A business is acquired when it provides the buyer with synergies through –

  • Operating leverage
  • Financial leverage
  • And tax efficiencies if any.

Hence integration of finance and accounting is mainly to attain the planned synergies i.e. put the plan into action. This would require compromise, adjustments, reshuffle, retuning, compliance, etc from both transacting and outside entities. The finance integration is approached in the following stages –

Post Merger Integration - Finance

Finance – Acquisition

The Acquisition stage also termed as the “pre – integration” addresses matters relating to a mode of consideration and acquisition. Mode of consideration is a purchase of business in cash, shares or any other financial instrument. Further, the mode of acquisition refers to purchase of business through a special purpose vehicle, group holding or the subsidiary.

As discussed earlier the significance of Finance is more critical at the time of pre-integration stage since a decision is required to be made with regard to the mode of acquisition and consideration. The pre-integration stage would involve the activities of due diligence, valuation followed by negotiations and finally at the time of deal closure certain unexpected events. Hence the significance of finance planning in terms of the aforesaid activities at the time of pre-integration in percentage is expressed as follows –

Post merger integration-activity

[Source: Inference is drawn based on the survey of Merger market commissioned by the Merrill Corporation – Second quarter of June 2009]

Acquisition is influenced by primarily two factors –

  • Commercial – The break even posts which the planned synergies would be crystallized. The trade off therefore is between the cash flows generated and the impact on the bottom line due to the synergy. Consider an example of a loss-making business but a potential for growth in the foreseeable future.
  • Financial –The optimum way for utilization of funds of the group. Consider an example where the group holding company can borrow at 6% whereas its subsidiary contemplating acquisition can borrow at 12%. Now either the group can raise the equity in the subsidiary through borrowed funds and enable to latter to acquire the target entity or where the group does not want to further increase its holding in subsidiary then it may evaluate the opportunity for leverage buyout such that its effective cost of borrowing is down to 6% from 12%.

Finance – Operational Integration

This stage also termed as “In process Integration” refers to identifying functional areas for integration without affecting the ongoing operations of the buyer and the seller. In other words, it addresses taking active steps that are reversible without any permanent impact on the business of the transacting parties. The approach to this stage is better understood by considering the functional areas that may differ across sectors. For instance, in a manufacturing concern, functional areas are treasury, procurement, production, and sales & marketing, (which is inclusive and not exhaustive). In process integration, these areas would have to be approached as follows –

  1. Treasury –
    • Transfer of existing external loan funds to attain optimum cost of borrowing
    • Renegotiation with the lenders for the terms and conditions of borrowing e.g. repayment schedule
    • Searching for entirely new avenues with the objective of optimum cost, repayment, security and other terms and conditions.
    • Explore the possibility of eliminating cost of forward cover where either the buyer or the acquired entity is exposed to import payment and export receipts
  2. Procurement –
    • Common supplier is negotiated for higher bulk discount
    • Different suppliers are evaluated for higher bulk discounts
    • Negotiation for terms of payment with the single supplier
    • A reshuffle of existing suppliers to attain higher savings in logistic costs. E.g. the buyer is sourcing supplies to its units at a different location from the single unit of its supplier may now evaluate sourcing from the supplier of the acquired entity situated in proximity to the buyer’s units.
  3. Sales & Marketing –A reshuffle of customers to achieve product cost, timeliness and logistics efficiencies. E.g. Customer of the buyer would be supplied by the target entity production unit situated in proximity to such customer leading to change in the bottom line of the acquired and the acquired entity.
  4. Production –Change in product mixes pursuant to a reshuffle of suppliers, customers, logistics, and production efficiency. E.g. the target entity may commence producing the type of product for the customer of the buyer situated in proximity to the target entity that may result in larger impact favorable or adverse on the bottom line of the acquiring and the acquired entity.

Finance – Complete Integration

This stage also termed as “Post Integration” refers to an irreversible long term permanent decision that aims at achieving in creating a new identity for both the buyer and the target entity. It is the end action undertaken to achieve total integration as a single identity with regard to –

Finance – Internal  The “in process integration” dealt with financial integration of external sources but this stage deals with the financial integration of internal sources e.g. establishing the transfer pricing of goods and services between the acquiring and the acquired entity or amongst different divisions.

  1. Accounting –Integration from the accounting angle requires merging of financials within the existing regulatory framework with a view to preventing the direct impact to the shareholder’s value. For instance in the case of merging of the subsidiary into the holding the brought forward losses be knocked off against the Free reserves or business reconstruction reserve of the merged entity without impacting the current year’s profits and thereby the shareholder’s value of the transacting entities. Hence the choice of method of accounting for amalgamation plays an important part amongst other aspects, which decide the impact on the shareholder’s value. Apart from the above integration would also require the following secondary steps from the accounting angle –
    • Integration of accounts with different year endings and accounting policies
    • Redefining Management Information Systems
    • Retuning internal controls due to changes in size, hierarchical structure of organization and technology

The post-acquisition integration process is a ticklish issue which, most of the time gets well documented at the pre-integration stage but fails miserably at the implementation stage. Companies should be wary of this critical issue and keep their eyes and ears open at every stage of the implementation.

Click on the links below for related articles

Post Merger Acquisition - General
Post Merger Acquisition - HR
Post Merger Acquisition - Legal

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