Life after a merger or an acquisition
Sudha Kumar
A recent Forrester report predicts a major shakeout in the offshore IT industry and recommends that even large players align with each other to prepare for a maturing market. They predict consolidation, not just at the small company level, but among companies of all sizes.
We have recently witnessed the acquisition of Mphasis by EDS, one of the more significant deals in the offshore space. In an industry that is seeing consolidation at various levels, it is relevant to examine both the motives behind this trend and, more important, look at what it takes to create a successfully merged entity.
M&A drivers
It is important to understand the causes that motivate mergers and acquisitions as they drive, to a great extent, the method of integration. Broadly speaking, M&A drivers could be customer acquisition and topline growth, new market entry or competence building. Scandent is an example of a company that has grown aggressively over the last two years by almost single-mindedly following an acquisition strategy. Intelenet, a joint venture of HDFC and Barclays, has similarly resorted to inorganic growth to create a significant presence in the domestic market. Infosys, a more conservative player, has bought Expert Information Services to strengthen its presence in Australia while TCS picked up Comicron in Chile, South America.
Having said this, the most often encountered motivation for an acquisition is competence building. Wipro’s acquisition of Spectramind, Nerve Wire and, more recently, Quantech are all related to acquiring or augmenting competencies . Zensar’s acquisition of Hyderabad based OBT Global is yet another example of an instance where the company strengthened its skills — in SAP — through this move.
A strategy
A fourth reason for M&As is to make a significant change to the business model. Valtech’s acquisition of Majoris and the EDS take over of Mphasis are examples of companies using acquisition as a strategy to bring about a quick change to their existing business or delivery models.
A contrasting example is one of Indecomm Global Services, a fast growing provider of transaction processing services, acquiring Mortgage Dynamics, a leading US based mortgage consulting firm. This acquisition would allow Indecomm to globalise its business model and offer a more sophisticated set of services to its clients.
Clearly, there are many reasons for a buyer to seek out companies to acquire. On the flip side, companies sell out either for size and scale benefits or simply for survival.
While most of the attention of observers and analysts and, sometimes, even the management is on evaluating companies for M&As and assigning a value to the deal, few companies pay equal importance to integrating the merged companies. Widely researched statistics show that less than 20 per cent of takeovers globally have yielded superior results to shareholders.
That’s not all, we have seen many examples in the IT industry where M&As lead to confusion at an employee level, ambiguous go-to-market strategies and often, lowered customer satisfaction.
Good synergies
In one instance of a US-based consulting firm acquiring an emerging IT services company, the synergies were theoretically good — the two companies addressed different geographies; one was strong in consulting and the other had a well honed offshore delivery model.
However, since the consulting company paid little attention to the real issues to be addressed post acquisition, employee morale dipped and the company has seen plenty of churn at all levels in its India operations. This has undermined the utility of the deal.
In my view, there are four important areas where integration efforts need to be focused — alignment of values and vision, especially among management; a unified go-to-market strategy; people integration; and operations integration. The relative importance of each would be determined by the level of integration being considered. Often, highly simplistic approaches are taken.
For instance, compensation rationalisation is equated with HR integration, while merging Web sites and printing new business cards and signage are thought to be sufficient at a marketing level.
Talking of marketing integration, it is also necessary to set practical expectations. In another case of a multinational company acquiring an Indian company for extending its delivery model offshore, the management’s expectations on how soon the acquisition would yield benefits for higher growth in bottomline were unrealistic.
Changing a business model needs to be preceded by a change in mindsets and this is an important task of post merger integration. As we know, this cannot be done overnight and therefore, it is prudent to put in place a series of measures to prove value and change views. If this approach is not taken, it leads to dissatisfaction and doubts.
Integration tactic
The level of integration needed between the companies also decides the post merger integration strategy.
There are many cases where the acquired company keeps its original identity and more or less continues to work independently. Suffice to say that these situations are easier to handle.
Having spoken about the need for a clear post merger integration plan, let us now examine the main ingredients of one (illustrated in the accompanying diagram).
Strategy and structure is probably, conceptually, the easiest and the most critical part that has a bearing on the rest of the integration. However, if the acquisition does not have total management buy-in, it may be a problem area too. Some of the key elements of this are leadership consolidation, vision and business philosophy alignment, cultural alignment, consolidation of business reporting and organisation structure definition.
Market integration is a more involved exercise and needs to consider issues covering a broad spectrum — brand integration (visual and messaging); sales force integration and retraining; product and service integration; channel integration; and supplier integration are key. If done well, this is one area that could lead to tremendous synergies and even not so obvious cost benefits.
People integration, the most sensitive area, comprises compensation rationalisation, creation and deployment of a communication plan, devising employee retention mechanisms as well as employee feedback processes.
Operational integration
Last, we have delivery or operational integration. This would include process and system alignment, technology integration, consolidation of support functions and workplace branding.
While chalking out a post merger integration plan, it is a good idea to identify a team comprising members from both organisations to anchor the initiative. Needless to say, the top management should visibly support the initiative, and it is useful but not compulsory to have external help.
It is also practical to be aware of typical challenges:
Maintaining day-to-day business continuity
Overcoming cultural differences including management style, company structure, employee mind-set
Delivering the needed integration synergies in the first year and deliver sustainable synergy benefits over the long-term
Creating and maintaining effective employee communication
And address these effectively through the plan. Finally, here are some pointers to a successful integration
Quick and speedy integration
Swift leadership consolidation
Unambiguous and continuous communication to stakeholders
Setting up an empowered and small integration team
Top management commitment and involvement
Detailed plan with milestones and metrics to evaluate success
Identifying quick wins and displaying success
In times to come, we will see more and more companies entering interesting partnerships. Some will go all the way, others may have strategic, but more loosely coupled relationships. However, the above approach will help in all such scenarios.
(The writer is CEO and co-founder of the Bangalore-based Prayag Consulting, a marketing consulting firm with special focus on the IT and BPO segments)
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