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Knowledge Management and Value Creation through Restructuring, Recapitalization, Merger and Acquisition


Megat Zainurul Anuar bin Megat Johari Email:


We assume that the objective of the firm is to maximize its value to its stockholders. According to Brealey & Mayers, 'success is usually judged by value'. It is therefore can be concluded that the secret of success in financial management is to increase value.

There are several ways where finance can play a lead role in creating value:

1. Improving the allocation of resources between business units, divisions, or other parts of the business. 2. Realigning the operating units of the business for a better fit with the rest of the organization. All parts of the business need to work together within a single strategic framework. 3. Increasing the focus of the business on what is important. 4. Introducing shared services and transfer pricing to better leverage the resources of the business and reduce redundancy. 5. Initiating a sense of urgency and change to move the organization in a new direction. 6. Increasing the capacity of the organization to borrow.

When it comes to arranging a restructuring, it is important to be creative since the restructuring must fit with the reasons for change. When Gary Wilson, CFO (Chief Financial Officer) of Walt Disney was asked how does a CFO create value, Wilson replied: "Just like any other great marketing or operating executive, by being creative. Creativity creates value. In finance that means structuring deals creatively."

Restructuring can take many forms. Some typical approaches to financial restructuring include:

Vertical Restructuring: Changing the configuration of assets within a business unit or part of the organization. A sale and lease back arrangement can be used to restructure assets between business units. Franchising and subcontracting are two other forms of vertical restructuring.


Horizontal Restructuring: Change in the overall business through a new joint venture, new acquisition, sale of a business unit, or other form. A leveraged recapitalization is a common form of horizontal restructuring where debt is used to change the capital structure of the organization. Corporate Restructuring: A corporate restructuring relates to how the business will operate in the future. There are several ways to initiate a corporate restructuring: y y y y y New issue of stock and/or debt Change in business form (such as partnership, corporation, trust, etc.) Repurchase of stock Leveraged Buy Out (LBO) - Borrowing against the assets of the firm to take the company private. Liquidation of the business when the break-up value exceeds the fair market value of the organization.


One of the most popular forms of corporate restructurings is the merger. A merger is when a bidding company negotiates to acquire another company. Payment is often made in the form of stock. The buyer is usually a larger mature company with surplus cash and wants to grow externally by acquiring another company that has strong growth. The merging of the two companies is supposed to result in higher values, commonly referred to as "synergy" values. However, the reality is that mergers do not necessarily lead to higher values.

A study of 150 mergers over a five-year period (1990 to 1995) found that one-third of all mergers "substantially eroded shareholder value." A comparison of acquiring companies with non-acquiring companies showed that non-acquiring companies (companies that grow internally) outperformed the acquiring companies. As Tom Peters (author of In Search of Excellence) has pointed out - "mergers are a snare and an illusion."

One reason mergers fail to provide higher values is due to the fact that the price paid for the acquired company exceeds the value of the company. Good target companies are hard to find and larger companies are unable to grow internally. This drives the price of target companies up. Additionally, investment bankers are eager to arrange mergers regardless if value is enhanced. There is no such thing as a bad merger in the eyes of an investment banker.

Some other reasons why mergers don't work include: y Increased Earnings: Mergers are sometimes undertaken to improve earnings. However, the mere purpose of increased earnings is no guarantee of higher values since the new combined company may fail to earn positive returns on capital invested.


Competitive Advantage: Trying to beat the competition through a merger is a temporary quick fix. It does not address the fundamental reasons for failure to compete. You still have to outperform your competition on the total capital invested. If you are unable to generate higher


returns, investors will move funds to competing companies that offer higher returns for the same level of risk. y Bargain Purchase: Buying a company simply because it is undervalued should raise a red flag. You are guessing against the marketplace when it comes to valuation. Additionally, undervalued companies sell at a discount for a very good reason - they are not worth much because their prospects for future recovery are doubtful. Trying to turnaround an under-performing company is not easy.


Cash Flow Cow: Buying a company just to acquire a strong cash flow is costly. The very reasons for the strong cash flow soon evaporate after the merger and long-term values fail to materialize.


On the other side of restructurings are recapitalizations (recaps) of the business. The evidence is strong that recaps do in fact enhance values. Even if a company borrows heavily to simply pay out large dividends can boost values. Recaps send a message to the marketplace about what management thinks. One important element in many recaps is the use of debt. Debt helps enhance values. Why? It seems that when an organization operates under heavy debt loads management is forced to make better decisions for the shareholders. Under high debt, the company must make interest payments and this forces management to watch how it invests scarce resources. Management is more likely to look for ways to preserve cash. In the absence of debt, managers have a tendency to overpay for acquisitions, misuse surplus funds, and disregard returns on invested capital. Therefore, carrying high levels of debt can be a simple and effective way to keep managers working on behalf of higher values.

The Synthesis of the Model


Restructuring Knowledge Management Merger Value of the Firm



Why Knowledge management?
Knowledge management determines the company s knowledge requirements and the knowledge acquisition and learning processes the company uses to meet the requirements. Knowledge management strategies determine in operational terms the learning and innovation capacity of the firm.

Knowledge is often categorised as explicit or tacit. Explicit knowledge consists of anything that can be documented, archived and codified (e.g. knowledge held by designs, manuals, etc.) and therefore can be easily communicated and shared. Much harder to manage is tacit knowledge, or implicit knowledge representing the personal knowledge which cannot be described and is primarily manifested through the results of actions. Tacit knowledge resides with individuals and their relationships and is affected by the organisational structure including the business network and the organisational culture which in turn reflects the value traits of the company.

The transfer of tacit knowledge to knowledge that can be shared within the organisation has been an important branch of knowledge management . According to Nonaka there are four basic patterns for knowledge creation in an organisation:

1. Socialisation: sharing of tacit knowledge between individuals that increases tacit knowledge but does not increase explicit knowledge to be used by the organisation as a whole. 2. Articulation: making tacit knowledge explicit allowing sharing within the organisation through individuals succeeding in formulating the fundaments of their own tacit knowledge in a way that can be communicated to others. 3. Synthesis: combining several pieces of explicit knowledge into a new one, but not extending the total knowledge of the organisation. 4. Externalisation: using explicit knowledge to broaden, extend and reframe tacit knowledge.

In a knowledge-based organisation, these four patterns are assumed to exist in dynamic interaction, a kind of spiral of knowledge, moving into higher and higher levels at a rate and manner dependent on knowledge networking characteristics.


In short, by managing knowledge, organizations can: y provide a better foundation for making decisions on choosing strategic options and means of implementing its chosen options; y y y y y y y y y y y y increase responsiveness to clients or customers and other stakeholders; improve efficiency of people, operations and programmes; improve the speed and effectiveness of innovation; improve the quality of products and services; improve the competitive position by operating more intelligently; enhance the continuity of the organisation; enhance the financial performancof the organisation; optimize the interaction between all the arms of the organisation; improve collective and individaual competencies; make professionals learn more efficiently and more effectively; improve communication and synergy between all knowledge-workers; make the company focus on the core business and on leveraging critical knowledge assets

(Chase, 1997 ; uit Beijerse 1999).

"The value of the firm relates directly to the effectiveness with which the managed knowledge enables the members of the organization to deal with today's situations and effictively envision and create (its) future. Without on-demand access to manage knowledge every situation is address based on what the invividual or group brings to the situation. With on-demand access to manage knowledge, every situation is addressed with the sum total of everything anyone in the organization has ever learned about a situation of a similar nature" (Bellinger, 2001)