One of the biggest challenges an Indian M&A deal faces post integration is extraction of value from the deal. At the end of the day, we have to sit back and ask — was the price right? Was it really worth it? By concentrating and putting all our energies on ‘growth’ (which is a dominant driver of an Indian M&A), there are other long-term gains and losses to look for.
According to statistical analysis of the top 50 largest global deals and the 25 largest deals involving Indian firms over 2005 – 2007, Indian firms have fared better than the global average when it comes to value creation. The market perceives a value creation possibility in 87% of the Indian deals, compared to 85% in case of global deals. But the difference is very marginal and the general perception (although triggered off by the larger known deals) is that we tend to overpay.
Executives defend the high price they have paid based on their strategic priorities. Others feel that the average daily global deal volume of $80 billion tends to drive prices up and it is really difficult to find good bargains. You are not going to find ignored stock held by widows who are desperate to offload it. When you pay that kind of premium, the question is how to extract value. Another very interesting phenomenon at play is the global perception of the success of ‘India Inc’ which causes prices to become overly inflated.
Arguably, ‘value’ depends on how you look at it, do we look at it the American way- which is looking at the share price right after the deal is done or the other; the Japanese way-looking at the deal 25 years later ? Clearly, there is no consensus on this, but it is one area where Indian companies need to be extra vigilant.
For optimal value extraction, rigorous policies on negotiation and valuation have to be put in place. Most companies start off with an offer they can defend but where they end up depends on the decisions made by the CEO. There have been instances when it has been a CEO game all the way. This should never be allowed to happen. The role of the board members cannot be underplayed and their involvement must begin as early as developing the growth strategy for the company and should continue rigorously until the very end.
The most important asset of an acquisition is people and they go a long way in extracting value out of an acquisition. Their market knowledge, customer and supplier relationships and technical capabilities cannot be under estimated.
An acquisition or a merger is a sensitive time for employees at both ends — target and acquirer and great care needs to be taken to address their concerns and insecurities. More so in cross-border deals where cultural differences have to be taken into consideration. Companies that fail to realise this not only pay heavily by losing skilled resources but leave a sour taste in the mouth. In some large companies, trade unions are key players as in the Tata-Land Rover Jaguar deal, wherein they protected the employee’s pension funds and approved Tata’s future plans.
In others, the formation of an integration committee may be required to smoothen the transition period. Whatever be the approach, it has to be addressed early enough in the deal and followed through stringently.