What You Don't Know About The Intangibles

The Intangibles of M&A Deals

Economies are slowly recovering and companies, last year, made quite a few mergers and acquisitions to mark the post-2008 financial recovery. One of the biggest mergers and acquisitions in 2012 were the acquisition of Fraser & Neave in Singapore by TCC Asset for $13.5 billion. Although acquisitions are important to expand and grow a business, not all acquisition or mergers show positive results post the transaction. From 2010 to 2012, the value of intangible assets of acquisition declined by 38%. If this is applied to M&As in 2012, companies stand to lose over $100 billion in value by 2014.

What are intangible assets?

Intangible assets are hard to define or pinpoint. However, experts agree that the intangible assets of a company consist of its organizational, relational and human capitals. Organization capital constitutes the communications and company culture, relational capital consists of the client loyalty and brand value of the company and human capital refers to the employee management, development and engagement aspects of the company. After acquisitions and mergers; the employees, brand management, leadership skills and other forms of engagement needs to remain active, according to Andreas Raharso – Director of the R&D Centre for Strategy Execution of the Hay Group.

Intangible assets as active capital

According to the Hay Group, about 60% of a company’s earnings before tax, interest, amortisation and depreciation, is its intangible asset in active form. Also, 77% of movement in stock price of an organization can be attributed to this intangible asset that is active. On the other hand, most companies and executives admit that obtaining information on intangible assets is almost impossible.

Companies must understand that they need to keep the intangible assets after mergers and acquisitions active to maintain the pre-merger value of the company. Companies often believe that assets are inherently active and this is not true or intangible assets.

How to keep intangible assets active

To make sure that the intangible assets of the acquired company remain active and at pre-merger values, the acquiring organization needs to check for compatibility in four areas. These four areas or drivers are:

  • Compatible response
  • Calculated risks
  • Courageous follow through
  • Candour

The first two drivers refer to the corporate culture of both the companies involved at the organizational lever. Acquiring companies must make sure that they acquired companies have the same spirit and culture. For example, they must check if both companies take risks, are informal, take quick decisions, etc. A clash in corporate cultures led to BenQ’s acquisition of Siemens struggling, where the latter company was more formal and had strict defined procedures and the former having a more open and informal culture.

Acquiring companies must also have courageous follow through abilities. This means that senior management must be able to handle tough issues during the merger. They must be willing to make difficult decisions like laying-off people in the acquired company or discontinuing a product, etc.

Candour is an important driver that leads to trust among the companies involved in the merger. Trust is critical in maintaining the value of both companies after the merger at the pre-merger values and helping both companies grow. Deals can also collapse if trust is not maintained. Companies need to quell false rumours by reassuring employees as they can leave if they hear rumours about lay-offs and this can hurt the intangible assets of the company.

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