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POST ACQUISITION INTEGRATION CHALLENGES SHOULD NEVER BE UNDERESTIMATED

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POST ACQUISITION INTEGRATION CHALLENGES SHOULD NEVER BE UNDERESTIMATED 1

By Charlie Mayes, Managing Director, DAV Management

The announcement of Microsoft’s acquisition of Nokia’s Devices and Services business for $7.2 billion back in September last year sparked plenty of debate around the future direction of both companies. Marking the end of an era for struggling Nokia, the move was deemed by analysts as a necessary gamble amid Microsoft’s failed platform only approach to the mobile market. Technology strategies aside, top analysts also highlighted in particular the significant challenge that Microsoft will inevitably face in integrating Nokia should the deal be approved – especially at a time when Microsoft is in the middle of its own mammoth re-organisation.

Charlie Mayes, Managing Director, DAV Management

Charlie Mayes, Managing Director, DAV Management

Last month the European Commission cleared the deal, bringing the acquisition closer to completion, which is expected in the first quarter of 2014. At that point the really interesting question will be, how will Microsoft execute on its wider strategy and how will it manage a business integration of the magnitude the Nokia  acquisition represents at the same time?

The truth is it won’t be easy. History is littered with failed integration efforts of this magnitude. The stats relating to successful acquisition outcomes in general aren’t encouraging either. According to a report by McKinsey & Company more than 70% of all mergers and acquisitions fail to produce any benefit for the shareholders, and over half actually destroy value.

With these kinds of odds (and I’ve seen figures quoting that up to 90% of mergers and acquisitions fail), companies have to do significantly more than due-diligence on the tangible assets of financial structures, IT and IP to ensure success. Successful acquisitions are dependent on many different factors, most of which are subtle and complex.

From experience it’s the intangible assets that tend to cause the most challenges. These include people, politics and culture (more on this later) – all of which can put a damper on a positive outcome. Identifying and managing the post acquisition integration of business operations along with the people, processes and technology elements involved is key.  And the planning for this must start early in the process.

For Microsoft, making a success of the integration will be hard work but, as I’ve written before, the approach needed to carry an acquisition through to success is in fact very similar to what is required in any large-scale programme of change.  Get the approach right, ensure it’s planned and managed by people who know what they are doing, have a clear and well communicated vision for the acquisition and break this down into tactical chunks of work that can be delivered as part of a structured programme of change.

However, the size and magnitude of the people element in this acquisition will add an extra dimension. For Microsoft, not only will 32,000 additional employees be added to their ranks, their own reorganisation initiative (coined ‘One Microsoft’) is also in play. There’s also the fact that CEO Steve Ballmer who conceived Microsoft’s transformation strategy is leaving in 2014 and won’t be around to execute on the vision.  Challenging times ahead – and especially for a new incoming CEO.

One of the most interesting aspects arising out of this is the integration of the two cultures.  There is a belief that cultural issues are less important if the acquisition target is principally product or software based and to some extent this is true.  But Nokia represents a whole new ball game to Microsoft and there will be a high reliance on the skills and experience embedded in the former’s business for the outcome of the acquisition to be successful.  So, whilst there will inevitably be staff rationalisation, most likely at the management level, I’d hope to see Microsoft working hard to preserve something of the culture of Nokia, or at least smoothing the way to accepting its own over time.

Microsoft is ultimately looking to transition from a software provider to a devices and services company and is going through change on a massive scale. The industry will be watching developments over the next year closely. Will Microsoft’s purchase of Nokia join the list of acquisition casualties or will it be a triumph of transformation? Only time will tell. Interesting times ahead though to say the least.

McKinsey&Company, Perspectives on Merger Integration, June 2010

Business

Battling Covid collateral damage, Renault says 2021 will be volatile

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Battling Covid collateral damage, Renault says 2021 will be volatile 2

By Gilles Guillaume

PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19 pandemic, including a shortage of semiconductor chips, that could make for another rough year for the French carmaker.

Renault reported an 8 billion euro ($9.7 billion) loss for 2020 which, combined with gloomy take on the market, sent its shares down more than 5% in late morning trading.

“We are in the midst of a battle to try to manage a difficult year in terms of supply chains, of components,” Chief Executive Luca de Meo told reporters. “This is all the collateral damage of the Covid pandemic… we will have a fairly volatile year.”

De Meo, who took over last July, is looking at ways to boost profitability and sales at Renault while pushing ahead with cost cuts. There were early signs of improving momentum as margins inched up in the second half of 2020.

The group gave no financial guidance for this year, although it said it might reach a target of achieving 2 billion euros in costs cuts by 2023 ahead of time, possibly by December.

Executives said they were confident the carmaker could be profitable in the second half of 2021, but that they lacked sufficient market visibility to provide a forecast.

Renault struck a cautious note, saying it was focused on its recovery but warned orders had faltered in early 2021 as pandemic restrictions continued in some countries.

The group is facing new challenges as the European Union tightens emissions regulations and after rivals PSA and Fiat Chrysler joined forces to create Stellantis, the world’s fourth-biggest automaker.

The auto industry endured a tough 2020 but a swift rebound in premium car sales in China helped companies such as Volkswagen and Daimler to weather the storm.

Auto companies globally have since been hit by a shortage of semiconductors that has forced production cuts worldwide.

“The beginning of the year has shown some signs of weakness,” De Meo told analysts, but added the chip shortage should be resolved by the second half of 2021. “We have taken the necessary measures to anticipate and overcome challenges.”

Renault estimated the chip shortage could reduce its production by about 100,000 vehicles this year.

SHARP HIT

The group was already loss-making in 2019, but took a sharp hit in 2020 during lockdowns to fight the pandemic, which also hurt its Japanese partner Nissan.

Analysts polled by Refinitiv had expected a 7.4 billion euro loss for 2020. The group posted negative free cash flow for 2020.

The 2018 arrest of Carlos Ghosn, who formerly lead the alliance between Renault and Nissan, plunged the automakers into turmoil.

In a further sign that the companies have been working to repair the alliance, De Meo told journalists that Renault and Nissan will announce new joint products together in the coming weeks or months.

Renault has begun to raise prices on some car models, and group operating profit, which was negative for 2020 as a whole, improved in the last six months of the year, reaching 866 million euros or 3.5% of revenue.

Analysts at Jefferies said the operating performance was better than expected. Sales were still falling in the second half, but less sharply.

Renault is slashing jobs and trimming its range of cars, allowing it to slice spending in areas like research and development as it focuses on redressing its finances. It is also pivoting more towards electric cars as part of its revamp.

It was already struggling more than some rivals with sliding sales before the pandemic, after years of a vast expansion drive it is now trying to rein in, focusing on profitable markets.

De Meo told journalists on Friday that the French carmaker will make three new higher-margin models at its Palencia plant in Spain, where manufacturing costs are lower, between 2022 and 2024.

($1 = 0.8269 euros)

(Reporting by Gilles Guillaume and Sarah White in Paris, Nick Carey in London; Editing by Christopher Cushing, David Evans and Jan Harvey)

 

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Business

UK delays review of business rates tax until autumn

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UK delays review of business rates tax until autumn 3

LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.

Many companies are demanding reductions in their business rates to help them compete with online retailers.

“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.

Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.

($1 = 0.7152 pounds)

(Writing by William Schomberg, editing by David Milliken)

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Discounter Pepco has all of Europe in its sights

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Discounter Pepco has all of Europe in its sights 4

By James Davey

LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.

The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.

Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.

“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.

To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.

The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.

Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.

Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.

That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.

“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.

Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.

Sales rose 3% to 3.5 billion euros, reflecting new store openings.

($1 = 0.8279 euros)

(Reporting by James Davey; Editing by David Goodman)

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