Like marriage

Indian companies are busy on deal street, merging and acquiring like never before""in fields as diverse as telecom and aviation, pharmaceuticals and software. Some weeks, there is more action overseas than in the domestic market""adding a touch of novelty. It's easy to get excited by the drama, but some words of caution are also in order. As studies over the years have shown, a significant portion of M&As do not deliver their desired or planned value. That's partly because of faulty pre-deal negotiations and partly due to mismatch in the strategic, cultural and human resource objectives of the merging partners. The proposed acquisition of Air Sahara by Jet Airways has highlighted, for instance, the dangers posed by different interpretations of government regulations. The costs of a faulty merger can be high. And given the high number of unsuccessful or half-successful mergers, it is important to focus on the best practices that create maximum value.

The experts say that successful M&As depend on superior execution, addressing specific value-capturing objectives. How can this be ensured? One common mistake is for the merger partners to view the initial negotiations and post-deal processes as two separate activities. Increasingly, M&A specialists say that the more successful cases are those which are treated as integrated activities with a process that begins with the pre-deal package (goals, transparent due diligence and fair valuation), moves to deal execution and culminates with smooth integration. Good execution of M&As should see all these activities as one holistic process, rather than as piece-meal activities. For this to happen, one crucial pre-requisite is top management commitment from both sides to ensure that the deal is kept on course during the entire process.

Second, it is important to focus on value creation and tapping the synergies of the merged entities. To do that, integration activities are best prioritised according to the value they create. The problem is that in many mergers, integration activities are sequenced on a functional basis rather than on a value-addition basis. For example, while consolidating marketing activities, IT systems and rationalising policies are important, but each of these activities needs to be prioritised because not all of them yield equal benefits.

Third, the partners will have to marry speed of execution with cultural sensitivity. This is easier said than done. From the time of announcing the deal, bringing the merger to complete closure in integration planning activities is important. Depending on the size of the deal and nature of activities of the merged entities, this could take up to a couple of years. During the early phase of this period, when regulatory agencies may be reviewing the deal, the two merging entities often engage in intensive integration activities, till the required government clearances come in. These interim periods are crucial because it is times like these that can lead to postponed strategy implementation, dilution of brand equity, lowering of employee morale, and workforce and customer defections. Having a proactive strategy in place to take care of these contingencies and related cultural issues is crucial.

Fourth, the right way of achieving people integration is crucial. Issues of compensation, designation, hierarchy, way of doing business, retention of people, top management structure and graceful exit of redundant manpower are all important. In this, optimum communication throughout the organisation is needed. Finally, greater clarity of government policies and guidelines will help the companies a lot on what can be done, and what cannot be""as seen recently in the civil aviation sector. What should be clear is that, as industries consolidate and companies supplement organic growth with mergers and acquisitions, success down this route is not guaranteed just because a deal has been done, and has to be worked for over time after the deal is signed and announced.