Market Stress and the Well-managed Merger

For some companies, global expansion may simply mean expanding into new geographies. But companies that are already operating in multiple geographies may not be seeking merely to grow, so much as they are looking for better ways to realise the benefits of operating as truly global organisations. Thus, they face varying degrees of difficulty in making their merger and acquisition (M&A) strategies succeed. This is particularly so in today’s financial environment, where market pressures have never been greater than now, with considerable turbulence in the eurozone, potentially less growth in Asia’s economic powerhouses, uncertainty about recovery in the US, and heightened returns in Latin America.

It’s no surprise, then, that expanding into new countries and operating globally are two of the most difficult business challenges an employer can face. For companies in either position, the various differences between M&A transactions inevitably have an impact on the degree of difficulty there may be in realising the full value of any deal. These differences range broadly, of course, and since there is a near-infinity of specifics attaching to any merger of existing entities, it can be dangerous to over-generalise. But there are some basics that are bound to affect the complexity level, deal to deal, and company treasurers would be wise to have a sure grasp of these, in addition to a sharp focus on the current market dynamics of any and every geography affected by M&A decisions.

The number of countries, for example, not to mention the specifics of each country which is countries involved in the M&A process is a huge factor, given the differences in culture and regulation that come to bear. Is the industry capital- or labour-intensive? Is it a young versus an old, established company? Does the company have a pattern of acquired or organic growth, or rapid versus slower, consistent growth?

In addition, such factors as ownership structure – are the merging entities private, public or state-owned? – and the broad complexities of culture, both organisational and national, affect the degree of difficulty in ways that can be at once obvious and subtle. A private company seeking to merge with a public one or a state-owned enterprise forging an arrangement with public or private companies carry issues that call for the most considered human resource integration, due diligence of financials and strategic contingencies.

As for the enormous category of culture, variables such as salary and incentive structures, benefit packages and benefit traditions, such as the common provision of parental health coverage in nations such as India, make it difficult to enact one-size-fits-all HR and compensation policies across many borders.

But the complexities hardly end there. Organisations vary, often profoundly, in terms of financial performance – from distressed quarterly earnings to robust profitability – so it’s important for the financial professionals involved in M&A due diligence to bring their expertise to bear in support of ‘big picture’ decisions that top management must take.

Financing, Rates and Retention

That said, financial issues are at the core of the M&A challenge. Organisations targeting the assets of a distressed company, or its potential for turnaround, face degrees of difficulty that extend to deal financing, interest rates, the retention of key talent to ensure sufficient levels of continuity and execution, severance costs. In addition, national regulatory requirements can impact the acquiring organisation’s flexibility in making key decisions. In many mature economies – from the US and Latin America to the EU and beyond – the complexities of labour relations come into play, with work councils, guilds and unions wielding significant influence over M&A outcomes.

Then there are the less tangible, or at least more difficult to measure, issues of leadership capability and organisational talent. Organisations with what might be termed ‘highly evolved’ leadership capability – evolved through such crucibles as a lengthy or substantial tenure within the company (which generates institutional knowledge), a history of promotion and success at diverse projects, and international experience – differ from organisations led by relatively unsophisticated, or less tried-and-tested, leadership. This adds a degree of difficulty in the assessment of how much value will be realised through a merger.

Similarly, the talent levels, assessable potentials and skill sets that prevail throughout the organisation, from top management through rank-and-file employees, add to the general complexity. The logical yet crucial approach to this is to ensure that HR leadership be strongly engaged in the M&A due diligence process to assess these capabilities, but always in close collaboration with financial management to ensure that compensation and cost-structure issues are properly considered in assessing the talent required vis-à-vis the talented the organisation can afford.

Ideally, the process can include estimations of what level of leadership and talent may be lost in the course of the acquisition process, so that the appropriate retention strategies and succession planning can be in place. For example, retention of key leadership and talent in high tech or pharmaceutical industries may be more crucial and potentially more problematic than talent and leadership retention in commodity industries such as energy, or in various realms of manufacturing.

Application of Resources

Organisations must maintain a high-level sense of the various degrees of difficulty inherent in any deal in order to evaluate and prioritise the application of resources and decide on action steps during due diligence and integration planning.

On the most basic level, this leads to a key question: is there a proper understanding of local issues? Indeed, for organisations that are beginning to go global (as opposed to those already functioning at a high level globally), local issues can be a challenge, particularly if the acquiring organisation has a dearth of experience in the country/region. Thus, understanding the implications of local issues requires not only a grasp of legal requirements, but also of the entire context, including market/social practice and culture, at a sufficient depth.

If there is a salient example of how challenging ‘being global’ can be, it may be glimpsed in the compensatory realities encountered by companies buying into the US and encountering an upside-down pay culture. Indeed, there has been any number of instances in which an Asian company acquiring a US firm discovers that the US human resources (HR) leader, for example, is making more money than the Asian company’s chief executive officer (CEO). Depending on the level of cultural awareness and willingness to embrace such inequalities, the degree of difficulty in making the deal work, and capturing its ultimate value, can be higher or lower.

Specific examples aside, degrees of difficulty hinge upon the merging organisations’ capacity for understanding and leveraging culture differences in order to accelerate integration and deal-value capture. This requires, for example, overcoming communication and language barriers. This refers not merely to language and translation, but also to ensuring a common view of the deal logic and what is required for success.

Obviously or not, this extends to leadership. That is to say, ensuring that leaders own the integration effort and the organisational design, ensuring that both organisations’ structures and processes enable and encourage desired behaviours. Leaders and organisational designs that fail to recognise the pre-deal importance of integration strategies are destined to fall behind the curve when it comes to going – and successfully being – global. Making the complex connection between people and financial strategies is crucial to success in today’s unsettled economic landscape.

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