thesoftsideofmergers

The soft side of mergers

Roopen Roy

Mergers and Acquistions (M&A) are a tricky business. M&A transactions are no longer about hard assets. The intangibles and soft assets like know-how, intellectual property, talent, innovation and research capabilities are increasingly becoming important. More than ever, the risk of talent flight keeps CEOs awake at night.

The ability to assimilate culturally –post-merger- is critical to success. The alignment and integration of sales channels, IT architecture, physical assets, HR processes and financial systems are relatively easy. The silent killer is usually the failure to assimilate culturally.

There are three cardinal challenges. First : Attila, the Hun, problem. When you acquire a company, the last thing you want to do is to ride a high horse and play the marauding, rapacious conqueror. If you cannot treat the people of the acquired company with respect, do not lament if the talent of the acquired company vote with their feet. You asked for it.

A CEO of an Indian company which acquired a European company larger than itself shared with me a valuable insight. When he spoke to the people in the acquired company, he sensed a huge anxiety. They were apprehensive that the acquirer would slash and burn to reduce costs. His first task was to earn trust. He explained how the acquired company would add immense value to the group. He portrayed the transaction as a great alliance rather than a conquest. The Indian company, to its credit, walked the talk. Remember what Porus wished after being overpowered by Alexander? When asked how he expected to be treated, Porus replied,” Like a King.”Alexander indeed treated him as a King. Alexander did not have to repent for it. No one, except an asset –stripper, buys a company simply because it is cheap. You buy because you see value. If you destroy the value by causing a flight of talent, what did you buy?

Second : the Noah’s Ark problem. After a combination you have too many “two of the same kind” .There are two CEOs, two CFOs, two CIOs, two of almost everything. Noah built the Ark, according to God’s bidding, to protect his family and the animals of the world from deluge so that they could regenerate.

If you are the CEO of a combined company, for God’s sake do not play Noah. You are not ordained by the Almighty to perpetuate “two of a kind”. You cannot take the easy option and try to accommodate all managers with fancy titles and joint roles. If you do so, you will stretch, beyond the limits of tolerance, your people’s ability to handle ambiguity. You must decide early on, through a fair process, who is the best athlete for a particular sport. Do not keep the people guessing as to who is the captain and who is the coach? Bite the bullet.

The third barrier is the “Israel challenge”. Israel was created to fulfil the Zionist dream of a Jewish homeland. Judaism was just one identity of the diaspora. When they migrated after two thousand years-their mother tongues were French, Polish, Russian, English, Arabic and so on. They came from Baghdad to Budapest, from New York to Napoli, from Kolkata to Kochi. They brought in the rich diversity of their cuisines, music, art, culture and lifestyles. These threads of different colours were knotted into the tapestry of nationhood. The binding backcloth was a combination of religion, the Hebrew language and a shared history of suffering. When companies merge, people bring with them the culture of their legacies, different ways of doing things and their diverse experience. It is important to create a bonding with a sense of belonging and “nationhood”. This can be done through a common mission and a framework of shared values. There is no need to cast the different identities into a “melting pot” of uniformity. It will destroy the strengths that diversity engenders.

In the late 1990s I worked on the merger of two global companies. Both were in the professional services sector. Globally, they were about the same size –with similar footprints. Their Indian affiliates looked similar from outside. But under the hood, they were as different as chalk and cheese. The most striking differences were in talent management and in their culture of innovation.

For Firm A, meritocracy was religion. If you were a fresh graduate with an excellent academic record you could simply walk into firm A. In Firm B, you had to be connected. The answer to the question: do you have a relative in the C-Suite of an important customer was more relevant. Firm B had more people who had superior sartorial tastes, deeper knowledge of fine wines and the good things in life. Unfortunately, when you are having a by-pass surgery you do not seek the surgeon with immaculate bedside manners or the one who is a great sommelier. You seek the safest hands. In professional services you need the best minds with the relevant experience to solve your most complex problems.

When the merger discussions were underway, two interesting facts surfaced. Firm A was at least 4 times more profitable than Firm B .It was also at least twice as successful in harvesting innovation by every measure. It was clear that in the service sector, talent is what differentiates an ordinary firm from a great one.

Initially, the combined firm AB was quite successful in scaling up and gaining market share. It, however, played Noah for too long. The DNA of meritocracy was diluted over time. Gresham’s Law came into play,”Bad money drives out good.” The AB firm now looks more like B. Inability to assimilate culturally was the silent killer.