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How to make M&As successful
Govindkrishna Seshan in Mumbai | August 18, 2006
Corporate acquisitions are a lot similar: you spend huge amounts of time and money in the build up to the main event and plan hopefully for a magnificent future together - only to find that reality is altogether different. We aren't the only ones thinking along these lines.
"M&As (mergers and acquisitions) are like marriages," says R Gopalakrishnan, executive director, Tata Sons, adding "They are not made in heaven." Or hear Amrish Shah, executive director, PricewaterhouseCoopers: "Acquisitions are like marriages. You can't predict what will go wrong."
What you can depend on, though, is that things will go wrong. According to estimates by industrialists and consultants alike, only two out of every 10 M&As can be termed successful.
Consultants estimate that deals worth about $25 billion will be struck in 2006, 25 per cent more than last year's $20 billion and more than double the figure for two years ago ($12.3 billion). But with a success rate of just 20 per cent, which means $20 billion worth of deals aren't going to deliver the expected results.
Explains Boston Consulting Group director Harsh Vardhan, "Fewer than a third of all acquisitions actually create long-term value to a company since more often than not, the post-acquisition integration fails to deliver expected benefits."
Granted, there's no perfect acquisition, just as there's no perfect marriage. But does it necessarily have to not "succeed"? Isn't there a list of do-and-don'ts India Inc could follow to make acquisitions and mergers work and integrate seamlessly? We asked around on deal-making and breaking issues in four critical functions - finance, marketing, human resources and operations. Here's what we learnt.
You've hammered out every little detail of how much, in what manner and who gets what. But the finance department's contribution to the deal doesn't end there. There are other critical issues to be sorted out.
Different accounting systems is one of the first hurdles to be crossed when integrating two different entities.
Typically, acquiring companies believe it's best to incorporate their own accounting practices into the acquired organisation, since that's the format they understand best. That brings its own set of problems: software integration, computer upgrades, workforce training and so on. Still, most companies believe the shift is worth the hassle.
For instance, in the past year, Wipro has acquired four companies in Europe alone. All four originally followed the International Financial Recording Standards, adopted by the European Union, but have now switched to the US GAAP.
To make these changes, Wipro had to replace its software, train its workforce and even transfer some of its Indian functional support employees to these companies.
Sudip Nandy, chief strategy officer, Wipro, accepts the changes as essential. "You have to follow a uniform accounting standard so that everyone is measured on the same yardstick," he says.
If changing accounting systems was difficult, wait till you have to decide on banks. Invariably, the acquirer and its target have different banks, bound by ironclad agreements.
Should you switch or not? "In the case of international acquisitions, it's wiser to stick with the foreign bankers," says PwC's Shah. The logic being that the overseas bankers will be well versed in the accounting principles and legalities of that country.
In local acquisitions it's a clash between penalty costs - often imposed by the acquired company's bankers - and loyalty to one's own bankers.
Consultants warn against falling into the "it's-too-early" trap and not keep checks on the acquired company's financial performance, post acquisition.
While it would be clearly unrealistic to expect the acquired company to show results immediately, it is also a mistake to be too casual about performance. "Monitor the economic rewards of the acquisition, thoroughly and periodically," advises Gopalakrishnan.
One option could be to consider the economic value added of the acquired company, that is, to check whether the profit after tax is higher than the cost of capital employed.
Godrej Beverages & Foods Ltd, for instance, only buys firms whose projections show they will be EVA positive for the next 10 years. If the company's performance drops after acquisition, its targets are revised based on these projections. Nutrine, Godrej Beverages & Foods' latest purchase, had to pass this test before its purchase.
This should be the easy area, right? Wrong. Think about it: two sets of sales teams, brand managers, distributors, retailers, vendors� and then you try to make them work as one. So, where do you begin?
Companies that want to avoid the frustrations and stress that are inevitable when trying to integrate two separate organisations could take a tip from Marico's acquisition strategy. Marico doesn't buy companies; it only buys the brands it wants, from Mediker in 1995 to the recent acquisitions of Nihar (hair oil brand owned earlier by Hindustan Lever) and Manjal (soap brand from south India).
Another FMCG manufacturer, Godrej Consumer Products Ltd (GCPL), has a similar buy-out style: its domestic acquisitions are of brands (like Ezee), not companies.
"We prefer buying brands as we already have the infrastructure," explains Hoshedar K Press, executive director and president, GCPL. But does this aggravation-avoidance tactic work only in the consumer goods sector? The jury's still out on that one.
Don't change for change's sake
Consultants have a stern word of warning for buyers of brands. Don't be in a hurry to put your stamp on your new purchase.
First understand how the market and the consumers will react to changes in their touch points. Wipro routinely sends emails to employees before a new deal; it briefly considered adding its consumers to the mailing list, too.
That idea was discarded in favour of maintaining confidentiality, but the underlying concept has merit, says Wipro's Nandy, "The consumer is anxious when an acquisition takes place. That must be addressed."
Marico, too, understands the importance of holding back. It has deferred its plans to change Manjal's packaging until it understands the brand better. "You need to look at why a brand is selling and isolate these factors before you start tinkering around with it," points out Saugata Gupta, chief marketing officer, Marico.
Typically, when your company's in the thick of a takeover, brand marketing activities are way down on the priority list. That's understandable, but the brand suffers in the meantime. Quick integration is essential to regain lost ground, especially since acquisitions are part of a larger, consolidated marketing strategy.
"When a brand is put on sale, it is dressed up like a bride. But during the days of the deal and the days following, there is no focus on the brand," points out Marico's Gupta. When Marico bought over Nihar, it readied the entire support infrastructure (distributors, salesmen and so on) within the first month itself.
Here's a hypothetical example: Company A believes in stockpiling supplies; it's got three months' worth of materials ready and waiting in its warehouses.
Company B, on the other hand, is a devotee of lean thinking and is a convert to the just-in-time method of manufacturing. One day, company A and company B become company A. What next?
Room for growth
"Remember, what you are acquiring is a running engine. Don't disturb that unless your own capacity is ready," says Wipro's Nandy. He should know. In 2006, when Wipro acquired Quantech, it also gained 200 new employees who needed to be physically close to Wipro's existing set up under the planned integration.
But Quantech was based in International Technology Park, over an hour's drive away from Wipro's operations in Bangalore, which meant it needed to relocate completely.
In this case, Wipro's facilities were large enough to make room for the new people and the integration was completed within a month.
Moving people is still doable. Manufacturing is an entirely different ballgame, for the company comes a package, complete with factories and warehouses, all of which need to be accommodated in the new blueprint.
When Dabur India bought over the entire operations of Balsara last year, it acquired 25 C&F agencies to its existing network. It also gained three factories, at Silvassa, Kanpur and Baddi.
Dabur converted the Kanpur unit into a warehouse, relocated surplus staff from Silvassa to Baddi, and moved production of Dabur International's range to Silvassa. Says Charanjit Mohan, executive director, operations, Dabur India, "We had to draw up a whole new blueprint."
When an acquisition is within the same industry, one of the biggest benefits is the opportunity to club suppliers to take advantage of scale economies. You optimise your bargaining power and streamline your transportation logistics further.
Again, the Dabur-Balsara deal is a case in point. Both companies manufactured toothpaste (among other things), but where Balsara bought critical components like sorbitol and calcium carbonate through direct negotiations, Dabur used the reverse auction system for its supplies.
After the acquisition, though, with both companies on e-procurement, Dabur's become a heavyweight buyer. The combined company now accounts for 11 per cent of the demand for toothpaste tubes, up from 4 per cent pre-acquisition. As a result, procurement costs have dropped by 6-7 per cent.
HR is the white pawn in the acquisitions game: it moves first. Getting the people equation right is perhaps the biggest challenge. There are new roles to be carved out, old ones to be rejigged; and then there are the routine tasks of synchronising salaries and designations, the hiring and the firing.
You heard it here first
Communicate, communicate, communicate. Employees of both the buyer and the seller must be informed of the acquisition before the news becomes public.
"We always ensure that the CEO of the acquired company sends out a well thought-out email to all employees," says Homi R Khusrokhan, executive director, Tata Chemicals.
The letter explains the purpose served by the acquisition and how employees will benefit from it. The Godrej group, for its part, goes a step further: group chairman Adi Godrej makes it a point to personally address the employees of the acquired company.
He travelled to London last November to speak with Keyline employees after GCPL bought over the British cosmetics and toiletries firm. A few months later, he was in South Africa, speaking with the staff of Rapidol.
Duplication of roles and employees is an unavoidable part of the acquisition process. Domestic M&As lead to a surfeit of senior personnel, which can affect the morale of employees across both organisations.
The general consensus seems to be that some level of retrenchment is inevitable, so be prepared. But, warns A Mahendran, director, Godrej Beverages and Foods, "It's important to ensure you don't lose an experienced workforce as they are your drivers. You lose them and the vehicle will derail."
It's a little easier in the case of an overseas buyout - the CEO of the acquired company can become the country head for that location. Says GCPL's Press, "We prefer acquiring companies located abroad. If we already have a presence in a foreign country, then we prefer buying only brands in that location."
Sense and sensibility
When taking over a new company, it's important to make allowances for the differences in organisational culture. There's the now-legendary example of the multinational that removed a religious idol from the front office of its new Indian acquisition. The MNC saw its move as secular; the employees, however, were deeply offended and went on strike.
The emphasis on acculturation is relatively new. Points out Gopalakrishnan, "In the past, the father saw a girl, got his son married to her and the mother-in-law then hammered her into shape. Companies, too, followed a similar strategy of acquiring and hammering."
Those days are gone, thankfully. But acquisitions continue and so do the problems. Will India Inc's new marriages fare better than some of the earlier ones? Or is happily ever after only for fairy tales?