Mergers: What Can Go Wrong?

A merger is easily the most common vehicle for solution providers to increase
their geographic presence and expand their customer reach. But like everything
else in life, they too can fail if everything is not planned well. For a merger
to be successful it is very important that the differences in work culture
between the merging companies be sorted out and the two entities work towards a
common goal of growing bigger and better

Mergers, the way we understand them, have been the chosen vehicle for many
solution providers, to add value to their existing business either in terms of
geographic expansion or for sharing technical expertise. A merger normally takes
place between two equal-sized companies looking to work together, rather than
competing with each other in areas of technical expertise and the targeted
customer base. Or a bigger entity can take over a smaller one, depending on its
business interest in this decision.

When companies want to expand into new geographies, it is easy for them to
build business by joining hands with a partner with an established base there. A
merger is technically therefore, the clubbing of two or more corporate entities
into one. It is very strategic in nature wherein post the merger, the nature of
both firms changes hopefully for the better.

Having said that, recently there has been a spate of mergers in the IT
industry. Probably the most significant of these was the merger of Tech Pacific
and Ingram Micro in the year 2005. When the Tech Pacific acquisition was legally
consummated on May 1, 2005, Ingram became a Rs 5,517 crore company in 2005-06.

In troubled waters

Although the two companies had many similar portfolios, despite overlaps, Ingram
was stronger in the component business. Post merger, Ingram Micro spent the year
integrating its facilities, warehouses and other support infrastructure.

However, inspite of the amalgamation, when compared with Rs 4,788 crore that
was the combined revenue of Ingram and Tech Pacific in 2004-05, the growth was
just 15 percent post-integration. A figure far less than what both grew as
separate companies in 2003-04 fiscal.

Another big challenge faced by Ingram, post merger, was that of credit
enablement. The total number of sub-distributors and resellers stood close to
12,000, of which 4,000 were its earlier partners who had enjoyed credit from
Ingram.

Additionally, the amalgama­tion process ran into litigation problems with
Samsung Electro­nics India, a creditor of both companies, which refused to give
its assent to the merger. Though full details of this Samsung-Ingram feud are
not known, as the matter is now sub judice, sources close to the industry feel
that it will not be easy for Ingram to proceed further with its integration
related to merger if the court gives a ruling against it.

Industry sources also opine that objections from Samsung were expected.
Samsung, they feel, might have outstanding payments with Tech Pacific, which
will burgeon its outstan­ding, if it is assimilated into Ingram, which is also a
debtor.

Where does the channel fit in?

It is well understood that the announcement of any merger elicits its own
unique reaction within the industry as well as channel circles. Either there is
surprise, or confrontation, or acceptance, or complete resistance. In India, we
have only recently started getting exposed to the realities of mergers.

When companies merge, the channel does not have an immediate understanding of
how its business is going to be impacted. Partners don't seem to know what's
going to happen next and they tend to panic. At the same time, the channel
community is also going through its own phase of mergers and acquisitions. Which
is throwing up its own set of problems.

Against this backdrop, are mergers a difficult exercise to sustain? Why and
how do mergers go wrong and how can solution providers ensure that mergers
actually work to their benefit? According to industry experts a merger would
make sense only if the weaknesses of one company could be covered by the
strengths of the other and if the threats faced by one could be taken care of by
the opportunities of the other. Once that is done, the work cultures of the two
entities, their systems and processes, their revenue models and the management
team should be looked into.

	“Mergers help companies in multiple ways since it gives better geographical reach and expertise in terms of increased skill sets and management bandwidth” Atul Hemani,CEO, Omnitech Infosolutions
	“If the strengths and skills of both companies are complementary then the synergy will bring in much larger revenues than just the sum total of each other's revenues on a standalone basis” Sudhir Sarma,MD, Network Solutions
	“The biggest factors that contribute to the success of two merging companies are their clear understanding of each other and their common objective. The two entities should fully utilize their manpower and focus their synergies to achieve their common goal” Sanjiv Bhavnani,CEO, Visesh Infotecnics
	“While mergers can be utilized as a tool for growth, a lot is dependent on the companies' culture and goals as also the valuation of company matters, especially the kind of premium the buying company is paying vis-à-vis to the post-merger earning potential” Sudhir Kothari Director, Embee Software

Long-term investments made by one would need to be complemented by short-term
revenues or cash reserves of the other. Or else the entire initiative would lose
steam in record time. The criteria for a merger vary from company to company and
depend largely on the long-term vision and growth objectives of the two
companies.

Working out differences

Since mergers are among the best tools to help companies grow bigger and better,
a lot of understanding has to be worked out before undertaking the exercise.
According to KK Jha, CEO, KK Software, “Mergers are advantageous wherein
com­panies can utilize each others resources and can aid in business
development. Merging can be beneficial to small enterprises and low-cost
solution providers who find it difficult to sustain independently. It can help
them perform better in the market as their manpower is increased and they get
new avenues to grow in the market.”

Agreeing with him is Atul Hemani, CEO, Omnitech Infosolutions India who
opined, “Mergers help companies in multiple ways since they give vast
geographical reach and better expertise in terms of increased skill sets and
management bandwidth. Also available is a readymade set of clients, which can be
developed for long-term relationships.”

This means that when two companies decide to merge, they would have different
areas of specialization and domain knowledge that can collectively contribute a
lot in building brand recognition. “The customer base would be larger and both
companies can now cross-sell each other's offerings. If the strengths and skills
of both companies are complementary then the synergy will drive much larger
revenues than just the sum total of each others revenues on a standalone basis
and may also result in a financially stronger organization,” said Sudhir Sarma,
MD, Network Solutions. In summary this means that mergers help companies to grow
not just bigger but possibly better.

Disadvantages of merging

On the flip side, merging is a very sensitive process and the mindsets of
owners/shareholders play a vital role in carving out a success story. Sometimes
merging happens through the top-level management without the consensus of
individual company employees.

As Sudhir Kothari, Director, Embee Software, put it, “While mergers can be
utilized as a tool for growth, a lot depends on the two companies that are
getting merged, their culture and goals as also the valuation of the company
matters, especially what kind of premium the buying company is paying

vis-à-vis post merger earning potential.”

When two companies merge they have different culture and background. Hence,
there is always some space for failure of this strategy. “If companies do not
have similar cultures and HR and business strategies are not aligned, then
things could go wrong. Attrition may increase and key people may leave. Total
revenues may decrease if customers do not accept the new strategy and chose not
to do business with new entity,” Sarma explained.

Therefore, for mergers to become a good tool for growth the success of the
exercise depends to a great extent on the nature of business or competition the
two companies are into. “Advantages of a merger vary from situation to
situation. If two market leaders merge together then there are chances of
capturing a better marketshare and more profit. But in cases of smaller
companies chances of success are quite high,” Kothari added.

Making a success of a merger

Accurate planning, post-merger estimation of business processes and a
general consensus for merging are important factors for the success of any
merger. “However, depending upon the status of the companies, sometimes there
may be other major factors like revenue sharing, work areas, human resource
management that may also have to be decided and taken care of,” opined Dilip
Banerjee, Director and CEO, Syntech Infoprojects.

It's very important for companies getting merged to share a similar work
culture, otherwise things can go wrong. When one company is buying another, it
is not merely buying its physical value, but its manpower and clients and other
such assets.

Therefore it is very critical for both companies to have a common vision and
share the same passion for serving customers (customer satisfaction, for
instance). Strategies have to be aligned and communication both to internal
employees and to customers should be consistent. There should be a dedicated
integration team working full time to ensure that the integration is a success
and regularly review if the milestones that have been jointly defined are being
met.

“The degree of success depends on the nature of two companies and whether
they are willing to move ahead together forever. The biggest factors that can
contribute to the success of two merging companies are their clear understanding
of each other and their common objective,” said Sanjiv Bhavnani, CEO, Visesh
Infotecnics.

Talking in the same vein, Jha noted, “To make sure that the merged companies
perform well, they should have well-defined strategies and innovative thinking.
They should chalk out a plan that will benefit both of them and then work on
it.”

In essence therefore when companies decide to get merged, their strategies
should be implemented in a phased manner. There has to be complete synergy
between the two teams and a complete agreement of the concept right from the top
to middle-level management. In summary everybody has to be convinced of the
merger.  

When mergers go wrong

All said and done, mergers can, and do go wrong either because they are not
well planned or because the partners are not in sync. Industry experts are of
the opinion that short term goals and individualistic benefits may be a reason
for the same.

One of the main reasons of failure is their ill-defined marketshare and
partnership of the profit. If they do not mutually agree to their marketshare
structure, it will directly have an impact on the final outcome of the
merger. “The most obvious reason however for mergers going wrong is that there
are differences in their objective and understanding,” felt Devender Taneja,
CEO, PC Solutions.

If mergers are initiated with short-term goals in mind, power clashes and
personality clashes cannot be avoided. The thought process is unclear and the
merger can go wrong. If strategies are not aligned; HR issues are not taken
seriously; if revenues fall drastically, if key people leave the organization
and if the organization loses its original focus thereby its customers, then it
is a sign that the exercise has not gone well. “Mergers can go wrong in the
absence of trust and faith. When two companies come closer, they have different
background-cultural as well as professional, so differences are bound to arise.
In such a scenario, absence of cultural diplomacy and a biased organizational
structure lead to conflicts and misunderstanding. Salary structure, management
ownership and market sharing issues if not worked out, play a great role in
creating gap between the two companies,” Bhavnani explained.

Avoiding the loopholes

In order to avoid any loopholes that come in the way of a successful merger,
due diligence has to be employed by the companies in the entire process. The
buying company has to make sure that there are no added liabilities in the name
of the company that they are acquiring. It is also very important to understand
the business models of each other before proceeding further with the exercise.

The most important thing to be considered is, however, the culture and
ideologies of the two companies. If one company's culture is not matching or as
disciplined and professional as the other one and vice versa, then problems will
certainly crop up. Therefore, it is very important to make the necessary
adjustments and revisions and ensure that the companies getting merged have a
similar culture and vision. Further to avoid any loophole, the two entities
should work in a way so as to compliment each other and should not give
preference to their personal interest. It is very essential that they mutually
overcome all the hurdles.

“Since there is no set formula, the success of a merger largely depends on
the perspective and outlook of the companies involved,” Taneja asserted. The
buying company first has to decide what type of company they want to buy and
whether they can manage the new entity properly. If the two companies belong to
similar work area, there is less worry. If not, then it is important to measure
the pros and cons of the new business and whether the buying company is capable
of handling the new venture. Secondly the culture of the two companies plays a
vital role in a successful merger. Proper price assessment is also very
essential for a merger getting success.

“The merging partners should bear in mind the strategic fit for the buyer-the
exercise should either complete a product gap, a market gap, a vertical gap or
an expertise gap. Before considering a merger proposition, it is important that
the partners analyze the benefits and costs in terms of money and then arrive at
the conclusion.

Bottomline

To summarize therefore, mergers are a great way to enhance the success and
growth of a company, but only if executed well. Proper planning and deciding on
a common vision and strategy, focused integration team with regular reviews,
taking care of employees and their concerns and communicating regularly to
customers and employees helps reduce any apprehensions that might arise in view
of the exercise.

When any two companies decide to merge together, they have plans to succeed
and grow better. If these objectives are clear in the minds of both parties, and
if they are implemented carefully, then success is sure to come in the way of
the organization that are set to work as one.

Subbalakshmi BM

With inputs from Piyali Guha in Kolkata and Snigdha Karjatkar in Mumbai