Why does public-sector merger fail

Group-7 Ranadip Madhu Kumar Abhinav Divesh Ranjan Mudaliar Ravi Mohan Nikhil Motiwala

PGP/15/168 PGP/15/228 PGP/15/275 PGP/15/292 PGP/15/310

Agenda
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Major Public Sector Mergers Issues with the Public Sector Mergers Examples of AI, IOC and Insurance Companies Reasons for failure : AI Example Other reasons for Public Sector Mergers Failure

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Major Public Sector Mergers

AI and Indian Airlines (IA)

Indian Refineries Ltd (IRL) and Indian Oil Co. Ltd. (IOCL)

Insurance companies nationalized in 1970s & clubbed into four large public-sector organizations

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Issues with the Public Sector Mergers (1/3)

AI-IA merger

Prolonged strike by Air India (AI) pilots

AI and Indian Airlines (IA), the pilots of both from the dissolved organizations continue to view themselves as employees of the original enterprise in their opinion the promises made then, whether explicit or implied, have to be honored the contentious issue in the current tussle that only former AI pilots have the right to receive training and fly the new Boeings, as they were ordered by the former international carrier
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Issues with the Public Sector Mergers (2/3)

IOC : Merger of Indian Refineries Ltd (IRL) and Indian Oil Co. Ltd. (IOCL) (1964)

IOC still looks like two companies

Two distinct cultures Different HR practices Diverse career progressions Inter-division relations are characterized by rivalry and mutual distrust. Every senior-level position that is open to all divisions is bitterly contested and divided among the two merged groups by unwritten but informally 11/3/2012 IIM and formulae 5 understood practicesKozhikode|MACR

Issues with the Public Sector Mergers (3/3)

Insurance Companies nationalized in 1970s & clubbed into four large public-sector companies HR problems took decades to unravel Numerous managing directors and general managers slotted into new positions
Resulted in writ petitions and court cases took decades to resolve

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Motivation for mergers

Create market power

Save costs by sacking workers and increasing the workload on remaining employees
Acquirers get banks and the government to waive part of the liabilities These so-called synergies are at the cost of either consumers, employees or bondholders
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Autopsy of the failure of Public Sector Mergers

Case of AI merger

Merger of AI was not driven by the boards or senior management of the two airlines Initiative was entirely the design of the ministry of civil aviation The two managements were bullied to assemble a joint team to work out the merger Not much synergy or cost-savings
two former entities had placed large orders from two rival manufacturers (Boeing and Airbus), unlikely that any synergy from common maintenance can be realized.
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Time-line for AI merger

Minister of aviation promised Parliament that network integration would be achieved in 16 weeks In reality, the contract for network integration of the airlines was awarded in April 2010 and realized in 2011 The new AI could not even merge its call centers or airport lounges. In 2010, a committee under Justice Dharmadhikari
to sort out the wage fixation and related HR issues

In 2011, another committee to Dharmadhikaris recommendations implemented

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study can

how be
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Cost-Benefit Analysis for AI merger

Downsides Consultants had predicted an increase in HR and branding cost of Rs 385 crores over the first three years Upsides Eroded all the cost savings from integration of hangars, maintenance facilities Gains were to come from growth in revenue and reduction in borrowing costs Revenue growth would result from network integration and subsequently by joining the Star Alliance, which would divert international traffic towards the merged entity The savings and synergy can be expected from fewer ladders and desks at the terminals or buses to ferry passengers In an industry where fuel and lease rent accounts for 80 per cent of costs, these savings are very less
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FACTS equally valid for other PSUs

Possibility of gains through exercising market power is remote most PSUs (power, petroleum marketing, railways) cannot even charge enough to recover their legitimate costs, leave alone extract monopoly rent Nor can they realize savings from the merger, which come mainly from increasing workload and reduction in overlapping manpower The human costs of mergers in PSUs far outweigh any minor gain. Layoffs are impossible; most employees would seek protection under the mandate of writs in courts. The senior management will spend the bulk of its time and energy sorting out human issues, rather than evolve new strategy or fight competition.

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The bulk of mergers fail to create value for anyone except consultants, lawyers, advisers and investment bankers

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