The Ultimate Value: Q&A with Gene Wickes
Lack of understanding of hidden liabilities can lead to unfulfilled promises, disengaged employees and consequently, loss of productivity
For M&As to yield desired results, companies should focus on the journey as much as on the final business outcome, shares Gene Wickes, Global Benefits Director, Towers Watson
As Indian MNCs expand their global reach by inorganic growth, what important factors should they consider when acquiring businesses?
There are a few key challenges that any company would face when making an overseas acquisition. The major risk in any M&A is being able to actually realize the perceived transaction value. The reasons attributable to failed transactions are many, from cultural differences, to integration issues at the workplace that affect employee engagement and productivity, to hidden liabilities that the acquirer finds at a later stage that make the asset less valuable. It is extremely important to institute and meticulously follow a detailed due diligence process to identify potential risks and thereby take calculated decisions.
Compensation structures, for example, vary dramatically across countries. It is critical to understand the promises made to employees during the due diligence stage, as these promises are liabilities that will be transferred along with the transaction. Lack of understanding of these liabilities can lead to unfulfilled promises, disengaged employees and consequently, loss of productivity.
Similarly, at the due diligence stage, identifying cultural differences and understanding the value systems of the two companies involved, is vital in enabling prudent decision making. Sound due diligence practices in an M&A situation equip organizations with valuable information and knowledge, helping them comprehend the full extent of the liabilities and therefore, mitigate risks.
An M&A is as much about acquiring customers as it is about acquiring employees. This could pose unique challenges in cross country deals given divergent customer needs and competitive landscape. Companies need to be mindful of these differences and gather as much information as is possible during the due diligence stage.
Can you share your thoughts on how can companies assess the culture fit during the due diligence stage?
The significance of organizational culture and cultural compatibility in an M&A transaction cannot be overstated. Towers Watson’s recent studies also indicate that clashes between disparate corporate cultures can be a barrier to successful post-merger integration. It was found that even though strategic and financial aspects of a deal are taken into account, socio-cultural aspects can result in acute inter organizational conflicts and mismatches between HR and managerial policies and practices. Unmistakably, the culture of an organization manifests into customer experience, shareholder value and business results.
In my experience, what works is when the CEOs, the leadership and the execution team of both the companies sit together and share the facts that are important to them. Assessing the cultural fit for both the companies is extremely important. Working together during the due diligence stage helps in assessing this fit as effectively as possible.
Most of the times, since acquisitions are usually made in related or competing businesses, people from both organizations are aware of the other’s business, culture and work ethics. Hence, it can be easier to assess the extent of the cultural fit.
What are the key issues that the HR department needs to be aware of before an acquisition?
Human resources play a crucial role in an M&A deal. The first key issue for HR is to look into the financial obligations; identifying the contractual and non contractual promises made to the employees and the ones that will be recognized after the transfer. This is critical because the differences in compensation structures and benefits expectations are very high from region to region. In most cases, success of a deal is dependent on the engagement levels of employees post M&A. HR has to be aware and in control of the way the employees of the acquired companies feel about their work. At the due diligence stage too, it is important to ensure employees feel valued by asking for their inputs and opinions when defining the agenda for the integration.
Employee engagement is a challenge faced by most companies. It becomes more important in an acquisition process because no matter how similar the businesses might be, no two cultures are the same. There has to be a formal roadmap to blend these cultures to ensure that people feel engaged, motivated to add value and remain loyal to support the expansion of the business. Another important thing is to ensure there is focussed, transparent and frequent communication. Towers Watson’s research confirms that effective communication is an important element of change management, and if both are done well, there is a stronger relation with financial performance. Companies highly effective at both communication and change management are 2.5 times as likely to outperform their peers as companies that are not highly effective in either area.
What should be the roadmap for a successful merger and acquisition?
There are two critical things that companies need to do. First, is to ensure thorough market research is done early on. Second, is to ensure there is a robust due diligence process. Add to this, communication is critical to the success of any deal. It is important to ensure that the employees of the acquired company are regularly updated of the forthcoming plans. When people do not have any information, they tend to fill the void with their own thoughts. Overall, my advice to companies looking at expanding through acquisitions is to focus on the journey as much as on the final business outcome. Most successful M&As take years to show results. It is important to have a long term plan with focus on the key issues and implement it correctly, taking one step at a time.