WHAT IS BUSINESS INTEGRATION?

1. What is business integration?

Business integration refers to a process in which multiple companies establish a new holding company as a parent company and the companies in which they have invested become affiliated with the holding company as subsidiaries.

A holding company holds the shares of its subsidiaries and manages group companies. As a general rule, each subsidiary maintains its independent legal personality even after business integration, so the ties between each company are considered to be weaker than in the case of a merger between companies, which will be discussed later.

There are two types of holding companies: operating holding companies and pure holding companies. A business holding company is a company that owns shares in its subsidiaries and also conducts its own business.

On the other hand, a pure holding company is a company whose sole purpose is to hold the shares of its subsidiaries. In other words, a business holding company's purpose is to control group companies and its own business operations, whereas a pure holding company's purpose is only to control group companies.

2. Difference between business integration and merger

Mergers are an M&A method that is similar to business integration, but there are some differences.First, the number of companies after establishment is different. In the case of business integration, in principle, a new holding company will be established, so the total number of group companies will be greater than the number of affiliated companies. To give a specific example, if Company A and Company B integrate their businesses, a holding company, Company X, will be established and Company A and Company B will become affiliated with Company X.

In other words, while there were initially two companies (Company A and Company B), with the new establishment of Company X, the total number has increased to three.However, in the case of a merger, whether it is an incorporation-type merger or an absorption-type merger, the overall number of companies decreases. Specifically, in the case of a new merger between companies A and B, a new company Become.

Additionally, if Company A merges with Company B, Company B will disappear and Company A will become the surviving company, leaving only Company A (one company) in total.There are also other differences, such as unifying systems is not necessary in business integration but is necessary in case of a merger, and while in business integration the corporate status of each company remains, in the case of a merger, the corporate status of all companies other than the surviving company disappears. There is a point.

3. Advantages of business integration

The benefits of business integration include the following:

・Subsidiaries can develop their businesses with autonomy and independence.・The system for controlling and monitoring the company can be strengthened.・Confusion among employees can be suppressed.

Let's take a closer look at each.

3.1. Subsidiaries can develop their business with autonomy and independence

In the case of business integration, each subsidiary essentially operates independently, allowing each company to run its own business. Since a holding company owns the shares of its subsidiaries, in an emergency it can exercise its rights as a shareholder and intervene in the management of its subsidiaries, but this is only a last resort. Normally, the strength of business integration is that the autonomy and independence of each subsidiary is emphasized, allowing them to operate their businesses freely as long as they follow the group's business plan and management rules. Another advantage is that because the business portfolio is diversified, even if one company in the group is underperforming, it will not affect other subsidiaries.

3.2. The system for controlling and monitoring companies can be strengthened

This is especially noticeable in the case of pure holding companies, but business integration has the advantage of strengthening the system for controlling and monitoring group companies. A holding company can oversee the group companies as a whole and provide instructions and advice to each company from a high-level position.If you focus only on your own business, you may not realize that you are implementing measures that are detrimental to other companies in your group. However, with a holding company, such issues can be noticed quickly and adjustments can be made at the appropriate time. A great benefit is that it allows us to aim for the best as a corporate group.

3.3. Reduce employee confusion

When a merger is implemented, the employees of the absorbed company will be upset. You may not be able to feel secure, as it may have a major impact on your future work style, such as what will happen to your treatment or whether your duties will change.At this time, there is concern that confusion and dissatisfaction will occur among employees, resulting in continued disengagement from their work.However, in the case of business integration, there is generally no sudden change in previous treatment or job content, so there is little concern that there will be major complaints or dissatisfaction from employees or confusion. This point is one of the major advantages of business integration.

4. Disadvantages and points to note regarding business integration

The following are the disadvantages and points to note when conducting business integration:

・Compared to a merger, it is difficult to achieve synergy effects・Improving the efficiency of indirect operations is likely to be an issue・Easy to generate unnecessary costs

Let's take a look at each.

4.1. Compared to a merger, it is difficult to generate synergy effects

Business integration has the disadvantage that it is difficult to achieve synergy effects because the emphasis is on the independence and autonomy of each company. Synergy refers to a synergistic effect, where different companies cooperate to complement each other's weaknesses or achieve results through joint development.In the case of business integration, it may be difficult to share know-how and skills among group companies or commercialize new ideas. Unless the holding company consciously takes a leadership role, it will not be easy to realize synergy effects.

4.2. Improving the efficiency of indirect operations tends to be an issue

Even after business integration, there may be cases in which each group company continues to carry out indirect departmental operations such as accounting and human resources operations individually. In these cases, having multiple companies perform similar tasks can be inefficient. Even if you try to integrate your business operations, it will not be easy if the accounting standards and accounting systems used are different.In such cases, it may be desirable to improve the efficiency of indirect operations by establishing (or acquiring) an outsourcing company that undertakes accounting operations for the entire group.

4.3. Unnecessary costs are likely to occur

As the number of affiliated group companies increases, the number of overlapping departments may also increase. Typical overlapping departments are indirect business departments such as accounting and human resources departments. Carrying out similar tasks across multiple group companies can be costly.In order to suppress the generation of such wasteful costs, organizing and outsourcing tasks that are common to each company is one solution to reducing wasteful costs.

5. Advantages of doing a merger

Possible benefits of a merger include:

・Company organization will become larger・Synergy effects will be more likely to occur・Cost reductions can be expected・Integration can be achieved relatively smoothly・Slow performance will be improved

I will explain each in detail.

5.1. Company organization grows

By merging with another company, you can expect both the size of the company and the scale of its business to grow. The larger the company, the larger its presence in the market, which is considered advantageous for business development.If the merged company is a powerful company, the social credibility of the company can be expected to increase. In other words, it will be easier to promote the business than before the merger.

5.2. Synergy effects can be easily achieved

Unlike business integration, in the case of a merger, you will be working within the same company, so you can share skills and technology. In other words, it will be easier to achieve the synergistic effects you expect.Through a merger, if colleagues working at the same company complement each other's lacking abilities and skills, it can be expected to produce greater effects and results than if the two companies were to proceed with business alone.

5.3. Expect cost reduction

By integrating the departments that existed in each company through a merger, it will be possible to reduce personnel costs and system usage costs. Let's carefully examine areas where costs can be reduced and consider what kind of effects will result.In some cases, it may be advantageous for each company to exist separately (for example, if they have established a system that allows other companies to provide backup during busy times), and if they forcefully promote cost reductions, the result will be There is also the potential for significant disadvantages to occur. Therefore, it is necessary to check carefully in advance and then implement measures to reduce costs.

5.4. Integration can be achieved relatively smoothly

Another advantage is that it can be integrated relatively smoothly compared to other schemes. In the case of an absorption-type merger, all rights and obligations, including credits and debts, of the dissolving company are transferred to the surviving company. For example, in an absorption-type merger, labor regulations and employment contracts are passed on to the surviving company, so there is less confusion for employees than in an acquisition where contracts need to be re-concluded, and management can be achieved smoothly and quickly.

5.5. Poor business performance is improved

In the case of business integration, it is unlikely that one company's poor performance will affect other companies, but at the same time, one company cannot have much say in the other company's poor performance. However, in the case of a merger, you can work with a company that was underperforming before the merger, so depending on the method you take, you can get out of the underperformance. In other words, if M&A is carried out through mergers and acquisitions, there may be an advantage in improving the performance of companies with poor performance. However, before a merger, it is important to properly investigate and understand the details and causes of poor performance. Therefore, it is important to check whether there is a possibility that a merger will help the company overcome its poor performance.

6. Disadvantages and points to note when merging

On the other hand, the following points are listed as disadvantages and points to note when conducting a merger.

・The burden of integration work is heavy・Sufficient explanation to stakeholders is required・There is a risk of negative impact on the stock price

6.1. The burden of integration work is heavy

In the case of a merger, it involves integrating personnel systems and updating and replacing various systems and systems. The integration work requires considerable time, effort, and cost. There is also the possibility of updating machinery and equipment that were used before the merger, which may result in excessive costs. Therefore, it is necessary to estimate the cost-effectiveness of a merger, including these burdens, before the merger. However, there are cases where unexpected burdens are discovered during the merger process, so it is necessary to set a certain amount of allowance (tolerable range) in advance.

6.2. Sufficient explanation to stakeholders is required

Unlike business integration, mergers result in the creation of a new company or a dissolved company. In particular, there are cases in which the employees and business partners of the dissolved company may feel psychologically repulsed by the fact that the company they worked for and did business with will no longer exist. In some cases, there may be repercussions such as resignation or suspension of trading. In particular, tell employees that their treatment will not change after the merger and that depending on their contributions, there is a high possibility that the results of the merged company will improve and that it is quite possible that their treatment will improve as a result. It is extremely important to have employees understand the merger in order to prevent them from leaving their jobs. Therefore, it is necessary to carefully explain the merger to stakeholders at an appropriate time.

6.3. There is a risk of negative impact on stock prices

When listed companies merge, stock prices may be adversely affected. However due diligence should be carried out carefully before a merger, if scandals of the merger partner come to light immediately after the merger is announced, or if existing shareholders' shares are diluted by issuing new shares, etc. There may be a risk that stock prices will decline significantly.In order to avoid such risks, it is possible to have representations and warranties included in the merger agreement (such as a stock transfer agreement) and to take measures such as canceling the contract or claiming damages in the event that risk materializes. Masu. However, there is no way to prevent a merger from affecting stock prices, so it is basically important to conduct thorough due diligence.

7. Difference between business integration and capital alliance

A capital alliance is an investment method in which companies hold each other's shares. Companies of similar size pool their capital and build strong cooperative relationships by mutually providing operational support.Other than strengthening capital ties compared to business integration, there will be no major impact on business or management. Therefore, the difference is that it is more easily accepted by stakeholders than business integration. Depending on the partner, you can also expect the stock price to rise.

8. Process after M&A (merger/management integration)

The process after M&A (merger/management integration) is called PMI. We will explain in detail how the integration process progresses.

8.1. Understand the overall picture of the integration process

・We will formulate basic policies for integration and goals for synergy effects.・Set milestones (milestones) for specific work processes.

8.2. Composition of the project team

・Establish a decision-making body and secretariat.・Set up subcommittees and members for each department.

8.3. Issue extraction

- Extract and organize problems and risks related to operations and goal achievement under the new system.

8.4. Consideration of specific countermeasures

- We will consider specific countermeasures from various fields such as production, sales, finance and accounting, human resources and labor, legal affairs, and IT.

8.5. Formulation of business plan after integration

・Put the decisions in writing.・We will formulate a post-integration business plan based on the decisions made.

8.6. Institutional decision/implementation of measures

・The business plan will be decided by the board of directors, etc., measures will be implemented, and the company will transition to a new system.・We will conduct appropriate monitoring and promptly make improvements to any matters that require improvement.

9. Examples of business integration

As specific examples of business integration, we would like to introduce Matsuki Yokokokara & Company and Z Holdings Co., Ltd.

9.1. Case study of business integration between Matsumotokiyoshi Holdings and Cocokara Fine

In October 2021, Matsukiyokocokara & Company was launched through the management integration of Matsumotokiyoshi Holdings and Cocokara Fine. The creation of a gigantic company that was the second largest company in the drugstore industry at the time (based on simple total sales) had a huge impact on other companies. Matsumoto Kiyoshi Holdings is aiming to return to the top of the industry and aim for the No. 1 position in Asia. On the other hand, Cocokara Fine had a strong desire to take advantage of Matsumoto Kiyoshi's strong private brand, and it is thought that the reason for this business integration was that they felt that each other's businesses were attractive from a business strategy standpoint.

<Background to the business integration>April 2019 Cocokara Fine announces the start of consideration for acapital and business alliance with Matsukiyo HD June 2019 The company begins discussions with Sugi HD regarding business integration→ Immediately after, Matsukiyo HD begins capital and business alliances in lieu of a partnership, Cocokara Fine set up a special committee to consider the content of the integration proposal by both companiesAugust 2019 Cocokara Fine announced the start of integration discussions with Matsukiyo HDJanuary 2020 Both companies officially announced Signed an agreement for business integration and announced business integration in October 2021.In October 2021,the two companies merged and Matsuki Yokokokara & Company was born.

9.2. Business integration case of Z Holdings and LINE

Z Holdings Co., Ltd. and LINE Co., Ltd. announced that their business integration was completed in March 2021. Z Holdings Co., Ltd. and LINE's successor company are said to have completed the business integration as of the effective date of the share exchange stipulated in the share exchange agreement signed on January 31, 2020. We intend to utilize AI technology in four areas of focus: ``Commerce,'' ``Local/Vertical,'' ``FinTech,'' and ``Society,'' by leveraging synergy effects centered on the areas where both companies have strengths. The new Z Holdings Co., Ltd. aims to strengthen its corporate foundation, increase sales, and expand its corporate scale in order to compete with giant overseas IT companies.

<Background to the business integration>November 2019: Signed a basic agreement regarding business integration December2019: Signed abusiness integration agreement January 2020: Signed a stock exchange agreementAugust 2020: Signed a basic agreement regarding business alliance ConclusionMarch 2021 Business integration will be completed with the effective date of the share exchange

Above, we have introduced management integration, including the differences between mergers and other alliances. It is important to carefully consider the advantages and disadvantages of each.

10. Difference between business integration and business alliance

A business alliance is a measure to grow business and strengthen competitiveness by having multiple companies pool their management resources and work together to solve problems that cannot be solved by one company alone. Business alliances include ``technical alliances'' related to technological development, ``production alliances'' where a company supplements its manufacturing capabilities by outsourcing some of the manufacturing of its own products, and outsourcing the sales of products to other companies that have sales routes and channels. ``Sales alliances'' are used and can be expected to strengthen competitiveness and reduce costs.This can be said to be a looser relationship than business integration or the above-mentioned capital alliance in which the company acquires shares.

Above, we have introduced management integration, including the differences between mergers and other alliances. It is important to carefully consider the advantages and disadvantages of each.