Key factors to look into before mergers and acquisitions

A recent report suggests that M&As (mergers and acquisitions) are set to take off in India. Quoting a Grant Thornton study, the report points out that the country's corporate sector witnessed deals (inbound) worth about $8.6 billion in 2013 and about $ 2billion in the first 40 days of 2014. Sectors like health care, metals, real estate and telecom are believed to be leading the asset sales.

Experts, however, caution against various risks inherent in M&As. For example, the mining giant Rio Tinto's multi-billion dollar writedowns on its 2011 purchase of Mozambique coal explorer Riversdale Mining is attributed to a lack of infrastructure oversight. Rio admitted to underestimating the challenges. This type of situation highlights the unseen variables during and after a deal. Corus continues to be a drag on Tata Steel. Next, value creation has to be at the heart of any due diligence process relating to M&As. The fastest-growing corporates are those that focus on opportunities for creating value through M&As. International companies known for acquisitions have a value creation element built into their strategies and one of the most difficult problems encountered in value creation is how to estimate the potential value-creating synergies. For example, Ernst & Young's 2012 Global M&A Tax Survey and Trends suggest that one of the main factors affecting the post-deal tax synergies was that the tax issues were not taken into account early enough. This is important particularly in cross-border deals as different countries have different tax regimes. It might be noted that Apollo Tyres' bid to acquire Cooper Tire of US did not succeed.

The importance of HR issues too should not be overlooked. A 2012 report, Human Capital Risk in Mergers and Acquisitions produced for the Canadian Financial Executives Research Foundation found that 87 per cent of those companies that were successful in M&A activity identified retention of talent as the key factor. Experiences show that the merger of a sick private bank into a healthy public sector bank in our country threw up huge HR problems. IT is another area requiring careful attention. Again, EY report on IT as a driver on M&A successes highlights the importance of separate due diligence on IT related issues. Some companies feel that there is a need for incorporating IT-related issues during the valuation process itself. Oversights on areas such as IT and talent retention can have negotiators in the dark over potential costs and synergies of the critical assets involved in M&A.

Price is fundamental to every deal but it should not be discussed in isolation. It should be negotiated as part of the whole deal. This is because the valuation gap that can appear between a buyer and a seller can be a breaking point in negotiations. Deal-makers need to be clear about how synergies and operational efficiencies are going to be delivered and the various key areas, including, culture, regulatory environment, intellectual property and corporate social responsibility record, need to be analysed.

Cultural differences can be specially challenging for cross-border negotiations. Baker & McKenzie's 2013 Trends in Cross-Border M&A report found that overcoming cultural differences was the greatest challenge for such acquisitions. Tata Steel was believed to have faced the same challenge immediately after acquiring Corus in Europe. Finally, a M&A deal is only as good as the negotiators want it to be. Skilful negotiations can make all the difference to any deal — big or small. A positive atmosphere of collaboration and mutual understanding are more likely to be successful than conflict of interests and mutual distrust.

The author is a senior journalist