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Like in our marriages, where there’s a pressure not to let on that the show has stopped running, it’s difficult to suss out whether our mergers are working or not. But it’s time someone took a peek behind the drawing-room curtains of Corporate India, writes Amitava Sanyal. Evaluating mergers.
Hindustan Times | By Amitava Sanyal
UPDATED ON APR 05, 2008 11:25 PM IST

For some time now, the failure rate of mergers in the US has been hovering above the country’s divorce rate. But ours is a different culture. Like in our marriages, where there’s a pressure not to let on that the show has stopped running, it’s difficult to suss out whether our mergers are working or not. But it’s time someone took a peek behind the drawing-room curtains of Corporate India.

This becomes much more fraught when the bahu is phoren. If the merger is a cross-border one, especially one in which an Indian company has acquired a foreign one (an outbound transaction), not only clunky confidentiality clauses but even national pride can be brought on to shut out the bedroom from prying eyes. But the need of the year is to look beyond that door.

Not only have Indian companies acquired more abroad than within the country for the last two years, they have also overtaken the number of foreign companies buying into Indian firms. So before we pop the bubbly and parade this as yet another achievement of Bulging India, we must see whether the mergers have worked or not. After all, Indian companies spent more than Rs 13,000 crore ($32.8 billion) bringing in more than 200 phoren bahus in 2007 alone. Their success or failure can only be gauged when the post-merger integration has taken place. But where should we look in this many-sided game?

“There are three things to an M&A (merger and acquisition) — physics, chemistry and maths,” says Indroneel Dutt, managing partner at Finovant Solutions, a California-based M&A advisory firm that has worked with Indian companies. “The physics bit is the business fit, the demand from the buyer and the supply on the other side. The maths bit is about fiscal consolidation and technological integration. But the weakest link is the chemistry, which concerns the integration of the people of the two entities.”

P2P: The vital resources are human

Depending on who you ask, the global success rate of mergers could be pegged at anything between 30 per cent and 60 per cent. They bicker over different corners of the integration and its results. But all pundits agree on this one thing: people integration is one of the most important parts of it.

Sanjay Kumar of Mittal Steel has seen both sides of such deals in the Czech Republic, Poland and Algeria — as part of the deal teams that did the rigorous homework needed for the deals, and then as director or CEO working to make the deals work on ground. He says the toughest part of any deal is getting the buy-in of the workers.

What about the fat marriages, the $1-billion-plus deals, where the failure rate is higher than the smaller ones? There have been several such deals recently: between Tata and Corus, Hindalco and Novelis, Suzlon and REpower, Essar Steel and Algoma, and United Spirits and Whyte & Mackay.

Rana Kapoor, managing director and CEO of Yesbank (which managed the Suzlon deal), had worked on the first large foreign acquisition — the $700-million buyout of Tetley by Tata Tea in 2000 — as the then CEO of Rabobank India. He says, “Tata Tea brought the Tetley team to its Kolkata headquarters, showed them around the tea gardens in Assam. They made an effort to imbibe the culture.” As a result, what seemed an extremely difficult proposition at first worked out well later on.

Managing cultures is even more important in a people-intensive business like outsourcing. In this space, ICICI-controlled Firstsource, which has bought seven foreign companies in the past six years, counts 4,500 of its 17,000 employees as of foreign origin. Ananda Mukherjee, managing director and CEO of the company, says, “We are always short on senior management bandwidth. So often, some people from the acquired company come over to the mother company.... We always try to keep the original team intact.”

Continuity: Retaining the team

The Tata group, which has acquired 36 foreign entities since the Tetley deal, also believes in continuity. Alan Rosling, who as executive director of Tata Sons is “responsible for the group’s drive to internationalise”, says, “We have not changed the management in a single case... We believe in decentralised management.... We sit with the management of the other company to work out a joint plan. We bring a lot of training material gleaned from documentation of earlier cases, but we do not have a ‘black book’ that says this is how it is to be done, like some companies do.”

Harish HV, partner (corporate advisory) at Grant Thornton, agrees. He says, “Unlike many foreign companies here, Indian companies buying abroad often retain the senior management team of the acquired entity. They do not want to downsize too much. But they prefer to post their own chief financial officer. It gives them a high degree of control, the reporting happens automatically, and this person’s external relationships are limited.” Though it has retained most, the Tata group too has changed a few CFOs in its acquired entities.

How is it paying off? Problems have arisen now and then when the Indian company has failed to understand the business environment in another geography, as in the case of Dr. Reddy’s purchase of betapharm in Germany where patents were a concern. There has also been friction in some IT companies over merging sales teams in the US.

But in most cases, the cross-border marriages have been successful on the cultural ground. Rosling of Tata Sons says, “I have not seen more dedicated Tata workers than those in Korea (Daewoo), except perhaps in Jamshedpur.”

Motivating employees remains one of the biggest challenges for the Indian manager, at home or away. Marriages, after all, may be made in heaven, but they are worked out on dear old earth.

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