By Graham Scrivener, European Managing Director, Kotter International
Shareholders of Standard Life and Aberdeen Asset Management vote in June on their proposed merger, which would create UK’s largest active asset management company and the second largest in Europe. They believe that it will create scale, financial strength and an increased breadth of investment capability, as well as an estimated£200million in annual cost savings, but at a cost of some 800 jobs within three years – almost 10% of the combined total workforce.
However, delivering those cost savings and creating a new entity where 1+1= 3 is far from straightforward. In France, a number of mergers in the asset management sector have led to very different results. Where there are complementary skillsets, as when Natixis Global Asset Management (NAGM) acquired a controlling interest in Darius Capital Partners, or it creates a more balanced client portfolio, as when Financière de l’Echiquier acquired Acropole Asset Management, the results have been positive.
In contrast, when the two companies are of very different sizes it is all too easy for what has made the smaller partner special to become submerged in the processes of the larger. This was the case when BNP Paribas Asset Investment merged operations with Fauchier Partners, and BNP subsequently sold Fauchier a few years later.The same appears to be happening following the merger of Rothschild & Cie and HDF Group.
Research says less than one third succeed
Navigating the internal dynamics and restructuring challenges associated with a merger is full of complexity. John Kotter, founder of Kotter International and Emeritus Harvard Professor of Leadership, has spent some 40 years analysing the factors that can derail the best laid plans. His research shows that 70% of large-scale transformations, including mergers, do not deliver the anticipated benefits.
To be one of the 5% that fully succeed in their original large-scale transformation ambitions, organisations need to address both the management aspects of the merger (i.e. technical/business/regulatory issues) and the leadership aspects, such as developing the vision and engaging as many people as possible in the two organisations.
In financial services, with stringent and constantly changing regulatory issues, it can be all too easy to lose focus on the leadership side of the equation. Deadlines need to be met, systems integrated and the highest standards of governance maintained. However, DrKotter’s research has shown that, to be successful, executives also need to focus on actually leading the newly combined organisation forward and creating a strong team that understands and can deliver their vision. How might this apply to Standard Life and Aberdeen Asset Management?
Obtain buy-in to the vision
John Kotter’s body of work shows that the single most common factor in why mergers do not succeed is not the lack of a post-merger vision for senior leadership, but the lack of one in which everyone can share and buy in to. This is essential: a post-merger vision from the top echelons of senior leadership, or one that is focused on delivering the right response from the City, is not enough. It is vital for two organisations genuinely wanting to become greater than the sum of their constituent parts to engage their staff throughout both organisations. It is particularly important in this instance where, although there is a size difference between the two organisations, they will be merging as equals. The vision must stress what both organisations bring to the combined entity, and emphasise clearly that it is a merger, not a takeover, despite the facts that Standard Life is much larger, its chairman will preside over the new entity and its shareholders will own two-thirds of the new company.
The two chief executives clearly know each other well and will have spent considerable time with their senior teams talking about the benefits of merging their organisations, strategically, financially and in terms of their offer to customers. Having answered the fundamental question: “what more could we become by coming together?” the combined senior leadership team needs to express this in a way that resonates with everyone at all levels and build a collective sense of urgency, excitement and alignment around a common goal.They have a sophisticated workforce, and need to communicate appropriately with them. Staff must be given permission to make the vision culturally their own, and to run with it in building the new organisation.
Retain key staff at all levels
In any merger there is the potential for both attrition and for job cuts due to economies of scale, and in this case the two companies have already been open about the scale of potential job losses. Aberdeen also has some history in this area – three years ago it bought Ignis Asset Management, the Scottish Widows fund management arm of Lloyds Bank, which resulted in the bulk of Ignis’ 250 Glasgow-based staff being made redundant. This will not have been forgotten in the tight-knit Scottish finance community.
In many sectors staff retention is ignored because human capital assets are difficult to value correctly. This is not the case with this merger, where the two companies have (according to media reports) put aside around £35m in retention bonuses to offer top fund managers once the merger goes ahead. With significant competition now from tracker-based and new low cost market entrants it is still critical to retain the very best fund managers to maintain funds under management. Asset management is after all a people business. With one star fund manager already having left Standard Life in March, effective steps need to be taken to ensure that other fund managers want to stay.
But it is also important to make other staff at all levels feel valued and able to participate in the merger. Institutional knowledge needs to be retained in the short term if the new entity is to function effectively. Interestingly, we have found that in situations where it is clear that some rationalisation and cost-cutting will be inevitable, those at risk respond much better if they are engaged with the process. Although sometimes seen as inevitable, the loss of organisational knowledge capital and goodwill can be minimised if people not in key client-facing positions are able to build the new organisation together with their new counterparts. Creativity and positivity can emerge from even the most difficult circumstances if people are given the chance to have more input. This requires courage from senior leaders, who have to resist the temptation to tightly control the integration and instead trust their workforce.
Avoid creating a survive only mentality
Dr Kotter’s latest thinking suggests that the way our brains are wired affects how we respond to change. If the process is not handled well, many people go into a state of panic, in which they believe the only possible responses in order to survive the change are fight, flight or freeze. Clearly none of these bode well for successful business performance.
Communication needs to motivate people through optimism, not fear. There must be enough urgency generated to spur everyone into action without creating frenetic, unproductive activity. True urgency means painting a clear picture of what’s important, what’s at stake and the role each employee can play in delivering the new future.
It is vital to ensure that a majority is involved in delivering the transformation, or they will quickly become disenfranchised.There must be a critical mass of people within the organisation supporting the roadmap for change, typically way more than half, to successfully transform both parties into the new organisation.
The best leaders understand that there will be varying opinions and challenges and are open to considering them to create the best of both in the new organisation. Only if disagreement genuinely jeopardises the pursuit of the newly-merged organisation’s big opportunity in its market is an immediate exit process actually required. Courage shown by senior leaders to allow staff from both teams to engage with the realities of the merger, with the emotions that entails, builds a much more engaged final organisation than the traditional night-of-the-long-knives approach.
Enable employees to shape the new organisation
Could this merger be one of the 5% that exceed their transformation ambitions? This is not a sudden marriage – it has been some eight years in the making, the CEOs know each other well and the top-level structure will have been prepared for the City to feel comfortable. However, a paper organisation chart will not consider the actualities of how both organisations work. The new organisation needs a degree of flexibility to enable employees to shape it.
In our work, we have observed that business transformation stands a much better chance when the newly combined organisations create more informal networked groups to run alongside the hierarchy – a kind of dual operating system. Composed of leaders at all organisational levels who have volunteered in service to the vision, the network side of the system can infuse the company with more agility, adaptability and innovation than a hierarchy alone allows.
This network can quickly adapt to new ways of working and innovate processes that drive toward the company’s future goals. It can also disseminate new cultural norms much faster than is possible in a hierarchical structure.
An integrated, informal network will allow key cultural traits to become ingrained in the DNA of the new company and serve to make it stronger. Organisations with strong networks running in tandem with the hierarchy already in place grow even stronger during integration. They are critical to innovation, engagement and effective execution. Shutting them off would only serve to disenfranchise employees and disable the routes for effective change.If the new merged organisations can maintain their relationship and curiosity about the real strengths that each party brings there is the potential to create 1+1 = 3.
No secret to success
There is no magic bullet that guarantees success in merging complex entities, as Standard Life and Aberdeen Asset Management will find out over the coming weeks and months. However, if they focus on crafting and communicating a vision that clearly spells out the opportunities of the new business and engage the majority of employees in working out how to make it happen, then they have a good chance of being in that really successful 5%.
For more information visit www.kotterinternational.com
Euro zone business activity shrank in January as lockdowns hit services
By Jonathan Cable
LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.
With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.
IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.
“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.
“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”
The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]
A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.
With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.
That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.
Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.
An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.
But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.
As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.
“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.
(Reporting by Jonathan Cable; Editing by Toby Chopra)
Volkswagen’s profit halves, but deliveries recovering
BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.
The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.
Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.
“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.
Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.
Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.
Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.
It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.
Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.
The group is expected to release detailed 2020 figures on March 16.
($1 = 0.8215 euros)
(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)
Global chip shortage hits China’s bitcoin mining sector
By Samuel Shen and Alun John
SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.
The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.
Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.
Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.
“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.
Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.
Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.
The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]
Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.
Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.
“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”
Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”
“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.
Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.
A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.
“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.
The cryptocurrency surge is affecting who is able to mine.
The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.
“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.
Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.
“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.
Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.
(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)
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