High Performance through Mergers and Acquisitions: India’s New Dynamics

Mergers and acquisitions (M&A) have become a popular avenue for Indian companies to achieve rapid reach and scale. This study explores the dynamics behind the new wave of acquisitions by Indian companies. There is great confidence behind their growth-focused M&A strategies, but our research uncovers that insufficient attention is often paid to the operational implications of M&A.

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Today’s global economy is characterized by multi-directional flows of products, services, people, ideas and capital. A complex web of interconnections is bringing new opportunities and options to companies and individuals around the world. Most notably, we have seen firms from emerging economies expanding at a speed and scale that is transforming the nature of global business.

A key factor behind the speed of global expansion by emerging market multinationals has been the adoption of mergers and acquisitions as a means to rapidly access new markets, assets and capabilities.

Indian companies have been active and visible players within this new M&A trend, but this strategy is known across the world for its high failure rate when it comes to execution.

Indian M&A transactions are primarily driven by the desire for growth.

• Indian companies are leveraging their low-cost advantage to create efficient global business models; they are seeking entry into fast-growing emerging markets and market share in profitable developed economies; they are looking to augment their knowledge, reach and capabilities through acquisitions of companies for their brands, technology, talent and product portfolios.
  
  
• 69 percent of survey participants identified economies of scope (expanded markets and enhanced product portfolios) as the key strategic intent behind their M&A decisions.
  
  
• A further 13 percent of respondents identified the acquisition of key technologies and innovation capabilities as their primary objective.
  
  
• In comparison, only 16 percent identified economies of scale (such as more integrated supply chains and reduced overheads).

With a focus on speed and growth, there appears to be a lack of attention paid to operational implications of M&A, for example:

• Only 11 percent of survey respondents identified supply chain management as an area that requires attention during M&A planning and integration.
  
  
• 89 percent of respondents were satisfied with their latest merger, yet only 45 percent of them considered they had undergone a successful supply chain integration.

The new dynamics of M&A, particularly the string-of-pearls approach and the increasingly cross-border nature of M&A, are bringing new complexities to the integration process

• It is harder to integrate across more numerous locations.
  
  
• The technological complexity of integration has increased.
  
  
• Communication can be hampered through a multitude of languages.
  
  
• A variety of regulations, policy environments and legal systems must be continually tracked and incorporated into overall corporate planning.
  
  
• Consumer segments will vary across locations, as will service levels and customer segmentation approaches.
  
  
• Supply, manufacturing and distribution networks may need to be continually reconfigured.
  
  
• The development of a greater diversity of supplier, distributor and partner relationships, each potentially using different processes, technologies and languages.
  
  
• Measuring success is more difficult.

India’s new M&A dynamics display some specific characteristics:

• Indian deal sizes are relatively small by global standards: 2007 average M&A deal size was about US$56 million in India compared to a global figure of over US$100 million. NB: If we exclude India’s five mega-deals in 2007, the average falls to less than US$20 million.
  
  
• Cross-border acquisitions are becoming increasingly important: They made up nearly 75 percent of the total value of M&A deals in 2007. Developed markets are currently the more popular targets, though M&A in emerging economies are growing at a much faster rate.
  
  
• String of pearls approach to growth: Indian companies often build a series of smaller stakes in different businesses and often industries. This approach allows them to rapidly expand their growth opportunities and extend their geographical footprint. Building a portfolio of complementary businesses is intuitive to many companies as it fits the traditional conglomerate approach which has been so successful in India and many other emerging markets.
  
  
• Gaining experience and confidence by venturing into similar markets in emerging economies: This is before tackling more sophisticated mature markets. For example, Mahindra & Mahindra automotives targeted Malaysia, Indonesia and Thailand before moving on to South Africa. The European and US markets represent the ultimate challenge.
  
  
• Long-term perspective: Experience within India’s domestic markets has given Indian executives an appreciation of risk and complexity that puts a premium on long-term planning and relationships. The ownership and control structures of Indian companies also give them more flexibility, particularly where companies are not listed and have less urgency to respond to the quarterly demands of investors.
  
  
• Collaborative perspective: Each transaction is viewed as one element of a greater strategy, and the value of each deal is seen from the perspective of both the acquirer and the acquired company. This collaborative approach is based on a conscious effort to maintain the value of their acquisition targets which are often larger companies than their own and which frequently possess greater experience and knowledge than themselves and operate higher up the value chain. There is recognition of the value lying on each side of the deal, and acknowledgement that learning is a two-way process, in many cases from the acquired to the acquirer. This approach has a stronger emphasis on partnership than traditional M&A deals.
  
  
• Talent perspective: With talent becoming one of the world’s rarest commodities, and conscious of India’s talent shortages, an acquisition that loses precious employees risks destroying the value of that deal. In a global study by Accenture with the Economist Intelligence Unit, over 90 percent of the Indian executives involved in M&A transactions agreed or strongly agreed that the valuable employees from the target company were retained after their merger. An important factor behind Tata’s acquisition of Jaguar and Land Rover was support from UK trade unions based on a shared understanding of avoiding lay-offs.

Overlooking operational opportunities can have serious and long-lasting implications on profitability:

A great part of M&A synergy value comes from operational efficiency

• About 50 percent of M&A synergies arise from operations.
• The supply chain forms around 70 percent of these operational synergies.

Operational improvements hit both the bottom line and the top line through:

• Managing customer service levels.
• Aligning channel strategies.
• Ensuring geographic reach and availability of the products.
• Mitigating risks of disruption.
• Integrated branding and packaging.
• Generating additional revenue streams through optimized after-market operations.

The cost of neglect can be high on account of customer dissatisfaction and lost sales resulting from:

• Product launch disruptions.
• Product or service quality deterioration.
• Problems in order fill rates.
• Inventory buildups.
• Stock outs.

Accenture’s research and experience highlight the following operations-focused lessons for sustainable growth:

• Raise the strategic importance of operational synergies through involvement of relevant leadership and experts throughout the M&A process. This includes bringing operations leadership to the top table, involving operations leadership in globalization strategies and leveraging supply chain skills to raise performance across the organization.
  
  
• Mitigate execution risk through continuous planning and measurement. This includes assigning responsibilities early on, crafting a clear road map, tracking appropriate metrics related to operational synergies and prioritizing initiatives.
  
  
• Do not underestimate technology efforts. This includes robust planning for IT infrastructure and networks as well as the involvement of supply chain leadership in planning for IT.

Looking forward, Indian businesses aspiring to high performance will need to have honed their expertise in M&A, including cross-border acquisitions, with an emphasis on leveraging operational synergies through supply chain excellence. Executives leading the supply chain in these organizations will play a central role in achieving operational excellence, and making them an integral part of the high-performance business of the future.