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\begin{document}

\title{MERGERS \& ACQUISITIONS IN ELEVATOR INDUSTRY: THE ROLE OF ICTs TO AVOID
INFORMATION ASYMMETRY}



\author[1]{Juan de la Guardia}%
\author[2]{Miguel Palacios}%
\author[1]{Ricardo Zurdo}%
\affil[1]{Universidad San Pablo CEU}%
\affil[2]{ESCP Business School - Madrid Campus}%


\vspace{-1em}



  
  \date{May 28, 2024}


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\selectlanguage{english}
\begin{abstract}
Mergers and Acquisitions operations continues to be one of the most
explored growth strategies globally in all markets, and also in the
Elevator Industry. Volume of investments grows year after year. It is
the fastest way to grow in international and domestic markets, but the
reality is that a high percentage of the operations carried out do not
meet the expectations of the investors when the integration phase,
called the post-acquisition phase, has been completed. There are several
causes of failures on mergers and acquisitions processes, such as lack
of commitment from the management, unrealistic business plan, cultural
shock, etc \ldots{} But the most common and the one with the highest
risk in an acquisition decision, is the asymmetry of information. During
the negotiation phase a large amount of data is collected, and
subsequently analyzed during the Due Diligence period, but does not
correspond to reality during the integration phase. That is, the
information that the seller has provided, and has been studied and
analyzed to take a decision of acquire by investors, has not been the
real and complete one. In this article we will propose how the asymmetry
information can be avoided by the application of Information and
Communication Technology (ICT) through the IoT of the elevators. Same
can be applied to other industries.%
\end{abstract}%



\sloppy


\textbf{MERGERS \& ACQUISITIONS IN ELEVATOR INDUSTRY: THE ROLE OF ICTs
TO AVOID INFORMATION ASYMMETRY}

\textbf{Corresponding Author:}

Juan de la Guardia Garc\selectlanguage{ngerman}ía-Lomas

\emph{juan.dlg@hotmail.com}

PhD Student at CEINDO

Universidad CEU San Pablo

CEU Universities

PhD Miguel Palacios.

Associate Dean Executive Education.

ESCP Business School

PhD Ricardo Palomo Zurdo

Dean

Professor of Finance

School of Business and Economics

Universidad CEU San Pablo

CEU Universities

\emph{SUMMARY}

Mergers and Acquisitions operations continues to be one of the most
explored growth strategies globally in all markets, and also in the
Elevator Industry. Volume of investments grows year after year. It is
the fastest way to grow in international and domestic markets, but the
reality is that a high percentage of the operations carried out do not
meet the expectations of the investors when the integration phase,
called the post-acquisition phase, has been completed. There are several
causes of failures on mergers and acquisitions processes, such as lack
of commitment from the management, unrealistic business plan, cultural
shock, etc \ldots{} But the most common and the one with the highest
risk in an acquisition decision, is the asymmetry of information. During
the negotiation phase a large amount of data is collected, and
subsequently analyzed during the Due Diligence period, but does not
correspond to reality during the integration phase. That is, the
information that the seller has provided, and has been studied and
analyzed to take a decision of acquire by investors, has not been the
real and complete one. In this article we will propose how the asymmetry
information can be avoided by the application of Information and
Communication Technology (ICT) through the IoT of the elevators. Same
can be applied to other industries.

\emph{Keywords} : IoT, IT Due Diligence, ICTs, Digital Strategy,
Information Asymmetry, Adverse selection, M\&A Performance, M\&A
Success.

INTRODUCTION

In the Elevator segment of all markets, historically there has been a
lot of activity in Mergers and Acquisitions (hereinafter M\&A) between
companies of different sizes to accelerate strategic growth in some
international markets, or just in domestic markets. The challenge is to
be present in areas where the presence of the buyer is small or just
non-existent. The operations consist of the purchase of a company that
has maintenance service contracts for Elevators, and Escalators
(hereinafter E\&E), or simply the purchase of the portfolio of
maintenance service contracts for said E\&E.

These M\&A processes between E\&E maintenance service companies are led
by multinational manufacturing companies. As a general rule, the
candidates to be acquired are local companies that, for the most part,
still work without a defined digital strategy and with a much simpler
quality management system than multinational companies. They use
incomplete or poor procedures with a work methodology based on
experience, such as: ``This is how we have always done it'', which is
not enough for obtaining, processing, and analyzing subsequently, the
information. In the M\&A processes between E\&E maintenance companies of
different sizes, the calculations and premises used by multinational
companies to evaluate the suitable candidates to be acquired, are
therefore, based on experiences and Excel-type spreadsheets. The data
provided by the selected candidate may differ from reality, causing that
M\&A projects that seemed to be beneficial in the pre-acquisition phase,
to be a failure in the integration, as we have already studied, damaging
the ``Profits \& Losses'' accounts and the brand value of the purchasing
companies. That is, they are based on subjective criteria that cause an
overestimation of returns and an incorrect business plan due to
asymmetric information obtained, that does not is adjusted to reality
(Akerlof, 2001).

Why is there asymmetric information? Because the data used for the
analysis and case study in the pre-acquisition stage, have not been
obtained, treated, and processed correctly due to the simple digital
tools that the candidate to be acquired has. When an M\&A operation
happens between different sized E\&E maintenance companies that have
different digital strategies, the information asymmetry is the most
important source of failure.

BACKGROUND

Currently, mergers and acquisitions processes are growing significantly
around the world (Cartwright \& Schoenberg, 2006). As an example, in
2004 there were 30,000 M\&A operations in a global level, equivalent to
1 operation every 18 minutes. However, despite the growth it means,
investors continue to experience low returns in the months following to
integration. For investors, the return on investment is still highly
questionable. For the authors Cartwright and Schoenberg, there are
fundamentally three reasons that cause this poor performance: The first
, that managers make decisions that do not maximize the value of the
operation, the second that academic research has not yet reached the
joint of investors and they are not totally aware about many lessons
learned from operations already carried out, and the third and last,
that the investigation of the causes that produce the failures is not
yet complete.

\par\null

Other authors who investigate the factors that motivate M\&A operations
as well, (Calipha, Tarba \&Brock, 2010), affirm that the success rate of
M\&A operations is below 50\%. There is a lot of information and
research on M\&A processes that allows us to analyze what has been
learned so far from the pre-acquisition and post-acquisition phases, and
what is not yet known. The factors that motivate M\&A operations can be,
among others, the entry into new markets, the acquisition of resources
and talent, or simply the application of synergies. In the research of
the aforementioned authors, the phases, reasons and success factors of
the M\&A processes are addressed, and it is shown that the operations
have grown and are growing drastically in the United States, Europe, and
globally in the World as we already mentioned, but still with low
performance rates. In a survey (Accenture and Economist Intelligence
Unit, 2006) to Executives of companies involved in M\&A operations, the
following responses were obtained: 47\% answered that the causes of
failure come from the coordination and integration of the process, 43 \%
responded that due to the execution of the Due Diligence, and 40\%
responded that the causes of failure were due to lack of motivation of
the organization and lack of business cultural integration. A common
argument in explaining the failures in M\&A operations are excessive
attention to financial parameters and insufficient attention to business
and human organization, as well as operational parameters.

About the phases, different authors define different phases. In some
cases, two phases, pre-acquisition and post-acquisition, in other cases
3 phases, in other cases 4 phases, and in other cases up to 7 phases.
But all agree that the steps in an M\&A operation are: Strategic
planning, candidate search, candidate evaluation and negotiation,
execution of the integration plan, and finally the integration phase.
And in terms of success factors, it can be summarized in identifying and
evaluating strategic objectives, diversification, candidate selection
criteria, staff integration, business culture, company size, information
technology, and reduced ambiguity.

By ambiguity it is understood to resolve all doubts and questions during
the pre-acquisition phase, since continuing with doubts and
uncertainties that are not resolved during the process, can be critical
in the integration phase. The different information that appears in the
integration or post-acquisition phase with respect to what have been
analyzed in the pre-acquisition phase, is what we call information
asymmetry. Therefore, reducing ambiguity, that is, information
asymmetry, is a success factor.

Coming back to the motives, was mentioned above that knowledge and
talent about a specific Industry is one of the goals of M\&A operations.
(Coff, 1999). Many times, this objective is not achieved due to the
asymmetry of information since the information can be found in work
teams and not individually. Russell W. Coff argues that knowledge is
generally the main cause of M\&A, and analyze its impact on M\&A
strategies. Although knowledge may be the focus of acquisition, in many
cases it is not acquired due to information asymmetry. This creates
information dilemmas and ambiguities and can lead to overpricing risk.
Therefore, the information asymmetry is linked to the risk that the
buyer could pay an overprice.

In addition to the reasons, we also mentioned that many things can be
learned from the reasons of the successes and failures of M\&A
operations. A lot of research has been done and is being done to find
out these reasons and there is a lot of evidence on the causes of
failure. (Schoenberg, 2006) In an investigation carried out on a sample
of British companies, operating in foreign markets, researcher Richard
Schoenberg states that the success rate of the investigated operations
were between 44\% and 56\%. Regardless of the variables that are
measured to evaluate the performance of the operation such as
accumulated returns, evaluation of the management, evaluation of expert
informants, and others, again the asymmetric information between the
management of the company and the investors appears again as one of the
great reasons for failures.

Therefore, the information asymmetry that appears between the
pre-acquisition and post-acquisition phases is clearly one of the
problems still to be solved in M\&A operations. (Dierickx,1991) During
the negotiation phase, this problem already appears at the moment in
which the seller cannot or does not want to transmit certain information
to the buyer, so the buyer does not have all the real information he
needs. Unfortunately, in many operations there is still a differential
between the target value and the obtained value, and this obtained value
is dependent on the level of information asymmetry. (Cuypers I., Cuypers
Y., \& Martin X., 2017). The authors Ilya Cuypers, Youtha Cuypers and
Xavier Martin have carried out an investigation on 1,241 articles in a
period of 30 years, and they argue that the part that obtains the
greatest value in a M\&A process is the one with the most experience.
These investigations detected how the experience contributes to the
creation of value in the transaction and improves the performance of the
acquisition. It is argued that the difference in experience between the
acquirer and the acquiree determines that one party negotiates the terms
and conditions of the acquisition better than the other.

If we put an example of the valuation of tangible products, information
asymmetry also plays a relevant role. (Afzal, Roland, \& Mohammad
Nasser, 2009). In a study carried out by those researchers , for two
different groups of people, one of them receiving symmetric information
of a product, and another group receiving asymmetric information from
the same product, different evaluations were obtained. The most real
about the product, was being made by the group of people who received
the symmetric information.

As we mentioned at the beginning, some M\&A operations aim to penetrate
international markets, and in these cases the cost of the operation is
still much higher due to information asymmetry (Boeh, 2011). The author
Kevin K. Boeh carries out a study of 3,000 M\&A operations and recreates
a theoretical model of reduction of information asymmetry based on the
hiring of a Consultancy Firms for the management and coordination of the
operation and maintains that the use of mechanisms for reducing
information asymmetry in international processes are more expensive than
in domestic processes. While for most companies that carry out M\&A
operations, asymmetric information can be one of the biggest cost
drivers, for other Consultancy Firms, can be a source of opportunities.
(Nayyar,1990). To obtaining information is expensive. The author Nayyar
points out that information asymmetry is usually the most important
source of costs for both parties, seller and buyer. Information
asymmetries present a problem for both the seller and the buyer, but
also a benefit for Consultancy Firms since they can help to lower
investment costs for buyers. There are alternatives to face the costs of
information asymmetry, such as including responsibilities, guarantees,
signaling in contracts, etc. But normally they are not sufficient or
satisfactory. In fact, in some companies there is a specific function to
improve the performance of M\&A operations, since through lessons
learned, capacities can be developed (Trichterborn, Zu Knyphausen, \&
Schweizer., 2016). Certainly, learning generates experience and skills
to identify incomplete and / or ambiguous information in the
pre-acquisition phase. More and more companies that are active in M \&A
processes, incorporate departments that are responsible for the
valuation of the possible acquisition.

Authors Jun-Joo Kang and Jin-Mo Kim investigate a long history of
acquisitions of foreign companies in the US and theorize that the
asymmetric information experienced by foreign investors in their
acquisition operations in the US, is a notable determinant for their
investment objectives in the US. (Kang \& Kim, 2010).

With all the research carried out on M\&A processes and information
asymmetry, an attempt has been made to find out how to reduce such
asymmetry, and some reduction mechanisms have been proposed. The authors
Jeffrey Reuer and George Akerlof propose three methods to resolve
information asymmetry (Reuer, \& Akerlof, 2005), which are: Select a
different purchase structure, enter into a contractual agreement, and
use information from other markets.

\par\null

But there are proposals for other possible ways to reduce information
asymmetry, one is through previous alliances (Reuer, Jeffrey J. \&
Ragozzino, 2008), and another is through an early interaction between
seller and buyer. (Brueller \& Capron, 2021).

Through previous alliances, according to the authors Reuer, and
Ragozzino, because the shareholders of two companies are often more
favorable to Joint Venture than to acquisitions when both companies do
not have much information about each other. There may be a potential
``lemon'' problem (Akerlof, 2001) that can generate costs. According to
Akerlof, asymmetric information exists when the seller has more
information than the buyer. The seller can hide part of the information
to avoid the risk of reduction of the offer prices by the buyer. Authors
Srinivasan Balakrishan and Mitchell P. Koza support this claim by
comparing the results of abnormal returns between 64 Joint Ventures and
165 acquisitions. (Balakrishnan \& Koza, 1993).

And through early interaction between seller and buyer to achieve the
success of the transaction from the pre-acquisition phase to the
post-acquisition phase. Authors Nir N. Brueller and Lawrence Capron in a
study carried out in Israel about start-up acquisitions by two ICTs
Companies, they have called this early interaction as the three 3Cs
phases, that consist of: A first phase in which the seller has to be
Complementary to the buyer, since buyers are more defenders of their key
business, a second phase involving key Clients who validate the
operation, and a third and final phase, using executive Champions who
sponsor the transaction.

\par\null

When an investor decides to acquire a company, a general strategy is
always defined, but many times a specific strategy for IT integration is
not defined. (Ournal \& Nline,). Digital strategy disparity can have an
impact on ROI and on integration effectiveness in the post-acquisition
phase. The authors Sundberg, Tan, Baublits, Lee, Stanis and Tanriverdi,
in their research they refer to a study by Accenture Consulting on the
integration of IT in 57 acquisitions between 1997 and 1999: 42\% did not
carry out a Due Diligence in IT and the the consequence was that the
acquisitions did not produce the expected returns. In the Elevator
Industry, this situation also occurs when the two companies have
different digital strategies.

With the recent development of digital technology and the large amount
of data recorded by devices, companies are increasingly driving digital
transformation to create value. Value creation only can come when the
strategy formulation and the strategy implementation are connected.
(Correani, Massis,Frattini, Messeni, \& Natalicchio, 2020)

But small-sized Enterprises (hereinafter SMEs), susceptible to being
bought, do not invest in technological resources, and do not have ICTs
to manage their maintenance portfolio and their clients, even in many
cases the information is processed in simple Excel spreadsheets and
databases made manually, fed by data from different departments of the
company itself. SMEs are still at a low intermediate level of
digitization compared to Industry 4.0, but they are aware that they have
to identify a more appropriate digital strategy to tackle the fourth
industrial revolution 4.0 (Pirola Cimini, \& Pinto, 2019). All companies
have the need to exploit the opportunity that digitization offers, to
have their data available to increase knowledge and decision-making.
Profitability is not only achieved through the experience and talent of
people, but also through the collection and processing of information
through technologies and processes such as BIG DATA for making correct
decisions. The information processing, internal and external, is needed
for any efficient growth strategy, such us expanding in new markets or
in new business opportunities. (Garcia-Canal, Rialp-Criado A.,
Rialp-Criado J., 2007)

With globalization, the mortality rate of SMEs has increased notably.
They must adopt digital strategies and decisions to meet the challenge
and survive. One of the global challenges is the application of ICTs.
(Gamage et al., 2019). In contrast, multinational companies have higher
driving forces and lower barriers for Industry 4.0. The desire to
increase control and allow real-time performance measurement is reason
enough and rationale today to involve SMEs in the digitalization.
(Horváth \& Szabó, 2019)

\emph{''Technology alone does not benefit the organization, it needs to
be incorporated into daily activities through employee training.
Likewise, isolated technology does not change the production or
commercialization processes, if it is not supported by business plans
that control and define the objectives of its use. To extract all its
potential from ICT, its implementation and development, they must be
considered in the context of a sustainable technological strategy over
time. ''} (Galo \& Cano-Pita, 2017)

SMEs, by not investing in technology and in their own R + D + i, can be
left behind and stop being competitive. The IIoT (Industrial Internet of
Things) is impacting on the business model of companies and in the
future business. It is the interaction of industrial objects with
information technologies, with companies and their employees, and there
are very few small companies that are applying ICTs that promote this
interaction of companies and people with computers, making tasks
therefore more productive. (Jiwangkura,Sophatpathit, \& Chandrachai,
2018).

The IoT (Internet of things) arises as the search for the interaction of
people with everyday objects through the internet. With the IoT,
communication between objects and companies means the entry into the era
of industry 4.0 and has improved the availability of data in large
companies, as well as the efficiency of their processes. But SMEs are a
step back, and also on the defensive, although it is a tremendous
potential for increased efficiency (König et al., 2019).

DESCRIPTION OF THE PROBLEM

In E\&E maintenance services companies, such in other maintenance
service industries, the greatest volume of failures in M\&A operations
is the asymmetry of technical information existing in the operational
variables that are established for the measurement of the technical
parameters between the pre-acquisition phase and the post-acquisition
phase. This asymmetry of information causes uncertainty and confusion in
the integration stage, as we have explained, and is not detected in the
operational Due Diligence. This asymmetry of information comes from the
different digital strategy that each party has developed and
implemented, since most of the M\&A operations are carried out by large
multinationals or Investment Funds with resources to have powerful IT
tools, while SMEs do not.

In the research carried out to find out more information about the
causes of general M\&A operations failures, and this specific problem of
information asymmetry, 155 articles have been reviewed, of which 86 have
been selected from different disciplines with different keywords. Among
these articles, we have also studied the different digital strategies
that companies have, based on their size and resources, and how this
different digital strategy can affect an M\&A operation between
companies of different sizes, already known that small companies are not
yet facing Industry 4.0, the fourth industrial revolution. A collection
of articles focused on the failures and successes of M\&A operations
that describe the real situation for decades.

WORK HYPOTHESIS:

In all the reviewed and selected articles about M\&A processes, there
are important conclusions about the failures and successes. It can be
said that there is a very extensive literature with many research
studies over decades in which many conclusions are reached and new lines
of research are recommended, but, even so, it is also concluded that
there is still a lot of pending work that can contribute to the academic
research and the successful practice of M\&A processes.

There is a lot of research on the different phases of the processes, on
how to name them, and how to define them. Also, on the different
motivations of the processes and the interests of the different
stakeholders within each process.

It has also been written about the pre-acquisition phase, where much
reference is made to ambiguity, difference in experience, and
information asymmetry. Many failures are attributed to unresolved
ambiguity in the prior phase of the Contract of Sale signed, the
pre-acquisition phase.

This article wants to focus mainly on the operational Due Diligence of
the pre-acquisition phase when the candidate has already been selected
and an audit process has begun before the signature of the definitive
contract. In this phase is where the real information is not detected in
many cases. That is, it is the origin of an unresolved ambiguity that
appears in the integration phase as information asymmetry, that must be
minimized or avoided. In addition to the fact that there are specialized
consulting companies that can accompany the investor in the negotiation
phase with also the collaboration of expert's business informants and
considering that legal and control mechanisms can also be implemented in
the Contract of Sale that adjust the acquisition price in the financial
and legal Due Diligence, technologies provided by Industry 4.0 must also
be adopted in the operational and financial Due Diligence. That is,
mechanisms that through the IoT of the E\&E and ERPs, provide us with a
reality of the measurement of variables.

Own E\&E have a lot to contribute with their daily, weekly, and monthly
records of all the failures and behavior statistics. Thanks to the IoT
they have their own voice, and it is only necessary to register it to be
analyzed properly. Obtaining this information on operational parameters
directly, allows us to understand from a technical point of view how are
operating the E\&E of the maintenance contracts. If the purchased
capital goods are not in proper working operation due to poor service
maintenance, it may involve moderate or serious additional risk to
future improvements or repairs not attributable to the owner, unforeseen
and undesired, which reduce the contract profit.

According to all what we have exposed, we can formulate the following
hypotheses:

''Information and communication technologies (ICTs) can reduce the
information asymmetry between E\&E maintenance companies that
participate in a M\&A process, and consequently increase the success of
the transaction.''

Therefore, it can be stated that:

1. Information asymmetry appeared in the integration phase reduces the
success of M\&A processes

In previous sections we have defined information asymmetry as the
difference of information between companies of different sizes, that
develop different digital strategies. On the one hand, the buyer is not
able to distinguish in many cases the quality of information offered by
the seller and does not have all the information, and on the other hand,
although the seller generally has more information, he does not share it
entirely.

George Akerlof (2001 Nobel Prize), in his book ''The market for
Lemons'', from his research in markets with information asymmetry,
defined the ''junk market'' model, where the second-hand product seller
knows if his product is good or bad, while the buyer does not. Normally
the buying party does not have the necessary information to know the
negative characteristics of the seller's product, and this is a
disadvantage that can be exploited by the party that has more
information. (Akerlof, 2001).

Where does the information asymmetry usually reside in M\&A processes
between E\&E maintenance companies?:

\begin{itemize}
\tightlist
\item
  Existing relationship in the terms of the contracts, between the
  client and the acquired company.
\item
  Real knowledge and skills of the employees of the acquired company.
\item
  Relationship between the official reported remuneration, and the
  possible remuneration agreed with some group of employees of the
  acquired company.
\item
  The technical conditions of the E\&E to provide maintenance service.
\item
  The relationship between the BIG DATA that the acquired company has,
  and the information that is processed and obtained.
\item
  The relationship between the quality management system of its
  procedures and the usual work methodology.
\end{itemize}

What variables are considered in M\&A processes in E\&E maintenance
companies?

The variables considered are the ratios of the financial statements of
the company to be acquired, and the operational variables from the Key
Performance Indicators (hereinafter KPIs) of the balance scorecard or
dashboard of the acquired company, and their subsequent analysis for the
study of synergies and profitability. An example of some important
operational variables about maintenance service are shown below in
figure 1:

\textbf{Hosted file}

\verb`image1.emf`  available at \url{https://authorea.com/users/451711/articles/712733-mergers-acquisitions-in-elevator-industry-the-role-of-icts-to-avoid-information-asymmetry}

\emph{Fig 1: Example of dashboard with Maintenance Key Performance
Indicators (KPIs).}

Some of these variables must be quantified, qualified, and compared, in
addition to the average service levels of the industry where the seller
is operating and the competitors, also compared with the objectives
established in the 5-year horizon in order to have information and a
management control once the transaction has been carried out, in the
post-acquisition phase. The role of information technology in M\&A has
gained greater importance due to the globalization of digitization and
it creates value in the processes of a Company. It is a support for the
risk-free evaluation of the mentioned variables, and therefore can
analyze the appropriate acquisition price. (Stein, Zureck \& Jäger,
2018).

2. Technology can reduce information asymmetry:

How can technology reduce information asymmetry? With correct data
collection and its subsequent analysis and processing through BIG DATA
tools, of the acquired company.

Nowadays, it is possible to store files and BIG DATA through remote
access to software, which is called ``cloud computing'' and which has
become an essential tool for the development and growth of SMEs.
(Zabalza et al.,). This tool makes possible have all the stored data for
processing and treatment. As operations become more complex, technology
and people who provide and support IT are critical drivers for resolving
ambiguities. ICTs are essential in the previous phase of integration.
(Larsen \& Larsen, 200505-01).

There are ICTs that allow communication through the Internet of Things
(IoT). In the US auto insurance market, for example, some insurance
companies track driver behavior through technology to apply the correct
insurance premium. For example, a driver who takes risks will pay more
than a driver who is more conservative and does not assume them. It is
therefore about monitoring the habits and behavior of the driver through
a direct recording of the information from the vehicle's IoT. This
monitoring through technology reduces information asymmetry and adverse
selection. (Chen \& Jiang, 2019)

ANALYSIS: ECONOMETRIC MODEL

To support the exposed theory regarding information asymmetry, an
economic analysis is carried out about how would imply in an M\&A
process the acquisition of E\&E that are \emph{not in good operational
conditions} and have not been identified during the DD process.
Generally, around the 5-10\% of the portfolio are generating more than
the 50\% of breakdowns. The key is to identify all those elevators that
are damaging the Profit \& Losses statement (P\&L).

For this we propose an econometric model that relates operational
variables from the E\&E operation and how they affect each other,
allowing us to obtain future predictions and estimates of profitability
and the return of the investment. The proposed model tries to quantify
the cost of acquiring a E\&E in unsuitable operating conditions, and as
consequence depending on the volume of these E\&E acquired, how can
cause a non-return on the investment. To carry out the econometric
model, first of all, is needed to define the average price values \selectlanguage{english}\selectlanguage{english}of
the local and regional companies that can be acquired, both for
preventive maintenance, and annual repairs. The econometric model
proposed can be applied to any market in any region, but we have taken
the average values of the Spanish market as an example.

We define preventive maintenance as that which is carried out
periodically according to the Country Regulations and execution program
of each company that maintains E\&E. And we define corrective
maintenance as all that which is not predictive maintenance represents
an economic cost for the company.

In the Spanish elevator market, we have to differentiate two segments,
the residential segment composed of elevators installed in residential
buildings, whose average type of installation is 450Kg (6 people), 1 m /
sec of speed and 8 stops. And the commercial segment that It is composed
of E\&E, both elevators and escalators, in buildings such as Hotels,
Shopping Centers, Offices, Airports, Train or Metro Stations, and whose
diversity of average characteristics makes it impossible to determine an
average type of E\&E installed.

The average normal preventive maintenance contract in the Spanish market
contemplates the periodic review according to the RAE and the
Regulations published, which implies the periodic mandatory inspection,
the attention in a maximum time of 30 min from Monday to Friday and 2
hours from Saturday to Sunday for rescue of passengers. Rest of
breakdowns, the time should not exceed 24 hours, and includes labor only
in preventive and corrective maintenance, and does not include material
in case of corrective maintenance. Repairs are budgeted separately.

Therefore, and given the evidence that local and regional companies
which are the ones that are mostly bought by multinationals, have 99\%
of their portfolio of elevators corresponding to the residential
segment, we will carry out the econometric study in the Spanish
residential market. The premises we use are the average price values
\selectlanguage{english}\selectlanguage{english}of the Spanish market in the residential segment shown in figure 2:

\textbf{Residential Segment}\selectlanguage{english}
\begin{longtable}[]{@{}ll@{}}
\toprule
\begin{minipage}[t]{0.47\columnwidth}\raggedright\strut
Average elevator contract value/Year\strut
\end{minipage} & \begin{minipage}[t]{0.47\columnwidth}\raggedright\strut
900 \textbackslash{}euro / Y\strut
\end{minipage}\tabularnewline
\begin{minipage}[t]{0.48\columnwidth}\raggedright\strut
Average elevator repair value/Year\strut
\end{minipage} & \begin{minipage}[t]{0.48\columnwidth}\raggedright\strut
\textbackslash{}euro / Y\strut
\end{minipage}\tabularnewline
\bottomrule
\end{longtable}

\emph{Fig 2.: Values obtained from different market studies: Alimarket
S.A and DBK Informa}

To calculate the profitability of a maintenance contract, the costs of
preventive maintenance and the costs of possible corrective maintenance
must be analyzed. The best corrective maintenance is the one that is not
done.

Figure 3 shows how the Gross Margin (GM) and the profit before interest,
amortization, and depreciation (EBITDA) of each maintenance contract are
calculated, which is the sum of the GM and EBITDA of each elevator. In
the aforementioned figure an example is specified, based on the average
market cost values of a local or regional company, which are lower
than the average cost values of a multinational. Depending on each
company and its market prices and operating costs, GM and EBITDA may
vary.

Where Direct cost of sales is direct labor cost, which represents the
salary, training, and social security cost of each maintenance
Technician who intervenes in the service operation that must not exceed
a certain maintenance time, which the average is approximately 60
minutes per each elevator. Where the tool cost is the prorate of the
depreciation of each tool used for the operation, where the transport
cost is the time the Technician travels to the location of the
installation, including non-desirable times, and where the cost
Corrective maintenance is the cost of any action that does not
correspond to preventive maintenance.\selectlanguage{english}
\begin{longtable}[]{@{}llll@{}}
\toprule
Elevator & Elevator 1 & Elevator 2 & Elevator 3\tabularnewline
\midrule
\endhead
Sales & 75\textbackslash{}euro (monthly) & &\tabularnewline
Direct cost of sales & 40\textbackslash{}euro & &\tabularnewline
Tools costs & 3\textbackslash{}euro & &\tabularnewline
Technician transport time & 3\textbackslash{}euro & &\tabularnewline
Corrective cost & X\textbackslash{}euro & &\tabularnewline
Absolute GM & 29\textbackslash{}euro - X\textbackslash{}euro &
&\tabularnewline
\% GM & 38,6\% -X\% & &\tabularnewline
SG\&A & Y\% & &\tabularnewline
EBITDA & GM\%-Y\% & \ldots{} & \ldots{}\tabularnewline
\bottomrule
\end{longtable}

\emph{Fig 3.: Profit \& Losses (P\&L) example of each elevator}

The operational variable that measures the breakdowns that occur in the
elevators is the ''Breakdown Index'', which means how many breakdowns
occur per elevator in a period of time of operation, normally is
12-month period. This KPI that appears in figure 1 is one of the most
important parameters to know the profitability of a maintenance
contract. The ratio that should not be exceeded, as a general rule, in
multinational companies is 10\%, which comes from the maximum allowable
number of breakdowns on a maintenance route (geographic group of
elevators usually made up of 120 elevators maximum). Each route is
serviced by a maintenance Technician who, as a general rule again,
should always be the same.

In other words, a 10\% rate of breakdowns on a route means that 12
breakdowns of different or the same elevator, occur throughout the year
in the mentioned route.

Figure 3 shows that the uncontrolled cost that can damage the Profit \&
Losses (P\&L), is the cost of corrective maintenance. The better the
preventive maintenance is performed, the lower costs of corrective
maintenance. The uncontrolled cost must include the opportunity cost of
not performing preventive maintenance on other elevators in the daily
planning and the cost of overtime for the maintenance Technician.

Following figure 3, a normal preventive maintenance contract of one
elevator that has a monthly income of \textbackslash{}euro 75, which
means \textbackslash{}euro 900 per year, has a direct preventive
maintenance cost of \textbackslash{}euro 46 per month which means
\textbackslash{}euro 552, provides to the company a GM of
348\textbackslash{}euro, which means 38.6\%, without breakdowns.

To obtain the EBITDA, the general and administrative expenses (GG\&A) of
each individual company shall be applied.

RESULTS

Let's take as an example, shown in figure 4, the elevator 1 from figure
1. Let\selectlanguage{ngerman}´s suppose that has had 1, 2, or 3 breakdowns this year and have
meant 1 hour of resolution for each breakdown, but also 1 extra hour of
the Technician to recover the hours not invested in maintenance
preventive of the other elevators belonging to the route that were
planned. Let's calculate the variation in profitability of the
maintenance contract in all cases also assuming that the local company
has 15\% of GG\&A:\selectlanguage{english}
\begin{longtable}[]{@{}lllll@{}}
\toprule
\textbf{Elevators} & \textbf{Elevator 1} & \textbf{Elevator 1} &
\textbf{Elevator 1} & \textbf{Elevator 1}\tabularnewline
\midrule
\endhead
Breakdowns & 0 & 1 & 2 & 3\tabularnewline
Sales & 900\textbackslash{}euro & 900\textbackslash{}euro &
900\textbackslash{}euro & 900\textbackslash{}euro\tabularnewline
Direct cost of sales & 480\textbackslash{}euro & 480\textbackslash{}euro
& 480\textbackslash{}euro & 480\textbackslash{}euro\tabularnewline
Tools costs & 36\textbackslash{}euro & 36\textbackslash{}euro &
36\textbackslash{}euro & 36\textbackslash{}euro\tabularnewline
Travel costs & 36\textbackslash{}euro & 42\textbackslash{}euro &
48\textbackslash{}euro & 54\textbackslash{}euro\tabularnewline
Corrective costs & 0 & 80\textbackslash{}euro & 160\textbackslash{}euro
& 240\textbackslash{}euro\tabularnewline
GM & 348\textbackslash{}euro & 262\textbackslash{}euro &
176\textbackslash{}euro & 90\textbackslash{}euro\tabularnewline
GM & 38,6\% & 29,1\% & 19,5\% & 10\%\tabularnewline
SG \& A & 15\% & 15\% & 15\% & 15\%\tabularnewline
\textbf{EBITDA} & \textbf{23,6\%} & \textbf{14,1\%} & \textbf{4,5\%} &
\textbf{-5\%}\tabularnewline
\bottomrule
\end{longtable}

\emph{Fig 4.: Comparative example of P\&Ls with and without breakdowns.}

The reason why the multinationals are not accepting more than a 10\%
rate of breakdown index in their portfolio is because the lack of
profitability. Has to be considered also that when the integration phase
is completed, the labor cost of a multinational company is higher than
in a local company. In an M\&A process, the potential incoming orders of
repairs, not included in above calculations, is either very important
for decision making.

During the DD there is a very high percentage of E\&E that are not
inspected and therefore their operating status is not really known,
except for the information on breakdowns that the acquired company may
provide. These E\&E can represent an uncontrolled cost during the
negotiation process and can damage the bottom line after integration and
even destroy company value in the event of an accident.

CONCLUSIONS

The real operational variables could be obtained in real time by means
of a connection interface (hardware) with the electronic board of the
E\&E, which incorporates a SIM card. This SIM card provides an internet
connection to the interface, so that through the IoT of the E\&E itself,
and during a certain period of time, all the operational variables of
the E\&E would be recorded, which would allow an analysis and a data
projection to be carried out and take the correct decisions. It would
allow to have a history that anticipates the present and future behavior
of each E\&E that is in the maintenance portfolio. These operational
variables, together with the data of each maintenance contract extracted
from the database, and together with the financial variables that would
also be collected through the connection to the ERPs, would form a pool
of data that would be subsequently processed by tools of BIG DATA.

The digital strategy applied by the big multinationals companies
currently consists of a digital platform that is able to connect the
E\&E with the technicians, passengers and customers. The information
obtained from the IoT of the E\&E is used to predict the maintenance
service in order to reduce the corrective one. Each multinational
company is using their own devices compatible with their own E\&E brand,
but these types of devices are already existing in the market and are
universal for different brands.

Can be used to record the operational variables during a defined time of
period to learn the E\&E technical status? Yes, can be used.

With this information, the operational ambiguity of M\&A processes
between companies of different sizes with different digital strategies
in the E\&E maintenance sector would be resolved. Normally, a visual and
technical check is carried out on a small sample, about 10\%, of the
portfolio of the acquired Company in the Due Diligence phase due to the
lack of time and high cost of resources. However, the use of this
technology would allow not using human resources, not making large
investments, and making a 100\% sample, eliminating the risk of
asymmetric information.

In other words, through the IoT of E\&E we can have accurate and
complete technical information. Then that information can be analyzed
and processed thanks to the BIG DATA tools. In this way we will have the
necessary information to gain economic efficiency in M\&A operations.

IoT devices will be the norm in the future and will assist humans in
daily routines. Authors Souza, Carlson, Ramos, Loureiro and Oliveira, in
their article \emph{``Internet of Things device authentication via
electromagnetic fingerprints''} describe several scenarios where IoT can
communicate and interoperate. To any other interlocutor. One of those is
the scenario of vehicle-to-everything. We can consider an E\&E a vehicle
(Souza, Carlson, Ramos, Loureiro \& Oliveira, 2020).

What cannot be measured, cannot be managed.

Information and communication technologies (ICT) can minimize/avoid
information asymmetry and increase the success of M\&A operations, not
only in the Elevator sector but also in other service operations
sectors.

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