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M&As: More failures than film liaisons

Shyamal Majumdar | July 18, 2003

A popular joke doing the rounds in management circles reads like this: which corporate activity has an even higher failure rate than the liaisons of Bollywood stars? Answer: Mergers and acquisitions.

The joke, however, only reinforces what a great deal of research all over the world have shown: M&A deals have been encountering enormous difficulties and "people" problems rank high in the list of problems that ultimately derail them. N S Rajan, Ernst & Young's national director, human capital, gives some startling numbers:

  • Seventy five per cent of M&As all over the world are disappointing or outright failures.
  • Fifty per cent of corporate unions experienced a sharp decline in productivity in the first four to eight months.
  • Forty seven per cent of senior executives in acquired firms leave in the first year, 75 per cent in the first three years.
  • One-third of all acquired firms are sold within a couple of years.

Says Rajan: mergers are not just about balance sheets, cashflows or marketing synergies; they are about people making the synergies real. Rajan is right. For, even when the new management does not want to implement drastic measures, large-scale changes are inevitably affecting people.

For instance, after acquiring Tomco, the Hindustan Lever management had said it would only make marginal changes in certain systems and practices. The "marginal changes" resulted in the company shifting production from the Sewree plant to facilities at Chiplun, Ghaziabad and Kerala.

Many of the product lines of Tomco's Chennai factory started being outsourced. In addition, new systems were brought in to monitor and reduce raw material and inventory costs. Typically, M&As are initially driven by financial, strategic and legal considerations.

The "people issue"that Rajan talks about is often ignored or considered only after the deal is signed. Which is a pity considering that a human resource professional can make multiple contributions as a strategic advisor in an M&A deal.

Why do organisations consistently ignore the people factor? A Watson Wyatt study has an answer: while the financial and legal persons enjoy a generous allocation of upfront resources, managing the people factor is considered a backroom job and often carries a second class stigma which is reflected in lesser resources allocated to it.

A top HR executive recounts how the due diligence that his team was asked to do in an M&A deal was restricted to straightforward data -- headcount, pay, outstanding legal cases and so on.

No effort was made to understand the skills and effectiveness of the people of the acquired company, how they work and relate to each other and how to deal with the problems of cultural integration.

Result: post-merger, the management was perpetually in a fire-fighting mode having to deal with HR issues instead of devoting time to business operations.

The actual integration cost far exceeded the plan making the entire process meaningless, the executive says. For example, in every department there were two persons working in the same position. Since no one thought about this problem, there was intense politicking with among the legacy players jostling for the same space.

Also, there is plenty of evidence to suggest that the announcement of an M&A deal has an instant and negative effect on the performance of both the organisations. The reasons for this ranges from a feeling of alienation to insecurity to utter confusion.

One major fallout of this is flight of top quality people. Head-hunters sense an opportunity of poaching and generally have a field day.

"The danger is real. Birds with strong wings will fly away and only the ducks will stay back unless you handle the entire process correctly," says Ernst & Youngs's Rajan. One way of dealing with this kind of talent exodus is to involve the HR department and explain the business rationale of the merger.

Consultants like Watson Wyatt have done some significant research work on this. According to the firm, "If the target is, for example, a high-tech company whose value resides in the 'brains' of its people, identifying and retaining all the key players becomes the number one priority.

If the acquisition is the result of industry consolidation in which the firms have overlapping skills and customers, broad personnel retention will be of lesser importance." Managements planning an M&A can, however, take inspiration from two sterling role models: Cisco Systems and General Electric which have achieved spectacular success in M&As.

  • Delay the start, drag out the finish
  • Put no one in charge
  • Allow divergent initiatives
  • Forget the business and the customer
  • Under communicate
  • Ignore project management disciplines
  • Use second-rate staff to manage the integration

Cisco follows a simple principle: no one should make any hurried assumption regarding who will stay and who will go, the business rationale is clearly articulated by the senior management and all acquired companies have to follow Cisco's cultural values and systems.

As a result, there is perfect clarity in the minds of the employees of the acquired company about what to expect. The other example -- GE -- offers three key integration lessons:

Lesson 1: Integration does not begin when the documents are signed. Rather, it is a process that begins with due diligence and runs through the management of the new enterprise.

Lesson 2: Integration management is a full-time job and needs to be recognised as a distinct business function, just like operations, marketing or finance. In fact, GE is the only one to treat M&As as an SBU (strategic business unit).

Lesson 3: Decisions about management structure, key roles, reporting relationships, layoffs, restructuring and other career affecting aspects of the integration should be made, announced and implemented immediately after the deal is announced.

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