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While many companies in Asia have gone out of business during the recession, several big domestic players have used the downturn as an opportunity to grow their operations locally and overseas through bold, reduced-cost acquisitions. These companies stand to make huge financial gains if their transactions are successful, but without proper due diligence up front and a strong commitment to post-merger integration they may lose considerable amounts of money once the market turns. So given the vast opportunities, how do organizations take advantage of the downturn and ensure they develop a successful M&A strategy for the upturn?
M&A transactions require meticulous planning, robust management and aggressive execution in order to succeed, and there are several critical actions companies must take. The buyer must ensure the rationale for any deal is sound and that the target is complementary in terms of footprint, business model or service offering, for example.
Companies must also undertake comprehensive due diligence on the target before buying, examining everything from financial performance to reputation and legislative compliance. This is especially true in today’s difficult market conditions, where distressed companies may be more susceptible to practices such as occupational fraud or employee relations issues.
The post-merger or post-acquisition phase is also challenging and critical for creating the expected value of the deal. Integration measures must be put in place that align with the rationale for the merger or acquisition – the business strategy – that has been determined in the planning phase. One such consideration is the degree of organizational integration required – will the buying company absorb the target entirely, in which case it needs to fully align objectives, processes and systems? Or will the target remain a standalone entity? The answer probably lies somewhere between the two extremes and will have significant implications for the way in which the human resources programs, policies and systems are structured.
Deal derailers and how to avoid them
However sound the integration strategy, there are many potential hazards that stand in the way of success. Poor cultural integration has been responsible for derailing many otherwise strong transactions, either through national or corporate differences or a combination of the two.
Companies looking to buy outside of their domestic market or multinationals investing in Asia need to be mindful of a host of potential pitfalls, from understanding the local labor laws and legislative requirements of the target market to basic cultural sensitivities. Meanwhile, organizations coming from the same market or industry may still face cultural challenges despite their apparent similarities – for example, in the case of a state-owned enterprise joining forces with a large private sector company.
Whatever the situation, there are several key factors that must be considered across both organizations. Retention, for one, is always an issue. Whether you are an Asian company investing overseas or a multinational venturing into Asia, it is essential that you retain top talent once the deal is complete. Similarly, executive compensation issues – whether across companies or countries – can trip up organizations. Another common derailer occurs when companies don’t do their financial due diligence carefully enough and discover large unfunded employee benefit programs, such as retirement plans, that can transform a seemingly profitable deal into a very costly proposition.
Ultimately, it is important that the buying company be able to control the M&A process from wherever it is. This requires home leadership bench strength and the ability of leadership to create a line of sight from the acquired entity to the parent company.
What HR needs to do to drive deal success
In order to contribute to the success of any M&A deal, HR must secure a seat at the deal table, preferably as early as possibly and before the deal is signed. This ensures that HR is involved in business critical decisions at the onset and contribute thoughts on likely issues or integration strategies. While this is not always as simple as it might sound, there are several key actions HR can take.
While HR professionals understand the value they bring to the deal, often the business does not. Therefore, HR executives need to be able to speak the same language as the deal-makers, and demonstrate a clear understanding of the M&A process and the logic behind different types of deals. HR needs to be able to develop a people strategy that supports the deal structure. And finally, it’s important to be able to quantify HR risks and liabilities in clear business terms, using statistics and case studies. Only when the C-Suite understands the very real HR-related risks faced will HR be welcome at the table.
About The rules of recovery
The rules of recovery explores economic recovery in Asia, identifying the critical issues companies must address now in order to create a competitive advantage once the markets turn. In an effort to help companies overcome the four core challenges discussed in this point of view; we will be exploring the following issues in a compelling series of articles and webcasts over the next four months: