“Department of Industrial Policy & Promotion (DIPP)” for “simplification of Land Acquisition Act”, in India | ET Retail

The Department of Industrial Policy and Promotion (#DIPP) will pitch for simplification of the #LandAcquisitionAct to facilitate investment and manufacturing in the economy by doing away with the cumbersome rules and procedures in the legislation..

Commerce and industry minister Nirmala Sitharaman, will likely take the matter up with her rural development counterpart Gopinath Munde…DIPP will likely propose ” doing away with the social impact assessment process in the Act, which is a pre-requisite for public-private partnership (PPP) and private entities to acquire land”.

” Land Act in the present form has stalled industrial activity and suitable amendments are urgently needed to spur manufacturing in the economy…. There is no land acquisition taking place. We have taken up the matter with the minister,” said an official…

 

 

Act stipulates establishment of a state social impact assessment unit, the office of a commissioner, rehabilitation and resettlement, and a state-level monitoring committee by each state government. The Act has nearly brought acquiring land to a halt, impacting large projects hitting manufacturing growth, which contracted by 0.7% in 2013-14.

Besides, the commerce and industry ministry may also recommend empowering of district collectors of each state to authorise providing of up to 500 acres for small-scale industrial projects. Investment and infrastructure reforms are one of the 10 point agenda of Prime Minister Narendra Modi unveiled on Thursday… Rural development minister Gopinath Munde ruled out scrapping of the land acquisition act, however, called for a need to amend it….

Ms. Sitharaman has emphasised on bolstering manufacturing in the economy. Munde was recently reported as saying that the rules of the Act have made the implementation difficult. “There is no question of repealing the Act, as we supported it in Parliament; it is a good law. I have taken up the Act as my first issue with officials in this ministry… I must say I agree with the rates of compensation in the Act,” he said.

Any amendment the Act will need to go through the Parliament. The Act has made it mandatory to get the consent of at least 70% of the affected people for acquiring land for PPP projects and 80% for acquiring land for private companies.

DIPP secretary Amitabh Kant had said in his interview to ET last month that the law had to be redrafted and simplified keeping in mind that a fair price is paid to the farmer.

“We need to un-shackle controls. It provides for too many committees and too many approvals. It will be too time-consuming a process,” he had said..

The ” New Law provides compensation FOUR Times the Market-price for Rural-Land and up-to TWICE the value of Urban-land for acquiring for public works or industrial activities”…!!

“Corporate-Governance Reform in India”: Gauging Impact on Investors | Aligning Listing, with Companies Act 2013 | CFA Institute

Approval of all material related-party transactions by independent share-holders (i.e., related parties have to abstain from voting) is standard in many markets around the world and considered a best practice. Now, listed companies in India will abide by this rule beginning in October 2014 as part of a slew of corporate governance reforms announced recently, by the Securities and Exchange Board of India (SEBI). Will these new measures bring much-needed relief to minority shareholders, or is it just old wine in a new bottle ??

SEBI consulted industry participants in January 2013 to revise and overhaul Clause 49 of the Equity Listing Agreement that deals with the corporate governance norms for listed companies in India….CFA Institute, in conjunction with the Indian Association of Investment Professionals (IAIP), officially responded to the consultation by highlighting our policies and global best practices. The recently revised SEBI norms are expected to enhance the corporate governance framework to reflect global best practices. The requirements in certain areas, including independent directors and related-party transactions, are more stringent than the new Companies Act 2013.

Some of the significant changes are discussed below : 

 

Aligning Listing Agreement with the Companies Act 2013 – Companies Act requirements on issuing a formal letter of appointment, performance evaluation, and conducting at least one separate meeting of the independent directors each year and providing suitable training to them are now included in the revised norms of SEBI. Independent directors are not entitled to any stock option, and companies must establish a whistle-blower mechanism and disclose it on their websites.

Restricting Number of Independent Directorships – Per Clause 49, the maximum number of boards a person can serve as independent director is seven, and three in cases of individuals also serving as a full-time director in any listed company. The Companies Act sets the maximum number of directorships at 20, of which not more than 10 can be public companies. There are no specific limits prescribed for independent directors in the Companies Act.

Although SEBI reforms seem to be moving in the right direction, these limits may initially pose challenges in sourcing qualified independent directors for listed companies.

Maximum Tenure of Independent Directors – Based on the Companies Act as well as the new Equity Listing Agreement, an independent director can serve a maximum of two consecutive terms of five years each (aggregate tenure of 10 years). These directors are eligible for reappointment after a cooling-off period of THREE years.

Can a director who has served two five-year terms be considered independent after a cooling period of three years ? CFA Institute recommends that board members limit their length of service on a specific company board to no more than 15 years to ensure new board members with fresh insights and ideas are elected.

Board-Mix Criteria Redefined – Per Clause 49 of the Equity Listing Agreement, 50% of the board should be made up of independent directors if the board chair is an executive director. Otherwise, one-third of the board should consist of independent directors. Additionally, the board of directors of a listed company should have at least one female director.

While it is a welcome change that SEBI mandates a female director, will it make a huge difference to the effectiveness of boards ?

CFA advocates that diversity should be embraced from all angles, such as diversity of backgrounds, expertise, and perspectives, including an increased investor focus to improve the likelihood that the board will act independently and in the best interest of shareholders.

Role of Audit Committee Enhanced – The SEBI reforms call for two-thirds of the members of the audit committee to be independent directors, with an independent director serving as the committee’s chairman. While the Companies Act requires the audit committee to be formed with a majority of independent directors, SEBI has gone a step further to improve the independence of the audit committee.

The role of the audit committee also has evolved to incorporate additional themes from the Companies Act, such as reviewing and monitoring auditor independence, approval of related-party transactions (RPTs), scrutiny of inter-corporate loans, valuations, and evaluations of internal financial controls and risk management systems.

More Stringent Rules for Related-Party Transactions – The scope of the definition of RPTs has been broadened to include elements of the Companies Act and accounting standards :

  • All RPTs require prior approval of the audit committee.
  • All material RPTs must require shareholder approval through special resolution, with related parties abstaining from voting.
  • The threshold for determining materiality has been defined as any transaction with a related party that exceeds 5% of the annual turnover or 20% of the net worth of the company based on the last audited financial statement of the company, whichever is higher.

Since SEBI Clause 49 requires shareholder approval for all material RPTs, with no exception for transactions in ordinary course of business or at arms-length, companies feel that this will result in practical difficulties (i.e., compliances costs and delays), particularly for those that regularly transact business with subsidiaries.

The ultimate effectiveness of such legislation will depend upon the degree and quality of enforcement, or the monitoring capabilities of the regulator.

Improved Disclosure Norms – In certain areas, SEBI resorts to disclosure as an enforcement tool. Listed companies are now required to disclose in their annual report granular details on director compensation (including stock options), directors’ performance evaluation metrics, and directors’ training. Independent directors’ formal letter of appointment/resignation, with their detailed profiles and the code of conduct of all board members, must now be disclosed on companies’ websites and to stock exchanges.

E-voting Mandatory for All Listed Companies – Until now, resolutions at shareholder meetings in listed Indian companies were usually passed by a show of hands (except for those that required postal ballot). This means votes were counted based on the physical presence of shareholders. SEBI also has changed Clause 35B of its Equity Listing Agreement to provide e-voting facility for all shareholder resolutions.

We think this is a pertinent change as it will allow minority shareholders to express their voices at shareholder meetings without having a physical presence. CFA Institute has advocated for company rules that ensure each share has one vote.

Enforcement – SEBI is setting up the infrastructure to assess compliance with Clause 49 to ensure effective enforcement. Companies need to buckle up and assess the impact of these reforms and step up compliance.

Industry Impact – I asked Navneet Munot, CFA, CIO of SBI Mutual Fund and advocacy director for IAIP, to gauge industry reactions. Mr. Munot was optimistic about SEBI boosting investor confidence through these sweeping changes, especially the potential to empower minority shareholders through e-voting, enhanced disclosures on remuneration that is aligned with global best practices, and by requiring independent share-owner approval for related-party transactions. Given India’s humongous need for risk capital, regulatory reforms and better enforcement are critical for market integrity and building investor trust, he said.

CFA Institute, along with the IAIP, is currently working on an investor’s guide to shareholder meetings in India to help retail and institutional investors understand the rights, role, and responsibilities of shareholders…

“Fighting Corporate Hubris”: FOUR Steps of the “Perpetuity Principle”|by:Hans-Paul Bürkner | BCG

Massive corporate fraud, the dot-com bubble, the worst economic crisis since the 1930s—these events have undermined many companies and leaders over the past 15 years. As CEOs begin to absorb the lessons of this turbulent period, they should be careful not to overlook one significant contributory factor: hubris, the pride that comes before a fall.

In a corporate setting, “Hubris” can take many forms, such as :

  • Creating grandiose strategies that find their way into glossy brochures, new advertising campaigns, and rhetorical conference speeches—but never get implemented
  • Launching high-profile moves into new, exciting, international markets in a costly and flamboyant way—but failing to create competitive advantage
  • Pursuing big mergers and acquisitions that deliver scale, bold headlines, and large bonuses for the management team—but no long-term value
  • Completing dubious financial transactions that undermine transparency—and serve only to show that the company isn’t addressing the fundamentals of business

Time and again, these activities have led companies to overextend themselves, to falter, and—all too often—to fail. CEOs should guard against them at all costs.

Hubris and Its Nemesis: The Perpetuity Principle – 

The CEO and the executive committee play a critical role in the fight against hubris. They do, by their conduct, set the boundaries and norms of behavior for the rest of the company. Today, the best managers follow what we call the perpetuity principle, serving as stewards of their companies and, by doing so, developing profitable, sustainable, and trusted businesses. They focus on results, ensure that substance triumphs over style, and champion a true humility—one that prioritizes ethical behavior, respect for others, modesty, and diligence. To adhere to this principle, CEOs should take the following steps.

1. Renew the focus on delivering long-term value. It is all too easy to shrug off a sluggish performance as evidence that the market misunderstands the company’s terrific work or to point to a great quarter or two as a reason for ignoring any deterioration in the business fundamentals. But before castigating critics or declaring victory, the prudent leader should take a long, hard look in the mirror: knowing what creates value—and what destroys value—for customers, shareholders, and other stakeholders are core competencies of the CEO.

On a routine basis, the CEO and his or her team should embark on an unsentimental, even ruthless, review of the company’s portfolio to identify any under-performing business units or decline in the key drivers of value, such as market share, gross margin, and pricing power.

At the same time, they should pursue strategies to deliver top-line growth. But they must be wary of tempting proposals for fast-tracking growth—such as buying and selling businesses—just to please the markets. Though such strategies have their place, big splashy acquisitions that promise much but turn out to be poorly thought-out, badly executed, and deeply damaging to the long-term health of the company occur all too often. In fact, according to BCG analysis across all industries, more than half of all public-to-public deals between 1988 and 2010 actually destroyed shareholder value.

Ultimately, a company will thrive only if it offers differentiated products or services to its customers and delivers them well. Leaders should never forget this—no matter how much pressure they feel from the financial markets.

2. Foster an open and questioning culture, and encourage the company’s major decision makers to challenge conventional wisdom. Of course, this is not easy to do; for CEOs, encouraging others to question their carefully worked plans can be an uncomfortable process. But cultivating an environment in which executives feel free to articulate their views without fear of retribution is necessary—and usually the company is stronger for it.

There are a number of ways to foster an unfettered dialogue. The most effective is when a CEO initiates the discussion by challenging the existing business model. Another is to conduct an exercise in which one group of executives takes a contrarian view, playing devil’s advocate.

A third approach is to develop a series of scenarios, or mental “boxes,” that give members of the executive board a chance to gain a fresh perspective on their strategic plan. This is not some tired recommendation to engage in scenario planning or to think outside the box. Rather, it is an exhortation to think in newboxes—to question everything, to think the unthinkable.

Whether or not these new scenarios are plausible is beside the point. What’s important is that each box be sufficiently provocative to enable the CEO and the executive team to test the merits of their preferred approaches in different boxes and, in doing so, to break out of a tunneled managerial perspective.

As well as creating new visions of the future, CEOs must address, in a very practical sense, the way they manage and organize work. All too often, a CEO orders a reorganization of the company that, despite the best of intentions, leads only to a costly and over-complicated proliferation of structures, processes, and systems. This is why what we call “smart simplicity”—minimizing structures, processes, and systems while maximizing leadership, cooperation, and engagement—is so important. It avoids the illusion of superficial change, which actually inhibits real transformation, and forces leaders instead to consider some key questions: Are we really going to change what happens, what we do, and the way we work together?

3. Develop a role as stewards of the company, guiding it toward a prosperous future with a respected place in society. Companies play an important role in society, and their leaders can be significant local, national, and international citizens. CEOs, therefore, should be conscious of their role in the community, set an example through their behavior, and strive both to do well and to do good, today and for tomorrow. A narrow focus on short-term profitability, coupled with excessive bonus payments for top management, undermines the very existence of a company—especially during a time of austerity in the West and widening gaps in wealth around the world.

To set the best example, CEOs should ask themselves this question: “Is my compensation in line with performance?” If the answer is no—then that’s a problem. Certainly the best-performing executives should be well compensated. But those who have poorly served—or even defrauded—their shareholders, customers, and local communities should face negative consequences rather than be rewarded with golden handshakes.

CEOs should also ask themselves, “Is my company making an appropriate contribution to society ? ” With the rising importance of citizenship, trust, sustainability, and reputation, leaders cannot fixate solely and selfishly on the company. They have a role in shaping a more resilient and responsible future for society at large.

Companies can contribute to the well-being of local communities through their products and services, job creation, education, and skills training. They should also pay an appropriate level of corporate tax. Of course, it is the duty of each company to take every legal step to minimize its tax burden. But going too far risks a serious backlash—not least from consumers and especially at a time of large government deficits, which are partly due to tax evasion and poor collection. This risk holds equally true when it comes to labor laws, environmental regulations, and quality standards.

4. Ensure a regular change of leadership. CEOs should conduct a periodic shake-up of those around them, including their loyal lieutenants. It is lonely at the top—and never more so than when reshuffling the executive pack. But this is a task that CEOs must not shirk: they cannot afford to surround themselves with a cadre of people who stop challenging the status quo (now that they are the status quo), who put career before company, and who stay silent when they should speak out.

In general, CEOs themselves should have time-limited tenures, too. No one is above the company, not even its highest officer. In my experience, most CEOs, in the true spirit of a steward, should step aside after no more than ten years. Now, some leaders may read this and think that a decade in the top job is the kind of corporate eternity they can only dream about. The fact is, however, that some companies are nominally led by people who no longer actually lead.

So why deprive the company of a top leader who has built up a wealth of experience? The answer is straightforward: Over time, it gets progressively more difficult to bring about necessary change. Of course, it is not hard to point to the exceptions that prove the rule—the extraordinary CEOs who defy the years and continue to generate value over decades. But, too often, long-serving CEOs are wedded to ways of doing things that quickly become outmoded in today’s fast-changing and volatile world. And while success can certainly breed success, it can also breed complacency and failure.

Knowing when to hang up one’s boots is notoriously difficult, whether in business, politics, or sport. The most successful leaders, wary of destroying the legacy they have built, understand that they should never think they are indispensable.

The CEO’s Core Task : Putting the “Execute” Back into “Executive”…

Over the past two decades, too many CEOs lost focus: to use the language of sport, they took their eyes off the ball. Today they have a second chance.

The essential purpose of a company is to deliver value to its customers and profits to its shareholders on a sustainable basis—and this means that the organization needs to be a good citizen in the communities where it does business. So the task of the CEO, as the leader of the company, is to make this happen, to get things done, to execute—hence the name, “chief executive officer.”

” To be truly successful in a game-changing way : CEOs must adhere to the “Perpetuity Principle”, leading from the front and engaging in a relentless fight against corporate hubris—whether this manifests itself as greed, self-promotion, or ducking the hard realities of the world “.

“Start-up’s in India can list without IPO’s”: Angel Funds can invest only in start-up’s up to 3 years old|by: Sainul K Abudheen | VC Circle

Securities market regulator, SEBI (Securities and Exchange Board of India) has come with significant guidelines for the “Start-up Ecosystem in India”, boosting liquidity prospects for early-stage investors by allowing start-ups to list without IPOs but has proposed certain restrictions on angel funds which may affect their investments.

The proposals, some of which have been talked about for a while, were cleared in a board meeting of SEBI on Tuesday. However, SEBI did not give a timeline for the implementation of the new decisions.

 sebi

Start-up listing :

SEBI noted that lack of exit opportunities for the existing investors and restricted access to new investors is one of the problems faced by start-up’s and SMEs. To provide liquidity for angel investors, VC firms and others, it approved the proposal to amend regulations to permit listing of start-up’s and SMEs in a separate Institutional Trading platform (ITP) without having to file for IPOs.

This would be different from the existing SME exchange platforms of BSE and NSE which allow firms to list with relatively laxer regulations. SEBI said such firms shall be accessible for investment to the ‘informed investors’ only and it marked the minimum amount for trading or investment on the ITP as Rs 10 lakh. These companies shall also be exempted from the requirements to offer up to 25 per cent of their stake to public through an offer document in order to get listed. This would allow such firms to list without IPOs and do away with the expenses associated with it.

However, SEBI added that such companies will be able to only make private placements and not public issues. This would create an institutional trading market for shares and other convertibles of startups, which can potentially bring more investors beyond angel investors and VC firms who have access to investments in such firms.

Standardised norms of entry for companies, eligibility criteria, continuous disclosure requirements, simplified exit rules and corporate governance norms will be prescribed separately, SEBI said.

According to Sanjay Vijayakumar, an angel investor and co-founder of MobMe Wireless (which is in the process of listing in an SME exchange), the decisions will help bring in more financial discipline much early on for entrepreneurs.

“In my opinion, along with HNIs, the platform should be open to working professionals as well since there are many young professionals who understand the Internet/mobile medium but are not HNIs. The next generation of youth has a higher risk appetite and they would be willing to invest under Rs 5 lakh in a startup,” he said.

Vijayakumar said the current SME exchanges call for 25 per cent of equity dilution which was a dampener. “In most cases, the startups would want to dilute less, raise what is needed, increase the valuation and then raise more money,” he said.

Vijayakumar explained that a positive spin to listing is that it can assign a market cap for the company and the shares can then be used as collateral as well. “This will help in unlocking value of shares in early stage itself as government funds give out loans at soft interest rates with shares as collateral, he said.

One of the key features of an IPO-less listing would be cost saving from the process of going through an IPO. This additional platform may also put pressure on the associated costs of listing on an SME exchange.

Mahesh Murthy of Seedfund said, in theory the SEBI proposal to allow startups and SMEs to list on an ITP without an IPO is great as it allows firms to divest less than 25 per cent and discover a price for their stock so that raising the next round though private placement will have fewer debates on pricing and valuation.

“But in practice, I’d like to see this market of HNIs and others on the ITP. I am not sure it’s a big market of buyers right now. For an ecosystem to work it needs not just sellers but buyers too. There will be hundreds of sellers. But where are the buyers?,” he asked.

Angel funds : 

The market regulator also came up with guidelines for angel funds and angel pools, bringing them under the ambit of Alternative Investment Funds (AIF) regulations. Given the smaller size of such funds compared with other VC firms, it categorised them as separate from VC firms but put such early stage investment funds under category I of AIF regulations.

SEBI said individual angel investors shall be required to have early stage investment experience/experience as serial entrepreneurs/be senior management professionals with 10 year experience. They shall also be required to have net tangible assets of at least Rs 2 crore ($330,000) while the corporate angel investors shall be required to have Rs 10 crore net worth or be a registered AIF/VCF.

For angel funds, the regulator prescribed a minimum corpus of at least Rs 10 crore (against Rs 20 crore for other AIFs) and minimum investment by an investor into that fund to be Rs 25 lakh (may be accepted over a maximum period of three years) against Rs 1 crore for other AIFs (such as larger VC firms and private equity firms). It added that the continuing interest by sponsor/manager in the Angel Fund shall be not less than 2.5 per cent of the total corpus or Rs 50 lakh, whichever is lesser.

SEBI also put separate riders for angel investments: they shall invest in firms incorporated in India and are not more than three years old; have a turnover not exceeding Rs 25 crore ($4.2 million); are unlisted, not promoted, sponsored or related to an industrial group whose turnover is in excess of Rs 300 crore and have no family connection with the investors proposing to invest in the company.

Further, investment in an investee company by an angel fund shall be not less than Rs 50 lakh and not more than Rs 5 crore and shall be required to be held for a period of at least 3 years.

This makes the guidelines restrictive which may affect such investments. This is especially so with respect to the requirement that angel funds to limit their investments to firms which are up to three years old. Though much of such investments happen in the early life cycle of a firm, it would take out access to such angel funds by firms whose founders managed to bootstrap for the initial years.

Such Start-up’s would need to pitch to larger VC firms

What “India’s Union-Budget 2013” means for Startups, Incubators, Angel-Investors | by:Sainul K Abudheen |VC Circle

Small and medium enterprises (SMEs) have always been a focus of the Union Budgets in India. However, this year’s budget had a surprise element for the Indian start-up ecosystem (mainly dominated by tech enterprises or new age companies rather than traditional SMEs). This also has a bearing on the start-up incubators, and also the angel investment ecosystem.

Here’s a quick take on “what the budget means for each of these stakeholders in the Indian start-up ecosystem ??…..” 

Startup’s : 

The finance minister has opened a backdoor listing route for SMEs including startups and they can now list at the two SME exchanges in the country. The proposal will allow such startups to list without going through the elaborate process of an initial public offering (IPO).

However, such firms’ shares will be open for subscription only for a set investor base. A clear picture regarding the modalities is yet to emerge, but it is likely to be in the form of an institutional placement while providing liquidity on the exchanges.

Sanjay Vijayakumar, CEO of MobMe Wireless and chairman of Kochi-based incubator Startup Village, said, “This is a great move because SMEs can now monetise their shareholding and leverage the same as collateral to get money from institutions like the Technology Development Board, where loans can be raised at 5 per cent simple interest rate.”

MobMe is the first tech startup which has already applied to get listed on the SME Exchange in India for its IPO.

Jade Magnet co-founder Sitashwa Srivastava said, “This will open up a genuine fundraising avenue for young companies.” Bangalore-based Jade Magnet offers a design crowdsourcing platform.

“This will potentially create an excellent platform for venture capital and private equity players to deal in their unlisted portfolio companies without having to go through a lengthy and expensive listing process. This can also serve as an alternative and tax-efficient exit route for the funds from their illiquid portfolio companies,” observed Siddharth Shah, partner at the law firm Khaitan & Co.

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Tech-Incubators : 

The government has said that funds given by companies to support tech incubators within academic institutions and approved by the Ministry of Science and Technology or the Ministry of MSME (Micro, small and medium enterprises) will qualify as corporate social responsibility (CSR) expenditure. Although this will not directly affect the growing number of private incubators, it is expected to generate more funds for institutions like the CIIIE (Centre for Innovation, Incubation and Entrepreneurship) which runs iAccelerator and is associated with IIM Ahmedabad.

The companies contributing to such incubators will be able to show those expenses as CSR expense, which is part of the mandatory CSR spend under the new Companies Bill.

“The biggest challenge for incubators is that the funds allocated for its operations are very low,” said Vijayakumar. “So the inclusion of 2 per cent of CSR funds as expenditure for incubators will be a game-changer,” he added.

Ravi Kiran, co-founder of VentureNursery, an angel-backed startup accelerator programme, said that the move to allow investment in technology business incubators (TBIs) as CSR investment is a good step. “I hope it comes with a mechanism to establish accountability of such investments. Also, the government needs to recognise private accelerators’ role in the entrepreneurial ecosystem as well,” he said.

Angel Investors : 

Angel investments, which have become a key part of early-stage funding in India in the last two years, got a shocker in last year’s budget because of a proposal, which in effect, amounted to taxing such investments. Although the government was expected to make some clarifications, the latest budget is a win some-lose some scenario for angels.

The finance minister has said that market regulator SEBI will prescribe requirements for ‘angel investor pools’ by which they can be recognised as Category I AIF venture capital funds and thereby, get tax benefit. It is not immediately clear if this represents ‘angel funds’ or ‘angel networks’ or both.

In either case, this may leave out individual angel investment, which is done outside the angel networks such as Indian Angel Network (IAN), Mumbai Angels, Chennai Angels, etc. This may help consolidate such investments while making it tough for those individual angel investors to support the startups in early years.

Padmaja Ruparel of IAN said, “We are happy that the finance minister has recognised genuine angel investing and that this activity should be encouraged. We will work with the SEBI to see how the rule can be applied to angel investors.”

According to Ravi Gururaj, co-founder of HBS Alumni Angels (India Chapter), the new AIF class of investment vehicle will be helpful if it helps catalyse the growth of many new micro funds where investors syndicate to pool in their resources.

“However, I hope the new regulation does not hinder the existing regular angel investing activities, dominated by individuals making investments in their own personal capacity and selectively investing in startups. Such individual activity, which forms the bulk of the current angel activity in India today, should not be adversely impacted by these new norms,” he noted.

“Internal Audit (IA) & Risk Management” need Increased Collaboration, NOT Re-organization | by: Chris Bart & Elliot Schreiber

 

Having robust Internal Audit (IA) and Risk Management functions with an organization are essential to a strategy’s successful execution. However, there are increasing signs that IA and Risk Management need to work much more closely together. A new KPMG Study found some startling issues for both the risk and IA communities.

For Risk Management, strategy execution is being threatened because : 

  • Only one-third of companies felt that their Risk Management programs were robust enough to keep up with the changing risk environment; Only 52% of board members were satisfied that management had identified the risks to business growth. 
  • This is a bit startling since a McKinsey study a few years ago found that it was the CEOs who felt that the board did not understand the company’s risks.  So, neither the board nor the CEO is comfortable with one of the most important oversight responsibilities of the board. 
  • For Internal Audit, a strategy’s successful execution is being undermined because: Less than one-half of companies felt that IA delivered real value to the company – and most likely due to an overemphasis on compliance versus execution; About one-half do not believe that IA properly focuses on the company’s strategy. 
  • The real issue is that both IA and Risk Management exist to not only find problems, but also to recommend changes – “opportunities” – that could benefit the firm.  However, according to Archie Thomas, a consulting IA and former Chief Audit Executive, many IAs do not understand the strategy of their company.  Thomas believes that internal auditors should be attuned to the strategy since they should be evaluating how well the company has done at implementing that strategy. This, he sees, is a major gap in IA. 

We’ve heard the same issue from risk managers we know.  They note that many risk managers are more focused on compliance or “checking the box” than they are with strategic a risk, which has been found to account for nearly 70% of risks and which cause the greatest loss of value.

We believe that it is time that IA and risk management begin to work more closely together or we may see companies make some rash organizational changes that negatively impact both functions and further blind a company’s ability to identify and mitigate gaps in their strategy’s execution..  Already in Australia, about 65% of companies have either linked IA and Risk under a common executive or put IA under risk management.  This is too new to know what the implications of such changes might be.

As we’ve noted previously, the Audit Committee should be asking both IA and risk management to provide a strategy execution audit in addition to their normal work.  Also, since there seems to be discontent with what each group has been doing independently, we believe that an alignment council of IA and Risk should be formed to determine how they could better work together to meet the needs and demands of both the board and top management.

“Mergers & Acquisitions”: Understanding the Essentials of Strategy & Execution in the M&A Ecosystem | Executive Street

We explored the landscape of the Merger & Acquisition (M & A) ecosystem and how M&A activity is generally driven by strategic objectives that must form a match between both parties – the buyer and the seller. As discussed, mergers & acquisitions, in some cases, may be required by one or both organizations in order to survive.  In other cases, the M&A move be seen as a strategic action that will lead to a leaner, more profitable company once the transaction is completed – one that is better positioned for growth.  We will delve, further into the points of commonality between mergers and acquisitions and looked at the buy and sell-side perspectives of each in more detail.

In this third installment, we will examine domestic versus international M&A transactions, then explore the analysis behind selecting another company worth merging or acquiring and discuss how due diligence should actually be performed.

Other M&A Factors to Consider : 

Is the M&A transaction Domestic or International ? 

Obviously, the complexities of mergers and acquisitions across national borders are far more so than M&A transactions with a domestic company – so the data collection, due diligence process and closing process will take more time, effort and money to complete.

The level of challenge is generally dependent on the acquirer’s experience and presence in the country where an acquisition is being made.

Acquiring across national borders requires the buying firm to understand differences to account for in areas such as: 

  • Political
  • Legal
  • Economic / Financial
  • Cultural

Different functions of the target company pose unique challenges, such as in Accounting and Finance.  Standards and best practices differ across countries and the impacts of those differences cannot be overlooked.  For a purchaser with multi-national acquisition experience, this may be less of a factor than for a first-time buyer.  Regardless, it adds to the time and effort required for due diligence. 

The human resource function is another area that in cross border M&As requires an in depth understanding of potential risk factors like :

  • Labor laws 
  • Health benefit programs 
  • Vacation policies 
  • Pension plans 
  • National regulations 
  • Unions and workers councils 
  • Work conditions 
  • Local employment restrictions
  • Employment security laws 
  • National and organizational cultures and customs 

Being there helps.  Organizations that are already operating globally and have a division or subsidiary in a particular country will have an advantage during due diligence and the negotiations of an M&A transaction over one entering into a country where there is no local knowledge and no established contacts to leverage. However, the role of the subsidiary must be clearly defined in the M&A process and just as much planning and coordination is required. In cases where a firm is undertaking an acquisition in one or more countries where it has no presence, seeking a local intermediary to assist in the process can help avert many issues that might snag the process later on after much time, money and effort have been spent.  Such M&A transactions in certain countries can be even more difficult to complete when the local and federal governments play stronger roles in business affairs of companies, involving themselves in labor decisions, market entry and foreign company access to their supply networks.

How Do You Target and Select Another Company When Acquiring or Merging ?

Assessing “fit” with another company can be where executives face the greatest difficulty in the M&A process.  It is easy to overestimate the synergies that might result from an M&A transaction and to underestimate the difficulty of assimilating the purchased company into the organization and harvesting the benefits of those synergies.  Excitement about a pending deal can cause executives to see the M&A deal through “rose colored glasses” and fall victim to a “wishful” strategy and not a realistic one.

Knowing what you are looking for and how you want to use it are essential knowledge elements in targeting companies in M&A strategy.  With a merger, the acquired company will be absorbed into the buying company.  With an acquisition, it must be decided on whether the purchased company be integrated (and to what extent) or left alone.  If integration is the intent, it poses another challenge that is easier said than done. Assuming the potential target to be a perfect fit for deriving synergistic benefits, integration of strategy depends on the vision and the mission of the two organizations. The strategy pertaining to target markets, human resources, information technology platforms, financial systems, accounting practices and many other ecosystem factors must be in sync for having a successful M&A deal close.

While there is something to be said for consolidation and the initial cost savings that can be achieved, integration should never be evaluated on cost savings alone. If the collective output of the integrated firm does not exceed the individual outputs of each entity (prior to the integration) than it should not be attempted other than in the case of horizontal integration for the purpose of eliminating a competitor. This basic metric for evaluating the benefits could be applied to manufacturing capacities, sales increases, engineering, economies of scale in purchasing and marketing, etc. Individually each of these areas may be a reason to consider acquisition and integration, though it is best to do so when looking at the collective picture so as to avoid placing too much emphasis on the benefits achieved in any one area that might represent the smallest cost implications (which leads to underestimation of difficulty).

The result of overestimation of the M&A benefits and underestimation of the M&A costs is, of course, another statistic in the failure count of such transactions.  With more careful valuation and due diligence (and less wishful thinking) it can sometimes become apparent to the buying company’s executives that the company being acquired presents a long shot (perhaps even more so than the “more risky” strategy of internally developing the capabilities of the acquisition target) and the purchase price is far too high and likely returns on capital for the acquisition are far too low given the associated risks.

Performing Due Diligence : 

After targets have been selected and initial high-level analysis has narrowed the field of candidate companies, due diligence begins.  Due diligence is where much of the information gathering takes place to confirm the “fit” for the target company in the buying organization’s strategy.  The process also typically involves valuation and early-stage negotiations to determine if the two companies are in the same “ball park” on valuation. It is during this period that the executives, senior managers and their staffs attempt to learn all they can about a target company (or division) so as to better understand the organization’s value, how it operated and performed in the past, how it is likely to operate and perform in the future, and how it will likely fit with the buying firm (determining the synergies).

In a perfect world, the acquiring company would have access to and know everything there is to know about a target firm prior to the M&A transaction closing. In reality, attaining that level of visibility into the target company rarely, if ever, happens.  Instead, M&A deals usually get constructed with a much murkier view into the target.

So why do deals proceed without a fully completed due diligence process?  Sometimes it can be because the process to get the target company’s information is not well planned and the target company is often not organized and prepared enough to gather all of the requested information.  Add to that the pressures from executives in the buyer company to quickly complete a deal, and soon short-cuts are taken and “hopeful” strategy wins out over comprehensive analysis.  Why would the buying company’s executives want to rush the process?  Perhaps to avoid further distractions to the core business because the process has gone on too long.  In some cases the rush to close is to avoid competitive bidding from other suitors.

Unfortunately, during due diligence, the executives of the acquiring firm typically develop only a partial understanding of a target firm.  This partial understanding is often accomplished by piecing together information obtained from internal company documents, interviews with key managers, interviews with a sampling of employees, on-site inspection and surveys and/or interviews with key customers. During due diligence, using external data can help add back some of the missing pieces to the information puzzle.

Gathering external data might include : 

  • Talking to ex-employees
  • Surveying or interviewing current and past customers
  • Reviewing SEC and other published data
  • Interviewing former consultants
  • Researching past press releases or articles written about the target firm
  • Conducting a 5-Forces analysis

Often, however, obtaining such information requires considerable effort and adds time to already aggressive schedules. For example, rarely is there as much external data available in acquisitions of small privately held firms. Moreover, many owners of small businesses either do not have much of the information requested or can be guarded about revealing it.  This is especially true if the buying firm is a larger competitor.

In such cases, the negotiation process will have to progress to more advanced levels of commitment (e.g., letter of intent, preliminary agreement, non-disclosure agreements) before access to information is provided. Even when historical data is reasonable to obtain and is acquired during due diligence, it is still impossible to know what the future holds. 

“Top 50 Key highlights” of the Indian Companies Bill 2012 | by: Corporate Professionals, Advisors&Advocates | VC Circle

” The Lok Sabha (India) has passed the much awaited Companies Bill 2012 on 18th December, 2012. The Bill is all set to replace the 56 year old Act.”

The promulgation of the new Act is a step towards globalization and is a successful attempt to meet the changing environment and is progressive and futuristic duly envisaging the technological and legal developments.

The new law surely promises investor democracy and addresses the public concern over corporate accountability and responsibility and alongside introduces some industry friendly provisions.

Here’s a look at some of its key highlights – 

Incorporation & Capital Raising : 

  • A private company can have a maximum of 200 members, up from 50 in the Companies Act, 1956.
  • The concept of One Person Company introduced. It will be a private limited company.
  • Concept of dormant companies introduced. It can be formed for a future project or to hold an asset or intellectual property.
  • All companies to follow uniform financial year, running from April to March. Exceptions to be made only for certain companies with the approval of NCLT.
  • All types of securities to be governed by the Bill.
  • The Prospectus has to be more detailed.
  • Money raised through a prospectus cannot be used for dealing in equity shares of another company. If a company changes terms of the prospectus or objects for which money is raised, it shall provide dissenting shareholders an exit opportunity.
  • Private placement‘defined, with detailed provisions for such placement.
  • Apart from existing shareholders, if the Company having share capital at any time proposes to increase its subscribed capital by issue of further shares, such shares may also be offered to employees by way of ESOP, subject to the approval of shareholders by way of Special Resolution.
  • NBFCs not covered by the provisions relating to acceptance of deposits. They will be governed by Reserve Bank of India Rules.
  • Companies can accept deposits only from its members, that too after obtaining shareholders approval. Acceptance of deposit also subject to compliance with certain conditions.
  • Public companies can accept deposit from public on complying certain conditions like credit rating.

Management & Administration : 

  • Listed companies required to file a return in a prescribed form with the Registrar regarding any change in the number of shares held by promoters and top 10 shareholders of such company, within 15 days of such change.
  • Postal Ballot to be applicable to all the companies, whether listed or unlisted.
  • Interim dividend in a current financial cannot exceed the average rate of dividend of the preceding three years if a company has incurred loss up to the end of the quarter immediately preceding the declaration of such dividend.
  • Financial statements include Balance Sheet, Profit & Loss Account and cash flow statements.
  • Provisions for re-opening or re-casting of the books of accounts of a company provided.
  • The National Advisory Committee on Accounting Standards renamed as The National Financial Reporting Authority.
  • The authority to advise on Auditing Standards and Accounting Standards.

Auditors & Financial Statements :

  • Every company is required at its first annual general meeting (AGM) to appoint an individual or a firm as an auditor.
  • The auditor shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter till the conclusion of every sixth meeting. The appointment of the auditor is to be ratified at every AGM.
  • Individual auditors are to be compulsorily rotated every 5 years and audit firm every 10 years in listed companies & certain other classes of companies, as may be prescribed.
  • Auditors have to comply with Auditing Standards.
  • A company’s auditor shall not provide, directly or indirectly, the specified services to the company, its holding and subsidiary company.
  • A partner or partners of the audit firm and the firm shall be jointly and severally responsible for the liability, whether civil or criminal, as provided in this Bill or in any other law for the time being in force. If it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, then such partner or partners of the firm shall also be punishable in the manner provided in clause 447.

Directors :

  • Prescribed class or classes of companies are required to appoint at least one woman director.
  • At least one director should be a person who has stayed in India for a total period of not less than 182 days in the previous calendar year.
  • At least one-third of the total number of directors of a listed public company should be independent directors. Existing companies to get a transition period of one year to comply.
  • Liability of independent directors and non-executive directors not being promoter or key managerial personnel to be limited.
  • A person can hold directorship of up to 20 companies, of which not more than 10 can be public companies.                                        

 

  • Governance :
  • Companies with more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year to constitute a Stakeholders Relationship Committee, with a non-executive director as a chairperson and such other members as may be decided by the board.
  • No permission of central government required to give a loan to a director.
  • The provisions on inter-corporate loans and investment (372A of Companies Act 1956) extended to include loan and investment to any person.
  • A company cannot, unless otherwise prescribed, make investment through more than 2 layers of investment companies.
  • No central government approval required for entering into any related party transactions.
  • No central government approval required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary.
  • Prohibition on forward dealings in securities of company by any director or key managerial personnel.
  • Prohibiting insider trading in the company.
  • No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the Company’s Auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under clause 133.
  • Creation of treasury stock/trust shares is prohibited.
  • Every listed company or such class or classes of companies, as may be prescribed, to establish a vigil mechanism.
  • The Bill makes provision for cross border amalgamations between Indian Companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government. 

Miscellaneous :

  • The Bill provides for class action suit by specified number of members or depositors against the company except the banking company, which is prevalent in developed countries.
  • The Bill provides for specific provisions related to any act of fraud.
  • The process for declaring a company sick and its revival and rehabilitation has been rationalized.
  • The National Company Law Appellate Tribunal shall now consist of a combination of technical and judicial members not exceeding 11, instead of 2 as provided in the Companies Act 1956.
  • The Central Government may establish as many special courts as may be necessary to provide speedy trial of offences.
  • The Central Government may establish a mediation and conciliation panel.
  • The Bill makes provision for cross border amalgamations between Indian companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the central government.
  • Where any valuation is required to be made of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the Act, it shall be valued by a registered valuer.

Warning Against Binge Buying-“When is M&A the Right Answer to Your Growth Challenges?” | by:Laurence Capron & Will Mitchell | INSEAD

” A great read with credible analogies for all such Business Leader / Executives, who are contemplating on M&A’s as one possible growth opportunities to expand Domestically & Internationally in 2013 & later. This piece of article/discussion detailed here…would serve as a effective “Sounding- Board” to all such, before embarking & firming up their M&A / Growth plans….MP.” 

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One of the truisms of business life is that mergers and acquisitions often create more headlines than value. Some studies indicate that 70% of deals fail to achieve their objectives. In our research on 150 ICT firms (“ Build, Borrow or Buy: Solving the Growth Dilemma”, Harvard Business Review Press, 2012), only 27 % of the responding firms reported they were able to extract the value that they wanted to achieve from their target firms’ capabilities following their acquisitions.

M&A’s can also damage employees’ careers. We vividly recall a situation one of our students encountered while working for a first-tier supplier in the auto industry. His company’s newly appointed CEO had attended a seminar and learned that he needed to have audacious goals for transforming the company, and that M&A was an effective tool for rapid transformation. The company had deep pockets at the time, so the CEO went on a buying spree. Our student was put in charge of integrating the hodge-podge that his boss had purchased. He wanted our advice on how to avoid integration mistakes. We were able to help—up to a point. But, in truth, the major mistake had already been made. Most of the acquisitions made little sense and fit together poorly. A year later, the parent firm was in a mess and on the market, the CEO was gone, and our student was looking for another job.

Does our student’s experience sound familiar to you? For us, similar stories are far too common. Our students come to see us because they need to integrate firms that their CEO just bought, while knowing little about the strategic rationale for the acquisition, and wondering whether a more flexible approach such as an alliance would have been a more effective way to obtain the resources they needed.

Yet, very few corporate events make the CEOs’ heart race like a big acquisition deal. And, undoubtedly, M&A is a critically important part of the tool kit for responding to changes in your strategic environment. But why do executives jump to M&A’s as their first choice—when, in fact, acquisition should often be the mode of last resort? In our research, we find that many CEOs suffer from blind spots about alternatives ways of undertaking important changes. They also often underestimate the difficulties they will face in integrating a target. And they often overlook the necessity to sequence and balance acquisitions with other modes of growth.

Blind Spots: Why do executives jump to M&A’s ? 

Many firms expect acquisitions to accelerate their growth, but executives often turn to them for the wrong reasons, including their own self-interest, an over-commitment to the buy mode and to the allure of a particular target, the value of M&A as a blocking strategy, and its use as a strategic shortcut.

Managerial self-interest. M&A activity is often seen as driven by greed, personal aggrandizement, and other self-serving managerial motives. Indeed, many studies document that acquisitions feed managers’ egos, reputations, and empire-building aspirations; increase their compensation and perks; mask the poor performance of their current portfolios; maintain their attractiveness for future CEO posts, or simply protect their present jobs. At the basic level of raw ambition, problems arise when executives use acquisitions unthinkingly as a shortcut to meet growth targets and generate publicity for themselves. At a deeper level, managers abuse M&As because of incentive systems that encourage them to ask the wrong questions: emphasizing size over real synergy, speed over careful due diligence, and short-term focus on earning per share over long-term value creation.

Over-commitment. Even leaders who do not suffer from excessive self-interest can mismanage an acquisition by becoming over-committed—both to acquisition as a mode of growth and to the particular target that first inspired their interest. It is easy to get carried away by the dynamics underlying the acquisition process. For instance, it is hard to ignore the many stakeholders who push hard toward the completion of a deal. Internally, the M&A and business-development teams have been working on the deal for weeks or months, and are deeply invested in it. Externally, powerful forces at investment-advisory and banking partners have financial incentives, and a strong reputational interest, to push the deal forward. Thus the process itself often leads to an escalation of commitment.

It is important to have the discipline not to escalate your commitment simply because you have spent a lot of time analyzing a deal (the so-called Law of Sunk Costs). One company we know devised the strategy of appointing a “green team” and a “red team” to assess each potential deal. The teams undertake independent due-diligence analysis of potential deals. The green team is responsible for making the positive case; the red team makes the equally important negative case. Staff members take turns serving on red teams, so that no one becomes “type-cast” as a corporate naysayer. Senior management assesses the green and red cases and makes a final decision. While this approach requires extra analysis, as well as time and money, the company has found it invaluable. They not only avoid bad deals, but also gain a better understanding of the deals that they undertake.

Blocking strategy. Firms sometimes use acquisitions to stop competitors from purchasing a target (some of this motive was at play in Boston Scientific’s pursuit of Guidant). While such efforts sometimes yield short-term payoffs, they rarely create lasting value. The buyer has to incur the costs of integrating and/or breaking up the target. Moreover, competitors can almost always find alternative—and sometimes superior—ways of obtaining the “blocked” resources. Nonetheless, 50% of executives in our telecom survey involved in M&As reported having bought a resource provider to prevent a competitor from acquiring it.

Strategic shortcuts. Even executives driven by a thoughtful strategic vision sometimes use acquisitions when other modes would work better. Executives tend to view acquisitions as a shortcut to implementing their strategies. Acquisitions rarely provide a quick fix. 65% of the telecom executives who chose acquisitions reported encountering frictions during the integration process. Integration almost always brings unanticipated roadblocks and expenses.

Once you have clarified the strategic reasons for making an acquisition and come to the conclusion that you need full control over an external resource partner (either because you lack internal skills to build or you cannot craft an effective contractual relationship with a resource partner), you then have to assess carefully whether you can integrate the target firm.

Can you integrate the target firm ? 

To assess your ability to integrate a target firm, you must consider whether you can clearly map the integration pathway and keep the people on both sides of a deal motivated. If you cannot identify a clear integration pathway that will create enough value to justify an acquisition, you may be strongly tempted to pull the word “synergy” from your back pocket to use as justification for the deal—one that can dangerously cloud a healthy instinct to walk away from a bad deal.

Knowledge Question: Can You Map Integration Clearly ? 

Whether the steps along an integration path are clear from the start or unfold over time, you need sufficient clarity to identify the major milestones. You have achieved integration clarity when you can define the scope of resource combination, the scope of the resource divestiture, and the timeline of your integration process.

Scope of resource combination. This first aspect of integration clarity is crucial. You must identify which resources will fill your resource gap. In some cases, M&A due diligence can accurately inventory the target’s resources. In other cases, you will only be able to gather in-depth information after the deal closes—when you will need to set up cross-company teams to evaluate the resources. For example, the Chinese bank Minsheng bought a substantial stake in the West Coast U.S. banking company UCBH in 2007 without realizing that the American bank’s allowances for bad debts were grossly understated; Minsheng ended up writing off the investment.

Resource-seeking acquisitions come in 3 flavors. While any one acquisition may encompass several of these goals, typically one objective dominates:

  1. Exploitation acquisitions provide resources that strengthen your core domain by adding something new to the resource base, which will enhance your existing activities in established markets. 
  2. Extension acquisitions provide resources that extend your existing activities into new geographic markets, or enable you to develop new products for existing markets. 
  3. Exploration acquisitions provide resources that make it possible for your firm to explore new market spaces, potentially consisting of disruptive technologies, product categories, or business models. 

Clarifying which of these three goals you want to emphasize will help define the scope of your resource combination—meaning which resources to integrate and which to leave as autonomous assets—either to retain or to divest. Defining the scope of the resource combination for an exploratory acquisition is typically far more difficult. Exploratory acquisitions may involve targets whose skills you do not yet clearly understand, and might conceivably destroy if you were to integrate them into your current organization too quickly.

Scope of resource divestiture. In addition to the desirable resources that inspired the acquisition, target firms almost always have resources that you do not need. Thus, while designing your plan for integration, you also need a parallel process for divesting unnecessary resources—including those of both the target and your own firm. As you integrate the businesses, you will need to sell product and service lines, manufacturing facilities, intellectual property, and other resources that do not contribute to achieving your strategic goals. Unless you divest unnecessary and obsolete resources, you risk collecting a jumble of resources that lead to corporate bloat.

Integration timeline. The third aspect of integration clarity requires that you understand the optimal time horizon for integration and divestiture.

Expect time horizons to vary depending on whether the acquisition is motivated by an exploitation or an exploration opportunity. An exploitative acquisition can be integrated relatively quickly, mainly by aggregating relevant resources and selling off the unnecessary or obsolete parts. With exploratory acquisitions, however, dealing too hastily with resources you do not yet understand well is potentially destructive. That said, you should not allow such acquisitions to function fully independently if you hope to gain the value of their potentially promising resources.

Although you may be unable to identify even the major milestones of a clear integration process, you may still be tempted to go ahead with the deal while hoping that a clear pathway will emerge later. However, the paths that emerge in such cases often lead directly over cliffs. The only way to avoid disaster is to identify the major goals for the acquisition before concluding the deal, and then create a detailed integration plan as soon as possible once the deal is closed. Google, for instance, purchased YouTube for $1.65 billion in 2006, with the goal of connecting on-line search and video streaming. Google allowed YouTube to operate largely independently for about two years, while it learned more about YouTube’s people and worked with them to develop specific opportunities for the integration. After this initial period of independence, Google then actively connected Google’s core search business to YouTube’s video streaming platform.

Governance Question: Can You Sustain Key Employees’ Motivation At Both Firms ? 

Much of the value of acquisitions is in their people. If you lose too many of the wrong people, you will struggle to gain full value from an acquisition. The retention challenge—which applies to acquirer and target alike—has two elements: first, you must identify the talent you want to retain; second, you need to create incentives to make retention more likely.

Identifying key people. It is easy to make mistakes about which people at a target are most important. It is especially easy to confuse high visibility with high value. No preeminent scientist or star equity analyst works alone. There is almost always a less-visible supporting team that is critically important to overall performance. Therefore, it’s important to look at the work of star players in a team context. In the financial industry, for instance, commercial banks that buy investment banks sometimes make the mistake of focusing their efforts on retaining visible “product stars” from the investment banks while ignoring the “client executives” who are critically important for maintaining client accounts. Deprived of critical team components, stars sometimes falter post-integration. There will be times when you should try to keep valuable teams more or less intact.

When evaluating key resources, it is important to track them back to their DNA. If a target grew organically, then most of its value was created through R&D, marketing, and other functional resources. If its growth was externally driven, then you should focus on the key deal-makers and the teams who scan and evaluate external sourcing opportunities.

A senior executive from a life-sciences firm that was purchased by a multinational pharmaceutical company told us that the firm’s scientists were given the most attention and the best retention packages. However, the acquirer failed to realize that most of the innovation had resulted from the target’s previous partnerships and acquisition deals—with in-house scientists in a mainly supporting role. In the senior executive’s view, the key people were actually the corporate-development people and business unit managers who brought external innovation into the firm.

Retaining key people. Targets need to become part of the acquirer as quickly as possible. In part this means aligning incentives of all members of the corporation—whether they have just joined or have spent their entire careers there. Clearly, neither side’s managers will work to implement an integration without sufficient incentives.

The personnel of target companies are often deeply resentful of the acquisition. Many will continue to refer to themselves as working for the target company long after the deal is done. This is a clear red flag suggesting that an acquisition will fall far below its integration potential. Indeed, many such employees will immediately begin searching for new opportunities—with the brightest stars enjoying the greatest number of attractive options. You will need to do everything possible to create a welcoming atmosphere that will encourage a sense of affiliation with the newly combined enterprise.

If you do not require target employees’ immediate affiliation or, indeed, an explicitly combined entity, you may avoid many short-term difficulties and the cost of some incentives. Leaving the target to operate autonomously within its new parent can help retain key personnel. The start-up life-sciences venture Sirtris retained its independent identity within acquirer GlaxoSmithKline (GSK) for several years after the 2008 acquisition. GSK wanted to preserve Sirtris’s entrepreneurial culture and retain valuable scientists whose knowledge differed substantially from GSK’s existing resource base.

Acquisitions also threaten people at the acquiring firm. Unless the acquirer foolishly puts its thumb on the scale (always a destructive idea), the goals of integration—to produce a rational combination of old and new resources—will necessarily disrupt the careers of some of your current staff. That disruption can be positive. After all, the value of an acquisition lies partly in the opportunity to change the way your business operates. The status quo can become stultifying, and your people may, in general, relish the chance to leave behind obsolete practices and careers. Just as you need to identify key target firm employees whose loss you seek to prevent, you must also do likewise in your existing organization.

Sustaining motivation. Motivation is of course an issue in both target and acquiring firms. From interviews we conducted at telecom companies that had purchased businesses in order to obtain new market and technical knowledge, we learned that many acquirers knew they needed the targets’ cultures and mindsets, but they were also concerned about disrupting their own staff.

In our interviews across many industries, executives have wondered how best to keep incumbent staff motivated while they import new skills from the target. There is no simple answer here. Your business runs the risk of failing if it cannot balance internal with external growth. Acquisitions are exciting because they bring new opportunities. At the same time, they threaten the status quo. You must provide incentives to keep your staff fully engaged with legacy activities even as you are exploring new paths. Helping them understand the coherent vision that inspired the acquisition is a first step. Showing them how their legacy work will be combined with the target’s new resources will calm many misgivings.

If you have serious concerns about your ability to integrate the target into your current organization, then you should step back and reconsider other modes of growth like internal development or alliances. In the event they remain infeasible, you should revisit your strategy.

Sequencing and Balancing M&A’s : 

The process of any program trying to grow through acquisition becomes even more arduous because of the disproportionately rigorous demands of integration. Aggressive use of acquisitions will stretch your company both organizationally and financially—potentially leading to lower performance and higher risk. You will need to exert substantial effort to prevent internal fragmentation and financial fragility.

“ Aggressive use of acquisitions will stretch your company both organizationally and financially—potentially leading to lower performance and higher risk.” 

Binge buying—too many acquisitions undertaken too quickly—may leave little time to digest what’s been consumed. Cooper Labs, for instance, grew rapidly in the medical sector through a series of acquisitions during the early 1980s. The expansion succeeded as long as Cooper was able to integrate its growing set of business activities. But the pace of unchecked acquisitions surpassed its integration limits and Cooper foundered. Lockheed Martin and Raytheon both struggled to integrate several closely sequenced major acquisitions in the past few years.

Lastly, it is important to revisit past acquisition decisions and assess whether acquired businesses should be divested. Divestiture is a way to correct prior acquisition decision mistakes or to adjust the business portfolio to new market conditions. Firms that engage actively in acquisitions but avoid divestitures are like hoarders, eventually finding themselves overwhelmed by clutter. They become uncompetitive across most or all of their unconnected businesses, which become attractive targets for more efficient competitors. By contrast, firms that have particularly successful acquisition strategies are almost as active in divestiture as in acquisition.