Financial Analysis Series: Acquisitions controlling and analysis

Financial Analysis Series: ACQUISITIONS CONTROLLING AND ANALYSIS

Statement of the Issue • In large, complex and acquisitive companies, it is difficult to keep track of the success of acquisition success vs. integration management vs. ongoing operational management. • The results of these activities must be mapped onto the budgeting process and tracked by a controlling function • To avoid a conflict of interest, the responsibility to control and measure the success of these activities is separated from the other three functions • Control to ensure that the terms of the acquisition/merger agreement are being upheld © Robin Bhattacharya 2010. All rights reserved.

Methodology • Tracking over a multi-year timeframe using a “summing up” methodology • Correct attribution of the results, especially the integration costs or gains, must be ensured to avoid incorrect measurement, cross-subsidisation, etc. • The acquisitions controlling function will establish the distribution of revenues and costs between the two previous entities (existing and acquired operations) and identify the synergies (integration management) Even if the operations are managed by a combined (single) management, it is important to separate the figures to measure the success of the original acquisition estimates © Robin Bhattacharya 2010. All rights reserved.

Sources of information for the new operational budget multi-year Integration management/ plan 3 realisation of synergy plans Acquisition Process multi-year New Operations budget 2 Acquisition(s) (incorporating acquisitions) Existing operations one-year budget & multi-year budget 1 Sources 1. Pre-existing budgets 2. Target’s pre-existing budget vetted and/or modified by acquisition team 3. Plan put together by acquisition team as part of the calculations for pricing (which will consider revenue/cost synergies) © Robin Bhattacharya 2010. All rights reserved.

Sources of the results Synergies Integration management effect nominal Acquisitions Acquisition effect growth before acquisitions Existing Management of baseline Existing operations (existing) operations operations Once the actual results are split up into the three sources, then the results of the various functions can be estimated • operational management; and/or • the integration function; and/or • analysis and estimation of the acquisitions’ effect (acquisition valuation) © Robin Bhattacharya 2010. All rights reserved.

Culture • Culture is quoted as the most important differentiator separating successful M&A from failures • Therefore, cultural aspects and the integration of another firm’s different culture must be considered and planned for integrally. A short list of issues to examine: Authority Attitude to and of employees Chain of command Champions vs. team players Decision heirarchies Method of rewarding performance Teams vs. departments Internal vs. external hiring Freedom to act independently Processes Risk tolerance Definition and flexibility of Perfecting existing methods budgeting, decision making vs. Star Trek and other processes © Robin Bhattacharya 2010. All rights reserved.

Politics • Internal politics will play a large role in every aspect of an acquisition and must be duly considered: Vested interests related to or within the company may push for/ against a deal. In detail that may involve over/under valuing several aspects in a proposed deal and will often include either rosy or pessimistic projections. • There are various ways of dealing with politics in general, but the principles for M&A should include: Create a neutral body that can double check analyses on a detailed level Ensure that the goals and targets held before an acquisition (e.g., synergies) are not left behind in post-acquisition planning Hold departments responsible for their estimates – this will filter into the operational evaluations after acquisition © Robin Bhattacharya 2010. All rights reserved.

Structure • The structure depends on the firm-specific and pre- existing structure, which may or may not require modifications. • Structure will also be reflected in terms of acquisition regularity, horizontal vs. vertical, technology fit, retention of management, etc. • Aspects to focus on: Modifications in the business due to integration are clearly identified and not loaded onto the pre-existing business line Forward planning does not disregard the acquisitions planning prior to the investment The views of the departments responsible for operational realisation must be considered before the acquisition estimates are made © Robin Bhattacharya 2010. All rights reserved.

Structure (cont’d) • Aspects to focus on (cont’d): Issues such as transfer pricing should be explicitly taken into account as they were for initial synergy estimations. Responsibilities for (i) ongoing operations, (ii) acquired operations and (iii) synergy realisation must be clearly defined to avoid the losing track or double counting Communications between those responsibilities must be formalised For more information, please contact RobinBhattacharya@yahoo.com © Robin Bhattacharya 2010. All rights reserved.

Appendix: Interrelation and fit with other analytical financial functions Corporate Financial Strategy Communications Operational Financial Analysis Analysis Valuation Performance M&A Support Monitoring & Control: Acquisitions Treasury Strategic Investment & Due Diligence Asset Management © Robin Bhattacharya 2010. All rights reserved.

Financial Analysis Series: Acquisitions controlling and analysis

by RobinBhattacharya on Jun 15, 2010

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