Culture blend: For outbound M&A to work, partners need to share the same goals

The transistor radio, the Trinitron Colour TV, the Walkman and the Watchman can all be attributed to Akio Morita, the late Chairman of Sony, and one of the leaders at the vanguard of Japan's post-war economic recovery. Unfortunately, Morita can also be held accountable for the decision to acquire Columbia Pictures in the US for $3.4 billon in 1989. Morita apparently believed that the acquisition would give Sony the software that would compel consumers to buy its hardware. He is also supposed to have said that he was "proud of the fact that this acquisition would rank as the most expensive foreign takeover of an American company." By November 1994, Sony announced a $3.2 billion write-off of its investments in Columbia, a recession in Japan, the consequent appreciation of the yen and a slowdown in the hardware business all conspiring to ensure that the targeted synergies never materialised.

If Morita could go wrong, what are the chances of India Inc, which has collectively spent $15.7 billion (Rs 706.5 crore) to buy some 147 companies worldwide-or at least some sections of it-making an acquisition that will end up an absolute disaster? Not remote for sure. After all, the pressures are varied, and to be sure it's not just about making the numbers add up. It's also about making the twain of conflicting cultures meet (the Japanese at Sony were apparently uncomfortable with the spending habits of the Americans), and it's about ensuring that employees thousands of miles away are aligned with the objectives of the management back home. Then, ask L.N. Mittal of Arcelor-Mittal fame, and he will likely tell you the challenge starts right from the nationality of the bidder. UB group's Vijay Mallya is believed to have faced similar resistance when making a play for French champagne house Taittinger.

A clutch of Indian acquirers, for their part, has been there, felt that. Consider for instance the experience of Tata Chemicals when it acquired the UK-based Brunner Mond in December 2005 through a negotiated process; the acquisition made Tata Chemicals the third largest soda ash manufacturer in the world (up from number 14). While there were few cultural issues in The Netherlands, the headquarters of Brunner Mond, Tata Chemicals faced resistance from employees in Kenya (Brunner also owned natural soda ash reserves at Lake Magadi in Kenya), who were not willing to work for an Indian group. Their bias was based on previous bitter experiences with Indians in Kenya. "They had a feeling that we would exploit them," says P.K. Ghosh, CFO, Tata Chemicals.

"If you are determined to get something, and go into a transaction with a good heart, the divide between those who are with you and the fence sitters blurs quickly." Percy Siganporia MD/ Tata Tea

Tata Chemicals handled the problem by meeting with the local Masai leader and the company's senior management in Kenya. "We also invited 20 senior managers to India to literally show them the legacy of the Tatas and assured them that we would contribute to the corporate social responsibility programme in Kenya. We explained our involvement in similar programmes in India-like the Tata Rural Development programme," says Ghosh. It was a small but important step in building confidence and making the acquisition a success.

For a group with a stated objective of growing via the inorganic route, the Tatas have mastered the art of acquiring companies overseas, be it new businesses or those that are several times their own size. The key, says Tata Tea MD Percy Siganporia, is to lock in the commitment of the target company's management towards future growth. "If this thinking is established across the companies, the expectations and threat perceptions are diffused and instead replaced with growth expectation," he says. Locking in management commitment has been the mantra of success for Tata Tea in its acquisition of Tetley, Jemca, Good Earth, Eight O'clock Coffee and recently Glaceau.

Besides, the Tatas have always opted for negotiated acquisitions. They plan the entire integration process during the negotiation phase with emphasis on constant communication between the top management of both companies. They work with the management of target companies to identify areas of synergy and then set up joint teams for each of the identified areas to execute on the game plan. The objective: to show results in terms of operational improvements and cost savings at the earliest. In the case of the Singapore-based NatSteel acquisition, Tata Steel had to integrate operations spread across seven different countries. It started out by creating platforms where learnings could be shared between the companies. Tata Steel is superior in steel making while NatSteel had better products and solutions for the construction sector. In both the NatSteel and Thailand-based Millennium Steel acquisitions Tata Steel retained the top management. The Tatas also succeeded in keeping back the CEOs and all employees-something that would not have gone unnoticed when Jim Leng, Chairman, Corus Steel, was making up his mind on Tata Steel's merger offer.

HOW THEY DID IT Kimchi, Soju and CVs To take over Daewoo CV in Korea, the Tatas had to first prove their credentials as worthy acquirers.

Confident Kant: Taking Tata Motors to new heights Daewoo's commercial vehicles business was never really on the radar of Tata Motors. Like many proposals that came from financial advisors, Daewoo's proposal too landed on Tata Motors' MD Ravi Kant's desk. The offer had come from the target firm itself, through KPMG, the official advisor to Daewoo. "Language was a huge barrier, but since the acquisition process was transparent and neutral, (it was being done through the court) we decided to bid for the company," recollects Kant of his meeting with the company's CFO Praveen Kadle in July 2003. On his first visit to the Daewoo CV plant in Korea, Kant asked the company a strange question-what kind of company was Daewoo looking to partner with? Known not to be particularly fond of Indians, the middle level manager was candid: Daewoo wanted to partner with a well-known company, (which he thought Tata Motors was not), possibly European, which would bring with it new technology and money. Kant's immediate reaction was to pull back, and question whether they really wanted to do this. After several huddles and a bit of guidance from group chairman Ratan Tata, Kant and his team decided to do something they'd never done before. "We realised that to acquire Daewoo we had to go beyond the pricing issue and connect with the Korean society." After the first meeting, Kant sent missives to Bombay House asking for a Korean-translated version of all Tata Motors' brochures, pamphlets, along wit a film with insights on the group's credentials, legacy, work culture and philosophy, to be delivered to the Daewoo employees and shareholders in 10 days. The result of this effort was startling. On Kant's next visit to Daewoo, everyone from the governor to the mayor to the trade minister to the leader of the employees union wanted to meet him. "We sensed that they had been surprised and impressed by our sincerity and also the fact that Tata Motors was owned by a trust that followed the highest standards of corporate governance," recollects Kant, adding, "I think the fact that we were not behaving like buyers, rather as a company trying to sell itself to them, is what sealed things for us." By his fourth visit to Korea, before the final court announcement (the whole process was being handled by a court) on the selected bidder, it was apparent that Daewoo employees wanted the company to go to the Tatas. Sure enough, Daewoo was handed over to Tata Motors, probably the least well-known of the total 10 bidders in the fray. Post-acquisition, which Kant says took less than six months, Tata Motors has made conscious efforts to retain the emotional bond created during the acquisition process. "Any employee who is sent to Daewoo is first trained in the language, culture and food habits," says Kant. In turn, the cooks at the Daewoo canteen have learned to cook and enjoy Indian food. The company has also flown down the union leaders from Korea to visit the Jamshedpur and Pune plants to understand the scale of operations at Tata Motors. That the acquisition has been a success is evident from the market share Daewoo CV enjoys today. Tata Motors, which has rolled out its medium CVs in Korea, has a 25 per cent market share in the segment in that country. Its share in the heavy CV segment has increased to 27-28 per cent from 21-22 per cent at the time of acquisition. "Today, 45 per cent of Daewoo CV's production is for exports and is adding to the bottom line of Tata Motors' consolidated earnings," says the proud MD, who has learnt to enjoy Korean food of rice and kimchi (usually fermented cabbage) and shots of Soju, the traditional Korean liquor.

Outside the Tata fold, other Indian companies too have adopted the consultative approach. Suzlon's acquisition of Belgian gearbox maker Hansen in March 2005 was smooth, thanks to the effective communication of the mutual benefits to the two companies. "They realised that we will be a catalyst for their growth and not hamper their prospects. We have already invested Rs 800 crore to increase Hansen's capacity from 3200 mw to 5800 mw," says Tulsi Tanti, Chairman and Managing Director of Suzlon Energy. In the case of Asian Paints' 51 per cent acquisition of Singapore company Berger International in 2002, Vice Chairman & MD Ashwin Dani says he was clear that his company will be choosy in its operations and not necessarily operate all the 10 subsidiaries of Berger. In the four years since the acquisition, Asian Paints has sold three of the subsidiaries (in Malta, Philippines and Myanmar). Dani's motive is clear: To be present only in emerging markets and in markets that generates cash flows. "Surely, cultural issues play an important role in an acquisition. To handle this carefully, we spent time with the employees and worked as a team to thrash out the synergies such that the acquisition generates value."

"Betapharm was really a game-change acquisition-a huge one in terms of size, one that put us at number four position in Germany." G.V. Prasad Executive VC & CEO/ DRL	"They (Hansen Transmission, which Suzlon acquired) realized that we will work as a catalyst to their growth, and not hamper their prospects." Tulsi Tanti CMD/ Suzlon Energy

Dr. Reddy's Laboratories (DRL), like other pharma majors, has been on an acquisition binge-gobbling up BMS in the UK, betapharm in Germany and Roche's business of active pharmaceutical ingredients in Mexico. While BMS was a small acquisition and gave DRL a foothold at the retail end in the UK, betapharm was, as G.V. Prasad, Executive Vice Chairman & CEO, says "really a game-change acquisition-a huge one in terms of size, one that put us at number four position in Germany." Roche's API business in Mexico was a good fit as DRL could leverage its chemistry strengths to serve the needs of large innovators.

The integration process has been a mixed bag for DRL. While in the UK it had to replace the existing management team of BMS, which was not keen on continuing with the new owner, in Germany the management got an opportunity to learn a thing or two from the target company. Says Prasad: "betapharm is a lean organisation; self-driven, self-managed and entrepreneurial, when compared to DRL. Instead of imposing our culture, we are learning from them." In all its acquisitions, DRL has ensured it used "local talent rather than imposing expats". The us business, thus, is headed by an American, the China JV by a Chinese, the South Africa JV's CEO is a South African (though of Indian origin) and the head of the Brazil operation is a Brazilian.

The Indian companies' need to acquire has been driven by desire for scale, access to global markets and the latest technology. Whether these acquisitions will be entirely successful, it is still early to tell. Shalini Pillay, Director of Advisory Services at KPMG, is candid when she says: "As many as 50 per cent of Indian companies going overseas for acquisitions neglect pre-dealing integration planning. This can prove costly, while on the other hand effective planning can even bring down the deal size." Critics say Sony overpaid by about $1 billion when it acquired Columbia Pictures. More than a few Indian acquirers may be sailing in the same boat.

-additional reporting by E. Kumar Sharma and Anand Adhikari