Cultural interventions, people assessment and coaching are crucial for the success of these transactions
Anupam Prakash, Partner, Mercer India, talks about the opportunities for Indian companies in cross-border M&A, and the crucial role that people and human capital considerations play in ensuring a successful transaction
Today, in my view, there are two countries which have a great opportunity in exploiting cross-border M&As: China and India. The reason for this is that these two countries are used to scale and size. They have large domestic markets, know how to sell at scale, know how to manufacture in scale and so on. Besides China, India (and the U.S.), there is no other country that really understands size and scale.
India in particular, is very well placed to do cross-border deals, as India-based organizations understand diversity, complexity and scale. This is due to a thriving culture of private sector and entrepreneurship, something that their Chinese counterparts have not been exposed to. In China, it is mostly the state-owned enterprises which have been doing cross-border deals. In India, M&As are being performed by very large enterprises as well as by mid-sized, and even smaller organizations. At all levels, Indian companies are innovating in terms of products, opportunities and business models, by exploiting the M&A platform to globalize rapidly.
Cross-border deals vs. domestic deals
When looking at cross-border transactions, the only thing that is actually different from domestic deals is the people or human capital aspect. Broadly, you can classify these HR aspects in two categories: one is related to employment matters (regulation, benefits, legal issues); the other relates to softer issues related of culture, communication, behavior and style. When an Indian company is acquiring in India, these two challenges do not really exist; or at least, organizations are completely familiar with them. The moment the deal is cross-border, these challenges become significant, and potentially, can derail and disrupt the deal. When an HR head is looking at the benefits, or the liability, or actuarial valuation to pensions and benefits for India-based population, a standard due diligence activity will easily provide estimations. This is not the case in cross-border deals. Just to give you an example, a large auto-components player in India made an acquisition in Europe. The acquirer did not undertake an HR work stream audit, which they could have done quite easily during the diligence stage, and went ahead with the acquisition. They later realized the liabilities in terms of severance, workers’ compensation, and issues related to other employment matters - healthcare, pensions, retirement and gratuity. These costs were so large that the company carried a large load on its P&L and balance sheet for several years - as a result of which the transaction did not realize the planned business synergy till much later in the game. The level of liabilities that some countries impose on employers in terms of severance pay, benefits, employee rights, trade unions, etc. is of a magnitude, that Asia-based organizations find it difficult to comprehend and cope with.
The second challenge of cross-border deals relate to the softer aspects: style, culture, communication, behaviors. Most Indian companies doing transactions are promoter-driven and managed - these types of organizations have a unique set of dynamics that many organizations in the west are not familiar with. If an Indian promoter is going to maintain the senior management of the newly acquired company, then it is important to sensitize both the promoters on how to deal with a global management team, and the senior global team on the dynamics and expectations of promoter-driven business based in India. Cultural interventions, people assessment and coaching are crucial for the success of these transactions.
A classic intervention to cope with these issues is a culture scan. Done during the M&A process, this tool can easily determine cultural gap and fitment between the two organizations, and throw up an action plan to cope with the gap, as well as, define a roadmap for integration across aspects of management style, organizational communication and team interactions during the post merger phase, and after.
A good deal is not enough – people’s role is crucial to realize the planned synergy
When planning a transaction, organizations typically tend to consider three things: balance sheet synergy, acquisition of technology and access to customers.
Unfortunately, not many companies will look at the employees and the HR issues till later into the due diligence stage, or worse, and more often, till later into the post deal period. This is the reason we find many cross-border deals ending up not realizing the planned business synergies, having a delayed integration, or in many situations, continuing to work as two independent and unrelated organizations, even long after the deal has been consummated. This is a real pitfall, one that needs to be avoided, if Indian organizations aspire to use mergers and acquisitions as a vehicle for globalization.