Adit Jain & Akhil Mohan discuss the role of the CFO in an environment where cross-border mergers and acquisitions are becoming the order of the day, even for midsized organisations
Overseas deals and cross border acquisitions are no longer limited to large corporate houses or to high profile IT companies in becoming popular amongst India's rapidly growing medium enterprises as well. From 360 deals valued at USD 12.3 billion in 2004, outbound deals rose to 467 at a value of USD 18.2 billion in 2005. In 2006 so far, acquisitions worth over USD 13 billion have already been announced, including the expected high-profile merger of Tata Steel and the Corus Group. A substantial share of these transactions are in the manufacturing sector.
What is driving this trend? A Grant Thornton survey, 'The M&A and Private
Equity Scenario 2006', suggests that the they acquire other businesses either to increase turnover or gain scale quickly. Yet, the reality is not that simple. Acquisitions often are driven by other reasons - access to technology, brand acquisition, access to overseas distribution. In some instances, as Homi Khusrokhan, Managing Director, Tata Chemicals (previously Managing Director of Tata Tea and Glaxo SmithKline, where he was involved with the high profile and successful acquisitions of Tetley and Burroughs Wellcome respectively) points out, simply the premise that "I want to have a foreign presence" provides the basic motive!
In other words, acquisitions are sometimes motivated completely by end up in a painful aftermath. The most common failing of acquirers is that they often neglect the softer sides of a merger - issues that have to do with people and integration management. Popular statistics suggest that over 70 per cent of global acquisitions that take place are value destroying. Statistical evidence would further suggest that of the 193 cases studied between 1990 and 1997, only 36 per cent were able to maintain revenue growth after a merger announcement. Of 160 cases examined from 1995 to 96; (a) only 12 per cent managed to accelerate growth, (b) merged companies have average growth rates lower by 4 per cent when compared with companies that did not merge and (c) 42 per cent of the acquirers actually lost market share. There is evidence to also suggest that 40 per cent of merged
companies failed to capture cost synergies planned and very few indeed managed returns to shareholders that were better than the industry average. Similar statistics are not available for Indian acquisitions specifically, but these are early days yet.
Why Acquire? There are however, very valid reasons for acquisitive growth. Acquisitions create exponential growth as opposed to incremental. They help reduce costs and gain economies of scale - mergers can create a stronger business that commands a greater say within the market place. (Indeed, many believe that cost-oriented acquisitions are sounder than those undertaken for revenue enhancement - for the simple reason that costs are easier to isolate and measure. Hence, it is easier to assess whether an acquisition will result in savings or not, and whether those savings are eventually realised or not. In the case of revenue, it is often difficult to tell whether growth is attributable to the acquisition, whether it could have been higher (or the same) without the acquisition, and so on. However, that is another debate altogether. In the case of complementary businesses, synergy-based
value can be created in a merger - as in the case of Tata Tea and Tetley. Often self-defence against another hostile bid can lead to a merger. Sanjeev Agrawal of Standard Chartered, the man who front-ended SCB's mammoth acquisition of Grind-
Acquisitions create exponential growth by reducing costs and gaining economies of scale. Cost-oriented acquisitions are considered sound
lays Bank a few years ago, says that "talent balancing is equally critical. If an acquisition helps a company fill major talent gaps, which cannot be addressed through ad-hoc hiring or consultant expertise, then that alone provides a justifiable reason."
But the fact remains that acquisitions also take place for the wrong reasons. Pressure from investors, media and analysts is one important factor. Often zealous managements or maverick CEOs acquire businesses to get a feather in their caps (a 'trophy' of sorts). Sometimes, there is cash lying in the bank, giving way to temptation to go out on an acquisition binge, ignoring the fact that the money belongs to shareholders and could be put to alternative uses. No doubt, pressure from merchant bankers 'to do something about idle cash' plays a role. Amongst pharmaceutical companies, acquisitions are sometimes driven by a dwindling R&D pipeline, though managements sometimes forget the tiny detail that two deficient pipelines cannot create one good one.
Outward Bound: Major Outbound M&A Deals in the Last 2 Years
Target Company, Country
USD 300 Million
USD 290 Million
Thomson, China and others
USD 263 Million
USD 220 Million
FLAG Telecom, US
Tata Telecom (VSNL)
USD 135 Million
Tyco's fibre optic network, US
USD 100 Million
Trevira Gmbh & Co KG, Europe
USD 100 Million
RPG Aventis, France
USD 300 Million
Finmetal Holdings, Bulgaria
USD 290 Million
Thomson SA's global colour picture-tube business, France
USD 239 Million
Teleglobe International Holdings Ltd, Bermuda
Apeejay Surrendra Group
USD 138 Million
Premier Foods Ltd, UK
Millennium Steel, Thailand
Tata Chemicals Ltd.
USD 113 Million
Brunner Mond Group, UK
Dr Reddy's Laboratories
USD 59 Million
Roche (Active Pharmaceutical Ingredient), Mexico
USD 56 Million
USD 56 Million
Imatra Kilsta AB, Sweden
USD 565 Million
Hansen Group, Belgium
Dr Reddy's Laboratories
Betapharm Arzneimittel GmbH, Germany
Suzlon Energy Ltd.
USD 565 Million
International NV, Belgium
Ranbaxy Laboratories Ltd
USD 324 Million
Terapia S.A. Romania
USD 140 Million
Azure Solutions, UK
United Phosphorous Ltd
USD 119 Million
Advanta Netherlands Holdings BV, Netherlands
USD 25 Million
ROOM Solutions Ltd, UK
USD 220 Million
8 O'Clock Coffee, US
Aban Lloyd Chiles Offshore
USD 445 Million
USD 7985 Million
Videocon Industries led consortium
USD 695 Million
Daewoo Electonics, South Korea
Mahindra & Mahindra
USD 120 Million
Jeco Holding AG, Germany
Tata's Indian Hotel
USD 170 Million
Ritz-Carlton Hotel, US
Corus Group, UK
"I want to have a foreign presence" Homi Khusrokhan Tata Chemicals
Before looking at the acquisition option, companies would be well-guided, according to Mr. Khusrokhan, to keep the following principles in mind:
Examine all possible options of organic growth before evaluating the acquisition option. Acquisitions need a compelling strategic reason that can be substantiated quantitatively. They cannot be based on whims, emotions or mere qualitative assumptions.
If acquisition is deemed necessary, good research is critical - sweet deals do not just'drop by?.
In particular, pricing considerations are paramount - any acquisition only makes sense at the right price. This is where merchant bankers and investment advisers often need to be kept at bay. Their fee is not only success based very often, but is directly proportional to the size of the deal. There are several valuation methodologies but the most reliable, according to Mr Khusrokhan, is the principle of Net Present Value (NPV) of future earnings. This is more accurate than the multiple of earnings or book value method. Any premium paid over NPV would be quite inappropriate. There is often the temptation of quantifying the benefits of what 'one might be able to do with the acquired company' to make it more profitable. This, however, is a grave error: a business should be valued on a stand-alone basis and the add-ons post merger should be treated like the icing on the cake.
Share swaps do not always work out cheaper - the markets tend to discount the share price of a bidding company just as they always inflate stocks of the target company.
Set yourself a 'walk away' price beyond which you will let go of the deal.
Often lengthy negotiations serve the acquirer well, and hence, it may be in your interest not to set yourself (or agree with the target company) a date for concluding the negotiation.
There is nothing more critical than detailed due diligence as a lot can crawl out of the wood-work once the deal is done. As Satish Kaura of Sam-tel said in a recent press interview, it can take up to two years for there to be 'no more surprises'. (See chart: 'The importance of due diligence').
No matter how rigorous the due diligence, it would be unrealistic to expect that the acquirer will know everything that needs to be known: skeletons may fall out of cupboards
All changes must be made fast - miss an early chance to change and things may be lost for ever
The new head of the company has the right to rectify problems and impose his stamp on processes - and he must exercise this
What's unpleasant must be addressed first
Incomplete tasks fester on and create trouble later
Criticise processes, never people
Sympathies linger for past bosses
Do not carry out a post mortem or indulge in a witch hunt
Ensure that there is no loss of face for those exiting
Best of both' is a powerful concept - it applies to both people and processes
It demonstrates fairness
It is useful in proving credentials
Keep a score-card of 'wins'
Early wins creates enthusiasm for larger tasks;
Wins provide proof that changes are working;
A little empathy and sympathy go a long way
Often, many involved with the past have been silent by-standers - they are not to blame
Humane behaviour can bring out crusaders who will fight to right the wrongs of the past
A number of mergers have soured due to cultural differences:
Snapple & Quaker Oats
Pharmacia & Upjohn (Pfizer)
Daimler Benz & Chrysler
Citicorp & Traveller's Group
Steps that can help address such issues, include:
Carrying out a Beliefs Audit
Setting up Mixed Integration Teams
Ensuring frequent interactions and communications
Redeveloping a shared vision, mission and values
Yet, no matter how rigorous the due diligence, it would be foolish to expect that the acquirer will know everything that needs to be known. SCB's Sanjeev Agrawal does not deny that "a number of skeletons fell out of the closet as we began to integrate with Grindlays Bank". But he's quick to add that "this happens in a 'business as usual' scenario as well... every business throws up surprises, including our own; often, one finds it 'convenient' to blame/attribute this phenomenon to the acquiree or the acquisition process".
Concluded the Deal? The Hard Work Begins Now! After going through all these highly complex steps, the acquirer is faced with its most difficult challenge and key determinant of success: the post acquisition effort towards integration. The Grant Thornton study found that 60 per cent of the respondents believed that poor integration strategy was the primary reason for failure of mergers, not insufficient due diligence (10 per cent) or the lack of a strategic rationale (20 per cent).
Integrating two dissimilar corporate cultures is enormously difficult and needs a lot of attention if it is to be successfully done. It needs to be handled as quickly as possible
Integrating two dissimilar corporate cultures is enormously difficult and needs a lot of attention if it is to be successfully done. Most experts agree that the best way to do this is to do it quickly. Delays and drags raise speculation, create uncertainties, and make the whole process generally more difficult. People involved in the acquisition - including those of the acquired entity - need to see benefits happening and things must seem to improve as opposed to deteriorate (or for that matter, stay the same).
"Talent balancing is a justifiable reason" Homi Khusrokhan Tata Chemicals
Mr Agrawal agrees entirely. According to him, "if we had to do the entire SCB-Grindlays acquisition all over again, the one thing that I would like to change is our speed of integration. At that time, we had valid reasons to take things slowly, but on hindsight, a quicker integration process would have meant lesser pain".
Some Lessons. Mr Khusrokhan's career saw several important mergers - the most important ones being Glaxo's acquisition of Wellcome and subsequently, Tata Tea's acquisition of Tetley.
He has learnt a number of lessons on post-acquisition integration (see box).
Integration and cultural issues. The process of an acquisition needs to engage a number of people on the top table, for strategy cannot reside in the mind of a CEO. Integration can be successful if the company's entire top management is brought in at the early stages. Credibility of decision making is essential. There is no gainsaying that a win-win for everybody is not always possible. A large number of job losses can take place and often do - and so it's best to be fair, quick and impartial. The focus should be on growth as opposed to cost cutting.
"Quicker integration means less pain" Sanjeev Agrawal Standard Chartered
Formal mechanisms. A formal integration process is essential. The formation of an apex steering group helps, which involves top executives from both companies. The mandate of this group should be to
direct the process of the merged company, identify the 'big issues', decide on projects and task forces and their composition, and finally identify roadblocks that may come in the way. Usually, multiple task forces help in bringing about integration of processes and operating systems - marketing, finance, supply chain etc. It is vital to develop a shared vision and objectives, strategies and value systems.
Consultants are useful as they bring to the table experience from several deals, but they are expensive. They bring about impartiality in processes and decision making, ensure discipline, adherence to time frames and also take care of the administrative work load, including simple things such as keeping a record of activities or minutes of meetings etc.
But one shouldn't go too far down the 'Committees-and-Workgroups' route either. Mr Agrawal says that "we asked ourselves whether we should treat the integration as a separate 'project' or continue with a 'business as usual' scenario". Eventually, SCB went with a combination approach. A very slim project management team was appointed, comprising just 4 individuals drawn from both banks - not an elaborate group of functional and business managers. This team's primary role was to coordinate and troubleshoot. The detailed integration tasks were given to individual
A large number of job losses can take place and often do - and so it's best to be fair, quick and impartial. The focus should be on growth as opposed to cost cutting
managers and business heads, and "deriving synergies from the acquisition was made a part of their performance evaluation system". This ensured an immediate buy-in from all concerned, rather than the 'project team' being lumped with all 'unpleasant tasks'.
Whose 'job' should it be? Mr Agrawal thinks the CFO is best placed to assume the primary role, "The CFO has the best view of the organisation, after the CEO". Moreover, tax issues alone can make or break a deal, especially in a cross-border transaction. When Standard Chartered was acquiring Grindlays, it was simultaneously reporting to the tax and regulatory authorities in three countries-Australia, the UK and India. Issues involved included double taxation avoidance, transfer pricing, change of accounting standards and accounting years, in addition to day-to-day compliance. "Who better than the CFO to handle this complex web", says Mr Agrawal.
""It can take two years for no more surprises." Satish Kaura Samtel
Manage uncertainty, manage the acquisition. Mr Khusrokhan emphasises that 'first footing' is important, as initial impressions always last. Aspirational targets need to be set and buy-ins by everybody are crucial. Big or difficult issues need to be identified quickly and resolved behind closed doors - washing dirty laundry in
public only undermines the process. Communication is critical at all times together with the keeping of score cards to publicise success. Retention of key talent is good not only for the business, but also sends a message that the company is doing the right thing. If uncertainty is effectively managed, so is the acquisition.
For CFOs, acquisitions present a two-fold challenge. On the one hand, they must carry out rigorous and quantitative due diligence to ascertain whether an acquisition makes commercial sense. On the other, they must provide for 'slippages' and 'inefficiencies' that will inevitably creep in on account of softer HR issues. A disgruntled employee, a mutinous work force, a dissatisfied customer... the list of unexpected inheritances an acquisition brings with it, is endless. CFOs have always been comfortable with financial analysis. They have considered financial due diligence to be a part of their core competence but not the integration process itself. That was relegated to the 'HR folks' who were meant to use their mystic potion of motivational strategies, skill development and talent management, to ensure that the CFO's spreadsheet is adhered to. But this must change -spreadsheets must be built to respond to people, not the other way round. No due diligence is complete without a careful understanding of the cultural synergies (or lack, thereof) that exist between two organisations. Equally, no revenue or cost synergies will be realised if CFOs distance themselves from the crucial process of 'people integration'.
No revenue or cost synergies will be realised if CFOs distance themselves from the crucial process of 'people integration' or from understanding cultural synergies
Leading an acquisition means leading the people. How many CFOs are prepared for this challenge?