When Elephants Get Bigger

"Many mergers are financial failures because the people aspects have not been planned and managed properly."
--- Watson Wyatt

The decade of 90’s and 2000 has been marked by big ticket merger and acquisition (M&A) activities. The M&A activities have resulted in bigger corporations, lesser competitors, better economies of scale, more bargaining power and definitely more offerings to customers at competitive prices. Business magazines and journals have been inundated with case studies of M&A, extolling their virtues and encouraging others to go for the dive.

The scale of M&A in recent times at the international level has risen to unprecedented heights. The scale of cross-border M&A has also increased rapidly. The United Nations estimates that cross-border M&A amounted to $275 billion in 1996, a three-fold increase in five years. In 1998, there have been a number of "mega-mergers" between firms from different systems: the tie-ups between Daimler and Chrysler ($41 billion) and BP and Amoco ($48 billion) are two of the largest cross-border mergers in history. HP acquiring Compaq in the year 2002 created an $87 billion behemoth. P&G, after acquiring the Gillette’s operations, has becomes the second largest consumer goods company in the world with sales of $61 billion next only to Nestle SA.

In Indian context, mergers and acquisitions started taking place as the Indian companies developed global aspirations. In Banking Industry, merger of ANZ Grindlays and Standard Chartered bank was one of the grand events. In the FMCG sector, Dabur created a ripple by acquiring the Balsara group of products. The M&A activity in India more than doubled during 2004. The total size of M&A during 2004 was to the tune of $ 12.3 billion (Rs 54,120 crore) as compared to $5.11 billion (Rs 22,484 crore) for 2003, according to a survey by Bloomberg. There were several big-ticket deals for 2004 which included sale of L&T’s cement division to the AV Birla group for $572 million. It’s not that acquisitions and alliances are restricted to old economy sectors. These have also become more relevant in new technology ventures. Wipro, a software firm, made a foray into the ITES sector by acquiring Spectramind for a consideration of $93 million.

American Companies have created a titanic acquisitions and alliances wave by announcing 74, 000 acquisitions and 57,000 alliances from 1996 through 2001. During those six years, CEOs signed, approximately, at least one acquisition and a partnership every hour each day and drove up the acquisitions’ combined value to $12 trillion. The pace of collaboration has slowed since then. U.S. firms struck only 7,795 acquisitions and 5,048 alliances in 2002 as compared with 12,460 and 10, 349 respectively, in 2000, according to data from Thomson financial. Unlike wines, acquisitions didn’t get better over time.

Yet, you shall see a darker side to every M&A activity when you closely examine the horror stories highlighting the human resource turnover during failed mergers and acquisitions - AT&T, Quaker Oats, Disney, Sony, Compaq, General Electric – all of them have gone through the same turmoil. While the excitement of the deal consumes management's passion, every employee knows in their heart, mergers tend to mean job losses.

The most difficult yet most important factor in achieving a successful merger or acquisition concerns key employee issues. Time and again, unexpected or undiscovered people liabilities emerge after a deal is completed.

Most of the time, M&A have failed to achieve their desired objective in terms of strategic and financial either due employees being discontent ,integration issues, cross cultural issues, management crises etc. These dynamics have been found in combinations involving organizations of all sizes, in all industry sectors and across international boundaries. Two of the top merger challenges include communication effectiveness and leadership.

Acquisitions often have a negative impact on employee behaviour resulting in counter productive practices, absenteeism, low morale and job dissatisfaction. It appears that an important factor affecting the successful outcome of acquisitions is top management's ability to gain employee trust. In a study that explored a number of variables which bear an impact on managerial trustworthiness, it was found that frequent communication before and after acquisition, and the already existing quality of employee relations seem to play the most important role in M&A activity.

Research suggests that employees of acquired companies become unproductive because they are not comfortable to work in the predator’s interests and believe that they have lost the freedom to work. In fact, most of the people often walk out of the door after acquisitions. Therefore, a carefully planned, employee-centered communication programme, together with a good level of employee relations, seem to form the basis for a successful outcome as far as employee relations in the face of acquisitions is concerned.

The key issues which need to be addressed while going for mergers and acquisitions are as follows:

1. Culture

2. Structural Integration

3. Profile of people

The success of any merger and acquisition depends largely on the perception of employees because these are the people who run the day to day operations of organization. So the objective before engaging in M&A should be to create an environment in the organizations where these people get the necessary time to adjust to new environment. People who are resistant to change should be given a chance through a training programme whereby they would be explained and convinced about the need and importance of the M&A decision.

The mergers that have worked relatively well are those where managers both have a sensible strategy and set about implementing it straight away. The acquisition of Turner Broadcasting by Time Warner comes in this category. Gerald Levin, Time Warner Boss, had developed in the late 1980s a vision of media conglomerate, offering one piece of content to many different audiences.

Management should hold sessions with employees, clients and public as to find out what they perceive about new organization. Top management should also be clear about its vision and should be flexible and be open to listen to its employees, i.e. communication should be clear and precise.

However, if the transition phase is not managed with openness and transparency, cultures will clash, employees will be dissatisfied and there shall be a fight for power. This will create confusion and the best people will leave leading to crisis and downward spiral in performance. Hence it becomes very much important to be careful during first few months of an M&A venture. It is at this juncture that the corporate leader has to face most demanding challenge. This is, like the second marriage, a triumph of hope over experience.

Bubble Bursting - Capital Markets

Interestingly, the Thursday evening i.e. 27^th April 2006, When S.EB.I. Announced the I.P.O. scam it was like hearing another new scam in the offing. This has been the trend of the Indian capital markets since we have decided to liberalize the economy. The Very next day Sensex nose dived 400 points within opening minutes of the trading session, but interestingly again on this fall of sensex S.E.B.I. announced yet another investigation. Is regulator the culprit for bringing the sensex fall or it’s the driving force acting on somebody’s behalf? In fact, everything about the present scandal on the Indian stock markets has a sense of Déjà vu to it. In the cast of characters, the lack of regulatory supervision and investors trapped in the maelstrom of a bull – bear war. It is a story that has been repeated every three years in India. One half of the Indian capital markets have continued to develop and change all through the succession of scams and debacles. In terms of automation and legislation, it is on par with the best in the world; it has also reduced problems related to paper-based trading and counter-party risk -- but when it comes to enforcement and supervision the rating is down to a near cipher. Ironically enough, the formula never changes. It is always a promoter-broker nexus, inside information, powerful political friends and lethargic regulators who act out the same hackneyed script.

India is already the most expensive capital market in the world. But typically, expert opinion about the future is sharply divided. Foreign institutional investors (FIIs) are showing signs of withdrawal, especially as US interest rates firm up. When prices beginning to look unrealistic, one would actually do well to install a rear-view mirror and remember that the 1992 collapse led by Harshad Mehta , the 1996 boom was followed by the C.R. Bhansali Scam and the 2000 one led by Ketan Parekh took down two banks each and the savings of several lakh investors. In between these two scams, the IPO (Initial Public Offerings) mania of 1993-94 killed the primary market for a decade, after hundreds of companies vanished with investors’ money.

Circa 1999. Ketan Parekh began to make his presence felt by identifying information technology, communications and entertainment (ICE stocks) as his chosen areas; that this coincided with a runaway international boom in these sectors helped him immensely. Ketan's problem was that he either failed to spot the end and get out in time or was so badly trapped in the pyramid of speculative funding that he had created, that it was impossible for him to get out. Everybody credited Parekh with being far more sober than Harshad Mehta is, but the truth became chillingly clear only in February.

The only thing to differentiate the Indian market at the current level from a bubble is the future growth. The market is willing to pay an expensive looking price on historical basis for the prospect of future growth. The Indian growth rate is likely to accelerate from the current level on back of few fundamentals. Any global event will also have its repercussions in the Indian market. Indian markets also will not be able to maintain the spectacular returns of the past. Though the current valuations of India look little higher on a historical perspective, it is not a bubble. It is based on future growth.

But, there is also the other side of the story about the Indian Capital markets. The sensex has delivered a return of more than 53% in the last 12 months, compared to Nikkei’s 45%; Seoul stock exchange in South Korea delivered 38%, Hang Seng 11% and The NYSE just 10%. This is not because of India being hot and happening, it’s also because of the consistent good performance of the Indian companies delivering consistent results and expansion plans which has boosted the Investors confidence to Invest in the Capital markets. The country has attracted more overseas investors, who poured $10.7 billion into Indian equities in 2005, and $4.13 billion in just the first quarter of this year.