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Cover Story

Does R&D Really Pay?

Issue Date - 03/02/2011
It is important to make quantitative forecasts of synergies during the due-diligence phase and to use the assessment of the R&D group to determine future incoming revenue. Communication is key to implementation, the third phase in a merger or acquisition. First, prepare the M&A plan at least one month before closing. Make sure that the R&D group has a clear understanding of the objectives from the start. It is also important to establish a time–line to ensure that goals are met in a timely manner. In many cases, staff, equipment, and research projects are pulled out of an existing organisation. If so, the company should establish a technology transfer plan that will define which individuals and components of the system will remain and which will go. It is critical to communicate clearly the process and time frame of the transfer to all members of the technology team (a subgroup of the R&D group created to work through issues related to the merger). Organisationally, successful implementation also requires a road map. Establish decision-making principles and deadlines and manage them on a project-by-project basis. Integration is the final phase in M&A. During this phase, the technology team should use strategic alignment to confirm the details of the acquisition. I will again use the example of DuPont’s acquisition of Herberts. Immediately following the closing of the deal, the technology teams of both companies held a two-day meeting to educate each other about their technologies, existing projects, and plans for innovation. During this meeting, the teams also clearly defined a new leadership structure, discussed goals, and established strategies to achieve the goals. Of course, the nature of the acquisition can predetermine some of these guidelines. However, it is still crucial to create a clear understanding of how the organisations will combine and evolve into a new culture.

Finally, it is important to avoid any negativity throughout the M&A process. The company should create situations that promote teamwork and success, not only in R&D but also throughout the organisations. Both companies must understand that consolidations of people, programs, and facilities are a part of M&A. Be aware that when you acquire a company, you are also acquiring the individuals and culture of the company. Mergers and acquisitions create difficult times for both companies. The guidelines discussed here help to clarify the importance of R&D in the entire M&A process and identify principles to guide successful mergers and acquisitions.
COMMENTARY : Gary Calaberese, Former VP & CTO, Rohm & Haas Co.
Evaluation, Validation, and Respect of Research in the Merger Process
Gary calaberese elucidates validation and valuation of technology and talent being acquired through a merger and also the role of R&D in the entire process...

To start with, we turn from a CEO-level focus on mergers to consider what role R&D compatibility plays in looking for mergers and how R&D divisions help evaluate intellectual property complementarities. I will focus on the role of R&D before, during, and after a merger from a broad perspective.

I see the chemical industry coming out of the mergers of the last few years with a stronger focus on high-technology products in electronics and other areas. We are the sector with the R&D resources to drive technology forward. That message needs to get out to business analysts and the public. My comments are based on two mergers with which I was recently involved and reflect the questions that were put to me by senior management before and during the mergers. In my experience, R&D should be heavily involved with all stages of a merger and should have the opportunity to pose questions back to the people engaged in due-diligence work. In effect, we need to expand due diligence to incorporate a broader view of technology. Although often overlooked, mergers among chemical firms involve combining technology companies, each of which has unique products, development approaches, and research cultures. The people driving a merger often fail to understand these factors, but the merger’s success hinges on attention to innovation cultures.

Before a merger is underway, company scientists and technology managers should engage with the two Vs: validation and valuation. Starting with validation, it is crucial that a merger pass the so-called laugh test. Is this thing really worth doing, and are we going to get the synergies we expect? Any company contemplating a merger should involve R&D staff members early enough so that they can help answer these key questions. One of the key questions in validation is whether the technologies you will acquire are good for making money. This needs to be assessed from both a short-term and long-term perspective. Very often, the assessments are weighted toward the short term, which is unfortunate because you should piece together companies to last a long time. Leaders need to determine both short and long-term payoffs, and it is important to distinguish between the two. A second key question is whether there are synergies in the merger?

The next set of questions revolves around the issue of organisational cultures. Are the cultures compatible? Will there be a clashing of heads, or are the organisations that you bring together going to be able to work together? This is vitally important, but again, it is often a question that is not asked early enough, seriously enough, or often enough. Cultures do change and evolve as you go through the process of a merger. Yet you need to make sure that both parties to a merger, especially their research divisions, can adapt to the new common identity. Finally – and this is a question that is always asked – without sacrificing good projects, can the new company have a lower R&D expenditure as percent of sales than the two individual companies on their own? A good and justifiable answer must be forthcoming on that front.


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