Cos need to look at factors beyond due diligence

P.T. Jyothi Datta

Mumbai, Oct. 25

The Tata Group's multibillion-dollar deal for UK-based steel-maker Corus may have been the toast of last week. But as corporate India's juggernaut rolls on and more companies chart their high-profile course through acquisitions overseas, consultants caution that they must watch out for not-so-tangible stumbling blocks.

"A culture mismatch is one of the main reasons for failures of cross-border acquisitions. The difficulties that arise while effectively integrating the cultures of the company are underestimated. Language barriers and disparities in organisational culture can be a detriment to the process," says a recent KPMG report on the pharmaceutical industry. KPMG's observations find an echo among other advisers who have helped pharma companies strategise and make overseas moves.

They should know of integration-related hiccups - Indian pharma companies formalised 18 overseas deals of varying sizes in the last two years.

Dr Reddy's 480-million (Rs 2,250-crore) deal for German generic drug maker Betapharm in February may have sent ripples in the sector.

But other major players including Ranbaxy, Wockhardt, Nicholas Piramal, Sun Pharma, Matrix and Dishman Pharma have also been active in acquiring overseas.

Mr Hitesh Gajaria, KPMG's head of pharmaceuticals in India, said that financial and legal due diligence may not be sufficient in a cross-border deal. Companies need to look at factors beyond traditional due diligence.

An acquisition looks glamorous and may bring strategic value, but integration depends on the size of the deal, strategic fit and cultural alignment, among other things.

Companies need to address these "uncomfortable issues" before they consummate mergers, as it would reduce the time it takes to integrate both operations, he said.

Cultural integration is a dilemma that most companies have to confront in cross-border expansions, said Mr Utkarsh Palnitkar, Partner with Ernst & Young.

Placing senior executives of the home country and parent company vis-à-vis local recruits in key positions, is one such dilemma, he said."There are two schools of thought here. Some feel that senior levels, like a country head, for instance, should have a person from the parent company. The rationale being the ethos of the group can quickly permeate through the new entity."On the contrary, others prefer to continue with local hires, and continue an empathy with employees and local markets."While there is no one solution to the problem, it would depend on the maturity of each entity and history of previous dealings, he added.Typically, sales and marketing are entrusted to local staff, while human resources and finance have a more group bearing.In such circumstances cultural issues could assume importance. The IT industry and some older drug companies have dealt with this well, he said.Rabobank's Executive Director Mr Anand Dikshit, however, said that acquisitions are driven by business synergies, adding that he saw no cultural mismatches."Employees of the acquired company are usually retained as they understand the local market."

(This article was published in the Business Line print edition dated October 26, 2006)
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