The Role of Financial Management in Successful Business Acquisitions and Mergers - Essay Example

The role of financial management in successful business acquisitions and mergers Introduction Advice pertaining to investment banking with in mergersand acquisitions forms an integral park of the job of a banker and will be adding momentum towards the closing and coordination of the plethora of events and actions which need to be reviewed before any such transaction. This will involve giving strategic advice and help in tackling the “complex beast” of Mergers and Acquisitions. From a financial perspective mergers and acquisitions have become an attractive business option in the modern corporate practice as a means of achieving increase in growth, diversification, and the ultimate goal of economies of scale .Many companies also have the strategic aim of acquiring a global presence through these mergers and acquisitions.Any merger or acquisition will require careful financial attention at all stages particularly because this is a financial consolidation of two corporate entities whereas the assets and liabilities will be shared.It is worth noting the difference between mergers and acquisitions as mergers are attributed to the consolidation of two corporations and acquisitions involve purchase of one organisation by another.This will be a decision based mainly on financial strategic management where the danger is that there will be a failure to meet the anticipated purpose in the end.Therefore in the light of all these considerations in order to ensure that my presentation is a success my aim will be to educate the audience into becoming more informed users of financial statements pertaining to mergers and acquisitions .I will emphasise upon the intricacies of financial accounting in this regard particularly with regard to goodwill, acquisition provisions and tax. Another consideration will be the use of acquisitions concluded by contract, rather than by exchange of equity interests. This is will also involve an explanation of how the GAAP (Generally Accepted Accounting Principles) have coped with the variances in different systems in order achieve successful financial reporting objectives. The presentation will highlight the fact that corporate financial statements serve as information givers about the portfolio of the firm pertaining to its performance and prospects.My presentation will demonstrate the link between the economic atmosphere and how its reflects onto a financial statement.Also included in the presentation will be how the organisational manager of a firm can communicate to the financial users the views of the financial issuers thus taking on the role of a financial intermediary. Of prime importance will be an understanding and communication of financial statements and what should or should not disclosed in line with the regulation and strategy. The Balance Sheet The pith and substance of reviewing a financial statement prior to concluding a merger/acquisition contract pertains to the underlying economics of the economic events highlighted.The relevant information would include the figures which reflect the current value of the assets which are to be acquired and the liabilities assumed.This would allow a potential buyer to recognise the assets acquired and liabilities assumed at their acquisition date fair values and this should be reviewed regardless of the fact how these assets were acquired (that is by merger or contribution or even purchase).This would help the acquirer recognise many intangible assets separately from goodwill. The diagram above1 shows how the financial information and its disclosures will finally lead to the closing of a merger deal. Before concluding a merger or acquisition the experience accountant will scrutinise the pension and tax liabilities which will arise subsequently and how will they be computed post acquisition.Also relevant is the extent to which the buyer will be held responsible for the company’s individual assets acquired and liabilities assumed . It has to observed from the balance sheet and agreed from the start how the liability for the amount of the projected benefit obligation or for the amount of the projected benefit obligation in excess of plan assets or an asset for the amount of plan assets in excess of the projected benefit obligation will be computed in the future accounting books.In this regard what is necessary is the use of consolidated financial statements which will always be beneficial in gleaning over the results of operations and the financial position of a parent company and its subsidiaries more importantly if the group was a single company with one or more parts.It is a well known fact that the consolidated financial statement will almost invariably be more useful in this regard while being a fair presentation of all the companies in the group which are being managed by the same parent company. As I evaluate the information typically revealed in a balance sheet that will be of relevance to a potential buying organization when reviewing financial information prior to an acquisition bid the following considerations will be of relevance to me . The balance sheets of the last five years whether they have been audited whether they have been audited and reviewed in line with GAAP? whether copies of federal, state and local tax returns for last three years are available with in the balance sheet If the accounts receivable contained with a provision for bad debts etc. What about the aging report of the company and whether any offsets are available against receivables? Next whether the inventory of raw materials and finished goods is adequate for the business. whether it is too obsolete Is inventory amount normal for the size of the concern being purchased? has the company’s cost of goods sold ever been overstated in the past? the items pertaining to work in progress and whether the balance sheets reflect this adequately. Review work in process. Is work in process adequately reflected in the balance sheets? If the physical/depreciation based conditions of plant, equipment furniture and machinery verifiable and adequate for a running business.? On a review of liabilities whether they are adequately presented and if there are any accrued vacation time or pension liabilities. whether the bank and cash equivalent accounts are verifiable? Whether the deposits for taxes , insurance, lease,utilities are verifiable? whether the tax returns have been properly filed whether all the pay roll taxes and and independent contractors properly have been classified and paid out. whether copies of tax bills have been paid. If local business taxes have been paid for each jurisdiction in which the company is doing business. Review copies of all promissory notes, deeds of trust, mortgages, security agreements, and other documents evidencing liabilities. review of unsecured local loans the position as to the Bank short-term and long-term financing and Pension plan liabilities. if there are any other possible unknown or contingent liabilities for the type of business being purchased? Product innovation The concept of product innovation pertains to the whole process of bringing a new product or service to the market and which include the stages of product conceptualization, design and development. More importantly there will be a need to improve upon the conceptions of production and distribution of the new product.As the name suggests that the “innovation” pertains to the something new in terms technology and creativity .The innovation process will involve the activity of people and organisations who will be able to change themselves and the environment. The process in intensely organisation and The process of product innovation involves to a large extent realising what kind of a merger has been concluded. The diagram(Lind 2005) above shows the approach taken by Lind (2004) where she has argued that successful product innovation with in a merger includes identifying what kind of merger has been concluded.For example if the merging parties produce the same product she recommends a fast and highly directive approach .(Lind 2004) . Product innovation would involve aiming to market a strategy where the customers would not just be offered the product but a solution to their needs and problems.How then can the product be developed to match specific needs rather than “bundles of standardized products or services “solutions”. One of the most brilliant examples of product innovation comes from IBM which has become popular for successfully transforming itself from a provider of hardware-based products to more software-based services .The new IBM aims to provide IT-consulting and outsourcing and the original parent IBM has benefited from this in a great way.The course of the product development approach I will take will follow a rather customer-centric approach of providing them with the best product innovation through co-creation and customization .It would be worth assessing at the onset the intricacies of direct market relations and profit/loss responsibility with in the new post merger corporate set up and whether procedure is knowledge or research intensive.Also of great use would be the exogenous and endogenous factors through the cross pollination of which a strategy of moving forward can be gleaned and enhanced. The diagram2 above shows the various stages involved in product development post merger.The first stage would invariably be research and whether the product requires to be patented and developed further.There would be the testing of the models and samples until it is confirmed that there should be full production of the product. Successful product innovation would entail the use of all these stages properly to develop the product thoroughly. Business Score Card approach The balanced scorecard was is the Brainchild of Kaplan and Norton and has been endorsed academically as means of measuring sound business performance which will be represented by what Kaplan has termed as “a balanced presentation of both financial and operational measures”.The background to this approach is the author’s quest in setting up a range of measures which will give the top managers a fast yet coherent view of the business.The balanced scorecard approach that I will employ in the post merger situation will state the results if the company’s operations, which are the “operational measures that are the drivers of future financial performance”. Kaplan and Norton define this approach as allowing managers to form a fourfold view to approaching their business that is how the customers perceive you as a company(Customer Perspective),what your company excels at ( Internal Perspective),whether the present setup allows you to continue to improve and create value(Innovation and Learning Perspective) and last but not the least how you look at shareholders.(Financial Perspective).This fourfold view then not ony minimises the information overload but also allows the manager to put everything on a paper.The method is popular with all the big corporate entities like Rockwater (part of Brown and Root), Intel and Apple computers, BP Chemicals, Milliken, NatWest Bank, Abbey National and Leeds Permanent. Before discussing the business scorecard further it is worth recognising that the whole concept is heaving based upon the notions of corporate governance with in the firm. Corporate sum up governance has come to mean the result of processes through which the company was managed and controlled. This again means that there have to be rules and regulations, with financial implications, that separate the makers of the rules from those who perform under it. Making of rules is under scrutiny as much as observance of the rules. And governance will essentially cover both aspects to come to any conclusion.There is no doubt that the mangers in the post merger/acquisition position will act for their own interests as Corporate governance refers to mechanisms that ensure that managers act in the best interest of the owners. These will be based on a number of considerations like the PESTEL factors which are beyond the control of the companies or their board and management and have to be accepted for whatever they stand for.(PESTEL stands for political, economical, socio-cultural, technological, environmental and legal issues facing the managers and employees) However the business scorecard Analysis helps the company to understand the external compulsions and to devise internal regulations to manage their practices. .The internal policies and procedures need to be adjusted in accordance with them as is the internal factors that can be controlled, modified and regulated by the board and the management.They are internal when there will be internal system encompassing policies which will help the processes and people and serve the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Therefore a sound business card approach is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards these policies of keeping all perspectives before it in its policy making. The business scorecard approach thus relies heavily on its precision and relevance and will ideally be a success where it is possible to deliver information which is the backbone of the strategy, and can function as the cornerstone of both the organization’s current and future success by balancing short-term, essentially financial performance, with long-term growth opportunities; balance internal and external perspectives by ensuring that comparison against current competitors is undertaken, in addition to comparison with the organization’s own past performance; highlight performance by adopting a broad perspective: financial, business processes, customer/market interfaces and employee motivation; act as an integrating tool, both horizontally (across functionality) and vertically (through levels of management), by communicating the business strategy and the organization’s priorities; serve as a dynamic, continuous process used to evaluate performance and redefine strategy and measures based on results.(Kaplan and Norton 1993, It is also quickly worth mentioning that the Business card approach is aimed at good governance and is seen as a firm’s results that emanated from a series of contracts between several types of stakeholders. This is an incident of how the mangers and employees should be allowed a free hand to achieve various business goals and not over dominated.As managers in a newly acquired entity corporate governance does become an issue because the managers will undertake the optimal level of investment and minimize the risk while taking decisions in situations which are not a part of the incomplete contract.. Therefore this scorecard will allow me to assess with in a single report how approaches can be adopted in the last post merger corporate entity to make the company more customer orientated and how improve its product development and management.When all these perspectives are viewed together it is possible to see whether the development of any one perspective is damaging the development of another.The diagram below adopted from Kaplan and Norton shows how this perspectives can be brought together onto a single table for a comprehensive perspective. There are many advantages of using this approach as it puts strategy and vision at the centre where as the “control bias” is avoided thus by not bossing the employees as to business decisions but instead setting out goals for them to follow and pursue which will allow them to judge for themselves the appropriate course of action as to whatever is necessary.As in the end result is known but the path to it is not rigid inorder to allow motivation and flexibility to managers.This will promote the identification and emulation of best practices in an innovative way to cope with all business problems. It is believed however that it is important for researchers to gain insights into the motivation of these individuals who are seen as indispensable actors in corporate governance, for the very reasons cited in the agency theory and resource based view . The managers and employees need to be analysed through this approach for their hard work and performance it has been noted that once such an analysis is underway the prestige expansion of personal contacts and exposure to different business structures and experiences may be a pivotal factor in motivating them to work harder and work together with take over management.The approach will allow me to take into account the customer’s perspective which will boost competitive strategies within the firm.The company’s strategy can thus be translated into measurable goals.This is will also allow a linkeage between corporate objectives and the personal objectives of the management and so they may be compared against a standard of expected performance. The Business Score card will allow me to analyse strategical and critical success factors where for the results of each perspective goals are set and measures developed.Whereever these performance criterias conflict there will be the task of management to resolve these conflicts for a more balanced approach.One of the most major task in introducing the business card approach to measure this post merger situation would be devise a set of measures compatible with the current challenges of the firm. However this approach cannot be relied upon solely to bring about business stability and a good business score card will not always reflect the guaranteed quality results particularly if there is a lack of proper analysis dialogue, commitment and action which are all the success factors in the development of a sound scorecard.It has often been said that the balanced scorecard approach has the dangers of ignoring the uniquely cultural and individual needs of the organisation and this cannot be a one size fits all scenario.The concept is appealing but at times too simplistic to the intricacies of organisational management.Last but not the least in my presentation my advice would be to warn the company of the hazards of spending too much time upon irrelevant things which do not relate over all to the strategic goals of the organization.Also this entails that all activities of the firm should be included but not it too much useless detail but adequately measured. Conclusion In this Paper I have discussed my role as a manager in the strategy dept of a major UK high street bank where I can evaluate potential acquisition targets while making people aware of the The role of financial management in successful business acquisitions and mergers. I have discussed how this presentation can be improved, and what kinds of financial information should be review prior to an acquisition bid.Then I have discussed the various conceptions of product innovation and development post mergers.The last part of my paper has discussed how the business business scorecard approach can be adopted as a mechanism for measuring business performance post and junior management and cultural conflicts with in the organisations atmosphere.The essay ends with an evaluation of whether the business card approach does deliver what is promises and what can be its shortcomings due to the variance of certain factors. References 1. International GAAP: International GAAP: Generally Accepted Accounting Practice under International Accounting Standards, The Financial Reporting Group of Ernst and Young. 2. Barbara Lind, John Stevens (2004),Match your merger integration strategy and leadership style to your merger type ,Strategy & Leadership ,Volume 32 Number 4 2004 pp. 10-16 ,Copyright © Emerald Group Publishing Limited ISSN 1087-8572 3. Kaplan, R.S., Norton, D.P. "The balanced scorecard - measures that drive performance", Harvard Business Review, January-February 1992, pp.71-9. 4. Kaplan, R.S., Norton, D.P. "Putting the balanced scorecard to work", Harvard Business Review, September-October 1993, pp.134-42. 5. Kaplan, R.S., Norton, D.P. "Using the balanced scorecard as a strategic management system", Harvard Business Review, January-February 1996, pp.75-85. 6. Eccles, R.G., The performance management manifesto Harvard Business Review, March-April 1991, pp.131-7. 7. Stephen R. Letza, 1996,The design and implementation of the balanced business scorecard ,An analysis of three companies in practice ,Business Process Re-engineering & Management Journal ,Volume 2 Number 3 1996 pp. 54-76 Read More