The secret for a successful business reorganization, KNEWS

Linos Zambas gives the ins and outs of the secret to a successful business reorganization

31 JANUARY 2019 - 10:18

The secret for a successful business reorganization.

In the business universe, there are two available structures for organizations to emerge. Organically, by expanding their production capacity increasing their labor force and related factors of production and externally, through mergers and acquisitions (M&As). The latest is commonly achieved by acquiring a combination of existing production factors i.e. purchasing another company to expand its operations.

An acquisition growth strategy can be jeopardous, but not as unsecure as a diversification strategy. This is based on the grounds that the products and markets are already established. However, for a higher probability of success, a company must accurately identifythe goals when using an acquisition strategy, mainly due to the significance of the investment required to implement it.

Breaking down M&As, their literature commonly distinguishes the three following genres. Horizontal: Wherefirms participating in the same markets combine (an extreme and unlike example is the creation of cartels). Vertical: Wherefirmsreserve bigger part of the production ladder (i.e. engulfs its supplier and/or consumer). Conglomerate: Wherefirms of unrelated lines of businesses combine (as a move of risk disperse).

Generally, vertical and conglomerate mergers depict the combination of firms from diverse markets.However, this distinction of the three formsis not always unambiguous and often depends on industry classifications.

The motives that drive the Companies to merge or takeoverestablished businesses are mainly economic and strategic. Economic motives concentrate to create value for the acquirer's shareholders, by realizing synergies and increasing profits and subsequently investor’s return. On the other hand, strategic motives are those that aim to improve the strategic positioning of the firm for achieving long-term growth.

Nonetheless, in many cases history has witnessed major disastrous amalgamations of business where colossuses have collapsed in the blink of an eye. Piles and piles of articles and studies have been written trying to strip the methods of the optimisoptimus and encapsulate the attributes of their success. The following steps cited are trying to summarize and encompass their “golden” attributes:

Preparation Stage:

For sure a preliminary cost to benefit analysis, evaluation and due diligence of the targeted acquisition or merger is essential prior proceeding. Nonetheless, the owners and management should also measure and accurately weigh the non-financial aspects of the undertaking. Establishment of acquisitions targets, maintenance of the Companies’ identities, alloy of the two cultures and smooth transition are vital issues that should bear warning flags in case they derail from their projected routes.

During the procedure:

Virtual data rooms can help to expedite the M&A process whereas qualified transition teams that will coordinate and oversight the procedure should be appointed. At this point the management should be cautious to retain the key personnel from the side of the acquirer and the selleras well avoiding the highly likely appearance of frictions encouraging them to embrace the changes. John Kotter and Leonard Schlesinger on “Choosing strategies for change” highlight the importance to minimize the resistance to change applied to reorganizations. Even though, compatibility and integration issues areimpossible to be entirely avoided but appropriate managerial actions can overcome those possible obstacles. Strategically, the Company must concentrate on harmonization of the growth strategies existed and also to the perfection of the final output using the knowhow and synergies created.

Post-Acquisition:

Business Continuity: After the establishment of “Life in Mars” the Company must fortify its colony. Appropriate measures and procedures must be established to generate growth in the foreseeable future. The Management should also respect the roots of the Company examining and incorporating existed strategies and specifications of its ancestors at the potential business plan in order to avoid past mistakes and learn from experience. Finally, milestones of targets and achievements must be set and frequently examined.

Tracked records and history clearly shows that M&As should entail dedicated planning, commitment and faith in order to succeed. Nevertheless, in many cases where all the above have been followed, downfall was at the gates. Timing? Luck? Are those factors that should be considered? For sure, but how can they be accurately quantified?

K. Treppides & Co Ltd, the largest independent consulting firm, with established international presence and offices in London and Malta, offers a full range of legal, tax, accounting, consulting and financial advisory services to international Investors that are operating within a wide range of industry sectors. The company possesses many years of experience and a team of experienced members of staff who remain on hand to assist individuals and businesses throughout the entire investment process, in and through Cyprus.

Linos Zambas

Senior Manager

ICAS Department