DSS Case Study: A knowledge-based Decision Support System for enterprise mergers and acquisitionsFaculty of Computer Science and Engineering, HCMC University of TechnologyOctober 2011
Outline1. Introduction2. Mergers and acquisition method and process3. The architecture of the knowledge-based DSS.4. ConclusionsReferences
IntroductionThe merger and acquisition offers incredible market opportunities.The main objectives of M&A are to capitalize on gaps in the market, increase market share, improve customer service, and eliminate local and global competition, not simply to cut operation costs.M&A have been applied in a wide range of industries such as banking, communications, airline, manufacturing, and service industries.Because of the complexity and importance of M&A, decision support systems are frequently used as tools to support decision-making.
Mergers and acquisition method and process
Merger means acquiring control of a target company through stock purchases or exchange.Mergers include the acquisition of the essential assets of a company by another company or the acquisition of shares in a company by another company.Acquisition is the combining of two or more enterprises into one through the purchasing of a target companys assets or stocks.Mergers can be divided into two types: absorptive merge and creative merge. Absorptive merger means the target company will be eliminated. Creative merger means that both companies including the target company and the buying company will be erased and then a new company will be established.
Ten actions by the acquiring firm to assure success in M&A.1. Set the companys long-term objectives2. Select the means to achieve the objectives3. Make sure that the proposed acquisitions can achieve the objectives.4. Establish candidate search procedures5. Develop strategies and criteria for analyzing potential acquisitions6. Prepare negotiations with the target firm.7. Prepare actual consummation of the acquisitions.8. Plan the post-acquisition changes and integration.9. Allocate budgets and responsibilities.10. Exercise leadership and control.
Figure 1.The process of mergers and acquisitions
Five steps of M&A processIn practice, the M&A process can be broken down into five steps:1. Perform a pre-acquisition review2. Search and screen the target company3. Investigate and value the target4. Acquire the target through negotiation5. Perform post-merger integration
Step 1 - Pre-acquisition reviewIn this step, a pre-acquisition review is performed to assess the companys own situation and decide whether a M&A strategy should be adopted.If the company finds that its difficult in the future to maintain its core competencies, market share, return on capital, etc., the a M&A program may be necessary.If a company fails to protect its valuation, it may find itself the target of a merger.The main task in a pre-acquisition review process is to determine if the desired growth rate of the target company can be achieved in the future. If not, an M&A program should establish a set of criteria whereby the company can grow through acquisition.
Step 2: Search and Screen targetsThe second step is to search for possible M&A candidatesTarget companies must fulfill a set of criteria so that the fitness of the target company is good to the acquirers.The search and screening step process should be performed in-house by the acquiring company.This step consists of the following activities:Develop a growth strategy defining the role of M&A.Set criteria for candidate screening, evaluation and selectionIdentify, collection information about and assess potential candidates.Determine which candidate offers the best fit for a deal.Develop an action plan for executing the deal.
Step 3: Investigate and value the targetThe step is to conduct more detailed analysis of the target company.This will require review ofOperationsStrategiesFinancialsOther aspects
Step 4 Acquire through negotiationAfter the target company is selected, the process of negotiating an M&A begins.In this step, several key questions should be considered:How much resistance will come from the target company?What are the M&A benefits for the target company?What will be the bidding strategy?How much does the acquirer offer in the first round of bidding?The most common M&A method used to acquire a target company is for both companies to reach agreement about the M&A.
Step 5: Post-merger integrationIn this step, the integration of two M&A partners is achieved.The post-merger integration step is the most difficult phase.This step requires extensive planning throughout the entire organization.The integration process can take places at three levels:Full: all functional departmentsModerate: some key departmentsMinimal: some selected personnel
The architecture of the knowledge-based decision support system (KDSS)The KDSS for mergers and acquisitions is composed of 6 components:A databaseA case baseA rule baseA model baseAn inference engineA user interface.It provides users with a friendly and effective interface to communicate with the system and find alternative actions for decision-making.
Figure 2. The knowledge based DSS for mergers and acquisitions
The architecture of KDSSThe database provides all the information needed in the model base and rule base for calculating, analyzing and reasoning.The rule base stores all the necessary rules for supporting reasoning when the inference engine performs forwarding chaining.The model base employs critical statistical models to analyze, forecast, or evaluate business value. In KDSS, there are two models:The discounted free cash flowEconomic profit models.and adopt scenario analysis to perform business valuation.
The case base helps the user deal with a new problem while he/she faces a similar case.The inference engine uses rules in the rule base and data in the database to select suitable rules that it can use to infer new knowledge or models to predict or analyze the problem.
The databaseThe database stores a collection of end user data that consists of raw facts of interest to the end user and meta data which are the data about data.The meta data provide a description of the data characteristics and relationships.To manage data, answer ad hoc queries, gain better access, and reduce data inconsistency, a DBMS is required.This approach uses Microsoft Access to create a database and an ODBC driver to access the data in the database.The database contains all financial data used in the models, cases, or rules.
The database consists of 3 tables: Password, FinancialData, and ModelParameters The Password table is to verify user identification.The FinancialData table provides diverse information about a companys finance. The attributes of FinancialData are Current_Liabilities, Net_Operating_Capital, Current_Assets, Net_Property_Plant_Equipment, Other_Operating_Assets, Short_term_Investment, Goodwill_amortization, Non_Operating_Investment, market_price, stockholder_equity, debt_ration, etc.The ModelParameter is used to provide a wide range of variables for model analysis and forecasting.
The knowledge baseThe knowledge base contains domain knowledge useful for problem solving.In order to use experiences effectively, knowledge extraction and collection must be continually performed.The knowledge stored in the knowledge base is in the form of rules or cases, which the inference engine in the KDSS can quickly and accurately infer and generate suggestions and actions.
The rule baseThere is a rule base in the knowledge base.The rules in the rule base are represented as a set of rules.Each rule specifies a relation, directive, strategy, and recommendation.It is in the form of: if then If the antecedent clauses are true, then the consequent clauses are true.
- Some rules:Rule: 1 If Growth_Rate 30% of a similar industry then Type = OptimisticRule: 2 If 5% Growth_Rate 29% of a similar industry then Type = NormalRule: 3 If -5% Growth_Rate 4% of a similar industry then Type = ConservativeRule: 4 If After_Merger_Business_Value 130%* Before_Merger_Business_Value then Strong_Suggestion_to_BuyRule: 5 If 110%*Before_Merger_Business_Value After_Merger_Business_Value
- Rule: 6If 100%*Before_Merger_Business_Value After_Merger_Business_Value
The case baseBeside a rule base, the KDSS also uses a case base in the knowledge base.The case base records all past cases of mergers and acquisitions. For these cases, the basic financial data, procedures, policies, legal issues, and other related problems are evaluated, organized and saved in the case base.There are four pairs of successful merger and acquisition company, called X1Y1, X2Y2, X3Y3 and X4Y4, from Taiwans electronic and chemical industries. The four main cases in the current case base named CASE01, CASE02, CASE03 and CASE04.Each case links basic data, related regulations and taxes, procedures, expert audits, and agreements, all organized in a hierarchical format.
Figure 3. The hierarchical structure of a case representation
Case base reasoningUpon receiving a case, the KDSS first checks the case base to determine if a similar case exists. If so, the old case is used as guidance to solve the case.If not, the case is regarded as a new case, the whole process is performed.When the case is finished, it will be evaluated and added in the case base if it exhibits good performance
The model baseA model base in a DSS provides at least one management science model for analysis, evaluation, or forecasting. The result produced by the