Shashwat DC
While Mergers & Acquisitions (M&As) are a fairly modern phenomenon, coming to fore only in the 20th Century with multi-billion dollar deals, there is one anecdotal incident that links India with possibly one of the very first official mergers ever. In fact, through a quirk of fate, India was the primary reason behind the said merger. It was in 1708 that two companies -- the English Company Trading to the East Indies and the East India Company -- were amalgamated by a tripartite indenture into a single entity. Both the companies were claimants for exclusive trade to India, and the British Government (Crown) thought it best to merge the two rather than create inefficiencies borne out of competition. And as they say in such anecdotes, the rest was history.
Yet, not all M&As end up on high-notes. Corporate history is littered with instances and illustrations of how some big-ticket M&As failed, and mailed miserably. In fact, an article in the Harvard Business Review puts the failure rate of M&As at around 70%-80%. Even the most optimistic of these assessments put M&A failures at around 50%. Namely, close to half the corporate takeovers, buyouts, acquisitions, mergers, fail to live up to the promise and deliver the value that was supposed to come.
“The reasons for such failures range from really big ones to very small ones such as improper match of the two entities. And this trend is not confined to western countries, but is also a case in Indian shores, of course to a lesser extent,” says Bharat Dhawan, Joint Managing Partner, Mazars India, an international audit & consulting firm. Mazars is a leading advisory and consultant on corporate matters, and works with various companies to help streamline their business.
A recent study which supports Bharat’s argument states that 75% of Indian companies doing foreign deals fail to create value in the first year after completion and 59 per cent of M&A deals actually destroy value. So the question that begs an answer is what are the reasons for such big-ticket M&As to fail and how can it be avoided?
Here is a list of reasons why most M&As run into rough weather:
Not doing the homework
One might think that any M&A that involves big money would be a result of a studied and empirical business case. Thus, the company that is buying or investing in a new firm would know everything about it, right? Wrong. In fact, one of the primary reasons why M&As falter is because of this gap analysis. Even before considering an M&A, due diligence is utmost important. Also, you must have an understanding of the brand fit once the merger is done. A lot many times, companies are impressed by the brand and its dynamics, and fail to pay attention to finer details. For instance, recently, Cooper Tire & Rubber Co terminated a proposed $2.5 billion merger agreement with India’s Apollo Tyres because of differences that arose over labour and pricing issues. Undertaking an extensive diligence exercise beforehand, could have reduced the heartburn and litigation that followed.
Getting the basics right
Believe it or not cultural issues are termed as one of the chief reasons why quite a few M&As fail. Typically, the company that is acquiring the other has an attitude of a victor that is taking a POW. It is often assumed that the management and culture of the big entity will be new norm. Also, the acquiring company needs to pay attention to the culture of the old firm and must work towards reassuring employees that things won’t be forced on them. Take the case of German Daimler Benz & US Chrysler Motors that had announced a merger in 1998, creating a new entity -- Daimler Chrysler worth $37 Billion. Yet, differences arose in the management, largely wrought by cultural issues. In no time, the deal soured and the proposed merger was called off. Cultural issues get exaggerated when the two companies are in different geographies. For instance, Tata Motors had to face some labour issues when they took over the reins of Jaguar Motors, but they worked overtime to reassure the British workers about their intentions, and now the company is functioning seamlessly.
It's always about money
Hard to believe but in the euphoria of acquiring a new company, valuations sometimes go for a toss. There have been many instances in the past of companies doing faulty assessment and paying through their nose for their mistakes. Take the case of Quaker, which in 1994 had acquired Snapple drink for a whopping $1.7 billion. Within a matter of two years, the acquisition failed and Quaker sold the drink for $300 million. Similarly, one of the biggest mergers in corporate history worth $111 billion between AOL & Time Warner also went bust because of pricing related issues. Hence, getting the price right is one of the most important aspects of any M&A.
Integration issues
Many a good M&As have been undone because of bad integration.
“Often, integration is poorly managed with a relatively vague set of goals, unrealistic objectives and/or a weak framework or design. Right from managing corporate assets to managing human capital, integration must be done in a seamless manner. An important measure of the success of integration emanates from the transformation which is achieved in terms of alignment of stakeholder behaviour with the new culture. One such benchmark of success is that a bulk of employees of the acquired entity feel comfortable in the new setup and continue with their jobs,” says Monish Chatrath, Partner & National Leader for Consulting & Markets at Mazars India.
To get the integration right, a high-level team must be formed at the board level to overlook the process. There are very few instances of successful integrations and one such is that of Mahindra & Mahindra. Even today, the founder CEO of Reva Car (the Electric car) still continues with Mahindra Reva, few years since his company has been acquired.
“India being a growing economy has great potential for M&As and its vibrant business culture will only act as a catalyst. India is becoming and will continue to be a more and more important place for M&A in the global scenario. As Indian companies are also looking at expanding both domestically and abroad, they can be key player in the M&A space going forward as external growth has to be part of their strategy. The changing business dynamics will place India at the cusp of a revolution,” states, Nicholas Ribollet, Partner & National Leader for Transaction Advisory Services at Mazars India.
Laying a roadmap for the future
Now imagine that a company did all things right, namely, the homework, the cultural mapping, the valuation and even the integration. But that does not mean that it is time to relax and be laid back. One needs to continuously monitor the progress and realign their strategies. It is very important to know that mergers don't work on their own, but have to be worked upon. Some years back when Kingfisher Airlines had bought out the low-cost Air Deccan, it was assumed that the two would make a winning combination. But even after the integration, where Air Deccan was rebranded as Kingfisher Red, the parent airline continued to lose traffic and finally the merger failed.
To sum it up, an M&A is to quite an extent like marriage, both partners need to work hard so that the relationship remains on solid ground. After all, a divorce is not all always the right way out.
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