Monday, November 05, 2007

Managing Cultural Integration post M&A

Year 2007. Indian companies have gone on an acquisition spree. According to Dun & Bradstreet, 243 M&A deals were concluded in the first 5 months worth a staggering $46.8 billion!! Most of these were acquisitions overseas by Indian companies. And the rate of these M&A activities shows no sign of slowing down.

Compared to the year 2006, the total value of M&A deals was a miserly $20.6 billion.

Local economy is driven by robust growth, buoyant demand & a strong surge of confidence. This effect is seen in increasing FDI inflows, resurgent stock market and long term Indian investors. Thus the increased inflow of capital and strong growth prospects is driving Indian companies to acquire companies abroad.

Indian companies have so far been able to manage these acquisitions quite well. But this time the challenges are bigger and there is lot at stake. The biggest challenge facing Indian firms after acquiring companies in other countries is that of Integration - more specifically Cultural Integration. As Indian companies are now acquiring global companies such as Corus Steel, Novelis, Flag Telecom etc., the challenge to integrate different work cultures is a daunting task.

Just to illustrate, long time Corus employees in UK were aghast when they heard of the possibility that an "Indian" company will acquire them, and they will have an Indian boss - whose name they cannot pronounce. Similarly, Novelis employees will not be able to pronounce the name of their new Chief - Kumaramangalam Birla!

Under such circumstances, think about the challenge of cultural integration.

To make these acquisitions work and deliver results as per share holder’s expectations, acquiring companies must overcome the challenge of cultural integration.

Why is Cultural Integration such a Big Challenge?

Cultural Integration is never easy. Even global companies struggle with it even now. The reasons why cultural integration is such a huge challenge are:
  1. Cultures build prejudices which is often influenced by history. Most Europeans & Americans view India as a third world country, poor country and as a backward country. This distorts the current reality and people have difficulty to come to terms with the acquisition.
  2. Corporate culture is an amalgamation of: National culture, Religious culture, and professional culture. These cultural dimensions are often invisible - but ever present & relevant.
  3. Need to balance the local needs and the global needs during the post-acquisition period. These needs may be the local community demands, business demands, investors demands etc.
  4. Need to meet the high expectations of the share holders post-acquisition. Often times these acquisitions are financed through LBO or debt, and this needs a good cash flows to sustain. In addition, the management will be under pressure to show the benefits of acquisition as promised before the acquisition
  5. Lack of Experience in dealing with a different culture. This applies equally to Indian & foreign company managers. Most managers lack the cross-cultural skills needed during the post acquisition integration.

Changing the HR paradigm

For a long long time in India, the concept of human resource management meant only Industrial Relationship management. Indian HR Managers became experts in dealing with unions, all IR related issues and today they have to deal with this complex challenge of cultural integration. For most organizations, cultural integration is a new challenge never before seen in India.

How to overcome this Challenge?

Cultural Integration is not an easy challenge and therefore there are no simple answers or no single correct answer. The options of all available tools and solutions is just as large as the problem itself - and that makes it even tougher to overcome the challenge.

The task of cultural integration must be headed by "two-in-a-box" leadership, where one person from each company are assigned equal responsibility and they work in a team. For example in Tata-Corus merger, there must be two persons who share the responsibility for cultural integration.

  • Identify the problem

    Based on my experience, I would say that if the company’s HR managers were to identify the scope and dimension of the challenge, then they have 25% of the solution. I often say that correctly defining the problem itself is the biggest challenge - once the problem is correctly defined, finding the solution is mearly an exercise of logical analysis.
    Identifying the scope, the nature and the dimensions of the challenge will require in-depth survey & analysis of employee behavior, attitudes and responses. This is best done by a third party consultant(s) who is seen as a neutral entity by all employees.

  • Develop common policies & procedures for the combined organization

    Policies & procedures of the newly combined organization must have a great amount of commonality - but without imposing it forcefully on the employees. By this I mean, the new policies/procedures must be developed which takes both sets of employee’s interests into considerations and avoid imposing the policy/procedures of the acquirer company on the acquired company. The new policy & procedures must be accepted by both sets of employees.

  • Build a cultural integration Roadmap

    Cultural integration will take a long time - often several years. It is therefore essential to have a roadmap for this integration which shows important milestones and accomplishments. Some of the milestones & accomplishments can be: Cross-Cultural training, Success of Inter-company transfer employees (rather % success of the transferred employees), measurable aspects such as employee behavior & attitudes towards coworkers from the "other" organization, level of cultural awareness etc.

  • Hire a Cross-Cultural Consultant

    During cultural integration, it is important to be seen as fair and reasonable by all employees. Often times, existing company managers are influenced by the past records & history and their decisions cannot be guaranteed to be fair or neutral - more over there is an element of mistrust by one set of employees. It is therefore very important to hire an outsider - a neutral third party consultant to deal with sensitive issues.


The main advantage of having a third-party consultant is that they bring in the expertise needed to carryout the cultural integration. Consultants have the expertise in developing company policies, establishing procedures, conducting survey’s, analyzing these survey results, conducting the required training's etc., Due to their high level of expertise, employees often have a high regard to these consultants and are seen as neutral arbiters in a conflict situation. (which is often in the early days of acquisition)


Closing Thoughts

Benefits of global acquisitions are HUGE, and so is the risks. To make these global acquisitions succeed, one must overcome the challenges of cultural integration - which are complex and hidden.

In this article, I have just highlighted the main issues of cultural integration involved in a global M&A. There is lot more to it and I can keep on writing about it. If you need more information, please feel free to contact me at - kvarun@hotmail.com or arun@ninedots.in

3 comments:

Tom said...

Arun,

I recently completed a course on International Project Management and the course reinforced your points around the need to manage cultural integration in mergers and acquisitions. I used some of your project failure and success examples for my class, thank you for that.

Not hiring a political consultant is a mistake that my company recently made in China. The local government dragged their feet and didn’t pay the subcontractors which impacted the project schedule and cost. From what I have read similar issues occur in India.

In many cases you might need to hire several consultants including a political, cultural or a technical consultant. The political consultant should be well respected by the local government and at a similar status level. Hiring a consultant is an involved process. You really need to hire a general consultant to interview your other consultants. If you spend enough time to find a good consultant they can be worth their weight in gold.

The company I work for has not yet invested in India but it is only a matter of time. Hopefully the lessons learned in China will be utilized and modified to work in India.

Best Regards,

Tom

Ami said...

Hi Arun,
Am looking to talk on post-merger integration in crows-border M&As with you. It's for a feature in the Hindustan Times. Would help if you let me know (amisanyal@gmail.com) how to get to talk to you.
Best,
Amitava Sanyal

smith said...

hi,You have a very good blog that the main thing a lot of interesting and useful!thanks Mergers and acquisitions consultants