Globalisation has change the complete facet of global economy which is currently categorized by multi-directional flows of products, services, people, ideas and capital. Moreover, it has given ample opportunities and options to companies as well as individuals across the globe. Certainly, emerging economies are transforming the nature of global business. As much as 70 companies from emerging economies had entered in the 2007 Fortune Global 500 list of the world’s largest economies compared to just 20 a decade ago. Mergers and acquisitions (M&A) has been considered as one of the most important aspect of this speedy global expansion by emerging market multinationals (EMMs). More than 1,100 mergers and acquisitions were conducted by EMMs in 2006, representing US$128 billion in value. Even India has evolved the M&A trend very actively. As per Thomson Financial, around 543 M&A deals had been made by Indian companies both at home and abroad in 2007, with a total value of US$30.4 billion. This represents a compound annual growth rate (CAGR) of 28.3 percent in deal value over the period 2000-2007. The volume of M&A transactions in India has apparently increased to about $67.2 billion in 2010 from $21.3 billion in 2009. More recently, 72 overseas M&A deals (worth $11 billion) have been completed in 2012 only. So, a bullish trend in M&A may indicate that most of the M&As bring success to companies. But reality explicit the reverse.
Every merger, acquisition, or strategic alliance takes place with a certain objective to generate value from some kind of synergy, yet statistics show that the benefits that look so good on paper often do not materialize. Several studies and reports have highlighted that more than two thirds of M&A have failed to serve its main purpose to be profitable. A Business Week study revealed that more than 60 percent of the mega M&A cases conducted between 1998 and 2000 destroyed shareholders’ value. Now, a very simple but important question strikes in our mind that why do so many corporate combinations that looked like such great opportunities end up in disaster? Recent research suggests that contrary to common belief, it is not poor strategic fit that most often causes mergers and acquisitions to fail but poor execution. The errors can be seen, for example, in instances of insensitive management, lack of trust building and communication, slow execution, power struggles, or a leadership vacuum following the deal. Even with this kind of information, most corporate combinations still place special emphasis on the strategic and financial goals of the transaction, whereas the cultural and people implications rarely receive as much attention.
In this globalisation era where merger and acquisitions involve blending people of different corporate cultures and even various national cultures into one company, which tends to complicate matters further. So, leaders have to play a pivotal role to turn a merger successful. Carlos Ghosan, CEO of Renault (which owns 44 percent share of Nissan) once critically said that Academic scholars and most business analysts would like to “tend to view these business ventures only from financial and operational perspectives” ignoring cultural impact on merger. In the same line, Jean Pierre Garnier, executive director and CEO of GlaxoSmithKline (GSK) explained similar thing in other words: “In any merger or acquisition, investment banks and equity analysts will provide you with a plethora of figures quantifying the synergistic strategic benefits of the union. Yet what determine whether a merger succeeds or fails is really its people. History, sadly, has been littered with far too many examples of failed acquisitions or mergers that did not create value for the companies involved. What lessons can we draw from them, and how can we avoid this?” Ghosan further added that “My experience with Nissan has reconfirmed my conviction that the dignity of people must be respected even as you challenge them to overturn deep-seated practices and traditions. The most fundamental challenge of any alliance or merger is cultural: if one does not believe anything can be learned from one’s new partners, the venture is doomed to fail. I have always believed that an alliance, merger, or acquisition— in fact, any corporate combination— is about partnership and trust rather than power and domination.”
Over the time, consulting with Human Resources Department has become a very important aspect to make a merger fruitful. However, most of the companies would like to consider legal and financial aspects rather than HR factor. A recent study found that organisations that were strongly HR led, anticipated and overcame many of the integration stumbling blocks that beset other mergers and outlined the areas in the table below as those that needed addressing. A gap inevitably remains between HR and strategy albeit this could be set to change. A global survey on people and business challenges found that while 63% of organisations rarely or never consult their senior HR team on mergers or acquisitions (before or after the deal), within the next 3-5 years 82% of the senior leaders surveyed expect HR to be perceived as a strategic, value added function and not just the personnel cost-centre. Today a CEO generally overlooks the importance of smooth transition post-M&A. Even if he does, he treats all his employees as one assuming everything to fall under ‘melting pot’. Even in case of M&A being in same cultural vicinity, the CEO must address the minor internal differences in corporate culture which is obvious after a new alliance.
According to SHRM, over 30% of mergers fail because of simple culture incompatibility. The merger of German Daimler with Chrysler (in 1990s) failed due to cultural differences between the two with respect to work environment, philosophy, remunerations and other similar issues that got swept under the carpet during the process. In recent times, the most infamous of all M&A disaster is the HP and Compaq deal. In 2001, Hewlett Packard contemplated to acquire Compaq which failed as the former has an engineering-driven culture while the later had sales-driven Culture. This not only led to huge opportunity loss but also created a financial loss of $10 billion dollars.
As per a research paper titled ‘A CEO’s guide to the new challenges of M&A leadership’ authored by Orit Gadlesh, Robin Buchanan, Mark Daniell and Charles Ormiston of Bain & Company, a leader should essentially communicate the strategic vision, cheer on the troops in both companies, should close the deal and not leave it open, manage the integration and change and crusade for the new company.
Therefore, the factors leading a successful M&A have evolved over time. Initially, it was accounting based measurements that used to steadfast the intrinsic value of amalgamation and its success. The inherent shortcomings of that principle gave way to equity based merger equations. Moving through time the financial managers realized that optimizing better promising results out of the merger dynamics is to focus more on more holistic views and to the factors that will steady the ship one’s the financial measurements are complete and change of hands have taken place. It is going back to the people that are instrumental in fetching the new promoters the estimated required rate of return and maximize the shareholders’ value. That is essentially recognizing the fact that evens the best financial analyst with most prudent financial forecast will not be able generates success for the company, if its employees fail. Because, a company is not an automated entity but a profit center whose success and failures depend on the relative success of the people that runs it. And that is foremost role of a CEO to optimally use his peer groups and deliver through them.