Academy of Better Business

Mergers, acquisitions and spin-offs in SAP systems

Consequences of business reorganization for IT

Mergers and acquisitions of companies or a spin-off of a part of a company’s business are frequent ways to gain particular financial benefits and to increase the company’s goodwill on the market and for shareholders. Business reorganization is a huge legal and organizational undertaking. The IT area also requires a detailed analysis of changes and adaptation needs both with regard to the law and the SAP technical infrastructure and application layer.

Economies of scale, the introduction of new brands on the international market, the acquisition of new technologies, the modification of a business model or reduction of the operating costs of a business’s activity are typical benefits that a company can gain through mergers, acquisitions or spin-offs of a part of the business.

Taking into account the indicated benefits from the reorganization, the following strategic company mergers and acquisitions are considered:

• Merger of the capital group companies in order to reorganize the structure and business processes.
• Merger with an external company with centralized financial-accounting and HR processes.

Whereas, for spin-offs we consider:

• Creation of a new company to run a specific part of the company’s business (e.g. HR processes)
• Sales of the company to other entity
• Company spin-off in the case of bankruptcy.

The last business case may occur more frequently due to the unsteady global economic situation and it applies to the situation in which a parent company goes bankrupt because of a lack of financial liquidity, but in which a daughter company, e.g. located in Poland, is still profitable and generating positive cash flows.

Need for a good analysis

The statistics show that many such undertakings fall through and end without gaining the expected business benefits. Often, there are operational problems, such as a lack of harmony as concerns business processes or their insufficient integration. Also, differences in organizational culture, if they are not taken into account during the reorganization, may affect the operational effectiveness of the merged companies.

At the bottom of these problems are first and foremost an inaccurate investment analysis of the undertaking and a lack of a set strategy, including an IT strategy. Whether the company makes an optimal investment decision greatly depends on the level of detail of this analysis and the widest possible range of factors taken into consideration.

The investment analysis of the undertaking, so important in the case of acquisitions and mergers (due diligence), is based on the economic, legal and marketing analysis of the current situation and the target state after the merger. Usually such an analysis is carried out by an external consulting company.

The process of analysis, decision-making and finally the registration of the changes in the National Court Register is complex, and is connected with the need to meet a series of legal requirements that must be fulfilled in a specific order and particular time. Thus, the necessary legal actions must be planned and synchronized sufficiently early with the activities in other areas, including IT.

Setting the exact date of the change registration by the court is one of the key elements of the planning process, because the time of the formal implementation of any organizational and IT change in the company will depend on it. Therefore, the time of registration of the new legal form should be confirmed well in advance of the registration date. In practice it may turn out that obtaining such a confirmation in advance will be unsuccessful and the court will inform us post factum. Also this risk should be taken into account in the planning stages.

Impact on IT

Often, in the process of analysis, before making a decision on the merger or spin-off, the impact of these changes on IT is not sufficiently accounted for. After all, the company processes that are usually subject to modifications due to any organizational changes are built on IT solutions. It’s therefore indispensable to include the planning and evaluation of the changes also in this area already at the stage of merger, acquisition or spin-off planning.

It’s the IT area that will play the key operational role in the process. While organizational changes and those in the area of infrastructure may go quite smoothly, in particular when the businesses of the merged entities are similar, the IT solution modification project may be a pretty big challenge and could introduce an additional time factor which should be taken into account when planning the activities.

The evaluation of the impact of the merger or spin-off on the application solutions and technical infrastructure of the company should be included in this analysis.

Criteria for the analysis of the impact of the planned organizational company transformation should be selected depending on the type of transformation, because different elements may be taken into account as concerns the merger or acquisition of companies and different in the case of spin-off.

The analysis of any adaptation needs in the IT area in the case of mergers or spin-offs applies to two main areas, i.e. a network infrastructure with devices, systems and applications that support it and the application layer made up of ERP, CRM, EDI, HD and other systems used by the company to perform its actual business processes.

Mergers and spin-offs in SAP

In the application area, in which SAP solutions are included, the scale of change is analysed. We focus on both the functional areas (modules) and the technical area, i.e. data migration and interfaces. We also take into account any necessary hardware changes.

During the analysis, the scope of the project connected with the merger or spin-off of entities is determined. This project, as with other implementation projects, requires a methodological, i.e. phased, approach to maintain the proper quality and security.

In case of a merger of two or more companies, we mostly have to deal with the following variants in SAP ERP:

• Merger of company codes that already exist in the ERP system
• Creation of a new company code.

Company codes, depending on the adopted model and system development strategy, may be merged or spun off within one client (single client approach) or different clients (multi-client approach).
 
Each of these approaches require the completion of specific tasks in the SAP system. In the case of the merger of company codes, the tasks will consist of a reassignment or the creation of relevant organizational objects and the completion of the configuration and development modifications.
 
If we are dealing with a merger within the same client, we have to consider the inclusion in the project of the activities aimed at the elimination of redundant entities or the restriction of access to them. We should account for the fact that the act of data removal is a significantly more complex process and for this reason it is usually scheduled for a later time and as a separate project.

Implementation tasks should be carried out based on the system model (template company) that determines what type of objects should be adjusted as concerns the new company code. Therefore, it's important to carry out such tasks based on the available reference documentation, which in this case refers to the “implementation guide”. The implementation blueprint during the execution of the project tasks, on the other hand, will consist mainly in the analysis of differences – which objects should be copied, which should be adjusted and which created.

One of the main elements of the blueprint preparation for a merger should be the agreement of the scope of consolidation of the merged companies financial reports.

It should also be noted, and should be one of the blueprint elements, that functional solutions in the system where we make changes may consist of e.g. implementation of restrictions and conditions for using a function in the spun off or merged entity, because it will not be possible to directly make use of all the solutions run in the source entity.

For example, access may be restricted within an interface to only one selected part of it, in a report there will be an additional data selection restriction, and the additional extension required for the process execution in a merged company will not be required in it. So, the implementation of such changes in the “model” requires a very good grasp of it.

Similarly, we make a user authorization (system role) review during the project. In case of the spin-off of a company which is going to run other, often new processes, it’s essential to define new roles that will be assigned to the created positions.

Interfaces and data migration

In each of these projects, the interface and data migration areas require special attention, since changes in them may be the largest and most sensitive.

The data migration area requires developing an appropriate strategy for transferring the data from the merged or spun off company to a target environment. For a merger project, it is necessary to perform a precise analysis of the exact data and the exact parameters that must be transferred, and take a look at whether we are going to supplement or merge the data, whether the changes in the existing environment are needed and whether the migration will be automatic or manual, etc. The required migration activities are determined by the business processes executed in the merged company.

When e.g. the company that has so far been running only sales processes merges with a production company, it may be necessary to transfer the completely new master data to the system to execute the production processes.

The migration area is closely related to the data maintenance in the system. Execution of a merger project usually enforces the changes in the data maintenance procedures, i.e. central data management, e.g. through the introduction of workflow automation mechanisms.

Usually, the material master data, customer and supplier master data and the related data such as pricing conditions are subject to management centralization. It exists in most logistics processes of the company, hence the need for the systematic approach to it, especially when the merger with other entities is the key element of the strategic development of the company.

When considering the interface area in merger projects, even during the conceptual works we consider the potential impact of the changes in organizational structures on the implemented solutions. – Will the new company introduce its own interfaces or use the existing ones? Will the current interface be valid in an identical scope in the new company (messages, parameters)? Will the modification of processing rules, i.e. routing, data conversion, etc., be necessary?

In the spin-off process, additionally, we determine in the migration area what data will be transferred to a new entity and what data will be subject to removal from the source entity. Here, a particularly vulnerable area is HR with sensitive personal data.

In the course of a typical merger-related migration project, special tools (programs, reports) are created that allow for the export and “clearing” of the system from the data of a spun off entity and its import to a target system.

In another spin-off case, we may also encounter the isolation of an entire client from the existing system. In a situation like this, the project will focus mainly on works in the Basis area and a possible adjustment of the functionality, depending on the corporate requirements.

When planning the organizational changes in SAP with relation to business changes, it is necessary to consider how they will affect the current structure and function of the IT/SAP helpdesk, whether additional competences and resources are needed, and whether the system maintenance procedures will need to be changed.

In particular in spin-off projects, when the spun off company hasn’t often dealt with the system administration and hasn’t earlier maintained a hardware layer, it’s worth comparing the costs of purchasing the hardware and maintaining competency with that of an SAP administration hosting and outsourcing offer. Also in the case of mergers, organizational changes are a good time to consider a possible change of the system maintenance model to outsourcing.

From analysis to business benefits

Merger and spin-off projects are very attractive in terms of business, however, due to their specific complexity they require a well-thought through and comprehensive preparation. Apart from the organizational aspects, this also includes taking into account the legal aspects.

Efficient project execution depends on the completeness of analysis and the selection of the right strategy, which is important in that, in the case of mergers and acquisitions, the companies want to gain the assumed business benefits as soon as possible.

The speed and proper security of such projects will be ensured only by a comprehensive analysis incorporating the necessary knowledge and IT requirements.