Global mergers and acquisitions
Truly global corporations have established sales operations in almost all countries in the world. Legal set-up in the country is driven by taxation and desired customer contacting party. Typical set-up is either subsidiary or branch office of the parent.
Consolidation within the industry that is implemented by global m&a, the acquisition targets are typically listed in one or more stock markets. Acquisition of a listed multinational is implemented by stock buy-out from major owners and acquiring the rest by public offer. Post-merger integration programs start in full speed after the official approvals.
Country legal merger
After acquiring the ownership to parent company there are still duplicate legal set-ups in up-to 100-130 countries world-wide creating a major additional cost and fragmentation in operations. One of the must-do synergy and integration activities is the merger of country level legal entities.
This blog briefly describes the model and challenges in implementing country legal mergers.
Country merger deployment methodology
Different integration activities have many dependencies and require careful planning. Typically, new leadership is nominated and global operations such as production, distribution and product management are harmonized prior to local sales operations and country legal mergers. Otherwise customers and customer facing teams have to deal with multiple supply chains, product coding systems and possibly split orders to different ERPs based on portfolio.
Country mergers are normally done within 1-2 years from acquisition with the target of not distracting the ongoing business and customer interface. Many multinationals have done multiple rounds of global mergers and developed rigid methodologies for the same.
Country legal mergers start with centralized decisions on country sales mode, legal set-up, IT systems landscape, product portfolio, processes and division of work to centralized vs. country level activities.
Country legal merger includes several task packages:
- Changes in sales mode and legal set-up
- Personnel transfer
- Asset & liability sale or merger
- Product and service portfolio harmonization
- Contract and open order transfer, including contracting party changes
- IT & process implementation
Country mergers require dedicated resources as well as part-time participation of several functions, such as HR, tax, legal, product lines and IT.
Changes in sales mode and legal set-up
Country’s sales mode defines the desired contracting party for different types of business e.g. for product sales and services sales. Often the preference is to contract product sales by the parent to make the profit repatriation more straight-forward. Services sales is contracted by local entity because it requires local subcontracting and resources.
Legal set-up is defined to support selected sales mode. Subsidiary requires permanent establishment of the company in the country and intercompany pricing between the parent and subsidiary. Subsidiary needs license for product importation and it can hold inventories. Branch office is created to do sales and contract service delivery.
The existing entities in the country might have different legal set-ups and sales modes. It needs to be decided centrally which entity will survive and which one is liquidated. Sometimes completely new entity has to be established.
New roles & responsibilities have to be agreed for people who are transferred. Job descriptions are updated, employee data is opened to payroll system and employee related liabilities are transferred to surviving entity. New IT users are trained for respective systems and access to relevant systems are granted.
Asset and liability sale or merger
Liquidated entity’s assets and liabilities are sold to or merged with the surviving entity. Typical balances include accounts payable, accounts receivable, fixed assets and employee related liabilities.
In asset sale cases, the receiving entity issues intercompany invoice or debit note to liquidated entity. Asset sale will result one-time journal entries and require reconciliation of transferred balances between the entities’ books.
Product and service portfolio harmonization
Product portfolio decisions are made centrally and harmonization might take place later than country level merger. Existing product portfolios are still sold and supplied in the country for some time after the country legal merger. Acquired entity’s product portfolio has be made available for ordering and supply in the IT systems for contract fulfillment.
Contract and open order transfer, including contracting party changes
Contracting party will change in acquired entity’s contracts. Negotiation with customers and vendors must start early on in order to have enough time to negotiate good terms and conditions. Transfer is earlier if existing contract templates include clauses that permit contracting party change.
Customers and vendors shall be communicated the timing and changes in processes, new business contacts, product codes etc.
IT & process implementation
Target IT systems set-up is defined centrally in order to ensure integration of supply chains and ability to consolidate reporting. Country-by-country discussions between the system owners on surviving systems should be avoided.
Processes and IT systems are typically harmonized at the same time as the legal merger in order to avoid two rounds of country deployment. This will however make the country merger more complex. Extensive user training and end-to-end testing are needed. Acquired entity’s IT master data needs to be harmonized: customer and vendor codes, product coding, financial accounts etc. in order to migrate the acquired personnel, contracts, open orders and financials to the new IT systems. Open order migration can be very complex due to different statuses of orders and thus should be avoided as much as possible by delivering, invoicing and paying open orders before the cut-off date.
Acquired entity’s IT systems can also be left functioning, but that would require harmonization of at least reporting and establishing “cross-ordering” process and “cross-use” access rights.
Country legal merger might require extensive IT deployment as described in the previous chapter. If merger is strongly driven by legal or tax department, this work might be underestimated.
Country deployment needs to be planned in advance. Planning consists of defining the generic deployment methodology and country specific target state and deployment plan. Deployment methodology defines the way to do deployments and standard operating model (sales modes, legal set-ups, IT systems, processes and roles & responsibilities). Country specific plans define target operating model and it’s deployment plan, considering all different work streams, dependencies, work effort and needed time.
Even good planning cannot consider all possible issues encountered in real country merger. Piloting one or two countries is useful to identify issues and to finetune methodology and plans for subsequent deployments.
Program management should actively identify and resolve issues in resourcing. Centralized resources doing country deployment activities such as data migration, testing and training might become bottlenecks when sharing time across multiple deployments in different timezones. Deployment team, especially if resourced with external new resources, should have prior experience on the industry, similar tasks and systems.
Global and local steering teams must have enough authority to make difficult decision, such as dealing with possible resistance by affected functions.
Midagon team has a lot of practical experience in different roles in post-merger integration and synergy projects. Recently published white paper on “ICT Integration in Mergers and Acquisitions” provides more insights to this particular area of competence.