M & A: The Odd Couple

M&A may generate additional value worldwide, but not in India. Even three years after the transnational parents merge, for peculiarly local reasons, their subsidiaries in this country, assimilate cultures, or derive synergies. That's why global M & A never seems to add value to local shareholders.

They are the M(&)arriage mismatches. The nuptial nightmares. The weirdo weddings. Or the Odd Indian Couples. Odd because while they have forfeited every reason to compete in isolation, yet, they continue to do so. While their parent transnationals have tied the knot abroad to increase marketshare, enhance scale-economies, build R&D muscle, or smother the competition, these Indian subsidiaries continue to eke out solitary existences of their own. Even 3 years after their global mergers, the Indian appendages continue to jealously safeguard their maiden names, maiden brands, and maiden markets. Which, inevitably, threatens their very survival, and adds little value for their shareholders.

It is true that global weddings, being complex multi-market, multi-product, multi-national affairs, take time to consummate. Yet, most are impulsive; some are strategic responses to global trends, others are opportunistic over-diversifications. And, by the time a transnational couple's far-flung arms across the world unite, the marriage may have lost its meaning. For instance, if a company found eminent logic in taking over its supplier in, say, 1995, it might find the same rationale weak in 1998--when all their operations finally merge--since virtual integration could dictate the contrary by then. Alternately, the strategic logic of a merger in the US, where a predator might be interested in the prey's intellectual property, may cut no ice in India if the latter has only a manufacturing-facility--and hardly any R&D activity. Paradoxical, but possible.

Truly, global mergers are clumsy affairs. Talent departs, customers flee, strategies flounder, and value migrates when they are not managed well. According to a recent survey by The Financial Times, at least 40 per cent of the Top Twenty mergers concluded in the last 2 years failed to increase shareholder value internationally. And, more pertinently, India-specific problems compound, and prolong the crisis. Agrees Arun Maira, 53, the ceo of the Boston-based management consultancy firm, Innovation Associates: "It is like an arranged marriage. Since the parents negotiate the deal, the subsidiaries do not have much of a choice." Adds Pankaj Ghemavat, 38, Professor, Harvard Business School: "There has been a lot of imitative behaviour in global mergers. Most often, they do not offer added value. If they do not make sense at the global level, how will they make sense at the local (Indian) level?"

Arun Maira

"Mergers are like arranged marriages. The subsidiaries do not have much of a choice"
Arun Maira, CEO, Innovation Associates

Especially since the business environment in this country is different from that in the West. In sectors like computers, telecommunications, and foods, the domestic market is not mature enough to warrant consolidation. Not only are they fragmented, they are also in nascent stages of development. And international mergers, fuelled by American stockmarket booms, have little relevance in this country. Which is why there is such a time-lag between a merger announcement abroad and its manifestation locally.

The coming together of the Swiss pharmaceutical giants, Sandoz and Ciba-Geigy, for instance, was announced in March, 1996, but their Indian arms continued to operate as separate companies until October, 1997. Delay dogged the American medicine-manufacturers, American Cynamide and Wyeth Laboratories, as well, with a combined Indian entity taking nearly 8 months to emerge. Indeed, India creates quite a few untidy knots in global m&a--glitches that can derail the best-laid gameplans. Little wonder, then, that for most transnationals, life after a merger actually means starting afresh here.

India happens to be a remote outpost in a transnational empire. Often, Indian subsidiaries are pygmies compared to their merging parents. When the global pharmaceutical majors, Hoechst, Marion Merrel Dow (mmd), and Roussel, decided to merge in 1994, for instance, India didn't figure in their strategic priorities at all. After all, mmd did not have a presence in India, and the combined turnover of Hoechst India and Roussel India was a fraction of the sales of the new global entity.

Similarly, the $20-billion Union Bank of Switzerland (UBS)-SBC Warburg overshadows its Rs 100-crore Indian operations. Others do not wield enough influence over their global headquarters since they are, practically, start-ups in the Indian market. When the Baby Bells, Bell Atlantic and Nynex, merged globally in 1996, both the companies--which had been operating for less than 2 years in this country--preferred to close down their outfits. For most American companies, the integration process begins in the US, and is followed by Europe, before making its presence felt in Asia.

Crucially, any India strategy becomes part of an overall Asia gameplan. When the French banking giants, Banque Indo-Suez and Credit Agricole, merged in 1996, their Indian arms were refocused on investment banking and asset management in consonance with their headquarters' Asia strategy. Explains Vijay Sood, 41, the Senior Country Officer of Credit Agricole Indo-Suez: "In India, we have largely revisited the Asia strategy, and replicated it."

However, the actual merger pattern may be different from the international context. For example, the overseas amalgamation of Sandoz and Ciba-Geigy into Novartis happened differently locally. Internationally, Ciba-Geigy, being a smaller company, was swallowed by Sandoz; in India, Hindustan Ciba-Geigy, being bigger, became the dominant player in the partnership. Even in the case of the American infotech giants, Compaq Computers and Digital Equipment Corp. (DEC), the former took over the latter in the US. Back home, it was Compaq India's turn to be gobbled up.

The lag effect. Size has created incompatibility in at least 2 mergers--Glaxo-Burroughs Wellcome, and UBS-SBC Warburg--both of which are yet to fructify. Almost all of them are small in size, and are part of a larger Asia gameplan. Typically, the insignificance of the Indian market results in a delay of 12-36 months between the time a merger is announced officially and the time its takes effect in India.

Ramesh Subrahmanian

"Indian managements will have to learn to talk the complete picture"
Ramesh Subrahmanian, Executive Director (Fin.), HMR

With India being the market of tomorrow, not today, most transnational subsidiaries are not fully owned by their parents. For instance, DEC has a stake of only 51 per cent in its Indian arm. That is in stark contrast to the ownership-patterns in the rest of the world, where it fully owns its subsidiaries. When the merger between Compaq and Digital is finalised in India, the latter will have to make an open offer to hike its stake. Points out Ashvin Parekh, 42, Head (Financial Services), PriceWaterhouseCoopers: "Legal mergers in India are problematic and cumbersome." Which is compounded if the financial institutions have stakes in the subsidiaries and, consequently, have been allotted seats on company boards.

Quite often, parent corporations are stunned by the nitty-gritty of India's laws, especially the Companies Act, 1956, the guidelines of the Securities & Exchange Board of India, the Factories Act, 1948, the Establishment Act, 1954, and the stamp duties levied by state governments. E.g., the merger of Hoechst Marion Roussel (hmr), which had manufacturing operations at Thane in Maharashtra, was slowed down by legal problems. Complains Tarun Sheth, 57, Director, Shilputsi Consultants: "Transnationals not only have to cope with labour problems, they have to manage the political environment as well."

Moreover, the shackles of policy are difficult to break. For instance, the merger between International Distillers & Vintners (IDY) and United Distillers has got bogged down because both have Indian partners. They independently opted for joint ventures because the norms in the early 1990s stipulated that only Indian companies could become liquor licencees. Since then, the policy has changed, and to complete a global merger in India, the transnationals may have to disengage themselves from their partners. Points out Deepak Roy, 45, the CEO of IDY India: "Since liquor is a sensitive issue in this country, we are trying to tap synergies by initially keeping the joint ventures intact."

The lag effect. Since most subsidiaries are products of the pre-liberalisation era, they must offload their historical baggage before embarking on any meaningful merger. Indeed, some of them have started skirting the legal problems by first resolving other issues. Agrees Rajen Mehrotra, 53, the Vice-President (HR) of the Rs 632-crore Novartis India: "Since legal mergers take time, it is important to address the process of cultural integration first in India."

Just like international mergers, most Indian ones are accompanied by a painful process of restructuring and downsizing. Yet, there is a fundamental difference between the two. While global mergers are dictated by over-capacity, the minuscule size of the operations in India may not be an adequate justification for a merger. Compulsive restructurings have, often, run into labour problems in an environment where employee and worker unions are strong.

Pradeep Saxena

"Post-M&A restructuring in India have, by and large, followed global restructuring patterns"
Pradeep Saxena, Country Manager, ING Barings

Novartis and Glaxo-Burroughs Wellcome, for instance, had to downsize their manufacturing operations in India--a process that has taken about 20 months. So, although Indian mergers have to mirror the global ones--be it in terms of the number of business divisions, the organisational layers, or reporting-levels--the small size of subsidiaries is a blessing in disguise. Explains Pradeep Saxena, 50, Country Manager, ing Barings: "Indian restructurings have, by and large, followed global restructuring patterns. However, since the scale of operations has been small, the negative fallout has been minimised."

A global business model could scupper the chances of a subsidiary that is into businesses that do not fit into the parental framework. Even when D.M. Gavaskar, 54, the ceo of Knoll Pharmaceuticals--which merged with Boots India--made 3 presentations to his global headquarters requesting them not to divest the product-portfolio of the antiseptic-cream, Burnol, his request was turned down. Although the range contributed 8 per cent to his company's sales, the Over-The-Counter business did not fit into the merged entity's global strategy. Argues K.R.S. Murthy, 60, former director, Indian Institute of Management, Bangalore: "The global approach may not necessarily be the best in India since the core competence of the parent may be different from that of its offspring."

To avoid such pitfalls, transnationals tread cautiously, preferring to leave successful local businesses undisturbed. When the $48.76-billion (Rs 204,792 crore) Unilever plc exited the speciality chemicals sector in 1997, it retained that highly-profitable business in India. At another level, while the advertising agencies, J. Walter Thomson and Ogilvy & Mather, operate closely worldwide, they still operate as 2 different entities in India. Argues Ranjan Kapur, 56, ceo, Ogilvy & Mather India (1997-98 billings: Rs 340 crore): "There is no need for mergers in creative fields. Growth can come faster if you remain separate."
the lag effect. Culture creates the biggest barrier. Not only is India an emerging market, cultural intrusions are new to Indian organisations. Typically, local subsidiaries are marketing- or manufacturing-arms. And a technology-driven strategy could be at odds with a well-entrenched marketing culture.

If global mergers are discreet affairs, it is only because of the communications gap between Indian subsidiaries and their employees, and the subsidiaries and their parents. Motivational levels have to be raised internally, but Indian subsidiaries, frequently, get overwhelmed by post-merger fears. Agrees Anita Ramachandran, 39, the ceo of Cerebrus Consultants: "Managements must make it clear from the very beginning that they will act fairly, genuinely, and transparently. More importantly, they must have a clear-cut communications programme." Adds Arun Thiagarajan, 53, the former CEO of the Rs 1,084-crore ABB India: "Creeping changes, uncertainty, and anxiety tend to drain value from mergers."

To staunch such a haemorrhage, both Thiagarajan and K.N. Shenoy, 65, the then CEO of Hindustan Brown Boveri and the present Chairman of abb India, respectively, visited all the manufacturing facilities of their companies when a merger was announced by Asea and Brown Boveri in 1989. Even as the announcement was made public, both personally wrote to all their employees, assuring them that their jobs would be safe, and that the restructuring would be done in a just manner. Accordingly, abb followed a two-pronged strategy: communicating extensively, and restructuring speedily.

Selling India and her potential to the global headquarters is critical. The time between the announcement of a merger and its implementation creates a period of uncertainty. Even then, top managers are not privy to information that affects their future. When the Digital-Compaq merger was announced, Som Mittal, 45, the CEO of Digital India, may have been caught unawares. Subsequently, it is surprising why CEOs do not prepare a Sell India blueprint. Points out Ramesh Subrahmanian, 39, Executive Director (Finance), hmr: "Indian managements will have to learn to talk the total picture. They should be aware of what is happening in the US and Europe."

The lag effect. All told, a communications gap is the biggest cause of delays. Both internal and external communications are crucial to strategy-formulation, which the M&A process entails. By not formulating a coherent policy, subsidiaries may have to wait for years before they can merge.

While global investors bless M&A even before the knot is tied by sending stock-prices to new heights, the local bourses, often, react belatedly. After all, Dalal Street has absolutely nothing to be buoyant about initially. When the Digital-Compaq merger was announced in January, 1998, the Digital scrip rose by almost 25 per cent on Wall Street even though the shareholders of the 2 infotech giants were yet to ratify the merger. Back home, value migrated from Digital, with its share price declining by 3 per cent, signifying that a painful process of transition lay ahead.

Today's marriages are tomorrow's uncertainties--if not divorces. And fund-managers know that only too well. Which is why the stockmarket responds indifferently whenever a global merger is announced. Explains Udayan Bose, 49, Chairman, Lazard India: "Digital and Compaq married because of global, not local, synergies. Couple that with the time that it takes to make a merger effective in India--and the difference in share values is obvious." Crucially, the value-chain is not fully developed downstream. For instance, in the automobile industry, the supplier sector is still in its infancy. Consequently, a global merger between an Original Equipment Manufacturer and a supplier is unlikely to have a value impact in this country.

The lag effect: While their parents are capturing value within the industry, their subsidiaries are unable to snap it up. Typically, it takes the latter between 2 and 3 years before they can grow both sales and profits. Synergy--or shareholder value--does not drive mergers in this country since such weddings are, often, imposed on reluctant partners.

In a dramatically-changing environment, a time-lag of 24 months is equivalent to a lifetime. Those subsidiaries that communicate their business aspirations well in time to their parents will be able to guard their Indian futures; those that don't will have to live with the hope that a merger gives birth to a strategy that benefits an obscure operation in a global empire. Only by orchestrating their efforts to harmonise their goals with those of their parents can transnational subsidiaries neutralise the consequences of delay. After all, couples that do not see eye to eye are not only millstones around their parents' necks, they are likely to break up too.