Business

MANAGING THE PEOPLE RISK IN M&A: HOW GOOD CULTURE MANAGEMENT DRIVES M&A SUCCESS

Published

3 years ago

28/08/2017

GBAF Mag

MANAGING THE PEOPLE RISK IN M&A: HOW GOOD CULTURE MANAGEMENT DRIVES M&A SUCCESS

By Andy Moseby, Corporate Partner at Kemp Little LLP

Andy Moseby

We’ve known for a while that proper integration is the key to M&A success. Yet the integration of staff is often overlooked, with culture management usually left out of the discussion entirely. This was the case with Sprint and Nextel in December 2004, when they announced their $35 billion merger. It seemed like a perfect marriage which, if successful, would create a telecommunications behemoth. Sprint was, at the time, ranked third in the market in terms of revenue with Nextel in fifth spot. On paper, it should have been a slam-dunk; in reality the realisation that the two were woefully mismatched began to sink-in almost immediately.

In a Nextel manager meeting held to celebrate the merger announcement, Nextel’s CEO Tim Donahue pumped up the executives cheerleader-style. Dressed in a casual sweater and khakis, he led a chant of “Let’s go stick it to Verizon!” to cheers from the crowd. Donahue then introduced a special guest: Gary Forsee, Sprint’s CEO. Wearing a buttoned-up suit, For see strode on stage and launched into a detailed PowerPoint presentation, setting out his expectations for the merger. The excitement drained from the room, and the Nextel managers sat in dumbfounded silence.

Global studies show an overall M&A failure rate of between 70% and 90%, which immediately suggests that acquirers are repeatedly overlooking what is important for successful integration. Sprint and Nextel were ultimately unable to deliver a successful merger due to their contrasting corporate cultures; their focus was primarily on the integration of business processes, not humans, and this had a devastating impact. Sprint CEO Forsee resigned in 2007. By 2008, Sprint had written off $29.7 billion of the acquisition cost (effectively wiping out 80% of Nextel’s value) and by the summer of 2013 what remained was sold off to SoftBank in Japan.

In 2017, PwC found that just 5% of all Fortune 1000 deals from the last three years were classed as high-performing in their M&A Integration Survey Report.They also found that dealmakers are becoming more ambitious –54% of the survey respondents described the largest transaction they completed in the previous three years as transformational: a deal that involved acquiring new markets, channels, products or operations in a way that moves the business materially in another direction. For many companies involved in this type of M&A transaction, the result is an integration of two very different business models or cultures. The Nextel / Sprint merger serves as a good reminder of how mashing two contrasting styles of business together can, if not carefully managed, pull the joined entity apart. Nextel executives who witnessed the benefits of Donahue’s “Be first, be different” philosophy and customer-centric entrepreneurial style became frustrated with their Sprint counterpart’s insistence on approval from superiors and bureaucratic processes. Sprint employees, centred on numbers-driven management and adherence to playbooks, viewed Nextel as reckless and impulsive. The divide was too great and the business became fragmented. Yet, it didn’t need to happen that way.

Whilst Gary Forsee was falling on his sword at Sprint, another large deal was happening on the other side of the world: Haier, China’s leading manufacturer of home appliances formed a joint venture with Sanyo to develop refrigerators in Japan. On cultural terms, the companies were arguably more at odds than Sprint and Nextel. Haier promoted staff on merit and remunerated on the basis of results; Sanyo was run in the traditional Japanese way, rewarding age and longevity. Haier’s Asia chief executive, Du Jingguo– in charge of integration – decided to focus on the people.

He split the workforce into small groups and night after night, over drinks, he gave them the opportunity to voice their concerns. Over time, he was able to gain their trust and began implementing change: younger employees were promoted, but in a manner which spared the pride of their seniors. The Haier-Sanyo deal became one of the most successful in the region at the time, mainly because of Du’s commitment to staff integration by listening to their employees and ironing out their concerns.

Management usually find full integration of employees to be notoriously difficult: “soft” issues like communication and culture are often left to HR, allowing leadership to focus on integration which can be measured and tracked with reportable metrics. However, behavioural science and behavioural economics have shown that the culture of an organisation has its own measurable data and metrics. Variousscientific methods can now be applied to understand the attitudes, priorities and skills of the target workforce as well as the individual characteristics of management inherent to the target and acquirer organisations.

This data can then be used to predict cultural conflicts, identify any differences in management style and plan workforce integration processes, just as most acquirers plan for IT integration.Although the numbers and anecdotes suggest businesses involved in M&A processes have a long way to go to achieve more successful integrations, moving workforce integration issues higher up the agenda is a good place to start. This would enable both the acquirer and the target to manage change through their employees, as opposed to managing their employees through change.

Business

Rio Tinto executives say goodbye to 2020 with chunky payouts

Published

11 mins ago

22/02/2021

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Rio Tinto executives say goodbye to 2020 with chunky payouts 1

MELBOURNE (Reuters) – Three Rio Tinto executives forced to leave the company after the destruction of sacred rock shelters at Juukan Gorge in Western Australia all closed off the year with substantial payouts, Rio’s annual report released on Monday showed.

Chief Executive Jean-Sébastien Jacques, who stepped down from his role at the end of 2020, received total remuneration of 13.3 million pounds ($18.6 million) under Australian accounting rules, up from 7.1 million pounds a year earlier.

Despite the loss of about 2.7 million pounds in awards following a board review into the blast, the sum, which includes the value of share awards that have not yet vested, was boosted by Rio Tinto’s strong share price performance.

Jacques and two other executives left Rio after the company determined their positions had become untenable after a backlash against a board review that originally imposed only financial penalties for the destruction of the sacred sites.

Rio Tinto’s remuneration committee, led by non-executive director Sam Laidlaw, granted “eligible” leaver status to the three executives, meaning they avoided stiffer financial penalties for the incident.

“In making the eligible leaver determination the Board fully recognised the gravity of the destruction at Juukan Gorge but was mindful that the three executives did not deliberately cause the events to happen, they did not do anything unlawful, nor did they engage in fraudulent or dishonest behaviour or wilfully neglect their duties,” it said in the annual report.

Rio’s iron ore head, Chris Salisbury, who stepped down in September, received total remuneration of A$6.7 million ($5.3 million) including termination benefits and unvested share awards, from A$2.9 million in 2019. Salisbury lost a A$1.1 million short-term incentive.

Head of Corporate Affairs Simone Niven forfeited 525,000 pounds in short-term incentives but received 5.1 million pounds, including 1.1 million pounds in termination benefits and unvested share awards.

Independent Rio Tinto Director Michael L’Estrange, who lead the initial board review, had a 46% increase in fees and salary. His total remuneration rose to A$227,000 from A$201,000.

Chairman Simon Thompson was paid 939,000 pounds, up from 934,000 pounds the year before.

($1 = 1.2695 Australian dollars)

($1 = 0.7136 pounds)

(Reporting by Melanie Burton; editing by Richard Pullin)

Business

Australia’s Macquarie raises guidance after U.S. winter freeze

Published

2 hours ago

22/02/2021

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Australia's Macquarie raises guidance after U.S. winter freeze 2

By Paulina Duran and Jonathan Barrett

SYDNEY (Reuters) – Macquarie Group lifted its profit guidance on Monday, sending shares to 12-month highs, as its large North American energy business profits from the winter storms sweeping across Texas and other states.

Macquarie said it expects its fiscal 2021 profit to jump by as much as 10%, after warning just two weeks ago that earnings would be “slightly down”.

The energy business unit, designed to move large quantities of gas to meet unexpected demand, has single-handedly increased the overall profit forecast of the investment bank by about A$400 million, analysts said.

“Extreme winter weather conditions in North America have significantly increased short-term client demand for Macquarie’s capabilities in maintaining critical physical supply across the commodity complex,” the company said in a statement.

Macquarie is the second biggest gas marketer in North America, behind oil major BP. It purchases natural gas and moves it along pipelines and grids, typically from an area where usage is low to high-demand markets.

The deadly winter storm that crippled infrastructure and left millions of Texans without power meant electricity generators had to compete for natural gas supplies, pushing up prices sharply in the deregulated market.

The urgent supply situation has provided Macquarie with an unexpected windfall

“Macquarie appears to be capitalising well on volatility and financial market dislocation,” Bank of America Securities analysts said in a note, as it increased its earnings forecasts for the Sydney-headquartered company.

Macquarie’s performance hurt last year by the pandemic, with subdued deal-making and deteriorating economic conditions leading to a rise in impairment charges.

But a strong initial public offering of its majority-owned data analytics software business, Nuix, late last year and a fillip in the energy business have helped push its share price back to pre-pandemic levels.

The company, which also operates Australia’s largest asset manager and investment banking business, is set for extra boost from a rebound in local M&A activity this year.

Macquarie’s shares were 4.31% higher at A$148.39 early on Monday, the highest level in a year, outperforming a broader market that was flat. The share price eased slightly in afternoon trading.

Earlier this month, the Sydney-based financial conglomerate had forecast full-year earnings for the group to be “slightly” lower than in fiscal 2020.

Macquarie’s Commodities and Global Markets division contributes close to 40% of its group earnings. Analysts had previously raised concerns that the pandemic could erode profits from the division if high energy-use industries shuttered.

(Reporting by Paulina Duran and Jonathan Barrett; Additional reporting by Shriya Ramakrishnan; Editing by Peter Cooney, Jane Wardell & Shri Navaratnam)

Business

Baidu-Geely EV venture names Mobike co-founder as chief

Published

2 hours ago

22/02/2021

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Baidu-Geely EV venture names Mobike co-founder as chief 3

BEIJING/SHANGHAI (Reuters) – China’s Baidu Inc and automaker Geely hired Mobike co-founder and former chief technology officer Xia Yiping as chief executive of their new electric vehicle venture, the search engine giant said on Monday.

Baidu last month had announced it would set up a company with Zhejiang Geely Holding Group to leverage its intelligent driving capabilities and Geely’s car manufacturing expertise.

“Xia has extensive management experience in the field of smart cars and mobility services,” Baidu said in a statement. “We welcome Xia Yiping to join Baidu’s auto company and look forward to his contribution to Baidu and the automobile industry.”

Reuters reported Xia’s appointment last week, citing people familiar with the matter.

Xia served as Mobike’s chief technology officer until the company was acquired by food delivery giant Meituan in 2018. Prior to Mobike, he worked at Ford Motor and Fiat Chrysler.

(Reporting by Yingzhi Yang, Yilei Sun and Brenda Goh, Editing by Sherry Jacob-Phillips)

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