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'Sharks should not buy sharks'

A University of Michigan professor says Indian companies need to be cautious with their merger and acquisition strategies, reports Venkatesh Ganesh.

india Updated: Nov 21, 2007 21:34 IST
Venkatesh Ganesh
Venkatesh Ganesh
Hindustan Times

Gautam Ahuja, professor of strategy, Stephen M Ross School of Business, University of Michigan, is not happy with the way companies are handling their merger & acquisition strategies. Acclaimed for his contrarian views, he says that Indian companies need to be cautious with their M&As, whether they are within their country of operation or in a foreign country.

"The problem is more likely to occur if the merger was a strongly contested one, in which a bidding war developed between two or more companies to take over a third company," he says. Recently, Tata Steel and CSN of Brazil were locked in a battle to take over Anglo Dutch steel firm Corus, before Tata Steel won the battle. Another reason for overpaying, Ahuja points out, could also be when the acquisition becomes an issue of prestige.

Then there are issues of integration between the cultures of the merged companies. He pooh-poohs the notion that this problem is more prevalent in geographies such as Europe, insisting that it is more of an organisation-specific issue. It is more likely to occur if the acquirer and the acquired are both of the same size and have strong but different cultures.

"Interestingly, a lot of the research on M&As finds that cross-border mergers are not any more likely to fail than are within-border mergers," says Ahuja. One possible reason he attributes to within-border failure is that when managers undertake a cross-border acquisition, they are very sensitive to the cultural issue; possibly in within-border acquisitions, they may not take organisational culture as seriously.

Often, the problem of adjustment arises in M&As due to a lack of management vision, Ahuja insists, especially when it comes to day-to-day business operations. The problem of management vision is likely to be worst in the case of acquisitions beyond the core business of the company, like in the case of diversifying M&As. In such mergers, it often happens that managers see "synergies" only to find out after the merger that they are actually very difficult to achieve, and that there are many "dis-synergies" of bringing together different businesses.

He is of the view that leveraged buyouts will be on hold because of a global credit crunch and mergers between relative-sized companies pay. "Sharks should not acquire sharks," he says.

When asked about the 'innovation' part of Indian companies, he is of the opinion that "Indians are creative but lack the relentless to-be-the-best attitude." He attributes the reason to the culture and behaviour of the people who "make do" with things that are below world-class standards.

Ask him on whether Indian companies have it in them to be global players in terms of scale, size and brands, and Ahuja has a mixed view: "Going by the Goldman Sachs BRIC (Brazil, Russia, India and China) report, India is going to be the third largest economy after China and US by 2050. But, to achieve that, Indian companies have to be higher on the efficiency and innovation front, even more than their current levels."

He says that Indian companies should move from comparative to competitive advantage if they have any aspirations to be amongst the top three economies of the world. Recently, Indian IT and BPO exporters have been seeking further tax sops in order to compete against other software exporting countries. "In 2040, we could see the rupee at 14 to a dollar. What would Indian software companies do then?"

First Published: Nov 21, 2007 21:26 IST