Shyamal Majumdar: Jet's work has just begun

THE HUMAN FACTOR

Acquisitions are not just about balance sheets; they are also about people making the synergies real.

The Jet Airways-Air Sahara deal has been struck, finally, but the actual work "" that of post-merger integration "" has just begun. Unlike the last time when it started on the wrong note by saying that it would absorb only the pilots and technical staff of Air Sahara, Jet has said it would retain the entire staff of the acquired operations. The country's largest private sector airline is probably wiser after the three-day flash strike by Air Sahara pilots in February last year (20 of them joined rival Kingfisher Airlines later) soon after the first round of the acquisition plan was announced.

But the job protection promise is just one part of the solution. While it may be a big issue for the ground staff and other backroom boys, job protection is hardly a concern for the 250-odd pilots of Air Sahara at a time when India faces a shortage of 5,000 pilots in the next five years. Retaining them will clearly be one of the biggest challenges for Jet. For the pilots of Sahara, seniority and pay-scales are the real issues. Sample this: a senior commandant of Air Sahara gets a salary which is reportedly the same as a junior-most first officer of Jet Airways.

Increasing their pay scales may look to be the easiest solution. But there are two problems here: one, the financial implications would be substantial for the acquirer; and two, Jet pilots may feel shortchanged if their pay scales are also not raised simultaneously. These are the issues that Jet will have to grapple with now.

The airline would do well to listen to McKinseyquarterly.com, an on-line journal published by McKinsey. It says one of the few certainties in an M&A process is that essential employees will be tempted to jump ship within days of a merger announcement. To keep them aboard, acquiring companies should identify them before a deal is announced, establish clear guiding principles for selecting managers in the new company, and provide attractive (and intelligently structured) financial incentives for those they want to keep and for those who will have to depart.

But often corporations make the mistake of treating these issues "" which McKinsey has famously called the people problem in mergers "" lightly. The implications have been disastrous: Records show 75 per cent of M&As all over the world have been disappointing or outright failures; half of corporate unions experienced a sharp decline in productivity in the first four to eight months; and 47 per cent of senior executives in acquired firms leave in the first year "" 75 per cent in the first three years.

There is plenty of evidence to suggest that the announcement of an M&A deal has an instant and negative effect on the performance of both the organisations. The reasons for this range from a feeling of alienation to insecurity to utter confusion.

Consider the case of America's largest merger "" the AOL-Time Warner deal in January 2000 "" that created the biggest company in the world. In his book, Stealing Time, Alec Klein, a Washington Post reporter, chronicles a fascinating tale of how the deal of the century became an epic disaster. The deal was celebrated as the marriage of new media and old media, a potent combination of the nation's number one Internet company and the country's leading entertainment giant.

But only three years later, nearly all the top executives behind the merger had resigned and the company had lost tens of billions of dollars in market value. Klein shows how a clash of cultures set the stage for a spectacular corporate collapse. AOL executives lorded it over their Time Warner counterparts, who felt they were being acquired by brash, young interlopers with inflated dollars. The AOL way was fast, loose, and aggressive, and Time Warner executives "" schooled in more genteel business practices "" rebelled. In the midst of clashing cultures and conflicting management styles, AOL's business slowed and then stalled.

Why do organisations consistently ignore the people factor? A Watson Wyatt study has an answer: while the financial and legal persons enjoy a generous allocation of upfront resources, managing the people factor is considered a backroom job and often carries a second class stigma which is reflected in lesser resources allocated to it.

The result is that often, the actual integration cost far exceeds the target, making the entire process meaningless. For example, often in every department there are two persons working in the same position. Since no one thinks about this problem till it is too late, there is intense politicking among the legacy players jostling for the same space.

So, half the battle is won if companies remember a simple principle: acquisitions are not just about balance sheets, cashflows or marketing synergies; they are also about people making the synergies real.