india going global.indd - The IIPM Think Tank

MERGERS & ACQUISITIONS
from the scratch.
Most of the Indian business houses like, that of the Tatas,
the Birlas, the Thapars, the Singhanias and the Seths had
control in their companies with stakes ranging from fifteen
percent to forty percent. Therefore, looking at promoter holdings
and current market prices, most of these companies were
still, quite susceptible to hostile takeovers.
Many companies are also playing safe by shoring up their
holdings by buy backs of their shares to thwart hostile corporate
raids for example what HLL did recently. In this
context, companies like, Kesoram Industries, Finolex Cables,
Indian Rayon, etc. had all announced buyback programmes
worth as much as Rs. 400 crores in the year 2003-04. All
these anticipated a loss of corporate control, a fact which
was evident from the case of G.E. Shipping which went for
a second buyback in less than a year as the promoters were
initially holding a meager eighteen percent equity after the
first buyback.
Impact of Mergers and Acquisitions:
Various studies have been carried out for determining the
impact of M&As on the profitability of the merged companies
wherein analysis had been made of the pre merger and post
merger profit margin in respect of a sample of 20 acquiring
firms where there was a decline in profitability in about 10
of these companies after merger.
Overall, acquirers were found to be high growth firms
which had improved their performance over the years prior
to the merger and had higher liquidity. The target firms, on
the other hand, were firms that had higher than industry
profitability which had deteriorated over the period just prior
to merger. If pre merger profitability (an index of efficiency
of a company) of acquirer and target companies were to be
compared, the acquiring companies had been found to have
higher pre merger profitability in 20 of the 25 merger cases
studied. This revealed that, in general, the acquiring firms
were found to be more efficient than the corresponding targets
in terms of their profitability.
Integration Aspects in India:
Post merger acquisition or integration of the firms was also
a crucial task that required to be accomplished for securing
effective performance. The organizational cultures of the two
companies may have been different and sometimes there may
have been differences in their policies, procedures and styles
as well. Functional facilities and activities would therefore
require be aligning and coordinating for such purpose. The
most common perception generated by M&As is that there
is a loss of self-determination and post-the M&A phase it is
characterized by a change in strategic stance (and therefore, in
the operating systems) of the acquired company. For instance,
a merger or acquisition to achieve a backward integration
would make it a logical necessity for the target company to
lose its market-orientation and become more of a feeder unit
as would require to plan and produce to suit the priorities of
the acquiring company.
Changed conditions always have the potential for generating
a sense of powerlessness among the employees, and often
kill their initiative and entrepreneurial spirit which becomes a
core issue that needs to be addressed in the acquired company.
Another common offshoot of this phenomenon is the problem
of a sense of alienation among the employees. With people
facing an overhauling of their identity post merger, relationships
which they had built with their organization, its culture
and people - all undergo a cataclysmic metamorphosis.
At the most obvious level, in the post-M&A period there
are changes in the company’s name, marketing strategies,
and control systems. Besides these, employees also have to
contend with many other changes, all of which make their
daily experience of working in the new company strange and
alien. For instance, colleagues of many years either leave or
are transferred to other parts of the organisation, or former
powerful bosses suddenly lose their power and status in the
company all of which affect the emotional quotient of the
employees.
In the HLL-Tomco merger, about 50 top Tomco executives
posted out from the company headquarters left the company,
within a year. Since the executives who left were also the ones
with whom the employees had identified themselves closely,
their departure signified both the psychological as well as an
emotional loss for the existing employees. This dilemma was
well expressed by a senior Tomco manager who has fought
Levers in the market for as much as twenty years, so much
so that he could not mentally accept the situation of working
for the Lever company at this stage of his career, which only
goes to expose one small aspect of the cultural problem that
companies have to contend with when they merge.
However, in the case of HLL the management of HLL
were aware of these issues, and referring to the merger, the
Chairman of the company when asked as to whether the
merger would create cultural mismatches answered that the
culture factor is indeed an issue that they have to take into
consideration for which they have already outlined a strategy
and put it in place. The first task of course is to communicate
the plan clearly and if some insecurity creeps in then counseling
would be needed to be undertaken in order to remove
the scope for misunderstanding arising in such a process.
The important thing to note is that success or failure of any
new entity would depend largely upon the people affected by
the merger process who are important and who run the new
company. If there is any unhappiness, insecurity or uncertainty,
obviously, the merged company cannot expect to get
the best out of them and this will require a very high degree
of attention.
July-October - 2007 Need the Dough
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