Corporate Buyers: Avoid becoming a prisoner of your past

Interview by Katherine Steiner-Dicks

Mark Arian, Global Co-leader Aon M&A Solutions, says that the firm is seeing healthy activity in the corporate/strategic M&A market with a growing trend of Asian companies looking to acquire US and European assets. The drivers behind this shift in the market stem from good value for money deal propositions paired with attractive currency valuations and swings.

But there is a hesitant air among Chinese dealmakers stemming back over the past 30 years. Arian explains: “Asian companies are in some regards prisoners of their past. A lot of Asian companies made their foray into the US and Europe by buying big brands in the 80s and 90s that did not succeed because integrations and brands were not managed well. This history has made them hesitant to date, but they are now more likely to be acquisitive.”

He adds that over the past five years Chinese companies have avoided the wholesale buying of companies or brands, but this is beginning to shift. He sees a micro trend emerging: “While they are still wringing their hands about it, companies are considering reverse integration models whereby they acquire superior management teams with a view to taking Chinese state owned companies private. They then have them managed Western style, much like a private equity house would, over a five-to-seven year horizon, and then re-list them in Hong Kong.”

Not letting the growth synergies slide

A major factor for many of these deals is that, when you bring in the Western style management, you need to support the integration of staff into a foreign corporate culture. Arian says that the majority of management teams come from some sort of finance background, which allows them to appreciate the often immediate positive cost synergies that come after a bolt-on acquisition.

But, Arian observes, these growth synergies soon start to flatten after the six month honeymoon period because there is an element of breakage to the company, especially with staff who see their colleagues and friends being laid off. “Ignoring the human capital issues means risking the loss of better growth synergies post-deal”, he says.

True value of an engaged workforce

This is true not only for cross-border deals, but for all situations when companies integrate. A 2010 report done in collaboration with Aon Hewitt highlights that some of the most difficult challenges in M&A activity include aligning company culture, engaging key talent and integrating reward schemes.

“Ignoring the human capital issues means risking the loss of better growth synergies post-deal”.

“Human Capital Management and the Success or Failure of M&A” (Nov 2010) surveyed senior executives from companies that had engaged in M&A activity in the past two years. A majority of respondents said they felt there was room for improvement in managing human capital programmes during their M&A activity. In particular, areas mentioned included establishing the desired company culture, communicating and measuring performance standards, and pricing in human capital assets, costs and risks before doing the deal. Mostrespondents agreed that effectively managing the HR dimension of deals contributes to their company’s ability to realise financial value from transactions.

Arian says, “Once a client comes on board with us, we encourage them to keep their employees fully informed since an engaged workforce will drive shareholder value.”

If employees are worried about job losses, and start to feel unclear about their future in the merged company, then they will not be focused on driving the new business forward. “Their priorities will diverge from the business as they become concerned about their future livelihood,” he says. “This change in daily focus will occur from the shop floor all the way up to senior management.”

All of this anxiety can be eased and the emotional, motivational and rational lines of thinking can build, rather than slowly destroy, shareholder value if a company communicates to staff very early on why they are acquiring the new business, what is and is not changing, the value proposition of the deal and each employee’s part in executing the deal.

Communicate your plan to employees

Arian illustrates a very poignant point, which is that even the most acquisitive companies can still be prisoners of their past mistakes because they repeatedly, deal after deal, forego cohesive and well communicated organisational transitions. Arian, who has been in the M&A business for more than 20 years, says that in 100 per cent of cases, there is a drop in company performance during a deal.

“What companies typically do is not communicate until they have a clear understanding of what they are doing and that has a direct and often negative impact on the emotional and rational qualities of the employees. If employees are not informed they assume the worstscenario. The highest value employees will very quickly go out to see what they are worth in the marketplace,” warns Arian.

But how do you ‘communicate’ when you do not know the outcome yet? Arian offers what he and his team suggest is a very useful transition management process, which can be achieved by creating a sense of attachment between the employees and those leading the deal. Simply emailing a real-time action plan that sets out the stages of development of the deal to employees will ease all those negative emotional triggers.

He says this can be accomplished, in part, by offering information on whom is making the decisions, who the decision makers are meeting, when they are meeting, why they are considering this proposition, when the next update will be and how employees can offer their input. Spelling out these steps will engage employees with the transition process even at the early stages of the deal discussions. “By going through this process you are informing them of the criteria and showing that you are reaching out to them, this builds a foundation of trust,” says Arian.

He continues: “Corporations are beginning to get the message that organisational culture is a huge trip wire. They therefore are explaining early on ‘how things are done around here’. This leads to people understanding what their authorities and accountabilities are by outlining what their decision rights are, what are they entitled to do, who or what they have to control and to whom they report, all the way down the organisational structure.”

This type of action plan clearly sets out the culture of the new business, which is of the utmost importance when combining businesses from different organisational and international business cultures. He uses the example of the extremes of some Asian business cultures compared to US businesses. He explains that some Asian business cultures, such as Korea, traditionally have a very tight knit decision-making structure, which puts the power into the hands of a very small percentage of staff. This would not gel well with, say, a US business culture that spreads its decision rights among division heads, for example.

To ensure that all employees are on board with how the parent management team wants things done, the details need to be spelled out to all members of staff; not just through an organisational chart, but through a company ethos, sales models and executive remuneration plans, all of which could be under the scrutiny of specific labour laws depending on the chosen jurisdiction.
Speaking the same language?

Arian concludes with an example of how even companies merging within the same sector can have very different ways of running their sales models, financials and marketing. For example, when advising an established US utility on acquiring a smaller high growth utility, Arian saw that the two companies clashed when it came to financial and operational skills.

The established utility had a deep seeded culture of conserving cash, whereby the high growth business lacked operational skills and, in some ways, was losing out on cost-savings. The two companies needed to acknowledge the weaker aspects of how they ran their businesses and devise a new business model that combined and improved each company’s skill sets so that the newly merged staff spoke the same language. Only then were the companies able to generate the benefits of both worlds, which is ultimately why they did the deal in the first place.

Useful contacts

Line between aggressive tax structures and efficient tax planning still unclear for UK M&A

Provisional GAAR regulation in the UK is likely to target artificial and abusive tax schemes by next year.
However, in the context of commercial transactions, especially those with a cross-border element, a provisional GAAR could generate additional tax uncertainty.

Read more

Beating the seven year itch:

Finding new ways to best respond to market change and achieve more buying power in portfolio companies
Portfolio managers and investment teams within corporations and private equity firms are feeling increased pressure to achieve more buying power in the market. With investee companies being held longer than they were just seven years ago, there are new tactics for realising cost savings, risk reductions and controls.

Read more

The latest issue of the AMAS Review. A quick digest for private equity investment managers, corporate undertaking acquisitive transactions or organic growth and JVs in the new territories and transactional lawyers.

Download the AMAS Review -
May 2012

Previous issues of AMAS Review