IT Assignment essay help on: KPG Infotech Ltd.

Introduction

KPG InfoTech Ltd is a company engaged in IT and ITes services. It operates globally and has offices in India, Australia, and London with HQ in Cincinnati, US.

 The company is booming and enjoys a good turnover. To reach a higher growth trajectory, the CEO is considering having a ‘merger’ with one of the major IT companies, Unicon Ltd. Though local and cross border mergers are quite significant now a days; these are not always successful. Any merger or similar initiatives do have their inherent risks and it is must for the company to analyze those risks before delving into these initiatives.

The present report is a detailed analysis of potential risks arise out or mergers and their mitigation.

1. Merger and its Relationship to Strategic Goals of the Organization

1.1 Merger: A Brief Overview

‘Merger’ is defined as a combination of two or more companies into a single company where one survives and other losses its corporate existence (M.Bragg, 2008). It is similar to takeover except that merger is usually between two ‘equals’  and is a mutual decision while takeover is done between two ‘unequal’s and may not be a mutual decision. Usually, stronger company may take over the smaller company even if the smaller firm resists to it.

A typical merger involves two related companies that join hands with a goal to increase their worth and benefits by becoming a single entity. Shareholders possessing shares in older entities get equal number of shares in the ‘new ‘entity. In 1998, an American automaker, Chrysler Corp, merged with German automaker, Daimler Benz to form DaimlerChrysler. This move proves beneficial to both as it provided Daimler to reach American markets and Chrysler to reach European markets (Rezaee, 2001).

1.2 Merger: Its Objectives

Any business move is taken, obviously, for the good of business. Same is the case with mergers. KPG Ltd is planning to merge with Unicon Ltd majorly for the following objectives:

1.2.1 Branding

Unicon is a renowned brand across the globe and its association with our company may result in to good recognition and growth across the globe.

1.2.2 Economies of Scale

 The combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins (John Coffey, 2012). For example, core or basic functions like HR; accounting can be merged to get cost-cutting and increased profit margins.

1.2.3 Increased Market Share

There are two options to exist; either compete or join hands with competitors. Board of Directors of both the companies feel that they can absorb major competitors and focus their energy on other crucial tasks rather than delving in cut-throat competition. This can increase market share for both firms.

Some other objectives pursued with this merger are:

1.2.4 Geographical Diversification and Resource Transfer

KPG feels that the merger will increase chances of geographical diversification and reach in areas that are not under reach presently. In addition, value addition can be made by even distribution of resources across firms that are presently unevenly distributed.

1.3 Nature of Merger and Its Relationship with Strategic Goals of Organization

There are different types of merger but what the companies have planned is a blend of horizontal and vertical merger. It means that though these are similar in operations, some services are different from each other. KPG is more into core IT and software development while Unicon has elaborated and diversified ITes sector. Thus, vertical integration is expected to increase market area and profit margins for both.

                                                    Vertical Integration

The merger plan is exactly in sync with the strategic goals of the organizations that include high profit share, market diversification, brand recognition and long term growth.

If the risks are properly encounters and effective planning is done, this merger will be win-win situation for both the firms. The next section is dedicated to identification of risks and their proper mitigation.

2. Risk Identification

Mergers are easy to make but difficult to keep. As per CFO Magazine (CFO magazine, 2011),

• 75 % of mergers are disappointing
• “People problems” are cited as the primary reason for failure
• 50 percent organizations experience a decline in their productivity  in first year of merging
• 47 percent of senior executives in new entities leave the company in first year

Above data is disturbing though, reveals the truth about mergers. It doesn’t mean that all mergers prove out to be a failure but proper risk identification and mitigation is required to make it a success.

2.1 Risk Identification Tools

Proper identification of risks is must to avoid undesirable conditions. There are many tools, qualitative and quantitative, for risk assessment.

Qualitative tools include (Kendrick, 2009):

• Risk identification
• Risks rankings
• Risk Maps
• Risks mapped to objectives
• Identification of risks correlations
• Validation of risk impact
• Gain/loss curves
• Tornado charts
• Scenario analysis
• Net Present Value
• Traditional Measures

Quantitative tools include (Kendrick, 2009):

• Probability
• Cash flow at risk
• Earnings at risk
• Earnings distribution
• EPS distribution

Organizations can adopt any of these, or combination of these tools to identify risks arising out of merger or any other significant change in the company. Selecting the tool depends on different factors including the size of company, size of risk management team; their expertise, time devoted to risk identification and other similar factors. Of course, quantitative methods may come out with better results but they are difficult to implement.

So, assuming that an organization doesn’t to delve too deeper into tough risk identification process, it can select following simpler approaches for risk identification:

2.1.1 Gain/loss curves

This is a useful tool as the impact of risk on finance can be gauged. Further, these curves also reveal potential losses or gains that can help any organization to plan its cash flow and capital investment (Conrow, 2003).

Figure 1: Adapted from pool.ncsu.edu

The sample gain/loss curve shown above has a horizontal axis that represents the currency (dollars) and vertical axis that represents the probability. The figure shows that there will be a loss of around 1.15 million dollars on an average.

Thus an analysis of gain/loss curve may provide the management with potential financial risks and also the information that how much money they need to spend in mitigating that risk.

On the negative side, making these curves requires a lot of efforts in data collection and if a company can manage that; these curves prove one of the best methods for risk identification.

2.1.2 Probability

Computing probability is also a good method of risk identification. Probability takes in to account the impact of any business move and the likelihood of impact (Conrow, 2003). The risk management team can use various scales including:

• Low, medium or high
• Improbable, possible, near certain
• slight, not likely, likely, expected

Instead of having quantitative figures, the team can also assess the range of risk using probabilistic measures. For example, entering of a new entrant in market may be judged as a low risk or high risk depending on the products and services and, prices, market capture and other things.

The launch of a new phone by Sony may be judged on high scale of risk by competitors.

2.1.3 Risk Questionnaires and Surveys

This is comparatively simpler method but provides with good results. A questionnaire is prepared including external and internal environment that may pose risk for the company (Wells, 1996). Internal risks may arise from ethical, cultural and other problems arising out of merger; external risks are more associated with social, political, legal, economical and technological environment in which an organization operates.

Internal factors may also include risks related to suppliers, customers, processes, raw materials and other related factors. Questionnaires are helpful in the sense that they come up with a list of risks. However, these may go wayward and may not prove much beneficial.

Instead of questionnaires, organizations can also use surveys. A survey may ask the respondents to rank five major risks they think are crucial for the organization.

These methods (questionnaires and surveys) may prove more beneficial if used with a facilitated workshop.

2.2 Merger of KPG with Unicon: Major Risks Identified

The ERM team of KPG employed a combination of quantitative and qualititative tools to identify risk that may arise out of this merger. Major tools used were: gain/loss curves, tornado charts, probability, surveys and questionnaires. Major risks that were identified after the process are as follows:

• Overpaying for an asset
• Problems related to employees: Talent Flight
• Technological issues
• Structural differences
• Redundant staff
• Overlapping subsidiaries
• Incompatibility between budget of two organizations
• Market inefficiencies
• Problems arising out of merging process

The above mentioned list of risks is not all-inclusive. There are lot more risks and threats to the identity of a company. “Overcoming Merger Risks” was the article published in Bloom berg Business Week (BusinessWeek, 2012). It discusses in detail about the risks arising out of mergers, the process, marketing efficiencies and the different nature of two corporations.

It clearly says, “All mergers involve risks- and carry no guarantee of fulfilling expectations. Less than half of corporate marriages succeed in the minds of most important constituents: shareholders, customers and employees…” (BusinessWeek, 2012)

3. Customers and Employees – Do they Face the Brunt?

Now, it is clear that merger of two organizations is not an easy deals. The different nature of businesses, structural problems, financial issues, legal problems etc. may prove a major threat for the organization.

 The Enterprise Risk Management team of KPG InfoTech Ltd. stated that major risks are related to employees and customers. Let’s discuss these two threats in detail.

3.1 Employees

The team applied quality measures including questionnaires and surveys to judge the impact of merger on employees. Employees were asked to mention and rank various problems they may occur on account of merging with Unicon Ltd.

Surveys were distributed to 20 people in the organization. Results were as follows:

Enhanced competition and workload10

Issues related to promotions and appraisal12Increased Stress8

The table clearly shows that employees were quite apprehensive about merger and came out with different issues they thought could impact them.

3.1.1 Why Survey and Questionnaire?

As discussed in previous section, there are many qualitative and quantitative tools to assess risks. The ESR team of KPG used these methods because issues related to employees need subjectivity and quantitative methods may not be suitable in that case. It also consumed less time and efforts in data collection.

Moreover, who will give a better account of the risks than employees in the organization being merged?

3.1.2 Employees at Risk- Their Retention

There is no denying the fact that employees are highly influenced by mergers. The table is exactly in sync with different studies done on the impact of merger on employees. Let’s discuss the concerns of employees in a bit detail:

Cultural factors

Recent study (Jain, 2009) has revealed that culture of the organization play a big role in employee’s motivation, their stress level and performance. If two organizations are not able to merge themselves culturally, severe issues can crop up at workplace. Cultural issues may occur from: issues related to religion, the way of doing work, management system of an organization etc.

For instance, suppose, company A is a decentralized organization in comparison to the company B that believes in centralization. If they both get merge, employees will feel problems in performing as culture of a centralized company is quite different from the decentralized one and these things don’t go in sync so easily.

Increased Competitiveness                                           

After merger, the size of workforce gets increased resulting in increased hierarchy and hence the competition level (Gunter Stahl, 2005). Thus, employees who were expecting promotions and appraisals previously may need to wait because of this changed structure of the company. This may result in de-motivation and increased stress levels affecting their performance and company’s growth also.

Different leadership

Employees may feel difficult to work with different seniors. When it gets long time to work with somebody, we tend to develop a sort of understanding and sometimes human mind may not be able to cope with these changes (Gunter Stahl, 2005). It also leads to stress and turnover in the company.

Summing up, there are other similar risks also that may affect the workforce during mergers and acquisitions. It’s the HRD that can play a positive role and give a boost to their employees.

Regular counseling, grievance redressal sessions, good promotions for deserving employees, involving them in decision making are some of the factors that can mitigate negative effects and retain key employees.

3.2 Customers’ Problems

It’s a myth that customers remain unaffected as they are outside the organization. If employees are essential to retain, companies also can’t let go their customers. After all, they are the source of revenue and any decision negatively affecting those needs proper analysis.

3.2.1 The Methods Used

Among different quantitative and qualitative methods available, the ESR team selected probability tool to analyze the risk associated with customers.  The team risk maps to analyze the impact of their merger with Unicon.

Risks identified were:

• Resulting identity is more towards monopoly and may lose customers if prices are kept high
• Efficiency and goal of the company may get diverted resulting in customers’ dissatisfaction
• Customers may not enjoy dealing with the new identity and switch to other companies.

Though it seems that customers do enjoy cost-benefits when organizations merge; in reality they also hate mergers.

An article “Why Consumers hate mergers” published in Bloomberg Business week (BusinessWeek, 2012) clearly says that usually customers get dissatisfied because of mergers. The report has been prepared on the basis of American Customer Satisfaction Index related to around big 28 companies that undertook major merger decisions between 1997 to 2002.

Prices, quality of product and services and companies’ ability to meet expectation were 3 major areas that received not-up-to mark feedback from customers after merger. They revealed that only 29 percent mergers were able to serve them with better products and lower prices.

Though mergers don’t always result in customers’ dissatisfaction; this is one of the major risks organizations need to address as customers’ turnover may cause them huge loss in terms of revenue and profit margins.

4. Critical Evaluation of Analysis

Obviously, there are several risks and different identification tools. The management team of KPG Ltd. came up with 2 major risks: employees and customers’ concerns.

Obviously, the results are in sync with the current trends and various news articles and journals have also approved it.

Employees are one of the major factors for any organization and it should properly monitor the risks and take necessary steps to mitigate those.

Similarly, no organization can survive without customers’ satisfaction. As stated, customers also hate mergers and get dissatisfied afterwards, companies should take necessary steps regarding effective pricing, better quality so that customers can be retained.

5. Recommendations for Risk Control

Reasons for frequent failure of M&A were analyzed by Thomas Straub in “Reasons for frequent failure in mergers and acquisitions – a comprehensive analysis”, DUV Gabler Edition, 2007. Despite the goal of performance improvement, results from mergers and acquisitions (M&A) are often disappointing. Numerous empirical studies show high failure rates of M&A deals. Studies are mostly focused on individual determinants. The literature therefore lacks a more comprehensive framework that includes different perspectives. Using four statistical methods, Thomas Straub shows that M&A performance is a multi-dimensional function. For a successful deal, the following key success factors should be taken into account:

• Strategic logic which is reflected by six determinants: market similarities, market complementarities, operational similarities, operational complementarities, market power, and purchasing power.
• Organizational integration which is reflected by three determinants: acquisition experience, relative size, cultural compatibility.
• Financial / price perspective which is reflected by three determinants: acquisition premium, bidding process, and due diligence.

All 12 variables are presumed to affect performance either positively or negatively. Post-M&A performance is measured by synergy realization, relative performance (compared to competition), and absolute performance.

Summing up, mergers are two-edged sword. If companies don’t take risk in business, they may lose chances of high growth. On the other hand, taking this route is not an easy deal and involves high risk.

Proper monitoring and control of risk is required to achieve desired objectives and goals.

If you want IT management Assignment Help study samples to help you write professional custom essay’s and essay writing help.

Receive assured help from our talented and expert writers! Did you buy assignment and assignment writing services from our experts in a very affordable price.

To get more information, please contact us or visit www.myassignmenthelp.Com