Key ERP decisions facing global M&A

Today many medium and small businesses are selling products in a global economy and employing a global workforce.  Many of those businesses have outsourced key functions to meet customer demands and keep costs low. Your software development team might be in Hyderabad, India, your procurement department may reside in Bratislava, Slovakia or you may be running a ‘Maquiladora’ free trade zone manufacturing facility in Mexico.

Depending how your firm intends to grow the business (i.e., through acquisitive growth in multiple regions of the world or with global operational strategies to cut cost and drive value to your organization and subsequently the end customer), your ERP strategy can vary greatly.

M&A as the path to growth

Companies relying on acquisitions to fuel growth often struggle to answer the age old question regarding an ERP strategy during an M&A transaction - “Should I deploy regional ERP systems or one global ERP system? And what system should I use?” Consider the following:

Do you have a global operational or product strategy for the new company? 

• If you can build similar products globally with volume and scalability, then you can take advantage of a global procurement and purchasing strategy.  This will allow you to leverage high volume discounts and material management.  You should consider a “Go Global” strategy with a single global ERP system.

• If your product mix varies by region with volume and scale of products being different in each region, then you should consider a “Go Regional” strategy with multiple ERP systems. In addition, if you plan to divest any portion of the business in the future (or you would like to keep the door open to that possibility), you should consider a regional strategy. You don’t want to go through the effort of integration only to separate the business down the line.

Depending on your industry and as you research potential acquisitions, you should consider operational strategy as part of the foundation for your investment thesis, thus making proper due diligence on your ERP system strategy and selection vital.

How and where will the new company be organized in terms of resources and deployed capital investments? What global requirements must be taken into consideration?

• Global trade compliance: Depending on where you have operations, you may need to comply with a variety of regulations - European Union Intrastat reporting, Import/Export compliance with Free Trade Zones (NAFTA - US, Canada, Mexico), etc. Can your current ERP system manage these requirements or is a third party bolt-on package required, which may increase total cost of ownership (TCO)?

• Governmental and regulatory compliance: If you have operations in Brazil, for example, you will need to comply with an ever changing tax system. Will you need to source a local Brazilian vendor who integrates shipping and invoicing documents (Nota Fiscal) to the government? In other cases, you may need a pre-defined chart of accounts required by countries’ governments (e.g., Croatia in addition to US GAAP).

• De-centralized workforce versus centralized workforce: How will you maintain and support customer products globally?  Will your global ERP system have integrated workflows to approve purchasing or material master setup, or should a regional approach be taken?

• Selling products across countries and various tax implications: Will your ERP manage European cross-border value-added tax (VAT) implications? Or is an additional tool required?

• Financial consolidation: What should a company with global legal entities and regional ERP systems do for financial consolidation?  Should you consider a standalone financial consolidation system? Or does your global ERP system manage financial consolidation quickly and efficiently?

• Multi-currency conversion and exchange rate integration: Does your accounting or treasury system require foreign exchange rates, comparative financials, interest rates, swaps, etc.? Will your e-commerce site, procurement department, or ERP systems need to integrate exchange rates, or commodities prices, to track real time forex pricing?  Can your ERP system integrate to receive such real-time requirements?

• Multi-language requirements: Are there countries that require dual shipping outputs in multiple languages? Does your ERP system manage language translation or are you manually translating in excel outside the system?

As you develop your investment thesis, questions may arise with the ultimate question being “Do I need a Regional or Global ERP system?”

Can your existing portfolio company’s ERP system manage these requirements or will the acquiring company’s ERP do so?  What if both ERP systems cannot scale?  Will your return on investment be in jeopardy due to the lack of prior IT investment?