New culture in corporate mergers

New culture in corporate mergers

By Greg Doyle

JAKARTA (JP): It seems likely that we will soon see a wave of
mergers, divestitures and acquisitions in corporate Indonesia.
Multinational firms are again looking for good deals, and the
talk of the town is increasingly what is going to be sold, to
whom and for how much. In this, Indonesia rejoins the rest of the
world economy where merger and acquisition activity continues to
grow unabated.

Globally, such activity is often driven by the search for
synergy as companies seek ways to access new markets and
customers. Yet, despite the boom in mergers and acquisitions,
corporate unions seem to rarely meet expectations. A 1995 report
by Cooper and Cartwright calculated that 50 percent to 77 percent
of corporate unions fail. Robert Kaplan of Chicago University
estimates that acquiring companies lost an average of 10 percent
on deals conducted between 1993 to 1995.

These figures are cause for alarm in Indonesia, where a
rationalization of industry structure and corporate ownership is
seen as the only way to get the economy on a sound footing. An
industrial restructuring through mergers and acquisitions, with
significant foreign investment, is the only thing likely to
ensure the creation of new wealth and secure jobs in the country.
It is therefore worth taking a closer look at how to maximize the
chances for success when corporate ownership changes.

A recent study of global merger and acquisition activity by
Hewitt Associates, the world's largest integrated human resource
(HR) consulting firm, suggests that a significant cause of merger
failure is poor attention to people management before, during and
after the transition. Failure arises when the new organization
cannot get people working together to create new value.

This may be because entrenched "old guards" block the changes
needed to create the new organization. It may be because the best
and brightest employees jump ship during and after the
acquisition. In the longer term, synergies fail to materialize
because the organization neglects to restructure employee
communication, reward and performance management programs to
support the new business.

The experience of countless global mergers teaches us that
long-term success requires an integrated project plan with three
objectives -- assessing liabilities, creating the right culture
and developing supporting structures and programs.

While companies must first assess merger viability in light of
revenue, debt and assets, the target company's people programs
can also contain high costs for the purchaser that need to be
considered before determining a final price. Compensation and
benefit practices and employees' skill and ability all affect the
underlying business value.

On the financial side, the competitiveness of reward policies,
the cost of pension and medical plans, and executive and
management compensation contracts are often not considered until
after the deal is settled, yet they can affect financial results
for many years.

On the softer side, low employee skill and performance levels
represent liabilities and costs that need to be factored into the
deal. The acquiring company will then truly know what it is
getting and what it will have to work with. Low ethical standards
can also detract from a company's value.

Detailed analysis can highlight a company's real financial and
strategic worth. Any company in the market for another needs to
be sure it is getting value for money across the widest range of
measures. These need to relate clearly to the underlying reasons
for the tie-up.

A thorough analysis provides a clear understanding of both the
financial and people implications of the change. Cultural
similarities and differences of both organizations will be
highlighted, as will the steps required to bring the two
businesses together.

The Indonesian companies that will survive the monetary crisis
are now struggling to create professional and performance
oriented business cultures. A change in corporate ownership
provides a rare opportunity to generate such a culture from
scratch.

The key to creating the appropriate culture is management buy-
in and open communication at all levels. Management must quickly
define and convey a business model for the new organization, and
engage the workforce in the operation of the new business.
Throughout the transition, they must keep employees focused on
operational continuance.

Companies often find it effective to formalize the desired new
culture through a mission and vision statement, and cascade
direct communication through the organization from the highest
level. Continual communication through information sharing
sessions and focus groups also helps create organizational
cohesion and build the desired culture.

Creating the right culture also requires some hard decisions.
In many cases, management must develop and implement a reduction-
in-force strategy while controlling dissonance and disruption in
the workforce. As they move certain employees out of the
organization, managers need to simultaneously retain the best
employees and develop plans to attract and retain the additional
talent needed for long-term success.

Because the new organization will have a new business strategy
and a new culture, it will also require new performance and
reward programs, development systems and employee benefit schemes
to support the desired culture and motivate employees to exhibit
the appropriate performance and behavior.

The HR team, working with line management, needs to align
organization structure and staff capability with business needs,
allocate roles and responsibilities and achieve efficiencies in
design, delivery and administrative activities.

The writer is director of Hewitt Associates, Jakarta.