Moneycontrol Pro Panorama | Mergers are not a please-all solution

Mergers and acquisitions are not always the best way to grow a business.

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Mergers and acquisitions are not always the best way to grow a business. Companies resort to them to expand their product offering, gain scale and operating efficiencies. Yet such activities can create role redundancies, trigger attrition and sometimes even disturb the growth tempo.

HDFC Bank is the latest company to report an exit of a senior employee Arvind Kapil, group head retail assets - home loans. Kapil is heading towards Poonawalla Fincorp where he is set to become a managing director and chief executive officer (CEO).

After the merger of HDFC, HDFC Bank has seen exits of several senior executives. Some went on to take leadership roles in companies outside HDFC Bank. While employee churn is not uncommon, investors should watch out for the impact on the business. Departing executives tend to dip into the talent pool of their previous organisations. But a steady loss of talent can weigh on business momentum. “We believe any similar churn at the senior management level over the near-to-medium term will be a key monitorable,” warn analysts at Nomura.
Developments in the IT sector hold a cautionary message too. LTIMindtree, which was created after merging Mindtree with Larsen & Toubro Infotech, lost steam after amalgamation of the companies.

Prior to the merger Larsen & Toubro Infotech consistently outperformed large cap peers on revenue growth by a wide margin, even during slowdown. But as the industry hit a soft patch in FY24 and LTIMindtree faced post-merger attrition in senior management, revenue growth slowed considerably. The company is unlikely to outperform large IT services companies in FY24 the way it did in FY23 or before, show analyst estimates. You can read our story on LTIMindtree here.

Companies such as Infosys managed to cope with attrition relatively better till now. Even so, success of larger acquisitions and mergers will be known only over a period of time.

Wipro acquired a technology consultancy company, Capco, during the height of the COVID pandemic induced demand for IT services. But as clients pulled back discretionary spending in 2023 affecting the consultancy industry, revenue growth decelerated at the company. Constant currency revenues declined sequentially for the fourth consecutive quarter in December 2023 at Wipro. Amid a slowdown the company is also facing churn in its senior leadership.

To sum up, while investors may eye greater benefits from mergers and acquisitions, they should also be mindful of the integration challenges and changes in the sector. Quick replacements in leadership roles, smooth transition and razor-sharp focus on execution will be important to monitor.

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R Sree RamMoneycontrol Pro