WHAT IS NEEDED FOR EFFECTIVE MERGERS FROM PEOPLE PERSPECTIVE
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.
(The views and opinions expressed herein are those of the author and do not necessarily represent the views
and opinions of KPMG in India.)