Study of the Synergy Effect between the Subsidiary Company

Yang Limao,Tian Liang School of Business, Hubei University, Wuhan 4300 !,"hina

Abstract: The #ur#ose of the com#any to carry on merger an$ ac%uisition is in or$er to obtain the synergy effect, so for reali&ing synergy effect it is necessary to $istribute the income fairly among the com#anies #artici#ating in the merger ' ac%uisition ()'*+ to brea, the obstacle of sharing resources.n this #a#er /e /ill stu$y the synergy effect after the com#any merging other com#anies, buil$ u# an evaluation system of the contribution of the subsi$iary com#anies to the synergy effect, an$ construct a synergy effect contribution evaluation mo$el base$ on the entro#y metho$- 0inally /e /ill sho/ the utili&ation of this mo$el through a sim#le- The com#any can use the evaluation result of the mo$el to encourage the merge$ subsi$iary com#any sharing their resources in or$er to reali&e the synergy effectKey Words: Synergy 1ffect2 1ntro#y )etho$2 1valuation )o$el2 Subsi$iary "om#any 1. Introduction Hiroyu,i .tami, a 3a#anese strategic management e4#ert, believes that synergy is #ic,5u#- When the resources /hich are accumulate$ by a #art of the com#any can be use$ synchronously by other #arts of the com#any or #artner com#anies /ithout cost, the synergy effect have #ro$uce$ (6780+- Therefore, /hether the obstacle bloc,ing the resources sharing bet/een organi&ations can be bro,en is im#ortant to reali&ing organi&ation synergy"om#anies carrying out )'* are to increase the value of them, an$ the synergy effect bet/een the ob9ective com#any an$ #arent com#any is 9ust the origin of the increase$ value- .n the reality the main reason of the failure of the synergy an$ )'* is that the obstacles, /hich bloc,s resources sharing bet/een #arent com#any an$ the merge$ an$ #urchase$ com#any, have not been bro,en- These obstacles a##ear various forms, such as com#any culture conflicting, inefficient coor$ination to the organi&ations, having no sense of belonging of the merge$ an$ #urchase$ com#any an$ so on1s#ecially in the com#any )'* these ,in$s of obstacles #erform more obviously- *fter )'*, the relationshi# bet/een the com#any an$ ob9ective com#any become to #arent subsi$iary relationshi#, so each com#any is still an in$e#en$ent cor#oration- 0or the relative in$e#en$ence, #arent com#any can not su#ervise the ob9ective com#any in lots of as#ect- When the su#ervision an$ stimulation from the #arent com#any become /ea,, then #ossibly the merge$ an$ #urchase$ com#any might act /ithout consi$ering the interest of the /hole com#any, even it /ill carry out cut5throat com#etition /ith other subsi$iary com#any of the com#any, all these can lea$ to the inefficiency o#eration of the com#any /hich is ba$ to reali&e the ob9ective of the )'*2. Synergy Effect and ea!i"ing Synergy Effect Ho/ to reali&e synergy effect bet/een the com#any an$ the merge$ an$ #urchase$ com#any: ;osabeth )oss <anter, a #rofessor of business school of Harvar$, #oint out that there are three #remises for the reali&ation of the synergy effect- =ne of them is that managers shoul$ encourage team collaboration, but not 9ust in$ivi$ual #erforming (6787+- She gives an e4am#le, in athletics, /hich the loser lost is e%ual to the obtaining of the /inner, an$ the /inner ta,e a/ay the only re/ar$, but the loser /hile lose the re/ar$, then /ill also have to #ay certain #rice- .n this case, the fear of #eo#le /ill urge the com#etition to the reverse si$e $evelo#ment, an$ the motive of avoi$ing #unishing an$ see,ing the re/ar$ /ill cause the com#etition to evolve into $estructive battle- But if the situation changes slightly, regar$less of /ho gains the victory, so long as goo$ $is#lays may obtain the re/ar$,

then the collaboration might a##ear (6787+1ncouraging an$ re/ar$ing both si$es of the collaboration can lea$ to collaborate, but it is also im#ortant to encourage an$ re/ar$ both si$es of the collaboration for maintaining collaboration- .f the contributions of both si$es are $ifferent but both si$es obtain the same re/ar$s, then this collaboration can not maintain for long time- "hen 3uhong(!00!+ ta,es the #rocess of income $istribution bet/een collaboration com#anies as a gambling #rocess, an$ she buil$ an income $istribution mo$el for the collaboration com#anies from the game Theory vie/- Through gambling analysis she $ra/s the follo/ing conclusion> in or$er to ma4imi&e the benefit of the /hole com#any, benefit assignment of a member belonging to the collaboration shoul$ match its contribution to the /hole com#anies, namely this member shoul$ obtain more benefit assignment /hen its core ability is more uni%ue an$ im#ortant to the com#anies, vice versa (!00!+Therefore, in or$er to obtain synergy effect after the com#any )'*, it is necessary to $istribute synergy income accor$ing to the contribution to the synergy effect reali&ation of the merging an$ #urchasing com#any an$ the merge$ an$ #urchase$ com#any, in or$er to encouraging them to sharing their resources- But the contribution to the synergy effect is $ifficult to measure, on one han$ the form of the synergy effect is com#le4 an$ $iverse, on the other han$ $uring the measuring #rocess there are a lot of target involve$, so it is $ifficult to buil$ u# the evaluation mo$el- Therefore, this #a#er /ill buil$ u# an evaluation target system of synergy effect contribution an$ an evaluation mo$el through research the internal synergy after the com#any merge$ an$ #urchase$ other com#anies, for #rovi$ing a solution to the com#any to encourage subsi$iary com#anies to sharing resources /ith each other#. Construction of the Synergy Effect Contribution $ode! The #rocess of the construction of the synergy effect contribution mo$el in this #a#er is that> first /e /ill buil$ u# an target system of synergy effect contribution evaluation in /hich the targets can be %ualitative or %uantitative, in or$er to reflect com#rehensively all ,in$s of synergy effect contribution of the com#anies #artici#ating in the )'*2 an$ then /e use this evaluation system to recor$ the contribution to the synergy effect reali&ation of these com#anies2 at last a a##ro#riate overall evaluation metho$ /ill be selecte$ to estimate synthetically each target in the evaluation system of a certain com#any, in or$er to obtain the contribution #ro#ortion to the synergy effect reali&ation of this com#any1.1 Contribution of the Synergy Effect Contribution E%a!uation System 1.1.1 &esign 'rincip!e of the Synergy Effect Contribution E%a!uation System The synergy effect after the com#any )'* come from the action of sharing resources bet/een the merging an$ #urchasing com#any an$ the merge$ an$ #urchase$ com#any, an$ this ,in$ sharing a##ears $ifferent in $ifferent time an$ $ifferent com#any- So if /e /ant to estimate the contribution to the synergy effect of the com#anies #artici#ating in the )'*, a $etaile$ evaluation target system must be built u# to reflect the origin of the synergy effect com#rehensively- .t is necessary to meet the follo/ing #rinci#le for buil$ing u# a synergy effect contribution target system> Scientificalness an$ feasibility- ?uring the $esign of the target system, each target shoul$ meet relate$ #rinci#le of economics, reflect the synergy effect origin correctly, an$ its a##raisal sco#e is clear "om#rehensive an$ re#resentative- .n the target system the target selection must be consi$ere$ as far as #ossible from $ifferent #oint of the research ob9ect- These targets not only reflect the current collaboration con$ition of the com#anies, but also the im#act of the current con$ition to the future income- *t the same time the target choice must have the re#resentation to avoi$ $u#lication-

"ommonality an$ $ynamic #ro#erty- The selecte$ target must meet the nature of %uite /i$es#rea$ serviceability, namely they must be able to reflect the general character of the com#anies collaboration in $ifferent #rofession- )ean/hile the target selection must act accor$ing to the change of the environment to ma,e the a##raisal result to be more ob9ective an$ scientific1.1.2 Construction of the Synergy Effect Contribution E%a!uation System The construction of the evaluation system is the ,ey of the synergy effect contribution evaluationThe evaluation system /ill affect the rationality an$ scientific of the a##raisal result $irectly, for the a##raisal system can reflect the contribution to the synergy effect of the com#anies #artici#ating in the )'* com#rehensively- *ccor$ing to the research of the /est scholar, @hang Aiusheng (!006+ $ivi$es the synergy effect into four ,in$s> management synergy effect, o#eration synergy effect, financial synergy effect an$ intangible assets synergy effect- .n this #a#er /e /ill stu$y the synergy effect after the com#any from these four as#ects> )anagement synergy effect- )anagement synergy effect is a synergy effect /hich #enetrates $ifferent business of the subsi$iary com#any of the com#any, mainly coming from the $ecrease of the manager, increase of the management efficiency an$ the shift of the management s,ill- The com#anies having strong management ca#ability can shift its management e4#erience an$ ,no/le$ge to the management inefficiency com#any to enhance the management efficiency of the latter=#eration synergy effect- Synergy effect brought from the enhance of the o#eration efficiency is mainly at form of $ilute$ fi4 cost for the scale economy, saving mar,eting e4#ense for the sale $e#artment merging an$ the mar,eting scale e4#ansion, saving cost for the resources sharing bet/een the relate$ #ro$ucts an$ services, transaction cost saving an$ so on0inancial synergy effect- 0inancial synergy effect originates from each effect of the financial as#ect /hich is brought out by the )'* of the com#any, such as cost $ecrease for the internal ca#ital re#lacing e4ternal ca#ital, using the o#eration loss $eferring an$ so on.ntangible assets synergy effect- .ntangible assets synergy effect come from the enhance of the o#eration efficiency of the com#any for the sharing goo$ intangible assets bet/een the com#anies #artici#ating in the )'*, such as enhancing the saleroom of the merge$ an$ #urchase$ com#any by using the goo$ bran$ image of the merging an$ #urchasing com#any, enhancing the efficiency of the assets o#eration an$ #ro$uction by #roliferating technology, a$vance$ enter#rise culture of the merging an$ #urchasing com#any $evelo#ing the cohesion of the merge$ an$ #urchase$ com#any an$ so on*ccor$ing to the research above, /e buil$ u# a synergy effect contribution evaluation system for the )'* of the com#any, as it is sho/n in table 6- .n this evaluation system, first level target is built u# by the management synergy effect, o#eration synergy effect, financial synergy effect an$ intangible assets synergy effect, an$ the selecting of the secon$ level target is u# to the material form of the synergy effect(ab!e 1. Synergy Effect Contribution E%a!uation System for the $)A of the Company 0irst Level Target )anagement Synergy 1ffect ?ecrease of the manager 1nhance of the management efficiency Shift of the management s,ill Sim#lifying the office organi&ation )erging the #lace for office Secon$ Level Target <in$ of Target Auantitative Auantitative Aualitative Auantitative Auantitative

=#eration Synergy 1ffect

Saving mar,eting e4#ense for the sale $e#artment merging an$ the mar,eting scale e4#ansion ?ilute$ fi4 cost for the scale economy 1nhance the creative ability for merging the ;'? $e#artment Saving cost for the resources sharing bet/een the relate$ #ro$ucts an$ services 1nhance of the mar,et lea$ing #osition "ost $ecrease of certain #ro$uction for the #ro$uce integration ;e$ucing the #ro#erty s#ecial5#ur#ose ris,, enhancing #ro$uct stable Transaction cost saving ?evelo#ment of the #ro$uce efficiency for the enhance of the management an$ /or, s#eciali&ation level

Auantitative Auantitative Aualitative Auantitative Aualitative Auantitative Aualitative Auantitative Aualitative Auantitative Auantitative Auantitative Auantitative Auantitative Aualitative Auantitative Aualitative

0inancial Synergy 1ffect

"ost $ecrease for the internal ca#ital re#lacing e4ternal ca#ital .m#rovement of the loan cre$it Scale economy to the securities issuing Using the o#eration loss $eferring Loss $eferring from the bon$

.ntangible *ssets Synergy 1ffect

1nhancing the saleroom of the merge$ an$ #urchase$ com#any by using the goo$ bran$ image of the merging an$ #urchasing com#any 1nhancing the efficiency of the assets o#eration an$ #ro$uction by #roliferating technology *$vance$ enter#rise culture of the merging an$ #urchasing com#any $evelo#ing the cohesion of the merge$ an$ #urchase$ com#any an$ so on

1.2 E%a!uation $ethod Se!ection "urrent overall evaluation metho$ can be $ivi$e$ into t/o ,in$s> sub9ective evaluation metho$ an$ ob9ective evaluation metho$- The $ata of the sub9ective evaluation metho$ come from the sub9ective /ill to each target of the evaluator2 in contrast the $ata of the ob9ective metho$ originates from the ob9ective environment- ?uring the overall evaluation #rocess /ith many targets an$ ob9ective, the basic #rinci#le of evaluation metho$ selection is that the ob9ective $ata of the evaluate$ ob9ect shoul$ be use$ furthest in the #rocess of /eight com#uting- So in this #a#er /e /ill choose ob9ective evaluation metho$=b9ective evaluation metho$ inclu$es #rinci#al com#onent analysis metho$, factor analysis metho$, an$ entro#y metho$ an$ so on- Buo Cianguang (6774, 6778+ has com#are$ these ob9ective evaluation metho$s, an$ he conclu$e that the result obtain by the entro#y metho$ is more #recise than other metho$s- Therefore, /e /oul$ choose entro#y metho$ to overall evaluate the synergy effect contribution after the )'* of the com#any1.# Synergy Effect E%a!uation $ode! Construction *ased on the Entropy $ethod .f there is m com#anies to evaluate an$ /e have buil$ u# an evaluation system inclu$ing n targets to calculate the synergy effect contribution of these com#anies- 0irst /e can obtain an original $ata matri4 X= ( xi j

+ m n , an$ the $ata in the matri4 have been cocurrent #rocesse$xi j >

Dormali&ing the

x ij pi j E

x
i =6

ij

pi j is the /eight of the i com#any /ith j target- i =12m j =12n.

"alculating the entro#y value

e j of j target>
m

e j E 5 , pi j ln pi j (k > 0 e j 0+
i =6

.f all the xij is e%ual to certain j, then>

x ij pi j E

xij
i =6

6 m

Do/ ej get its ma4imum value>

ej E 5 ,
i =6

6 6 ln = , ln m m m

.f /e let k =

6 , then 0 e j 1. ln m

"om#uting the coefficient of variation of the j target- .n regar$ to certain j, /hen the otherness of the xij is smaller, then the ej is bigger2 /hen all the xij are e%ual, then ej = emax E 6, so at this moment the target xj is no use to the com#are of #ro#osal2 /hen the otherness of the xij is bigger, then the ej is smaller, therefore this target is im#ortant to the com#are of #ro#osal- We calculate the coefficient of variation as follo/>

gj E

6 ej

When the value of gj is bigger, then the target /ith the gj is im#ortant in the evaluation"alculating the target /eight>

gj Wj E

g
j =6

Then /e can obtain a /eight vector> W=(w1,w2,, wn)"om#uting the value of the Synergy 1ffect contribution of the com#any by the linear /eighting metho$n

Vi E

W
j =6

p ij

Vi is the value of the synergy effect contribution of the i com#any- The com#any can $istribute the

synergy income accor$ing to the evaluating result to encourage the resources sharing bet/een com#anies #artici#ating in the )'*, in or$er to reali&e the synergy effect after )'*+. Synergy Effect Contribution E%a!uation $ode! ,ti!i"ation .n this section /e /ill sho/ ho/ to use the evaluation mo$el to estimate the synergy effect contribution of the com#any #artici#ating in the )'*- A com#any is a gear grin$ing machine #ro$ucer /hich has t/o subsi$iary com#anies %6 an$ %!- The #ro$ucts of the com#any have hol$ F0G native mar,et, but its #ro$ucts e4#ort is 9ust at $o&ens of ten thousan$ $ollar level every year- *t the same time, for the machine tool fiel$ is a very #rofessional an$ technical in$ustry, it is har$ for the A com#any to have some brea, in the technology of the #ro$ucts 9ust by itself- Therefore, in or$er to brea, the e4#ort bloc, an$ enhance the core com#etitive ability of the com#any, it #urchase$ L com#any, an *merican in$ustry com#any, in !003- The intention of the )'* of the com#any is to enter the *merican machine tool mar,et an$ enhance the /hole value of the com#any by the a$vantage of technology of the L com#any*fter )'*, the original subsi$iary com#any of the A com#any collaborate an$ sharing resources /ith the L com#any- *ll these ma,e the value am#litu$e of the /hole com#any gro/ing obviously com#are$ /ith last years- 0or evaluating the contribution of the three subsi$iary com#anies to the value increase, /e buil$ u# a synergy effect evaluation mo$el to a##raise each com#any, as it is sho/n in table !(ab!e 2. Synergy Effect-s E%a!uation esu!t of the . company o%er the *ranch Company Synergy 1ffect 1valuation Target )anagement Synergy 1ffect (r6+ 1nhance of the management efficiency %6 com#any 3-H 0 (Sub9ective target> full score 60+ (r!+ Saving mar,eting e4#ense for the sale $e#artment =#eration Synergy 1ffect merging an$ the mar,eting scale e4#ansion (Unit> ten thousan$ $ollar+ (r3+Saving cost for the /ith$ra/ing #ayment(Unit> ten thousan$ $ollar+ (r4+"utting cost inventory(Unit> ten thousan$ $ollar+ (rH+ 1nhance the creative ability for merging the ;'? $e#artment (Sub9ective target> full score 60+ 0inancial 1ffect .ntangible *ssets Synergy 1ffect Synergy (r + "ost $ecrease for the internal ca#ital re#lacing e4ternal ca#ital (Unit> ten thousan$ $ollar+ (rF+ 1nhancing the saleroom of the merge$ an$ #urchase$ com#any by using the goo$ bran$ image of the merging an$ #urchasing com#any (Unit> ten thousan$ $ollar+ (r8+ *$vance$ enter#rise culture of the merging an$ #urchasing com#any $evelo#ing the cohesion of the merge$ an$ #urchase$ com#any an$ so on (Sub9ective target> full score 60+ 4-3 H-F 0 6H0 F00 H0 0 !00 H0 4H0 3-8 H0 -! 0 0 !0 F0 H0 30 H00 %! com#any -H L com#any 0

0irst /e buil$ u# an evaluation target system- .t inclu$es eight secon$ level targets /hich re#resent contribution of certain com#any in one ,in$ of synergy effect- The $ata of the sub9ective target /ill be

com#ute$ by ?el#hi metho$2 the $ata of the ob9ective target /ill be obtaine$ from the o#eration of the com#any or calculate$ by *HI metho$- Such as the target Jsaving mar,eting e4#ense for the sale $e#artment merging an$ the mar,eting scale e4#ansionK, for %! com#any an$ L com#any have their o/n mar,eting team before )'*, so after )'* %! com#any can save thirteen ten thousan$ $ollar mar,eting cost for the com#any an$ L com#any is five hun$re$ ten thousan$ $ollar, but %6 com#any $oesnLt- .n regar$ to the target Jenhancing the saleroom of the merge$ an$ #urchase$ com#any by using the goo$ bran$ image of the merging an$ #urchasing com#anyK, %6 com#any, %! com#any an$ L com#any have their o/n bran$- The saleroom of the /hole com#any gro/ nine hun$re$ ten thousan$ $ollar after these three com#anies sharing their bran$s, but it is har$ to certain the contribution of the bran$ of each com#any to the sale gro/ing- Through the *HI metho$, /e can ,no/ that the value of %6 com#any, %! com#any an$ L com#any is 6H0, F00 an$ H0 ten thousan$ $ollar0irst /e shoul$ transform the original $ata in the table t/o to non$imensional $ata- The metho$ of transformation is>

x M ij =

x ij xj

(i =12mj =12n)

x j is ty#ical value of the j target- 0or there are some target /hose value /oul$ be &ero or

negative, /e must translate these $ata before averaging- The formula is>
x M ij E xi j N min xi j O 6

*fter non$imensional translation, /e can obtain the follo/ing $ata matri4 X>
6-037 X E 6-F36 0-!36 0-00H 0-6F4H !-8677 0-4!7 6-H 6-0F6 !- 877 0-304! 0-00 6-60F8 6- 6F 0-!308 0-06! !-383 0- 0H 0-07 8 !-F07F 0-673H 6-!!3 6-H4 0-!36

By using formula , /e can normali&e the non$imensional $ata in matri4 X an$ /e can get matri4 P>
0-34 ! P E 0-HF 8 0-0FF 0-0067 0-0H8! 0-74 0-643 0-H 0-3HF 0-87 0-6064 0-00! 0-3 7! 0-HH38 0-0F 7 0-004 0-F743 0-!06F 0-03!3 0-703! 0-0 4H 0-40FF 0-H6H3 0-0FF

*ccor$ing to the formula , /e /ill get the entro#y value ej of each target>

e E [ 0-80!7 g E [6-!4HH W E [ 0-0F0

0-!644

0-7033

0-366

0-86!3

0-480H

0-34H

0-8!3

Then /e can calculate the coefficient of variation gj of each target by formula >

4-

4! 6-60F6 3-!07! 6-!366

!-086!

!-873H 6-!64!] 0-0 88]

*fter that /e can get the /eight Wj of each target through the formula >

0-! 43

0-0 !F

0-6867

0-0 78

0-66F7

0 -6 4

0inally by using the /ay of formula /e can com#ute the evaluation of the contribution of each com#any to the synergy effect>

V6 E 0-!H

V! E 0-4!68 V3 E 0-3!6

*ccor$ing to this result /e can conclu$e that> the contribution rate of the %6 com#any to the synergy effect is !H- G, the %! com#anyLs is 4!-68G an$ the L com#anyLs is 3!-6 G- The com#any coul$ $istribute the synergy income accor$ing to this result- This $istribution #lan can encourage the com#anies #artici#ating in the )'* sharing resources for future synergy effect income/. Conc!usion 0airly $istributing the income originating from the synergy effect is im#ortant to the reali&ation of the synergy effect after )'*- ?istributing the synergy income can encourage the collaboration among the com#anies #artici#ating in the )'*- But it is $ifficult to evaluate the contribution of these com#anies to the reali&ation of the synergy effect, for the form of the synergy effect is various an$ there are lots of %uantitative $ata an$ %ualitative $ata $uring the evaluation #rocess- .n this #a#er through the a##earance of the synergy effect /e buil$ u# the synergy effect contribution evaluation system an$ the synergy effect contribution evaluation mo$el base$ on entro#y metho$By this mo$el, the com#anies can not only evaluate the contribution of the com#anies #artici#ating in the )'* to the reali&ation of the synergy effect consi$ering each %uantitative $ata an$ %ualitative $ata, but also use it to fin$ the $eficiency in the collaboration for these com#anies an$ enhance the synergy $egree among them by it*lthough the entro#y metho$ can reflect information effectiveness of the targets, it can not su##ly the information about the relationshi# among these targets- ?uring the #rocess of synergy effect contribution evaluation there are some targets that have relationshi# /ith each other- Then it is im#ossible to sho/ these relationshi#s 9ust accor$ing to the change $egree of the target itselfTherefore it is necessary to use other evaluation metho$ to mo$ify the result calculate$ by the entro#y metho$ in or$er to reflect this ,in$ of relationshi#- This is a #roblem that is /orthy to research in the futureeferences
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