M&A activity has clearly moved to the next level, whether it is the aggressive entry by global majors who are acquiring sizeable stakes in leading Indian companies?in sectors as diverse as cement, software and investment banking?or the moves being made by Indian business houses to take over companies abroad.
An interesting aspect of some recent acquisitions has been the penchant for the foreign entrant to retain?in fact, insist on?the existing top management at the companies which are being acquired. Take, for instance, the case of Holcim. Which, taking the ACC and Gujarat Ambuja acquisitions together, has pumped in nearly $2 billion into its Indian operations. Not only has Holcim chosen to retain the top management at ACC, but at Gujarat Ambuja, executive director Anil Singhvi has, in fact, been elevated to the position of managing director. Similar is the case of Oracle?s entry into India through software company i-flex. Both Rajesh Hukku and Deepak Ghaisas, the two faces synonymous with the company, have been retained at the helm and there has been little change at the top level in the company. In fact, even in the case of DSP Merrill Lynch, where Merrill Lynch has now taken control, the US investment banking major has insisted that Hemendra Kothari, one of the best known Indian investment bankers, will still be very much around to guide the company.
In fact, corporate watchers say the trend clearly is for foreign capital to ride on Indian enterprise and talent even after they take control of the companies after putting in large investments. The reasons, of course, aren?t far to seek. One of the key elements of any acquisition strategy has to be continuity, so that the entry of a new owner does not ruffle feathers and destabilise a company which was being run attractively enough for the foreign owner to seek to buy it out in the first place.
The second, and equally important issue, is the fact that the existing management, in most cases, are better equipped to understand the complexities of the Indian market and business environment than the foreign owners. So, whether in cement or in software, the business environment and competitive pressures are best assessed by the team at the helm. Doing business in a new market can be a daunting task for any player, and continuity in management can be a big help.
In fact, top managers and pundits of M&A call it ?cultural due diligence.? And continuity as a key element of any acquisition?s strategy will depend more and more on such cultural due diligence being conducted by both global majors entering India and Indian corporations buying companies abroad. Not surprising, therefore, that even the large Indian corporate groups like the Tatas are very clear that even as they go global, such cultural due diligence will form a vital element of their strategy. Which is why the group has allowed the local managements, even post-acquisitions, to run the show in countries like Korea and Singapore in businesses such as automobiles and steel.
In fact, a leading venture capitalist in India, acting on behalf of an overseas major, says that in planning a European takeover, he is putting the greatest emphasis on continuity and such cultural due diligence so that the transition and the future course for the corporation is smooth. Consequently, the existing management group, which also holds a minority stake in the company, is being retained with add-ons such as stock options and other sops.
Most managers now agree that cultural due diligence is often more significant than financial due diligence. Very often, even if assessments of balance sheet strength and the future cash flows of the takeover target are on the right track, incorrect or inefficient cultural due diligence, leading to a cultural mismatch between the acquirer and the target company, can have disastrous consequences. Imperative, therefore, is a thorough assessment of the corporate culture of the target company and the business environment of the country in question. In fact, corporate circles also say, off the record, that the Tata group had even given up the idea of pushing through some acquisitions in the recent past after it found gaps following a cultural due diligence exercise.
Going forward, as Indian M&A activity increases, correct cultural due diligence will hold the key to how well companies manage their companies post-acquisition. If the past few high-profile cases are any indication, we?re on the right track.