Shyamal Majumdar: The GTB deal's people problem

THE HUMAN FACTOR

The Global Trust Bank (GTB) deal is seen to be a perfect fit for Oriental Bank of Commerce (OBC) While sewing up the legal, financial and operational elements of the merger, OBC Chairman B D Narang would, however, do well to also give priority to something mostly ignored during mergers and acquisitions "" human resources. McKinsey has dubbed it "the people problem in mergers."

OBC is, of course, not new to mergers. Nationalised in 1980, the bank grew in size after Punjab Cooperative Bank and Bari Doab Bank were merged into it in 1996. But these mergers are small change compared to the GTB deal.

In case of Punjab Cooperative, Narang's predecessors took care of the salary fitment problem by asking all officers "" from juniors to the level of assistant general managers "" to join OBC in Scale I, which is the bottom end of the officers' salary levels.

The resentment among Punjab Cooperative officers could be easily contained as most of them were only too relieved to have been absorbed in a better public sector bank, which had an excellent balance sheet and the lowest cost-to-assets ratio.

GTB would be vastly different. Despite its recent troubles, a significant percentage of the 1,200 GTB employees enjoy much better salaries and privileges than what a public sector bank like OBC is constrained to pay its own employees.

The scheme of amalgamation drafted by the Reserve Bank of India has clearly said that all GTB employees will continue to retain their jobs and get the same salary package and work on the same terms and conditions as applicable prior to the closure of business hours on July 24.

But "salary fitment problems" could only be a part of the "people problems" to be faced by OBC. A survey of 1,000 organisations by HR consultants Watson Wyatt found that many boards and senior management teams only pay lip service to the idea of giving priority to the human side of the merger.

More than 76 per cent of executives in the survey said that the retention of key managers was a critical ingredient of M&A integration. Another 71 per cent picked communication, and just over half pointed to the assimilation of corporate cultures as being crucial.

But these good intentions often fall by the wayside: only 5 per cent chose human resources and communication as an area of top priority, while more than 36 per cent chose strategic business development and 15 per cent picked finance.

According to the survey, M&As have turned out to be just terrible for business so far. Less than 33 per cent of companies attained their profit goals after a tie-up. Only 46 per cent ever met their expense-reduction goals and the mergers failed to produce the expected benefits 64 per cent of the time.

Why such a woeful track record? HR consultants say people in charge of acquiring another company often forget that mergers are not just about balance sheets, cash flows or marketing synergies; they are about people making the synergies real.

A top HR executive recounts how the due diligence that his team was asked to do in an M&A deal was restricted to straightforward data "" headcount, pay, outstanding legal cases and so on.

No effort was made to understand the skills and effectiveness of the people of the acquired company, how they work and relate to each other and how to deal with the problems of cultural integration.

Result: post-merger, the management was perpetually in a fire-fighting mode having to deal with HR issues instead of devoting time to business operations.

The actual integration cost far exceeded the plan, making the entire process meaningless, the executive says. For example, in every department there were two persons working in the same position.

Since no one thought about this problem, there was intense politicking among the legacy players jostling for the same space.

One major fallout of this is flight of top quality people. According to The McKinsey Quarterly, if key employees don't feel that they have been kept in the loop after a merger, they will probably start honing their resumes.

Competitors understand that your employees don't know whether they have a job or, if they do, where it will be located, where they fit into the new company's structure, how much pay they will receive, or how their performance will be measured.

Key employees usually receive inquiries within five days of a merger announcement, precisely when uncertainty is at its highest.

For OBC, the biggest challenge would be how to treat the brighter of the GTB employees, who would be the most vulnerable at this point. According to some estimates, around 250 GTB employees have already left the bank from the time trouble started brewing in the organisation.

As per the The McKinsey Quarterly, the takeover approach usually proceeds on the assumption that the acquirer's management will remain, but exceptions must be made when the acquired company's employees "" some of them, at least "" are clearly superior.

This means OBC should quickly identify GTB's key people, tell them that they are well regarded, and offer incentives sufficiently generous to keep them.