Leadership

Implications of Cross-border Deals

Jul 1st 2011
By Anupam Prakash

Anupam Prakash, Partner, Mercer India, talks about the opportunities for Indian companies in cross-
border M&A, and the crucial role that people and human capital considerations play in ensuring a
successful transaction

Today, in my view, there are two countries which have a great opportunity in exploiting cross-border
M&As: China and India. The reason for this is that these two countries are used to scale and size. They
have large domestic markets, know how to sell at scale, know how to manufacture in scale and so on.
Besides China, India (and the U.S.), there is no other country that really understands size and scale.
India in particular, is very well placed to do cross-border deals, as India-based organizations understand
diversity, complexity and scale. This is due to a thriving culture of private sector and entrepreneurship,
something that their Chinese counterparts have not been exposed to. In China, it is mostly the state-
owned enterprises which have been doing cross-border deals. In India, M&As are being performed by
very large enterprises as well as by mid-sized, and even smaller organizations. At all levels, Indian
companies are innovating in terms of products, opportunities and business models, by exploiting the
M&A platform to globalize rapidly.

Cross-border deals vs. domestic deals
When looking at cross-border transactions, the only thing that is actually different from domestic deals
is the people or human capital aspect. Broadly, you can classify these HR aspects in two categories: one
is related to employment matters (regulation, benefits, legal issues); the other relates to softer issues
related of culture, communication, behavior and style. When an Indian company is acquiring in India,
these two challenges do not really exist; or at least, organizations are completely familiar with them. The
moment the deal is cross-border, these challenges become significant, and potentially, can derail and
disrupt the deal. When an HR head is looking at the benefits, or the liability, or actuarial valuation to
pensions and benefits for India-based population, a standard due diligence activity will easily provide
estimations. This is not the case in cross-border deals. Just to give you an example, a large auto-
components player in India made an acquisition in Europe. The acquirer did not undertake an HR work
stream audit, which they could have done quite easily during the diligence stage, and went ahead with
the acquisition. They later realized the liabilities in terms of severance, workers compensation, and
issues related to other employment matters - healthcare, pensions, retirement and gratuity. These costs
were so large that the company carried a large load on its P&L and balance sheet for several years - as a
result of which the transaction did not realize the planned business synergy till much later in the game.
The level of liabilities that some countries impose on employers in terms of severance pay, benefits,
employee rights, trade unions, etc. is of a magnitude, that Asia-based organizations find it difficult to
comprehend and cope with.
The second challenge of cross-border deals relate to the softer aspects: style, culture, communication,
behaviors. Most Indian companies doing transactions are promoter-driven and managed - these types of
organizations have a unique set of dynamics that many organizations in the west are not familiar with. If
an Indian promoter is going to maintain the senior management of the newly acquired company, then it
is important to sensitize both the promoters on how to deal with a global management team, and the
senior global team on the dynamics and expectations of promoter-driven business based in India.
Cultural interventions, people assessment and coaching are crucial for the success of these transactions.
A classic intervention to cope with these issues is a culture scan. Done during the M&A process, this tool
can easily determine cultural gap and fitment between the two organizations, and throw up an action
plan to cope with the gap, as well as, define a roadmap for integration across aspects of management
style, organizational communication and team interactions during the post merger phase, and after.

A good deal is not enough peoples role is crucial to realize the planned synergy
When planning a transaction, organizations typically tend to consider three things: balance sheet
synergy, acquisition of technology and access to customers.
Unfortunately, not many companies will look at the employees and the HR issues till later into the due
diligence stage, or worse, and more often, till later into the post deal period. This is the reason we find
many cross-border deals ending up not realizing the planned business synergies, having a delayed
integration, or in many situations, continuing to work as two independent and unrelated organizations,
even long after the deal has been consummated. This is a real pitfall, one that needs to be avoided, if
Indian organizations aspire to use mergers and acquisitions as a vehicle for globalization.