mercer - implementing effective governance in a newly acquired company - client final midres
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IMPLEMENTING EFFECTIVE GOVERNANCE IN A NEWLYACQUIRED COMPANYA case study about the challenges one Japanese organization faced when acquiring a foreign company.
SITUATIONA Japanese manufacturing firm, Manufacture Co, faced a common challenge among Asian organizations that acquire foreign companies. To expand its channels in the market, Manufacture Co had performed the necessary actions for consolidating the overall financial strategy and group compliance policies after close, but was concerned about struggling to implement effective governance within the acquired company. The buyer did not have the capabilities in-house to deploy a “ready to act” CEO and lacked sufficient knowledge of the new market to take full control of the new company. In this situation, it is not unusual for Japanese buyers to delegate management responsibilities, retaining the acquired company’s existing management team after closing. There is therefore an undesirable lag between acquiring the new company and properly taking control of management, leaving much in the hands of the retained management team, which can result in an uneasy collaboration.
ChAllENgEManufacture Co realized the importance of gaining appropriate control over the foreign company’s management, but Japanese companies tend to be restrained in their dealings with retained management teams. If the buyer does not explicitly spell out its strategy going forward, existing management tends to take its own course. Japanese buyers are then likely to face a number of issues, for example:
• Japanese companies often experience difficulty in understanding the current management process in detail, even after they have sent senior representatives into the acquired company. Establishing trust with the acquired company CEO is challenging, so the buyer tends to feel that the only solution to sustaining existing levels of business performance is to delegate control to the existing management team.
• Another challenge lies in introducing different or more aggressive targets/goals without understanding the new market in detail. The buyer tends to accept what the existing management team proposes because the acquiring company does not yet have enough context to properly critique the proposed targets/goals.
• Setting up new succession plans is also problematic without first establishing trust between the two management teams. Japanese buyers tend to avoid any serious conflicts and consequently feel that they do not have the option of replacing the existing management team or CEO.
DECEMBER 2013
ThE glOBAl ADVANTAgE
ACTIONTo address the challenges outlined above, Mercer advised that the following actions be taken in order to establish appropriate governance for the newly acquired company, in line with the goals of the post-merger integration (PMI) phase.
Prepare a Draft Integration PlanIt is the buyer’s responsibility to initiate integration planning, but Mercer was engaged to assist the two companies in preparing a draft plan that set out Manufacture Co’s required actions for successful collaboration with the acquired company within the desired time frame. At the same time, Manufacture Co sought to understand the acquired management team’s needs by asking it to list its own required actions. The lists were then integrated and the two teams discussed which action items were to be managed by whom and within what time frame. The final action list was prepared soon after signing, and the two management teams agreed upon the tasks to be performed before and after closing. This process was vital in helping both parties understand what each company considered important after closing, rather than simply forcing the needs of the buyer onto the acquired company.
Many experienced multinationals that conduct a lot of outbound M&As tend to share their vision and strategy for what they want to achieve through the M&A and set required tasks and actions before signing, then force those actions onto the acquired company within a limited time frame. When it comes to organization and management team structure, these companies tend to design their ideal organization structure and spell out the required skills and capabilities for key positions. They then assess the existing talent based on these ideals in order to manage the acquired businesses. Although such a straightforward assimilation method is effective if the buyer deeply understands the new market, the buyer may risk weakening the acquired company without addressing the real business issues. PMI planning regarding governance methods should therefore be managed carefully, taking into consideration the whole situation and the level of understanding of the new market.
Setting Key ActionsIn order to clarify the key actions of the draft plan, Mercer and the two companies covered off the following three areas:
1. Achieve alignment as an integrated company, including consolidating the financial model, group compliance, group legal processes/requirements, group quality policies, group talent management policies, IT infrastructure, and so on.
2. Decide on the necessary actions for pursuing synergies, including a current-state analysis. These PMI actions were organized by themes, including R&D and production for leveraging the buyer’s knowledge and products in other regions, setting out processes and time frames and assigning team members.
3. Perform cultural integration activities. To build trust and work collaboratively on business issues, both companies hosted on-site visits and off-site gatherings to develop a deeper understanding of each other’s working methods and to form individual relationships. For example, Manufacture Co invited the acquired company’s management to its manufacturing facilities and merchant channels in Japan and hosted off-site gatherings near the facilities with generous hospitality, and vice versa.
To address these three areas, Manufacture Co initially assigned key staff to the acquired company to liaise between headquarters and the newly acquired foreign operation. This team was responsible for reporting to the CEO of the acquired company on the development of PMI activities, as well as liaising between Manufacture Co and the acquired company to facilitate better cultural understanding. In addition to the liaison team, a direct line of communication between the CEO of the acquired company and the head of the Manufacture Co board was established, in the form of a regularly scheduled teleconference. The teleconference was to have no specific agenda; it was meant as a means for exchanging updates and forming a closer relationship.
Next, to execute key actions properly, Mercer advised that establishing the rules for the management board was of the highest importance. It was essential to determine the rules of governance as well as the roles and responsibilities of management on both sides, so that the new structure could be instituted immediately after closing with minimal disruption to either organization.
Finally, after setting up the new management team, which included mainly existing management staff from the acquired company as well as some of its own people on global assignment, Manufacture Co tabled some draft rules for business, investment, finance, and talent-related issues that aligned with its overall management policy, and then discussed them several times to reach consensus.
• The first step was to confirm the current roles and responsibilities of the acquired company then revise them as appropriate. The new management team was charged with developing and executing an operational strategy with appropriate monitoring processes in place, and managing talent below the CEO.
• Manufacture Co’s aims in setting governance practices was to gain control of future business targets, establish the management team’s roles and responsibilities, and manage three key areas of authority of the new management members: appointment, performance evaluation, and reward.
Overall, to appropriately manage the acquired company, Manufacture Co had to design both “hard” and “soft” forms of governance. hard governance covers items such as board rules, including decision-making processes and rules regarding the schedule and agendas for board meetings. Soft governance refers to items such as appointment authority based on performance evaluation, and setting up a rewards scheme. Manufacture Co had to review both the hard and soft governance items and revise them as necessary in order to align with its overall governance strategy.
OUTCOMEWith Mercer’s assistance, the approach outlined above resulted in a healthy and functional relationship between Manufacture Co and the acquired company. Although Manufacture Co’s management went in with firm ideas about what it wished to achieve, the team was able to accommodate the views and requirements of the acquired company in a manner that suited both organizations. The process effectively avoided potential conflicts, established an appropriate governance scheme, and gained agreement around key PMI activities, overcoming cultural differences between the two entities.
Manufacture Co learned that although a buyer may be able to establish appropriate rules of governance, it all comes to nothing if its authority is undermined by a lack of trust between the buyer and acquired company. Even though Manufacture Co’s approach may seem overly polite and process-heavy, the company accomplished its goals, and the success of the process was even greater than expected before acquisition.
The desired outcome of the process is a relationship in which the buyer and the management of the acquired company can discuss the needs and goals of the business without reserve. Even though it is the buyer’s responsibility to take the initiative and establish appropriate governance, a collaborative approach can be the most effective way to reach a consensus for Asian organizations that do not have sufficient knowledge of the target’s market.
JUNJI hORINOUChI Partner, global M&A Consulting leader, Mercer — JapanJunji is a partner and the global M&A consulting leader for Mercer in Japan. Before joining Mercer, he worked at the Boston Consulting group, leading a variety of global and domestic projects that focused on post-M&A change management, mid-term business and organizational strategy development, and new product development. Junji also served as the director of the marketing and management planning departments at one of Japan’s biggest apparel retail companies and as a product manager at FUJIFIlM.
Junji’s recent consulting projects have included providing overall integration support for out-in acquisition; due diligence support for a multinational carve-out, in-out acquisition; organizational diagnosis of the PMI phase; retention/communication strategy design for PMI; and analysis of sales force effectiveness.
Junji earned a BA in economics from Keio University, Japan, and an MBA from the Sloan School of Management at Massachusetts Institute of Technology.
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