7. Managing IS integration in four M&As at Trelleborg AB
7.3 Case B: Dynaflex
The second case in this empirical account further elaborates upon the first case. The purchase of Kléber/CMP led to the creation of the TIH unit. This second case was a purchase by the consolidated TIH unit and this second case tells the story of how TIH acquired and integrated the highly niched company Dynaflex.
The small hose manufacturer Dynaflex with production facilities in Sancheville, France, addressed a small niche of the hose industry with focus on products for the oil and petrochemical industry.
Dynaflex produced, and still produces, hose in composite materials.
Typical applications were tanker-truck hose, aviation-fuel hose and hose for aggressive chemicals. The unit was considered technologically relatively advanced and specialized. Dynaflex has had a relatively turbulent life since its foundation. Former Dynaflex employees decided in the late 1990’s to set up their own manufacturing line and become one of Dynaflex’s major competitors in the new company Unifluid.
Unifluid was acquired by Trelleborg AB in 2003 and the Trelleborg representative saw the potential of joining the former colleagues of Dynaflex and Unifluid under the same roof in the Trelleborg family.
Organizationally, the acquisition was driven by the Trelleborg
Industrial Hose-unit - the unit created after the purchase of Kléber/CMP. Figure 7.4 displays the organizational progression of Trelleborg, Dynaflex and Unifluid.
The universe of European hose-manufacturers is fairly graspable with a limited number of producers. The different actors are no strangers to each others. At the time of 2004, Dynaflex was owned by the Italian industry group, Manuli, and although a successful operation, not at the group’s core business at Manuli. For various reasons, further elaborated upon later in this case description, Trelleborg and Manuli agreed that the business could be further developed by Trelleborg and the deal was settled in March 2004.
Compared to the previously described M&A and integration of Kléber, this case presents a fundamentally different story, not the least because of the fact that the desired level of IS integration was achieved after 3 months – not 10 years. The story, just as in the previous case, depicts using the framework for IS integration in M&A.
7.3.1 Dimension A: Synergetic potential
As mentioned, Trelleborg (represented by the TIH unit) and Dynaflex were both in the hose manufacturing business and geographically close to each other with major production and managerial centers in the middle of France. The market was somewhat overlapping in
Figure 7.4 The organizational progression of Dynaflex, TIH and Unifluid
geographical terms, but the bases of customers and products were mostly different. Whereas TIH had a wider range of hose offerings, Dynaflex was a smaller niche player specialized in composite hoses for the oil and petro-chemical industry.
At the point when the deal was struck Trelleborg did only buy products from Dynaflex. Now both sides are both buyers and sellers of products to one another. There were no competing products. Or, as we bought Unfluid there was, but this more or less a part of the Dynaflex case (BM, 061120).
The aim was not to acquire a company that was already full flourished and working well but rather to see future potential and to develop the company and introduce its products in new countries.
For example we have introduced Dynaflex products in the U.K.
where Dynaflex previously did not have any business (AG, 061213).
In order to produce this composite hoses, Dynaflex could potentially use hose manufactured by TIH, but this was not the actual case. TIH was also a potential customer of Dynaflex products as to complement their own offering towards their customers.
Dynaflex had two activities. One was manufacturing of hose. Another was assembly, to take other types of hose that they bought from elsewhere and prepare them for use at gas stations. In this activity they could have used Trelleborg hoses but were not doing that. There we did see a potential (BM, 061120).
With the purchase of the Dynaflex spinoff Unifluid, TIH had products directly overlapping with the ones of Dynaflex. In specific terms, Dynaflex had two production lines and the Unifluid one that basically could be used to produce the same products. The M&A thus included aspects of both vertical, market and product concentric acquisition.
Vertical in that Dynaflex was a potential buyer of TIH’s products.
Market concentric as TIH, it did offer products on the same market, although not directly competing. Product concentric as the recently acquired Unifluid unit and Dynaflex did have overlapping product portfolios that could be produced with the same procedures. There was thus a great range of synergetic potentials that logically should be possible to leverage. Synergies that were not possible between Dynaflex and its former owner, the Manuli group.
Manuli was not specialized in composite-hose. Their specialty is hydraulic hose. Basically, within the hose business these are two different markets. Hydraulic hoses are for high pressure application and composite hose is for low and medium pressure. Manuli is focused on the first type and Trelleborg on the second type.
Unifluid was already in the realm of Trelleborg and that Dynaflex was a large customer of Trelleborg. Dynaflex was not really put up for sale. It was more like there were discussions and consensus that joining Dynaflex with Trelleborg could be a good way of developing the business of Dynaflex (BM, 061120).
Unifluid was purchased based on the premise that the Dynaflex unit should be possible to acquire. The deal would not have been settled otherwise. By combining the two units TIH managed to produce the same quantity of products using only two production lines instead of the previous three. The third line that became redundant was used in a joint venture initiative and shipped to China. Apart from the production economies, technical economies could also be achieved through the combination of sales organizations, as the offerings complemented each other. Regarding banking and compensation, as Dynaflex was a small unit (with only some 20 employees), the increase in size was not substantial enough to affect these economies. From a Dynaflex perspective, the unit was leaving one large industrial group, Manuli, to join another, Trelleborg, and thus did not see any extraordinary effects in banking or compensation economies.
No, there was not foreseen synergies in financial areas. In terms of size, Dynaflex was a very small unit. The size increase had very little impact on our business units. The reason was to be able to specialize in this particular business segment. We got access to a new product segment.(BM, 061120)
The same can be said about pecuniary economies – the change in size was not large enough to trigger pecuniary effects. Neither diversification economies were a source of synergy: TIH, Unifluid, and Dynaflex were all active in the hose market that must, by logic behind diversification economies, be considered as the very same market.
However, the companies had somewhat distinct positions on that market with Dynaflex in terms of portfolio management extending the product range into areas of great potential for the future.
The fact that the purchases of Unifluid and Dynaflex to some extent were vertical M&As, where TIH acquired potential customers should enable scheduling economies. Vertical economies was reached in the sense that Dynaflex increased their use of TIH products, but scheduling economies was not neither mentioned as the driving force behind the purchase decision, nor in retrospection evaluating the synergies reached.
7.3.2 Dimension B: Organizational integration
TIH enhanced its product palette and became both internal supplier and buyer of Dynaflex’ products after the purchase. By consolidating Unifluid and Dynaflex, TIH expected some technical economies in the production activity and by integrating the sales departments, invoicing would be handled centrally by TIH. Unifluid was originally a break out of people formerly employed by Dynaflex. From their perspective, the integration became a type of absorption, and a small number of employees chose not to join the combined unit. From the Dynaflex perspective, the integration more resembled a preservation.
Overall integration has been with Unifluid and Dynaflex with the help of Trelleborg. Not between Trelleborg and Dynaflex.(BM, 061120).
The joining was made in the way that Trelleborg bought Dynaflex in march 2004. At that point it was directly decided to consolidate the physical spaces, moving everything to Unifluid’s old premises. Their premises were considered more appropriate for the business. It was also decided to make one legal entity out of Unifluid and Dynaflex.
Immediately after the deal was finalized the two became ’Trelleborg Dynaflex’ (BM, 061120).
Dynaflex was bought by reason of having an interesting range of products and a functional organization to manufacture these products.
The overall objective was thus to enable development of the units business, for example, introducing the products to new markets where Trelleborg already had a strong foothold, as in the UK. As such, the core operations of the Dynaflex unit were left rather undisturbed and the integration could be categorized as a preservation.
Dynaflex still has an extensive autonomy. They are still a small unit with one person responsible and reporting to our financial manager.
They function as a small individual company. That was a strong desire from the Trelleborg side that they would continue to operate in this way, being quick to respond and flexible. Because, this already worked well and we had no desire to absorb them into the big unit that was located in Clermont-Ferrand (BM, 061120).
With the core operations left largely undisturbed, integration focused on integration of functional activities, for example, supervision and management. These functional activities were primarily linked through pooled relations with information flowing in one direction and only limited dependency.
7.3.3 Dimension C: Intention & Reactions
The Dynaflex acquisition was managed by TIH’s sales department, and the main person in charge was the sales director. According to the interviews conducted, Dynaflex did not need this deal for financial reasons, but mainly wanted the deal out of organizational reasons. The deal was wanted by both sides, and both sides could see advantages in working together under one roof.
Trelleborg already had contacts with Dynaflex and the deal was based on a shared view that it would benefit the business to join activities. I would categorize the deal as a collaboration, it was not an aggressive takeover or anything like that. People knew each other and saw a potential. (BM, 061120)
The takeover was perceived as positive, and there were no other plans to associate with other companies in case the deal with Trelleborg would not be successfully accomplished. In the interviews it became clear that the company was not put up for sale which further strengthens the argument that the decision evolved mutually and was wanted by both sides. The fundamentally positive approach was manifested it the adoption of the new IS:
Employees were positive to learning the new system. That is critical, because it is the employees that use the system in the end. If they don’t want to learn it does not matter what you do, it does not work.
It has been a huge focus on training during the project, on to make
the user like and use the system. This also worked very well at Dynaflex. Everybody learnt very fast. They were told that in two months you will be working with this system. […] I left the site two weeks after the go live and at that time they managed to work in the system themselves. Of course some support via mail or phone, but essentially on their own. (BM, 061120)
Trelleborg were quick to secure important key persons at Dynaflex. A few employees did not want to join Trelleborg and they left the company. After the consolidation with Unifluid some positions in the new company were double staffed which meant that some persons had to leave the company. A few people also left because they would find it hard to once again cooperate with their former colleagues.
For them [Dynaflex employees], it kind of made sense. They already belonged to another industrial group, but were not part of their core activity. It was more logic that they would be with us than with Manuli. Therefore, the view was fundamentally positive. It made sense to everyone. But… we joined two organizations in new facilities so… sure, some people left us. At some positions there was double staffing. But it was not many that left. (BM, 061120)
We were really quick to secure key persons at Dynaflex, some people did not want to join us and they had to leave. But basically at the time when the IS integration was finished, the working team at Dynaflex was also ready. (AG, 061213)
These persons were engaged at the management level. During and after the organizational integration there were no developments leading to conflicts inside the unit or between the unit and the Trelleborg group.
There occurred a transfer of personnel from Trelleborg to the newly acquired unit in the case of the general manager/chief executive officer and also head of production which were installed by Trelleborg with internal personnel. There was nobody transferred from Dynaflex to the Trelleborg group. Employees felt part of their new company, the Trelleborg group, as they were precociously informed about the situation and its effects. They were included organizationally at an early stage in the integration and were fully granted information regarding their concerns which helped to be comfortable with the new situation.
Directly they were given the information that even though the should be a part of the Trelleborg group, Trelleborg expected them to stay
within their niche. Being autonomic and flexible. Not putting to much bureaucracy. (BM, 061120)
7.3.4 Dimension D: IS Ecology
The choice of what should be integrated and not was in the Dynaflex case most often decided upon by pure cost calculations as the desired integration was preservation. However, the management wanted visibility, and information level integration served as a precondition when discussing integration alternatives.
As we bought Dynaflex we knew that we had to replace there IS.
Manuli used JD Edwards. It was negotiated that Dynaflex was allowed to use the systems until September [6 months after the deal].
At the end of September Manuli would close the channel to their JD Edwards. Because of that we knew already as the deal was struck that from September 2004 Dynaflex would not have any ERP-system.
The dirrent parts of the IS Ecology were affected as foolows:
Infrastructure – Group-wide standards were, as explained earlier, rare in the Trelleborg Group. However, some did exist on the infrastructural level, and when integrated with TIH, Dynaflex automatically derived this set of standards that included security settings, email, network, and intranet solutions.
Transaction –Transaction IS was integrated enterprise-wide with the choice of extending the existing ERP system. TIH wanted one common invoicing and sales organization and made Dynaflex provide the input for such a solution by inputting production volumes and processing orders from the Movex system. However, the integration was not completely automated, as the production processes remained an isolated island.
Information – In order to develop the business of Dynaflex, the outspoken reason for the acquisition, managers wanted control over the business and full transparency activities. This was reached by introducing the supporting sales and administrative procedures of the TIH Movex system to Dynaflex.
Strategic – Neither TIH nor Dynaflex regarded IS as a strategic resource and had no strategic systems to integrate.
7.3.5 Dimension E: Integration Architecture
One week before the contract was to be signed the IT department of Trelleborg Industrial Hose was approached and told that the current owner of Dynaflex was going to continue to support and keep alive the current IS for only six months more. In March, 2004, the contract was signed and the deadline for the IT department to integrate the old system at Dynaflex into Trelleborg Industrial Hose’s Movex ERP system was set to September, 2004. This was not a choice but part of the M&A deal as the unit could not continue operating the former owner’s ERP system, JD. Edwards. The project team consisted of the chief executive of IS and operations, one IT manager, two junior IS managers, and occasional external IT consultants.
We knew that we needed to do something. Then it was the question of what, there was different alternatives… should we install a system only for them, should we not install any system at all… or should we integrate them into the system that we already have… Because of the time aspect, there were not many options. We used what we had already. (BM, 061120)
As the Dynaflex unit was using the ERP system of another company there was never a choice whether to do something or not, the system had to be replaced. The new management had basically three choices, either to implement the ERP system which had been implemented nearly throughout Europe, to implement part of this ERP system, or to do nothing. The last option was excluded quite quickly as some form of IS was necessary for the new unit. After a two day visit to the site the decision was taken to keep the production related IS, since it was deemed costly to replace, was functioning well, and no synergies (except for system maintenance cost) could be gained by a switch.
The sales department did not want to implement a too complex IS since Dynaflex at the time was a small, efficient and flexible company and if we would have implemented the full Movex package with all modules we would have destroyed this flexibility. (AG, 061213)
Project plans, milestones and time frames were made in order to manage the system integration. As the Trelleborg group already had implemented the Movex system in many other European sites, they had
experience from this work and were able to profit from this fact in the Dynaflex unit.
We had been the same team for 3-4 years. We knew what had worked before. That was why they asked me. I had actually left France at that time, but since I was operational immediately they wanted me. The same was true for Isabelle. We could both use our previous knowledge. (BM, 061120)
The project team was confident that the given time frame for the integration was sufficient because at that time Trelleborg Industrial Hose was in a process where they had already integrated seven other national units into their Movex system which was used to manage the entire business. When integrating the other national units, the scope was around 500 persons, compared to Dynaflex which had a personnel of 20 persons. Also, the sales department did not want to implement a too complex IS since Dynaflex at the time was a small, efficient and flexible company, and if the full Movex package with all modules would have been implemented, it would have destroyed this flexibility.
Another aspect was that TIH only had an interest in visibility of finished products which meant that processes like finance, sales and logistics were implemented and not the complete production module.
According to the interviewees, the production module would have been the most complex one to implement in a new IS.
We only created a new financial unit and a new company so that they would have their own databases and invoices. The management can see about everything instantly as they are in the same Movex system.
The first step in the IS integration implementation was to send two people from Trelleborg to the site in France in order to get an overview of the situation and the processes being employed in the company in particular. In this first assessment a list of processes was created which would be necessary to implement in the Movex system. This was done in just two days and after this visit to the site, management decided to implement part of the European wide system, excluding most of the production planning in order to keep the flexibility wanted for the unit.
This meant that workers reported in the system what had been produced and what input material had been used to do that.