The Hindu Business Line : Tata's learning experience with acquisition<br> Going beyond the obvious equation

The connection between the domestic core business and the overseas expansion should be clear; the post-merger integration must be consistent with the strategic intent of the acquisition; the core values of the acquiring company should be made explicit to the acquired company; the positioning of the business of the host country should be harmonious with the actual action on the ground; and, it is important to engage with the society in which the business is located.

"Globalisation is a way of constantly creating a new context so as to continue to deliver economic value to a given intellectual property," says Mr R. Gopalakrishnan, Executive Director, Tata Sons Ltd. He goes on to explain that globalisation is breaking up a company's value chain — from procuring raw materials to achieving customer satisfaction — and doing each bit where it makes maximum economic sense. With this perspective, Mr Gopalakrishnan talks about the lessons the Tata group has learnt from its international experiences.

Acquisition challenges

The Tata group with revenues in 2005-06 of Rs 97,000 crore has operations in over 40 countries. The group companies have been acquiring firms overseas — in fields as diverse as automobiles to steel to information technology to hotels. Each overseas venture, be it an acquisition or a greenfield plant, brings with it challenges — that of integrating the operations with the parent company's goals, communicating the vision to the employees of the acquired company, making the local population comfortable with the intentions of the company doing the acquisition and getting the employees to become part of the society they are in.

The challenges are not just managerial, but cultural too. That is why a group like the Tatas conducts what it calls a cultural due diligence — different from the financial due diligence that precedes any acquisition — to ensure that the company to be acquired fits in with the group's overall goal.

This was the thrust of Mr Gopalakrishnan's speech at the "Captains of Industry" conference at the Global Entrepolis at Singapore recently. Dealing with the theme "Entering new markets and becoming international — the Tata experience," he summed up the lessons the Tata group had learned from its overseas operations into five. They are: The connection between the domestic core business and the overseas expansion should be clear, defined and pursued with persistence; the post-merger integration and processes must be consistent with the strategic intent of the acquisition; the absolute core and non-negotiable values of the acquiring company should be made explicit to the acquired company; the positioning of the business of the host country, positioning into society, the economy and with decision makers should be harmonious with the actual action on the ground; and, it is important to engage with the society in which the business is located, irrespective of whether it is a rich country or a poor nation.

Tata Motors, a group company, acquired Daewoo Commercial Vehicles Company, Korea's second largest truck manufacturer, in 2004. Any acquisition must look for an equation beyond the obvious. The fit between the two companies seemed perfect. India was a market for low horsepower trucks because of the way its highways had developed. Korea, on the other hand, was a market that demanded high horsepower trucks due to the built-up infrastructure. "One of the advantages was we could give something to the acquired company and take something from it as well," pointed out Mr Gopalakrishnan. Heavy commercial vehicles designed by Tata Daewoo Commercial Vehicles Company, as the Korean company has been renamed, have been introduced in India while medium commercial vehicles — a segment in which Daewoo did not have any product on its own — designed by Tata Motors have been launched by the Korean subsidiary. "It is the self-evident things that one tends to miss while doing cross-border acquisitions."

There are two broad models of acquisition — the prescriptive and the adaptive. In the former, more an Anglo-Saxon way of dealing with acquisitions, the acquiring company takes all the decisions — where to have outlets and how many to have, for example. The latter model - the adaptive approach — is not one that the Western world is used to. "In an adaptive model, you have entered the market with an idea and you have to develop that idea and figure out how is that you can make the idea deliver economic value."

For example, Tata Chemicals took over a British company Brunner Mond. The two companies sat together and discussed how the best practices could be shared. Among other things, this resulted in cost savings for the two companies, which, more or less, paid for the acquisition itself — a bonus as far as the original intent of the acquisition was concerned.

Cultural due diligence

The matching of the core values is an important aspect of the post-acquisition due diligence. The Tatas do something called a cultural due diligence, which is nothing but a lot of applied common sense. The idea is to ensure that the chemistry is right between the company that is sought to be acquired and the company acquiring it. For example, when Tata Steel acquired NatSteel in Singapore, the code of conduct of the Tatas and NatSteel were put together and several sessions held to communicate what was acceptable behaviour. "As you go into emerging markets, the world ceases to be black and white. And in those shades of grey, acquisition principles can be lost," Mr Gopalakrishnan said.

Levels of engagement

There are four levels of engagement when a company enters a foreign country — explore, pioneer, settle down and cultivate, and harvest. In some instances, a company can jump stages depending on the kind of entry, especially if it is an acquisition. The positioning of the business in the host country should be harmonious with the actions of the company on the ground.

The Tata group has gone through these four stages in its international operations, which started more than four decades back. But, it has also been able to avoid the pioneer stage completely, thanks to acquisitions. Again, when Tata Chemicals acquired Brunner Mond, the acquisition gave it a company that had a 60 per cent market share and access to customers, something that would have taken Tata Chemicals a long time to acquire. Tata Chemicals, therefore, had to behave simultaneously in different modes in different countries, which is complicated and difficult, but the right thing to do.

Engaging with society — the last of the lessons that Mr Gopalakrishnan cited as the Tatas' learning experience — is something that the Tata group companies have been quite used to. The involvement can be at different levels — interacting with society on specific issues or a much deeper engagement. Tata Consultancy Services, the information technology company in the Tata group, has several hundred employees working in the US. When Hurricane Katrina struck the US, the TCS employees working in and around the Louisiana area collected about $100,000 which the company matched.

Connect with society

This amount by itself may not have been large, but more than the money collected, the employees spent time preparing food and distributing it to the affected people. This symbolic and emotional connect with the society of which they were a part of would have given the employees more satisfaction. "I think it enriched the soul of the corporation as well in the process," was how Mr Gopalakrishnan put it.On a deeper involvement with society, Tata Chemicals' take-over of Brunner Mond brought into its fold a company in Magadi, Kenya. The Masai tribe, who were in a majority in Magadi, were quite sceptical of the local company being taken over by an Indian firm, especially one that they had not heard of. Tata employees made presentations to the Masai people and invited them over to Mithapur in Gujarat, where Tata Chemicals had a plant and had built a township. The Masai chief was so impressed with what Tata Chemicals had done in Mithapur that he did something which was considered the highest honour by them — donate the headgear and sword as a sign of friendship and welcome the Tatas to Magadi.

Tatas might not have done something unique, but they had to be sensitive to the local feelings and not try and bulldoze their way through. As Mr Gopalakrishnan said, as more and more companies globalise their operations, these lessons will be helpful in tackling ground realities.

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