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.