Wanda Rich, editor of Global Banking & Finance Review interviewed Lance Walter, CMO of Host Analytics to find out more about current Mergers & Acquisitions (M&A) activities, the financial issues that surface and the importance of company data in mergers.
There has been an increase in M&A activity for the pharmaceutical industry. What do you see driving force behind this?
There are a few things that have driven robust M&A in the pharmaceutical industry over the past years, and we think the trend is likely to continue. For large pharmaceutical companies, the “patent cliff” is a huge issue. Big companies need to replace revenue streams of blockbuster drugs with expiring patents that allow a whole market of competitive, lower-priced generic alternatives to be developed.
Given the length of time it can often take to develop new products and get them to market, it’s often faster and cheaper to buy a product pipeline than build one. Strategy plays a role as well. When smaller companies are acquired, it’s often because the buyer is looking to expand their presence in a given therapeutic area, or to enter a new one that’s complimentary to their current offerings.
When a very big company with a large war chest acquires a small, early-stage pharma or biotech company, they’re often “placing a bet,” knowing that while not all of those will pan out and achieve market success, there is absolutely an opportunity for tremendous payback given the nature of the market.
There are some ancillary issues like a U.S. firm acquiring an internationally based firm to take advantage of tax inversion, but that’s not driving as much of the volume as the patent-cliff and strategic issues.
What other industries are experiencing an increase in activity?
The technology industry is seeing a lot of M&A activity on both the enterprise and consumer sides. Ernst & Young noted a record-setting first half of 2014 for Tech M&A and predicted that by the close of 2014, it would be the biggest year for Tech M&A since the record was set in 2000.)
When going through a merger, what are some of the financial issues companies face?
While mergers can be very productive in the long term, “day 1” of most mergers brings a lot of challenges. I’ve actually personally experienced multiple aspects of this. I was at Arbor Software when we merged with Hyperion Software to become Hyperion Solutions. I was at OnLink Technologies when we were acquired by Siebel Systems. And I was at Business Objects when we acquired Crystal Decisions.
In the big picture, on “Day 1” most newly-integrated companies are trying to sort out organizational and personnel issues as well as develop a rationalized, integrated product and go-to-market strategy. These things are high value but difficult, and they take time. Unfortunately, private investors and Wall St. don’t let you “call a timeout” to work on them. You still have to report integrated financials and establish an integrated business plan and forecast. That is complicated by the fact that even if the merging companies happened to be using financial software from the same vendor, they’re still on different systems with different business structures and metrics. Given the requirement to keep the day-to-day business running and show a return for investors, it’s impractical for a company to say “OK we’re going to take a number of our G&A staff and put them on an 18-month project to get us on a single, common General Ledger.”
What role does company data play in mergers and how can companies’ best manage their data?
Company data plays a huge role. When companies come together, they want to quickly identify new strategic opportunities as well as to look for efficiencies and redundancies in the newly-integrated organization. They typically also need to understand and integrate customer data to understand which organizations are “joint” customers as well as where they might have cross-sell and up-sell opportunities with a broader product line. In most cases, they want to get this information as quickly as possible but it’s non-trivial from a technology perspective to say the least. That said, newer cloud platforms and ongoing improvements in integration technologies are making it faster, easier, and in many cases less expensive to do than it was historically with on-premises platforms and inflexible or cumbersome integration approaches.
How complicated is the process and what are the long term benefits?
That depends. If a huge company acquires a very small company, then you’re not dealing with a lot of data or users and it’s pretty easy to just migrate users and data from the acquired company’s systems. In most cases, it’s a fairly complicated process because you have to define the new processes and metrics of the new integrated company because now the whole business is different. The long-term benefits range from “synergy” and showing investors that the new “whole” is more valuable than the “sum of the parts,” to survival. It’s not uncommon to see stocks fall when two similarly-sized companies come together and that’s exactly what happened initially when the Arbor Software and Hyperion Software merger was announced. Wall St. is experienced and sometimes cautious given the fact that many mergers either never pan out, or take many years to really achieve their potential.
For a good example of success, synergy, and long-term benefits, I’d look to Jazz Pharmaceuticals, who is a Host Analytics customer and was recently named Fortune’s fastest-growing company for 2013. They used technology to streamline the financial side of company integration as they grew rapidly through M&A. They created an “acquisition-ready” platform in finance so that when the business decided to execute another acquisition, they had an efficient, repeatable, and scalable process to get an integrated financial view and integrated financial processes.