Risk-Based Asset Allocation A New Answer To An Old Question Post Merger, Acquisition Challenges & Solutions – A Contemporary Perspective

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Post Merger, Acquisition Challenges & Solutions – A Contemporary Perspective

The sun never sets on the British Empire

At the peak of British supremacy, it was often said that “the sun never sets on the British Empire” as its span across the globe ensured that the sun was always shining on at least one of its numerous territories. This could well be associated to the mergers and acquisitions British practiced since centuries. They were sheer strategists and by employing their economic and naval superiority over different nations worldwide experienced a superpower status for a long passage of time. Their top commanders employed growth and development strategies, possibly never missing to identify a target. In Indian perspective they formed various alliances, merged some states for effective ruling and acquired many others and decentralized the power structure with their numerous strategies and eventually brought our nation under their flag. This was 1900’s and in coming years all their strengths were diluted by constant clashes and a major factor which if carefully noticed would link to the cultural and social gaps they had with other parts of world. Secondly, their exploitation to gain short term volume misbalanced them completely in the long-run.  The cultural gap and social practices were evidently, as we propose in this paper, one of the major determinants of the failure in holding up their acquisitions around the world.

Hundred years hence as we have moved towards the contemporary and modern power centers in terms of trade and economic production this success equation of the mergers and acquisitions hasn’t changed as much. To be successful we propose that the cultural and the social context are as valid today in the long run as it was hundred years ago.

What is the most significant determinant in the long term success of a merger between two organizations? Is it the strength of the balance sheets, financial ratios, aspiration levels, the vision, the mission or else it is the nature of the suitable policy framework and other favorable government regulation for the environment in which they intend to operate? In the Indian context as we observe after the demise of the licensee-raj during mid and late nineties, the markets were wide open and Indian business began tasting the fruit of liberalization by acquiring and merging with other businesses around the world.

This paper intends to highlight various issues related to the post-merger environment and to devise some strategies to counter these challenges as the management of these post merger/acquisition issues is the biggest challenge in the hand of today’s managers  

The Race of Opportunity with Time, Tide and Technology

There has been a vast change of mind set in the new age corporate as we, Indians, have made a transition from boycotting foreign made goods in past to buying foreign companies in present. As the economic borders have fallen and as the propensity of the customers to be able to pay for good and services have increased the mantra of becoming ‘big’ for the corporate has taken the forefront. This mind-set is of new India which is no longer restrained by some petty permit-laws as in the past. It is coupled with emerging aspirations of Indian businesses to increase size and spread, enter new markets by growing inorganically for a bigger scale as the traditional organic growth cannot equip them with the same gigantic scale. Tatas could not have gone from 6 million tones of capacity to 25 million tones had it not been for the acquisition of Corus. But, is it all as good and easy as it appears?

Acquisition and mergers happen as opportunity exists to leverage the combined networks, co-create, to enter new geographic areas, to innovate new products and services with combined expertise, to create more wealth, to increase capacity and scale among many other reasons for the combination. Pre-merger communication happens and variables like time, environmental tide, technology are incorporated and the transition takes places, and appears a smart, crispy business model which is sure to take the world by storm. The human beings are guided and governed by the psychological processes and the intangibility of these beliefs and behavior makes it impossible for any modern gadget to measure and devise a 100% success formula. As evident from statistical figures and research by independent agencies, 70% of mergers fail to achieve their anticipated value.

This paper attempts to highlight some of the most common issues which organizations come across during the process of merger or an acquisition. We have endeavored to provide some solutions to counter these challenges in contemporary context.

Offsetting Culture & Philosophical clashes: Cultural Integration

As per the cerebrus report in 2008, the M&A deals in India amounted to $25.6 billion (Annexure 1), which is more than GDP of many underdeveloped and developing economies around the word. That make an enormous statement-The stakes involved in the mergers are enormous! Even after an acute research and investigation during the pre-merger period the value at most times is not delivered as expected. This is a huge loss of resources to the stakeholders as well as the nation. The interesting but unfortunate irony is the repeat of the same mistakes by some new entrants in the domain of mergers as they tend to repeat more or less the same mistakes all over again to waste even more opportunities and resources!

Almost every manager equipped with tons of analytical and market knowledge, a degree from a MBA college of repute etc. performs a due diligence in finance, market opportunity & behavior, operations, analysis with various projections, study of legal issues, labor laws and list could go on and on. Then, what actually happens when most of this analysis on paper fails to take a shape in profits? As per Sudi Sudarsanam (2004), ‘The merger integration process may often be based on incorrect assumption about the thinking, behavior, and expectations of people from two organizations’. This is where the culture or the philosophy of the two individual identities is taken granted for. The skilled workforce is though of as a machine, perhaps, which will duly turn its output almost immediately, which is not the case.

Trout and Ries (1990) argued that managers who plan from the top down are trying to force things to happen whereas managers who plan from the bottom up are trying to find things to exploit. The number of management layers between the top and bottom are overwhelming in a middle sized or a big organization. The more the coating, the more the top most management are insulated from the market. When these mergers do happen they happen at the top most level and other layers are left to assume things, which eventually become a big challenge in itself. This does not mean that companies do not value human skills & talent; it implies that companies often tend to take the human talent & skills for granted and assume that the same skill sets will be available to the enlarged firm even after the acquisition.

In a survey conducted by KPMG on M&A in 1999 brought out the factors that were essential in a successful merger:

Synergy Evaluation

Selecting the management team

Resolving cultural issues

Internal & External Communications

Integration planning

It is critical to note that all the above factors are based on people skills & people issues giving a clear indication that cultural integration is very important. David and Singh (1994) considered acquisition culture risk, which is a measure of cultural incompatibility or the distance between the acquirer and the acquired firms, and which is capable of impeding the efficient integration of the two. In most merger scenarios, the employees of the purchased company are given little information about the turn of events until well after the deal is settled. Rumors fly about what’s going on, and employees are left in limbo, bitter about the changes and worried about their jobs and their colleagues. If this goes on for too long, they can become less productive as a psychological protest. That again elaborates one of the biggest challenges that organizations face today while planning a merger and we see in following short cases, which reinstitutes this view.

Case 1: Year: 2008, Sona Group (Gurgaon, India) and ThyssenKrupp (Germany)

As Sona group was in acquiring stage of the German steel maker’s (ThyssenKrupp) forging business in January 2008, it realized the problem of the unionized workforce of ThyssenKrupp which resisted the takeover over the concerns of the job security. The proactive chairman had to constantly communicate the idea that the expansion needed all the workforce and also went on to the extend of forming a special group to analyze the cultural difference and the performance of the employees for a six month period before taking a call to restructure the organizational structure.

Case 2: Year: 2008, Standard Chartered bank and American Express Bank

Even before completing the process of acquiring the private banking business of American Express bank, Standard Chartered put multiple measures like rewards, harmonization, compensation and benefits integration and job grades to be addressed in a phased manner. These all were HR issues and pretty reflective to the culturisation issues as stated till now.

Case 3: Year 2007, Amtek Auto and Triplex-Kelton Group (UK)

A special task force communicated the growth prospects to the employees of the new company as Amtek went into understanding the roots of the cultural issues to deliver the merger situation correctly. It was imperative for Amtek to understand the cultural issues that emerge during the early days of an acquisition because that is the time when most people show maximum resistance

Case 4: GE Capital Acquisition Strategy

By using a dynamic model called “Pathfinder”, GE Capital has perfectly highlighted the importance of the human culture, values and beliefs in the business integration perspective. The model disintegrating the M&A process into four categories which are further divided into subcategories. Initial or the pre- phase of the model involves the cultural assessments, devising communication strategies and also evaluates strengths and weaknesses of the business leaders, by choosing an integration manager. In the subsequent phase the integration plan is prepared for the purpose of building the foundation by formation of a team of executives from the GE Capital and the acquiring company is formed. This is the most critical phase as a clear cut communication strategy is developed to be deployed for more than a 3 month period by involving senior management as well. In the third phase the integration takes place where the actual implementation and correction measures are taken. The processes like assessing the work flow, assignment of roles etc are done at this stage. This stage also involves continuous feedbacks and making necessary corrections in the implementation. The last phase involves assimilation process where integration efforts are reassessed. This stage involves long term adjustment and looking for avenues for improving the integration. This is also the period when the organization actual starts reaping the benefits of the acquisition.

Cultural Integration: Revisited

As can be seen and gauged from the above cases that there is no substitute for cultural integration. The mathematics and science has evolved and there will be new models to tap the complete potential of a merger but the very simple understanding of human behavior before two organization join hands will probably take precedence over every thing else. The two companies can identify these ‘human’ differences, recognize what’s good about each culture, and then determine jointly how they will face the future as a unified force. It is therefore necessary for today’s managers to assess the cultural fit between the acquirer and target based on cultural profile and managing the potential sources of clash even before the merger. It is necessary to identify the impact of cultural gap, and develop and execute strategies to use the information in the cultural profile to assess the impact that the differences have.

Countering Common Challenges

Cost Management: Post merger saving costs also becomes a worthy challenge for the corporate team. There might be duplications of processes within the new organizations which are needed to be countered as a starting point. The lack of standardization around items purchased, stocks, inventory, the flows of products and services all through the distribution chain induces a large cost both in terms of time and actual resources, which might reduce the profit of the new company. A procurement optimization could be effected in which all divisions could purchase the same products together, if possible and viable. It is a known fact that if items are purchased in volume, the profits curve starts immediately. The entire retail industry concept is based on the buying power and deriving profits rather than selling and gaining profits. The company could also incorporate reusable parts that go into making the products.

Control Execution and Speed of Integration: Control of the new unit should be taken immediately after signing of the agreement. ITC to widen its product range did so when they took over the BILT industrial packaging co. ltd. near Coimbatore in Tamilnadu even though the consideration was to be paid in 5 yearly installments. ITC controlled the assets and functions of the company immediately so as to put every function in the place and not let the ambiguity takeover the skilled personnel. The control should be immediate and over all the functions such as marketing, finance, production, design and personnel should be put in place. In addition to the prominent persons of acquiring company the key persons from the acquired company should be retained and given sufficient prominence opportunities in the combined organization. Delay in integration leads to delay in development and as stated earlier uncertainty and ambiguity for longer periods destabilizes the normal organizational life.

Streamlining Strategic Fit: Mergers with passage of time need to be fitted and continuously aligned strategically, at all strategies level, corporate, business level and functional level, which improves the profitability through reduction in overheads, effective utilization of facilities, the ability to raise funds at a lower cost, and deployment of surplus cash for expanding business with higher returns. If this strategic fit is not dynamic lack of synergies results in merger failure.

Infrastructure and Resource Maintenance Post Merger: As evident preventive maintenance cost is much less than breakdown maintenance costs. The resources or the facilities in case of a merger between similar product companies, which are duplicate should be disposed off or leased out on an immediate basis. There should be no duplication of process as well. Also, importantly the weak infrastructure in the new company should be identified and dealt with immediately with proper maintenance process allocation. Risk of failure will be minimized if there is a detailed evaluation of the target company’s business conditions carried out by the professionals in the line of business in continuous pattern. Detailed examination of the manufacturing facilities, product design features, rejection rates, and distribution systems, profile of key people and productivity of the workers is also very important. Acquirer should not be carried away by the state of the art physical facilities like a good head quarters building, guest house on a beach, plenty of land for expansion, etc.

Common Challenges: Revisited

Problems faced by Indian corporate houses as they grow and expand inorganically are numerous. Our political system has numerous muscle arms which probably are needed to be greased times often so as to go ahead with the merger and avoid conflicts post merger. Bharti- Walmart merger will pose problems of the over dependency on the supply side for the alliance, as far as Bharti is concerned. The high real estate cost for the scope of expanding the alliance should also be considered a big challenge for the Indian counterparts. Taxes and license requirements are other major issues which one would expect especially if the governments change overnight and include new policies for the existing or the new potential alliances. Illiteracy is also a big potential threat after merger, especially if Indian organizations are merging with organizations of under developed economies. In the case of potential Reliance-MTN, merger this might stand out as a potential problem. It is difficult to communicate with work force which, though is skilled but is illiterate or under educated. Rural communication experts should be sought for under these set of circumstances. As more and more companies adopt the route of inorganic growth they should also have ready answers for issues like health care benefits, stock options for employees, crisis counseling for employees in place much before merger so as to smooth sail during and after the merger. Another step would be investing some of the earnings in facilitating the corporate social responsibility program. Mergers should invest a small portion and by which they might be able to construct a belief and value in the eyes of the target consumers. Generally speaking the problems, issues or challenges which a Indian corporate might expect post merger should be very well addressed before the merger it self so as to minimize and offset those during the merger. India the seventh largest country in the world poses many problems and challenges for a local merger itself, international mergers are undoubtedly are more challenging.

Conclusion

British failed to hold on to their acquisitions for primarily not comprehending the culture values and exploiting these territories to experience short term profits and lacked the vision to work strategically for the long term ones. The classic contrast would be the merger and acquisition spree being carried on by Laxmi Niwas Mittal, the modern Midas, since some decades, and the slight change being the touch converts all into steel and not gold. His business acumen, long term vision, belief system, work ethics had transformed his steel-empire in same analogy, where once again the sun never sets. In the same context another big challenge for the Indian business corporate would be to exercise patience and plan for the long-term like LN Mittal and not rush into a mad rush to exploit profits like the British and lose it all in no time.

Making the mergers work successfully is not that easy as here we are not only just putting the two organizations together but also integrating people of two organizations with different cultures, attitudes and mindsets. While making the merger deals, it is necessary not only to make analysis of the financial aspects of the acquiring firm but also the cultural and people issues of both the concerns for proper post-acquisition integration.

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