Management consultants of overseas M&As treat cross-border deals like marriages. One cannot predict what will go wrong when.
According to a Harvard University study, around 70 per cent cross-border M&A deals fail because of three main reasons: under-estimating the integration costs, inability to link up the two businesses and cultures, and not achieving the expected revenue synergies. So, while deal volumes and values make for happy investment bankers, consolidation presents serious challenges to executives.
Does that mean that India Inc has a lot of balancing to do, now that it is in a fast-forward mode to acquire businesses abroad? Deepak Kapoor, executive director and country leader Transaction Practice, PricewaterhouseCoopers explains that though Indian corporates take a lot of precautions before signing a cross-border M&A deal, the challenges will get bigger as stakes increase. “With proper due diligence and charting out the right integration process by addressing the human resource, management and cultural issues, Indian companies can do well,” he assures.
The foremost challenge lies in people centric issues. The uncertainty during any cross-border M&A activity diverts the focus of employees from productive work to issues like job security, career growth and working with an alien management.
A study by Vienna-based Institute of Mergers, Acquisitions and Alliances found out that at least two hours of productive work per employee per man-day is lost during the acquisition stage if these issues are not sorted out promptly. A clearly defined communication strategy is imperative to dispel employee fears.
Retaining talent and finding the right person who can fit into the local culture to lead the overseas venture is another big challenge. A London School of Economics study, which interviewed 100 CEOs of Fortune 500 companies, found that companies that hire a local head have higher chances of survival post merger than those who get their own nationals. It cites the example of German companies, which mostly have their own national at the helm of affairs overseas resulting in maximum local management discontent. The key is to appoint an experienced local manager who has a record of forging strong ties with employees, suppliers and customers.
In fact, some Indian companies are doing that. Mumbai-based freight forwarding company Allcargo, which acquired Eculine, a Belgian firm, divided the acquired company into five regions and appointed local CEOs. Each region had an executive committee for better decision-making process and the financial systems were streamlined by bringing an Indian CFO, the only Indian in the acquired company.
Differences in business culture and practices can complicate cross-border M&As and trivial complications can jeopardize overseas expansion. Integration is easier for organisations that have a multi-cultural identity and take note of the fact that the two companies have unique social, ethical and behavioural cultures. For example, a simple issue like fixing the weekly holiday, a sensitive issue in Islamic countries, can make or break the merger.
While cultural gaps in management style and practice might never be fully overcome, they can be managed by striking a common chord. One way of promoting integration is to pair managers of the local company with the acquired one in various roles after an acquisition is completed. This can promote both connectivity and joint accountability and enhance the transfer of skills in both directions.
Last but not the least, issues like different accounting systems need to be addressed. Many a times the acquiring company tries to follow a uniform accounting system which increases the cost of training and integrating the software. Also, in cross-border deals it is wiser to stick with a foreign bank, well versed with the accounting principles and legalities of that country.
Apart from integration issues, cross-border M&As entails high risk like instability of the foreign government, significant changes in economic policies, currency devaluation and high inflation. In the US the Overseas Private Investment Corporation advises companies on various political and commercial risks of investing abroad and ensure risk mitigation cover for such companies. In India, the Prime Minister’s trade and economic relations committee is discussing a similar proposal to frame a comprehensive outward investment policy.