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With competition greater than ever before, individual companies find it difficult to survive on their own and hence are on a lookout for counterparties. Thus, this soaring number of M&As. Every merger or acquisition aims at bringing together two or more companies and functioning as one to achieve efficiency, a higher growth rate and synergy. In a way, to make 2 + 2 > 4. But rarely are these targets achieved and hence about 70% M&As end up being unsuccessful. Any company entering a merger usually considers financial and strategic issues at length with a lot of due diligence and planning but neglects the more sensitive issues such as Cultural Compatibility, the human factors and Post Merger Integration (PMI) Operations. In order to study these implications, an effort has been made to analyze the factors responsible for a mergers success or failure. The first one being DaimlerChrysler, a cross border merger. Where the former is a German company and latter an American one, this merger took place in 1998 with an underlying motive of mutual benefit. Thus, this was a friendly horizontal merger. Here is an attempt to show how a profit-making merger is declared a failure when it falls shot of the designers vision. The second case study is that of HDFC Bank and Times Bank Ltd. This case study analyses the fact that mergers often become one-sided affairs. This is reflective in the manner in which HDFC gains the most from this deal. .

DEFINITIONS
Be it a merger, an acquisition or a takeover, the main similarity is that they all aim at bringing together two or more companies and forming one entity. The differences lie in the accounting and tax implications, methods of payment of considerations etc.

1. Merger A merger is when a totally new firm is created. There is no distinction of which firm is the acquiring and which the acquired one is. They now take a new name and create a new business entity of the two firms assets and liabilities. The number of mergers in mergers and acquisitions is vanishingly small. Less than 3 percent of all cross border M&As are actually mergers1 2. Acquisition of stock This can be done in different ways, in buying the voting stocks in exchange for shares, securities, or cash. It is often done with a tender offer, which is really a public offer to buy shares of the firm targeted for the acquisition. Some factors are critical when choosing whether to merge or to make a tender offer: A. The board of the target firm can be bypassed if the shareholders are contacted directly. B. If the shareholders do not accept the tender offer, they do not trade their shares; no shareholder meeting or vote is necessary. C. When the bidder has purchased enough shares, it often leads to an acquisition of the target firm. (In Sweden the bidder can force a takeover when they hold 90% of the shares). D. Resistance by management of the target firm can make the acquisition very costly. Acquisitions of this type are often viewed by the target firm as an unfriendly move. In reality, even when mergers are supposedly between equals, most are acquisitions where one company controls the other. 3. Acquisition of Assets The bidder can acquire the target by buying all of its assets. A vote by the shareholder of the target is needed. This can also be a costly process since there is a great deal of red tape to go through. The above is a clarification of the different kinds of actions that are commonly referred to as M&As. In the following, we are going to use the generally accepted term M&A in our descriptions and discussions.

(UNCTAD, 2000: 99)

TYPES OF MERGERS
On the basis of area of work 1. The Horizontal M&A In this type of M&A, the bidder and the target are in the same industry; thus it serves to strengthen their position within the domain in relation to the competitors. The main purpose in this case is to gain economies of scale. 2. The Vertical M&A The bidder and target are positioned at different steps of the production process. It serves to expand the domain by offering a wider range of products and gaining control of the production process, that is, economies of scope. 3. Conglomerate M&A - The bidder and target are in totally different businesses, with no relation with each other. Such types of mergers are usually carried out to facilitate diversification of the company. On the basis of attitude of the two companies (acquirer and acquired) 1. Friendly 2. Hostile

THE MERGER LIFE CYCLE

The M&A life cycle comprises the following stages and applies to all types of M&As, but how each stage in the process plays out and its relative importance will depend on the type of deal being contemplated: I. Pre Deal Planning

Initial stage, can take anywhere from a few weeks to several year Acquirers search for compatible targets or merger partners Develop a growth strategy defining the role of mergers and acquisitions. Set criteria for candidate screening, evaluation and selection. Identify, gather information about, and assess potential candidates. Decide which candidate offers the best fit for a deal. Develop an action plan for executing the deal

II. Executing the deal

Due Diligence Takes place largely after an offer to merge or acquire has been made Companies ensure that the proposed deal is sound from strategic, economic and implementation perspectives Critical juncture in the life cycle of the deal; many transactions fail to proceed beyond this period of intense scrutiny

Integration Planning Generally takes place within 30 to 100 days of the decision to proceed and may begin even during due diligence if both sides are reasonably confident that the deal will go through Merger partners create the comprehensive plan for all aspects of integrating their businesses and organizations If regulatory approvals are pending, great care must be given to direct contacts and exchange of information or data.

III. Post Merger Final stage of the M&A life cycle; builds on the planning that has Integration taken place before Implementation can take from months to years, depending on the size and complexity of the companies involved and the lead times for major systems and operations integration activities Maintaining business continuity and momentum is the single most important factor in the ultimate success of an M&A Requires a well-planned, disciplined and speedy implementation process.
The M&A market can be viewed as an arena in which managerial teams compete for the right to manage corporate resources. If one team sees that a companys resources are not being leveraged in a way that exploits their potential it will argue that it will be a better owner. It can then offer existing shareholders a better price for the company than todays share price, backed up with ideas for new value creation. With one single move, you can change the course of your company, the careers of your managers and create value for shareholders.

SUCCESS RATE FOR M&As

Nobody has a very precise set of statistics regarding the success rate for mergers and acquisitions. One key reason for this is that approximately 60% of all merger activity is never publicized or consists of small transactions (less than million dollar deals) that no one tracks systematically. But of the statistics available, all of them suggest that less than 50% of the mergers become successful. Granted, success is a qualitative issue. What looks like success today, may later turn out to be a fiasco. And current disappointments can sometimes blossom forth to become outstanding moneymakers. But the grim facts remain far too many mergers go bad2. A popular joke doing the rounds in management circles reads like this: which corporate activity has an even higher failure rate than the liaisons of Bollywood stars? Answer: Mergers and acquisitions. The joke, however, only reinforces what a great deal of research all over the world has shown: M&A deals have been encountering enormous difficulties. To get an idea of how bad the situation actually is, take a look at the statistics below M&A: Current state of affairs3 75% of domestic deals fail; 50-60% globally Only half meet expected financial expectations; 57% had returns below industry averages 3 years after transaction 83% fail to enhance shareholder value (although 82% of execs believed the deal was successful) 62% fail to achieve stated goals Half fail due to incompatible cultures Fifty per cent of corporate unions experienced a sharp decline in productivity in the first four to eight months. Forty seven per cent of senior executives in acquired firms leave in the first year, 75 per cent in the first three years. One-third of all acquired firms are sold within a couple of years. Its a lot like buying a second hand car. The company tries to do its homework, but the pre-acquisition analysis never tells it all it needs to know about how the outfit has been run. Its like kicking the tyres, looking under the hood, and driving the car around the block. The company is probably going to have a tough time seeing the things the seller doesnt want it to see. The acquirer might be planning on a minor tune - up, while the seller knows all the time that his company is due for a major overhaul. Every company acquired gives some nasty surprises. But surprisingly, despite the risk, the prospect of increasing profitability and market share by acquisition or merger continues to exercise a more immediate and seductive appeal to business leaders than a reliance on growth alone. This is reflected in the recent and unprecedented wave of merger and acquisition activity worldwide.

2 3

Price Pritchett. After the Merger Business Standard

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3 However, instead of getting simpler to manage, easier to work in, or more profitable, the business simply gets much more complex since the merger. The value actually achieved from the acquisition is insignificant compared to what the investment bankers anticipated. In fact, when all is said and done, the company has actually reduced value in terms of market capitalization. In addition, despite all the high-cost legal invoices paid in the seven months of negotiations, many of the facts that were presented during due diligence were somewhat optimistic. So what we are left with is more work to do, less time to do it in, more direct staff reporting to all senior management, a slew of incompatible systems and inconsistent processes, while all along trying to make two very diverse organizational structures merge effectively without losing our best people. By the way, we also have to ship more products than we ever did before, not let any new product introductions slip, finish implementing the new ERP system, and complete the sales channel expansion project. Oh, and dont forget that we still need to make money while were at it says the harried employee of a firm that had recently acquired one of its competitors. A question that often strikes the minds of corporates and academicians alike is If these companies have failed in M&A, would they have been better off without taking this step? Look at it this way - These companies would have anyway destroyed shareholder value. Merely staying afloat does not mean you are adding value. If the economy has six healthy companies effectively meeting industry demand and adding value for the shareholder, it would be a better scenario than 10 struggling to stay alive. So, how is it that most mergers and acquisitions are undertaken with the right intentions, the right goals, the right advice, and still fail and fail miserably? Is it that we are all deluding ourselves and that mergers and acquisitions are actually a bad idea? This answer seems unlikely, given that some mergers and acquisitions are highly successful and that the big eat the small is a fundamental rule of survival. Consider this, GE acquires some company or the other almost everyday in the world, and yet never finds itself in any of the mess usually associated with M&As. In the forthcoming pages, Ill try to take a look at the various reasons for the failure of mergers, how they were painstakingly implemented by companies to create some of the biggest disasters, and how some companies blatantly flouted them and got away with successes. Finally, Ill also try to educate the readers as to how to look into the next merger before they leap into it; a thing that almost everyone knows, but almost no one adheres to.

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MEANING OF SUCCESS
Now that we are aware of this alarming rate of failures of M&As, one would be obviously interested in the underlying reasons but before understanding the reasons for a success (and failure) of a merger it is important to understand as to what does Success means. A merger between two or more entities is a success if the merged entity is able to achieve the underlying targets and motives which formed the very basis of the merger. Also, if the efficiency of the merger entity is more than the individual entities in terms of production, less cost, better market penetration etc, then the merger is said to be successful. The objectives generally include: Enhancing shareholder value Improving efficiency Increasing growth rate by symbiosis of the two separate businesses etc However, it does not necessarily mean that a merged company, which has failed in achieving its targets, will cease to exist. Companies (based on their own criteria for success)4 reveal that 50 years of research suggests most mergers have either a neutral or negative impact on profitability; 70% of acquisitions fail to meet the expectations of their architects; 33% - 50% of mergers are subsequently divested. Merger success is typically measured by various indices such as managerial assessments, share price fluctuations, or profit-earnings ratios. Thus, this is what the managers feel5:

Source: Dennis C Mueller, University of Vienna, 1977, Survey of 150 company senior executives by Economist Intelligence Unit, 1996 and other various studies; Towers Perrin analysis. 5 Business Owners Council Survey, Grant Thornton

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FACING THE REALITY

While the motives for merger are many--practical, psychological, or opportunist--the stated objective of all mergers and acquisitions is to achieve synergy or the commonly described "two plus two equals five" effect. However, as many organizations learn at considerable expense, the mere recognition of potential synergism is no guarantee that the combination will actually realize that potential. Empirical studies repeatedly demonstrate that, at best, only half of all mergers and acquisitions meet initial financial expectations. A high rate of merger and acquisition activity is often concomitant with a high rate of divestiture. In reality, two plus two is as likely to add up to less than four, than to achieve the magical five. The adjoining figure6 highlights the proportion of successful to unsuccessful M&As. Clearly the Proportion of Unsatisfactory mergers are more than all the rest taken together!

An A.T.Kearney Global PMI Survey 7 on Failure Risks by Merger Phase came out with the distinguished results:
% of Respondents

53 30 17 Pre Deal Execution PMI

The graph clearly indicates that the more riskier stages are the Pre deal Planning and the Post Merger Integration Stages as compared to the Deal Execution.

Stages

The various pitfalls8 to be addressed at the respective stages can be summed up as:

Dennis C. Mueller, University of Vienna, Survey of 150 company senior executives by Economic Intelligence Unit, 1996 and other various studies; Towers Perrin analysis
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After the Merger, Prentice Hall Publication, by Max M Habeck, Fritz Kroger and Michael R Tram Article Building Success through M&As by Mr. Mark Saunders, Principal and M.D., Tillinghast Towers, Perrin, Asia

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THE FACTORS RESPONSIBLE

Many companies expect a merger or acquisition to provide the scale of operations; resources and capabilities, financial strength, and broad market reach necessary for growth and long-run competitiveness. And yet, study after study concludes that even well conceived deals often fall short of their promised benefits. Despite the initial optimism, many organizational marriages prove to be financially disappointing. It is neither simply bad strategy nor paying too much to complete a deal that causes failures. Rather many organizational alliances fail to meet expectations because the cultures of the partners are incompatible and people related issues such as key managers and scarce talent leave unexpectedly. Valuable operating synergies evaporate because cultural differences between the companies are not understood or are simply ignored. The companies usually don't address the ways in which the two companies' managements will work harmoniously The seeds of success (or failure) are sowed well before the merger or acquisition is made public. Acquirers that fail to do the homework in formulating strategy and in due diligence almost always make mistakes in selecting partners and negotiating deals. Hence, the factors that broadly come out are 1. 2. 3. 4. 5. Financial and Legal Considerations Strategic Considerations Cultural Compatibility The Human Force Post Merger Integration (PMI) Operations

A survey9 inquiring the reasons for failure from the managers standpoint showed that they find poor integration strategy and losing key personnel as the two most important factors:

Business Owners Council Survey, Grant Thornton

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8 I. FINANCIAL, LEGAL AND STRATEGIC CONSIDERATIONS Financial and strategic considerations dominate the selection of a suitable acquisition target or merger partner. They are considered the primary issues and infact are actually important in the initial stages of planning. However, managers now have come a long way in the practice of Mergers and also have an expertise in these areas. Decisions are driven by issues like:

Offer price Mode of Payment Potential economies of scale Projected earnings ratios Clean Legal Status of either party Capital Restructuring Asset Liability Management

Although these areas now do not see much of a cause to worry but still problems may arise if

No clear Long term vision Over inflated purchase price Managerial incompetence in achieving projected economies of scale Organizations were strategically mismatched. Incomplete due diligence procedure (in case of Friendly merger) etc.

Merged entities must be especially careful for:

Exercising Due Diligence: Due diligence involves a comprehensive analysis of all important target firms characteristics to include its financial condition, management capability, physical assets and intangible assets relevant to the acquisition. In the conduct of due diligence it is important to detect potential liabilities arising from acquisition. Financing: Companies should carefully evaluate all options of financing the merger, whether it is cash purchase, an exchange of stock, or a combination of cash and stock or a debt. Looking for complementary resources: Melding of complementary rather than highly similar resources between firms involved in a merger or an acquisition increases the probability that economic value will be created. A key reason for this is that firms with highly similar resources also have highly similar strategic capabilities & vulnerabilities in the marketplace. Thus, a merger or acquisition that combines highly similar resources can result in a newly created firm that will encounter larger quantities of virtually the same environmental opportunities & threats that they faced as independent entities. Given this evidence, it is economically rational for firms in the pursuit of competitive advantages & marketplace success to seek combinations of complementary instead of highly similar or even identical resources. Achieving Integration and Synergy: Integration decisions are often justified by the synergies they create. Synergies exist when assets are worth more when used in conjunction with each other than separately. Synergies of some form are essential for integration to be successful. Integration offers little or no potential benefits when they do not exist.10

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by T.N. Hubbard

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9 II. CULTURAL COMPATIBILITY Characteristically, organizational culture concerns symbols, values, ideologies, and assumptions that operate, often in an unconscious way, to guide and fashion individual and business behavior. Culture is often defined associal glue." It serves to bind individuals, and creates organizational cohesiveness. Cultural incompatibility is being widely reported as a cause for poor merger performance. A survey of more than 200 European chief executives found that the "ability to integrate the new company" was ranked as the most important factor for acquisition success. Interestingly, this factor was rated significantly higher than financial or strategic factors. As culture is as fundamental to an organization as personality is to the individual, the degree of culture fit that exists between combining organizations is likely to be directly correlated to the success of the combination. Reasons for Cultural Incompatibility

Lack of expertise and product knowledge on the acquirer or parent organization's part may inhibit recognition of needed changes to current practices and culture of the acquired organization An organization with a proven record and successful organizational culture will not necessarily find that their culture is easily transferable, appropriate, or acceptable to others Integrating two previously separate and often very different workforces and organizational cultures presents a major managerial challenge to those involved Differences in accounting practices, managerial style, and problems with the workforce MNCs usually have their own culture depending on the country of origin. Very often, local employees find it hard to adjust and identify with such concepts. German companies exemplify technological superiority, American companies customer relationship and marketing and Japanese companies have a philosophy of common responsibility for continuous quality improvement.

Role Cultures Many organizations, by virtue of their size, develop "role" cultures. These cultures differ in terms of the openness of their communication systems and managerial style and the degree to which they are people-oriented. Role cultures that become dominated by corporate headquarters tend to develop and retain characteristics that resemble power cultures. Their communication systems are then typically more "closed." In contrast, role cultures that strive to maintain less formality are more informative and "open." The cost of "culture collisions" resulting from poor integration may typically be as high as twenty five to thirty percent of the performance of the acquired organization. This certainly makes culture fit of equal, if not greater, importance than "strategic fit." Result of Cultural Incompatibility:

Poor morale Employee stress Increased sickness absence High labor turnover Lowered productivity.

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10 The criteria or framework by which to assess the likely culture fit between two organizations are vague and unelaborated. Consequently, their importance is often neglected or, if attended to, any assessment is likely to be made intuitively rather than systematically. Culture can be assessed in a variety of ways. Observations, interviews, or questionnaires are generally used. As has been shown by many organizations' unsuccessful and expensive culture change programs such as at AT&T, an organization must first understand the existing cultures and sub-cultures before attempting to change it. Culture Compatibility does not mean Culture Alikeness. There are four main types of organizational culture 11 : power, role, task/achievement and person/support. The main characteristics of each type are detailed in Annexure 1. While there is no one "best" culture for organizational success, the different culture types create different psychological environments for their members. Some evoke deeper commitment and are experienced as more satisfying than others. Organizational Fit Organizational fit "occurs when two organizations or business units have similar management processes, cultures, systems, and structures." As a foundation to synergy creation, organizational fit means that firms are characterized by a reasonably high degree of compatibility. Thus, organizational compatibility facilitates resource sharing, enhances the effectiveness of communication patterns, and improves the companys capability to transfer knowledge and skills. The absence of organizational fit stifles and sometimes prevents the integration of an acquired unit. Merger Success--The Ability to Integrate or Displace a Culture Mergers must fall into one of three types depending upon the degree of integration and culture change necessary. This determines the form of organizational marriage and the terms of the marriage contract. Executive Mergers When the acquiring organization does not intend to change, other than perhaps minimally, business is conducted in a "hands-off" manner. Any differences in personality or organizational culture between the partners are accepted unequivocally and are considered relatively unimportant Collaborative Mergers In genuine collaborative mergers, where partner equality is recognized, differences in organizational culture are seen as potentially adding value to the partnership. The success of this union depends on the ability to integrate the two cultures, and create a new unified "best of both worlds" culture. This represents a win/win scenario. Redesign Mergers This type of merger happens when the acquiring organization intends to introduce wide scale changes. The acquired, usually smaller, merger partner totally adopts the practices, procedures, and culture of the dominant merger partner

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A study for over three years in U.K. conducted by Mr. Roger Harrison

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11 THE HUMAN FACTOR The human factor and Cultural Compatibility come hand in hand and have many aspects in common. Just like Cultural Factors, the role of people, erroneously labeled the "soft" or "mushier" issue, tends to be ignored or overlooked, perhaps not surprisingly, given that the human resource function often seen as marginal to the organization and is rarely involved in target selection or merger planning. HR has significantly less involvement in the earliest strategic stages of a merger or acquisition (predeal and due diligence) than during the later stages (integration planning and implementation). Management doesn't communicate its business rationale or its goal for the new company, and employees flounder in the ensuing confusion. What is expected as a result of a merger:

Reduction in work force Cuts in pay or benefit programs A transfer of ownership which, even at its minimum, calls for changes in the performance criteria, reporting procedures and control mechanisms.

It is important to appreciate that the human fallouts of M&A are, by no means, merely accidental byproducts of an otherwise straightforward business strategy. Rather, they are embedded in the very logic of mergers and acquisitions. M&As are based on the larger partner's (or acquiring company's) belief that it can utilize the capital in the target company more efficiently than is being done currently. Even the friendliest amongst them (such as bailing out the company from a financial crisis, or a merger of two divisions of the same company) have a destabilizing effect on the employees. "We're no longer the same well-knit group," one senior manager of an acquired company grudgingly commented. "Everyone is now suspicious of the others. Worse, everybody feels insecure and helpless, like a commodity which has changed hands." So happens because even though such changes are based on sound business logic, they are usually imposed, and, hence, alienate people. Hence, the outbreak of the final news can have adverse effects such as:

Job uncertainty, loss of security, and transfers, lowered morale and productivity, loss of selfdetermination Loss of loyalty from employees who view themselves as the "losers" in the merger process Fear of failure to consider long-term consequences and Underutilization of human resources professionals Increase in executive turnover Breakdown of lines of communication and control General apathy or resistance among executive to implement changes, etc.

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12 How to keep them intact? It is paradoxical that while these human factors significantly determine the success or failure of any M&A, the merger\ acquisition planning pays scant attention to them. In fact, more often than not, these issues become even more aggravated because the acquiring company either neglects them or fails to comprehend their importance. Some of the critical options that must be exercised to minimize the takeover traumas:

Develop an Integration Strategy: For a smooth and synergistic integration, it is essential for the acquiring company to consider and plan for managing issues like staffing decisions, organizational design, management of change, etc., which emerge once the takeover is completed, at the time of the pre-takeover planning itself. Prepare People for the Cultural Transition: It is necessary to familiarize the new management team about the cultural differences, and also help it develop relevant skills for managing through them. Develop and Implement a Communication Plan: Availability of accurate and reliable information has an important role in managing the changes that follow the takeover. The acquiring organization, therefore, must make a consciously planned and systematic effort at informing people about its plans, policies, corporate values, etc. Generate Involvement and Participation: The introduction of the new norms, culture and systems have the potential of alienating the employees of the target organization, and thereby, decreasing their commitment to the change process. It is worthwhile, therefore, to involve the employees, particularly the key personnel, in the formulation of the action plans, system building and execution of policies. Strengthen HRD Role: The human problems associated with the takeovers require humane handling. Helping people to cope with various anxieties and changes necessitates strengthening the role of HRD in M&A planning and implementation. Friendliness: Success requires cooperation. Merging two companies is complicated and requires much work by many people such that an uncooperative spirit in the target firm can lead to disastrous results.

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13 POST MERGER INTEGRATION (PMI) OPERATIONS A major task is to bridge both organizations once the merger is complete on papers. Infact, this is the most risk bearing stage when actually people are confronted with problems of day-to-day operations that rarely get attention at the time of strategy developments. The success of the merged entity would be depicted by

How harmoniously the employees of two organizations work towards the now common objectives and How well planned and laid down are the daily procedures to avoid confusion, duplicacy of work and redundancies in job profiles.

To achieve these there should be

Effective Communication channels Comprehensive orientation of the new team of employees Transparent and participative decision making A challenging, but realistic, time schedule Constant measurement against goals so as to give the organization early feedback on where the process stands Tracking major risks such as the loss of key clients and people

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The Case Facts

CHRYSLER CORPORATION Walter P. Chrysler, the founder of Chrysler Corporation, born in Wamego, Kansas in 1875. By 1929 Chrysler Corporation was the third largest car company in the US. In 1936 Chrysler Corp. production reached a million vehicles a year. In the late 1970s, due to a slowing economy and foreign competition, a sharp decline in sales nearly bankrupted the company. In 1979 Chryslers board of directors selected Iacocca as its chairman and CEO to lead the company, and bailed out the company through strategic steps. In 1987, Chrysler acquired American Motor Corporation and put Jeep brand under Chryslers name calling it Jeep Cherokee. As a result, it gained a reputation for being innovative. Robert Eaton succeeded Iacocca as the CEO of Chrysler Corporation in 1993. In 1995 Chrysler was the most profitable car company in the US, leading in SUVs (Jeep Cherokees) and minivans (40% market share); its pickup trucks had also been best sellers. Its sedans were the cheapest of the three major US companies.

DAIMLER-BENZ AG In 1890, Daimler established Daimler-Motoren- Gesellschaft AG as a German stock corporation in Cannstatt, near Stuttgart, Germany. On June 28, 1926 Daimler and Benz merged their two companies. On February 17, 1988, the companys production of cars reached the ten million per year mark. Daimler Benz diversified in to various areas like turbines and large diesel engines, aerospace, electronics etc. On May 24, 1995 Jrgen E. Schrempp became the new Chairman of Daimler- Benz AG.

KERKORIANS OFFER TO BUY CHRYSLER

Kirk Kerkorian was the largest Chrysler shareholder (10%). Kerkorian had a different investment plan that Eaton always rejected. He offered to purchase the remaining 90% of Chryslers stock at $55 per share on April, 1995, a premium of approximately 40%. Eaton rejected.

THE DAIMLER/CHRYSLER MERGER AGREEMENT

On May 7, 1998, the managements of Chrysler and Daimler-Benz announced that they had signed an agreement to merge their two companies with annual synergy of about $1.4 billion in 1998 and $3.0 billion in 1999, without any layoffs or plant closings. The exchange ratio was .6235 share of Daimler Chrysler to be exchanged for each share of Chrysler Company, and 1.005 share of the new company for each share of Daimler-Benz Company.

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ANALYSIS
MOTIVE BEHIND THE MERGER Chryslers Point Of View In the mid 90s, Chrysler virtually survived a near bankruptcy and also a failed hostile buy-out by an American company - Kirk Kerkorian. Talks had already started since 1995 that Chrysler should think on the terms of a merger preferably with a German top company. And therefore, in 1997 when the talks came about in open, it was accepted in a friendly manner and finally got merged with Daimler. Daimlers Point Of View CHRYSLER had the strategy and the plans chalked out. The only problem which Daimler could for see in Chrysler was a financial crisis. Hence Daimler agreed for the merger in order to benefit from the unique and original plans of Chrysler. Uniqueness in the deal: It was a, first of its kind in a car industry as a cross-border and a friendly merger and involved two leading companies of this industry.

Main issues discussed at the time of merger 1. 2. 3. The companies were with strong & distinctive heritages. This had to be retained. No precedence of such a merger. Post merger integration.

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Events Subsequent To Merger

Cultural Clash CHRYSLER The managers thought that their German counter-parts were a bunch of process led engineers. DAIMLER had the idea that Chrysler consisted of a group of hunch-inspired and risk taking personnel. Also, in this merger between Chrysler and Daimler, there were many obstacles that the executives and employees of each company had to overcome. The first big shock was the difference between executive compensation in the US and Europe. For example, Schrempps total compensation in 1997 (the year before the merger) was $2 million, while Eatons total compensation was $11 million. Chryslers employees and executives ate in the cafeteria. Daimler-Benz had a system of threetier restaurant services for executives and employees, depending on their rank in the management hierarchy. Mid-level managers in Chrysler were used to walking in and out of offices of their superiors whenever they had to report information and/or receive instructions. In contrast, German executive offices were staffed with layers and layers of secretaries that middle managers had to go through if they needed to see their immediate bosses. Americans were used to drinking water or iced tea at lunch, while Germans preferred wine or beer. Americans called each other by first names, while Germans used formal titles such as Doctor or Professor. Americans were used to running from their offices to their bosses in shirt sleeves, while Germans had to put on ties and coats. Also, while many German executives were willing to relocate in the United States, American executives refused to relocate in Stuttgart, Germany. Strategic Problems The very fact that it was a cross-border merger and had no precedence should have kept the managers of the two companies on their heels. Instead, it was never taken into consideration till the very end. There were 2 headquarters i.e. one at Stuttgart and the other at Auburn Hills, Michigan It wasnt decided before hand as to where the merged HQ would be. Financial Problems: DC abandoned detailed discusses of the cost-saving target it set for the new company.

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17 DC announced profits amounting to $1.17 in its 2nd quarter but was still struggling to meet its projections for the full financial year. Finally, the share price fell by a whopping 40% and the investors got disinterested. Human Resource Management Problems: CHRYSLER The American staff had a feeling that the Germany company wanted the main benefits and were not capable of planning out things in a proper manner. DAIMLER The middle managers of Daimler thought that a foreign company was acquiring it and they feared invasion of rigid teutonic working practices into their free wheeling company. Even after 2 years of the formation of DC, the word merger could still be heard. Chrysler Executive Exodus: Many top and middle level executives started leaving the company. As a result of which Chrysler workers and dealers were upset and worried about the implications. They thought the Germans are going to make it a subsidiary and send in their own people to run it. Operational Problems: Since they hadnt thought of the cross-border issue beforehand the strategy-planning stage, they had problems of time difference between Germany & American. The managers had sleep related problems and in an ironic twist, New York, Chrysler building has been leased to DC to reduce traveling.

CONCLUSION: Though this merger is making profits and the investors are still interested, it cannot be declared a success throughout. This is because; it fell far short of the designers vision.

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HDFC BANK TIMES BANK LTD.

Background Motive behind the merger Strategic Considerations Financial Considerations Merger Passes First Stage of Discussion Technological Considerations Post Merger Evaluation

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BACKGROUND
HDFC Bank was incorporated in August 1994 and began operations as a scheduled commercial bank in January 1995. The bank has been promoted by the Housing Development Finance Corporation (HDFC), Indias leading housing finance company. It is one of the first new private sector banks in the Indian banking scenario and a leader in specialized services. HDBA was one of the first bank's to set up custodial services in India. The bank is also a depository participant with NSDL with one of the highest value of assets under management. Times Bank Limited was promoted by Bennett, Coleman & Co. /Times Group as an initiative to enter the banking sector.

MOTIVE BEHIND THE MERGER

Times Bank got merged with HDFC Bank on 26th February 2000 through a stock swap deal between the two banks (Rare thing in India, where family owners normally prefer cash.). The various reasons for the two profitable private sector banks/entities getting merged can be gauged from the following explanations and considerations prevalent at the time of discussion as follows: I. According to Paresh Suthankar, head of credit and market risk, HDFC Bank, ``Growing organically at 30 per cent or 15,000 to 17,000 new accounts a month, it would have taken us two years to gain Times Banks 170,000 customers. By acquiring, we can get the same growth in six months and a higher rate of growth in the future.'' Aditya Puri, managing director, HDFC Bank, sited the reason as, ``It was a tremendous opportunity to gain market-share and buy a bank that does not carry too much baggage.'' II. The merger with Times Bank had catapulted HDFC Bank into a different league, giving it greater muscle in terms of retail client base as well as mid-market corporate clientele. The bank had nearly 8.5 lakhs retail accounts. III. Times Bank was known to be actively scouting around for a buyer for their stake in that bank to get out of the banking business. Thus an opportunity presented itself to HDFC Bank to expand rapidly that sounded better than buying the promoters stake in Times Bank (in view of managing a subsidiary company with a different corporate identity).

IV. Shareholders of Times Bank were getting a good deal (in terms of the number of shares received) considering the mounting level of NPAs of the bank and the shrinking interest spread (which could have only worsened overtime without the merger). For HDFC Bank, the deal provided an opportunity to gobble up a player only marginally smaller than it. [Type text]

20 V. Times Bank was up for sale for at least a year, and suitors were not exactly falling over one another to buy it (being due to a decision by Times Bank to focus on riskier non-AAA clients) and required a fresh capital infusion by the promoters. But the Jain family (promoters) seemed to be unwilling to commit more money to a venture not related to their mainline business interests. For Times group, the merger was an opportunity to exit an unrelated business and focus on its core operations of media and entertainment industry. VI. The merger provided strong growth opportunities for HDFC Bank in each of its key business franchises, driven by an expanded product range, enhanced customer acquisition, geographic expansion and higher levels of penetration. VII. Times Bank had 35 automated teller machines (ATMs) and 200,000 retail and demat accounts, branches in 23 cities, in seven of which HDFC Bank had no presence. In comparison, HDFC Bank had 400,000 retail accounts and branches in 26 cities. Acquiring a readymade branch network could not have been better that would enable the bank to leverage the use of its alternative delivery channels (phone banking, Internet banking, etc) and provide cross-sell opportunities across a wider product range and to a larger customer base. Product complementarity would be more pronounced in the case of ATM card networks. HDFC bank had Visa network and Times bank had Master card network. On account of the merger, it would be part of both the networks. So the TimesBank deal would help HDFC Bank's growth very significantly. VIII. "With the merger," said PwC's Parekh, "HDFC Bank would leap-frog ahead of the competition by at least a year. With one stroke, the merger would help HDFC bank become the largest of the private sector banks in the Indian banking industry. IX. The merger made sense from a business and as well as strategic point of view. Based on the balance-sheet sizes of the two banks as of September 30 1999, post-merger HDFC Bank would have total deposits of around Rs 6,900 crore and a combined balance-sheet size of over Rs 9,000 crore, making it the largest private bank. The merger shall bring in both synergies of operations and volumes. X. Merger provided an opportunity of savings on the costs associated with technology upgradation and infrastructure for HDFC Bank. With its record of higher operational efficiency HDFC bank could contribute value addition to the business growth of the Times bank and make better control of costs possible. XI. Some of the public sector banks also began attempting reshaping of their competitive strategies. New private sector banks have become aggressive in the race to grab the market share. Thus, for HDFC bank the timing of merger opportunity could not have been better.

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STRATEGIC CONSIDERATIONS
The merger between the two profitable private sector banks was planned out to be in form of a stock swap deal on a negotiated basis wherein, subject to the shareholder and requisite regulatory approvals, shareholders of TimesBank would receive one share of HDFC Bank for every 5.75 shares of Times bank. The basis for deciding the stock swap rate was arrived and agreed upon between the two banks in consideration of the following major points: 1. HDFC Bank would have to add Rs. 47.71 crores of gross non-performing accounts on its own account and another Rs. 61.67 crores of gross NPAs on account of the amalgamation in 1999-2000. Hence, the banks net NPAs would rise to 1.7 per cent from 0.7 per cent following the merger. The individual NPA levels for Times Bank stood at 3%. The figures got reflected in the higher provisioning of Rs. 26 crores during the first quarter (April-June 2000). 2. The amalgamation would add value to HDFC Bank in terms of increased branch network, expanded geographic reach, enhanced customer base, skilled manpower and the opportunity to cross-sell and leverage alternative delivery channels. Times Bank merger gave HDFC Bank a greater reach in terms of an expanded network, which would touch 107 branches after the merger. 3. The new balance sheet of the merged entity would have Rs 7,500 crore of assets, based on March 1999 figures, and not counting growth in the current year. This would take it ahead of the likes of ICICI Bank (Rs 6,982 crore), Global Trust Bank (Rs 5,200 crore) and IndusInd Bank (Rs 6,167 crore), though it was still massively behind the State Bank of India (Rs 2,20,509 crore). The total deposit base would stand increased at Rs 6,900 crore. 4. TimesBank had 35 automated teller machines (ATMs) and 200,000 retail and demat accounts, branches in 23 cities, in seven of which HDFC Bank had no presence. In comparison, HDFC Bank had 400,000 retail accounts and branches in 26 cities. The deal provided the bank with growth opportunities significantly. 5. The effect of Nani Jhaveri taking over Times bank a year before the merger had been much pronounced for he did two major things in the bank. First, he cleaned up the loan books and actually shrunk the balance sheet in an attempt to consolidate what was worth keeping back. Second, he decided that future growth should come from retail activities such as consumer loans and credit cards. 6. The capital adequacy of HDFC bank would be 10.3 percent post-merger and would go up to 11.1 percent after the proposed preferential offer to maintain the current level of holdings of different classes of investors. 7. With HDFC having more metro branches (65%) and Times Bank more urban branches (43%), overlapping of branch network was also not very high leading to enlarged potential market. 8. IT Infrastructure, facilities and back office systems of HDFC bank on the retail side was much stronger and efficient than that of Times bank, whereas the trading and risk management areas were edged towards Times Bank.

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FINANCIAL CONSIDERATIONS
Further to the effect, the following financials were taken into consideration for deciding the swap rate: 1. HDFC Bank had a retail base of depositors that carried a significantly lower cost. The interest expended by Times Bank as a percentage of total assets was 7.09 per cent as compared to 5.27 per cent by HDFC Bank for 1998-99. Similarly the interest spread was 3.38 per cent for HDFC Bank versus 1.66 per cent for Times Bank. 2. The pre-deal HDFC Bank's business-per-employee was Rs 520,000 while profit per employee was Rs 1 million. The respective figures for TimesBank were Rs 500,000 and Rs 722,000. In 1998-99, the two together made Rs 82 crore in net profits. 3. HDFC Bank enjoyed an above par quality of assets due to its focus on highly rated corporate customers in comparison to Times Bank focus on riskier non-AAA clients. HDFC Banks net NPA account for about 4.3% of its net worth, the lowest for any bank in India. 4. In 1998-99 Times Bank's bad loans aggregated Rs 46.32 crore, more than five times the previous year's figure of Rs 7.22 crore (from 0.46% to 3.01% of total loans). 5. HDFC's P/E was 8.5 times that of Times Bank that would form the basis for deciding the swap rate. 6. On account of massive NPA problems, TimesBank on its own would have needed a capital infusion. Its capital adequacy ratio -- or how much capital was backing every Rs 100 of commercial loans -- was already down to 9.97%, just a whisker more than the mandated 9%. In fact, if the entire Rs 27-crore net profit for the year had not been transferred to reserves, the capital adequacy ratio would have slipped to an inadequate 8.33% and the promoters had been unwilling to commit more money to a venture not related to their mainline business interests.

Data giving a clear picture for the proposed merger becoming inevitable 1. Audited Result for year ended 31.03.98 2. Times Bank Financials Particulars Audited results for the year ended 31.3.98 24080 6201 30281 13755 6022 19777 10504

Interest Income Other Income Total Income Interest Expenditure Other Expenditure Total Expenditure Gross Profit before Tax and [Type text]

23 Depreciation Depreciation Profit before Tax Provision for taxation Net Profit Paid up Share Capital Reserves (Excluding Revaluation Reserve) Dividend %

1069 9435 3120 6315 20000 8513 10

TIMES BANK - THE FINANCIALS 1995-96 96-97 Income (Rs cr) 37.06 144.16 Equity cap (Rs cr) 100 100 PAT (Rs cr) 7.61 10.12 RONW (%) 9.11 ROA (%) 0.83 CAR (%) 29.4 15.11 NNPA*(%) 0.46 *Net Non Performing Assets/Net Advances 97-98 213.96 100 24.11 18.74 1.15 11.26 1.41 98-99 286.4 100 27.08 17.48 0.95 9.97 3.01

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MERGER PASSES THE FIRST STAGE OF DISCUSSION

Based upon the discussions between the management of the two banks from time to time, the swap rate for the merged entity was arrived as follows: One share of HDFC Bank for every 5.75 shares of Times Bank. The value was arrived at based on the stock prices of the two banks as on 25th November 1999. HDFC's P/E was 8.5 times that of Times Bank, and this is what made Times Bank cheap. At Rs 16 a share (HDFC Bank's 25 November share price of Rs 92 divided by the share swap ratio of 5.75), Times Bank offered a sweet deal for HDFC Bank. It was decided that Times bank will merge with HDFC bank and the emerging entity will continue to function as HDFC bank. The shareholding pattern was arrived as below: Post Pre Post Merger HDFC Group Indian Private Equity Fund Indocean Financial Holdings Bennett, Coleman & Co and Group Cos Public 28.78 10 4.99
Merger
Preferential/ ESOP

25.74 8.95 4.46

27.98 8.43 5.96

NIL 56.235 %

7.78 53.07 %

6.86 3.94 %

The only cost to HDFC bank would be a marginal equity dilution of 12% resulting in massive increase of doubling the size of business for the bank.

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TECHNOLOGICAL CONSIDERATIONS
The proposed merger was through with the first stage of initialization but the problem existed in the technological compliance between the two banks that were using technologies backed by different programme for different areas of business. HDFC had chosen two different systems for its two different businesses wholesale banking and retail banking. Both of them came from I-flex, a Citicorp venture capital company. Times Bank had chosen to run all their operations on a platform from Midas Kapiti. The features HDFC bank had on the retail side were far superior to what Kapiti offered. On the wholesale side it was more of a toss up because the I-flex product, Micro Banker, was quite old. But it was found better to migrate to their new platform called Flex Cube. Looking at Times Bank it was realized that they had superior technology in trading and risk management (derivatives market in India) and that this should be implemented in the newly merged institution. The back office systems from HDFC were chosen over that of Times Bank and in some cases upgraded to deal with Indias changing markets. This involved a spending of less than $2, 00,000 where other, admittedly larger, banks in Asia had budgeted millions of dollars and 12-month plus time frames for post-merger IT integration.

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POST MERGER EVALUATION

The merger became effective from 26th February 2000 and the merged entity started operations as HDFC Bank. Till date, the merged entity is running effectively on lines of latest technology and has paved a way for further consolidation in the banking sector. The following points reveal the success of the two banks as a merged entity: (Rs in lacs) Particulars Audited results for the year ended 31.3.98 24080 6201 30281 13755 6022 19777 10504 1069 9435 3120 6315 20000 8513 10 Audited results for the year ended 31.3.99 37608 6807 44415 22918 8310 31228 13187 1502 11685 3445 8240 20000 13893 13 Audited results for the year ended 31.3.2000 67987 12535 80522 37428 20963 58391 22131 2646 19485 7481 12004 24328 50824 16

Interest Income Other Income Total Income Interest Expenditure Other Expenditure Total Expenditure Gross Profit before Tax and Depreciation Depreciation Profit before Tax Provision for taxation Net Profit Paid up Share Capital Reserves (Excluding Revaluation Reserve) Dividend %

Notes: Due to the amalgamation of Times Bank Limited with HDFC Bank effective 26th February, 2000, the Profit & Loss Account reflects the merged Banks figures from that date i.e. the standalone HDFC Bank revenues, expenses and profits till 25th February, 2000 and those of the merged HDFC Bank from 26th February, 2000 to 31st March, 2000. The Bank has made an allotment of 1, 98, 00,000 equity shares of Rs. 10/- each at an issue price of Rs.94/- per share in favour of Promoters and strategic investors on 29th March, 2000. These allottees will be paid dividend on pro-rata basis.

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Other achievements of the post-merger entity were:

1. The merger set off a chain reaction with the next to follow being the Bank of Madura merger with ICICI Bank. The next in line was the merger of Global Trust Bank with UTI Bank planning to be merged on similar lines. 2. Telco tied up with HDFC Bank on February 24, 2000 in view of the merger. 3. The bank has also invested 26% each in the equity of Computer Age Management Services and ACSYS Software India as strategic investments. While Computer Age is a well-established player in the distribution of a range of mutual fund products, ACSYS is into developing software that caters to distributors of financial products and mutual funds. Innovative telecommunication and internet based solutions will drive the future growth. The bank launched its Internet banking services on September 1, 1999 known as "Net banking". HDFC Bank and Hutchison Max Telecom also introduced the countrys first ever-mobile banking services in 250 cities and 60 countries. The company is also building a secure payments gateway for e-commerce. The company also plans to offer the facility to purchase goods on-line through tie-ups with other web merchants. The bank has created a website hdfcbankshop.com to host on-line shopping. 4. The Bank was selected for The Economic Times Award -Corporate Excellence for Emerging Company, selected as "Best Bank in India 2002" by Euromoney,"Best Local Bank in India 2002" by Finance Asia, both awards being received for the fourth year in succession. The bank was also rated as the "Best Domestic Commercial Bank 2002" by Asiamoney. The bank was selected from amongst over 400 nominations from 24 countries, to be a recipient of the Computerworld Honors 2002 award in the Finance, Insurance and Real Estate category for its use of Information Technology.

Going by the stride of performance and level of integration since the merger, HDFC Bank has come a long way paving way for other banks to enter the consolidation stage. The bank has met the expectations of the market by quoting at around the expected levels (estimated at the time of merger plan) and is emerging as a new technology bank in the Indian Banking Sector.

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Chapter V
Conclusion And Suggestions
After analyzing the cases, a list of following conclusions and Recommendations have been made:

CONCLUSION
Most acquisitions are as much a threat as an opportunity. Those involved are entitled to expect that management decisions should be both the result of deep and serious thinking (not only on the strategic logic of the merger, but also on its implementation) and that the decisions taken follow a visible procedural justice. Communication and authentic behavior are perhaps the most critical factors in a successful acquisition. Managers need to develop a more human face than many show at the moment, something which is particularly important in many countries where ill conceived and poorly executed deals have tarnished the M&A phenomenon. Mergers take place when there is anticipation of economic gains from merging resources of two units or firms. In free-market economies, the main interest of the firms decisions should be to enhance the value of shareholders. Synergy is merely a possibility of competitive advantage & value creation until appropriate & effective actions are taken. The vast array of cases in the history of M&As are indicative of the fact that Cultural Compatibility, Human resource and PMI Operations are equally (perhaps more) important as compared to Financial and Strategic Considerations. Learning from the past deals whether they are successful or a miserable failure teaches lessons which no management guru or consultancy firm can give leads to a core competency in matters of mergers. Development of core competencies has been described by Prahalad and Hamel as "collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple teams of technologies." Moreover, mergers are not the only solution. Today, companies who do not feel like entering the risky game of M&As can try out other options such as Joint Ventures and strategic alliances.

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RECOMMENDATIONS FOR A SUCCESSFUL MERGER

This section will look at the key factors that are required to ensure a smooth and effective merger process. Extensive and Regular Communication

Communication at various levels is crucial during all stages of the merger process, and is the key to its success. It is interesting to note that a recent Watson Wyatt survey found that only 5% of executives picked human resources and communication as a top priority matter, preferring to focus instead on strategic and financial issues, even though 71% of executives stated that communication was a vital ingredient of M&A integration. Even when communication is given high priority, the manner in which it is used is often less than ideal. To be effective, the communication process has to be carried out in such a way as to avoid confusion and mixed messages. It needs to be honest and to focus on positive messages. If not, it can encourage rumours that can have a negative impact both within the organisation and externally. Another fact to be kept in mind in the process of a cross-cultural merger is to understand the communication and management style of the acquired company (country). For Example; Brazilians are not used to a democratic style of management. They are more impressed by the Autocratic style of management. They have a mentality that a person who asks for a suggestion from a subordinate is not capable of taking decisions himself. It is very important for management to communicate clearly and regularly to all employees the implications of the merger, including the planned changes to working practices and organisational processes. If management is unable to discuss the merger while negotiations are taking place, then it needs to make up for it immediately in the post-merger phase. The communication process should include stating the merging companys goals and objectives to all employees and keeping them informed of progress during the implementation and integration phase of the merger. The communication process should also encourage two-way feedback between management and employees to make employees feel that they are contributing to the solution. By involving people at all levels of the organisation, the merging companies are encouraging widespread acceptance of the merger process and reducing feelings of insecurity. Not only is communication within the merging organisation essential, but also communication between the two companies that are merging is also important to reduce the us and them mentality, which can be destructive during the merger process. It is also important for the merging companies to communicate extensively to customers and to reassure them that their level of service will not be affected. The information flow needs to be continuous and specific in order to maintain a sense of continuity and to reduce feelings of uncertainty on the part of customers. Management does not want to complete a merger and wake up the next day without a key customer or supplier who is no longer doing business with the company because of uncertainty resulting from lack of communication.

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30 Effective Planning

Success in mergers and acquisitions correlates directly with the level of planning that goes into them. Careful and early planning has been shown to influence the success of a merger. A joint study by PA Consulting Group and the University of Edinburgh Management School, based on 85 M&A deals worth over 50 million ($75 million) each, found that companies that had planned the merger in great detail achieved short-term share price returns that were 4.5% higher than companies that had not carried out adequate planning. Companies that had created an integration and communications plan before the merger deal was finalised improved their share price return by a further 2.3 percent. Plans need to include realistic goals and reasonable timeframes, and should cover all the key aspects of an organisation including people, systems and organisational processes. They should also focus on ways to align systems, work structures and processes between the merging organisations, and on implementing structures and procedures that will allow the organisation to handle the changes brought about by the merger. When a carefully laid out integration plan is implemented, companies can achieve optimal results and maximise the value proposition of strategic transactions, regardless of the merger objectives. Retaining Key People

The retention of a talented workforce, which is often a major reason behind the decision to merge, should take priority during the merger process, and management needs to adopt measures to improve the retention rate of the best people in the merging companies. The good news is that over 76% of executives recognise the vital importance of retaining key managers during M&A integration, according to a survey by Watson Wyatt. The bad news is that senior managers in many companies have not yet mastered efficient ways of retaining their best people. Truthful and thorough communication with employees can play a significant part in managements retention strategy. If, however, managers are not honest about the true implications of the merger, they will lose the trust of their employees, causing them to leave the company. As for the remaining employees, they may no longer feel motivated to produce their best work. Dont expect employees to show loyalty if the employer does not act with the utmost integrity and sensitivity. Pay and reward strategies can also play an important role in managements retention strategy but they need to be addressed early on in the merger process and should not only focus on senior executive pay, but also on the remuneration of employees at all levels of the organisation. They also need to reflect the newly merged companys goals and business needs. Instead of being a challenge, pay must become the cement that will help bind the new company or entity together more positively and effectively. Companies that are considering cutting costs by lowering headcount should think twice and must remember that quality is more important than quantity. It is often the best people who are pushed out following a merger or acquisition, and the remaining employees are not always the most effective at bringing in business and clients. Talented employees are a companys best assets, and company leaders need to distinguish between their best people and poor performers before making decisions about job cuts.

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31 Managing Cultural Differences

Companies that are merging need to be aware of cultural differences between them and need to find practical ways of reconciling those differences. According to the previously mentioned study by PA Consulting Group and the University of Edinburgh Management School, corporate mergers where the acquiring company is aware that cultural differences exist, produce considerably higher shareholder value than those where the acquiring company believes there are no such differences. Jeremy Stanyard, a member of PA Consultings Management Group, explains: A measured and selective approach to post merger integration, coupled with a recognition that different companies have different cultures no matter how similar the businesses appear are two determinants of success. Conducting a cultural audit is a useful way of obtaining useful information about the two companies differing cultures and helps to evaluate differences and similarities in work standards and practices. That information can raise awareness of potential difficulties and issues in the merging process, and allows the merging company to take steps to minimise culture clashes by building an effective communication structure. With an increasing trend towards global mergers, language barriers also need to be taken into consideration, and companies should consider providing language training to their employees if this can benefit the integration process. Successfully integrating the two cultures of the merging companies is an essential step towards achieving a successful partnership. In order to do this, cultural awareness and sensitivity are crucial to avoid potential clashes and misunderstandings between the people in the two companies. Training and Development

Training and development should be provided to senior and middle management and should focus on all aspects of the merger process. Such interventions will facilitate more effective leadership on the part of managers, who will have a better understanding of the key issues that arise during the course of a merger. Training should focus on the implications of the merger for the company, its effects on employees at all levels of the organisation and its impact on working practices and organisational structures. Training should also educate managers on what each stage of the merger process entails for them and for the company as a whole. Ideally, training on M&A issues and activities should take place even if a merger is not being considered, so that managers are prepared in the event of a future merger or acquisition. Training managers on how to communicate M&A implications and issues to the rest of the organisation is also required. Post-Merger Integration Teams One way of ensuring that post-merger integration will run smoothly is to set up a post merger integration team in all the critical areas of the organisation, including finance, sales and marketing, human resources, and operations. The above study by PA Consulting Group and the University of Edinburgh Management School found that integration teams that were set up early, and where at least 40% of the team were from the acquired organisation, increased short-term share price returns by 6.5 percent. [Type text]

32 An interesting and rather more surprising finding from the study is that over-integration of the merger target can also harm shareholder value because it can destroy the essential value of the target company. The most successful mergers were those that aimed for a medium level of integration. There can be dangers in over-integration, or in moving too fast in an attempt to realise all your synergies at once. Its a question of identifying where value is being created, and then making sure you protect it during the integration process. You have to be selective when deciding exactly what to integrate, and how quickly. On one hand, it seems that senior executives in most companies recognise the importance of human resources issues in determining whether a merger is going to succeed or fail. On the other, those executives are not doing enough to encourage the involvement of HR teams and employees in the M&A process. This clear contradiction between what executives know to be true and their reluctance to do anything about it is baffling. No one would get into a car knowing that it had a fifty-fifty chance of reaching its destination safely without taking precautions. The same thinking should be applied to merger/acquisition integration. Obviously, the importance of financial, market and legal factors must not be downplayed in the merger process. However, human resources issues, such as the effects of the merger on the workforce, must not be neglected either. Unfortunately, they are typically short-changed in the euphoria of the financial transaction. Yet those issues are just as, if not more, important in determining the success of a merger. They can greatly maximise the chances that a merger will succeed if they are dealt with promptly and effectively. The business situations may be complex and unique, but the people situations are predictable and addressable.

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ANNEXURES
ANNEXURE I (Cultural Compatibility) The Research Evidence A recent study conducted over three years in the United Kingdom examined the relationship between combining organizations' culture types and their post merger/acquisition performance. All the mergers, acquisitions, and joint ventures were horizontal and involved wide-scale socio-cultural integration. Their overall success rate of around fifty percent was typical of mergers and acquisitions. Precombination assessments of the dominant culture type of the partnering organizations were compared with post-combination assessments of the emergent culture of the new "merged" organization, and its coherence. Roger Harrison proposes that there are four main types of organizational culture: power, role, task/achievement and person/support.13 The main characteristics of each type are detailed in Exhibit 1. Exhibit 1: Types of Organizational Cultures Type Power Main Characteristics
Centralized power; swift to react Emphasize individual rather than group decision making Essentially autocratic and suppressive of challenge Tend to function on implicit rather than explicit rules Quality of customer service often tiered to reflect customers' status and prestige. Individuals motivated by loyalty to the boss (patriarchal power) or fear of punishment (autocratic power) Bureaucratic and hierarchical Emphasis on formal procedures, written rules, and regulations about the conduct of work Clearly defined role requirements and boundaries of authority Impersonal and highly predictable Values fast, efficient, and standardized customer service Individuals frequently feel that they are easily dispensable and that roles are more important than the persons who occupy those roles Emphasis on team commitment and zealous belief in the organization's mission Task requirements determine how work is performed Tend to offer customers tailored products Flexibility and high levels of worker autonomy Potentially very satisfying and creative environments in which to work, but also frequently exhausting Emphasis on egalitarianism. Exists and functions solely to promote the personal growth of individual members More often found in communities and cooperatives than in profit-seeking organizations

Role

Task/Achievement

Person/Support

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34 ANNEXURE II (HDFC Bank Times Bank)

EQUITY SHARE DATA EQUITY SHARE DATA High Rs Low Rs Income per share Rs Earnings per share Rs Cash flow per share Rs Dividends per share Rs Dividend yield % Book value per share Rs Shares outstanding (eoy) m Bonus/Rights/Conversions Price / Income ratio x P/E ratio x P/CF ratio x Price/Book value ratio x Dividend payout % Mkt Cap Rs m No. of employees `000 Total wages & salary Rs m Avg. income/employee Rs Th Avg. wages/employee Rs Th Avg. net profit/employee Rs Th Year ending 31/01/01 285 185 51.7 8.6 22.2 2.00 0.7 37.5 243.59 AST 5.5 14.3 12.8 7.6 10.0 69,423 3 780 4,578.3 283.5 1,768.8 Year ending 31/01/02 248 192 60.5 10.6 16.7 2.50 1.0 69.0 281.37 ADS 4.1 17.4 14.8 3.6 17.5 69,780 4 1,092 4,551.0 291.8 1,074.3 Year ending 31/01/03 258 187 71.7 11.8 22.1 3.00 1.2 79.6 282.05 ESOP 3.6 14.1 11.7 3.2 16.4 72,769 5 1,520 4,222.5 317.3 1,077.0

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35 ANNEXURE III (HDFC Bank Times Bank) BALANCE SHEET DATA Advances Rs m Deposits Rs m Credit/Deposit ratio x Yield on advances % Cost of deposits % Interest spread % Net fixed assets Rs m Share capital Rs m Free reserves Rs m Net worth Rs m Borrowings Rs m Investments Rs m Total assets Rs m Borrowings/equity x ratio Income to assets ratio x Return on assets % Return on equity % Return on capital % Capital adequacy ratio % Net NPAs %

46,367 116,581 0.4 10.6 5.5 5.2 2,897 2,436 5,009 9,131 12,329 71,451 156,173 1.4 0.1 1.3 23.0 1.5 11.1 0.5

68,137 176,538 0.4 9.2 5.2 4.0 3,711 2,814 11,685 19,423 18,230 120,040 237,874 0.9 0.1 1.2 15.3 1.4 13.9 0.5

117,549 223,761 0.5 6.7 4.8 1.9 5,286 2,821 13,832 22,448 20,847 133,881 304,241 0.9 0.1 1.1 14.8 1.2 11.1 0.3

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36 ANNEXURE IV: ARTICLES

2006 was global year of mergers

The recent spate of mergers between giant companies with an Indian connection Mittal-Arcelor, Vodafone-Hutchison, Tata-Corus has woken India up to the heady world of high finance. But the phenomenon was not limited to India. In fact, 2006 will go down in history as a record-breaking year in terms of worldwide merger and acquisition (M&A) deals. Over $3.8 trillion worth of deals were struck, according to Thomson Financial, a leading financial consultancy firm. This represents a 38% increase over the previous year. It overtakes the previous record of $3.4 trillion reached in 2000, fuelled by the dotcom boom. Nearly 37,000 deals were hammered out globally in 2006, of which 157 were hostile takeovers, worth just under $500 billion. After the high-water mark in 2000, there was a slump in M&A activity following the dotcom bust. However, it started picking up in 2003 and has been continuously rising in volume. For India, too, 2006 was a mega-merger year there were 1,164 deals during the year valued at $35.6 billion compared to 1,011 deals worth $21.6 billion in 2005. So, whats fuelling this merger mania? In an increasingly competitive world, as companies reach saturation points in market shares, the only way to increase profits is to take over competitors and cut costs. Mergers and acquisitions can achieve both. However, to be able to buy out, you need money. This is where the high levels of accumulated profits come in handy. Interest rates, too, are generally at low levels, which means loans can be raised more easily. Giving this process a power kick are private equity or venture capital funds. These are huge funds held by private investor groups looking to invest in lucrative deals, making a quick buck and selling out. Estimates put private equity holdings worldwide at nearly $700 billion and growing fast. In 2006, nearly 20% of the deals were backed by these private funds, up from 12% in 2005. Even in India, which is relatively a small player in the world of high finance private equity or venture capital funds are estimated at $7.46 billion in 2006, more than three times 2005. For cutting costs, the most common measure is job cuts. According to Challenger, Gray & Christmas Inc., a global accountancy firm that tracks job cut data in the US, over 0.6 million jobs were cut in 2000 and over 1 million in 2005. In 2006, the trend appeared to be slowing down, with 22% decline in job cuts.

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'Tata, Corus are stronger together'

Roughly a year after Jim Leng first visited India to discuss his struggling company's search for a partner in a low-cost, high-growth economy, Corus chairman could barely disguise his elation at Tata's offer of 608 pence per share, which represents a 68% premium on his company's share valuation in October. In an interview, just hours after UK's Takeover Panel announced "the auction procedure which commenced at 4.30pm (London time) has now completed and Tata had won the day, Leng told TOI, his shareholders would be loathe to ignore Tata's 608 pence per-share cash offer. But in an indication that cultural disparities over the interface of business and politics may plague the new Tata-Corus relationship, Leng said the deafening silence of British politicians was "healthy in our country, politicians stay out of business talks and that's the best way". Sketching out the way ahead, Leng said, "look business goes on as usual as we've had an early morning board meeting, which saw full attendance and there was a unanimous recommendation (of the Tata offer)". The offer document, said Leng, "would be published in several days, normally no longer than a week". After this the Corus board was bound to give a 21-day notice for an EGM to give shareholders time to digest the offer. But Leng added, in a sign Corus was conscious of its rare good fortune in finding a buyer prepared to pay top-whack for a company, "was in bad shape four years ago", that it was "inconceivable the shareholders would take the lower CSN offer". He dismissed London market expert caviling Tata had "grossly overpaid with the firm declaration that Tata's knock-out, triumphant offer was consistent with the global steel industry's future. He said, "Admittedly, Corus was in bad shape four years ago but in the last three years there's been capital expenditure of 1 billion, investment in restructuring, in the way the company has been managed." Tata, said Leng, had bought Corus and, at the same time, shown "foresight in purchasing "an asset of 40 years with a view to fashioning its own global footprint. He said, "Tata and Corus are stronger together and will be able to compete effectively in an increasingly global environment."

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