Submitted by VARUN JHA PGDM- B12 /58

Managing People Integration in Mergers and AcquisitionsEnd-term Assignment

1. What was Tata Tea’s strategic rationale in acquiring Tetley?

Tata tea's global strategy is To become the market leader in tea production in India . To increase its reach in the global market thereby ending up being the global tea market leader

where Unilever is currently positioned.

For this the company has adopted the approach of forming subsidiaries and entering into alliances in countries that have considerable amount of presence in the tea market both from consumer as well as producer side.

The deal offer significant synergies

Tetley gets access to Tata Tea’s garden and production base and the latter gets Tetley’s premium brands and global distribution network.

The Tetley acquisition catapulted Tata Tea from the second largest branded tea market in India to the second largest tea multinational in the world with combined sales of over US$600M.

Tea prices in general are on a structural downturn with supply exceeding demand. In such a scenario, Tetley’s technical expertise should enable Tata Tea to upgrade its product portfolio and thus improve its competitive position. They work together to Capture cost synergies and revenue. The revenue synergy is accomplished by utilizing the complementary strengths of both organizations in marketing . –Tata Tea has been successful in the marketing of packet teas–Tetley is strong in tea bags.

Jointly developing the markets where one or the other company has so far worked singly thereby leveraging the Tetley international brand name. Bringing Tetley brand at the premium end of the Indian market in the form of flavored teas, Herbal teas, Organic teas and decaffeinated teas.

In the backdrop of the difficult domestic scenario and dwindling exports to Russia, was not difficult to conclude what prompted Tata Tea to go for an acquisition, that too at such a mammoth scale. As far as the scale of acquisition is concerned it could be said that nothing less than this kind of acquisition could have been meaningful for the company.

That is because the domestic market comparatively growing at a better rate than the other developed markets, 3%versus 1%, and rival HLL having benefits of access of access to parent Unilevers latest technology in product innovation, development and packaging, it could have been a difficult task for Tata Tea to go on its own to develop such technologies and to face the competition. With the threats of imports from rival companies looming large, its woes could have aggravated even further. The major driving force behind Tata Tea- Tetley deal was the fact that Tetley fitted perfectly into Tata Teas globalization drive and could be a perfect launch vehicle to achieve greater synergies in the global arena.

This seems understandable because of the three major factors:

• The acquisition brought with it a greater market penetration.• This helped Tata Teas operating efficiency, as Tetleys operating margins were superior in

comparison to Tata Tea, 20% v/s 14% in 1999-2000.• The acquisition would have resulted in instant expansion of product lines of Tata Tea- Tetley

combine.

The synergies that would have accrued to the combine entity as a result of the deal were supposed to be quiet significant. On the one hand, while Tata Tea was supposed to get access to Tetleys strong brands and its worldwide distribution network and about INR1900 crore of sales, on the other hand, Tetley was supposed to benefit from Tata Teas competencies in managing plantations and processing units.

Though Tata Tea didn’t have expertise in blending and branding , the acquisition came handy , as Tetley had proven expertise in the area of product innovation and in sourcing tea from auction houses and which also was a major blending and packaging company and owns a host of well-known international brands which the latter can leverage.

Tea is usually exported at a relatively early stage in the production chain and blending and packing, the most lucrative part of the tea trade, is mostly done by the tea companies in the buyer country. The large profits therefore don’t accrue to the tea producing countries. It was there that the acquisition would help Tata Tea to take advantage of Tetley’s proven skills of exotic packaging, which would fetch higher premiums. Also, many producers try to sell processed tea bags or repacked consumer units, but the export of ready-for-use tea is often hampered by poor market information and the absence of funds for expensive marketing strategies.

It could be rightly said then that the deal was supposed to bring together the two companies, one of which was the largest integrated tea company (Tata Tea) in the world, while the other world’s largest brand (Tetley).Together they make a world-class integrated outfit. The joint buying power and commercially relevant use of tea produced by Tata Tea was also supposed to facilitate cost control. Also among the other immediate priorities was the strategy to increase tea bag sales in East Europe and to improve upon the currently token presence of Tetley in the packet tea segment. The joint buying power and commercially relevant use of tea produced by Tata Tea was also supposed to facilitate cost control.

Global Scenario:

The tea industry worldwide in the last decade was going through a phase of transition. And, over the past few years many new development have taken place. The spate of mergers and acquisitions, in the tea industry, had touched the Indian shore in a big way. And it was the awakening call that got a prompt response and witnessed the coming of the world’s two tea giants, Tata Tea and Tetley, together. Surely, there was a flavor of uneasiness in everyone’s cup of tea. The above factors could throw a light on some of the reasons for this uneasiness and that concerned one and all in the tea industry worldwide. Acquiring Tetley would mean capturing the higher end of the value chain Tetley is well-established in international markets Tata’s gross margin is 36%, while Tetley’s is a more efficient 55% The combination of the two companies would allow for synergies that competitors couldn’t match Opportunity to buy a brand the likes of Tetley is rare.

2. In the post-integration scenario what should be Homi Khusrokhan’s order of priority

Tetley was expected to bring TTL volumes in the short term and greater opportunities in the long term. Tata and Tetley formed several groups – tea procurement group, geographic expansion group, R&D sharing. Legal merger took time as Tetley D/E ratio was too high and it needed to come down to 1:1.

One of the major problems Tata Tea faces is the lack of much product differentiation hence loyalty of consumers is a major area of concern. The distribution network of Network Tata Tea comprises on 1.25 lakh distributers this is not much when you compare to HUL who have the strongest dealer network in the country.

Before looking at the acquisition option Homi Khusrokhan’s must have kept the following things in mind. • Examine all possible options of organic growth before evaluating the acquisition option. • Acquisitions need a compelling strategic reason that can be substantiated quantitatively. • They cannot be based on whims, emotions or mere qualitative assumptions.• If acquisition is deemed necessary, good research is critical - sweet deals do not just 'drop by’.

In particular, pricing considerations are paramount - any acquisition only makes sense at the right price. This is where merchant bankers and investment advisers often need to be kept at bay. Their fee is not only success based very often, but is directly proportional to the size of the deal.

There are several valuation methodologies but the most reliable, according to Mr. Khusrokhan, is the principle of Net Present Value (NPV) of future earnings. This is more accurate than the multiple of earnings or book value method. Any premium paid over NPV would be quite inappropriate. There is often the temptation of quantifying the benefits of what 'one might be able to do with the acquired company' to make it more profitable. This, however, is a grave error .

- A business should be valued on a stand-alone basis and the add-ons post merger should be treated like the icing on the cake.

- Share swaps do not always work out cheaper - the markets tend to discount the share price of a bidding company just as they always inflate stocks of the target company.

- Set yourself a 'walk away' price beyond which you will let go of the deal. - Often lengthy negotiations serve the acquirer well, and hence, it may be in your interest not to

set yourself (or agree with the target company) a date for concluding the negotiation.- There is nothing more critical than detailed due diligence as a lot can crawl out of the wood-

work once the deal is done. - No matter how rigorous the due diligence, it would be unrealistic to expect that the acquirer will

know everything that needs to be known:-skeletons may fall out of cupboards.- All changes must be made fast - miss an early chance to change and things may be lost forever. - The new head of the company has the right to rectify problems and impose his stamp on

processes - and he must exercise this What's unpleasant must be addressed first.- Incomplete tasks fester on and create trouble later criticize processes, never people.

o Sympathies linger for past bosseso Do not carry out a post mortem or indulge in a witch hunto Ensure that there is no loss of face for those exitingo Best of both' is a powerful concept - it applies to both people and processeso It demonstrates fairness

o It is useful in proving credentialso Keep a score-card of 'wins'o Early wins creates enthusiasm for larger tasks;o Wins provide proof that changes are working;o A little empathy and sympathy go a long way

- Often, many involved with the past have been silent by-standers - they are not to blame Humane behaviour can bring out crusaders who will fight to right the wrongs of the past

Steps that can help address such issues, include: Carrying out a Beliefs Audit Setting up Mixed Integration Teams Ensuring frequent interactions and communications Redeveloping a shared vision, mission and values

No revenue or cost synergies will be realized if CFOs distance themselves from the crucial process of 'people integration' or from understanding cultural synergies.

3. What are the cultural issues that plague the merged entities?

Initially, culture was a huge issue and had to be handled very carefully. For example, Tata executives would complain about being kept waiting when visiting Tetleys UK head office reception centre, despite being the senior partners. Meanwhile, Tetley people would complain about being run by Tata which knew only about India and nothing about Western markets.

MANAGEMENT STYLE

The companies were different but were learning from each other. For instance, Tetley is very process oriented while Tata Tea is quicker to respond and more action oriented. Tata was quite aware that it needed to be sensitive to the potential cultural challenges of combining the two groups.

Objectives of companies:Tata had dual emphasis on plantation and domestic marketing. Tetley focused on global marketing. For most part it was quite impossible to fuse the working of Tata Tea and Tetley Tea together as they both had different Structures: Tetley focused on procuring tea, then packaging and selling, whereas Tata focused on producing tea in own plantations and then selling.

Geographical spread:Tata Tea is mainly present in Asian Sub continent and its business focus on bulk tea. Whereas Tetley was into brand marketing with a sizable international presence.

Differences in skills:Tata Tea is a plantation company whose major strengths were managing the estates, dealing with a huge work force, and making teas. On the other hand, Tetley is strong inbuying quality teas all over the world, in blending, in packaging innovation and combine good logistics with management skills.

Branding:Both companies had very strong brand names in their respective regions.

INTEGRATING:An executive board formed with 6 people from both companies to plan and devise the integration plans. Simultaneously a board of non-executive members were formed who were neutral with the objective of introducing Tetley in India. Also as last and final measure individual committees were formed to look at scope for integration in different areas like Commercial business, Supply chain, IT team etc.However, as planned the synergies of the companies were not so strong.

Brand appeal -Tetley was a global brand and hence had more standardized product mix, which focused on quality; whereas Tata was a Asian brand and as per customer preference focused more on making product as per local taste.

4. What steps can the organization take to resolve these issues?

The cultural differences between the companies is said to be one of the main reasons for resistance to integration, especially the management integration and communication within the workforce which creates uncertainty. This is generally seen in cross border merger and acquisition. Cultural differences reflect the way decisions are made between the companies.

To avoid inaccurate rumours, which is highly detrimental to organizational morale, employees should be informed as soon as possible about what to expect once the acquisition takes place. Management must continue to listen to and communicate with employees and relay accurate and comprehensive information throughout the process.

The success of a merger or acquisition depends, in part, on the cultural compatibility of the two organizations. When an organization acquires or merges with another, the contract may take one of three possible forms depending on the nature of the two cultures, the motive for and the objective and power dynamics of

• A realistic merger preview depicting job expectations for the future will allow employees to cope more realistically with new or modified job demands. Any layoffs or downsizing should take place as soon as possible to alleviate anxiety, reduce rumours, and allow employees to return to business as usual. The longer fear of the unknown lasts, the more damage will be done.

• Even the best-managed mergers can be threatening to some employees and lead to absenteeism, poor performance, and high turnover. To alleviate stress, management can conduct a merger stress audit to identify collective concerns. It can then implement programs, such as individual counseling on new career opportunities, to alleviate them. Voluntary stress management training can be provided on a group basis to allow employees to share their concerns.

• Because the turnover rate of top managers is unusually high after a merger or acquisition, it is important to conduct a talent audit before the change takes place to ascertain the managerial talent required for future success. Steps can then be taken to ensure that organizational talent will be plentiful after the merger.

• Differences in the two organizational cultures can lead to competition between employee groups and hostile ‘we-they’ attitudes. Managers should try to avoid this situation by carefully mixing employees as much as possible at all organizational levels. When combining departments, functional counterparts should not be placed in subordinate and supervisory relationships.

• Both organizations will have unique and beneficial cultural elements. Rather than imposing one organization’s culture on the other, the best of both organizations should be integrated into a common corporate culture that both sides can identify with. Mergers and acquisitions can be threatening for employees and produce anxiety and stress .

The Merger-Emotions Syndrome

• Denial - At first employees react to the announced merger with denial. They say it must be ‘just a rumour.’

• Fear - When the merger becomes a reality, employees become fearful of the unknown.For example, workers become preoccupied with job loss.

• Anger - Once employees feel that they are unable to prevent the merger or acquisition from taking place, they begin to express anger towards those who are responsible. In many instances, employees feel like they have been ‘sold out’ after providing the company with loyal service.

• Sadness - Employees begin to grieve the loss of corporate identity and reminisce about the good old days before the merger.

• Acceptance - Once a sufficient mourning period has elapsed, employees begin to recognize that to fight the situation would be useless, and they begin to become hopeful about their new situation.

• Relief - Employees begin to realize that the situation is not as inauspicious as they had envisioned and that the new employees they interact with are not as bad as they had predicted.

• Interest - Once people become secure with their new positions or with the organization, they begin to look for positive factors and for the benefits they can achieve through the new entity. They begin to perceive the new situation as a challenge in which they can prove to their organization their abilities and worth.

• Liking - Employees discover new opportunities that they had not envisioned before and begin to like their new situations.

• Enjoyment - Employees discover that the new situation is working out well and feel more secure and comfortable.

Downsizing and Its Impact

Depending on the type of merger or acquisition and the amount of integration between the two organizations, some duplication of functions is likely to occur, resulting in the term inaction of some employees and managers. Other employees are often forced to pick up the slack and do this obediently

for fear of being the next to receive the pink slip. The increased workload and the potential threat of layoff causes considerable stress for employees, particularly in the acquired organization.

If some downsizing and rationalizing is necessary, be honest about it. Tell people what’s going to happen. Don’t drag it out. Get the bad news behind you.’ If downsizing strategies are conducted in this manner, at worst management’s integrity will remain intact, and any future communications to employees by management will seem credible. If they are not, employee commitment to the organization may be thwarted and may not be regained for some time if at all.

The ‘Them-Us’ Syndrome

After the acquisition has been formally announced, employees of both organizations tend to adopt a ‘them and us’ stance, particularly in the acquired organization, if employees have perceived the acquisition as a loss.

A ‘merger can emphasize or even exaggerate the differences in status between employees; the resultant structure is often a constant reminder of who the “winners” and who the “losers” are Differences in organizational cultures including management styles can lead to competition between employee groups. Distorted perceptions and hostile feelings toward the other group become common and responsibility for ‘why things were not going as well as they should, why communications were so poor, or why “I” or my boss was not fairly treated.

It is therefore obviously very important to try to avoid the ‘we/they’ attitude by carefully and strategically mixing employees as much as possible at all organizational levels. Caution should be exercised when combining departments so that functional counterparts are not placed in positions of subordinate and supervisory relationships.

In the final analysis, it is employees who allow an organization to realize its change objectives. It is only when they truly understand the need for change, the direction set, and are actively engaged in the process that change can happen. Faced with a ‘burning platform’ in particular, most will be responsive to new approaches, but it is only when the infrastructure and support mechanisms are in place that they can give their support to implementing changes.

• Conduct a Cultural Audit• Conduct a Merger Stress Audit• Provide Employees with Avenues to Express Concerns• Provide Positive Feedback• Recognize that the Merger Emotions Syndrome Exists• Prepare and Deliver a Realistic Merger Preview• Provide Individual Counseling• Individual counseling on personal adjustment and stress coping strategies can assist the

employees to ‘solve the problem(s) associated with merger stress; recommend, demon.• Strategies to facilitate the transition should be implemented on aproactive basis• In addition, as mentioned, a counselor can unveil new career paths and job opportunities within

the newly acquired organization, which can provide incentives for employees to remain with the organization.

• Conduct a Talent Audit• Conduct Downsizing Strategies As Soon As Possible• Try to Eliminate the Them-Us Syndrome• Communication• Try to Establish a Common Culture

Management often fails to acknowledge that culture and human resource issues can actually cause amerger to fail. The commitment of those who produce the goods and services, make decisions and conceive strategies, mergers and acquisitions will fail to achieve their synergizing potential as a wealth-creating strategy’

Careful proactive planning by the acquiring organization to reduce the emotional fallout can ease the transition and reduce the risk of failure for an otherwise advantageous merger. Much of the research on human resource strategies in mergers and acquisitions is reactive and descriptive, and only recently have tools been devised to proactively investigate and alleviate potential obstacles. More o v e r, most of the research examines cultural and human resource matters for a relatively short period, but they need to be studied on a longitudinal basis.

Caution should therefore be exercised in implementing the recommendations set out here, since they are only general guidelines and are not to be construed as remedies for all the ailments associated with mergers and acquisitions. Each transaction is unique. However, it is to be hoped that future research will provide human resources managers with better insights into both short- and long-term effects of mergers and acquisitions and with solutions to the problems inherent in them.