What counts in making a happy marriage is not so much how compatible two people are, wrote Leo Tolstoy, but how they deal with incompatibility. That philosophy underlies a novel approach to M&A that some emerging multinationals have adopted. Instead of rushing to integrate businesses they’ve bought overseas, they’ve allowed their acquisitions to continue operating independently, almost as if there had been no change of ownership. Each organization focuses on what it does best even as it learns to use the resources and capabilities of the other to achieve its goals.
Partnering—our term for this approach—entails keeping an acquisition structurally separate and maintaining its own identity and organization. The acquirers retain the senior executives, particularly the CEOs, of the corporations they buy and give them the same power and autonomy they used to enjoy. The new parents simply lay down their values to serve as a beacon and create a fresh sense of purpose in their acquisitions. They hunt for synergies in a few areas, carefully choosing those that aren’t disruptive to their acquisitions’ businesses. In a nutshell, the acquirer treats the acquired organization as it would a partner in a strategic alliance. By doing so, emerging multinationals are able to manage acquisitions’ organizational drivers in a nonthreatening way, reduce the unintended consequences of integration, and create an environment in which companies can easily share knowledge and best practices.
Big business groups from several developing countries—the AV Birla Group, the Mahindra Group, and the Tata Group in India; the Ülker Group in Turkey; Neusoft in China; and AmBev in Brazil, among others—are using this light-handed M&A style. Their approach was summed up in 2004 by the Tata Group’s chairman Ratan Tata when his group acquired South Korea’s Daewoo Commercial Vehicle Company. “Tata Motors will operate Daewoo as a Korean company in Korea, managed by Koreans,” he stated, “but it will work as part of a global alliance with its Indian counterpart.”
The partnering approach is becoming a hallmark of reverse takeovers, even helping emerging giants win takeover battles. For instance, Murat Ülker, the low-profile chairman of the Ülker Group, was asked by Godiva’s board why he wanted to buy the company during the auction in 2007. “I have enough businesses to run,” he said. “For me, Godiva is the Spoon-maker’s Diamond [the 86-carat stone hanging in Istanbul’s Topkapi Palace] of the chocolate market. I will polish it, make a pendant with it, and help promote it in different parts of the world.” His clear intention not to manage the Belgian-American company in a hands-on fashion helped him bag Godiva. Hemant Luthra, the architect of the Mahindra Group’s overseas takeovers in the automotive components business, adds: “The management teams we acquired in Europe have become our best spokespeople. If the people in a company we are trying to acquire have any concerns, I simply put them in touch with those managers.”
It may be too early to tell how well the approach is working; cross-border acquisitions are notoriously tough to pull off. However, the signs are encouraging. We analyzed the financial performance of Indian corporations that bought 204 companies abroad between 2000 and 2007 and many of which have used the partnering approach, and we were surprised to find that they had created value for shareholders. After the takeovers, the buyers’ stock prices registered a gain of 1.76% after adjusting for other major factors, suggesting that the acquisitions were responsible for the increase. That’s exceptional; most cross-border takeovers destroy shareholder value. For instance, Daimler’s $36 billion acquisition of Chrysler, hailed as a deal “made in heaven” in 1998, ended with Daimler selling Chrysler for $7.4 billion in 2007.
A survey we conducted of Indian acquirers’ senior executives shows they’re satisfied with the outcomes. On a 7-point scale (where 7 stands for “I strongly agree”), scores averaged 5.69 for the statement “You’ve achieved most of your objectives in executing this acquisition,” and 5.47 for the statement “You’re satisfied with the outcome and performance of this acquisition.” When we interviewed a cross-section of employees in 10 U.S. and European companies recently acquired by Indian firms, more than 50% of them said they were “happy” with their new owners. Again, this is surprising, considering that M&A frequently results in disgruntled employees and an exodus of top talent. Thus, emerging giants could become acquirers of choice globally.
Emerging multinationals have persisted with the partnering approach despite the economic environment of the past two years. Never have companies had to place greater emphasis on reducing costs and improving efficiencies. Yet companies from developing countries have given their overseas acquisitions a great deal of managerial freedom—and financial support—to deal with the crisis as they see fit. It’s time to shine a light on this intriguing tactic, and to evaluate whether companies the world over could use this postmerger integration method.
What’s So Different About Partnering?
Companies have to make decisions about five issues after a takeover. The partnering approach differs from traditional postmerger integration practices on all of them, we find.
Most takeovers result in two organizations becoming one. Merging goals, procedures, and reporting relationships yields economies of scale and scope, and reduces operational and overhead costs—the raison d’être of most M&A. In stark contrast, most emerging multinationals haven’t absorbed their overseas acquisitions. They’ve allowed the acquisitions to remain separate organizations, and have given them almost complete operational freedom even when they are in the same or related businesses. Tetley and Corus (Tata Group acquisitions), Godiva (Ülker’s purchase), and Springs Industries (which Coteminas bought) all operate as stand-alone businesses despite having had new owners for three or more years.
Independence doesn’t result in dramatically lower costs, but it does allow emerging giants to avoid the mistakes that doom many takeovers. When companies merge, the process disrupts operations and activities in both organizations. Creating common procedures and reporting relationships is complex and consumes significant chunks of top management’s time. In the process, organizational morale dips and employee turnover soars. These hidden costs, many emerging multinationals have found, outweigh the monetary benefits of structural integration.
Reducing costs is not the only reason why emerging multinationals pursue M&A. They acquire to expand into new markets or gain control of brands and new technologies. By keeping acquisitions at a distance, they can take full advantage of overseas companies’ identities and prevent their own antecedents from clouding established brands—a particular worry when it comes to growing super-premium brands such as Godiva and Jaguar or consumer icons such as Budweiser. For instance, VIP Industries, India’s largest luggage producer, acquired Carlton International, the maker of high-end luggage in the UK, in 2001. The company now manufactures the Carlton line in India, but it maintains a very different organization in the UK, so that it can preserve the British essence of the brand.
Emerging giants don’t entirely forgo synergies; they go after them selectively and in stages. At first, they look for activities that, if coordinated, will yield cost savings or enhance revenues without disrupting either company’s core business. Taking a leaf from the strategic-alliances textbook, they use managerial links—such as joint teams and boundary-spanning individuals—to identify and exploit opportunities.
Raw material purchases are usually a good place to score quick wins. In traditional postmerger integration, procurement synergies come because the organizations have merged into one. By contrast, emerging multinationals set up teams to coordinate buying with overseas acquisitions. Soon after Tata Tea acquired Tetley, managers from both companies agreed to focus on open-market tea purchases—an area where they could reduce procurement and logistics costs just by acting in unison. They set up a buying team consisting of an equal number of managers from each company, so that each would become aware of the other’s quality standards. Similarly, Ülker and Godiva coordinate cocoa and hazelnut purchases, and Tata Steel and Corus now purchase all their zinc and scrap metal together.
Sharing operational know-how is often the next step. The key word is sharing. Knowledge usually flows from the acquirer to the acquired. However, emerging multinationals make decisions using a best-in-class philosophy: Teams consider best practices, processes, and ideas from both companies before choosing which ones to follow. To ensure that ideas travel both ways, Tata Steel and Corus created several forums in which employees could discuss and share technical know-how and best practices. As a result, Tata Steel implemented some Corus technologies—reducing the heating time of its coke ovens, for example, from 24 days to nine—and Corus picked up some Tata Steel technologies—reducing consumption of scrap and energy in its hot metal steel-making process, for instance.
Most emerging giants give overseas acquisitions the latitude to make strategy, but they align their planning templates and budgeting calendars with their own. By synchronizing the strategy planning process, they’re better able to coordinate and communicate about plans. India’s M&M Group pushed the companies it bought in Europe and China to move to the Mahindra Annual Planning Cycle quickly. “We encourage our overseas acquisitions to move to the MAPC as fast as possible,” explains Anand Mahindra, the group’s vice chairman, “so that we are in step with each other and speak a common language.”
It’s tempting to leave the quest for synergy to middle managers, but senior executives are better placed to spot opportunities. For instance, a few executives from the Tata Group have joined their acquisitions’ boards and vice versa. This has led to a greater flow of ideas and information and created natural opportunities for the acquirer and the acquired to work together.
Companies usually replace their acquisitions’ top management teams as one of the first steps of integration. Beyond signaling the buyer’s intent to change things, these actions also are a way of aligning the vision, strategy, and operating routines of the two companies. In fact, many experts believe that companies can create value from takeovers merely by replacing incumbent management teams with their own, more skilled managers.
Most emerging multinationals instead do everything they can to keep top teams intact. That, they believe, shows the buyer’s confidence in the company, its strategy, and the quality of its talent. It also dispels any notion that poor performance in some way led to the takeover. As a result, the acquirers don’t lose human and social capital or the team’s industry- and company-specific knowledge; in fact, they can harness all that for the benefit of both parties. Debu Bhattacharya, the CEO of India’s Hindalco, which bought Novelis, admits: “We paid for Novelis’s assets as well as its talent. Many of them are institutions in their areas of expertise.” Familiar faces reduce postmerger uncertainty among customers, suppliers, and employees; indeed, this approach has the added benefit of creating a positive organizational climate after a takeover.
Is this a feasible strategy? Judging by the number of emerging giants that have been successful in retaining CEOs, it is. Brunner Mond’s John Kerrigan, Godiva Chocolatier’s Jim Goldman, Novelis’s Martha Finn Brooks, NatSteel Singapore’s Oo Soon Hee, Springs Industries’ Tom O’Connor, and JECO Holdings’ Thomas Koerner all stayed on after being acquired by emerging multinationals. Jim Goldman explains, “The Ülker Group was up front. Its senior executives told me: ‘We want to work with you; we believe in you; we want to know what you think we should do…Can you continue to lead Godiva?’ I decided to give it a whirl. The relationship has continued to grow, and I’m still here three years down the line.”
Most companies end up with precious little operational autonomy after they’ve been acquired. Even when they aren’t integrated—as is the case with some of Cisco’s acquisitions—they don’t get much of a free hand. Moreover, it’s clear who the buyer is—and who has been bought. By contrast, emerging multinationals rarely get involved in day-to-day decision making—even on key issues such as staffing or pricing—unless asked to do so. They assume that incumbent teams know their customers, organizations, and rivals best.
Such freedom slows the pace of change, but it has distinct advantages. Independence minimizes the likelihood of poor performance after a takeover; acquirers often make bad decisions because they don’t understand the acquisition’s business. It also helps prevent the decision-making paralysis that can set in when managers don’t understand the acquirers’ expectations. In addition, autonomy motivates executives to do better. Many of the CEOs we spoke to felt lucky to have a parent willing to invest in them, and also a tremendous responsibility to deliver results.
Some emerging multinationals have placed one or two of their senior executives in the acquired organization. The job of those executives is not to oversee or second-guess CEOs but to act as bridges. They also help the acquired company’s executives understand the new boss—and vice versa. Ülker placed one such executive in Godiva: “He makes sure that people at Ülker don’t get in our way,” explains Jim Goldman. “He’ll make me understand where our chairman is coming from, and I’m sure he does the same at that end. Bringing him to New York from Istanbul was a good move.”
Vision and values.
Companies have traditionally been in no hurry to unify cultures and values following a merger. The “soft” stuff is tough to tackle, so executives usually focus first on generating synergies. By contrast, most emerging multinationals communicate values, ethics, and business philosophies immediately after a takeover. That’s critical for this approach to work: Structural separation and operational autonomy deliver results only when an acquisition understands the parent’s values.
In the Tata Group, for example, acquired companies must immediately sign and practice the principles enshrined in the Tata Business Excellence Model and the Tata Code of Conduct. Says Satish Pradhan, the group’s executive vice president of human resources: “All the companies in the group must move ahead keeping in mind the Tata Group’s philosophy and value system.”
In the partnering approach, the corporate center acts as the custodian of values and business principles, provides support services, outlines the broad direction for major sectors, facilitates best-practice sharing between companies, and monitors performance. The center doesn’t thrust practices on the acquisitions; it works collaboratively, helping top management teams appreciate the benefits and encouraging them to implement key practices. “When we acquire a company, we do not go in like conquerors,” explains R. Gopalakrishnan, the Tata Group’s executive director. “We go in with a collaborative mind-set and seek alignment in terms of our values.”
Some companies create monetary incentives that help in achieving common goals, even when the acquisitions are structurally separate. For example, M&M initially took a majority stake in the companies it bought, keeping 51% and leaving the remaining equity for the previous owners or offering it to managers through stock options. Later, it floated a publicly traded corporation that held stakes in all the acquired companies. Shareholders, including executives of the acquired businesses, received shares in that company in lieu of those they held. Not only has there been greater cooperation between those companies since then, but M&M has found that senior managers are now more likely to take into account the interests of all the companies in the group before making decisions.
Why Partnering May Be for Every Company
It’s interesting to speculate about how broadly applicable the partnering approach is. After all, some of the drivers of the approach are more characteristic of emerging multinationals. One, they often buy companies that own powerful brands or state-of-the-art technologies and have strong management teams, so it’s natural that they would retain their acquisitions’ identities and management. Two, emerging multinationals’ resources and those of overseas acquisitions are often complementary—not substitutable. That’s why selective coordination has been enough to create value. Three, some emerging multinationals simply lack the capabilities to manage complex overseas integrations. Finally, the conglomerate management style that’s prevalent in emerging markets predisposes these acquirers to the partnering approach.
Context is critical, but before you dismiss the partnering approach as another emerging-markets curiosity, be advised that some companies in the developed world have helped shape it. Cisco uses similar tactics to manage small entrepreneurial companies in which it invests, and Disney has done the same to get the most out of Pixar. The most striking prototype of the approach is, undoubtedly, the Renault-Nissan partnership. In 1999, when Renault acquired a 36% stake in Nissan (which it later upped to 44%), its senior executives emphasized that they weren’t taking over the company. Although Renault did appoint Carlos Ghosn as Nissan’s CEO then, it still saw the deal as a partnership that would maintain the two companies’ distinctive practices and systems, yet allow them to capitalize on scale and synergy. Mutual respect for culture and individuality was paramount.
The two companies created several mechanisms to benefit from the union: an alliance board to decide policy issues and fashion strategy; deputations of some senior executives from each company to the other to oversee functions at which they excelled; and multitiered, cross-functional, and cross-company teams to identify areas of cooperation. Renault and Nissan shared best practices in product design, procurement, and manufacturing and, over time, consolidated chunks of their supply chain and manufacturing platforms. By 2006, both companies’ sales, market share, and efficiency had shot up. Their respective market capitalizations grew by 300% between 1999 and 2006, while that of the global automobile industry rose by 27%. The global slowdown has affected Renault-Nissan, as it has all automakers, but the two companies’ fate would surely have been worse had they not teamed up.• • •
The partnering approach does have limitations. The benefits usually associated with the coming together of two companies are slower to materialize. For instance, because of the acquirer’s nonintrusive nature, its capacity to achieve substantial cost reductions, especially by eliminating jobs and sacking employees, is limited. This approach therefore works better for companies that exhibit patience and have a relatively great willingness to take risks—a point that came up frequently in our discussions with senior executives, who noted that they are able to follow this approach because they’re in it for the long run. Managers planning to use the practice should prepare stakeholders appropriately.
To conclude, some companies are better suited than others to adopt the partnering approach. Organizations with collaborative, inclusive cultures will have an easier time using the approach than companies with a hierarchical, command-and-control style. Senior executives in acquirer companies must be comfortable achieving goals through influence rather than control. The partnering approach requires leaders with a higher than average tolerance for ambiguity. Respect for new ideas is critical since executives must recognize the strengths of the acquired company and resist the urge to impose their way of doing things. These traits are encoded in the DNA of some organizations, but others will have to develop them. For instance, corporations that have experience managing strategic relationships with other businesses may have already acquired these skills. After all, the partnering approach embodies the best of both alliances and acquisitions.