HR Issues in Merger and Acquisition

By HR, 3EA
HR Issues in Merger and Acquisition

HR Issues in Merger and Acquisition

There are many roles of HR which have been considered as significant factor in managing merged entity effectively. Communication and transparency is an unavoidable factor to deal with the individual employee reactions to the merger. Kaydian Robinson Brown (2015) studied the impact of merger and acquisition on employee performance. They recommend some of the HR decisions in which the employee should take part. Kaydian said there are few areas of concerns like unity among employees, trust in leadership, communication etc. are few changes which impact employees. Kaydian gives recommendation like implement penalties on managers who do not recognize employees for work done, be transparent, effective communication. Host training sessions for employees to handle the change. Linda S. Johnson (2000) discusses the critical human resource issue that should be considered during the phases of merger and acquisition. She stressed on careful planning and early involvement of HR professionals in this process. She finds that by satisfying the employees in work HR professionals helps the organization towards maximizing the mergers fail what can be done to improve the chances of success. She examined that 60% to 80% mergers are financial failures when measured by their ability. Many studies are pointing to the neglecting of HR issues as the main reason for merger and acquisition failures. She finds that senior executives must realize the importance of HR issues in the success or failure of mergers, they are not doing enough to encourage the involvement of HR teams and employees in merger and acquisition process.

On April 6, 2014, Sun Pharma announced that it would acquire 100% of Ranbaxy Laboratories Ltd; in an all-stock transaction, valued at $4 billion, marked one of the landmark deals in the history of Indian Pharmaceutical industry. This deal resulted in making Sun Pharma the largest pharmaceutical company in India, the largest Indian Pharma company in the US and the 5th largest generic company worldwide. On a pro forma basis, the combined entity's revenues are estimated at US$ 4.2 billion with EBITDA of US$ 1.2 billion for the twelve-month period ended December 31, 2013. Response of the investors to the announcement was lukewarm, with the stock prices moving in the opposite direction. As an immediate effect, shares of Sun Pharma went up to 2.7% in the morning trade just after the acquisition announcement on the contrary Ranbaxy went down by 3.1%.

The swap ratio of 8 shares of Sun Pharma for every 10 shares of Ranbaxy worked in the favor of the new entrants as at the prevailing price they now needed to pay 5% less for getting the shares of Sun Pharma as compared to buying them directly from the market. There also lay a matter of uncertainty regarding the regulatory troubles and how soon Sun Pharma with a record of acquiring troubled companies at good price and later turning them around, can resolve these troubles.

The move was seen to improve Sun Pharma's presence by having access to new and emerging markets and product portfolios having a presence in chronic diseases while keeping intact Ranbaxy's presence in acute and OTC segments. Besides all of this, it will reap benefits in the long run by adding to its overall manufacturing base. Overall, the deal was perceived as a win-win situation for all the parties involved.

Sun Pharma and Ranbaxy Labs set up an integration committee headed by Mr. Ranjan Chakravarti, a veteran at the target company, to identify areas of synergies and overlap between the two generic drug firms, two company executives. Chakravarti, an executive vice president at Ranbaxy, served as the head of transformation & business consulting in the company and was also part of the executive management committee at the firm.

The members of this committee were drawn from both Sun and Ranbaxy. The group made several visits to different global markets where Ranbaxy has significant presence to conduct a detailed review of its overseas business. Besides the US and Canada in the North America region and Western Europe, Ranbaxy's global business is spread across many other regions.

At the time of merger, Dilip Shanghvi formed a committee to ease the process of integration. Post the completion of the transaction, it was decided that organization will run as a single company. Verticals in Ranbaxy were compared with that of Sun and those which could be merged were identified for a smoother integration of both firms, the committee was also entrusted with the additional responsibility of soothing nerves of anxious employees and convincing talented Ranbaxy executives to stay back.

Pre-Acquisition Stage:
Ranbaxy Laboratories Limited announced some big product launches in the US generics market, but it had been facing regulatory issues for the last 3years and now had ceased to make some profits. However, the company had a big business and huge product portfolio across various markets including India which made it an attractive deal for Sun Pharma to acquire this company. Daiichi, the promoters of Ranbaxy was struggling to manage its plants when it came under the US Food and Drug Administration's scanner after the acquisition. Ranbaxy, unable to overcome these issues building up pressure on its promoters.

Company Evaluation:
Next stage was business valuation which involves evaluation of both the present and future value of the target company. This process revealed details about Ranbaxy and the merger as mentioned below:

  • Sun Pharma's revenue was going to jump by 40% but its operating profit will rise by only 7.5%, based on pro forma 2013 financials.

  • Ranbaxy's profits had been hit by provisions related to foreign exchange and inventory write-offs. Sun Pharma said it expects to get INR 1550 crore in merger-related synergies by the third year after the acquisition is completed and these savings would be from procurement, sales growth and supply chain efficiencies.

  • The merger will have a negative effect on Sun Pharma's performance in the short term reducing its operating profit margin from 44.1% to 29.2%.

  • In terms of size, Sun Pharma will have revenue of INR 25911 crores which includes operating profit of INR 7577 crores, with a net profit of INR 1710 crore.

Process Initiation:
In process initiation, acquiring company sends a proposal for a merger or an acquisition to the target company with complete details of the deal including the commitments and the strategies. It is a non-binding offer document which is not available in open public forum. Sun Pharma hired external consultants to facilitate the merger of the two leading pharmaceuticals in the domestic market who had given a clear mandate, including "integration, rationalization and capacity utilization".

Post-Acquisition Stage:
This stage includes the process of preparing the official documents, signing the agreed agreement, and negotiating the deal. It also includes integration of the companies differing on various parameters. It also defines the parameters of the future relationship between the two. After signing and entering into the venture, Sun Pharma has various plans such as:
The company's basic structure and functions could be managed in the first year. There was a plan to streamline and rationalize functions. While it was estimated that it will take around two to three years to turn-around the merged entity and to expect contributions from the buyout

Sun Pharma prepared a three-pronged strategy which includes:

  • Resolution of regulatory issues

  • Integration of supply chain and field force for enhanced efficiency and productivity

  • Higher growth through synergy in domestic and emerging markets.

It was targeting full turnaround of Ranbaxy in three-year to four-year period after the closure of the deal.

On April 06, 2014 Sun Pharmaceutical Industries Ltd. and Ranbaxy Laboratories Ltd declared that they have entered into definitive agreements under which Sun Pharma will acquire 100% of Ranbaxy in an all-stock transaction. Under the deal, Ranbaxy shareholders will entitle to have 0.8 share of Sun Pharma for each share of Ranbaxy. This ratio represents a total value of Rs.457 for each Ranbaxy share, a premium of 18% to Ranbaxy's 30-day volume-weighted average share price and a premium of 24.3% to Ranbaxy's 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014. On a pro forma basis, the combined entity's revenues were estimated at US$ 4.2 billion with EBITDA of US$ 1.2billion for the twelve-month period ended December 31, 2013.The transaction value implies a revenue multiple of 2.2 based on 12 months ended December 31, 2013.

One of the most important aspects of a Merger/Acquisition is Human Resource Due Diligence because one firm essentially is inheriting the human capital of the acquired firm. Establishing a relationship between the two HR teams acts as a benefit during the HR audit process. During the Merger Senior HR Managers from both teams were involved in carrying out important plans and policies, structures.

STEP 1. Review Confidential Materials:
Analysis of an employee census (detailed information about employees), headcount reports of previous 3 years, confidential files related to ER (Employee Relations) and matters under litigation were all examined. All collective bargaining agreements between Labor Union of Ranbaxy and Management, labor-management MOU were examined to avoid post-merger labor disputes.

STEP 2. Review Organization Structure:
Organizational structure was analyzed, plans, agreement, arrangements relating to bonuses, incentive compensation, pensions, deferred compensation, retirement payments, profit sharing, insurance, stock purchase, stock options, medical, death benefits, other benefits for officers, directors, employees or consultants of the Ranbaxy were examined

STEP 3. Policies, Procedures and Training:
Detailed AS-Is To-Be analysis was done on employee handbook to understand gaps between policies and procedures of Sun Pharma. Changes were incorporated in some of the employee policies of Sun Pharma which were taken from Ranbaxy's Handbook.

STEP 4. Employment and Departmental File Audit:
Employment files from HR dept. were reviewed for completeness, in this personal details and performance appraisals of employee of Ranbaxy and other employment-related information was reviewed.

STEP 5. Culture Due Diligence:
Before Merger, Sun Pharma had performance driven culture. Organization believed that people will be successful if right resources and right environment is provided to them and they are regularly monitored. They had an effective feedback mechanism in place
Ranbaxy on the other hand had a strong culture of productivity, responsibility and learning. The company believed in the motto 'Putting people first', both internal and external. They constantly strived to make a culture based on transparency and trust. Ranbaxy believed in providing autonomy and independence to their employees
After Merger, both the parties made sure a positive culture was promoted in the organization as a whole. The systems and process were made more structured and efficient. Formal Communication was happened from senior leadership including Mr. Dilip Sanghvi & other leaders' through various mediums like formal letters to employees of Ranbaxy, regular town-hall meetings where concerns of employees were addressed by Sun Pharma's leadership.

STEP 6. Design Compensation and Rewards:
The merged organization maintained internal as well as external equity in order to retain and attract talent for their growing entity.

STEP 7: Decide Employee Fitment:
Ranbaxy employees had interview with the Sun's team for their appropriate role and position in the merged entity. Even though the HR processes and Analytics had been centralized, the employees could easily reach out to anyone in the hierarchy. The merged entity had an open door policy. Knowledge sharing and success stories were promoted for continuous improvement.

STEP 8: Acculturation:
The underlying assumption was the same for both the companies - Entrepreneurial Culture. They both promoted openness and transparency. The employee size was similar. The merged entity hence, followed a process of Assimilation in which Ranbaxy adopted the identity and culture of Sun Pharma. This helped in enhancing the performance and productivity of the merged entity.

To stop the kind of mass quitting that happened in Sun Pharma - Ranbaxy merger, management could have taken the following steps:
Firstly, to identify the key resources in both the organizations (key resources does not necessarily mean the top people in the management cadres, but those who have a following in the company as knowledgeable and trustworthy employees).
Secondly, proper communication with the employees should be there so that they should not feel that they have been kept in dark. Communication channel should be open in all directions once the decision is taken on an acquisition. Involve employees in the decision making regarding changes that greatly affect them and projects
Thirdly, host training sessions, workshops, seminars, and socials to get employees familiar with and make employees feel like a part of the change that is about to take place.
Lastly hold senior managers accountable for getting employees involved and for team engagement. And this is the major challenge for HR to retain the top executives.

The merger works on paper, but a final answer depended on how Sun handles Ranbaxy, and whether it is able to raise Ranbaxy to its own level of compliance with US FDA requirements - and how quickly. Looking onto the financial and other parameters after the merger, this is a good merger for Sun Pharma as it helped the company to fill in its therapeutic gaps in the US, get better access to emerging markets and also strengthened its presence in the domestic market. Sun Pharma also became the number one generic company in the dermatology space through this merger. After the merger the entity becomes the fifth largest global specialty generic pharma company and number one pharma company in India.
The financials of the company looks good after the merger and company was able to fetch the new markets as it was in the initial planning of the merger. On the contrary the integration of the HR processes and cultural integration of the merger wasn't that good. Soon after the merger, many employees who were earlier in the senior leadership team of Ranbaxy were either forced to step down from their positions or leave the job which resulted in mass quitting from the senior leadership team of Ranbaxy. This impacted the synergies and working culture of the newly formed entity. However, Severance Pay was given to employees of Ranbaxy which were not positioned according to Sun Pharma's organization structure, which included 18 Top Executives of Ranbaxy and some other mid-level managers.
In one move Sun Pharmaceuticals has doubled its size that too in a cashless transaction by acquiring one of India's largest pharmaceutical companies. The beauty of the deal lies in the fact that a smaller sized company acquired a bigger sized company without paying anything for it (in absolute rupee terms). The deal was a cashless share swap, where Ranbaxy shareholders get 80 shares of Sun Pharma for every 100 shares they have.

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Article by: HR, 3EA