WHAT IS NEEDED FOR EF­FEC­TIVE MERGERS FROM PEO­PLE PER­SPEC­TIVE

BioSpectrum (India) - - Bio Contents - DR. VISHALLI DONGRIE, ANIKET WAGHMARE & CHAYANIKA MALIK KPMG in In­dia

Last year was a record year for merger and ac­qui­si­tion (M&A) deals in biotech­nol­ogy and health­care sec­tor as only the first half of 2015 had a to­tal deal value of USD 221 bn whereas in 2014, it was only USD 162 bn. In 2015, In­dia also saw an in­crease of 340 per cent in cross bor­der M&A trans­ac­tions whereas the over­all M&A ac­tiv­ity was re­duced by 30 per cent to USD 3.7 bn. One of the ma­jor M&A trans­ac­tions in 2015 was ac­qui­si­tion of a US-based pharma com­pany by one of In­dia’s largest pharma com­pa­nies for USD 880 mn. Another In­dian pharma gi­ant ac­quired two US-based pharma com­pa­nies for USD 550 mn. The for­mer deal aimed at achiev­ing syn­er­gies and rise in over­all rev­enues by USD 300 mn by FY18 whereas the lat­ter one aimed to en­able the In­dian pharma com­pany gain pres­ence in a com­pli­men­tary prod­uct port­fo­lios. In In­dia, the pharma com­pa­nies with strong fi­nan­cial po­si­tion are will­ing to ex­pand their pres­ence in gener­ics and niche therapeutic ar­eas by mov­ing up the value chain by for­ward in­te­gra­tion via ac­qui­si­tions.

In the light of in­creased M&A ac­tiv­i­ties, it is im­por­tant to un­der­stand that around 83 per cent of the M&As fail to cre­ate the in­tended syn­ergy and value. Also, the suc­cess of the deal is de­ter­mined by the cul­ture in­te­gra­tion of the ac­quired and ac­quir­ing or­gan­i­sa­tion. Cul­ture in­te­gra­tion is one of the top three ar­eas of im­por­tance in due dili­gence

as per the study con­ducted.

“What’s most in­ter­est­ing about deal mak­ing is that the dif­fer­ence be­tween the suc­cess and fail­ure is of­ten not a mat­ter of strat­egy, logic, or money, but rather of re­la­tion­ships, cul­ture, pol­i­tics, power and emo­tions.”, the au­thor of the HBR ar­ti­cle, ti­tled ‘A suc­cess­ful M&A con­sid­ers the Hu­man El­e­ment’, has very suc­cinctly summed up fail­ing M&As. Typ­i­cally, the stake­hold­ers who take M&A de­ci­sions are ma­jorly the CEOs, CFOs, in­vest­ment bankers and strat­egy con­sul­tants who give more weigh­tage to quan­tifi­able fac­tors like pro­jected cash flows, rev­enue, strate­gic ben­e­fits post-merger and the hu­man and emo­tional fac­tors are usu­ally over­looked in the ex­cite­ment of the deal.

Keep­ing the above in per­spec­tive i.e. a surge in cross bor­der and cross cul­tural M&A ac­tiv­ity in biotech/ pharma in­dus­try and cul­ture be­ing a ma­jor cause of HR fail­ure, the role of the HR in an or­gan­i­sa­tion is ex­tremely in­stru­men­tal in smooth tran­si­tion which can de­ter­mine the suc­cess of the deal.

An HR man­ager should adopt dif­fer­ent roles during var­i­ous stages of the deal (Fig 1.1):

Pre-in­te­gra­tion stage: The HR func­tion along with

other stake­hold­ers should ide­ally be in­volved right from the be­gin­ning, in the due dili­gence stage, to iden­tify the rea­sons for the in­te­gra­tion and during the search for a po­ten­tial part­ner. HR should es­tab­lish a project man­age­ment of­fice (PMO) to en­sure smooth ex­e­cu­tion of the in­te­gra­tion. During the due dili­gence stage, an as­sess­ment of the or­gan­i­sa­tion struc­tures, HR pro­cesses and poli­cies along with com­pen­sa­tion struc­ture, ta­lent, lead­er­ship and cul­ture should be car­ried out. The HR func­tion could then iden­tify both favourable and un­favourable forces and other cul­ture bar­ri­ers and chalk out a strat­egy to mit­i­gate the op­pos­ing forces. Var­i­ous com­mu­ni­ca­tion chan­nels can be iden­ti­fied, de­pend­ing on the stake­hold­ers, via which the in­tent and the po­ten­tial im­pact of the deal is com­mu­ni­cated.

In­te­gra­tion stage: During the in­te­gra­tion stage, the strat­egy and the project plan chalked out during the pre­vi­ous stage is ex­e­cuted by HR. Com­mu­ni­ca­tion is one of the key as­pects in this stage through which HR man­ages un­cer­tainty and mo­ti­vates the em­ploy­ees. HR should drive the de­sign of the new or­gan­i­sa­tion struc­ture, com­pen­sa­tion struc­ture, HR pro­cesses and poli­cies. Fo­cus lies on re­tain­ing the key ta­lent and lead­er­ship. The strate­gies built around bridg­ing the cul­ture gap, are im­ple­mented by HR.

Post in­te­gra­tion stage: In this stage, HR should as­sess the new strate­gies im­ple­mented, col­lect feed­back from stake­hold­ers and re­vise the in­te­gra­tion process if needed. HR should also mea­sure the suc­cess of the in­te­gra­tion by as­sess­ing the new cul­ture and track­ing var­i­ous met­rics such as ta­lent re­ten­tion, sat­is­fac­tion scores, lead­er­ship re­ten­tion, etc.

KPMG in In­dia has de­vel­oped a five-pronged ap­proach (Fig 1.2) fo­cus­ing on the as­pects which are im­pacted by any M&A deal. We strongly be­lieve it is crit­i­cal to con­nect to the hu­man side of any M&A deal.

1. Cul­tural in­te­gra­tion- It is very im­por­tant to un­der­stand the cul­tural dif­fer­ences and nu­ances of the en­ti­ties in­volved in the deal. HR should be cog­nizant of the fact that the merg­ing com­pa­nies’ pur­pose, op­er­a­tions, fo­cus ar­eas may vary dra­mat­i­cally and these vari­a­tions un­less bridged seam­lessly, may have reper­cus­sions on the merged en­tity.

2. Lead­er­ship align­ment and ta­lent re­ten­tion Lead­er­ship align­ment is another key area which should be looked into. HR should have dis­cus­sions with the lead­ers from both the en­ti­ties to un­der­stand the as­pi­ra­tions, anx­i­eties and cre­ate a play­book of tran­si­tion.

3. Change man­age­ment and com­mu­ni­ca­tion Com­mu­ni­ca­tion is a key to ev­ery stage in any change process. In such deals, HR should update the em­ploy­ees of the big changes at the strate­gic level and the changes which would im­pact their daily work. It is also im­por­tant to mea­sure the suc­cess of the change for which HR should iden­tify the suc­cess fac­tors and track them through­out and post the tran­si­tion phase.

4. Or­gan­i­sa­tional align­ment- HR is also re­spon­si­ble for the align­ment of struc­ture, peo­ple and pro­cesses with the new vi­sion and strat­egy of the merged or­gan­i­sa­tion.

5. Peo­ple tran­si­tion- Hav­ing the right peo­ple in right roles, with the right ca­pa­bil­i­ties, is what one needs in one’s or­gan­i­sa­tion to run it suc­cess­fully for which the tran­si­tion­ing of the peo­ple from the old to new or­gan­i­sa­tion is of prime im­por­tance. HR should for­mu­late the ta­lent man­age­ment strate­gies for an ac­cre­tive trans­ac­tion.

Clearly, the role of the HR has to be­gin from the pre-sign­ing stage, where along with due dili­gence for other pro­cesses, HR due dili­gence is ini­ti­ated. Once, the due dili­gence is com­pleted, re­in­forc­ing the de­ci­sion to go ahead with the deal, the deal is signed and prepa­ra­tion for Day 1 (day of deal clos­ing) be­gins in the pre-com­ple­tion stage. In this stage, HR should es­tab­lish and train a task force or a core com­mit­tee on the ob­jec­tive of the merger or ac­qui­si­tion, the changes it would bring with the deal and how it would touch their and other peo­ples’ daily work lives. The task force is re­spon­si­ble for the fol­low­ing ac­tiv­i­ties:

1. De­vel­op­ing an in­te­gra­tion plan

2. Con­duct­ing anal­y­sis and di­rec­tion set­ting work­shops with var­i­ous stake­hold­ers

3. Defin­ing the fu­ture state of merged or­gan­i­sa­tion

4. De­vel­op­ing a risk mit­i­ga­tion and con­tin­gency plan.

Once the deal is closed, from Day 1 on­wards, HR along with the task force drives the in­te­gra­tion plan where var­i­ous or­gan­i­sa­tional as­pects, both tan­gi­ble and in­tan­gi­ble, adopt their new form and shape and once the sys­tems and pro­cesses are up and run­ning, HR de­signs the gov­er­nance mech­a­nisms to en­sure the smooth run­ning of the or­gan­i­sa­tion to even be­yond 100 days where 100 days sig­nify the first 100 days of the merged or­gan­i­sa­tion.

In the biotech/ pharma in­dus­try, M&A ac­tiv­ity faces three ma­jor chal­lenges i.e. siz­ing up the value propo­si­tion of the merg­ing com­pany, in­te­grat­ing the cul­ture and value sys­tem of the in­volved en­ti­ties, and in­te­grat­ing the R&D and sales team of the in­volved en­ti­ties. HR should clearly iden­tify roles and re­spon­si­bil­i­ties in R&D and sales func­tions and should ac­count for the re­sult­ing busi­ness model and op­er­a­tions, in change man­age­ment.

Es­pe­cially in biotech/ pharma mergers, the un­der­stand­ing of unique com­pe­ten­cies, new op­er­at­ing mod­els and pro­cesses are very im­por­tant and the readi­ness to adapt to this change is ex­pected from the in­volved en­ti­ties. HR should bring in a shared un­der­stand­ing of the new strate­gic agenda and com­mu­ni­cate it. It is al­ways ad­vis­able to not rush things and give time for in­te­gra­tion to take place and cul­tures of the in­volved en­ti­ties to fit into each other rather than force fit­ting them.

Gone are the days when the fi­nance and le­gal func­tions were the only front run­ners in any M&A deal. Un­less there is cul­tural com­pat­i­bil­ity, trust and co­her­ent value sys­tems be­tween the merg­ing en­ti­ties, the whole ex­er­cise of go­ing through a merger might be fu­tile. It is high time to start con­sid­er­ing the im­por­tance of the role of HR in man­ag­ing any peo­ple and cul­ture chal­lenges in the en­ti­ties in­volved in M&A deals, thereby hop­ing to dras­ti­cally re­duce the fail­ure rate from the cur­rent 83 per cent.

Dr. Vishalli Dongrie Aniket Waghmare Chayanika Malik

(The views and opin­ions ex­pressed herein are those of the au­thor and do not nec­es­sar­ily rep­re­sent the views

and opin­ions of KPMG in In­dia.)

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