CFO Service

What is Post Merger or Reorganisation of a Company?

• Gain or Loss to Stakeholders:

In Mergers and Acquisitions Services, it largely depends upon the terms and conditions of the merger and the track record of the transferee or acquirer company. Based on the cardinal principle, every buyer, in other words, transferee or acquirer has to pay more than the book value of the transferor or target company. However, the terms & conditions of transaction depend upon their present operations & past historical records. Some examples of the effect of acquisitions to small shareholders worth mentioning are as under:

On the announcement of the merger of the ICICI Ltd. with ICICI Bank, the share prices jumped from 47.70 &77.00 on 25.9.2001 to 56.10 &98.00 on 24.10.2001 respectively.

The takeover by Mr. Arun Bajoria for Bombay Dyeing provided a golden opportunity to the Small shareholders to exit at 110/- per share against the market price ruling between 60-75 Per share.

• Implementation of Objectives:

We have so far discussed various objectives, motives, reasons, and purposes which, hare to be achieved and accomplished by implementing them after completion of merger, amalgamation or acquisition. After the merger or acquisition, the resources of two or more companies should be put together for producing the better results through savings in the operating costs because of the combined management of production, marketing, purchasing, resources etc. These economies are also known as synergistic operative economies.

A key challenge in the mergers & acquisitions is their effective implementation as there are chances that the mergers & acquisitions may fail because of slow integration.To implement the objectives of mergers or acquisitions, the following factors are as below:

1. Legal Requirements
2. Combination of operations
3. Top Management Changes
4. Management of financial resources
5. Financial Restructuring
6. Rationalization of Labour Cost
7. Production and marketing management
8. Corporate planning and control

• Integration of Businesses and Operations:

Recognizing the importance of mergers in the success of a company, it is important to discuss some critical aspects that should be taken into account in the integration stage of a Merge & Acquisitions deal:

1. Focus on people and their incentives
2. Integrate selectively
3. Do not delay decisions and communicate clearly the new rules

Suppressing competition with coordination and control may not be a win-win proposition after all. Constant innovation and adaptation are critical for the long-term survival of an organization. Without competition- the fear to fall behind — there is not much rationale for constant re-invention. The fact is that it must be taken into account in a way that the various parts of the new organization are integrated.

• Post Merger Success and Valuation:

Every merger is not successful. The factors which help measure the success of any merger are briefly discussed below:

1. Whether the merged company yields larger net profit than before or a higher return on total funds employed or the merged company is able to sustain the increase in earnings.
2. The capitalization of the merged company determines its success or failure. Similarly, dividend rate and payouts also determine its success or failure.
3. Whether merged company is creating a larger business organization which survives and provides a basis for growth
4. In some mergers, there is not only increase in the size of the merged or amalgamated company in regard to capital base and market segments but also in its sources and resources which enable it to optimize its end earnings.
5. In addition to the above factors, a more specific consideration is required to be given to factors like improved debtors realization, reduction in non-performing assets, an improvement due to economies of large-scale production and application of superior management in sources and resources available relating to finance, labor and materials.

• Human and Cultural Aspects:

The successful merger demands that strategic planners are sensitive to the human issues of the organizations. For the purpose, following checks have to be made constantly to ensure that:

1. Sensitive areas of the company are pinpointed and personnel in these sections carefully monitored;
2. Serious efforts are made to retain the important & key people in the organization;
3. The replacement policy is ready to cope with the unavoidable personnel loss;
4. Records are kept of everyone who leaves, when, why and to where;
5. Employees are informed of what is going on, whether good or bad &even bad news is systematically delivered. The uncertainty is more dangerous than clear, logical presentation of the unpleasant facts;
6. Training department is fully geared to provide short, medium and long-term training strategy for both production and managerial staff;
7. Likely union reaction be assessed in advance;
8. Estimate cost of redundancy payments, early pensions, and the like assets;

• Measuring Post-Merger Efficiency:

The criterion to judge a successful merger differs in different conditions. Different factors may be considered for making value judgments such as growth in profit, dividend, company’s history, and increase in size, the base for growth etc. Several studies suggest different parameters to assess the success of mergers:

1. The successful merger creates a larger industrial organization than before and provides a basis for growth.
2. The 3 criteria were considered viz. (a) the merger should give a larger net profit than before (b) merger should provide a higher return on total funds (c) there should be a sustained increase in earnings.
3. Earnings on capitalization and dividend records determine the success of the merger.

• Measuring Key Indicators:

The main purpose of a merger or acquisition is to deliver the expected financial results namely earnings and cash flow. However, there are certainly other measures that serve as key indicators and they also need to be measured. The indicators may be grouped as:

1. Financial outcomes.
2. Components measures of these outcomes namely the revenues & the costs & the Networking capital as well as the capital investments.
3. Organizational indicators such as customers, employees, and operations. All areas being integrated & both acquirer & the target, or in the merger, both partners, should be brought within the ambit of continuous appraisal.

There are largely4 possible reasons for the business growth & expansion which is to be achieved by the merged company. These are-

1. Operating economies,
2. Financial economies,
3. Growth and diversification, &
4. Managerial effectiveness.

Thus, the aspect of post-merger reorganization isn’t exhaustive & the parameters of the same would have to be established by management of the companies, depending upon organizational requirements, corporate policies and plans and the objectives of the merger etc. sought to be met