Marriage Made in Heaven – Post Merger Integration

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With the announcement of merger between Mahindra Satyam and Tech Mahindra yesterday, analysts are upbeat about the future prospects of the company. The combined entity will become the fifth-largest IT company in terms of market capitalization. It will cater to more industry verticals in comparison to the standalone basis. So it stands a good chance of getting bigger business and more clients and breaking into the top tier of Indian infotech companies.

The benefits of the merged company will be made possible by a successful integration between the two companies. The company management foresees a period of six months for completion of the ‘complex’ post merger integration (PMI) process.

The integration process may touch upon several areas. It will entail the integration of the MIS platforms of the two companies. It appears that Satyam had close to 190 MISs earlier, many of which were not integrated, resulting in manual intervention for transposing data from one system to another. According Mr Vineet Nayyar, Chairman of Mahindra Satyam, this left scope for discrepancies in many cases. The MIS systems at Mahindra Satyam will now be integrated with the Oracle- PeopleSoft platform being used at Tech Mahindra. The post merger integration of the two organizations may also result in removal of significant duplication of corporate functions besides synergising sales and operations. Thus synergies will be realized through integration, by achieving cost reductions or bringing about revenue enhancements.

It will be an equally long drawn process to measure the success of integration. It is to be remembered that while organizational integration is necessary to reap synergies, but it also results in disruption due to uncertainty associated with organizational change, loss of motivation, turnover, changes in power dynamics and independence of decision making. Net gains from integration will accrue only when the benefits from collaboration exceed the costs of disruption.

Since integration is always costly, it will be crucial to have competent implementation and decide carefully on appropriate integration level such that for any given level of integration, gains are realized with lower costs of integration.

The other issue that impacts integration is the cultural alignment between the two organizations, which at times is very hard to bridge. Having worked with both the organizations, I can say thankfully that in this case though, the cultural alignment should not be very difficult to achieve owing to similar culture between the two organizations. However it still pays to be aware of any subtle cultural differences that might exist.  Overall a well communicated implementation strategy should be good.
As said by the management, “the Mahindra Satyam-Tech Mahindra merger appears to be a marriage made in heaven, and if they can execute their future business properly, one can expect the ‘honeymoon’ period to last longer.”

Building Blocks – Reliance Capital

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Reliance Capital, one of India’s leading Non Banking Financial Companies, is in news for chalking out a profitable growth path and de-leveraging its balance sheet. Reliance Capital is a portfolio company with different lines of businesses such as asset management, life insurance, general insurance, broking and commercial finance. All these lines of businesses are individually headed by their respective CEOs, who in turn report to the Corporate CEO.

In a recent news statement in the Business Standard, Sam Ghosh, CEO – Reliance Capital has said that his objective is to make each line of business profitable by using different strategies for different business. This statement leads to a very basic question. If each of the individual LOB is to become a profitable entity, what then would be the requirement for having a corporate portfolio company over these LOBs? Initially the corporate office served the purpose of capital infusion to the individual LOBs. However when these LOBs become profitable and self sustainable, capital infusion from corporate office may no longer be needed. One could wonder what purpose the corporate office will then serve. Will the corporate office simply be an overhead, with no revenues, removed from the individual businesses? Is this corporate structure created only to play the role of a ‘Big Brother’ for imposing corporate reporting restrictions and/ or bringing about cost savings by the way of shared services? Or does it add some value to the LOBs other than compliance and the shared services?

The answer lies in the notion of corporate parenting. Among the different types of corporate parenting activities, some are geared towards core compliance purposes while some activities are classified as shared services – i.e. providing services to multiple units in order to gain savings by obviating the need to replicate the service within each unit. Other activities fall under purview of ‘Value Added Parenting’.

Corporate advantage is created if the combined portfolio structure results in improvements in profits greater than the sum of the profits of the businesses operating individually. This draws on the idea of “synergies” that is closely linked to the idea of related diversification. In diversified business, corporate advantage is created if synergies can ensue by applying resources or combining capabilities across businesses to either reduce costs or enhance revenues.

 
 

As in the case of Reliance Capital, we see that beyond compliance and the shared services, synergies within an organization may be derived by applying common management capabilities at the corporate level to different businesses units, thus helping the businesses to pick on appropriate strategies, unlock value and promote self-sustainable and profitable growth.

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