Economies of scale, the introduction of new brands on the international market, the acquisition of new technologies, the modification of a business model or the reduction of the operating costs of a business’s activity are typical benefits that a company can gain through mergers, acquisitions or spin-offs of a part of the business.
Taking into account the indicated benefits from the reorganization, we consider the following strategic company mergers and acquisitions:
- Merger of the group companies in order to reorganize the structure and business processes
- Merger with an external company with centralized financial accounting and HR processes
For spin-offs, we consider:
- Creation of a new company to run a specific part of the company’s business (e.g. HR processes)
- Sale of the company to other entity
- Spin-off of the company in the case of bankruptcy
The last business case may occur more frequently due to the unsteady global economic situation. It applies to the situation in which a parent company goes bankrupt because of a lack of financial liquidity, but its subsidiary, e.g. located in Poland, is still profitable and generating positive cash flows.
The Need for a Good Analysis
The statistics show that many such undertakings fall through and end without gaining the expected business benefits. Often, there are operational problems, such as a lack of harmony concerning business processes or their insufficient integration. Also, differences in organizational culture, if they are not taken into account during the reorganization, may affect the operational effectiveness of the merged companies.
The main reasons behind these problems are an inaccurate investment analysis of the undertaking and the lack of a defined strategy, including an IT strategy. Whether the company makes an optimal investment decision greatly depends on the level of detail of this analysis – considering the widest possible range of factors.
The investment analysis of the undertaking, so important in the case of acquisitions and mergers (due diligence), is based on the economic, legal and marketing analysis of the current situation and the target state after the merger. Usually, such an analysis is carried out by an external consulting company.
The process of analysis, decision-making and finally the registration of the changes in the National Court Register is complex. It is connected with the need to meet a series of legal requirements that must be fulfilled in a specific order and within a particular time. Thus, the necessary legal actions must be planned and synchronized with the activities in other areas, including IT, well in advance.
Setting the exact date of the change registration by the court is one of the key elements of the planning process, since the time of the formal implementation of any organizational and IT change in the company will depend on it. Therefore, the time of registration of the new legal form should be confirmed well in advance of the registration date. In practice, it may turn out that obtaining such a confirmation in advance will be unsuccessful, and the court will inform us post factum. Also, this risk should be taken into account in the planning stages.
Applications supporting changes
Changes in SAP systems resulting from business transformations, such as: mergers, acquisitions, sales of business units or migration to S4/HANA always constitute a big challenge for IT departments. Business departments, for which it is critical to ensure continuity of processes and security of data, including historical data, are also faced with no less challenges in such situations. With unique SNP solutions, customers can automate SAP environment transformation projects, eliminate errors, reduce project time, and even using a near zero downtime concept can achieve periods of downtimes that are imperceptible to business. In the project of a complicated division of corporate business, a 36-hour downtime for SAP systems (size 35TB) for many companies sounds unrealistic. For us, this is already a standard. We specialize in saving what is priceless – time. That is why we are chosen by the leaders of their industries.
Wojciech Nowak, Sales Team Manager, SNP Poland
Impact on IT
Often, in the process of analysis, before making a decision on the merger or spin-off, the impact of these changes on IT is not sufficiently accounted for. After all, the company processes that are usually subject to modifications due to any organizational changes are built on IT solutions. It is therefore indispensable to include the planning and evaluation of the changes in this area too – already at the merger, acquisition or spin-off planning stage.
It is the IT area that will play the key operational role in the process. While organizational changes and those in the area of infrastructure may go quite smoothly, in particular when the businesses of the merged entities are similar, the IT solution modification project may be a pretty big challenge and could introduce an additional time factor which should be taken into account when planning the activities.
The evaluation of the impact of the merger or spin-off on the application solutions and technical infrastructure of the company should be included in this analysis.
The criteria for analyzing the impact of the planned organizational company transformation should be selected depending on the type of transformation, since different elements may be taken into account for mergers or acquisitions of companies and in the case of spin-offs.
The analysis of any adaptation needs in the IT area in the case of mergers or spin-offs applies to two main areas: the network infrastructure with devices, systems and applications that support it, and the application layer made up of ERP, CRM, EDI, HD and other systems used by the company to perform its actual business processes.
In company mergers and spin-offs, the analysis of any adaptation needs in IT applies to the network infrastructure and application layer.
Mergers and Spin-offs in SAP
In the application area that contains the SAP solutions, the scale of change is analyzed. We focus on both the functional areas (modules) and the technical area, i.e. data migration and interfaces. We also take into account any necessary hardware changes.
The analysis can be performed entirely manually, or it can be accelerated and the probability of errors can be reduced using dedicated analytical tools.he SNP Group has prepared a number of products supporting various stages of the analysis with regard to both the applications, business as well as network. The most important of these are:
- SNP System Scan – allows you to extract and analyze in a traditional manner or using graphic tools (CrystalBridge) key organizational and technical data of the existing SAP systems, including SAP organizational units (including relationships), used system modules, extensions and modifications, number of users, etc.
- SNP Business Process Analysis is a solution that can be used for analysis and visualization of business processes in SAP systems, e.g. for evaluation of changes to be implemented.
- SNP Interface Scanner enables automatic analysis and documentation of interfaces with minimal effort.
During the analysis, the scope of the project connected with the merger or spin-off of entities is determined. This project, as other implementation projects, requires a methodological, phased approach to maintain the proper quality and safety. In each phase, SNP transformation products can be used to improve the quality and safety of the project.
SNP solutions have been available as part of the CrystalBridge platform since 2019.
In the case of a merger of two or more companies, we mostly have to deal with the following variants in SAP ERP:
- Merger of company codes that already exist in the ERP system
- Creation of a new company code
Depending on the adopted model and system development strategy, company codes can be merged or spun off within one client (single client approach) or different clients (multi-client approach). Each of these approaches requires the completion of specific tasks in the SAP system and/or the migration of data between SAP systems. In the case of the merger of company codes, the tasks consist of reassigning or creating the relevant organizational objects and making the configuration and development modifications. Using the dedicated SNP Transformation Backbone with SAP LT product, we can automate the process of data copying/transfer, deletion and transformation for the needs of such a project. This allows for easy separation and combination of organizational units both in a single SAP system and across different systems.
If we are dealing with a merger within the same client, we have to consider the inclusion of activities in the project that are aimed at eliminating redundant entities or restricting access to them. We should account for the fact that data deletion is a significantly more complex process and for this reason it is usually scheduled for a later time and as a separate project. Using the SNP Transformation Backbone product, we can easily delete redundant data without scheduling a special task for it.
Implementation tasks should be carried out based on the system model (template company) that determines what type of objects should be adjusted considering the new company code. Therefore, it is important to carry out such tasks based on the available reference documentation, which in this case refers to the “implementation guide”. The implementation blueprint while carrying out the project tasks, on the other hand, will mainly involve the analysis of differences – which objects should be copied, which should be adjusted, and which should be created.
One of the main elements of the blueprint preparation for a merger should be to agree upon the scope of consolidation of the merged companies’ financial reports. In the case of a merger with a foreign company, it may be necessary to implement a consolidated report according to an international standard, e.g. IFRS or US-GAAP. Here, additional tools, e.g. a consolidation process module (BPC), will certainly be helpful.
It should also be noted (and this should be one of the blueprint elements) that functional solutions in the system where we make changes may consist, for example, in implementing restrictions and conditions for using a function in the spun-off or merged entity. This is because it will not be possible to directly make use of all the solutions that run in the source entity.
For example, within an interface, access may be restricted to only a selected part of the interface, an additional data selection limitation will appear in the report, and the additional extension required to implement the process in the merged company will not apply. Therefore, the implementation of such changes in the model requires a very good grasp of the topic.
Similarly, we review user authorizations (system roles) during the project. In case of the spin-off of a company that is going to run other, often new processes, it is essential to define new roles that will be assigned to the created positions.
Interfaces and Data Migration
In each of these projects, the interface and data migration areas require special attention, since changes in them are likely to be the largest and most sensitive.
The data migration area requires developing an appropriate strategy for transferring the data from the merged or spun-off company to a target environment. For a merger project, it is necessary to perform a precise analysis of the exact data and the exact parameters that must be transferred, and to decide whether we are going to supplement or merge the data, whether the changes in the existing environment are needed, and whether the migration will be automatic or manual, etc. The required migration activities are determined by the business processes executed in the merged company.
Such analysis can be supported by the SNP Interface Scanner, an invaluable tool that enables automatic data collection, graphical analysis and top-down approach.
For example, when the company that has so far been running only sales processes merges with a production company, it may be necessary to transfer the completely new master data to the system to execute the production processes.
The migration area is closely related to the data maintenance in the system. Carrying out a merger project usually enforces the changes in the data maintenance procedures, i.e. central data management by introducing workflow automation mechanisms, for example.
Usually, the material master data, customer master data and supplier master data and the related data such as pricing conditions are subject to management centralization. It exists in most logistics processes of the company, hence the need for a systematic approach to it, especially when the merger with other entities is the key element for the strategic development of the company.
When considering the interface area in merger projects, even during the conceptual work, we consider the potential impact of the changes to organizational structures on the implemented solutions. Will the new company implement its own interfaces or use the existing ones? Will the current interface be valid in an identical scope in the new company (messages, parameters)? Will the modification of processing rules, i.e. routing, data conversion, etc., be necessary?
In the spin-off process in the migration area, we additionally determine what data will be transferred to a new entity and what data will be subject to removal from the source entity. Here, a particularly vulnerable area is HR, as it contains sensitive personal data.
In the course of a typical merger-related migration project, special tools (programs, reports) are created that allow for exporting and “clearing” the data of a spun-off entity from the source system and importing it to a target system.
In another spin-off case, we may also encounter the isolation of an entire client from the existing system. In a situation like this, the project will focus mainly on work in the Basis area and a possible adjustment of the functionality, depending on the corporate requirements.
When planning the organizational changes in SAP with relation to business changes, it is necessary to consider how they will affect the current structure and function of the IT/SAP helpdesk, whether additional competencies and resources are needed, and whether the system maintenance procedures will need to be changed.
In particular in spin-off projects, when the spun-off company has not often dealt with the system administration and has not ever maintained a hardware layer, it is worth comparing the costs of purchasing the hardware and maintaining competencies with those of an SAP administration hosting and outsourcing offer. Also, in the case of mergers, organizational changes provide a good opportunity to consider changing the system maintenance model to outsourcing.
From Analysis to Business Benefits
Merger and spin-off projects are very attractive in terms of business, however, due to their specific complexity, they require well-thought-through, comprehensive preparation. Apart from the organizational aspects, also legal aspects have to be taken into account.
The efficient project execution depends on the completeness of the analysis and selecting the right strategy. This is important as in the case of mergers and acquisitions, the companies want to gain the assumed business benefits as soon as possible.
The speed and proper security in such projects will be ensured only by a comprehensive analysis that incorporates the necessary knowledge and IT requirements. It is recommended to carry it out based on the experience of the SNP Group consultants and numerous dedicated support tools ensuring even greater efficiency and safety of the transformation process.
Company Transformations vs. SAP Licenses
A separate issue that must be analyzed in the process of business reorganization concerns the legal conditions of using the SAP system, i.e. licenses granted by the software vendor. A merger of two entities is a relatively simple case. The entity formed by the merger becomes an “heir” of the license rights of both merging companies.
On the one hand, when we spin off a new entity in which the parent company retains more than 50% of the shares, we can transfer a part of the license to this entity. On the other hand, if we don’t retain a controlling stake in the new company, and we want to transfer the licenses to it, we must ask the software vendor for its consent.
Also, acquiring the controlling stake in a new company in which we want to implement the SAP system does not pose major problems. Licensing terms allow for situations in which we can somehow expand the system to include the new entity in a group.
In each of the above cases, it is necessary to inform the software manufacturer of the change in the legal status and indicate the entity that retains the license rights. The situation becomes complicated when an enterprise that does not have the system acquires a controlling stake in the company that already has SAP and wants to use its system in the future. SAP is usually a vital company asset – including infrastructure, configuration, master data, the administrator and user competence and, of course, license rights. However, the new owner may use the system only if it has obtained SAP’s consent. When deciding on the acquisition, it is necessary to make sure that SAP will give its consent. This is not obvious in cases where the acquired entity benefited from the specific licensing terms pertaining to its previous owner. In such cases, the system vendor may not give its consent, meaning that the company will have to buy the licenses or obtain them from the new owner, provided that it has the licenses, in order to use SAP products.
Thus, particular caution and diligence is advisable when checking the legal status of licenses and the conditions for their transfer. This helps avoid situations where a company becomes the owner of a developed and well-managed SAP installation that it cannot use due to a lack of license rights.
The above remarks apply to standard contractual terms and conditions that may differ in individual contracts with SAP. Therefore, companies should always become familiar with the details of the SAP license agreement during the auditing process before acquiring another company.
Ewa Komorowska, Sales Team Manager, SNP Poland