STRATE­GIC HR FOR TO­DAY’S BIOTECH M&As

BioSpectrum (India) - - Bio Contents - AMITAVA SAHA Sr. Vice Pres­i­dent & Head Hu­man Re­sources, Bio­con

The phar­ma­ceu­ti­cal and biotech­nol­ogy sec­tors have been wit­ness­ing a strong trend of con­sol­i­da­tion through mergers and ac­qui­si­tions (M&A) over the last few years. Glob­ally, 166 M&A deals were an­nounced in the phar­ma­ceu­ti­cal and biotech­nol­ogy sec­tors in 2015, up from 137 in 2014, ac­cord­ing to The Pharma Letter. More­over, the num­ber of deals ex­ceed­ing USD1 bil­lion rose to 30 in 2015 ver­sus 26 in 2014 and 20 in 2013.

Not only are the num­ber of deals in­creas­ing, their size is go­ing up too. The av­er­age po­ten­tial deal value in the biotech sec­tor in­creased to USD320 mil­lion in 2015 from USD309 mil­lion in 2014, ac­cord­ing to a re­port by E&Y. In 2015, 17 of the al­liances in this sec­tor had a to­tal po­ten­tial value greater than USD1 bil­lion ver­sus 12 in 2014 and only five in 2013.

The rea­sons be­hind the rise in the in­ten­sity of deal mak­ing are not hard to seek. A drop in earn­ings due to pa­tent ex­piries on block­buster drugs, de­clin­ing R&D pro­duc­tiv­ity and ris­ing pric­ing pres­sure are lead­ing to height­ened M&A ac­tiv­ity. More­over, US drug­mak­ers are look­ing at the M&A route to cash in on the ben­e­fits of low cor­po­rate tax rates in other coun­tries. In the biotech sec­tor, M&As are be­ing driven by the de­sire of larger bio­pharma play­ers to se­cure ac­cess to in­no­va­tive tech­nol­ogy plat­forms.

Why HR is key to suc­cess­ful M&As

Given the mega size of these trans­ac­tions, there’s more pres­sure than ever on com­pany man­age­ments to en­sure that M&As are con­sum­mated with as less fric­tion as pos­si­ble so that the com­bined en­tity works as a sin­gle uni­fied team to re­al­ize the po­ten­tial ben­e­fits of the merger. It is here that the Hu­man Re­sources (HR) func­tion has a key role to play. HR has the great­est im­pact in the process of in­te­grat­ing two sets of em­ploy­ees and their daily work pro­cesses. One of the po­tent ways in which HR can en­sure a smooth tran­si­tion to a uni­fied en­tity post a M&A deal is by fo­cus­ing on defin­ing a set of de­sir­able cul­tural at­tributes and then get­ting em­ploy­ees to quickly adopt these at­tributes in their daily be­hav­iour.

Re­search has re­vealed that ‘cul­ture’ is one of the key hur­dles to ef­fec­tive in­te­gra­tion. In one study, cul­ture was found to be the cause of 30% of failed in­te­gra­tions. It is easy to un­der­stand that cul­tural dif­fer­ence can lead to se­vere im­pact on em­ployee morale and per­for­mance and hence dent the busi­ness ob­jec­tives.

One of the clas­sic cases of a cul­tural mis­match that led to the break­down of an M&A is the one be­tween Ger­many’s Daim­ler and U.S.-based Chrysler in the late 1990s. Con­flict­ing cul­tures meant that the two com­pa­nies could not see eye-to- eye on a host of is­sues post-merger. Soon ir­rec­on­cil­able dif­fer­ences cropped up be­tween the com­pa­nies on as­pects such as the level of for­mal­ity, pay and ex­penses, and op­er­at­ing styles. As the sit­u­a­tion de­te­ri­o­rated ma­jor losses were pro­jected and lay­offs be­gan by 2001. Fi­nally, the USD36 bil­lion “merger” was dis­solved when Daim­ler sold Chrysler to Cer­berus Cap­i­tal Man­age­ment for USD7 bil­lion in 2007.

A sim­i­lar sit­u­a­tion played out when PC-mak­ing gi­ant Hewlett Packard (HP) and its com­peti­tor Com­paq merged in 2001. The fact that HP had an en­gi­neer­ing-driven cul­ture that was based on con­sen­sus and

Com­paq had a sales-driven cul­ture that de­manded rapid de­ci­sion-mak­ing meant there was a poor cul­tural fit from the very be­gin­ning. HP’S USD25 bil­lion ac­qui­si­tion of Com­paq didn’t work out in the long run pri­mar­ily be­cause of the fail­ure to rec­on­cile this in­her­ent cul­tural dis­so­nance. It even­tu­ally led to big write-down in the value of the Com­paq ac­qui­si­tion, thou­sands of lay­offs at HP, and the de­par­ture of then CEO Carly Fio­r­ina.

Closer home, a Ja­panese lead­ing Com­pany’s USD5-bil­lion ac­qui­si­tion of In­dia’s lead­ing phar­ma­ceu­ti­cal Com­pany ended dis­as­trously when the Ja­panese drug maker lost bil­lions after many of ac­quired com­pany’s prod­ucts were blocked as un­safe by U.S. of­fi­cials. Cul­tural dif­fer­ences in man­age­ment prac­tices frus­trated Ja­panese ef­forts to fix qual­ity prob­lems at the com­pany’s man­u­fac­tur­ing units which led to a com­plete shut down and value ero­sion of their ac­qui­si­tion, which forced them to exit the deal. Ac­cord­ing to an April 2014 ar­ti­cle in the Nikkei Asian Re­view: “The Ja­panese com­pany never fully con­trolled the In­dian com­pany’s man­age­ment. Ja­panese ex­ec­u­tives con­sti­tuted a ma­jor­ity of board mem­bers, but there was only one Ja­panese among the 10 se­nior op­er­at­ing of­fi­cers.”

In 2014, Ja­panese Com­pany had to sell off the Com­pany to another lead­ing In­dian Pharma com­pany. The post-ac­qui­si­tion pe­riod saw a lot of at­tri­tion across lev­els – one can at­tribute such an ex­o­dus to a com­bi­na­tion of fac­tors but Cul­tural dif­fer­ence would def­i­nitely rank amongst the prime ones. Such sce­nar­ios can be ex­tremely chal­leng­ing for HR if not han­dled ap­pro­pri­ately.

How HR can en­sure suc­cess of M&As

Strate­gic HR can help de­fine how the uni­fied en­tity should be or­ga­nized fol­low­ing the merger to carry out busi­ness strate­gies. It can iden­tify the ar­eas where the two par­ties have com­ple­men­tary skills and en­sure that there is align­ment in cul­ture, with sim­i­lar val­ues and busi­ness in­tent guid­ing de­ci­sion-mak­ing. In do­ing so, it will help en­sure bet­ter co­he­sion and fewer con­flicts. In fact, HR’s role in en­sur­ing a smooth busi­ness tran­si­tion during an M&A starts from the very day that two in­ter­ested par­ties come to­gether to dis­cuss a deal.

Due dili­gence

This is a very im­por­tant part of the M&A as in ad­di­tion to scru­tiny of fi­nan­cial data, pre-merger due dili­gence should in­volve a thor­ough “cul­tural as­sess­ment” to un­der­stand the po­ten­tial part­ner’s peo­ple poli­cies, prac­tices, com­pen­sa­tion, ben­e­fits and work cul­ture. Such an ex­er­cise can help the man­age­ment to be bet­ter pre­pared to ad­dress cul­tural clashes post-merger

Com­mu­ni­ca­tion

Com­mu­ni­ca­tion is key and HR’s proactive par­tic­i­pa­tion can make a big dif­fer­ence. The new em­ploy­ees should clearly un­der­stand that they are wanted in the merged en­tity and that though there are changes in poli­cies and prac­tices their in­ter­ests would be pre­served.

The de­par­ture of key lead­ers and se­nior man­age­ment is of­ten an in­di­ca­tor of an im­pend­ing M&A fail­ure. The re­sult­ing con­fu­sion hurts the morale of those in mid­dle and ju­nior man­age­ment, lead­ing to an ex­o­dus of top ta­lent. So, HR must en­sure that it lis­tens and re­sponds to the con­cerns of em­ploy­ees across the man­age­ment chain and com­mu­ni­cates those is­sues to the top de­ci­sion-mak­ers.

HR can fa­cil­i­tate and en­cour­age com­mu­ni­ca­tion among em­ploy­ees across the two merg­ing en­ti­ties with the aim of forg­ing stronger re­la­tion­ships and help­ing peo­ple rec­og­nize and ap­pre­ci­ate

their coun­ter­parts.

On­board­ing

This is not just a one-time process but con­tin­ues for about a year after the merger. Rec­on­cil­i­a­tion of HR poli­cies and pro­cesses of two en­ti­ties could be stag­gered over time to as­sess em­ployee sat­is­fac­tion lev­els and give peo­ple a chance to grad­u­ally ad­just to the changes. The fo­cus should be to make the new em­ploy­ees com­fort­able and the ex­ist­ing ones not wor­ried about their fu­ture.

Balanc­ing

Fol­low­ing the merger, HR needs to bal­ance poli­cies, fit­ment and pro­fil­ing to en­sure smooth tran­si­tion and also a ‘best-of-both worlds’ sce­nario in the new en­tity. Usu­ally the prac­tice is that the ac­quir­ing com­pany’s poli­cies take prece­dence and also the peo­ple who are in the roles that are du­pli­cated. This is a sen­si­tive ex­er­cise as no one wants to lose the crit­i­cal re­sources. Ta­lent re­ten­tion strate­gies should be de­signed to en­sure that top ta­lent is rec­og­nized and re­tained in the long term.

Com­pen­sa­tion & Ben­e­fits

In terms of com­pen­sa­tion and ben­e­fits, HR must en­sure all com­mit­ments are hon­oured and also salary and fit­ment par­ity is main­tained to the ex­tent pos­si­ble. Ben­e­fits can be fun­gi­ble.

Any M&A ac­tiv­ity presents a set of unique chal­lenges and op­por­tu­ni­ties for the par­ties in­volved. Given the fact that em­ploy­ees are the most valu­able re­source of any com­pany, it is cru­cial to en­sure that HR is em­pow­ered to in­ter­vene ef­fec­tively through­out the process - from pre-merger due dili­gence to the post-merger in­te­gra­tion process - to en­sure that the hu­man el­e­ment does not go miss­ing in the hurly burly of deal mak­ing.

Amitava Saha Sr. Vice Pres­i­dent & Head Hu­man Re­sources, Bio­con

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