A Case Study on Financial Control Power of Corporate Merger

ORIENT ACADEMIC FORUM
A Case Study on Financial Control Power of Corporate Merger
HOU Huaqing1, XU Biao2
1. Gezhouba Group Machinery & Ship Co., Ltd. of China, P.R.China, 443002
2. College of Economics and Management, China Three Gorges University, P.R.China, 443002
[email protected]
Abstract: In order to analyze the Financial Control Power (FCP) of corporate mergers well, this paper
mainly uses the case study method. In the course of this paper’s writing, FCP’s concept firstly discussed
and redefined. Secondly this paper introduces the FCP’s present research status. Subsequently, the brief
introduction of the case company, namely Gezhouba Explosive Co. Ltd. (GZBE Company), is
introduced, as well as its merger model concluded from its mergers in recent years. Fourthly, the FCP
configuration of GZBE Company’s mergers is presented. Fifthly, this paper focuses on introducing the
successful experiences of GZBE Company’s FCP configuration. Lastly, this paper demonstrates the
importance of corporate business platform in the FCP’s configuration.
Keywords: Corporate Merger, Financial Control, Business Platform, Case Study
1 Introduction
Different scholars hold different viewpoints on the concept of FCP. Wu Dongcai (2004) believed that
FCP is the financial control subjects’ power that can make company capital chain move along the goal
of company financial value maximization [1]. Yang Qingxiang and Zhang Jin (2005) believed that FCP is
mainly reflected as the voting right of financial decisions, and it is the right that can influence and
supervise the corporate financial decisions [2]. Chen Yiqiang (2007) believed that FCP, based on the
shares with the voting right owned through the direct or indirect ways, is the right of decision-making
and supervising of all important financial affairs in corporates [3]. In our opinion, the first concept
doesn’t expound FCP, the second one isn’t comprehensive and the last one doesn’t elaborate on FCP.
Based on the above analysis, we believe that FCP, resulting from the ownership identity, laws, and
contracts etc., refers to the financial control subjects’ decision-making right, enforcement power and
supervisory right of accounting, financial management and capital budget etc. in companies. FCP
includes the vertical control and supervisory relationships in the company, like the one between the
parent company and its subsidiary companies, as well as some external stakeholders’ supervisory and
influence on the company.
More and more scholars have been doing researches on FCP in recent years, and the following aspects
also have been studied: (a) FCP’s definition, classification, characteristics, principles, measurement,
goals, mechanism, model of distribution, theoretical basis and functions etc.; (b) the relationship
between FCP’s configuration and corporate performance; (c) FCP’s present configuration status and the
main existing problems of China’s enterprise groups; (d) the international comparisons, involving the
FCP of America, Japan, German and Korean etc.. Meanwhile, the above researches involve newspaper
industry, military academy, electrical apparatus industry and steel industry and so on. And the research
methods include literature induction, empirical research, case analysis and model construction. However,
the problem of FCP in corporate merger hasn’t been concerned, although there are so many research
achievements mentioned above, which brings this paper.
2 Case Company Mergers’ FCP Configuration
2.1 Introduction of Case Company
In this paper, we will focus on analyzing the FCP of GZBE Company, a successful company that has
done well in the configuration of FCP in its mergers. GZBE Company is one holding subsidiary
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company of China Gezhouba Group Co. Ltd. (GZBG Company), with 70 percent of the whole shares,
and the remaining 30 percent belong to the senior executives of GZBE Company. GZBE Company is a
professional company that embodies the production, sale, engineering blasting service of civil explosive
materials into one body. From 2002 to 2008, GZBE Company has successively recombined and
integrated 5 civil explosive production companies, as well as holding and stock-participating tens of
civil explosive circulation companies. Before these mergers in recent years, GZBE Company is a small
company out of the first-class companies in this industry; however, after these mergers, it becomes the
first one from the angle of production scale in about 2 or 3 years.
2.2 Merger Mode of Case Company
Because of the limitation of national policies or actual situations, GZBE Company has always to accept
all staff of the acquired companies. Generally, GZBE Company only sends 2 persons (i.e. the chief
accountant and vice production general manager) to the acquired company, as well as one whole set of
corporate system. Sometimes, GZBE Company’s headquarters will send a general manger to the
acquired company if the situation permits. And then the 2 or 3 persons, being sent by the headquarters,
will begin to integrate, manage and control the acquired company to enhance the company’s
performance, the level of corporate system and culture, as is shown in Figure1. According to our
investigation and researches, about 2 or 3 years, the acquired company’s performance, system and
culture will move up to a higher level.
Figure 1 Merger Model of GZBE Company
2.3 FCP Configuration of Case Company’s Mergers
GZBE Company always pays particular attention to its FCP configuration, which is the main reason
why the chief accountant is the first one being sent to the acquired company. In the integration and
merging of the acquired companies, the FCP configuration is mainly embodied by the following aspects:
(a) Decision-making Right: GZBE Company tends to adopt the centralized model in its business
decision-making, and all the important decisions of the subsidiary companies must pass the application
& endorsement process; (b) Enforcement Power: Most decisions, made by the headquarters of GZBE
Company, are enforced and implemented by the subsidiary companies, and some important and complex
ones will be implemented through the co-operation of GZBE Company and its subsidiary companies; (c)
Supervisory Right: GZBE Company also pays more attention to the supervision to its subsidiary
companies. GZBE Company has a set of unified financial software, and it can also control the computer
server of the subsidiary companies’ financial computerization system. Moreover, all companies in
GZBE Company use the online-baking system, which can improve the work efficiency, as well as
strengthening the supervision of subsidiary companies’ capital. GZBE Company’s headquarters now can
easily look into any accounting treatment and entry of its subsidiary companies wherever and whenever.
3 Successful Experiences of Case Company’s FCP Configuration
3.1 Employee Motivation
We all know that the FCP configuration isn’t just the financial staff’s job, and it should be cared by all
the employees. Thus it’s of great importance to think out many measures to incent the employee well,
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which will be beneficial to companies’ financial work, as well as the FCP configuration. GZBE
Company had noticed the great value and significance of the employee motivation many years before.
And luckily, it also found out the useful and suitable ways to incent the senior executives and ordinary
staff respectively.
3.1.1 Senior Executives
GZBE Company is one subsidiary company of GZBG Company. Therefore, the senior executives of
GZBE Company also need to be incented, which is implemented by GZBG Company’s headquarters
through the stock incentive. As is mentioned above, GZBG Company’s headquarters enjoy 70 percent of
GZBE Company’s whole shares. And the remaining 30 percent ones belong to the senior executives of
GZBE Company. There are about 9 senior executives in GZBE Company. That’s to say, these 9 senior
executives enjoy 30 percent shares of GZBE Company. Through this stock incentive method, the
benefits of both GZBG Company’s headquarters and GZBE Company’s senior executives are firmly tied
together. So any behavior that will damage GZBE Company’s benefits will weaken the benefits of the
two parties mentioned above, which will definitely be stopped by them. Besides the stock incentive,
GZBG Company also uses some measures about spiritual motivation to strengthen the loyalism and
hard-work of GZBE Company’s senior executives. Most of the senior executives have worked in GZBE
Company for many years, which have made the senior executives form a very deep feeling to the
company. Obviously, this strong feeling will be very helpful to make these senior executives spare no
pains and effort to struggle for the company.
Because of the guidance and help of GZBG Company, GZBE Company also emphasizes the incentive
and motivation of the senior executives of its subsidiary companies. In material motivation, GZBE
Company selects much more flexible and easy-operating way, Annual Salary System, to incent the
senior executives of its subsidiary companies. In the spiritual motivation, GZBE Company tends to
adopt the training ways, as well as establishing a business platform for senior executives that can help
these executives to realize their value and significance of their career life. Apparently, all of these
measures will form mutual supervision in the subsidiary company, which can ensure the FCP be
configured well.
3.1.2 Ordinary Staff
As for the ordinary staff, GZBE Company uses the following ways to incent them: (a) Improving Wage.
For the ordinary staff, this may be the most useful way to incent them. Recently, GZBE Company has
improved the wages of its ordinary staff, which is obviously much higher than before. Of course, this
measure has been incenting the ordinary staff heavily. (b) Emphasizing Training. The second biggest
hope of ordinary staff may be to improve their abilities and get higher and higher positions. Therefore,
the problem, whether there are enough trainings and opportunities in the company, will be important for
them. So improving more training chances may be a very good way to incent the ordinary staff, which is
why GZBE Company succeeded to incent its ordinary staff through this way. (c) Business Platform. In
recent years, GZBE Company has been developing very fast, which results in more and more vacant
positions for the employees. This situation can enhance the ordinary staff’s confidence of staying in the
company and working hard to get higher positions, more salary and better future, which of course can
incent the ordinary staff better.
3.2 Business First
Business-first is one important character and principle of the FCP configuration of GZBE Company.
GZBE Company has been thinking much of its business, production and operation. Indeed, GZBE
Company has merged 5 civil explosive production companies, as well as holding and stock-participating
tens of civil explosive circulation companies. And obviously, the speed of its merger and development is
too fast compared with the general companies’ mergers. However, GZBE Company has succeeded in its
merger and integration of the acquired companies, which not only makes the whole corporate scale
become the first one in its industry, but also heavily improves the company’s performance and future
development space. And the most important reason for this is that the mergers of GZBE Company
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belong to the same industry, which is guided by the business-first principle. On the one hand, this
principle points out the merger direction, which can ensure the rightness of merger direction’s
decision-making; on the other hand, this principle also clarifies the important part and essence of the
company’s financial work, as well as the guidance of its FCP configuration.
3.3 Financial System
As is shown in Figure 1, besides the chief accountant and vice production general manager, sometimes
plus the general manger, there is another important thing being sent to the acquired company, and this
thing is the whole set of corporate system of GZBE Company. From the merger model of GZBE
Company, we can infer that this whole set corporate system must play a very important role in
integration and merger of the acquired company. Of course, the FCP is also configured well with the
implementation of the whole set corporate system. Thus, we can know that GZBE Company always
attaches much importance to the construction and perfection of its corporate system. Otherwise, on the
one hand, GZBE can’t take out one whole set of corporate system, which definitely attributes the access
to the accumulation and conclusion of its daily working experiences and lessons; on the other hand,
GZBE Company can’t succeed in the integration and merger of the acquired company just with 2 or 3
persons plus this set of corporate system. Therefore, companies should lay much store by the corporate
system’s accumulation, perfection and implementation.
3.4 Financial Culture
According to our interviews with GZBE Company’s senior executives, middle-level managers and
ordinary staff, we found that there is a very strong kind of working atmosphere in the financial
departments of GZBE Company. In other words, GZBE Company has cultivated its financial culture in
the company. Because of this reason, during the past 10 years, only 4 financial staff left GZBE Company,
although the company’s salary isn’t the highest in its areas. This phenomenon can be little short of a
miracle compared with the other phenomenon that nearly half of college-student employees will leave
the company in their first year in other departments of the same GZBG Company. In so far as we can see,
the cultivating and forming of this financial culture is mainly because of the strong leadership styles and
culture of GZBE Company’s senior executives, which results from the stock incentives of GZBG
Company’s headquarters. Of course, good financial culture is helpful to realize the FCP configuration of
GZBE Company. Therefore, companies should pay more attention to the corporate culture construction.
3.5 Talent Mechanism
From the introduction mentioned above, we know that the chief accountant, as well as the vice
production general manager and general manager, play a very important role in the company’s FCP
configuration. GZBE Company once bought out a small company with 262 work staff. We can imagine
that 2 or 3 persons get into a company with 262 workers, as well as poor performance and management
level. And after 2 or 3 years, the 2 or 3 persons nearly make a new subsidiary company whose
performance, system and culture are much higher than before, which of course is little short of another
miracle. Obviously, these 2 or 3 persons play the greatest role in this transformation of the acquired
company. Therefore, as for the FCP configuration, how to select a suitable chief accountant becomes the
greatest problem. Luckily, GZBE Company has this kind of talent mechanism to help them to choose the
right candidates for the acquired company. In fact, GZBE Company has been attaching much weight to
its financial staff’s training and education. Any financial staff of GZBE Company has to start its
financial work from the cashier position for about one year. And then he or she also has to be an
ordinary accountant for about one year. In a new financial employee’s first two years in the company,
there is a master for him or her. After these two years, financial workers will be arranged to different
positions according to their abilities. In accordance to our investigation, a new financial employee needs
about 10 years to become a chief accountant. Besides those processes, GZBE Company also emphasizes
work staff’s training as is mentioned above, which ensures the high abilities and level of GZBE
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Company’s financial staff. Therefore, thanks to this talent mechanism, GZBE Company can find out the
best and right persons to the acquired company, which can make sure the FCP’s best configuration.
3.6 Supervisory Management
As we just mentioned, GZBE Company only sends 2 or 3 persons to the acquired company. We can also
imagine that, there may be many behaviors and affairs happened in the subsidiary company if there is no
supervision. Fortunately, as is mentioned before, GZBE Company has a set of unified financial software,
and it can also control the computer server of the subsidiary companies’ financial computerization
system. Furthermore, all companies in GZBE Company use the online-baking system, which can
improve the work efficiency, as well as strengthening the supervision of subsidiary companies’ capital.
GZBE Company’s headquarters now can easily look into any accounting treatment and entry of its
subsidiary companies wherever and whenever. All of this useful measures and advanced technical
equipment can ensure all of the subsidiary company go better and better. And of course, the supervisory
right of FCP can also be well implemented.
4 Conclusion
In order to complete this paper better, we have investigated GZBE Company and GZBG Company many
times, and the investigated departments includes the financial department, audit department, corporate
culture department and so on. Of course, we also researched GZBE Company’s five mergers carefully
and closely. During the investigations and researches, all of us can see the success of GZBE Company’s
great merger, which enhances our confidence to figure out the most important essence of these
successful mergers. Through our analysis, discussions and reflections, we found out the most important
reason for these successful mergers is the corporate culture of GZBE Company. All people in GZBE
Company regard the company as their business platform, some senior executives and old workers even
as the life platform. Therefore, all of these people are willing to spare no effort to struggle for GZBE
Company: the company headquarters will do their best to implement their decision-making right well,
the senior executives also will pay more attention to using their less decision-making right and
enforcement power well, and the ordinary staff of course will try their best to carry out the made
decisions. And for themselves, all of these people will instinctively protect their business platform
the acquired company, as is shown in Figure 2, which of course can make FCP be configured better and
better, as well as ensure the company a great and bright future.
——
Figure 2 Business Platform Model of FCP Configuration in Mergers
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References
[1]. Wu Dongcai. Exploration and Analysis on Distribution of Financial Control Power of Enterprise
Group. Prices Monthly. 12(2004), 40-41(in Chinese)
[2]. Yang Qingxiang,Zhang Jin. Perspective of Configuration of Corporate Financial Control Power
from the Stakeholder Theory. Social Sience in Hubei. 5(2005), 85-87(in Chinese)
[3]. Chen Yiqiang. Looking at the Financial Control Right of Listed Companies from Financial
Government Structure. Communication of Finance and Accounting (Academy Version). 12(2007),
77-79(in Chinese)
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