System dynamics in M&A situations

["Oliver Kunath"]

Dear all,

does anyone know of any articles, papers, case studies, etc. that talk about
how a company applied systems dynamics and systems thinking in a
merger/acquisition situation? I am looking for all kinds of models regarding M&A
activities, however, the analysis and valuation of synergies are of my special
interest.
Unfortunately, the German books I have read so far do not provide a lot of
detailed information on this topic, neither does John Stermans book Business
Dynamics.

Thanks in advance for any references you can provide!

Oliver Kunath
From: "Oliver Kunath" <Oliver.Kunath@gmx.de>
PhD Student
University of Hohenheim, Germany

[Kai.Arild.Lohre@dnv.com]

Oliver Kunath is looking for models regarding M&A activities.

A good starting point is Competitive Strategy Dynamics by Warren. The
resource view of strategy is a sound basis for learning about the
potential synergies of mergers. Another approach is Sterman &
Repennings Unanticipated side effects of successful quality programs.

When it comes to acquisitions, one of the key questions is how to
estimate a base line valuation of the company. I think an SD approach
can be of value, many of the drivers of operational performance, and
financial performance, are intangibles. SD can model intangibles and
their effects on operational and financial performance better than
"traditional" valuation techniques described f.ex. by Copeland or
Damodaran.

Would be interested to hear other applications of SD on valuation of
companies.

With regards,
Kai Arild Lohre
DNV Research
Phone: +47 67578276
From: Kai.Arild.Lohre@dnv.com

["Kim Warren"]

Just to add a little to this ...
A standard simple Strategy view of M&A relies on the notion of
relatedness. Basically, this works on the notion that its a good idea
to develop or acquire related businesses, since you are likely to have
the capabilities to run these new or extended operations. [I spent 5
years as part of a team building a portfolio of highly related consumer
service businesses - restaurants, hotels, clubs etc - and the idea is
pretty sound]. The most closely-related kind of business will be one
that is identical to your own, so that it can be fully integrated,
allowing you to strip out duplicate overhead and support activities,
giving you simple operational synergies.
Competitive Strategy Dynamics (CSD) deals only with business-unit
strategy, rather than the multi-business challenge of M&A-type
activities (planned for a future book = Corporate Strategy Dynamics).
However, it should provide the basic foundations you need.
Starting from a sound architecture of resources in your existing
business - customers, capacity, products, staff etc. - an identical
acquisition brings you a bucketful of new resources to throw into each
of these bathtubs. So, e.g. if one restaurant chain acquires another, it
adds some extra outlets, products, managers, customers etc. The
subsequent integration then implies disposal of unnecessary duplicate
resources - sites that are too close together, managers not needed,
products that overlap in their appeal to consumers etc.
The trick in M&A (assuming you have bought the right thing!) is
excellent post-merger integration, and firms that do this a lot (e.g.
Cisco) are outstandingly clever at pulling it off. 2 kinds of things can
go wrong. Either too little effort goes into making the merged
businesses work together - in which case your model merely continues
to run the two individual business models alongside each other, and you
have paid an acquisition premium for nothing! Or else, when you *try* to
integrate, the effort triggers outflows that you did not want -
customers resent being forced to deal with the newly merged business,
staff dont want to work together etc.
It should, then, be possible to build a sound model of the existing
business, consistent with the resource-specifications in CSD, and a
separate model section for the acquired business. Next, trigger the
merger integration by having resources flow in a pulse or series of
pulses from the acquired business into the existing business. Have this
pulse-flow trigger a set of deliberate outflows to strip out the
specific surplus that you expect to find in each resource-stock. You can
then explore what happens if there is an additional, unintended outflow
from these same resources over the months and quarters following your
integration effort.
If you have bought a business that is *related* rather than identical -
e.g. a restaurant chain buys a hotel chain - then the same principle
applies, but limited to only a subset of the resources. E.g. both
business can share a property maintenance team, a finance department
etc.
The Strategy field would layer on top of all this supposedly basic stuff
a load of more complex and sophisticated ideas, to do with core
competences, dominant managerial logic etc. etc. ... but unless these
tangible basics are right, these fancy extras wont work in any case.

Kim
From: "Kim Warren" <Kim@strategydynamics.com>

["sheldon friedman"]

Hi
Interesting I just got a copy of the Synergy Trap, which explores the issue
of never recovering the premium paid for an aqusition(in most cases), the
fact that over 50% of failures is due to cultural issues seems to be missed
by the attorneys.

In any case the concept might make a good article , Ill talk to you about
it further, after I start the Subway article. Im just trying to get the
freight model out and off my plate before I start anything new.
thanks

Shelly
From: "sheldon friedman" <sheldon.friedman@comcast.net>

[Paul Martin]

A good book on some of this type of thinking about relatedness and strategy
is Quinns "Intelligent Enterprise", a Free Press book about 10 or so years
old. Quite insightful about the way in which conglomerates can grow around
expansion on related dimensions.

Regards to all
Paul Martin
From: Paul Martin <Paul_M@profitfoundation.com.au>
Www.profitfoundation.com.au