Do Aur Do Panch

Synergy is achieved when more value is derived from M&A compared to simply added value of the entities. Many describe it by expression "2 + 2 = 5"

Equations in areas like production, procurement, R&D, management insight, marketing, and distribution can bring about Synergy. However, in most of the real life cases, possibility of Synergy is sheer imagination of optimistic managers who engage in M&A activities with the aim to grow their companies quickly. In fact, some combinations can result in negative Synergy i.e. combined entity having lesser value than the sum of its parts. Blame is then put simply on poor post-merger integration process, cultural issues and costs involved. After all, the managers had spotted the brilliant opportunity for creating Synergy.

Why so much fuss about post merger integration issues and costs when all of the elements that affect success of post-merger integration should have been assessed in determining the fair value of the deal ?

Is it not important to consider the risks and challenges of the integration at the very beginning of the M&A process when companies are expected to deliver benefits of the synergy as soon as possible? Why many companies mistakenly keep apparent issues related to integration pending to be resolved post- merger.

Ideally, pre-merger process should involve review of core processes and IT systems in nitty-gritty. Experts who know how to design and implement changes to systems, processes and organization should be involved up front to determine cost & efforts required in bringing necessary changes.

Post-merger integration should be focused on value drivers than just cost functions. These drivers include core processes such as product design, sales & marketing and supply chain management. Revenue Assurance is also very crucial for achieving planned growth during the integration. Best Practice is to have clear plan for retaining business during the integration.

The focus should be value creation rather than mere integration. Necessary activities and task need to be re-aligned in a methodical way, but instead of bringing blind standardization and using a one size fits all approach, the integration process should be customized to suit complexities and peculiarity of the subject involved.

Risk Consulting professionals can add tremendous value by vouching reasonableness of estimates of potential Synergies, calculating the risks in achieving Synergies, and estimating costs of realizing Synergies. Objective due diligence review in above areas can prove very crucial in arriving at a reasonable valuation. Don't just know Risk or know Reward but know if Risk is worth the Reward.

Let's do Insider Trading !!!

When Ranbaxy's promoters decided to sell their stake to Japanese Daiichi Sankyo, many believed that the deal was already known to few in the market and a case of insider trading cannot be ruled out looking at the performance of Ranbaxy on the Dalal Street during couple of months prior to the deal.

Many others think that Ranbaxy has passed the test of compliance as well as good governance as far as the insider trading law and the takeover code is concerned; the deal offered same price to all the shareholders including promoters.

Analyses of all the listed Indian companies, including Ambuja Cements, Centurion Bank of Punjab and I-flex Solutions that were acquired in the last two years also showed similar pattern in their stock prices compared to that of Ranbaxy. In all these cases, stock prices of these companies outperformed its industry peers during couple of months prior to the deal.

In a recent path-breaking verdict, the Securities Appellate Tribunal had said that a person indulging in insider trading cannot be punished unless proven that he had unfair advantage over other shareholders. The ruling has far-reaching consequences considering that insider trading by nature is extremely difficult to prove.

Now, the question is how others will behave in the future as far as insider trading is concerned. Well, I think all depends on the ethical values of the persons and how they take inspiration from the above case and the applicable laws at the time. Let us discuss the ethical dilemma keeping in view the above case, the existing laws and the level of ethical values prevailing in today's business world.

All of us have seen many examples of people violating ethical standards in extremes. However, there are also many far less extreme examples of violation of ethical values. When people evade tax or cheat banks to get loan or lie on their CVs; one might think this as an unethical behavior. However, if the other person has made up his mind that this behavior is acceptable, a conflict of ethical values arises which is difficult to resolve.

The argument that it is ok to violate ethical standard is commonly based on the rationalization that everyone does it. Many argue if it's legal, it's ethical. This philosophy assumes perfection of laws. The likelihood of discovery of the behaviour and the severity of the penalty or consequences also determines if the unethical behaviour is acceptable.

Should a business correct an unintentional double billing to one of its customers when the customer has already paid the bill in full? If the seller believes the customer will detect the error and respond by not buying in the future, the seller will inform the customer now; otherwise the seller will wait to see if the customer complains.

Nowadays, many movies, television serials, and other media subscribe unethical behavior in name of Entrepreneurship creating the impression that unethical business behavior is normal behavior. The people behind these media conclude that management cannot conduct itself ethically and at the same time have its business succeed financially. Also, many conclude that actions must be extreme to constitute unethical behaviour. There is considerable evidence that none of these conclusions about business ethics is correct.

A large number of highly successful businesses follow ethical business practices because its management believes that it has a social responsibility to conduct itself ethically and in the long run such actions would also result in business success for them.

An ethical dilemma is a situation a person faces in which a decision must be made about the appropriate behaviour. Auditors, Accountants, Audit Committee and other business people face many ethical dilemmas in their business careers. For example, dealing with a client who threatens to seek a new auditor unless an unqualified opinion is issued presents a serious ethical dilemma when an unqualified opinion is inappropriate or continuing to be a part of the management of a company involved in insider trading.

Now think - You are on the Audit Committee of a company dumping thousands of litres of untreated water in a nearby river and which cannot afford the cost of replacing the equipment to stop further spills. If the environment ministry orders the comapny to replace the equipment, it would be forced to cease its operations. Will you report the matter to the environment ministry?

Many frameworks have been developed to help people resolve ethical dilemmas. The purpose of such a framework is in identifying the ethical issues and deciding on an appropriate course of action using the person's own values. Following is a relatively simple approach to resolving ethical dilemmas:

a. Obtain all the relevant facts
b. To ensure assumptions are not treated as fact
c. Identify the ethical issues from the facts
d. To determine how each stakeholder will be affected by the dilemma
e. Identify the alternatives available to the person who must resolve the dilemma
f. Identify the likely consequence of each alternative
g. Decide the appropriate action