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Cover Story

Does R&D Really Pay?

Issue Date - 03/02/2011
The second crucial pre-merger issue is to assess the value of intellectual property, products, and R&D capabilities. What is the company really worth? The people assigned to handle due diligence and those working to calculate how much they can, should, and will have to pay for an acquisition need to ask detailed questions of the technology group and listen carefully to the answers. Is the technology behind existing products sound? Is the intellectual property on a firm footing? Are the key decision makers and organisational “thought leaders” solidly behind where the technology is going? The questions that you would ask of your existing portfolio must be asked of the merged portfolio. What is in store for the company in terms of new products and manufacturing processes? That is a critical question to put to the R&D team that is taking part in due diligence.

Last, but not least, assess talent. What is the talent in the company, both in the acquired company and in the existing company? Having done the work of answering the V questions, mergers that proceed should pay close attention to five Rs: revalidation, revaluation, respect, retention, and a realisation that imperfection is all but certain. Beginning with revalidation, companies should perform the laugh test again. In the initial research to answer validation questions, certain assumptions were made. A great deal can change once you actually start putting personnel, projects, labs, and intellectual property together, so you need to revalidate. Go through the same questions again, and ask them repeatedly of your research directors. Make sure you get answers that make sense and lead to action.

Next, run through a process of revaluation of the merged company’s R&D group. Reconsider the assumptions you made concerning the worth of your pipeline, the technology, and the research staff members and their talents. A frank assessment of their value is going to change as you learn more about the R&D group during a merger. You may not want to do this in a formal way every week, but it must play a role in decisions about staffing, and project development even as a merger proceeds. Respect is crucial. Organisations value products and outputs, but innovation is all about people.

Senior managers, shareholders, and outside analysts (and critics) expect the organisations to merge as quickly as possible. They want to see immediate value from outputs; as a result, insufficient attention is given to the merging of the research staffs. Companies need to be very careful about listening and responding to researchers, because they are the people who are going to make the future for the company.

Finally, realise that you did not get it perfect, and that there probably will never be a perfect merger process. Nevertheless, you should work hard to address at least 80% of the issues I have identified. Once events show where you were wrong in your assumptions, make changes. As long as you understand up front that mergers bring change and require flexibility and as long as you are diligent about looking at the organisation in a broad way, you will be able to address validation, valuation, respect, and retention in an effective manner.

To conclude, I would like to shift from our tendency to analyse process, procedures, pipelines, portfolios, and research content to address leadership. As successful merger requires key people in the right positions in R&D, a good line of communication and credibility with the executive teams, and an ability to influence the CEO and the Board of Directors. It takes those kinds of synthetic thinkers and influential actors to make a merger work. If you solve the issue of leadership, then you will reap rewards, and it will be a happy time for all parties.

Deepak Ranjan Patra and Steven Philip Warner           

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