
6. The last step of the PD process is the production ramp up where the production system is decided and the workforce trained to outturn the product as efficiently as possible.[vii]
VIII. RATIONALE FOR MERGERS & ACQUISITIONS:
The considerations that evolve in a prospective M&A relied on the strategic objectives of firms which include: designing a more cost-efficient operation out of the combined companies; expanding a company’s geographic reach; extending the company’s business into new types of products; gaining rapid access to contemporary technologies, resources, and competitive capabilities; and trying to establish a new industry and leading the convergence of industries whose boundaries are being blurred by wavering technologies and new market opportunities . In the case of friendly transactions, as opposed to hostile takeovers, the key strategic questions to be echoed cover whether: the combined company makes strategic sense; there are benefits to be derived from the new entity; the respective strengths; the overall cost; scope of investigations of each company; obligations to be met; the financial implications; and deal closure obsession. The objectives for pursuing M&A at the individual country level were attributed to: overcoming legal barriers to entry; greater access to resources; lower labour wage environment; market dominance; and reducing immediate rivalry. However, in this age of globalization, the basic objectives of M&A were seen as attaining a scale to meet global requirements; enhancing entrepreneurial activity; promoting diversification at the product and geographical levels; and facilitating new investments. The successful achievement of the objectives will lead to: creation of synergy which enhances performance; cost efficiencies which improve purchasing power of the firm; development of a competitive edge; creation of a diversified business network to reach markets; and an upsurge in market strength.[viii]
IX. FINANCING MERGERS AND ACQUISITIONS DELIBERATION OF DEBT AND EQUITY:
The modes of financing M&A involve equity through the acquisition of shares or stock in a firm, debt incurred via institutional loans subject to capital and interest repayments, and hybrids of the two. The traditional sources of funding embroil:
Ø Asset-based lenders;
Ø Commercial and Commercial finance companies
Ø Community banks;
Ø Insurance companies;
Ø Investment banks;
Ø Merchant banks;
Ø Investment companies;
Ø Private investment firm
In progressing countries, banks are the main external source of business finance because the financial systems are underdeveloped and Van Auken (2001) suggested that bank finance hover a valid source of external funding for firms and can become more effective, if firms reap a sound understanding of the different types of capital that can be accessed. The firm’s debt financing structure is intently related to its overall capital structure, and the critical steps in determining the appropriate capital structure are: estimate the interest rate the firm will pay; estimate the cost of equity; estimate the weighted average cost of capital; estimate the free cash flows and their present value; and deduct the value of the debt to find shareholders’ wealth. Financing the capital structure of a firm in M&A transactions often include multiple lenders with layers of debt arranged in the following levels of seniority: senior revolving debt secured by a first lien on current assets and fixed assets, liens on intangibles, and a pledge of stock; senior term debt obtained by a first lien on fixed assets, a first or second lien on current assets, and liens on intangibles and company stock; senior subordinated debt or mezzanine debt unsecured or secured by junior liens in the elegant asset sale leasebacks encompassing office equipment and real estate; and seller’s subordinated note or warrant secured or unsecured.[ix]
X. POST-MERGER INTEGRATION AND THE CORPORATE CULTURE CHALLENGE:
M&A constitutes a major strategy for developing Innovation, profitability, market share, and stock prices. It is widely accepted among practitioners of M&A that the integration process post-merger is fraught with complexity because this is the stage at which the deal is most vulnerable and to which the significant failures are attributed. Integration of two companies requires combining: cultures; vision, policy, ethics, and mission statements; key resources, processes, and responsibilities; and special resources such as human and financial resources, brand identities, plant, equipment, inventories, and real estate. A distillation of the research on M&A exposed that the factors responsible for successful post-merger activity are: strategic motivation leading to network efficiencies and synergies; clear relation to core business; economic pricing; prudent cash- or debt-based financing; and efficient integration planning. The post-merger plan should include goals of the new company; the support framework for integration of resources, systems, and responsibilities; and an integration timetable. The latest research on organizational integration was produced by Deloitte (2015) which detailed the top seven integration success factors as: executive leadership support (16.3%); across the board management involvement (14.6%); project plan which optimizes all resources (13.8%); integration team fully dedicated (12.6%); employee communication transparent (10.2%); achievement of synergy targets; and cultural fit addressed.
Post-merger integration research over the past 15 years has elucidated that many M&A did not yield the desired value as most surveys point to a success rate of around 30%. The evidence is that success is not based on a preoccupation with the financial, legal, technical, and procedural aspects alone, but a focus on the cultural aspects. Experience had shown that the integration agenda with respect to people and culture requires two distinct areas of focus: managing the initial emotional response, the state of mind of the acquired personnel by effecting them feel welcome, valued, and certain about their future; and aligning the mind-sets of the personnel in both organizations. The basic strategic options for successful cultural integration were identified as: leverage the benefits of the acquired organization’s culture to build a new “best of both” cultures; impose the acquirer culture so that one culture dominates; and keep the two cultures separate.[x]
XI. THE SUCCESSFUL MERGER TECHNIQUE:
The M&A process can be separated into 11 distinct stages which involve: formulating corporate strategy; developing acquisition strategy; conducting a broad scan of acquisition targets; undertaking a detailed review of acquisition targets; identification of potential targets and carrying out an initial due diligence (DD); examining the financing options and completing the DD; receiving the approval of and declaring the merger decision; undertaking post-merger planning; closing the deal; post-merger integration; and post-merger redesign. A successful merger can be increased by linking effective strategic formulation, pre-merger planning and post-merger integration. The key success factors in M&A arrangements as:
• Mergers of divergent-sized firms more successful;
• Early planning for the integration of the new physical and human assets;
• Fast-paced integration and early pursuit of available cost savings;
• Designating the merger integration leader and providing appropriate incentives;
• Awareness of cultural differences and avoiding conflicts through tailored communication with employees, customers, and stakeholders;
• The talent that resides in the acquired firm, especially technology and human capital, retained;
• Customer and sales force attrition minimized.[xi]
XII. CONCLUSION:
Thus the M&A process inevitably include groundwork of a strategic plan where it is significant to measure potential opportunities fit and rank them by “degree of desirability to a team of senior managers and trusted advisors”. The value of strategic planning in the merger/acquisition/buyout process was seen as a disciplining force on executives at the decision-making level, and as an aid to divestiture by throwing up candidates for “sell-off or shut-off”. In the case of a multi-business company, strategy development covered corporate strategy; business strategy; functional-area strategy within each business; and operating strategies within each business. Any M&A process without having a sound strategic plan in place is a recipe for failure. he financing of M&A transactions can be complex which dictates that persons engaging in M&A deals need to appreciate the sources of financing and different instruments in order to estimate the most appropriate type of financing for the particular acquisition. The complex phenomenon which mergers and acquisitions represent has captivated the interest and research attention of a broad range of management disciplines encompassing the financial, strategic, behavioural, operational and cross-cultural aspects of this challenging and high risk activity. [xii]Henceforth although coordination of the R&D in the new entity might be harder due to large distances, it seems unadvisable to move R&D centres following M&As. Also, if the R&D canters are to be moved following the M&A, the risk for losing key R&D employees is higher and therefore many of the possible synergies of the M&A are lost.
________________________________
(i) An Overview of Key Issues in Mergers and Acquisitions: A Case of Trinidad and Tobago (PDF Download Available). Available from: https://www.researchgate.net/publication/281556946_An_Overview_of_Key_Issues_in_Mergers_and_Acquisitions_A_Case_of_Trinidad_and_Tobago [accessed Nov 21 2017].
(ii) The Effects of Mergers and Acquisitions on Research and Development in Technology Firms. Available from:https://gupea.ub.gu.se/bitstream/2077/33486/1/gupea_2077_33486_1.pdf
(iii) The Effects of Mergers and Acquisitions on Research and Development in Technology Firms. Available from https://gupea.ub.gu.se/handle/2077/33486
(iv) Successful Mergers and Acquisitions: What You Can Learn From Them Available from: http://www.aperianglobal.com/successful-mergers-acquisitions/ul Mergers and Acquisitions: What You Can Learn From Them
(v) The state of case study approach in mergers and acquisitions literature: A bibliometric analysis. Available from: http://www.sciencedirect.com/science/article/pii/S2314721015000031
(vi) IT as a driver of M&A success. Available from: http://www.ey.com/Publication/vwLUAssets/IT_as_a_driver_of_M_and_A_success_GL/$FILE/EY_IT_as_driver_for_M&A.pdf
(vii) Top 10 Issues for Technology M&A. Available from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-article-page-top-10-issues-for-tech-mna-in-2014-110114.pdf
(viii) Rationale for Mergers and Acquisitions. Available from http://www.indianmba.com/Faculty_Column/FC799/fc799.html
(ix) Financing Acquisitions Using Debt Capital & Acquisition Financing Structures. Available from https://www.slideshare.net/GregTobben/financing-acquisitions-using-debt-capital-final
(x) Organisational culture and post-merger integration in an academic health centre: a mixed-methods study. Available from: https://bmchealthservres.biomedcentral.com/articles/10.1186/s12913-014-0673-3
(xi) Steps to Successful Merger & Acquisition (M&A). Available from: http://huconsultancy.com/7-steps-to-successful-merger-acquisition/
(xii) The Root Cause Of Every Merger's Success Or Failure: Culture. Available from: https://www.forbes.com/sites/georgebradt/2015/06/29/the-root-cause-of-every-mergers-success-or-failure-culture/#c8bc990d305b