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Jakob Miera

CRO – Contract Research Organization

Copyright © 2014. Diplomica Verlag. All rights reserved.

How Drug Research is Evolving

Anchor Academic Publishing disseminate knowledge

CRO – Contract Research Organization: How Drug Research is Evolving : How Drug Research is Evolving, Diplomica Verlag, 2014. ProQuest Ebook Central,

Miera, Jakob: CRO – Contract Research Organization: How Drug Research is Evolving. Hamburg, Anchor Academic Publishing 2014 Buch-ISBN: 978-3-95489-198-6 PDF-eBook-ISBN: 978-3-95489-698-1 Druck/Herstellung: Anchor Academic Publishing, Hamburg, 2014 Bibliografische Information der Deutschen Nationalbibliothek: Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar. Bibliographical Information of the German National Library: The German National Library lists this publication in the German National Bibliography. Detailed bibliographic data can be found at: http://dnb.d-nb.de

All rights reserved. This publication may not be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers.

Das Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwertung außerhalb der Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Dies gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Bearbeitung in elektronischen Systemen.

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Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten wären und daher von jedermann benutzt werden dürften. Die Informationen in diesem Werk wurden mit Sorgfalt erarbeitet. Dennoch können Fehler nicht vollständig ausgeschlossen werden und die Diplomica Verlag GmbH, die Autoren oder Übersetzer übernehmen keine juristische Verantwortung oder irgendeine Haftung für evtl. verbliebene fehlerhafte Angaben und deren Folgen. Alle Rechte vorbehalten © Anchor Academic Publishing, Imprint der Diplomica Verlag GmbH Hermannstal 119k, 22119 Hamburg http://www.diplomica-verlag.de, Hamburg 2014 Printed in Germany

CRO – Contract Research Organization: How Drug Research is Evolving : How Drug Research is Evolving, Diplomica Verlag, 2014. ProQuest Ebook Central,

Index Index V LIST OF FIGURES ...................................................................................................................................... VII LIST OF TABLES ..................................................................................................................................... VIII LIST OF ABBREVIATIONS ...................................................................................................................... IX INTRODUCTION ........................................................................................................................................11 METHODOLOGY ........................................................................................................................................12 1. MERGER & ACQUISITIONS FUNDAMENTALS.............................................................................13 ͳǤͳ    ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͳ͵ ͳǤʹ   Ƭ   ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͳͶ ͳǤ͵ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͳͺ 2. CONTRACT RESEARCH ORGANIZATION INDUSTRY ................................................................20 ʹǤͳ  ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤʹͲ ʹǤʹ      ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤʹ͵ ʹǤ͵     ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤʹͷ 2.3.1 Macro environment – PESTEL ............................................................................................................ 25 2.3.2Microenvironment - Porter.................................................................................................................... 27 ʹǤͶ     ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͵Ͳ 2.4.1 Structural Changes in the CRO Industry ......................................................................................... 30 2.4.2 Growth Strategies..................................................................................................................................... 32 2.4.3 Mergers & Acquisitions in the CRO Industry ................................................................................. 33 3. EXPLANATORY APPROACHES AND MOTIVES FOR M&A ........................................................35 ͵Ǥͳ  ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͵͸ 3.1.1 Synergy ......................................................................................................................................................... 36

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3.1.2 Market Power............................................................................................................................................. 37 3.1.3 Portfolio Hypotheses / Diversification............................................................................................. 38 ͵Ǥʹ   ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͵ͺ 3.2.1 Valuation Theory ...................................................................................................................................... 39 3.2.2 Tax Hypothesis........................................................................................................................................... 39 ͵Ǥ͵   ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͶͲ 3.3.1 Hubris ............................................................................................................................................................ 40 3.3.2 Agency Hypothesis ................................................................................................................................... 40

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4. SUCCESS FACTORS FOR THE MERGER & ACQUISITIONS PROCESS.....................................42 ͶǤͳ Ƭ   ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͶʹ 4.1.1 The Planning Phase ................................................................................................................................. 43 4.1.2 The Execution Phase ............................................................................................................................... 44 4.1.3 The Integration Phase ............................................................................................................................ 46 ͶǤʹ     ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͶͺ 4.2.1 Potential Success Factors in the Strategic Planning Phase .................................................... 48 4.2.2 Potential Success Factors in the Execution Phase ...................................................................... 51 4.2.3 Potential Success Factors in the Integration Phase ................................................................... 53 5. CASE STUDY: MERGER & ACQUISITIONS IN THE CRO INDUSTRY ......................................56 ͷǤͳƬ  ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͷ͸ ͷǤʹ Ƭ   ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͷ͹ ͷǤ͵    Ƭ   ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤͷͻ 5.3.1 Strategic Planning Phase ...................................................................................................................... 59 5.3.2 Execution Phase ........................................................................................................................................ 61 5.3.3 Integration Phase ..................................................................................................................................... 62 ͷǤͶ     Ƭ   ǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͸Ͷ ͷǤͷ     ƬǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤǤ͸ͷ 6. CONCLUSION AND RECOMMENDATIONS.....................................................................................68 APPENDIX ...................................................................................................................................................61

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BIBLIOGRAPHY .........................................................................................................................................73

VI

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List of Figures Figure I-I

Structure of the book

Figure 1-1

Concept of M&A definition

Figure 1-2

Merger Waves in the US Industry

Figure 1-3

Merger Waves in Europe and Asia Pacific (total numbers of deals)

Figure 1-4

Recent world-wide Mergers & Acquisitions

Figure 2-1

The drug development process

Figure 2-2

CRO revenue growth 1992 – 2013E

Figure 2-3

The CRO scope of operations

Figure 2-4

The ten largest CRO corporations by revenue

Figure 2-5

Clinical Trial Management Systems

Figure 2-6

Revenue growth for the CRO industry

Figure 2-7

Worldwide distribution of clinical trials

Figure 2-8

EBITDA multiple 2007 – 2012

Figure 3-1

Possible synergy benefits

Figure 3-2

Diversification Strategy

Figure 4-1

The development of the M&A process

Figure 4-2

The planning phase and its first three steps

Figure 4-3

The execution phase with steps 4 – 6

Figure 4-4

Valuation approaches

Figure 4-5

The integration phase with its three last steps

Figure 4-6

Stages for a successful screening process

Figure 5-1

Sent and completed surveys and analysis in which kind of M&A the participants were involved

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VII

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List of Tables Table 2-1

Selected takeovers in the CRO industry

Table 3-1

Potential reasons for Merger & Acquisitions

Table 4-1

Potential success factors of the strategic planning phase

Table 4-2

Potential success factors in the execution phase

Table 4-3

Potential success factors in the strategic integration phase

Table 5-1

Summary of the potential reasons for M&A in the CRO industry

Table 5-2

Potential success factors in the strategic planning phase

Table 5-3

Potential success factors in the execution phase

Table 5-4

Potential success factors in the integration phase

Table 5-5

Summary of potential reasons for M&A in the CRO industry

Table 5-6

Determinants and evaluation of success after an M&A

VIII

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List of Abbreviations CAGR

Compound Annual Growth Rate

CRO

Contract Research Organization

et. al.

et alii (and others)

f.

folio (following page)

ff.

folios (following pages)

FDA

Food and Drug Administration

HTS

High Throughput Screening

ibid.

ibidem (the same place)

IND

Investigational New Drug

IPO

Initial Public Offering

LBO

Leveraged Buy-Out

M&A

Merger and Acquisitions

MBO

Management-Buy-Out

NDA

New Drug Application

op. cit.

opere citato (in the worked cited)

p.

page

pp.

pages

PLC

Product Life Cycle

PPD

Pharmaceutical Product Development

PPP

Public Private Partnerships

R&D

Research & Development

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IX

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Introduction This book deals in general with mergers & acquisitions in the CRO industry, and more specifically with reasons for M&A, success factors during the M&A process, and why M&A can fail in the Contract Research Organization industry. The pharmaceutical industry faces increasing obstacles in respect to the development and introduction of new medications. That has to do with stricter requirements for admission and sharper controls by authorities. Today, the research and development of a new drug can easily consume more than $800 million and lasting between 10 and 15 years. Due to these admission, money and time pressures, pharmaceutical companies are looking for an alternative in the drug development process. A very popular alternative is the outsourcing or in-house working with Contract Research Organizations (CRO). Contract Research Organizations are specialized in coordination and monitoring of drug development activities. Due to their focus they often offer a more sophisticated and faster process. Demographic changes, chronic diseases like cancer and diabetes, and completely new cluster of symptoms demand new therapeutically treatments. The size of the CRO market in 2012 was around $32 billion and had an estimated market growth of around 9 – 12% for 2013. Increased outsourcing and allocation of R&D money towards CRO reflects a driving force for prospective growth. To benefit from the good industry outlooks CROs adjust their service offerings and strengthen their competitive situation. More and more Contract Research Organizations consider mergers & acquisitions as a vital solution to achieve their objectives. Since couple of years we can observe an increased number of deals. Large corporations can close the gaps in the internal service pipeline and smaller firms can use mergers as a financial exit. However, many M&A activities are considered as ineffective and contra-productive for the shareholder value – either destroy or merely add. Depending on the study, the numbers of

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M&A failures vary from 50% to even 80%. Possible reasons may be not enough integration planning and unrealistic expectations on the cost and time. The reality shows that it is not that easy to cut costs by simple combining two departments after a merger or acquisition. Additionally, we can see that mergers and acquisitions basically not succeed during the actual process.

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Methodology Mergers and Acquisitions in the CRO industry are a relatively new field from the perspective of academic research. When we have such a high number of M&A failures in general, is it possible to identify and counteract the reasons. The purpose of this book is, whether the possibility exists to workout specific factors in avoidance of failures for M&A. In order to answer this question, the book is structured in the following way. After the introduction, the fundamentals of Merger & Acquisitions will be described. The definition, the history and what are recent trends for the M&A market. The next chapter is to get acquainted with the Contract Research Organization industry. After the description of the drug development process, the book presents the fundamentals of the CRO business. The structural analysis consists of the PESTEL and Porter-5-Forces. The third chapter is about explanatory approaches and motives for mergers and acquisitions. It is divided in the parts of strategic, financial and managerial motives. The core of this chapter is to assess key motives of each part from the theoretical point of view. After the merger and acquisitions process is described in chapter four, the book examines the potential success factors of the strategic planning, execution and integration phase. Similar to the previous chapter the factors are based on academically research. Finally, the fifth chapter is a case study where theoretical and practical aspects are combined. The previous examined theoretical framework is evaluated on the basis of a survey. The data is analyzed in tables and on the one side ranked according to the number of entries

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and on the other side according to the average score.

Figure I-I: Structure of the book

12

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1. Merger & Acquisitions Fundamentals 1.1 Definition and History The conceptual word-pair Merger & Acquisition is used since the first merger wave in the years 1895 till 1904 (for M&A history see Chapter 2.1.2).1 The word merger has a clear legal meaning. A merger occurs when two or more corporations are combined and only one legally ceases to exist.2 For instance, company A mergers and disappears legally into company B. Shareholders of company A exchange their shares for those of company B. Often the companies are about the same size. Generally, a merger differs from a consolidation. Referring, to the above-mentioned example with company A and B, a consolidation would generate an entire new company C. An acquisition is the process where the shares or assets of one corporation come to be owned by another corporation. The purchase may lead to the outcome that one company takes a controlling interest of another company. Moreover, an acquisition occurs when one corporation acquires from another corporation an entire business operation and its assets.3 Additionally, the term Merger & Acquisitions has a series of different national and international meanings4: •

Collaboration, Strategic Alliance and Joint Venture



Spin off



Management Buy-in and Buy-out (MBO)



Private Equity involvement



Public Private Partnerships (PPP)



Initial Public Offering – IPO



Transformation and Restructuring



Outsourcing

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However, in the following chapters the focus will be on a narrower definition of M&A (see Figure 1-1). Besides the previous mentioned M&A definitions we are going to use the terms strategic alliances and joint venture. Strategic alliances and joint ventures are increasingly

1

Wirtz, B., Mergers & Acquisitions Management, Gabler, Wiesbaden, 2003, p. 10. Krug, J.A., Mergers & Acquisitions, Sage, London, 2008, p. 2 f. 3 Lucks, K. / Meckl, R., Internationale Mergers & Acquisitions, Springer, Berlin, 2002, p. 24f. 4 Achleitner, A., Handbuch Investment Banking, Gabler, Wiesbaden 2002, p. 141 f. and Copeland, T.E., et al., Financial Theory and corporate policy, Prentice Hall, Boston, 2005, p. 755 f. and Picot, G., Handbook Merger & Acquisition, Schaeffer-Poeschel, Stuttgart, 2012, p. 29. 2

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13

more important and common organizational vehicles for companies in the drug research and development (R&D) business.5

Figure 1-1: Concept of M&A definition Own representation based on Grünert (2006)6

Strategic alliances are contracts between legally distinct corporations or other organizations.7 These corporations usually implement a strategy together, share resources and pursue a specific, mutually beneficial goal.8 Another form of strategic relationships is a joint venture. A joint venture is a common subsidiary between two or more legally independent corporations. All involved parties share mutually in the profits and losses.9

1.2 Types and history of Merger & Acquisitions The academic literature discovered that mergers & acquisitions phases usually come in

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waves.10 Thus far, five completed waves have been examined - those of early 1900s, the 5

Robinson, D.T. / Stuart, T., Financial Contracting in Biotech Strategic Alliances, Journal of Law and Economics, 50, (2007): p. 560f. 6 Grüner, T., Mergers und Acquisitions in Unternehmungskrisen, Dissertation University of Gießen, Gabler, Wiesbaden, 2006, p. 27. 7 Underhill, T., Strategic Alliances, Penn-Well, South Sheridan, 1996, p. 1. 8 Robinson, D.T., Strategic Alliances and the Boundaries of the Firm, Review of Financial Studies, 21 (2), 2008, p. 650f. 9 Gutterman, A., A short course in International Joint Ventures, World Trade Press, Novato, 2002, p. 1. 10 Gaughan, P.A, Merger, Acquisitions, and Corporate Restructering, Wiley & Sons, Hoboken, 2007, p. 27 and Martynova, M. / Renneboog, L., A century of corporate Takeovers, Journal of Banking and Finance, 32 (10), 2008, p. 2153, and Eckbo, E., Handbook of Empirical Corporate Finance, Elsevier, Berlin, 2008, p. 295

14

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1920s, the 1960s, the 1980s, and the late 1990s, followed by periods with significantly lower activity.11 These periods mostly characterize the US M&A market, whereas the European and Asian market had a significantly lower transaction value until the 1990s. Specific types of merger and acquisitions characterize each wave. Typically, the formation of a wave goes along with political, economical, and regulatory changes.

Figure 1-2: Merger Waves in the US Industry Own representation based on: Müller-Stewens (2010)12

The first wave (1897-1904) was characterized by horizontal consolidations (about 80% of all M&As) in the heavy manufacturing industry, like fabricated metal products, petroleum products, chemicals, and machinery.13 A horizontal consolidation generally occurs, when two competitors from the same industry combine. This kind of consolidations often led to monopolistic market structures.14 Approximately 42 important industries were controlled by companies with at least 70% market share.15 The wave finally ended up due to economical reasons and the stock market crash. Additionally, the Supreme Court introduced the Northern Securities Decision and the Sherman Act, which was used to attack anticompetitive structures.16 The second takeover wave emerged in the late 1916s and continued through the 1920s. The wave was strongly characterized by vertical mergers and the monopolistic markets structures changed to oligopolies with two or more commanding corporations.17 A vertical merger is the Copyright © 2014. Diplomica Verlag. All rights reserved.

combination of two companies in the same production process but at different value chain

11

ibid. Müller-Stewens, G., M&A als Wellen-Phänomen, Schäffer-Poeschel, Stuttgart, 2010, p. 16. 13 cf, Gaughan, P.A., Merger, loc.cit., p. 30 and Fligstein, N., The transformation of Corporate Control, Harvard University Press, Cambridge,1993, p. 72. 14 ibid. 15 Sudarsanam, S., Creating Value from Mergers and Acquisitions, Pearson Education, Harlow, 2003, p. 15 16 Gaughan, P.A., Merger, op. cit., p. 36 17 DePamphilis, D.M., Merger, Acquisitions, and other restructuring activities, Elsevier, Burlington, 2011, p. 16. 12

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stages.18 Consequently two basic forms exist: the backward integration, a corporation acquires a supplier, and the forward integration, where a corporation buys its customer. The stock markets crash of 1929 and as the consequence thereof Great Depression marked the end of the second wave.19 Regulatory changes in the anti competitive law led to the third takeover wave (1965-1969). This was mainly characterized by diversifying takeovers that led to the development of conglomerates.20 Pure conglomerate mergers occur between companies in largely unrelated markets that are not competitors and do not have a customer-supplier relationship.21 Academic literature and studies show that many merger & acquisitions were followed by poor financial performance – more than 60% of cross-industry acquisitions that occurred during the period were sold or divested.22 A recent example for a conglomerate merger is the fusion between Berkshire Hathaway and Burlington Northern Santa Fe.23 The emerge of new financial instruments and markets (e.g. Junk Bond market24) together with significant changes in antitrust law (deregulation) introduced the fourth M&A phase (19811989). During this period the market was strongly characterized by going-private transactions like Leveraged Buy-Outs (LBO) and Management-Buy-Outs (MBO). Through this instruments listed companies were acquired and subsequently delisted.25 Both transactions are characterized by the way of financing where a great amount of money is borrowed. The LBO is usually undertaken by company outsiders (private equity investors), whereas a MBO is realized by the company’s management team.26 In 2011, one of the largest publicly held CRO companies PPD was acquired via a leveraged buy out (LBO) by the Carlyle Group and Hellman & Friedman for approximately $3.9 billion.27

18

Megginson, W.L. / Smart, S.B., Introduction to Corporate Finance, Cengage Learning, Mason, 2008, p. 855 Gaughan, P.A., Merger, op. cit., p. 36 20 Martynova, M. / Renneboog, L., A century of corporate Takeovers, Journal of Banking and Finance, 32 (10), 2008, p. 2145 f. 21 French, R., et al., Organizational behaviour, Wiley & Sons, Hoboken, 2011, p. 319. 22 ibid. 23 Pride, W.M., et al., Business, Cengage Learning, Mason, 2012, p. 126. 24 Junk Bonds are publically traded debt obligations. They are rated as noninvestment grade by the independent rating agencies (Standard & Poor’s lower than BBB- and Moody’s lower than Baa3); see Altman, E.I. / Nammmacher, S.A., Inside the high yield debt market, Beard books, New York, 2003, p. 1. 25 Renneboog, L. / Simons, T., Public-to-private transactions: LBOs, MBOs, MBIs and IBOs, Discussion Paper, Tilburg University, 2005, p. 2f. 26 ibid. 27 Online Sources: “http://www.contractpharma.com/contents/view_expert-opinions/2011-12-14/ppd-goesprivate-whats-next/” and “http://www.pharmatimes.com/article/11-1006/PPD_goes_to_private_equity_for_US_3_9_billion.aspx”, Accessed: 21.03.13)

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Increasing globalization and technological innovation together with the economic and financial bull markets led to the fifth M&A phase between 1992 and 2001. According to the volume of transactions this wave was the first one with a real international nature with the transnational Mega-Deals. For the first time the deals in Europe were almost as large as the deals of the US market.28 Particularly, German, British and French firms were very active as acquires, but also popular takeover targets.29 Companies start to move toward core businesses or specializations with divestitures or other forms of restructuring.30 Divestitures can occur as a spin-off, sell-off, and equity carve out or can take the form of sales of corporate assets and resources.31 For instance, ICI demerged via a divestiture into ICI and Zeneca, which merge with Astra to form the second largest UK pharmaceutical company AstraZeneca.32 Additionally, five out of the ten largest M&A deals occurred during this wave, e.g. the acquisition of SmithKline Beecham by Glaxo Wellcome in the year 2000 for $76 billion to form another pharmaceutical big player GlaxoSmithKline.33

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Figure 1-3: Merger Waves in Europe and Asia Pacific (total Number of deals) Source: Thomson Reuters Financial Securities Data

28

McCarthy, K.J., Understanding success failures in mergers and acquisitions, Dissertation, University of Groningen, 2011, p. 15. 29 Martynova, M. / Renneboog L., Mergers and Acquisitions in Europe, Discussion Paper, Tilburg University, 2006, p. 10. 30 Bhagat, S., et al., Hostile takeovers in the 1980s: The return to corporate specialization, Brookings Papers on Economic Activity,1990, p. 1 ff. 31 Brauer, M.F. / Wiersema, M.F., Industry Divestiture Waves, Academy of Management Journal, Vol. 55 (6), 2012, p. 1472. 32 Sudarsanam, S., Creating, op. cit., p. 25. 33 ThomsonReuters

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As mentioned above M&A waves go along with political, economical, and regulatory changes and typically occur during periods of high economic growth. Often the end of a wave was due to stricter legal rules or stock market crashes - similar to the first two takeover phases the third and fourth ended with a stock market crash and economic slowdown, the fifth was also negatively influenced by the 9/11 terrorist attacks.34

1.3 Recent M&A Trends Recent studies have examined that merger waves increased in intensity and frequency.35 The waves have larger volumes and are following more rapidly. After the fifth wave ended the total transaction value dropped by 55% in 2001 and 39% in 2002.36 The sixth merger wave started in 2003, with a total transaction value increase of approximately 30% and climax in 2006, before it significantly dropped in 2008.37 Low interest rates after the stock market crash in 2001 led to excessive lending and high liquidity. Also costcutting programs, which were introduced by the corporations after the crisis, generate large cash pools. As a consequence thereof the financing patterns changed to be more cash than equity intensive – the portion of equity in deals decreased by nearly 30%.38 Summarizing, mergers and acquisitions play more and more important role in the business world. A successively increasing number of company fates depend on the evolution. The number of transactions increased over the year and will rise together with the amplitudes over

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the next years.

34

McCarthy, K.J., Understanding success, op. cit., p. 40. Dong, et al., Does investor misevaluation drive the takeover market, Journal of Finance, No. 61, 2006, pp. 725 – 762 and Moeller, S.B., et al., Wealth destruction on a massive scale. Journal of Finance, No. 60, 2005, pp. 757 – 782. 36 Alexandridis, G., et al., How have the M&As changed? Evidence from the sixth merger wave, European Journal of Finance, No. 18 (8), 2011, p. 669. 37 ibid. 38 The fifth merger wave was dominated by stock financing (around 70% of all deals include stock compensation). .Rhodes-Kropf, M. / Viswanathan, S., Market valuation and Merger Waves, Journal of Finance, 59 (6), 2004, pp. 2685 - 2718 and Andrade, G., et al., New evidence and perspectives on mergers, Journal of Economic Perspectives, No. 15, 2001, pp. 103 – 120. 35

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Figure 1-4: Recent world wide Mergers & Acquisitions Source: Thomson Reuters Financial Securities Data, Institute of Mergers, Acquisitions and Alliances (IMMAA)

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2. Contract Research Organization Industry 2.1 The Drug Development Process The history of the Contract Research Organization industries can be traced back to the Contergan- and thalidomide scandal in the 1950s. Contergan was a drug based on the ingredient thalidomide. It was developed and introduced by the German pharmacy company Chemie Grünenthal. The purpose of the drug was to help woman against morning sickness in the early period of pregnancy and to help against headaches and colds.39 Despite the low quality of scientific and clinical research the drug was introduced in 1957 in Germany and latterly on at a global scale.40 The outcomes were tragically as side effects of thalidomide led to teratogenic (causing malformations) effect on human foetal development.41 Since this huge thalidomide scandal the process of drug approval has completely changed.42 The FDA43 (Food and Drug Administration) regulation became much more stringent.44 One major shift was the Kefauver-Harris Amendment in 1962. The act required important changes from the pharmacy and cosmetic companies: •

Effectiveness and safety of all new drugs



Regulatory Controls on the entire clinical research process



Disclosure of side effects on drug marketing and labelling45

The FDA approach became the global standard of pharmaceutical drug trials. First of all, because the volume and size of the US market but later on due to the harmonization process of regulatory requirements in Europe and Japan.46 The drug development process is very complex and can easily take up several years. According to a PhRMA research study the development of a new drug consume on an average $800

39

Reichl, F. / Schwenk, M., Regulatorische Toxikologie, Springer, Berlin, 2004, p. 433. White, A., Thalidomide and the FDA, Health Care Law & Policy, No. 12, 2001, p. 4ff. 41 ibid. 42 Drews, J., Die verspielte Zukunft, Birkhäuser-Verlag, Basel, 1998, p. 160. 43 The FDA is the central U.S. department of Health and Human Services. The core functions are Medical Products and Tobacco, Foods, Global Regulatory Operations and Policy, and Operations. Particularly, the FDA is responsible for protecting the public health by assuring the safety, effectiveness, and security of human and veterinary drugs. The European equivalent is the EMA (European Medicine Agency) where the FDA is also very active due to its extensive regulatory cooperation. (Source: http://www.fda.gov/AboutFDA/Transparency/Basics/ucm192695.htm, Accessed: 21.04.2013) 44 Grabowski, H.G. / Vernon, M., Consumer protection in ethical drugs, American Economic Review, 67 (1), 1977, p. 359 f. 45 ibid. 46 Getz, K. / de Bruin, A., Breaking the development speed barrier, Drug Information Journal, No. 34, 2000, p. 732

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40

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F ated drug million - $1 billionn and lastingg between 10 and 15 yeears.47 Geneerally, the FDA-manda developpment process consistts of four main stagees: drug diiscovery, preclinical research, r Approval (see Figure 22-1).48 clinical trials, and Regulatory R

Figure 2-1: The drrug develop pment proccess Own reppresentationn based on PhRMA P stuudy (2007) aand Mirowsski (2005)499

The enttire developpment proceess starts wiith the drugg research. The T primaryy drug research is a model of o cooperattion betweeen many different partticipants. Private organnizations liike huge pharmaccy corporattions or sm maller speciaalized comppanies are usually thee primary so ource of researchh findings.50 Public insstitutions liike medicall schools, universities, u and other research facilities also play a very signnificant rolee in the disscovery proocess.51 In both b approaaches the u a researcch project too understannd and find a way to cuure a diseasse. After scientistts will set up the grouups have enough e matterials to fully fu undersstand the ddisease pattern the poiint is to identifyy a moleculee or lead coompound thaat could curre the diseaase.52 Sincee the 1990s the high

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throughhput screeniing (HTS) iis a dominaant approachh for identiifying lead compoundss.53 With

47

PhRM MA, Drug disccovery and development, Phharmaceutical Research andd Manufacturees of Americaa, Washingtton, 2007. 48 Mirow wski, P. / Van Horn, R., Thee contract reseearch organizzation and the commercializzation of scien ntific research,, Social Studiees of Service, Vol. 35 (4), 2005, 2 p. 509 49 PhRM MA, Drug discoovery, op. cit., p. 2 f., and Mirowski, M P. / Van Horn, R R., The contracct, op. cit., p. 509 5 f. 50 PhRM MA, Drug discoovery, op. cit., p. 3 f. 51 ibid. 52 Hubbaard, R., Structuure-Based druug discovery, RSC Publishiing, Cambridgge, 2006, p. 4 and PhRMA, Drug discoveryy, op. cit., p. 3 f. 53 Rankoovic, Z. / Morpphy, R., Lead generation appproaches in ddrug discovery ry, John Wileyy & Sons, Hob boken, 2010, p. 22. 2

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this method we can screen hundreds of thousands potential successful lead compounds, which may cure the disease.54 After the screen of thousand of possible lead compounds the scientists choose the ones, which are particularly promising and relatively safe. These lead compounds are used in the preclinical phase on animal material, typically mice and rats. If the therapy shows successful outcomes, the research facility will fill out the Investigational New Drug (IND) application to receive the preliminary approval for the next stage.55 The clinical trial phase is divided in three different parts (trial phase 1 – 3, see Figure 2-1), each with an increasing number of patients. The drug is used for the first time on volunteer human candidates und must undergo excessive studies to asses the safety and efficiency.56

1. Phase (20 – 100 healthy candidates) •

Pharmacokinetics: Absorption and metabolism of the drug



Pharmacodynamics: Estimation of desired and adverse effects



Determination of dosing range



=> Overall drug safety

2. Phase (100 – 500 patients with this special disease) •

Is the drug working in a proper way and improve the patients conditions



Interactions with other drugs



Adverse effects

3. Phase (1.000 – 5.000 patients to provide statistically significant data) •

Benefit-Risk relationship of the drug



Final determination of drug safety and effectiveness

If the scientists can show that the tested drug is both safe and effective they submit the New Drug Application (NDA), which can have more than 100.000 pages. The NDA is the formal

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process to obtain the permission to sale and to marketing a new drug. Additionally to the above-mentioned points the regulating authority assess if the labelling is appropriate and if manufacturing methods are adequate.57 The final step (after the drug was already approved) in

54

ibid. Mirowski, P. / Van Horn, R., The contract, op. cit., p. 509. 56 Meinert, C., Clinical trials: Design, conduct, and analysis, Oxford University Press, New York, 2012, p. 4, and PhRMA, Drug discovery, op. cit., p. 3 ff. 57 Online Source: http://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/ApprovalAppli cations/NewDrugApplicationNDA/ (Accessed: 30.04.2013) 55

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the drug development process is phase four trial (Post-Marketing Surveillance). The regulating authority demands subsequent monitoring under more real-life conditions. In this phase scientists can focus on different drug doses and demographic groups with different ethnical background.58

2.2 Fundamentals of Contract Research Organizations As we have seen the drug development process is one of the most extensive and expensive activities conducted by any private industry segment in the world. It is also stringently regulated and monitored. Following the identification of a promising new drug candidate, a drug developer (sponsor) must demonstrate safety and efficacy through a series of prescribed laboratory experiments and tests in both animals and humans. The above-mentioned data for study of drug development reinforces the long-standing observation that developing a drug typically takes twelve to fifteen years and costs can easily excess $1 billion. Derived from these data the importance of an effective and efficient Contract Research Organization (CRO) is evident. According to academically researches pharmacy corporations start to outsource or work inhouse with specialized CROs in the 1980s. As we determined earlier the process of drug development is very lengthy and costly and pharmaceutical corporations are seeking for opportunities to cut costs. Outsourcing could shorten the drug development process and bring the desired cost benefits. Estimations expose that a drug delay may even cost $4 million to $5 million per day in lost revenues.59 Therefore, the management of clinical trials has become a business of its own.60 Pharmaceutical companies are able to turn their fix costs into variable costs. Usually, Contract Research Organizations coordinate and monitor the clinical trial phase I – III. This phases stand for approximately 70% of the complete research & development cost of a drug.61 Additionally to the core business CRO corporations conduct pre-

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clinical studies, phase IV marketing surveillance and maintain their own central laboratories.

58

Chin, R. / Lee, B., Principles and practivces of clinical trial medicine, Elsevier, London, 2008, p.39. Pope, D., Do it right…the first time, Applied clinical trials journal, March 2013, p. 50. 60 Jonvallen, P., Compliance revisited: pharmaceutical drug trials in the era of the contract research organization, Journal of Nursing Inquiry, No. 16, 2009, p. 1. 61 Huijstee, M. / Homedes, N., Putting contract research organizations on the radar, Journal of International Psychiatry, Vol. 9 (2), 2012, p.32. 59

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he emerge of the Con ntract Reseaarch Organiizations theeir industry faces succcessively Since th growing g revenues (see Figuree 2-2). Betw ween the yeears 1997 annd 2007 thee compound d annual growth rate (CAGR R) was apprroximately 34% 3 and for the years 22008 to 201 13E 15%.

Figure 2-2: CRO rrevenue Grrowth 19922 – 2013E Own rep presentation n based on Mirowski M (2 2005), IMS Health, Heealthcare Inssider, Clinu uity62

To sum m it up we caan abstract that t Contracct Researchh Organizatiions work in n the interseection of three most m importaant points: G Global regu ulations, whhich are the basic fram mework for conductc ing any y kind of drrug developpment, Busiiness (Monney), withouut this any corporation ns would invest the t amount of money and time to t find a neew drug, an nd human life, l every research

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should be b conducteed under thee premise off optimal leevel of safetty.

Figure 2-3: Th he CRO scoope of operratio

62

Mirowski, P. / Van Horn, H R., The contract, op. cit., p. 508, IM MS Health, Healthcare Insider, Clinuity

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2.3 Strategic Analysis of the Drug Development Market The strategic analysis of the CRO business is very important for understanding the manifold influencing factors. For the macro environmental screening I use the PESTEL analysis (PESTEL: Political, Economic, Social, Technology, Environmental, Legal). The microenvironment is analyzed with Porters-5-Forces. Both analyses PESTEL and Porter-5-Forces are based on academic research of literature and conducted interviews with managers in the CRO industry. 2.3.1 Macro environment – PESTEL Political: Politics have a quite high influence on the CRO industry. A very important issue where the government intervenes is the Regulatory Approval process. As mentioned in chapter 2.1 the regulatory approval is the permission to conduct the study in a specific country, for instance, in respect to ethical correctness. Most studies require a multi-country background, what therefore demand an approval process in every country. A new law in the EU, referred as the Voluntary Harmonization Procedure (VHP) might reduce the workload and particularly the costs for this process.63 Additionally, the relations between countries play a significant role. For example, it is hard for US (currently the biggest market for pharmaceutical and CRO corporations) companies to conduct clinical trials in former Eastern bloc countries – countries that do not belong the European Union. Wars between countries and the border relations have also significant political influences for the CRO industry. The corruption of political institutions can ease or hamper the work for Clinical Research Organizations. Moreover, the healthcare system is a very important indicator for the effectiveness of conducting clinical trials in a specific country. Generally speaking, managers in the industry

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suggest, that the better the healthcare system and medical care is the less successful are clinical trials in that country. When we are facing a weak healthcare system people can get easier access to modern treatment and better medical care through clinical trials and therefore take part in it.

63

EU clinical trials directive 2001/20 EC.

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Economic: From the economical point of view, exchange rates play a significant role. Studies usually take a long time – in average around twelve years to fifteen years. Additionally, they are based in different sites and different countries. The investigators and local partners are usually paid in their local currency. Contracts between a pharmaceutical corporations and CRO are done in Euro or Dollar. Therefore, high volatility in exchange rates can have an adverse effect on CROs financial results. As mentioned, studies take a long time and the CRO are paid gradual to it. Generally, contract prices include a yearly inflation rate of 4% but a rapidly increasing inflation rate can also affect the CRO negatively. The infrastructure and with it the logistical ability of a country have also an influence on the business. Many samples or other medical equipment must be send quite fast and safety. So, it is better and cheaper to offshore it in countries with a good infrastructure. Moreover, the consumer drug price has an economic effect. It is easier to conduct trials and recruit patients where drug prices are relatively high. Here apply the same reasons as mentioned as political factors – the poorer the general healthcare system the easier the recruitment of new patients.

Social: Factors like health consciousness, age distribution or emphasis on safety have an influence on the CRO industry. An on average older population have a higher demand for medical supply. Unhealthy nutrition habits und stressful life can increase the number of new diseases, like burnouts or depression. Emphasis on safety and health consciousness may have effects in recruitment process for patients. In the recent, most of the trials were conducted in high income countries but moving today more and more in less wealthy countries due less obstacles – e.g. better profit margins, easier patient recruitment.64 In countries where the doctor is perceived as a very high respect person, he or she can easier influence people for new treatment methods or drugs in the clinical trials phase. Copyright © 2014. Diplomica Verlag. All rights reserved.

Moreover, the perception of clinical trials depends on media and the coverage about the industry. Furthermore, this can also familiarize people with new therapies. The attitude towards confidentially materials and intellectual property may affect the industry in the way that companies are tend to choose countries where this values are more important.

64

Osei, A., Challenges of clinical trials in low- and middle-income countries, International Psychiatry Vol. 9 (2), 2012, p. 30.

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Technological: Technology has a huge effect on the CRO industry. Continues R&D (e.g. High-Throughput Screening) lead to better medical research results. CROs depend on an ongoing development and new findings in the genetic research. New technologies revolutionize and open the way for new scientific achievements and treatments. An important future business area might be the personalized medicine, which is becoming increasingly important in terms of new markets. Each patient can get a specialized treatment according to his or her individual conditions.

Environmental: In the future the influence of environmental aspects will steadily increase for the CRO industry. Climate change and particularly pollution have a huge influence on the health of people worldwide. These changes cater for totally new disease patterns. This new disease patterns require new medical treatments. Furthermore, the standardized process of food production with the increasing usage of chemicals and pesticides can have an adverse effect on the people’s health.

Legal: Legal aspects like health and safety law are very important for the approval process. Particularly, clinical trials, which depend on the involvement of people, have to go along with all country specific legal aspects. New developments show, that FDA (US Food and Drug Administration) require that specific clinical trials have to be outsourced, because CROs are better specialized for them. Meaning that pharmacy companies cannot conduct them in-house. Additionally, some countries like Russia demand that if you want to sell drugs in their country you have to conduct also clinical trials there. Both aspects increase business opportunities for CROs.

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2.3.2Microenvironment - Porter Competitors: The industry is characterized by a relatively high number of competitors (over 1.100), however the biggest 10 firms have approximately 50% of the market share (see Figure 2-4). The growth of the industry is with 10-15% relatively high, which allows that firms are able to improve revenues due to the expanding market. The top players are inter alia Quintiles, Covance, PPD, inVentiv, ICON and Parexel. The largest CROs are capable of providing the

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full service range for pharmaceutical sponsor and even outsource non-core capabilities to (low-profitability) to smaller CROs. But the market is becoming more crowded by companies that can call themselves large, global, and full-service.65 That development additionally increases the rivalry. Competitors have no high fixed costs (except salaries for the workforce) and exit barriers are relatively low – CROs maintain knowledge and relationship with clients and have no bigger and cost-intensive facilities. Often pharmaceutical and biotech companies are interested in a long-term partnership. Nevertheless, switching costs are relatively low. Due to these facts, the CRO industry is facing high intensity among its competitors.

Figure 2-4: The ten largest CRO corporations in revenues66

Customers: The main customers of CROs are pharmaceutical and biotech companies. In the 1980, CROs were very small and did projects nobody else wanted in the pharmaceutical industry. But the industries went through profound changes, including outsourcing tasks and jobs to drive growth. The drug development strategies are shifting. Today, CRO scientists are engaged at every stage of the R&D process. Over the longer term, strategic alliances will become a major driver of growth. PharmaceuCopyright © 2014. Diplomica Verlag. All rights reserved.

tical and biotechnology companies are continuously looking for the right CRO relationship model. A report of Booz & Company names four different future relationship types emerging: Qualified Talent Supplier, Preferred Capacity Partner, Preferred Capability Partner and

65

Olson, K., What to know about CROs, Journal of Applied Clinical Trials Supplement, May 2012, p. 20 The corporations PPD, inVentiv, ICON, INC and PRA went private between 2010 and 2011. Therefore, the last official financial data was published for these accounting periods. According to online announcements and previous growth rates of the corporations I derived the revenues for the accounting year 2012 (own estimations)

66

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Strategic Partner.67 By partnering CRO companies can profit of future development. A pharmaceutical sponsor wants a relationship model that is unique and fitted to their management practices and systems. Regardless of the relationship model pharmaceutical and biotechnological companies put pressure on CRO to provide preferential pricings.68 Taking into account that more and more top-pharmaceutical players are looking for only one strategic partner the bargaining power of them is strong.

Potential Entrants: The potential entry barriers for new competitors might be the proprietary knowledge and even more important contacts with potential customers. Most new CROs are founded by former pharmaceutical-industry employees and have wide knowledge and the client contact (e.g. former senior-management). Three of the largest firms (Quintiles, PPD and Parexel) have still their founders as CEOs. Additionally, mergers between small and relatively unknown CROs can form large CROs capable to challenge the big ones. The risk of potential entrants is medium too high.

Product/ Services Substitutes: As the main connection between sponsors and sites Clinical Research Organizations have become a major force in the clinical trial landscape. Clinical trials have shifted more and more from academic medical centres (AMC) – nowadays basically responsible for the fundamental research - to community-based sites. This movement is also fostered by the fact that CROs operate on a global scale. Community-based sites could be a single hospital or physician groups. In the year 2002 the market share of AMCs was approximately 30%. Hence, we can

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observe an ongoing decline. Therefore, the power of substitutes is relatively low.

67

Booz & Company, Nimble Partnerships in the Pharma Industry Well-designed CRO Relationship Enhance Focus and Quality, 2011. 68 Getz, K.A., Outsourcing Landscape, Applied Clinical Trials Supplement, May 2012, p. 25.

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Figure 2-5: Clinical trial Management systems Own representation based on marketsandmarkets.com69

Suppliers: The CRO industry has to different groups of suppliers. On the one side, typically suppliers like IT services and logistic / courier firm. Due the relatively high competition in that industries the bargaining power of these are low. On the other side, we have sites, clinics or laboratories. Depending on the pharmaceutical sponsor requirements – e.g. in respect to the country – the CRO has to find and implement sometimes specific institutions. That can be due to specialization or other reasons. Here the bargaining power may low too medium.

2.4 Growth Strategies in CRO Industry 2.4.1 Structural Changes in the CRO Industry In respect to different market reports the Contract Research Industry faces a yearly market growth between 12 and 15%. The Tufts Center for the Study of Drug Development predict in the Outlook Report 2013 a growth of 15% for the following years. Visiongain (a market research institute) estimates that the market volume in 2021 will be $61 billion (2013E: $35

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billion), what results in an average growth of 12%.70 The market growth analysis is also supported by the Equity Research institute.71 They estimated in a recent study that the addressable CRO market value represent an amount of more than $53 billion in the next years. Actually the Contract Research Organizations have

69

Clinical Trial Management Systems (CTMS) Market – Site Management, Billing & Patient recruitment, Cloud (SaaS) Global Trends, Opportunities, Challenges and Forecasts till 2016. 70 Tufts Center for the Drug Development Outlook 2012 and Visiongain: Pharma Clinical Trial Services: World Market 2011 - 2021 71 B.G.L. & Company, Industry Spotlight: Pharma Services, Healthcare Insider, June 2012, p. 1.

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estimated revenues of around $35 billion (see illustration No. X). That counts for a market penetration of approximately 65% (based on own calculations).

Figure 2-6.: Revenue Growth for the CRO Industry

According to the growth estimations I can determine the stage in the Product-Life-Cycle (PLC) model. The PLM model is used to explain patterns in the life of a product, as it starts with the introduction stage, followed by the stages of growth and maturity until it ends with a demand decline.72 As the industry indicates high growth rates in the next years, we can place the point in the growth stage (see Figure 2-6). The stage is characterized by an expanding market and an increase in new customers. These indicators will led to higher revenues.

In terms of total number of conducted studies the U.S. market is still the dominating one. In Figure 2-7, we can see that the major amount of all clinical trials is still conducted North America, whereof the U.S. market counts for 40%. Compared to previous years, where the U.S. market alone counted for more than 50%, we can derive that the market is facing a decline in respect to the total clinical trial market share.73 Similar to other industries, a large Copyright © 2014. Diplomica Verlag. All rights reserved.

part of the growth is coming from the emerging markets.

72

Anandan, C., Product Management, McGraw-Hill, New-Delhi, 2009, p. 94 Thiers, F.A., et al., Trends in the globalization of clinical trials, Nature Reviews Drug Discovery, Vol. 7 (1), 2011, p. 13.

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Figure 2-7: Worldwide distribution of Clinical Trials Own representation based on ClinicalTrials.gov74

CROs are looking for interesting growth opportunities in locations like Central and Eastern Europe (CEE) or Russia. Particularly, flourishing countries like India and China play an important role in the strategic expansion plans of Contract Research Organizations. All of theses markets are relatively young, e.g. the China’s one exist since 1996.75 With 1.3 billion people, China offers a huge market for pharmacy industry, especially CRO. The accomplishment of clinical trials is meted to Western standards cheap and the Chinese market has an estimated yearly growth of 30%.76 Just like the Chinese market also the Indian one has a huge population of 1.2 billion people and a fast increasing health-care market. To subsume the above-mentioned, the industry conditions of both old economies and emerging markets still offer huge potentials for CRO growth. 2.4.2 Growth Strategies

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In respect to growth strategies for Contract Research Organizations we can briefly distinguish between organic, inorganic / external growth. Organic growth is the company’s expansion from inside. These can be business activities like the increase of marketing budget (e.g. additional salespeople), opening of new branches, and the internally development of new

74

Accessed on the 07.05.13 Ma, S., CROs in Modern-day China, Journal of Commercial Biotechnology, No. 18, 2012, p. 1. 76 ibid. 75

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products.77 Inorganic growth is perceived as the growth through mergers and acquisitions of other firms. Moreover, inorganic growth can be conceived wider as external growth through collaborations like strategic alliances and joint ventures.78 Taking into account, that the presence in emerging markets is very important for growth, the inorganic approach seems to be the adequate decision. As we have examined Mergers and Acquisitions can accelerate the growth and also help CROs to keep pace with the increasing sponsor demands of geographically reach.79 CRO companies have to move to low- and middle-income countries to conduct clinical trials in a cheaper way.80 Moreover, the legislation for ethical constraints may be less rigorous and accelerate the process of clinical trials.81 2.4.3 Mergers & Acquisitions in the CRO Industry Since 2006 we can observe a profoundly change in the CRO market. Small CROs (revenues up to $25 Mio.), specializing in a particular trial stage, are often serving as business partners for large-scale companies. The middle-market (revenues $25 Mio. up to $500 Mio) is in a strong consolidation phase. Corporations are seeking for mergers and acquisitions to benefit from the advantages global players have, e.g. serving as a global full service provider for the top pharmaceutical companies.82 Large CROs are facing more pressure from new players entering the market, which emerge through the mentioned consolidations in the middle market. On this account large CROs are screening the market for potential targets to increase their market share and gain new capabilities. Private equity is playing an active role since the last years (PE takeovers marked in red, Figure 2-1). This kind of buyouts underlines the

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previously mentioned optimistic outlook.83

77

Sherman, A., Mergers and Acquisitions from A to Z, 3rd Edition, Amacom, Washington, 2011, p. 1. ibid. 79 Davidson, R., Change is not consolidation, Journal of Applied Clinical Trials, Feb. 2007, p. 12. 80 Skuse, D., The global spread of clinical trials. Journal of International Psychiatry, Vol. 9 (2), 2012, p. 29 81 ibid. 82 Olson, K., What to know about CROs, op. cit., p. 20. 83 B.G.L. & Company, Industry Spotlight, op. cit., p. 5. 78

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Table 2-1: Selected takeovers in the CRO industry Sources: S&P Capital IQ, PitchBook, Equity Research, Pharmaceutical Outsourcing Monitor

The average multiplier for selected mergers and acquisitions from 2007 to 2013 was 1,63x for revenues and 12,44x for the EBITDA. In 2012 the EBITDA multiplier was a bit lower with an average of 10x (see Figure 2-8). In comparison to Bloomberg’s Global Review (1,03x revenue and 7,04x EBITDA)84 the CRO industry numbers still confirm the high confidence of

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investors.

Figure 2-8: EBITDA multiple 2007 – 2012 Own representation based on Fairmount Partners85 84 85

Bloomberg Global Financial Advisory Mergers & Acquisition Rankings 2012 Fairmount Partners (2013): Pharmaceutical Outsourcing Monitor, April 2013

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3. Explanatory Approaches and Motives for M&A Technological changes, deregulations and economical aspects, like the emerge of new markets, provide a source of growth and explanations as well as reasons for collaborations and M&A. The globalization process increase the intensity of competition and led to the factor that corporations have to adapt their structures to regional differences. Corporations can counteract this development with collaborations and M&A activities. They can accelerate the market entry process, gain new sales systems and customers, incorporate highly skilled workers, financial capital and manufacturing facilities and get acquainted with the local market requirements.86 Moreover, corporations can share their risk through strategic alliances and joint ventures.87 Additionally, theoretical research and academic studies present several other manifold motives for mergers & acquisitions. Usually, mergers are driven by a specific pattern of motives and not just a single one.88 The pattern of motives is country- and time-depending, as well as influenced by the different interests of involved parties (e.g. shareholders, employees or governments).89 The literature has various attempts to group the motives into different categories.90 However, the categorization depends strongly on the researchers perception and most theories have not enough empirical results to claim a full correctness.91 In the following I will use three main categories: Strategic-, Financial-, and Managerial motives.92 Potential reasons for M&A are combined in table 3-1, which all examined in reference to academic literature. The following table is also the basis to determine the impact of potential reasons for M&A in the CRO industry (see Ch. 5).

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86

Stahlke, N., Erfolgsfaktoren bei Mergers & Acquisitionen in der deutschen Energiewirtschaft, Dissertation TU Berlin, 2006, p. 85. 87 ibid. 88 Trautwein, F., Merger Motives and Merger Prescriptions, Strategic Management Journal, Vol. 11, 1990, p. 283. 89 Balz, U. / Arlinghaus, O., Praxisbuch Mergers & Acquisitions, mi-Fachverlag ,München, 2003, p. 22, and Hausser, C., Chancen und Risiken einer Unternehmensacquisition durch eine Zwischengesselschaft als Finanzierungsmodell, Dimplomica-Verlag, Hamburg, 2009 p. 3 and Vogel, D.H. / Schumann, W., M&A – Ideal und Wirklichkeit, Gabler, Wiesbaden, 2002, p. 32. 90 For example, Trautwein has seven different categories for M&A, which are efficiency, monopoly, raider, valuation, empire-building; see Trautwein, F., Merger Motives, op. cit., p. 280 ff. 91 ibid. 92 This systematization is also used by Johnson, G., et al., Exploring corporate strategy, Pearson Education, Harlow, 2011, and Schoenberg, R., Mergers and Acquisitions, Oxford University Press, Oxford, 2006

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Potential Reasons for Merger & Acquisitions ♦ Potential Synergies in the departments - Finance

- Administration

- Business Development

- Research

♦ Reduction of Overhead Costs ♦ General Improvement of the competitive situation – market power ♦ Increase of the market share ♦ Extension of the value chain – vertical integration ♦ Geographical diversification ♦ Diversification of offered services / products ♦ Influencing shareholders perception and valuation of the firm ♦ Tax reduction ♦ Intellectual capital – transfer of know how Table 3-1: Potential Reasons for Merger & Acquisitions based on academic literature

3.1 Strategic Motives Due to mergers and acquisitions the corporations want realize synergies, market power and diversify the business portfolio. The corporations are able to acquire capabilities and to adapt more quickly to economical and environmental deferrals than they could develop internally. 3.1.1 Synergy Synergies tend to be the most frequently used explanation for mergers and acquisitions.93 Originally, the term Synergy was introduced by Ansoff in the early 1960s.94 Ansoff hypothesis was the 2+2=5 effect, where the value and performance of two combined corporations is higher than the mere sum of two separate undertakings.95 Davidson expressed the synergy surplus more deepening in the formula V(Combined) = V(Bidder) + V(Target) + Synergy.96

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This means that this kind of motive should be a value-increasing event precipitated by operational-, financial-, and/or managerial synergies:97

93

Devos, E., et al., How do mergers create value?, Oxford University Press, Oxford, 2008, p. 1183. Ansoff, I., Corporate Strategy, McGraw-Hill, Middlesex, 1966, p. 97. 95 ibid. 96 Davidson, I.R., Takeovers, Journal of Business, Finance and Accounting, No. 12, 1985, pp 373 - 385 97 The systematization refers to Trautwein, F., Merger Motives, op. cit., p. 284 and Ayoush, M., Are crossborder mergers and acquisitions better or worse than domestic mergers and acquisitions?, Dissertation University of Birmingham, 2011, p. 20. 94

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Operrational Sy ynergy • • • • •

Economicss of Scale Economicss of Scope e C Cross-Sell ing Opporrtunities on of redud dant functio ons Eleminatio Minimazing g transactiion costs

Fiinancial Synergy • Possibility to lower th he cost of ccapital Managerial Synergy • Higher ma anagerial co ompetence e by the accquaring firrm. Firm tend tto employ the surplus of manag gerial c competenc ce to impro ove the efficiency of the t target f firm. Figure 3-1: Possib ble Synergy y benefits 98 Own rep presentation n based on Trautwein T ( (1990), Ayooush (2011), Georgen (2003) ( Howeveer, a McKin nsey study says that synergies s arre systemattically overrrated, becau use only 30% of all M&A trransactions achieve thee assumed syynergy goaals.99 3.1.2 Market M Pow wer A very important motive forr mergers and a acquisittion is to increase i thee market sh hare and consequ uently impro ove the marrket power. According to Devos (22008) the fiinance and econome ic literaature recogn nized this isssue since a longer tim me that the market m pow wer can incrrease the equity v value.100 Th his kind off motivation n is particullarly importtant for horizontal merrgers but can also o be an imp portant argu ument for conglomera c ate mergerss. Smaller companies c p pursue a risk min nimizing way w while merging m witth competitoors, whereaas big playeers try to achieve a dominan nt market p position.101 Moreover, in static m market with low growin ng rates and steady 102 compan ny market sh hares, firmss can increase their shaares trough M&As. M T also go This oes along

with thee internal fo orces in a coorporations life-cycle. Managers undertake u m mergers and acquisi-

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1 tions to pursue a continually c eexpansion.103 Thereforre managerss can intern nalize the grrowth of

98

Trautw wein, F., Merg ger Motives, lloc. cit, p. 282 2 ff. and Ayooush, M., Are cross-border mergers, op. cit., p. 15 ff. and Georgen, G M. / Renneboog g, L., Shareho older wealth effects of Euuropean domeestic and cro oss-border takeover bids, Europeaan Financial Management M A Association, V Vol. 10 (1), pp. 9 – 45. 99 McKin nsey Quarterly y (2004): Wheere Mergers go o wrong 100 Devos, E., et al., How H do mergerrs create valuee?, op. cit., p. 1184. 101 Meyeer, L., Erfolgsffaktoren bei Mergers M & Acq quisitionen, D Dissertation Scchumpeter Sch hool of Busineess and Economics, 2011, p. 34 4 – 35. 102 Johnsson, G., et al., Exploring corrporate strateegy, Pearson E Education, Harrlow, 2011, p..358. 103 Greenn, M.B. / Crom mley, R.G., Th he horizontal merger, Econnomic Geograpphy, Vol. 58 (4), ( 1982 p. 36 60.

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young firms and strengthen their market power.104 However, corporations have to go through antitrust instances and get the approval from governmental institutions’ if the merge can have possible detrimental effects on the economy and for customers. 3.1.3 Portfolio Hypotheses / Diversification The portfolio hypothesis or diversification is another important strategic motive for mergers and acquisitions. The portfolio strategy is based on the theory of Markowitz, which he introduced in the 1950s before the third merger wave - which led to conglomerate structures. Markowitz stated that a portfolio with not perfectly correlated instruments might reduce the overall risk of the portfolio compared to the sum of the individual instruments risks.105 Diversification is a strategic motive that increases the scope of the company, while it takes the corporation away from its traditional markets and existing products.106

Figure 3-2: Diversification Strategy

Pertaining to the mentioned theories firms try to lower their dependence from one specific business and to diversify into different low correlated ones to benefit from the cash flows.

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3.2 Financial Motives In comparison to strategic long-term approaches the financial motives seems more mid- and short-term. The undervaluation of companies or the specific tax benefits could be possible financial motives.

104

ibid. Troschke, A., Strategien der Diversifikationen vor Markovitz, Josef Eul Verlag, Lohmar, 2011, p. 1. 106 Johnson, G., et al., Exploring corporate strategy, op. cit., p. 262. 105

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3.2.1 Valuation Theory In a recent study Rhodes-Kropf, Robinson and Viswanthan test theories to present an approach that undervaluation or mispricing of companies drives mergers.107 The misevaluation of corporations is usually based on models for listed corporations on the capital markets.108 Generally, the assumption was that capital markets are efficient, the hypothesis that every investor should have the same information.109 Due to an asymmetry of information’s, for instance non-public information, an investor can have superior knowledge regarding the real value of a company. Managers can screen the markets for such merger and acquisition opportunities to derive surplus revenue after the market see the real value of the company. Particularly, private equity companies or hedge funds are looking for undervalued corporations. After the acquisition the measure is to restructure the company, for instance with a new management or closing of unprofitable business units. Moreover, the goal can be complete liquidation of the company, as the assets sold separately may be higher valued than the entire company (asset stripping).110 An Ernst & Young survey supposes that the amount of private equity deals will still increase in the next years.111 3.2.2 Tax Hypothesis Academic researches suggest that tax benefits could be a motive for mergers and acquisitions.112 Beyond the motive to merge, taxes can determine the way in which a merger will be structured. Empirical studies show that particularly the following points are very important: •

Carry over the net operating losses and unused tax credits between acquirer and target113



Fully utilization of tax shields and increase leverage114



To use the internal cash flow to acquire other companies and lower income tax rate on

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capital gains in comparison to dividends115 •

Deduction of interest payments from the taxable income

107

Rhodes-Kropf, M. / Viswanathan, S., Market valuation, op. cit., pp. 561 – 603. Schleifer, A. / Vishny, R., Stock market driven acquisitions, Journal of Financial Economics, Vol. 70, 2002, p. 1 109 Fama, E., Efficient capital markets, Journal of Finance, Vol. 25, 1970, pp. 383 – 417. 110 Achleitner, A., Handbuch, op. cit., p. 144. 111 Ernst & Young (2012): Branching Out 112 Devos, E., et al., How do mergers create value?, op. cit., p. 1183. 113 ibid. 114 Devos, E., et al., How do mergers create value?, op. cit., p. 1883. 115 Brigham, E. / Erhardt, M., Financial Management, Thomson South-Western, Mason, 2007, p. 685. 108

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3.3 Managerial Motives Managerial motives have a more psychological background. They are driven by the Hubris or the Agency-Hypothesis. 3.3.1 Hubris Roll presented a study 1980s where he suggested that the hubris is an important motive for corporate takeovers.116 The interpretation of the empirical results is that manager’s pride and an exaggerated opinion of oneself could have a negative effect on the shareholders interests.117 Pure personal interests and not economic gains motivate the decision makers to undertake the takeovers. Due to the hubris managers could tend to pay a premium for a company that was correctly valued by the markets (assumption of strongly efficient markets).118 The hubris model is similar to the winner’s curse phenomenon in auctions and the irrational decisions can cause that the acquirer loose money on the acquisition.119 3.3.2 Agency Hypothesis Georgen and Renneboog outline that takeovers could be motivated by the agency hypothesis.120 This means that sheer self-interest of the acquirer is the main reason for the offer.121 Therefore, a conflict between the management (agents) and the shareholders could arise. Managers who are driven by this motive are mainly interested in takeovers that provide them additional power and prestige, whereas shareholders want a higher profitability and participate in higher stock profits.122 A study has shown that the corporation size is the main determinant for management salaries and bonuses and not the profitability.123 The difference

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to the hubris hypothesis is that here the managers will knowingly overpay the transactions to

116

Roll, R., Hurbis Hypothesis of Corporate Takeovers, Journal of Business, Vol. 59 (2), part 1, 1986, pp. 197 216 117 cf, Gaughan, P.A., Merger, loc.cit., p. 158. 118 ibid. 119 Mussati, G., Mergers, Markets and Public Policy, Kluwer Academic Publisher, Dordrecht, 1995, p. 60. 120 Georgen, M. / Renneboog, L., Shareholder, op. cit., 2003, p. 19. 121 ibid. 122 Hopkins, H.D., Cross-border mergers and acquisition, Journal of International Management, Vol. 5, 1999, pp 207 - 239 and Ayoush, M., Are cross-border mergers, op. cit., p. 24. 123 Conyon, M. / Sadler, G., Executive pay, tournaments and corporate performance in UK firms, International Journal of Management Review, Vol. 3 (2), 2001, p. 147.

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enjoy the mentioned personal advantages.124 As a result Morck, Shleifer, and Vishny pointed

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out that the pure self-interest could lead to many unprofitable mergers and acquisitions.125

124

Ayoush, M., Are cross-border mergers, op. cit., p. 24. Morck, R., et al., Do Managerial objectives drive bad acquisitions, Journal of Finance, Vol. 45 (1), 1990, pp 31 - 48

125

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4. Success Factors for the Merger & Acquisitions process First of all, this chapter illuminates an ideal Merger & Acquisition process. On that account the process is divided in three main phases. Subsequently, the components of each stage are presented. Afterwards the emphasis lies on the possible success factors of the phases.

4.1 Merger & Acquisitions Process Generally, Mergers & Acquisitions are structured as a multilevel process. According to a PWC study a comprehensive structure is important to deal with the complex and multifarious challenges. Moreover, it enables the management to work highly efficient and more goaloriented. There is no one-size fits all solution but the academic literature tries to develop models, which can be used as instruction. Basically, three main phases can be identified: Planning, Execution (Transaction), and Integration. The process is not static but rather dynamically and can be adapted to each M&A scenario concerning the company and industry characteristics.126 Additionally, there can be a lot of another factors (e.g. tax considerations, ownership-structure), which can have an influence on

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the configuration of the process

Figure 4-1: The development of the M&A Process127

126

Picot, G., Handbuch Mergers & Acquisitions, Schäffer-Poeschel, Stuttgart, 2008, p. 30. You can find the phases in: Lucks / Meckl (2002): p. 54, Gerpott (1995): p. 800, Picot (2002): p. 16f. , Jansen (2008): p. 249, Middelmann (2000): p. 112 (see literature review).

127

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4.1.1 The Planning Phase The planning phase can also be divided in three different parts (see illustration No. XX). First of all, the management has to evaluate the corporation itself. After the management has a better understanding of the entire situation it can develop an acquisition plan, which serves as the fundament for the searching and screening process.

Figure 4-2: The Planning Phase with the first three steps

For a comprehensive evaluation of the company the management has to conduct several analyses to determine the core competencies, potentials and corporate goals. The management can use Porter-5-Forces to analyse the external factors and recognize industry trends to determine where and how to compete. Additionally an internal strengths and weaknesses profile in combination with opportunities and threats (SWOT-Analysis) has to be set as a part of the company analysis. The Ansoff Growth matrix can be used to decide upon the product and market growth strategy.128 The corporation can attempt to penetrate new or existing markets either with new or existing products.129 The implementation of the Gap-Analysis can identify the discrepancies between the current situation and the potential future situation as well as the operational and strategic objectives.130 By doing this the management extrapolate quantifiable elements (e.g. revenue, ROI, profit) into the future and determines which gaps can be closed by basic optimalization of business processes (e.g. better usage of resources) and which by change in strategy (e.g. M&A).

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Out of the presented analyses the management should develop a strategic business plan, which can be used as a benchmark und include strategic goals (timescale 2-3 years), performance targets (1-2 years) and an action plan executable for the actual accounting period. Moreover, it should develop an Acquisition Plan if M&A is needed and superior to internal growth.

128

Perlitz, M., Internationales Management, Lucius & Lucius, 2004, pp. 35 – 37. ibid. 130 Stahlke, Erfolgsfaktoren, op. cit., p. 202. 129

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The acquisition plan determines the M&A strategy. It is derived from the acquisition needs and the acquisition criteria’s. Moreover, the management decide whether a M&A or a collaboration is better. With the scenario analysis the management can develop different forecasts according to the created strategic business plan.131 The sensitive analysis can help to indicate the impact of external factors.132 The objective of the acquisition plan is define some key factors, by mean of the management can determine the research criteria for the screening process – e.g. financial returns, size, growth or geographical reach of the target company.

After the needs are clarified, the management can draft a target requirements profile and initialize the screening process. In a first attempt the company select and evaluate a relative great amount of potential candidates. As the M&A market seems very discreet and intransparent companies usually hire external service contractor and experts – indiscretions may have a heavy impact on the price or lead to loss of trust. The potential candidates are entered into a Long List and are analyzed if they are fit into the requirements profile.133 Taking into account the Desk Due Diligences – a company audit based on all public available information – the list can be strongly shortened in this further consultation process.134 4.1.2 The Execution Phase The execution phase consists of three main parts. It contains the first contact between the firms, the negotiation stage and finally the closing.

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Figure 4-3: The Execution Phase with steps 4 - 6

The first contact with the potential target can be made by the service contractor or directly through the company itself. Usually the contact is established between the companies upper level management. The first contact is important to build trust and relationships for further

131

Alcamo, J., Environmental Futures, Elsevier, London, 2009, p. 15. Brigham, E. / Erhardt, M., Financial Management, op. cit., p. 432. 133 ibid. 134 Stahlke, N., Erfolgsfaktoren, op. cit., 2006, p. 205. 132

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negotiations. Additionally, management of both firms can discuss about the first business issues like common objectives and an approximately asking price. Generally, engaged parties sign a confidentially agreement and record the first results in term sheets.135 If the parties basically agree on the M&A process they sign a Letter of Intent (LOI).136 After the first contact is established the negation phase begins, which is one of the most complex parts of the entire M&A process.137 The parties have to refine the valuation, structure the deal, perform a due diligence, develop a financing plan and finally decide whether to close the deal or walk away.138 First of all, the data from the LOI and first preliminary valuation has to be updated.139 Therefore, the acquirer request financial materials from the previous accounting years. A due diligence team starts to analyse the accessible documents. Basically, the team can perform a market, financial, legal, tax, human resource, environmental, and risk due diligence, which of course have also overlapping parts.140 The goal of due diligence is mainly: •

In respect to the financial area due diligence evaluate past operating results and tries to identify potential sources of value.



Concerning the operational area due diligence taking multifarious layers into account – e.g. quality of the management system, quality of employees, partners, and sellers.



In regard to the legal area the future risk or risk from the targets past. Additionally, legal due diligence cover areas like tax law, employee law, and environmental law.141

The extracted data can be used for a comprehensive evaluation of the company and for the further asking price. The due diligence team can choose among a wide range of different

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valuation methods (see illustration No. XX).

135

DePamphilis, D.M., Mergers, Acquisitions, and other restructuring activities, Elsevier, Burlington, 2011, p. 176. 136 A LOI is signed between both parties to summarize the first agreed terms and transaction intention. It can either be a binding or non-binding agreement. Steingold, F., The complete guide to selling a business, Nolo, Berkeley, 2012 p.224. 137 DePamphilis, D.M., Mergers, op. cit., p. 178. 138 DePamphilis, D.M., Mergers, op. cit., pp. 179 – 180. 139 ibid. 140 Stahlke, N., Erfolgsfaktoren, op. cit., p. 207. 141 Hao, Y. / Guoqiang, L., Due Dilligence in Merger and Acquisition – With China practice, International Journal of Business and Social Science, Vol. 4 (4), 2013, p. 209.

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Figure 4-4: Valuation Approaches representation based on Jansen (2008) and Mellen (2010)142

Own

The choice of the valuation method strongly depends on the available data and characteristic of the company. Moreover, the due diligence team is not limited to use only one approach. According to my M&A transactions research and illustration No. XX we can see that the public market (for listed companies) or the merger market with the multiplier methods is most common. Taking into account the valuation methods and external factors the management can determine the standalone value of the company.143 After the final price is determined and a finance plan developed, the transaction can be closed. A further premise is that all legal aspects are clearly solved – e.g. US antitrust law, EU merger law. After the contracts are signed the acquirer pays, for instance cash or equity, and the seller completes the transfer.

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4.1.3 The Integration Phase The integration phase begins with the development of a comprehensive integration plan.144 Afterwards the integration process has to be managed and finalized with controlling / evaluation. Of course this is only an abstract model as in reality the integration controlling can be proceeded parallel to the previous steps. 142

Jansen, S.A., Mergers & Acquisitions, Gabler, Wiesbaden, 2008, p. 194, and Mellen, C. / Evans, F., Valuation for M&A, John Wiley & Sons, 2010, p. 139. 143 Stahlke, N., Erfolgsfaktoren, op. cit., pp. 210 – 212. 144 This step can also begin during the first contact or negotiation stage.

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Figure 4-5: The Integration Phase with the last three steps

Basically, integration is the process of bringing two things together and merging them (static perspective) or the implementation of a single part into a bigger entity (dynamic perspective).145 The final goal is to achieve the objectives for which the M&A was done – e.g. cutting cost through synergies or other revenue enhancements. Therefore, it is important to design a comprehensive integration plan or to elaborate and precious the previous ones (worked out during the execution phase). Furthermore, a post-merger organization has to be developed. The management has to assign the right people responsible for specific areas and tasks during the integration (e.g. what should be done, by whom and when). Moreover, the plan defines how deep the integration has to be and which level of organizational and cultural autonomy can be kept.146 A project-oriented approach for the integration management can be advisable.147 The integration phase also consists of the personnel redeployment with the decisions if the current company department is still needed or if the company is facing overlapping (rationalising offices).148 A crucial factor of the integration management is to drive the consolidation of both companies without having huge effects on the daily business. The objective is to establish merge the two system that both can work as one legal entity and achieve the planned long-term goals.149 Finally, the detailed integration plan can be used for the integration controlling. Usually, the controlling process can proceed parallel to the integration management. The integration controlling can use quantifiable measures, which allow a comparison of planned figures with Copyright © 2014. Diplomica Verlag. All rights reserved.

actual figures.

145

Davis, D., M&A Integration, John Wiley & Sons, West-Sussex, 2012, p. 21 and Barnickel, K., Post-Merger Integration, CT-Salzwasser-Verlag, Bremen, 2007, p. 15. 146 Barnickel, K., Post-Merger Integration, op. cit., p. 16. 147 Stahlke, N., Erfolgsfaktoren, op. cit., p. 215. 148 McGrath, M., Practical M&A Execution and Integration, John Wiley & Sons, West-Sussex,2011, chap. 5 149 ibid.

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47

4.2 Potential Success Factors during the M&A process Factors, which can have an essentially important influence and determine the success of mergers & acquisitions, can be identified as potential success factors.150 Success factors can be constructed as quantitative, qualitative or strategic goals.151 Usually the goals have a quantitative character and are oriented on financial results. Financial results are all hard factors like stock market performance, funding benefits and other measurable revenue and earning numbers.152 According to various studies the failure rate of M&A is with 60 – 80% relatively high – loss of shareholder value.153 Other surveys reckon that the success rate won’t be higher than 50%.154 As we have examined the planning phase consist of three main stages: analysis of the company, creation of an acquisition plan and the screening process. Each stage can contribute to the overall success if specific parameters might fit. In the following chapters 4.2.1 – 4.2.3 I will examine potential success factors, which we can find in the academic literature and other sources, like corporate studies. At the end of each of the previously mentioned chapters, I will formulate research questions for potential success factors based on the discussed academic literature. 4.2.1 Potential Success Factors in the Strategic Planning Phase The starting point of a successful merger & acquisition is the evaluation of the own corporation in strategic and financial terms. A development of a comprehensive business strategy plan can clearly enhance the overall success. Consequently, the management should understand the future value creating process and state clear and achievable deliverables.155 The deliverables can emphasize the business goals and exclude managerial motives like hubris, which might not contribute as a potential success factor.156 Also a McKinsey study pointed out that is inevitable to identify the value drivers during the strategic phase.157 According to

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the study 40% of all participants do not determine the value drivers or do it an insufficient

150

Stahlke, N., Erfolgsfaktoren, op. cit., p. 220. Vogel, D.H. / Schumann, W., M&A, op. cit., p. 273. 152 Meyer, L., Erfolgsfaktoren, op. cit., p. 43. 153 Morag, O., The role of speed of integration in the integration effectiveness and mergers & acquisitions success, Dissertation University of Pecs, 2001, p. 25. 154 ibid. 155 Salwanee, Key success factors in Mergers and Acquisitions, Azmilaw, Kuala Lumpur, 2008, p. 1. 156 ibid. 157 Beitel et al., Erfolg in M&A, McKinsey Akzente, 2010, p. 24. 151

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way. Crucial value drivers are future cash flows and the decrease of the associated risk of those and the ability of the management to present a strategy for future growth.158 Fundamental for a good and comprehensive analysis of the own company is the management team. The entire analysis and acquisition process involves a wide variety of different tasks. Taking into account the complexity of those tasks the managers and key stuff people throughout the process can exponentially increase the success of an M&A.159 The willingness and support of the top management and the ability to delegate and commitment to the tasks can represent a successful leadership team.160 Theses qualities can support the M&A process and permanently push projects. Additionally, it is assumed that the management experience in mergers and acquisitions also play a significant role as a success factor. A higher number of conducted M&A can be associated with better learning curve and therefore better decisions for actual and future market situations.161 In relation to the to the acquisition plan we can refer to similar success factors like an experienced management team. Above that, a proper conjunction of both the strategic business plan and the acquisition plan can contribute as a success factor – according to McKinsey only a few companies derive their M&A strategy from the business strategy. Additionally, the preparation of an M&A roadmap with quantifiable goals can ease the subsequent steps in order to create success.162 A crucial success factor during the screening process is the systematic selection of most potential alternatives and afterwards the recognition of the right target company. Basically, the selected companies have to fulfil three dimensions. First of all, the strategic fit shall insure that the target company goals are complementary to the acquirer strategy and therefore can contribute to the acquirer’s success, for instance, financial objectives.163 Moreover, the strategic fit is crucial for reaching synergy – often the

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main motive of M&A – and can determine the success or failure of an M&A.164 The defini-

158

Mellen, C. / Evans F., Valuation for M&A, John Wiley & Sons, New Jersey, 2010, p. 108. Jemison, D. / Sitkin, S, Corporate Acquisition: A process perspective, Academy of Management Review, 11 (1), 1986, p. 147. 160 Westerveld, E., The Project Excellence Model: linking success criteria and critical success factors, International Journal of Project Management, 21 (6), 2003, pp. 411 – 418. 161 Buehner, R., Erfolg von Unternehmenszusammenschlüssen der BRD, Poeschel, Stuttgart, 1990, p. 173. 162 Beitel, et al., Erfolg in M&A, op. cit., p. 22. 163 Jemison, D. / Sitkin, S, Corporate Acquisition, op. cit., p. 146. 164 Liu, H. / Dong, J., What makes Mergers and Acquisitions successful in China?, Journal of Management Science, 1 (1), 2007, p. 45. 159

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49

tion of a successful strategic fit must also be defined under the premise of pursed objectives – e.g. geographical reach, increase of product portfolio.165

Figure 4-6: Stages for a successful screening process representation based Lucks, K / Meckl, R. (2002)166

Own

Secondly, the validations of the financial fit to estimate the basic feasibility of the M&A project.167 The acquisition price, the necessary debt financing, the following charges for the annual earnings, and the price premium paid are important determinants of the subsequent success assessment.168 The financial fit considers also the financial situation of the target company in respect of possible costs for the acquirer. Finally, the organizational fit defines the level of successful and effective co-operation. The appropriate co-operation depends on the compatibility of both firms in terms of similarity of personnel characteristics, senior management style and cultural fit. These matching requirements are also central for the future integration phase. Organizational fit might also deal with individual motivation and productivity, management control systems and operating sysCopyright © 2014. Diplomica Verlag. All rights reserved.

tems.169

165 166 167 168 169

Lucks, K. / Meckl, R., Internationale Mergers & Acquisitions, op. cit., p. 81. Lucks, K. / Meckl, R., Internationale, op. cit., p. 80. Rezaee, Z., Financial Services Firm 3rd Edition, John Wiley & Sons, New Jersey, 2011, p. 150. Lucks, K. / Meckl, R., Internationale, op. cit., p. 86. Liu, H. / Dong, J., What makes Mergers and Acquisitions successful in China?, op. cit., p. 45.

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Potential Success Factors for the M&A Strategic Planning Phase ♦ Assessment of internal management skills / effectiveness ♦ Realistic estimation of future market trend ♦ Identification of companies value driver ♦ Aligning of corporate and M&A strategy ♦ M&A roadmap with quantifiable objectives ♦ M&A experience of the management team ♦ Strategic / Organizational fit Table 4-1: Potential Success Factors Strategic Planning Phase 4.2.2 Potential Success Factors in the Execution Phase As above-mentioned the execution phase consists of the first contact, the negotiations and the deal closing. Managing the entire M&A process is a challenging task. Related to the importance of an experienced management team the selection of the right advisory team is also considered as a potential success factor. The management should decide whether and in which extent they want to involve externals. The first contact between two firms can be very important in terms of the future M&A success. Taking into account the necessary nondisclosure policy the first contact may be done by, for instance, (investment) bankers / financial intermediaries.170 This factor is especially important for listed companies as to early public announcement can have an adverse effect on the M&A. Additionally, when preparing the final closing an experienced legal team is necessary to ensure that the entire deal is in compliance with the (antitrust) law. A wrong consultation can lead to a violation of the law and delay the final closure. Under this circumstances

parties 171

can be affected by potential liabilities what may cause a significantly higher deal price.

Furthermore, a McKinsey study claim that an adequate level of involvement of the CEO and senior / top-level management is a crucial factor of success. The point is to set up clear Copyright © 2014. Diplomica Verlag. All rights reserved.

management responsibilities and establish committees. Often the management is to late or weak integrated what slows down the decisions making process. Clear responsibilities can accelerate the entire process. A further point that may contribute to the above-mentioned success factor is a transparent decision-making process.172 More specific, the management

170

Balz, U. / Arlinghaus, O., Praxisbuch, op. cit., p. 47. Venema, W., Integration: The critical M&A success factor, Journal of Corporate Accounting & Finance, 23 (2), 2012, p. 52. 172 Beitel, et al., Erfolg in M&A, op. cit., p. 23 - 25. 171

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should be involved as early as possible, be proactive – having a detailed plan – and remain patiently in case of longer M&A transactions.173 .

The due diligence process evaluate the company, make possible opportunities and risks viable and finally provide a basis for the bidding price.174 The buyer should not only assess the company itself but also the target companies management relations and hence any possible political risks. This is particularly important for cross-border deals in developing or political unstable countries as.175 A further factor that influences the success is the type of the company ownership structure. A public company has a higher bargaining power in negotiations than a private firm, what may become apparent in the price paid (higher premium). The higher bargaining power can arise due to more potential acquirers since there are more information’s available for a public company.176 The mode of deal payment has also an impact on the success performance of the transaction. Usually, the payment is either done in cash or in stocks. A research of about 1,200 M&A deals showed that the (stock) performance was better when the transaction was done in cash rather than stocks.177 These test results are also confirmed by another study. The random sample resulted in an abnormal return of 1.4% for cash transactions and 0.2% for stock transactions.178 Particularly, the purchase price is very important as an indicator for a successful M&A. From the outside it is often the most relevant ratio. Therefore, the decision makers should have a good valuation discipline in terms of realistic estimations of further M&A costs and calculated revenues. As stated by Accenture, the management can overvalue the synergies and overpay the acquisition.179 An incentive plan created set up before the closing can have a true value for a successful merger and acquisition. Generally, the work force belongs to the most important assets of the corporation. The first information of a possible M&A may create anxiety among the employ-

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ees. According to a study is not unusual that during the first six month after an M&A 5 173

Honore, R. / Maheia, M., The Secret to a Successful RIM Merger or Acquisition, The Information Management Journal, Sep./Oct. 2003, p. 58. 174 Berens, W., et al., Funktionen, Terminierung und rechtlicht Einordnung der Due Diligence. In: Berens, W., et. al. (Eds.), Due Diligence bei Unternehmensakquisitionen, 2005, p.86. 175 Salwanee, Key success factors in Mergers and Acquisitions, op. cit., p. 2. 176 Capron, L. / Shen, J.C., Acquirer Returns when buying public versus private firms. In: Finkelstein, S. / Cooper, C. (Eds.), Advances in Merger & Acquisitions, 3, Emerald, Bingley, 2004, pp. 35 – 53. 177 Rappaport, A. / Sirower, M.L., Stocks or Cash? The Trade Offs for Buyers and Sellers in Mergers and Acquisitions, Harvard Business Review, Nov – Dec 1999, pp. 147 – 158. 178 Moeller, S.B., et al., Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Return in the Recent Merger Wave, Journal of Finance, 60 (2), pp. 757 – 782. 179 Park, M., Making M&A pay: Avoiding the winners curse, Accenture, 2005.

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percent of the true value get lost due to drop out of key employees. An incentive plan, finalized before the closing, can counteract such developments and contribute to a more successful M&A.

180

Therefore, it is advisable to involve the HR department in the due

diligence process. The HR department may have a different view on the deal structure and identify possible pitfalls. These characteristics can significantly contribute to the success.181 A further point, acquisitions are often more successful for smaller acquirers. According to a study, returns for shareholders of smaller firms were higher after the deal was announced and decrease the larger the company was.182 Moreover, it is stated that success is also positively correlated with the managerial stake in the firm. Particularly, the CEO ownership can positively influence the long-term success in terms of revenues.183

Potential Success Factors for the M&A Execution Phase ♦ Synergy Evaluation ♦ Involvement of an M&A advisory team ♦ Transparent decision-making process ♦ Involvement of CEO / Top-Management ♦ Involvement of other business departments ♦ Mode of payment / Financing scheme ♦ Final purchase price ♦ Creation of an incentive plan for the key personal ♦ Made availability of information by the target company Table 4-2: Potential Success Factors Execution Phase 4.2.3 Potential Success Factors in the Integration Phase As well as the other two previous phases the integration phase has many intersections with them in respect to a successful M&A. Furthermore, the parties involved in the M&A are often Copyright © 2014. Diplomica Verlag. All rights reserved.

more concerned about financial data and due diligence and neglect the integration. Therefore, a timely development of a post-merger integration plan is advisable, since a good integration 180

Watson, D., Acquisition: How to avoid Implementation Pitfalls and Improve the Odds of Success, Global Business and Organizational Excellence, 27 (1), 2007, p. 15 – 16. 181 McKay, J. / Constable, S.J., Make your Voice heard. Strategically Positioning HR during Merger & Acquisitions, WordatWork Journal, 11 (3), 2002, pp. 6 – 16. 182 Moeller, S.B., et. al., Firm Size and the Gains from acquisitions, Journal of Financial Economics, 73 (2), 2004, pp. 201 – 228. 183 Cosh, A., et. al., Board Share-ownership and Takeover Performance, Journal of Business Finance & Accounting, 33 (3-4), 2006, pp. 459 – 510.

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53

creates the potential for long-term success after the transaction. Due to time pressure and hence for an optimal outcome the company must provide sufficient resources for planning and managing the integration plan.184 The preliminary planning should start as soon as the potential acquisition candidate was found during the screening process and contacted for the first time. The more information the company get the more detailed the plan can be explained.185 Particularly, important for a successful M&A is the human resource management (HRM). One of the main tasks of the HRM - to secure a successful M&A - is to keep the key personal and minimize the fluctuation of both firms. Other than that previous mentioned incentive plan the focus is here a proper information and communication management. The information’s and communications should address all stakeholders, like employees, customers, and vendors.186 The merging of different corporate cultures requires an especially sensitive management. The management often underestimates divergences between cultures. An enforcement of the value standards from one company to another may contradict a successful M&A. A to weak consideration of different corporate cultures may be a substantial reason with the M&A fail. The cultural integration is a crucial part of the entire transaction process. The key to success should be to join the best of both cultures. In that case nobody has the feeling that he was forced to different culture.187 A formation of a special project management team can create the necessary commitment for the integration tasks, accelerate the process, and put a contact person for specific integration questions in first place.188 The implementation of efficient controlling tools can help to monitor the integration process. The adequate use of controlling tools enables the project management team to track the integration progress and. Moreover, performance control can increase the effectiveness and due to clear incentive schemes employees are more encouraged.189 Also as in other business the factor time is very crucial for the deal success. That is why the Copyright © 2014. Diplomica Verlag. All rights reserved.

speed of integration plays an important role. The entire integration process should move fast and consistently in order to provide the new structures as soon as possible. Through this the time of uncertainty among the employees, customers and vendors can be shorten as well as 184

Beitel, et al., Erfolg in M&A, op. cit., p. 24 - 25. Cusatis, P. / Blumberg, M., Why can’t we predict merger and acquisition success? An analysis and preliminary test of a new approach, Southern Business & Economic Journal, 32 (3-4), 2009, p. 87. 186 Venema, W., Integration, et. loc., p. 51. 187 Stahlke, N, Erfolgsfaktoren, op. cit., p. 239 f. 188 Salwanee, Key success factors in Mergers and Acquisitions, op. cit., p. 2. 189 Beitel, et al., Erfolg in M&A, op. cit., p. 25. 185

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the cost can be kept on a lower level. Furthermore, the sooner the entire integration process can be completed the earlier the corporation can benefit from the realized synergies.190

Potential Success Factors for the M&A Integration Phase ♦ Early start of integration planning ♦ Proactive risk-management ♦ Communication with employees, customers and vendors ♦ Delegation of special resources for post-merger management ♦ Prevention of key personal fluctuation ♦ Fast implementation of new management after the deal ♦ Cultural alignment – without violating believes and values ♦ Knowledge transfer between the companies

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Table 4-3: Potential Success Factors Strategic Integration Phase

190

Angwin, A., Speed in M&A Integration: The first 100 Day, European Management Journal, 22 (4), 2004, pp. 418 – 430.

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5. Case Study: Merger & Acquisitions in the CRO industry 5.1 Data & Methodology First of all, I studied the literature and derived potential reasons for M&A (chapter 3) and potential success factors in the M&A process (chapter 4). These findings were gathered in a survey. In the survey I review the theoretical and empirical research. From my point of view, a survey has a lot of advantages, namely it offers elaborate answers, answers that are reliable due to the fact of blinded survey and finally and exact and quantifiable outcomes. Most of the theoretical aspects in that survey can be found in academic literature, in journals, and publications of reputable consulting firms. Most of the literature deal in general with mergers and acquisitions but are not focussed on the CRO market. Therefore, the goal is to evaluate the impact of the theoretical findings for M&A in the Contract Research Organization (CRO) industry. In my opinion, many mergers & acquisitions fail during the M&A process. Accordingly, I will emphasize those problems in the survey. Moreover, I discuss potential reasons fur success failure, and examine the determinant and evaluation of success after a conducted M&A. Finally, the survey consists of four main parts: •

Reasons for M&A in the CRO Industry



Potential success factors for the M&A process in the CRO Industry



Reasons for Success failures for the M&A process in the CRO industry



Determinations of Success after finalization of an M&A in the CRO Industry

For a representative sample I contacted preselected people via mails and asked for the willingness to complete a survey for a research study. The approach was and is that there is no Copyright © 2014. Diplomica Verlag. All rights reserved.

or very few literature on this topic and my conclusions also base will basically base on the survey. All contacted persons receive the survey attached to the contact and inquiry mail. All together 20 surveys were sent. 13 surveys were completed what results in a response rate of 65%. According to the general discretion in this business area the actual response rate is a success.

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Figure 5-1: Sent and completed surveys and analysis in which kind of M&A the participants were involved.

The survey was completed by top-level managers in the CRO industry. All of them were involved in at least one M&A (the involvement in an M&A was not a necessary condition). As we can see in Figure 5-1, most participated in an acquisition (9) closely followed by mergers (8). Just two took part in a strategic alliance and nobody in a demerger. In the following parts of the book I will present the outcome of the survey. The chapters are divided according to the structure of the survey. The representation takes place in form of tables, some of which are ranked according to the number of entries and others according to their average score.

5.2 Why M&A occur in the CRO Industry The first part of the survey is about potential reasons for merger and acquisitions. We have Copyright © 2014. Diplomica Verlag. All rights reserved.

seen that the number of M&A is increasing. On the hand this is due to soared interest of private equity investors on the other hand due to management decisions within the CRO industry. I emphasize the latter one. The goal was to evaluate the impact of those factors, which are mentioned in the academic literature, for the Contract Research Organization industry. Additionally, the participants had the possibility to add own suggestions (“other”).

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57

Rang 1-1

Potential Reasons for Merger & Acquisitions

Number of entries

General Improvement of the competitive Situation – market power

10

1-2

Geographical diversification

7

1-3

Increase of market share

5

1-4

Intellectual capital – transfer of know how

4

1-5

Influencing of shareholders perception and evaluation of the company

3

1-5

Diversification of offered services / products

3

1-7

Reduction of overhead costs

2

Potential Synergies in the departments: Finance 1-8

1-9

1

Administration Business Development

1

Research

1

Tax reduction

0

other:

2

Table 5-1: Summary of the potential reasons for M&A in the CRO industry

Table 5-1 gives an overview about how often a potential reason for an M&A in the CRO industry was named. Subsequently, the table is classified into four different groups. The factors with the highest rank are also the most important motives in respect to the number of entries.

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The most important factor is the general improvement of the competitive situation – almost all completed surveys had this point. Another very important fact in the first group – named in over 50% of completed surveys - is the geographical diversification. The middle group is dominated by factors mentioned between 3 and 5 times - 23% and 38%. These are, for instance, the increase of market share or diversification of offered service and products. The less frequent point were reduction of overhead costs together with potential synergies in specific departments. Tax reduction was never mentioned. Other reasons were to get managerial support and thus help with the growth of the company. 58

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In reference to other studies synergies are often mentioned as one of the most important motivations for M&A. Interestingly we can observe that synergies have practically not the influencing value in the CRO industry and that other factors are more important. The same assumptions are also valid for the reduction of overhead costs. Generally, we can see that cost savings do not play an influencing role as estimated probably in other industries. As we have already examined the CRO industry is very knowledge intensive. The diversification of offered services and particularly the transfer of know are of great value for CRO companies. Business related factors like the general improvement of the competitive situation - market power – and the expansion of geographical reach are the most important motivations for M&A for CRO companies. Together with the previously mentioned points the firms are able to extend their business line and conduct new clinical trial phases. A broader geographical reach makes them also more attractive as a preferred strategic alliance partner.

5.3 Potential Success Factors for the M&A process in the CRO industry The next part of my research was to determine potential success factors for the M&A process in the CRO industry. According to a statement Joe Herring (CEO of Covance, in call with investors) the M&A process for CROs is considered as relatively hard, “Having three different operating systems, three different IT strategies, three different leaderships and cultures, (and) three different facilities in a given region that need to be rationalized (makes it) very, very difficult.191 The overwhelming number of questions is based on success factors, which the academic research discovered and were determined in chapter 4. As well as in the previous chapter the idea was to identify the impact of those success factors for the CRO business. The participants had the possibility to evaluate the success factors based on a grading system from 1 (minor) to 5 (outstanding). In the following the potential success factor are ranked according to the highest average. I also calculated the standard deviation to show the disper-

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sion of the data from its mean. 5.3.1 Strategic Planning Phase The survey part for the strategic planning phase consists of the analysis of the company, the development of an M&A plan and the screening process. As we can see in the table below we have 3 main groups. One group with five different points and a valuation range of 0,17 191

Online source: http://www.outsourcing-pharma.com/Clinical-Development/CRO-integration-post-M-A-willbe-very-difficult-Covance (accessed 07.07.2013)

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59

points. Followed by the assessment of internal management skill rated 0,20 points higher and finally the realistic estimation of future market trend with minimum 0,41 point gap or 0,21 points in respect the second place.

Assessment of internal management skills / effectiveness

2-3

M&A experience of the management team

2-4 2-5

Strategic / Organizational fit Identification of companies value driver

2-6

Aligning of corporate and M&A strategy

2-7

M&A roadmap with quantifiable goals

outstanding

2-2

very important

market trend

important

Realistic estimation of future

helpful

2-1

minor

Phase

Standard deviation 

In the Strategic Planning

1

2

3

4

5

3,91

2,50

0

0

2

8

1

3,70

1,58

0

1

3

4

2

3,50

1,72

0

4

1

1

4

3,45

2,31

0

0

6

5

0

3,44

2,37

0

0

7

0

2

3,40

2,22

0

0

6

4

0

3,33

1,84

0

2

2

5

0

Average Ø

Rank

Potential Success Factors

Importance

Table 5-2: Potential success factors in the strategic planning phase First of all, we can identify that every factor is at least important, with a minimum average of 3,33. Moreover, we can observe that strategic planning factors like an M&A roadmap with quantifiable goals and the aligning of corporate and M&A strategy don’t play the significant Copyright © 2014. Diplomica Verlag. All rights reserved.

role as estimated in the literature. More considerable is the evaluation of both companies, thus the identification of companies value drivers and the right strategic and organizational fit. The most crucial factor for a successful strategic planning phase is the right management team. It should have M&A experience, the right management skills and effectiveness to come to the right decisions and particularly run by a visionary team that have a realistic estimation of future market trend.

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These skills will help to identify a fundamentally good business and start a more successful merger and acquisition process. 5.3.2 Execution Phase I identified 9 potential success factors for the M&A execution phase, whereby the ranking is scaled in four groups. We have one outstanding factor followed by group with three very important criterions. A group, out of four points, rated as important and finally one characteristic, which was classified as helpful. The least important but still helpful process is the creation of an incentive plan for the management. Probably, we face a relatively high variance of answers here since it is not easy to define whether we count the entire management as key stuff or not. Surprisingly, the involvement of an M&A advisory team is more or less at the same importance level as the inclusion if other business departments. This is contrary to the literature, where an advisory team was crucial for the success. It is not uncommon that the acquirer pays a higher price in comparison to the real market value. Therefore it is very important assess the financial aspects for a successful execution phase. An accurate and detailed evaluation of the target company through a comprehensive due diligence in the execution phase will help to determine the final purchase price as well as the mode of payment / financing scheme. In contrast to the previously mentioned M&A reasons, synergies and overhead costs play quasi-no role. In the execution phase the synergy evaluation is much more important with an average of 4,40. So it is rarely advisable to buy businesses that add mass and subsequently hoping to reduce costs through the M&A. Companies have to be careful with to much overlap. Limited overlap means limited disruption. However, a company with substantial operations in a country / region buys another company with the same profile need many thousand of hours focused on who will be in charge of what, who runs which department and

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which employees will be moved to other offices. Generally, the literature emphasizes the importance of an advisory team. Therefore, I formulated the counter question, whether the company’s management should take part in the execution process or just indicate the framework conditions. According to the survey outcome, we can see that the involvement of the CEO / Top-Management is from outstanding importance for a successful M&A.

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scheme 3-4 3-5

Final purchase price Transparent decision-making process

3-6 3-7

Involvement of M&A advisory team Involvement of other business departments

3-8

Disclosure of information by the target company

3-9

Creation of an incentive plan for the management

outstanding

Mode of Payment / Financing

very important

3-3

Synergy Evaluation

important

3-2

helpful

Management

minor

Involvement of CEO / Top-

Standard deviation 

the Execution Phase

1

2

3

4

5

4,90

2,82

0

0

0

1

9

4,40

2,22

0

0

0

6

4

4,33

1,72

0

0

0

6

3

4,22

2,07

0

0

0

7

2

3,70

1,56

1

0

2

5

2

3,67

1,84

0

0

5

2

2

3,50

1,62

0

0

5

5

0

3,50

1,95

0

0

6

6

0

2,64

1,45

4

0

4

2

1

Average Ø

Rank 3-1

Potential Success Factors in

Importance

Table 5-3: Potential success factors in the execution phase 5.3.3 Integration Phase I identified seven potential success factors for the integration phase, which are divided into 4 groups. First of all, we can note that all reasons are at least important – lowest score 3,4. The Copyright © 2014. Diplomica Verlag. All rights reserved.

first as well as the second have one key reason. The third section has three and the fourth section two main points.

62

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4-3

Prevention of key personal fluctuation

4-4

Delegation of special resources for post-merger management

outstanding

management after the deal

very important

Fast implementation of new

important

4-2

helpful

customers, and vendors

minor

Communication with employees,

Standard deviation 

the Integration Phase

1

2

3

4

5

4,82

2,69

0

0

0

2

9

4,20

1,46

0

0

3

2

5

3,90

2,82

0

0

1

9

0

3,89

1,85

0

0

2

6

1

Average Ø

Rank 4-1

Potential Success Factors in

Importance

4-5

Early start of integration planning

3,80

1,73

0

2

0

6

2

4-6

Proactive risk-management

3,56

1,51

0

0

4

5

0

3,40

2,37

0

0

8

0

2

4-7

Knowledge transfer between the companies

Table 5-4: Potential success factors in the integration phase

Interestingly, we can note that the knowledge transfer between the companies is indeed important (3,40) but not crucial for a successful M&A phase. However, the transfer of knowhow is a reason for mergers & acquisitions. Generally, M&A projects have inherent risks and can negatively affect the entire project success. In any term risks should be prevented. Nonetheless, risk management is ranked in the

Copyright © 2014. Diplomica Verlag. All rights reserved.

lowest group with an average of 3,56. This is still important but savours not the recognition as in other industries. The management should start with an early integration planning and delegate special resources for the post-merger process. A clear and systematic process can also help to prevent the flight of the key staff. A fast implementation of the new management and therefore distinct authorities can also contribute to those factors. From outstanding importance for a successful integration process is the communication with employees, customers and vendors. Particularly, the communication with employees will

CRO – Contract Research Organization: How Drug Research is Evolving : How Drug Research is Evolving, Diplomica Verlag, 2014. ProQuest Ebook Central,

63

affect the teamwork in terms of motivation and fluctuation. Additionally, the communication with customers can ensure that the support and quality is still high and won’t be suffering due to the M&A process.

5.4 Reasons for success failures for the M&A process in the CRO industry As we already discussed most of Merger & Acquisitions are not successful. Depending on the study, the number for M&A failures varies from 50 to even 80%. As we already determined what are potential success factors for the M&A process we consider here the reasons for success failures.

Rank

Success failures in the M&A process

5-1

Lost of trust between the partners

5-1

Insufficient information flow between the parties

Number of entries

(lack of communication)

10 10

5-3

Financial problems of one / both parties

9

5-4

Insurmountable cultural difference

8

5-5

Insurmountable differences between the TopManagement

6

5-5

Insufficient synergy potential

6

5-7

Politically motivated interventions

1

Table 5-5: Summary of the potential reasons for M&A in the CRO industry The most frequent answer is the lost of trust between partners and an insufficient information flow between the parties – lack of communication. This can cause that decisions are not

Copyright © 2014. Diplomica Verlag. All rights reserved.

executed in a proper way. Particularly, in fast changing situations and even chaotic situations communications plays a critical role. Subsequent reasons were financial problems of one or both parties. Followed by insurmountable cultural difference and by insurmountable differences between the topmanagement. Late communications or not an ongoing dialog may be the reasons. In respect to quantity of answers an insufficient synergy potential was ranked at the same place. This is interesting due to the effect that potential synergies were not crucial reasons for M&A in the CRO industry. Despite the fact that PESTEL analysis pointed political factors as 64

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one potential problem for conducting trial phases in different countries, politically motivated interventions are not common and appear in less than 10% of all M&A.

5.5 Determinants and evaluation for success after the M&A In the last part of my survey I wanted to know how the participants assess the success after the completed M&A process. The objective was to determine of specific parameters were accomplished. I determined the four components of economic, competitive, social, and cultural success and asked within these for specific parameters like income or stock price development. Similar to the previous ranking system the participants had the possibility to evaluate each parameter from 1 (minor) to 5 (outstanding). The raking is based on the average from all answers. The highest rated component after a successful M&A was the economical aspect. Factors like income, profit and stock price were most positive affected. Particularly, the stock price had the highest rating among all factors (4,13). This appreciation has to be seen in the long-term view or from the perspective of the target company. Generally, after the announcement, we face the situation that the stock price of the acquirer fell and the target company’s price rise. In the long-term the price of the acquirer can also rise, as we face an increase of income and

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profit.

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65

6-2

6-3

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6-4

Standard deviation 

minor

helpful

important

very important

outstanding

1

2

3

4

5

Income

3,63

1,33

1

0

2

3

2

Profit

3,88

1,81

1

0

0

5

2

Stock Price

4,13

1,81

0

0

1

5

2

Determinants and evaluation of success after an M&A

Economic success

Average Ø

Rank 6-1

Importance

3,68

Competitive Success

3,48

Market Share

3,38

1,64

0

2

1

5

0

Product Quality

3,25

1,80

0

0

6

2

0

Customer Service

3,00

2,48

0

0

8

0

0

New Trial Phases

3,63

1,33

0

1

3

2

2

Geographical Reach

4,13

1,66

0

0

3

1

4

Social Success

3,44

Number of employees

3,38

1,34

1

1

2

2

2

Motivation

3,50

1,36

2

0

0

4

2

Cultural Success

3,17

Working atmosphere

2,75

1,36

2

0

4

2

0

Loyalty and Identifica-

3,25

1,80

2

0

0

6

0

3,50

1,96

1

0

1

6

0

tion Innovation orientation

Table 5-6: Determinants and evaluation of success after an M&A

66

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The competitive success is rated 0.2 points lower than the economic component. Factors like market share, product quality, customer service, new trial phases, and geographical reach contribute to this group. Particularly, the last one seems to be very important as it has the highest average rating at all. We can observe that geographical reach was one of the most frequent reasons for an M&A and that are the managers are relatively satisfied with the outcome afterwards. In general the social success is rated only 0,04 point lower in than competitive success. But we can observe that the answers are more fragmented. Particularly, the motivation aspect has a quite large spread. However, the number of employees is assessed in the upper field. This means basically, that companies could hire new people and increase the number of the staff. The cultural success exhibits quite the same assumptions – large spread in terms of answer allocation. The working atmosphere has the lowest rank among all other factors with 2,75. Interestingly, the group of participants that evaluate the development of these success factors predominately as minor or helpful were involved in M&As between larger corporations (>1000 employees). The more satisfied group, that estimated the development more success-

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ful was part in M&As of smaller firms.

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67

6. Conclusion and Recommendations In the first instance, the research analyses the definition and history of mergers and acquisitions. What is certainly apparent from my brief review is that increasing globalization and technological innovation together with the economic and financial markets play a very influential role for M&A activity. Merger waves increased in intensity and frequency, have larger volumes and are following more rapidly. Mergers and acquisitions play successively increasing role for any industry. Consequently, I give a broader insight into the Contract Research Organization industry. In order to understand the importance of the business I presented the history and fundamentals of the industry. Pharmaceutical companies are looking for a way to cut costs and outsource more and more of research businesses. Contract Research Organizations face relatively huge market growth since that. Nonetheless, we can observe that the requested standards are rising in terms of service pipeline and also price and margin pressure. Since 2006 we can observe a profoundly change and that CRO want to growth through mergers and acquisitions. I could identify ten frequently mentioned reasons for mergers and acquisitions as well as 23 potential success factors for the M&A process. All of those were documented in academic literature and showed in several studies. The literature, however, put no attention to the CRO industry. Therefore, an adequate evaluation was performed using the survey method, which were completed by top-level managers in that industry. Moreover, I add a category to ask about potential reasons for M&A failures. Equally interesting, a category to determine and evaluate the success factors after a completed M&A process. When it comes to the reasons, the mot important is the general improvement of the competitive situation of the firm and increasing of the market power. It is of elementary importance that companies secure a good positioning among their business competition. Due to this fact the company is able to compete in the service pipeline as well as on the quality and price. Second most important reason is the geographical diversification. Buy a business that adds a Copyright © 2014. Diplomica Verlag. All rights reserved.

geography region that the acquirer doesn’t have and not a business that add only mass and is similar to the existing one. The potential success factors for the merger and acquisition process are divided into three phases. We can observe that the most important attribute for a successful M&A is the management contribution. Activities throughout all phases require the involvement of the CEO and Top-Management. In case of a successful strategic planning phase it is the realistic estimation of future market trends, the assessment of internal management skills and the 68

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M&A experience of the management team. For the integration phase it is the fast implementation of a new board and communication with employees, customers, and vendors. A visionary and good management team can communicate in an effective way. Additionally, they can identify and purchase companies that are relatively cheap in terms of final purchase price but able to move them to a higher level. All of theses facts can also affect the fluctuation in a positive way. The prevention of key personal flight is of outstanding importance. Even when the buyer acquire a target with new geographical reach, the company has to keep enough of the personnel at the acquisition object so that the buyer can claim that they have that new geography region, service or expertise. Likewise important is the synergy evaluation. Companies have to be careful with to much overlap between the profiles of both because of the strain to put them together. Again, the talented employees can find a new employment whereas the merging companies will keep probably keep the mediocre ones. Furthermore, lost of trust and an insufficient information flow between the partners can lead to success failures. Managers also have to pay attention to avoid any financial obstacles that might influence the M&A in an adverse effect. However, the majority of managers evaluate the economic and competitive situation after the merger and acquisition in a positive way. Eventually, managers should emphasize the integration planning. Not enough integration planning and unrealistic expectations result into insurmountable cultural differences. Conclusive, I detected that it takes a lot of patience and communication, and especially planning to bring two companies together. First and foremost, you need a have a good team and spend time to have the dedicated people to try to facilitate the integration with an effec-

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tive communication and vision for the company.

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69

Copyright © 2014. Diplomica Verlag. All rights reserved. CRO – Contract Research Organization: How Drug Research is Evolving : How Drug Research is Evolving, Diplomica Verlag, 2014. ProQuest Ebook Central,

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Appendix

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61

SGH - Warsaw School of Economics Institute of World Economy

Survey for the determination of Success Factors for Merger & Acquisitions in the CRO Industry The goal of the survey is to determine success factors for collaborations / merger & acquisitions. Success is the achievement of an action within a specified period of time or within a specified parameter. It can also mean completing an objective or reaching a goal, e.g. to increase the value of the company. Generally, there is no academic literature available and therefore it is very important for me that you could complete the following questions. Even if you weren’t involved in any collaboration / merger & acquisition process you can determine factors you might consider as important. If you do not want to answer some specific questions, please leave them empty. Under every question you have space (“Remarks”) to add more information or make any comments.

Assurance:

The survey sheet is exclusively for academic purposes. The collected data is anonymized and

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treated strictly confidential.

Company Name: Address: Homepage: Name: Mail:

62

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1. General Company Data 1.1 Involvement in Merger & Acquisition / Collaboration procedures Please, define if you were involved in a Merger & Acquisitions process or any other closer collaboration with another company (Strategic Alliance, Joint Venture or Demerger) Yes

No (Please, go to question 2.4)

1.2 Type of (tried) Takeover Please, define the type and number of (tried) takeover(s) – in case of a merger or acquisition. If there was more than one, please use the space under the question to determine the quantity.

Friendly:

Acquisition of one firm by another where the owners of both firms agree to the term of the takeover transaction. Company asked a potential target for a Company was asked for a potential M&A M&A:

Remarks:

Hostile:

Acquisition of a firm despite the disapproval of the management. Company tried hostile takeover:

Company was a potential target

Remarks:

1.3 Nature of M&A? Please, define the type of collaboration with other corporations.

Merger

Combination of two (or more) firms in which one legally and functionally cease to exist

Acquisition

Purchase of another firm’s assets, with the acquired firm continuing to exist as a legally owned subsidiary

Copyright © 2014. Diplomica Verlag. All rights reserved.

or any other form.

Strategic Alliance

Arrangement between two companies that have decided to share resources/undertake a specific project or provide complementary type of service / geographical coverage

Demerger

The act of splitting off a part of an existing company, which operates completely separate

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63

2. Reasons for the Collaboration / Fusion Please, define the reasons for the collaborations / mergers & acquisitions (Multiple entries are expressly welcome).

General improvement of the competitive situation – market power Extension of the value chain – vertical integration Geographical diversification Diversification of offered services / products Increase of the market share Combined company can reduce its overhead cost Intellectual Capital – transfer of know how Influencing of shareholders perception and valuation of the company (public sectors) Tax reduction Potential Synergies in the departments Finance

Administration

Business Development

Research

Other

Remarks:

3. Potential success factors for the M&A process in the CRO industry Which factors (could) contribute to the success of different processes in collaborations / mergers & acquisitions? In the last two rows you have place to add your personal suggestions. Please, rate all relevant success factors according to the subsequent 5 point grading system: 1=minor, 2=helpful, 3=important, 4=very important, 5=outstanding.

3.1 Strategic Planning Process This process may include the following activities: Analysis of the company (Internal Analysis), Competitive and environmental analysis (External Analysis), business vision/mission, business strategies, acquisition strategy.

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minor=

1

2

3

4

Assessment of internal management skills Realistic estimation of future market trend Identification of companies value driver Aligning of corporate and M&A strategy M&A roadmap with quantifiable objectives M&A experience of the management team Strategic / Organizational fit Other success factors:

64

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5

=outstanding

Remarks:

3.2 Evaluation and Selection process This process may include the following activities: searching and screening process (contacting and negotiating), perform due-diligence, structure deal, develop financing plan, closing.

minor=

1

2

3

4

5

=outstanding

Synergy evaluation Involvement of an M&A advisory team Transparent decision making process Involvement of CEO / Top-Management Involvement of other business departments Mode of payment / financing scheme Final purchase price Creation of an incentive plan for the management Disclosure of information by the target company Other success factors:

Remarks:

3.3 Structural Development and Implementation Process This process may include the following activities: Post-Merger integration, Implementation of integration mechanisms (administrative, cultural, and operative).

minor=

1

2

3

4

5

=outstanding

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Early start of integration planning Proactive risk-management Communication with employees, customers, and vendors Delegation of special resources for post-merger management Prevention of key personal fluctuation Fast implementation of new management after the deal Cultural alignment – without violating believes and values

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65

Knowledge-transfer between the companies Other success factors:

Remarks:

4. Potential reasons for M&A success failures Please, tick the reasons for failures of collaboration / merger & acquisition (Multiple entries are expressly welcome).

Insufficient Synergy potential Financial problems of one / both partners Insurmountable cultural differences Insurmountable differences between the Top-Management Politically motivated interventions Loss of trust between the partners Insufficient information flow between the parties (lack of communication) Other

Remarks:

5. Success 5.1 Determination of success in collaborations / mergers or acquisitions, until now. If you were in involved in any collaboration / merger & acquisition, determine how successful the development of the following parts is. If you were involved in more than one collaboration / merger & acquisition, you can use letters (e.g. a,b,c,…) to fill in the boxes (instead of just one X). Please, rate all factors according to the subsequent 5 point grading system: 1=deficient, 2= sufficient, 3=satisfactory, 4=good, 5=outstanding.

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deficient=

1

2

3

4

The economic success: Income Profit Stock Price Remarks: The competitive success: Market share Product Quality

66

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5

=outstanding

Customer Service Possibility

to

conduct

new trial phases Geographical Reach Remarks: The cultural success: Working atmosphere Innovation orientation Loyalty and Identification with the company Remarks: The social success: Number of employees Motivation of employees Remarks:

5.2 Evaluation of the success components How important are the following components for accomplishing a successful collaboration / merger & acquisition? Please, evaluate the overall components of a successful collaboration / mergers & acquisition according to their importance (in %).

Economic Success

%

Competitive Success

%

Cultural Success

%

Social Success

%

Remarks:

6. Presentation of the Outcomes

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As many thanks for your support, I would like to propose you the aggregated results of this survey.

Yes, I would like to get the aggregated results. No, thank you.

Additional comments:

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67

Copyright © 2014. Diplomica Verlag. All rights reserved.

68

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SGH - Warsaw School of Economics Institute of World Economy

Survey for PESTEL and Porter-5-Forces in the CRO Industry 1. Please, describe the influential factor in the CRO industry according to the PESTEL-Model (Political, Economical, Social, Technological, Environmental, Legal):

2. Please, the influencing factors in the CRO industry in respect to the Porter-5-Forces Model (Threat of new Entrants, Substitute products / services, bargaining power of customers,

Copyright © 2014. Diplomica Verlag. All rights reserved.

bargaining power of suppliers, intensity of competitive rivalry):

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69

rank 1-7

Number of entries

Potential Reasons for Mergers & Acquisitions Potential Synergies in the departments: Finance

1

Administration Business Development Research

1 1

1-6

Reduction of Overhead Costs

2

1-1

General Improvement of the competitive situation – market power

1-3

Increase of the market share

5

Extension of the value chain – vertical integration

0

1-2

Geographical diversification

7

1-5

Diversification of offered services / products

3

1-5

Influencing shareholders perception and valuation of the firm

3

1-8

Tax reduction

1-4

Intellectual capital – transfer of know how

4

Other

3

Copyright © 2014. Diplomica Verlag. All rights reserved.

Potential Success Factors for the M&A Strategic Planning Rank Phase

10

Average

Standard Deviation

1

2

3

4

5

2-2

Assessment of internal management skills / effectiveness

3,70

1,58

0

1

3

4

2

2-1

Realistic estimation of future market trend

3,91

2,5

0

0

2

8

1

2-5

Identification of companies value driver

3,44

2,37

0

0

7

0

2

2-6

Aligning of corporate and M&A strategy

3,40

2,22

0

0

6

4

0

2-7

M&A roadmap with quantifiable objectives

3,33

1,84

0

2

2

5

0

2-3

M&A experience of the management team

3,50

1,72

0

4

1

1

4

2-4

Strategic / Organizational fit

3,45

2,31

0

0

6

5

0

Other:

70

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Rank 3-2 3-6 3-5 3-1 3-7 3-3 3-4 3-9 3-8

Potential Success Factors for the M&A Strategic Planning Phase Synergy Evaluation Involvement of an M&A advisory team Transparent decision-making process Involvement of CEO / TopManagement Involvement of other business departments Mode of payment / Financing scheme Final purchase price Creation of an incentive plan for the management Make availability of information by the target company Other:

4-5

Potential Success Factors for the M&A Strategic Planning Phase Early start of integration planning Proactive risk-management Communication with employees, customers and vendors Delegation of special resources for post-merger management Prevention of key personal fluctuation  Fast implementation of new management after the deal Cultural alignment – without violating believes and values 

4-7

Knowledge transfer between the companies

Rank 4-5 4-6 4-1 4-4 4-3

Standard Deviation 2.22

3.67

1.84

3.70

1.56

4.90

2.82

3.50

1.62

4.33

1.72

6

3

4.22

2.07

7

2

2.64

1.45

4

2

1

3.5

1.95

6

6

Average 3.80 3.56

Standard Deviation 1.73 1.51

3

4 6 5

5 2

4.82

2.69

2

9

3.89

1.85

2

6

1

3.90

2.82

1

9

4.20

1.46

3

2

5

3.80

1.36

4

4

2

3.4

2.37

8

1

2

1

3

4 6

5 4

5

2

2

2

5

2

1

9

5

4

1

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4-2

Average 4.40

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2 2

4

5

2

71

rank 5-5 5-3 5-4 5-5 5-6 5-1 5-2

Rank 6-1

6-2

Potential Reasons for Mergers & Acquisitions Insufficient synergy potential Financial problems of one / both partners Insurmountable cultural difference Insurmountable differences between the TopManagement Politically motivated interventions Loss of trust between the partners Insufficient information flow parties (lack of communication) other

Determinants and evaluation of success after an M&A Economic success Income Profit Stock Price Competetive success Market Share Product Quality Customer Service New Trial phases Geographical reach

6-4

Cultural success Working atmosphere Loyality and identification with the (new) company Innovation orientiation

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6-3

Social success Number of employees Motivation

Standard Average Deviation

1

3,88 3,63 3,88 4,13

1,33 1,81 1,81

3,48 3,38 3,25 3,00 3,63 4,13

1,64 1,80 2,48 1,33 1,66

3,17 2,75

1,36

2

3,25 3,50

1,8 1,96

2 1

3,44 3,38 3,50

1,34 1,36

1 2

2

1 1

Number of entries 6 9 8 6 1 10 10 6

3

4

5

2

3 5 5

2 2 2

1

2

1

1

72

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1 6 8 3 3

5 2

4

2

1

6 6

2

2 1

2 4

2 4

2 2

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