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Cover Story
 
ARTHUR A. DAEMMRICH, ASST PROFESSOR, BUSINESS, GOVT AND THE INTERNATIONAL ECONOMY UNIT, HARVARD BUSINESS SCHOOL
M&AS AND JVS OFFER COMPLEMENTARY TOOLS FOR ORGANIC GROWTH
Even as the number of mergers increased over the past decade, the funding dedicated to R&D suffered under stringent cost-cutting measures and restructuring
Issue Date - 05/08/2010
 
The chemical industry has witnessed significant changes in the recent years. A wave of mergers since the mid-1980s consolidated the industry and led to research on a scale unimaginable to the scientists who worked for firms in the early of 20th century. Prior to the 1990s, M&As were generally pursued only when identifiable business opportunities existed. By contrast, the number of M&As by specialty chemical firms has increased by a factor of four since 1993, and the number of transactions by commodity chemical firms has grown over the same time frame. Even as the number of mergers increased over the past decade, the funding dedicated to research and development (R&D) suffered under tough cost-cutting measures and restructuring. In mid-2003, a group of research directors, technology officers, current and retired CEOs, economists, historians, and analysts gathered at the Chemical Heritage Foundation (CHF) in Philadelphia. Two key questions were put to participants: Is today’s chemical industry mature, with little payoff to be expected from investing in R&D? Has a decade of M&A activity undermined innovation and creativity in the industrial research setting?

Expanding Due Diligence
M&As and JVs are nevertheless fraught with points of failure. In recent studies, economist have found that mergers are often based on faulty evaluation of assets, especially intellectual assets, leading to long-term decline in shareholders returns. A solution is at hand: involve the R&D division in the evaluation of a potential takeover target from an early stage.

 
Researchers will often be able to identify which firms should be considered for targeted acquisition. Once senior management decides to buy a merger or acquisition, its success hinges on effective use of R&D in each of the four major stages in the transaction: Target identification; due diligence; implementation and integration:

Target Identification: During target identification, R&D can assess the capabilities of the acquired firm’s research, including the researchers (their reputation, experience, culture, and style of working) and the quality and production of the technology itself.

due diligence: In the due diligence phase, the R&D staff can assist in evaluating the target’s intellectual property, licences, technology under development, and its collaborations and alliances.

implementation: During implementation, executive leaders should work closely with the R&D team to establish a clear strategic plan for the merger, with a focus on clear goals. As a merger takes form, firms must revalidate and revalue the R&D group created from the merger, based on actual observable characteristics rather than the assumptions made during due diligence.

Integration: The integration phase should involve strong communication between existing R&D staff and the acquired team to establish new leadership, discuss current projects and technologies, and pinpoint areas for innovation.

Collaborations, JVS and Networked Innovation
Like mergers, collaborations and joint ventures with other firms – especially small start up technology companies – has become an attractive way to achieve growth in recent years. However, joint ventures, M&As require the involvement and attention of both executive leadership and R&D management to succeed.

In effect, M&A, joint ventures, internal R&D and innovation networks offer complementary tools for growth. As participants in a knowledge-based sector, chemical firms must maintain internal R&D when contemplating any of the other options. Moreover, in-house research expertise is key to the successful use and commercialisation of an external technology. Two major conclusions emerge from this set of papers: first, successful mergers require an expanded role for R&D to identify and manage technology synergies and corporate cultures; and second, even as the chemical industry undergoes important changes linked to shifts in research to new areas (such as electronics, nanotechnology, and biotechnology).
          

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