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Cover Story

Does R&D Really Pay?

Issue Date - 03/02/2011
COMMENTARY : Thomas M. Connelly, Jr. Chief Innovation Oofficer, Dupont
The Role of R&D Before, During and After a Merger
Thomas M Connelly, Jr., Chief Innovation Officer & EVP of dupont, talks about why M&As in the chemical industry should only be undertaken with R&D in consideration During each of the four phases, including the critical period from one month before the merger until one month after.

I argue that there are three primary types of mergers and acquisitions. The first type is a bolt-on, where a company will have existing activity in a certain market space and will acquire a company with a similar operation. This acquisition is often carried out to gain production scale and access to new markets. In a bolt-on acquisition, the acquiring company is usually very familiar with the technologies employed in the company being acquired. An example would be DuPont Performance Coatings’ 1999 acquisition of Herberts (a subsidiary of Hoechst AG, which specialised in automotive and industrial finishes). Although this acquisition was on the large end of the bolt-on range (about $2 billion in revenue), many of the basic elements were there. DuPont had an existing performance coatings area, which was an industry leader in the technology of solvent-based finishes. Herberts had excellent technology in water-borne areas and copper coating. While this acquisition brought increased scale and market presence, it also added new dimensions in technology.

The second type of M&A is a strategic acquisition. In this case, the technology of the acquired company is used to move into an adjacent market space. An example for DuPont was the 1999 acquisition of Pioneer Hi-Bred International. DuPont had an established presence in agricultural and crop protection products, yet throughout the industry, there were increasing synergies in crop-protection strategies. Pioneer Hi-Bred International offered new technology in crop genetics, making it a strategic acquisition. DuPont acquired both new technology and additional market space.

A third type of M&A is a technology-driven acquisition. Although this type is also strategic in nature, it differs from a strategic acquisition in that it may not generate revenue. The objective instead is to gain industry leadership in a specific technology or technology area. DuPont’s 2000 acquisition of Uniax Corporation, a company specialising in polymer organic light-emitting diode (OLED) devices, is an example of a technology-driven acquisition. This acquisition allowed DuPont to get from pure research to a working prototype much faster than it could on its own.

Many acquisitions do not fit cleanly into one of these three categories. For example, I recently concluded an acquisition that fit into the categories of both bolt-on and strategic acquisitions. Depending on the characteristics of the M&A, the role of the R&D team will differ. In strategic and technology driven M&As, the role of R&D is critical. However, even in a bolt-on acquisition, where the emphasis on technology may not be as strong, the role of R&D is still crucial in determining the value of the acquisition. The role of R&D in the M&A process varies not only according to the type of acquisition but also within the specific stages of an acquisition. The involvement of R&D must begin before the acquisition and must follow through all phases of the process.

The phases of M&A are target identification, due diligence, implementation, and integration. During each of the four phases, including the critical period from one month before the merger until one month after the deal closes, the R&D team must make specific contributions to ensure a successful acquisition. In terms of target identification, the R&D organisation team should be involved in assessing the capabilities of the acquired company’s research. This assessment should include the researchers (their reputation, experience, culture, and style of working), as well as the quality and production of the technology itself. It should identify technical synergies that exist between the companies. For example, DuPont performed such an assessment in 2002, during the target-identification phase of acquiring ChemFirst. Before the announcement of the acquisition, the R&D team focused on the electronic chemicals area, an area of growing importance in DuPont.

Ultimately, the team concluded that by utilising the polymer technology of ChemFirst, DuPont would be better equipped to meet the needs of customers that purchase semiconductor fabrication materials. Due diligence, the second M&A phase, is heavily oriented to intellectual property assessment. The role of R&D during due diligence is to assist in the valuation of the acquired company’s existing patents and technologies under development. This valuation includes examining the patents held by similar companies. A broad assessment of intellectual property can help estimate the extent to which competitive patent activity may inhibit your technologies. During due diligence, it is also essential to evaluate other alliances, sublicenses, and agreements that exist around the technology of the acquired company. After technology assessment by the R&D team, the M&A team will inevitably address technology and cost synergies through a series of questions. Where are the laboratories? How many researchers does the company employ? What is the organisational structure? Answers to these questions will help the team assess the overall value of the deal and allow all to understand what can be achieved through the merger of the two organisations.

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