The Role of Interim Monitors in Divestitures

In a merger or acquisition in the pharmaceutical industry, it is important that there are strong structural remedies available, such as a divestiture of assets from one of the two businesses. Remediation of the perceived anticompetitive impact of a merger through the means of a structural remedy is considered to be “clean” because it involves no oversight or supervision once the divesture has been completed. However, many in the FDA, as well as other professionals in the industry consider this a “black box” approach, and feel that there isn’t enough transparency in these types of divestitures.

During divestitures of significant magnitude both parties go through great lengths to ensure that any kind of divestiture intended to remedy the anti-competitive effects of the merger is sufficient to preserve a post-merger competitive market. In simpler terms, the goal of the divestiture is to ensure that the purchaser or acquirer of the divested assets can actually possess not only the means, but also the incentive to maintain the competitive product(s) in the market of concern. To ensure that the buyer in question will have the proper incentive and means to become a viable competitor, the divestiture must include all the necessary assets, technology, know-how and business information to enable the buyer compete fully following the completion of the transfer of assets and technology.

Because of this “lack of transparency” concern associated with mergers in highly regulated and complex industries, the Federal Trade Commission (FTC) has the power to include special provisions in a Consent Order to appoint an individual, known as an interim monitor, to oversee the operation. The FTC regards the interim monitor as the eyes and ears of the FTC and is required to watch all of areas of the merger or acquisition and identify any issues that may arise which may hinder an independent and effective competitor from being established in the market.

In recent years, the FTC has included an interim monitor provision in those consent orders in which an upfront buyer has been identified and the divestiture will take place shortly after the finalization of the deal. Although it is the FTC’s decision whether to appoint an interim monitor or not, most divestitures in the pharmaceutical or biotechnology industry involving upfront buyers, in recent years, have required the services of an interim monitor. According to many expert pharmaceutical consultants and representatives, this frequent use of interim monitors in these up-front buyer situations, only illustrates the tremendous weight and influence the FTC puts on the protection of divested assets, even for a short period of time until the business is transferred to the buyer.

While many companies may see interim monitors as yet another form of government intrusion in the pharmaceutical industry, many companies and the FTC do not. They believe that not only does transparency promote more accountability in the pharmaceutical industry, but increases their level of credibility with the overall public. As such, the FTC recognizes the critical role of an interim monitor in assuring transparency and accountability that leads to a more successful transfer of ownership.

Divestiture and Business Carve-out Technology Considerations

Mergers and acquisitions continue to be prominent in today’s public corporate and private equity space. A significant challenge to most organizations that are in the market to acquire or divest a business unit is how to address the Information Technology requirements. Unlike an acquisition whereby the entire company is being acquired, an acquisition of an individual business unit(s) poses unique challenges particularly in the case where it resides in a well-integrated, efficient technical environment. Rarely can a business unit be turned over to the purchasing organization on Legal Day 1, but instead a Transition Services Agreement (TSA) must be developed between the two organizations which stipulates the seller to continue providing the computing environment for a period of time while the buyer executes the plan for integration into their own environment.

With increasing focus on individual privacy, and threats from malicious sources to gain access to individual’s information or corporate proprietary information, the importance of planning technology isolation during the TSA period has increased exponentially. This isolation is equally important to the organization that is selling the business unit as to the organization that is acquiring the unit to protect the interests of both parties and is required in regulated industries.

The most important, yet often challenging, step to a successful divestiture and impending acquisition of a business unit is to have a clear understanding of what encompasses the transaction. It is critical to have the application disposition defined, detailed inventory of the technology assets included sale, and the physical locations of the employees affected by the sale to develop an isolation strategy. Once the environment that is proposed to be sold has been defined, a crucial next step is to assess the applications and computing environment to garner an understanding of their dependencies on the selling organization, and the larger organization’s dependencies on them.

Technology organizations must work closely with real estate management divisions to develop a human resource strategy to isolate both physically and logically those employees that will be sold to the acquirer. Often this strategy involves the consolidation of employees and applications to designated sites, and the implementation of dedicated network and security infrastructure. Such isolation will assure that post-Legal Day 1, the individuals that became employees of the purchasing organization no longer have access to seller’s network and proprietary information. This task becomes more complex when seconded individuals exist which require access to both companies.

Investment by the seller is required to support the isolation of the business unit prior to its being sold. The IT component which potentially includes the purchase of new equipment and resource hours may be significant and should be considered prior to agreement on the deal. The amount of consolidation and number of employee affected may reduce costs, however, the seller needs to expect a minimal amount of activity to perform the isolation regardless of the size of the business unit, particularly if the industry is highly regulated. Aggressive timelines to complete the transaction may also significantly increase costs and need to be considered.

The Role of Culture in Mergers, Acquisitions, and Divestitures

A sensitivity to the role of culture and leadership in these organizational transactions is a critical consideration. In fact, the proof is in the pudding. Google the phrase “unsuccessful transactions” and see what the primary reasons are for failure – the lack of attention paid to understanding and effectively managing organizational culture. Think about Time Warner-AOL, Daimler-Chrysler, and the America West-USAirways mergers. These organizations cited the inability to effectively manage cultural complexities as being a key reason for less than desirable outcomes.

So, what can organizations that are facing a merger, acquisition, or divestiture do to ensure that organizational culture serves as an enabler rather than a detractor? Here are some important tips worth considering:

The Role Of Culture In A Transaction:

According to Bill Neale, co-founder of Denison Consulting, the greatest danger in a transaction is that the dominant culture will try to suck the color, or life, out of the other company’s culture, thus destroying the value proposition of the transaction.

Consider embedding the culture component into the change management program, which must consist of more than just a communications effort that cascades decisions from the top.

Be clear to link culture work to tangible and measurable components in order to maintain the momentum and to decrease the risk of it being perceived as the soft stuff. Yes, it can be measured using both a quantitative (surveys) and a qualitative approach (interviews and focus groups). This baseline can serve as a way to create mile markers along the way in order to maintain the momentum.

It’s About The People:

If a new culture is insensitively imposed on an acquired organization, it could destroy what it seeks to achieve. Consider the strengths of both cultures during the transaction and leverage those that will take the new organization into the future. Meshing these strengths strategically to achieve the organization’s goals is important – not just taking the best of both cultures and combining them since the best of both may not be helpful in achieving the new definition of success.

Communication is the basis for a successful integration effort and must be managed effectively – and not just in a top down manner. The most effective tool for an integration that preserves value is “process”, which refers to a managed and effective dialogue. This implies careful listening, based on the willingness to learn.

Take time to gain insight into the values and the basic assumptions that leadership and members of each organization hold true about people, the customer, rewards, systems, processes, and other critical topics. Will these beliefs and assumptions lead to behaviors that help or hinder the new organization from achieving its mission?

And It’s About Leadership:

Oftentimes, it’s the little things that leaders do (or don’t do!) that make the biggest impact on the transaction. Defining a decision-making process that is efficient, for example, is something that is generally overlooked, the result of which can have significant consequences. The leadership team should implement a speedy decision-making process by identifying decision makers, understanding decision-making styles, applying the right decision-making style to the situation, and providing deadlines as to when decisions need to be made.

Leaders must model the behaviors they are expecting from others. Oftentimes, it is difficult for leaders to change the culture since they are responsible for creating the current culture. Generating awareness about this is necessary to ensure success.

Leaders should have high levels of cultural intelligence. Cultural intelligence includes having a good understanding of one’s own culture and how their culture is perceived by the “other”. That is to say that one can only understand the “other’s” culture if they understand their own. Know yourself, your values, and your assumptions about the world and people first.

Mindfulness – the ability to pay attention to cues in cross cultural situations, to be curious and to ask questions – is also critical. Having a repertoire of behaviors to use in varying situations will help leaders navigate the most challenging cultural scenarios.