Pharmaceutical Executive Europe - November/December 2007 - (Page 40) 40 M&A Nov/Dec 2007 Pharmaceutical Executive Europe product at appropriate costs. From an R&D perspective, you may reply that the synergies would not exist without the research of R&D. Yet, from a company point of view it is highly irrelevant to which area these synergies have to be attributed. Instead, it is more important that the synergies are not included twice in the calculation and that clear responsibilities for identifying and implementing the synergies are in place. Evaluating the synergies by considering what would have happened without a merger is essential to assess the takeover based on the actual economic conditions. All other approaches will distort the real implications for the group’s result. As individual departments conduct the due diligence for their respective functional areas, the lack of a group perspective may cause additional errors in identifying and realising synergies. Only those measures that allow profit improvements at corporate level are relevant for synergies. This is often misjudged by crosscompany integration teams who maintain the perspective of the pre-acquisition individual company and focus on political aspects. For example, the takeover of sales activities by a group entity in a market where activities overlap has positive implications for the result of this entity. On the other hand, the result of the other group entity decreases by the same margin, which means that the overall group result does not improve at all. Exploiting tax advantages in low-tax countries, while beneficial for the overall group, could even lead to a disadvantage for some subsidiaries because of the shift of profits. The case of a subsidiary using the infrastructure of another subsidiary — for example, in the shape of a shared service centre — also demonstrates the complexity of synergy determination and implementation follow-up. For example, Subsidiary B is to use the IT helpdesk of Subsidiary A, thus avoiding investments and costs for setting up its own helpdesk. B will have to pay group transfer prices to Subsidiary A for using the helpdesk on the basis of service level agreements (SLAs). The implication of this construction is that A realises additional revenues from an affiliated company and incurs higher investments and costs for ensuring the SLAs for B, while B avoids investment in the setup and operation of an autonomous helpdesk but pays group transfer prices to A. From the perspective of the overall group, the synergy is calculated as follows: saved investments B saved operational costs B additional investments A additional operational costs A tax effect synergy. SYNERGY LEVERS 1. Research & development Common pipeline development/consolidation Exchange of property rights/products Pooling of development resources Standardisation of formulations Use of development resources in low-cost countries; for example, for clinical trials 2. Production Use of free capacities for insourcing in low-cost countries Pooling of batches: economies of scale Pooling of capacities: site closures Exchange of best practices 3. Purchasing Pooling of demand Switch of suppliers (API and contract manufacturing) Pooling of resources Use of tax advantages 4. Marketing & sales Consolidation of country organisations These levers are accompanied by general synergy levers such as overhead consolidation or IT harmonisation. Comprehensive integration management First, an overall project organisation needs to be installed early on (during the pre-merger phase) to ensure the comprehensive co-ordination of identifying and evaluating the synergy levers and the smooth transition to the post-merger integration phase. The synergies need to be defined, allocated and quantified clearly using a transparent calculation logic. Also during the pre-merger phase, intensive co-operation is required between the acquiring company’s own due diligence teams, auditors and investment bankers to determine the upper price limit for the target. In the subsequent integration phase, project management has to maintain a consistent group-wide perspective and, in case of doubt, take integration measures to the group board for decision. The entire integration team must meet frequently, not only to contribute to the cultural integration but also to safeguard a broad perspective. Thus, interface topics can be identified and worked on jointly. Having detailed the synergies and developed the integration concepts, the integration management process then needs to set up synergy and integration control measures that motivate the relevant managers. The synergy and integration measures need to be broken down to activity packages and allocated to a corresponding schedule for the managers, whose performance will be measured based on their compliance with this plan. An effective synergy controlling requires the conditions for realising the synergies to be clearly defined for these measures. It must also be ensured that the activities can actually be measured by controlling. Companies functioning as active market consolidators, making acquisitions in
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