Homepage | Download old issues


Volume 10/04  -  13.12.2004

Dear Sir or Madam,

Only a few days left until Christmas and New Year. Another year passes by. Looking back, it has been a hard year, yet a good one at the same time. In view of the stagnation in Germany, we have significantly developed our cross-border business in Poland and Western Europe. Just a few days ago we managed to successfully conclude a fusion project for two companies in the printer business. We are particularly proud of this project: Both parties agreed on JP Mergers & Finance AG as the sole consultant. The success shows they were right. The fusion talks were completed within just three months. The costs of consultation for the fusion were just a fraction of those in comparable cases. And it was a great display of trust in us. For JP Mergers & Finance AG as a corporate finance boutique, trust is a very special commodity. Our business is based upon our customer’s trust. And we do everything we can to honour that trust.

On that note, we would like to thank you for the trust you have shown us throughout 2004. For 2005 we wish you every success, happiness, health and satisfaction for you and your family.

Best regards,

Heinz Jäger
- CEO of JP Mergers & Finance AG -

Topics of this issue

M&A in times of structural change: Company transactions in global markets

Everybody in Germany is talking about the economic situation. The discussions are taking place in every conceivable form about whether or not we’ve come though the economic trough, what the government is to do about it, to what extent eastern Germany is impairing development, and so on. The much-discussed recovery seems to be impervious to this discussion; there is no sign of it to date, at least not outside of the increasingly repetitive forecasts.

One doesn’t have to be an economist to see that theories about economic cycles alone are not sufficient to explain the current economic situation in Western Europe. We are experiencing a far-reaching structural change and, the way things look right now, the “western world” does not necessarily count to the beneficiaries.

A few days ago, the author used the rainy weather as motivation to at last address the long-overdue task of clearing out the loft at home. To cut a long story short, the intention remained just that: an intention. However, buried deep beneath a stack of cartons, a collection of student's literature on economics turned up that the author then proceeded to study with no small amount of sentimentality.

The dusty books addressed Gutenbergs factors of production and the so-called efficient factor mobility which, to put it unscientifically, states that scarce production factors (labour, land, capital) have to be applied in such a way that results in the greatest possible economic output. Leafing further, the author was reminded of the price’s controlling function that, in an ideal market, reacts infinitely quickly or with a delay in an imperfect or regulated market. Continuing, changes in general conditions within submarkets lead to relocation processes for the production factors; this has consequences for price and wealth - all just theory, stuff of books?

Hardly - we feel the effects of these processes every day. The globalisation of the economy leads to adaptation processes that are most obvious in the form of movement and re-evaluation of production factors. The consequences for the job market and ultimately for the quality of life within the affected national economies are presented to us day for day in the media.

We are confronted by changes in the overall conditions that cannot be addressed by simply hoping for better times. For individual companies this means - more than ever - that they have to face up to the cold winds of the global market; they are forced to go new ways.

In this context, competitiveness - in particular through cost levels - is of primary importance. The only hope for the long-term generation of revenues is competitive cost structures. Revenues have long reached global magnitudes. A company’s production factors are, at least for a certain amount of time, locally fixed. And all too often, the usual methods (rationalisation, outsourcing, buying policy, etc.) simply cannot compensate.

The range of instruments offered by mergers and acquisitions presents numerous options for the lasting improvement of a company’s competitiveness. Leaving the issue of company succession aside, company transactions can be viewed under three aspects:

Economies of scale

The fusion of companies through merger or acquisition is often initiated with the aim of achieving a rate of growth over and above that of the cumulative business volume. This effect which is often described as the “1+1>2” effect can be achieved by penetrating the combined customer base with the expanded portfolio of products and services. Within the scope of existing capacities, the increased volumes lead automatically to degression of fixed costs and thus to lower unit costs. The effect applies equally to both production companies and service companies.

In addition, increased business volume leads to improved purchasing conditions, access to new markets for sourcing and sales, etc.

Synergies

Conventional explanations of synergies frequently refer to central and/or administrative functions. A merger can produce significant savings in costs by, for example, the pooling of logistics, business administration, purchasing, development, etc. The drive for synergy effects is often confronted by large discrepancies between theory and reality, and thus can be viewed as the main motive for M&A transactions only in select cases. Effects to the contrary, such as the increased complexity of the company, are difficult to evaluate in advance, whereas the presumed savings when comparing organigrams are all too quickly considered in the calculations.

M&A professionals thus view synergy effects as a welcome “icing on the cake” that results from integration carried out to the best effect.

Cost benefits

The industry has long practiced what critics refer to as “labour cost tourism” by transferring production facilities to countries with lower wage levels. These are often just a fraction of the costs for domestic labour and act to counterbalance the disadvantages from lower productivity levels. However, there is no denying that armchair decisions often underestimate the importance of subjects like quality assurance and cultural issues. Irrespective of this, the enlargement of the EU has created greatly improved conditions for small and medium sized companies to investigate new regions offering sales and procurement potential.

However, room for the realisation of cost advantages is not exclusively to be found in other countries. The management of a company and the associated policies developed over a period of years inevitably leads to an individual profile of cost-structure strengths and weaknesses. We see day for day how many companies addressing one and the same market segment fundamentally differ in their structures. In an ongoing fusion project, a benchmarking study to establish best practice revealed an improvement potential of 10-15% across the entire cost volume.

M&A projects are certainly not a matter that can be handled “on the side” along with existing management tasks. Entrepreneurs and managers are often so involved with their strategic and operational responsibilities that the extra load from M&A projects, for example, results in lasting economic damage to the enterprise, so reducing the original intention to absurdity. An obvious solution in this situation is to refer to experienced M&A consultants who can assure a discrete and professional realisation of the project. Let’s talk!!

Author: Hans-Jürgen Kenntner

To the top 

Cost improvement in company administration: Securing a competitive edge through lean administration

Inarguably the role of the price when deciding on the purchase of a product or service today is more important than ever before. A certain level of quality is presumed and only in select niche markets is it possible to demand a higher price than competitors due to image or other subjective factors. The “Geiz ist geil” (tight-fistedness is cool) fever seems to have spread worldwide.

The consequences for producers and retailers are obvious. Increasing sales prices are inconceivable; costs are the only lever left to avoid displacement by the competition.

Cost pressure in production has traditionally been addressed with process optimisation, rationalisation, procurement policy, etc. or companies have reacted with the hotly discussed transfer of production facilities to regions offering lower costs.

Left behind are just the central functions, popularly referred to as overheads. Even here, the times of day-to-day officialdom are history, and yet the situation is quite different.

Production generally involves clearly defined processes and products. It was these quantifiable factors that gave rise to payment models such as productivity bonuses. Performance is transparent and quantifiable, negative developments can be quickly corrected.

There is no such transparency in company administration. There are no “products” resulting from the work and the processes simply cannot be as intensively managed as in production. In extreme cases the administration develops a life of its own and ends up managing itself. The author remembers all to well a quote from a colleague who spent time in controlling within a German industrial enterprise: “We would only realise that production has ceased by carrying out a stock take.”

It’s high time to consider methods for optimising the administration of operations!

Process analysis

Process analysis in this context initially appears as a complex method for identifying potential savings within the administration, and yet it is an effective one. In the initial survey of the current situation, all administrative tasks and activities are recorded, related processes and interfaces are described, as are the available (personnel) capacities.

The result of this survey is a so-called process matrix which helps to reveal the relationship between capacities and time units expended on each activity. This survey usually takes place in combination with employee interviews. Employees who are not fully occupied often suffer from distress that is compensated for by longer processing times and the assumption of a higher degree of task complexity.

The identification of idle time or under-utilisation is, however, a welcome side effect of the “incorruptible” process matrix. This assessment of the current situation quickly identifies the factors that drive processes. It is often highly surprising to see which apparently insignificant activities load down the structures.

The preparation of a target concept should check the extent to which the studied activities are to be optimised, or even if they are necessary. In practice, it has often proven to be the case that the number of standard reports and evaluations increases rather than decreases. The result of an e-mail from the board of directors requesting an ad-hoc analysis all too often results in hurrying obedience and a rushed standard report.

At issue here is the question: What do we really need for efficient control of the company?

An advantage of process analysis is that the substantiated data acts as a basis for the discussion and scrutiny of fundamental themes and the clear quantification of the effects of corrective measures.

Cost analysis

The nature of the system requires that process analysis studies personnel costs which, depending on the size of the company, account for up to three-quarters of administrative costs. Naturally, the remaining quarter should be analysed for potential savings, too. In particular in larger companies, “budget thinking” leads to the simple acceptance of existing cost levels. To achieve worthwhile results here, rigorous groundwork needs to be carried out and there’s no call for reticence in reviewing individual invoice documents.

It is astounding just how much of a quagmire can collect over the years, particularly in the general and miscellaneous cost accounts. Starting with contributions to associations which haven’t been used in years, newspaper subscriptions for long-since departed employees, even ongoing insurance contributions for plant that has been sold off. Trivia? Hardly! Take a good look at the cash book and add up the sums from this so-called trivia for yourself.

Together with our affiliate JP Management Consultancy we specialise in projects for restructuring and re-engineering for small and medium-sized companies and for major enterprises. Our experience of process and cost analysis has shown that, generally speaking, cost savings in administration amounting to 15-20 per cent can be effectively realised.

We would be pleased arrange a no-strings exploratory meeting with you at your convenience.

Author: Hans-Jürgen Kenntner

To the top 

 JP Mergers & Finance AG


 

To the top 


Opportunities for Polish companies as typified by the bicycle market

Globalisation at the smallest scale: Bicycles in different countries are becoming more and more similar. Be they in the Middle- or Far East, south of the equator or way out west, they all have the same components. The frames are still different, featuring local labels and brand names. Looking to Germany we find a market that is structured much as it has always been. There are numerous manufacturers, few importers, a network of small and medium sized wholesalers, a large number of local dealers.

There’s no mistaking that there have been changes, though. Fusion and acquisition have lead to a concentration of many brands under a single corporation; component manufacture in Germany is declining; instead, they are imported from the Far East. Even complete bikes are sourced there. And so the importer becomes a national distributor. There is also a specialisation evident in retail markets. The traditional specialists now have to compete with national full-range retail chains, catalogue suppliers, and specialist bicycle dispatchers. Their catalogues are often exclusively available in the Internet.

In this situation, the adept Polish bicycle manufacturer has a wide scope of potential actions. He can take advantage of assembly costs that are just one quarter of those in Germany. Design and components can already be used internationally. An assembly contract for the German manufacturer is feasible. The brand name can be used directly, or the Polish name can be adopted as a second brand in a drive for product and price diversification.

The Polish manufacturer could also adopt the specifications of the foreign enquirer and assemble a licensed product in line with his guidelines.
The procedural steps are identical and very well known in Poland.

These beginnings as a cooperation for production will quickly yield consequences. A company handing over their specifications, their manufacturing quality-control procedures, their purchasing guidelines, their reporting instruments, and so on, will want to secure the control over this transferred know-how with the aim of securing their identity. The result will be the acquisition of a stake in the Polish company. This will have several benefits: Stabilisation of the relationship, utilization of the Polish capacities, expansion of the market for Polish products, gain in liquidity for the realisation of the Polish company’s expansion plans. Both partners participate to an equal extent in the cooperation.

Let’s talk - we know the players in this market. 

Author: Dr. Dieter Kurandt

To the top 

Service

• Advertise in JP Director's Report ...
• Change your eMail address ...
• Questions, criticism or suggestions ...

... contact us!

Unsubscribe from JP Director's Report ?
Just click here and send us a short eMail !

To the top 

The JP Mergers & Finance AG

Combining competence in corporate finance with classical management consulting generates strength.

Our core competences are:
Corporate finance, mergers and acquisitions, partnering, financial engineering, strategy / planning / controlling, restructuring, participation management.

For further information please call us or send a brief e-mail to eMail. We shall be pleased to contact you.

To the top 

Advertising rates: JP Director's Report

• Number of recipients: approx. 33.000 copies

• Target group: top management, corporate leaders, executive boards, supervisory boards (approx. 92%)

• Languages: German, Polish, English

• Release area: worldwide (emphasis: Germany, Poland, Switzerland, Austria)

• Frequency: approx. monthly via eMail and Download

To the top 



Acknowledgements & contact

JP Mergers & Finance AG
Schillerstr. 101
D-63512 Hainburg
 

Tel.: +49 (6182) 9904-83
Fax: +49 (6182) 9904-88
eMail: Vorstand@JPMergers.com
Internet: www.JPMergers.com

Chief editor: Matthias Noll

To the top 
 

Confidential copyright © JP Mergers & Finance AG 2004. Reproduction prohibited without preliminary authorization