EXECUTIVE SUMMARY

One of the greatest challenges faced in the industry today is to oppose the forces of institutional entropy that seemingly inevitable undermine organizational vitality. There is a pronounced pressure on companies to continuously renew and change themselves in order to remain competitive and innovative. Even under best circumstances, innovation at companies is associated with uncertain endeavors. I propose a conceptual framework that decomposes the overall acquisition integration process into four sequential and co-evolving processes: (i) Formulating the integration logic and performance goals, (ii) Establishing the integration planning approach, (iii) Executing operational integration, and (iv) Executing strategic integration. Managing the strategic dynamics of acquisition integration in fast changing competitive environments requires attention to all four processes and the feedback loops between them. Analysis of the HP-Compaq merger and Tata Tetley acquisition however, suggests that creating a strong feedback loop between the operational integration process and the process of formulating the integration logic and performance goals is difficult, yet is needed to timely revise the initial assumptions in light of changing market realities and responses of key customers to the new corporate strategy. It also suggests that establishing a strong feedback loop between the strategic integration process and the process of formulating the integration logic and performance goals is difficult, yet is needed to maintain sustained top management attention to the multi-year strategic activities necessary to meet the dynamic competitive challenges. Analysis, furthermore, suggests that top management should be cautious at the outset in stating long-term goals for the new company, not declare victory too soon, and reduce the opportunity costs of acquisition integration by augmenting its own bandwidth for managing large-scale strategic change.

OBJECTIVE
Successful integration leads to effective change management. I propose a conceptual framework that decomposes the overall acquisition integration process, which leads to successful change management into four sequential and co-evolving processes: 1. 2. 3. 4. Formulating the integration logic and performance goals, Establishing the integration planning approach, Executing operational integration, and Executing strategic integration.

Rationale behind the Objective The first process formulating the integration logic and performance goals involves the boards of directors, top managements, and consultants of the two companies, who convince themselves that the merger makes strategic sense and make high-level decisions about the new top leadership, major strategic goals and the overall organization. It is important to distinguish two aspects of this process. First, top management of the acquiring company formulates the new corporate strategy, which explains how combining the two companies will improve the product market position of the new company, how it will strengthen its distinctive competencies, and how it will use the strengthened competencies to defend and leverage its improved strategic position. Second, the top management of the acquiring company makes assumptions about the future state of the competitive and economic environments and uses these to formulate short and long-term strategic and financial goals for the merger and for creating shareholder value. The second process- creating the integration plan - involves, in first instance, deciding on the new executive team and the basic organization structure of the combined companies prior to the mergers announcement. Specific goals are set for each of the major stakeholders: shareholders, customers, employees, and partners. An integration planning team is formed and the blueprint of the integration process is created. Pre-deal clearance planning activities such as identifying short term goals for synergies, workforce reduction, procurement rationalization, phasing out redundant products, and getting the new organization up and running are established to prepare for the process of executing operational integration. Planning activities related to multi-year strategic initiatives needed to develop a new culture, effectively cope with the competitive dynamics, and meet long-term goals are also started to prepare for the process of executing strategic integration. At this point, the distinction between strategy and execution is 2

still meaningful: The vast majority of managers and employees of both companies only have to think about delivering current business results and the integration team only has to think about planning and creating the blueprint for executing the operational and strategic integration processes.

The third process - executing operational integration - starts the day the deal closes and the execution of the integration is launched. This process is very hard for everyone involved: There are often a large number of layoffs, the remaining levels of management are selected, people find out whether they have a job and what it is, new organization structures are activated, new sales teams call on worried customers, and on it goes. This process, which generally lasts between 6 and 12 months, involves time-consuming, often unexciting and frustrating working through the details of the integration at the frontline. The primary goals are short-term: To hold on to customers and achieve market share goals, achieve quarterly financial results, eliminate targeted product redundancies, get procurement synergies, select the right people and get the organization to work. At this point, the distinction between strategy and execution becomes blurred, and the effectiveness of strategic leadership is crucial and brutally obvious in the face of the challenges and the short-term results obtained. Executing operational integration tests the continued relevance of the new corporate strategy with key customers as well as the initial assumptions about the economic and competitive conditions. This learning, in principle, should trigger a feedback loop to allow the process of formulating the integration logic and performance goals to co-evolve. There is little time to think about strategy during the operational integration process, however, as management of the combined companies must now manage very complex integration issues and deliver short-term performance in line with the set goals. The cost of failing to execute well here is felt to be so high (a feeling not necessarily made explicit) that the strategy is, somewhat appropriately, viewed as secondary. At the same time, while the integration logic may remain valid, it may nevertheless be necessary to adjust the initial assumptions on which the performance goals are based in light of deteriorating economic and competitive conditions. This too is difficult because these changes are often not immediately and unequivocally clear, but also because the revisions they would require impose further difficult and potentially unsettling short term actions e.g., significantly increasing the number of layoffs on the part of an already stretched top and senior management. The fourth process - executing strategic integration - depends on some of the activities performed in the operational integration process and runs somewhat in parallel with it. It is, however, primarily driven by the multi-year strategic initiatives necessary to get ahead of the competitive dynamics envisioned. While these strategic initiatives are prepared for during the integration planning process, they may need to be subsequently adjusted in light of the feedback loop triggered by the execution of strategic integration. This feedback loop helps test and revise 3

the key assumptions of the integration logic that pertain to how well and how fast key competitors were expected to be able to improve their strategic position and competencies. In other words, the process of executing strategic integration must effectively cope with where key competitors will be several years down the road from the start of the strategic integration process, rather than where they are at the start. Strategic integration is the primary responsibility of top management and assigned staff, who continue to scan the rapidly evolving competitive environment. Effective strategic leadership of strategic integration requires being able to clearly define what winning means and forcefully executing the multi-year strategic initiatives that will make wining - achieving the longer-term performance goals set for the combined companies - possible. This in turn involves generating extraordinary energy that continues to radiate throughout the organization, and the ability to pick executives at the senior ranks with superior skills in getting their organizations to follow through on the strategic initiatives in the face of ambiguity and uncertainty. At the same time, everyone must continue to execute the remaining operational integration issues and deliver business results. The aim here would also be to study the human side of a merger. A merger brings a lot of change in the culture and the employee morale. Thus the concept of change management comes into play. Objective here is also to find the change management post mergers and acquisitions referring to human side of change.

STRATEGIC DYNAMICS FOR ACQUISITION INTEGRATION- COEVOLVING DYNAMICS OF CHANGE MANAGEMENT

PROCESS 1 FORMULATING THE INTEGRATION LOGIC & PERFORMANCE GOALS

PROCESS 2 CREATING INTEGRATION PLAN

PROCESS 3 EXECUTING OPERATIONAL INTEGRATION

SHORT TERM GOALS

PROCESS 4 EXECUTING STRATEGIC INTEGRATION

LONG TERM GOALS TIME

TIME

RESEARCH METHODOLGY
The research is primarily descriptive in nature. Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomenon being studied. Descriptive research answers the questions who, what, where, when and how. Primary Data is the original information gathered for a specific purpose. Sources for Primary data collection were: Secondary Data is the data already collected by others and is reused by the researcher. Sources of secondary data were 1) Magazine 2) Journals 3) Research studies 4) Online interviews of the company officials. 5) Newspapers 6) Company reports and Presentations Sample Sample consisted of officials within the company. Method adopted was Judgment Sampling. Judgment sampling is a common non probability method. The researcher selected the sample based on judgment that the sample will give accurate information on change management. This is usually and extension of convenience sampling. Limitations of the Study Secondary Data cannot be verified. Only top management officials of the company can give an accurate picture of the change management process. However, the top management officials were unavailable to comment. The HP-Compaq merger took place in US. Thus its implications in Indian context were not known.

LITERATURE REVIEW
MERGERS & ACQUISITIONS 1.1.1 OVERALL PICTURE OF M & AS Mergers, acquisitions and joint ventures are common ways for companies to meet their growth, globalization and development needs today. The words describing these different types of contracts between companies have definitions. In particular the concepts of merger and acquisition are used purposefully to give an impression about a situation in a certain perspective. In many situations executives prefer to use concept merger instead of acquisition to offer a view of co-operation instead of a hostile take-over. Merger is defined as 'in general a situation in which two or more enterprises cease to be distinct enterprises'. Acquisition is defined as 'by one company of sufficient shares in another company to give the purchaser control of that company'. (Both definitions are from Macmillan Dictionary of Accounting). Hubbard (1999) adds that acquisitions can be either friendly or hostile. Acquisitions are takeovers in which the bidder negotiates directly with the target companys board of directors. Proxy contest is in question when there is an attempt to gain control of the target company's board of directors via a shareholder vote (Hubbard 2001). Leveraged buyout is the purchase of shareholder equity by a group usually including incumbent management and it is financed by debt, capital or both (Hubbard 2001). Joint venture is defined as 'establishing a complete and separate formal organization with its own structure, governance, workforce, procedures, policies and culture - while the predecessor companies still exist' (Marks & Mirvis 1998). I intend use the terms 'mergers and acquisitions' or 'acquisition' as synonyms or simultaneously not differing them from case to case. Sometimes the word merger is a nicer word for the situation for the executives. Hostile take-over has not been included. I don't have a separate focus on hostile situations. According to the cases I have studied, there are enough problems to be solved

in friendly mergers and acquisitions to be more successful or less painful to the people involved. I shorten merger and acquisition as MA. According to company experts and economists there is no alternative to globalization. Competition forces companies to go where labor and raw material are the cheapest, capital favorable and the markets the biggest. The globalization started in the end of the 1980s when the GNP (gross national product) and world trade grew faster than ever. Firms and countries have been able to specialize and develop their core competencies (Helsingin Sanomat HS 18.9.2000). The American thinking about the importance of shareholder value has become common also in countries earlier with in-effective capital. According to Helsingin Sanomat arguments for globalization are: World GNP grows faster than ever Trade over borders is increasing Firms and people are able to focus on what they best can Firms are able to grow and become more profitable Firms are able to get labour, raw material and financing cheaper than before Competition and owners force the firms to be more profitable Fighting is more expensive Corruption decreases Oppressed minorities get their voice heard better than inside a country By international enactment it is possible to improve the position of labour, women and environment Availability of culture is improving, for example TV-series

Arguments against globalization are: Income differences among countries will increase The protected, weak, subnormal and slow areas will remain retarded in terms of development National states are tool less in world competition (market forces) Democracy (democracy losing its power when the market power takes over) Free capital, new technology and speculative investors bring instability in world economy with them Growing differences between poor and rich countries increase tension in world politics Immigrant problems increase Cultural clashes take place in multinational corporations Supranational monopolies decrease competition 8

Tax competition will wreck social security systems Cultural convergence because of exposure to shared media experiences

Globalization has become the most common thing to describe the business activities in the world today. Three reasons (Cartwright and Cooper 1992): To be present for the customers all over the world (customers). To use the favors of infrastructures of different countries remembering that countries, not only companies want to be and must be competitive. Companies work hard to locate their production and services in the best possible locations using all the competence and financial benefits, which are available in different countries (country competitiveness). Talent search (talent search and recruiting). Nations compete for companies; nations want to be competitive to get the best companies and favors coming with that (Porter 1992).

Governments work hard to attract business by offering special benefits, part of which is offered by the society: education systems, safe environment, well organized contacts between different stakeholders, taxation benefits, and technology power. Many of the major corporations with Indian origin have kept their headquarters in India, both because of taxation and human capital availability reasons. Even if, it has meant a few expatriates to India, a lot of traveling in top management. 1.1.2 TYPES OF MERGERS Horizontal Mergers Vertical Mergers Conglomerate Mergers Horizontal Mergers This type of merger involves two firms that operate and compete in a similar kind of business. The merger is based on the assumption that it will provide economies of scale from the larger combined unit. Example: Glaxo Wellcome Plc. and Smith Kline Beecham Plc. mega merger 'The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham PLC early this year announced plans to merge resulting in the largest drug manufacturing company globally. The merger created a company valued at $182.4 billion and with a 7.3 percent share of the global pharmaceutical market. The merged company expected $1.6 b i l l i o n in pretax cost savings alter three years. The two companies have complementary 9

drug portfolios, and a merger would let them pool their research and development funds and would give the merged company a bigger sales and marketing force. Vertical Mergers Vertical mergers lake place between firms in different stages of production/operation, either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communicating and coordinating production. Both production and inventory can be improved on account of efficient information flow within the organization. Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms plan to integrate the production process and capitalize on the demand for the product. Forward integration take place when a raw material supplier finds a regular procurer of i t s products while backward integration takes place when a manufacturer finds a cheap source of raw material supplier. Example: Merger of Usha Martin and Usha Beltron. Usha Martin and Usha Beltron merged their businesses to enhance shareholder value through business synergies. The merger will also enable both the companies to pool resources and streamline business and finance with operational efficiencies and cost reduction and also help in development of new products that require synergies. Conglomerate Mergers It is an amalgamation of the companies in two different industries, (Eg: DCM and Modi Industries.) Conglomerate mergers are affected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production, marketing and so on. This type of diversification can he achieved mainly by external acquisition and mergers and is not generally possible through internal development. These types of mergers are also called concentric mergers. Firms operating in different geographic locations also proceed wi t h these types of mergers. Conglomerate mergers have been sub-divided into: Financial Conglomerates Managerial Conglomerates 10

Concentric Companies

Financial Conglomerates These conglomerates provide a flow of funds to every segment of their operations, exercise control and are the ultimate financial risk takers. They not only assume financial responsibility and control but also play a chief role in operating decisions. They also: Improve risk-return ratio Reduce risk Improve the quality of general and functional managerial performance Provide effective competitive process Provide distinction between performance based on underlying potentials in the product market area and results related to managerial performance.

Managerial Conglomerates Managerial conglomerates provide managerial counsel and interaction on decisions thereby, increasing potential for improving performance. When two firms of unequal managerial competence combine, the performance of the combined firm will be greater than the sum of equal parts that provide large economic benefits. Concentric Companies The primary difference between managerial conglomerate and concentric company is its distinction between respective general and specific management functions. The merger is termed as concentric when there is a carry-over of specific management functions or any complementarities in relative strengths between management functions. 1.1.3 TYPES OF ACQUISITIONS Share purchases - in a share purchase the buyer buys the shares of the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities.

Asset purchases - in an asset purchase the buyer buys the assets of the target company from the target company. In simplest form this leaves the target company as an empty shell, and the cash it receives from the acquisition is then paid back to its shareholders by dividend or through liquidation. However, one of the advantages of an asset purchase for the buyer is that it can "cherry-pick" the assets that it wants and leave the assets - and 11

liabilities - that it does not. This leaves the target in a different position after the purchase, but liquidation is nevertheless usually the end result. An acquisition is only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies, and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another--there is no exchanging of stock or consolidating as a new company. Acquisitions are often congenial, with all parties feeling satisfied with the deal. Other times, acquisitions are more hostile. In an acquisition, a company can buy another company with cash, with stock, or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business. Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on how well this synergy is achieved. So, the term acquisition means an attempt by one firm, called the acquiring firm, to gain a majority interest in another firm, called target firm. The effort in control may be a prelude: To a subsequent merger or To establish a parent-subsidiary relationship or To break-up the target firm, and dispose off its assets or To take the target firm private by a small group of investors.

There are broadly two kinds of strategies that can be employed in corporate acquisitions. These include: 12

Friendly Takeover The acquiring firm makes a financial proposal to the target firm's management and board. This proposal might involve- the merger of the two firms, the consolidation of two firms- or the creation of parent/subsidiary relationship. Hostile Takeover A hostile takeover may not follow a preliminary attempt at a friendly takeover. For example, it is not uncommon for an acquiring firm to embrace the target firm's management. 1.2 CHANGE MANAGEMENT THROUGH EFFECTIVE INTEGRATION 1.2.1 CHANGE MANAGEMENT Change is a fact of life. On the positive side, change may be seen as akin to opportunity, rejuvenation, progress, innovation, and growth. But just as legitimately, change can also be seen as instability, upheaval, unpredictability, a threat, and disorientation. The concept of change management describes a structured approach to transitions in individuals, teams, organizations and societies that moves the target from a current state to a desired state. Stated simply, change management is a process for managing the people-side of change. The most recent research points to a combination of organizational change management tools and individual change management models for effective change to take place. To integrate companies following a merger, arguably the most important challenges involve the top of the organizationappointing the right top team, structuring it appropriately, defining its agenda, and building the trust that enables its members to work well together. Executives who fail to overcome these challenges are responsible for the ego clashes and politics that are often the root cause of spectacular failed mergers. Unfortunately, recent thinking about change management no longer emphasizes the pivotal role of the top team. The consensus on how to manage change has shifted to a dispersed approach because too many initiatives designed to cascade down the hierarchy have delivered disappointing results. The usual interpretation is that top-down change fails because at every step messages get diluted, so that each succeeding one seems less compelling and less authentic. While this may be true in certain circumstances, a merger requires direction from the top because that is the only way to initiate change throughout an organization. The change required to integrate companies cannot be driven from an entrepreneurial business unit, an innovative 13

functional unit, or the front line. Too much coordinated, programmatic change must be achieved in too short a time for such approaches to succeed. The spirit of the project is determined at the top, where the conditions are set for the whole integration effort. But the top team must do more than just talk about the new company, adopt its language and trappings, and act according to its norms. The team must become the new company in the full sense. Its messages, processes, and targets must deeply incorporate the aspirations of the new company in a way that is visible to managers, employees, and even outside observers. As the top team goes on to integrate the company down the line, it in effect re-creates itself. The company is not just rolling out messages, processes, and a set of targets; it is rolling out itself. In the best cases, members of the top team signal the kind of company they are creating and their commitment to that new company. In other cases, the team visibly lacks the requisite quality, and its weaknesses inevitably spread throughout the merging companies. The power of the signals emanating from the top team reflects the fact that they are not just signals: they create concrete realities. The important signals fall into three categories: (1) Senior appointments (2) The top team's alignment, and (3) Clarity about roles. Senior Appointments One of the most memorable things during an integration effort is the way managers, employees, and even other stakeholders closely watch to see who ends up on the top team. This attentiveness represents much more than a voyeuristic interest in the human drama taking place. The appointments provide strong clues about the new company's direction and, more subtly, about the degree of its commitment to its proclaimed course. Managers and employees will, of course, also interpret appointments to the top team as signals about their own future. Timing is crucial: in general, the earlier the decision-making process begins and ends, the better. In one study of 161 mergers, the early appointment of a top team was a strong predictor of the long-term performance of the combined organization. Understanding the impact of these signals on each side of the boundary between the merging companies is critical because the signals may depart from expectations in very different ways. Creating a new company at the top is particularly problematic in a merger of equals because managers are sorely tempted to maintain the identities of the predecessor organizations. To be sure, the proclaimed strategy usually calls for their full integration. Yet compromises on people issues may fatally obstruct this effort and ultimately undermine the merged company's pursuit of value. The resulting mess will often be attributed to "incompatible cultures," as if the failure of integration was the inevitable result of trying to mix oil and water. 14

Another source of failure at the top is an unwillingness to face the prospect of job losses among close colleagues who have performed well for yearseven though many more job losses are likely among people further down the line. Alignment of the top team Although appointment decisions can be difficult, at least in the end it is clear to all what has been decided. Top-team alignment, by contrast, is a rather nebulous outcome of many diverse activities. People know when a company really has it, but at various stages along the way they ask, "Are we aligned yet?" In a merger, the top team must fashion its own identity vis--vis the external world of business partners, competitors, customers, and regulators to reach this level of agreement. Research shows that when top teams turn their attention to the external environment, they often experience a catalytic effect, which carries them past the usual internal frictions much more quickly. Compared with the pressing need to thrive in the marketplace, these frictions simply do not matter very much. This effect is particularly striking when an external crisis suddenly emerges. Getting to that level of agreement without a crisis is mostly a matter of discipline. A carefully limited dose of team-building exercises can also help, but with two important caveats. First, managers on both sides may have very different perspectives on what constitutes a constructive, business-like exercise. If one side perceives an activity to be a touchy-feely distraction, it is not worth doing and could be counter-productive. Second, senior managers the world over have very limited patience for time spent on anything other than "real work." This is all the more true under the intense pressure of integration. It is best to focus on outputs whose value is clear even if they are intangible (for example, a set of behavioral norms for the new company). Role clarity The members of the top team share responsibility for the merging companies' future as a whole, but they also have distinct individual responsibilities. They must work together in a complementary way not only to help the companies integrate successfully but also to lead the combined one through its other concurrent and future challenges. To do so, the team must define roles very clearly and quicklyparticularly roles directly involved in the integration effort. From the perspective of a company's long-term corporate health, the future needs of the business are an equally strong factor in defining roles. Creating the top echelon of the new company is as important for its long-term performance as for the near-term success of the integration effort. Establishing the top team poses a critical and immediate challenge for merging companies. The new company's leaders must appoint the best possible top team for achieving its goals, and the top team's members must be aligned around them. To collaborate effectively, its members must be clear about their individual roles. All this is sensible enough and easy to say, but in practice that degree of leadership can be hard to achieve during the hectic period leading up to a merger or even in its immediate aftermat. 15

1.2.2 LEWINS THEORY OF CHANGE Kurt Lewin (1951) introduced the three-step change model . This social scientist views behavior as a dynamic balance of forces working in opposing directions. Driving forces facilitate change because they push employees in the desired direction. Restraining forces hinder change because they push employees in the opposite direction. Therefore, these forces must be analyzed and Lewins three-step model can help shift the balance in the direction of the planned change. According to Lewin, the first step in the process of changing behavior is to unfreeze the existing situation or status quo. The status quo is considered the equilibrium state. Unfreezing is necessary to overcome the strains of individual resistance and group conformity. Unfreezing can be achieved by the use of three methods. First, increase the driving forces that direct behavior away from the existing situation or status quo. Second, decrease the restraining forces that negatively affect the movement from the existing equilibrium. Third, find a combination of the two methods listed above. Some activities that can assist in the unfreezing step include: motivate participants by preparing them for change, build trust and recognition for the need to change, and actively participate in recognizing problems and brainstorming solutions within a group. Lewins second step in the process of changing behavior is movement. In this step, it is necessary to move the target system to a new level of equilibrium. Three actions that can assist in the movement step include: persuading employees to agree that the status quo is not beneficial to them and encouraging them to view the problem from a fresh perspective, work together on a quest for new, relevant information, and connect the views of the group to well-respected, powerful leaders that also support the change. The third step of Lewins three-step change model is refreezing. This step needs to take place after the change has been implemented in order for it to be sustained or stick over time. It is high likely that the change will be short lived and the employees will revert to their old equilibrium (behaviors) if this step is not taken. It is the actual integration of the new values into the community values and traditions. The purpose of refreezing is to stabilize the new equilibrium resulting from the change by balancing both the driving and restraining forces. One action that can be used to implement Lewins third step is to reinforce new patterns and institutionalize them through formal and informal mechanisms including policies and procedures

Therefore, Lewins model illustrates the effects of forces that either promote or inhibit change. Specifically, driving forces promote change while restraining forces oppose change. Hence, change will occur when the combined strength of one force is greater than the combined strength of the opposing set of forces. 16

1.2.3 INTEGRATION AND CHANGE MANAGEMENT The main goal of companies is to create value. If well managed, mergers help companies to achieve higher efficiency, productivity, and profit by creating opportunities for growth. According to a research conducted with the participation of 115 companies around the world, 58% of mergers result in failures. Mergers involve two critical phases that affect the outcome. Based on researches, 30% of the outcome is affected by activities during the pre combination phase, while 70% depends on activities during the post merger period. All merger interventions are complex change initiatives, and post merger integration activities are key elements for the success of the change. As in all change management interventions, the challenging dynamics of post merger period requires a well structured planning. Management should have a clear understanding about the change, and be prepared for the outcomes. Companies often ignore the importance of developing a merger integration plan, assuming that the employees will adapt to change with no preparation. However, employees are directly affected by the change. Therefore, successful integration requires extensive planning. The effectiveness of human resources strategies and practices are highly important for the success of post merger integration phase. The main tasks of human resources strategies are to communicate change openly, and in a timely manner with all levels of the organization, and to motivate the members of the organization to support and adopt to change. Cultural integration activities are also crucial for the success of merger interventions. These activities mainly involve the assessment of companies cultures through questionnaires and interviews and identify the key areas that will accelerate the integration process. Creating a trusting environment for employees and customers is another critical factor. Constructing an environment in which employees and customers feel safe and satisfied help companies to sustain change and make it part of the corporate structure. During this process, it is necessary to:

Manage expectations. Communicate decisions with right channels in a timely manner. Give consistent messages about strategies to all stakeholders. Assign management as change agents.

Post merger integration projects involve three major phases: 1. Identifying organizational strategies, 2. Establishing integration plan, and 17

3. Implementing plan. MANAGING CHANGE- HP COMPAQ MERGER The analysis of the HP Compaq is on the basis of four objectives explained above (i) (ii) (iii) (iv) Formulating the integration logic and performance goals, Establishing the integration planning approach, Executing operational integration, and Executing strategic integration

1.1 Introduction Seldom is the inevitability of the strategic logic of large-scale corporate change immediately clear to internal and external constituencies and observers. Even more rarely is such strategic logic turned into effective execution, especially if the change involves the integration of two large, high technology companies operating in rapidly changing competitive environments. Add to this that a relatively new outsider is in charge of orchestrating the execution of the acquisition integration and that she has to overcome active resistance of the major shareholding families of the founders of the acquiring company. The a priori odds of success seem daunting. HPs CEO Carleton S. Carly Fiorina faced this situation when she proposed to acquire rival computing company Compaq in September 2001. Following the consummation of the merger in May 2002, after a prolonged proxy fight, the organizational integration of HP and Compaq was initially considered a success , even by many skeptics, as the company was initially exceeding its goals. By the end of 2004, however, it had become clear that HP was missing the mergers longer-term revenue and profit goals. It was unclear whether this was due to the details of the organizational and cultural integration taking much longer to be worked out than initially expected, or to the original strategic assumptions being wrong, or to some combination of both. In early 2005 the competitive effectiveness of HPs new corporate strategy was still subject of debate among analysts and outside observers. The company continued to struggle with some key strategic issues, especially the development of a world-class direct distribution system to compete with Dell and the capacity to manage and provide business solutions to global enterprise accounts to compete with IBM. In February of 2005, concerns on the part of HPs board of directors about Fiorinas leadership style and her ability to get the organization to execute the new corporate strategy led to her ouster as CEO.

18

Why Did This Happen? Analysis reveals that effectively managing the strategic integration process was extremely difficult and suggests several reasons. First, the highly urgent short-term goals naturally focused the executive team and the integration planning teams attention on the operational integration at the expense of the strategic integration. It was difficult to shift managers attention focused on cost cutting and value capture to attention to strategic issues, because there was a fear that launching the strategic integration work would lead people to lose focus on the short-term goals, which were viewed as absolutely critical given the publicity of the $2.5 billion cost cutting target. Second, the battle fatigue that unavoidably accompanied working through the operational integration process made simultaneous strategic learning exceedingly difficult. Top and senior managers executing the operational integration had to manage both the very challenging integration tasks and had to deliver the expected quarterly financial results while keeping customers, employees, and other key stakeholders satisfied. Third, in part due to a major focus on potential integration risks during the proxy fight, there was a natural desire on the part of top management to get customers, business partners, and financial analysts to stop focusing so exclusively on how the merger integration was going. When the operational integration goals were met, top management declared victory to the outside world. One unintended consequence of this was a reduced sense of urgency and focus during the strategic integration process. As a result, it was hard to get the top team to focus on scanning the changing economic and competitive environment and to focus on the longer-term strategic initiatives necessary to achieve the potential of the new company. The resulting less forceful execution of the multi-year initiatives lead to a weaker feedback loop from strategic integration back to the integration logic and its assumptions about competitive dynamics, which created a vicious circle. In some ways, these strong forces may have led top management to equate the integration execution challenge 19

primarily with operational integration. Successful operational integration, however, was necessary but not sufficient for the company to achieve the new levels of success that were now expected as a result of the process of formulating the integration logic and the performance goals. Not fully following through on the difference between operational and strategic integration led to declaring victory too soon. The vicious circle caused by not executing the strategic integration process with the required focus and urgency, and thereby lacking an effective feedback loop to measure progress against the assumptions underlying the integration logic, caused top management to fail to achieve the full promise of the merger and to miss projected growth and profit goals. This led to disappointment of external and disillusionment of internal constituencies. CHANGE MANAGEMENT AT HP-COMPAQ MERGER 2.1 Merger Overview from HR Perspective Merger created a $70 billion global technology leader with the industry's most complete set of IT products and services for both businesses and consumers. New HP is the #1 global player in servers, imaging & printing, and access devices (PCs & hand-held), as well as Top 3 player in IT services, storage and management software. Combination furthers each company's commitment to open, market-unifying systems and architectures and aggressive direct and channel distribution models. Combined company is creating substantial shareowner value through significant cost structure improvements and access to new growth opportunities. New HP had operations in more than 160 countries and over 140,000 employees. HPs Challenge Largest merger in technology history Skeptical market. Heated proxy battle. Weak IT market

HP Commitments to its People

20

To help HP people share in the company's success, which they make possible. To provide job security based on performance. To recognize their individual achievements. To help them gain a sense of satisfaction and accomplishment from their work. Relationships within the company depend upon a spirit of cooperation among both individuals and groups, and an attitude of trust and understanding on the part of the managers towards their people. These relationships will be good only if employees have faith in the motives and integrity of their peers, supervisors and the company itself. Job security is an important HP objective ... the company has achieved a steady growth in employment by consistently developing good new products, and by avoiding the type of contract business that requires hiring many people, then terminating them when the contract expires. To foster initiative and creativity by allowing the individual great freedom of action in attaining well-defined objectives. Insofar as possible, each individual at each level in the organization should make his or her own plans to achieve company objectives and goals. After receiving supervisory approval, each individual should be given a wide degree of freedom to work within the limitations imposed by these plans, and by our corporate policies. CONSIDERED IMPORTANT FOR CHANGE

2.2 CRITICAL FACTORS MANAGEMENT AT HP

CRITICAL SUCCESS FACTORS

SAMPLE ELEMENTS

Well Defined Acquisition Strategy

Reasons for Merger Explained Degree of Integration Defined Criticisms Addressed

Clear Product Road Map

Communication of Offerings Market Place Re-alignment of Internal Efforts Branding Strategy

to

Unyielding Focus on Customers

Clear Points of Contacts Uninterrupted/Attention Support 21

Maintained Relationships Partners/Support.

with

Synergies and path to realization Recognition of Cultural Differences specifically identified

Both cost and synergies included Nature of Cultural Differences Plans, Accountability and clear Identified metrics and/ targets assigned to Proactive Steps Taken to identify project level. Gaps Strong Program Management Rules of The Road Interaction processes to track/drive results. Defined Boards/Executives Agreed to Minimize Periods of Uncertainty Organization Structure Defined Complete Planning prior to close Line Management Roles Determined Attack synergies from Day one Communication early and often Reaches all stake holders (employees, shareholders, analysts, customers, partners, et al Clear consistent message.

Clearly Defined New Corporate Governance Speed/Decisiveness

Effective Communication to Stakeholders

2.3 Step 1: Building the Integration Team

Post-merger integration (PMI) leadership and group management named at time of announcement on September 4, 2001. Additional new HP senior leaders announced October 12, 2001. Dedicated, full-time PMI leads from both HP and Compaq directing planning for businesses, functions and horizontal processes since September. Linked to new HP senior management team. World-class advisors engaged. 22

Carly Carly Fiorina Fiorina (CEO), (CEO), Michael Michael Capellas Capellas (President), (President), Bob Bob Wayman Wayman (CFO), (CFO), Susan Susan Bowick Bowick (HR), (HR), Bob Bob Napier Napier (CIO), (CIO), Webb Webb McKinney McKinney and and Jeff Jeff Clarke Clarke

STEERING COMMITTEE

Central PMO
Post Integratio n Team

PMI Team

Nerve Center Fast Track Center

PMO
Program Teams

PMO

PMO

PMO

PMO

PMO

PMO

Project Teams

PT

PT

PT

PT

PT

PT

PT

HP and Compaq set up an Integration Office (IO) of 600 people from both companies to oversee the merger process. Teams within the IO deal with IT systems, finance and human resources as well as fuzzier issues, such as the integration of the two companies knowledge 23

management systems. At each stage, the teams evaluated which companys systems worked best and these were then adopted for the merged entity. The IO has also spent a lot of time dealing with the cultural integration of the new company, with more than 150 executives and 35 focus groups of employees being involved in trying to thrash out a joint culture from two cultures that were quite distinct (Holland, 2002; The Economist, 2002). There were certainly some major cultural integration issues to be overcome. In contrast to the more paternalistic, family culture of HP, Compaqs culture was more difficult to pin down, being described by employees in the early 1990s as fast moving, entrepreneurial, sales oriented, aggressive, pragmatic, and quick, but, by the end of that decade as moribund and extinct. During this time, the company had also experienced several rounds of downsizing under Michael Capellas, and staff morale was low (Sakar, 2002). The key to a successful merger would be to integrate the faster-moving, aggressive sales focus of Compaqs culture, with HPs integrity, innovative capabilities and experience, as well as aligning internal systems, HR policies and operational procedures. Consequently, this was one of the most exhaustively planned mergers in corporate history. This desire to get this right was driven in large measure by Mike Capellas bitter memories of the problems Compaq had when it took over DEC in the early 1990s, and according to one commentator at the time, the employees in the two companies really dont like each other that much (Gottliebsen, 2002). An anonymous Compaq employee commented that, It will be two years of guerilla warfare. The merger led immediately to the loss of some 20,000 jobs worldwide and about 600 in Australia (Hayes, 2002 b & c). A new Australian operation was formed out of HP and Compaq employees into a new team selected by Fiorina and the new boss of HP-South Pacific, Paul Bradling (Hayes, 2002a). During 2002, it was reported that morale was at HP was at an all time low (Lashinsky, 2002: 17). Fiorinas personal standing also plummeted to the point where some HP employees in the USA began referring to her as, The Armani Witch, who never mixed with or dined with her employees in the staff canteen as her predecessors often did (Dalton, 2002). In fact, Fiorinas leadership style, and her tetchy relationships with the families of HPs founders, was a major issue throughout her tenure as CEO. On the positive side, she was seen as an excellent formal communicator, determined, confident, decisive, strategic and charismatic. She also clearly understood the need to somehow transform HPs stagnant culture; an incredibly difficult exercise given the strong emotional and psychological commitment that so many employees and the Hewlett/Packard families had to a culture that had served the company so well for such a long 24

period of time. On the negative side, she was regarded by many people as remote, aloof and autocratic (Mehta, 2003). Negative sentiments about Fiorina and the company among both employees and financial commentators were compounded when Capellas announced his resignation from HP in November 2002 to take over at the helm of the disgraced telecommunications company, Worldcom. At the time, this company was mired in the biggest bankruptcy in American corporate history and had laid off 17000 employees. While HP tried to put a positive spin on his departure, the companys share price immediately plunged 10% to $US14.99. Cynicism in the company reached new heights when it was revealed that Capellas was to receive a $US14.4 million bonus payment. He would not have been ineligible for this had he quit HP more than a year after the merger (Bergstein, 2003). CULTURAL INTEGRATIONAL TOOL- LAUNCH AND LEARN There were significant cultural differences between HP and Compaq and the integration required a strong, multi year focus on establishing the new culture. Susan D. Bowick, HPs executive vice president of Human Resources and Workforce Development, and a 25-year veteran of HP pointed said that to complement the Adopt-and-Go approach the Clean Teams also developed a Launch-and-Learn mentality. This was a way of taking action that was fast and good enough. None of this was easy, and the so-called soft social issues that had to be handled in order to create a new culture would take a long time to get right, or at least good enough, which is why Bowick was fond of saying, The soft stuff is the hard stuff. 2.4 Step 2: New HP Vision and Merger Integration Team Purpose NEW HP VISION We create a great new company that is a leader in our chosen fields and is positioned to be the leading overall IT solutions provider

Merger Integration Team Purpose Provide effective overall leadership for the planning and execution of the integration of HP and Compaq Assure effective linkages with the business line managers, functions, regions, the integration steering committee and HPs Executive Council. Assure that the value captured is maximized and exceeds public expectations 25

 Assure the new HP is set up to achieve long-term growth objectives Guidelines for the Merger Integration Team Start with the customer experience; retain the highest level of customer satisfaction. Name executive leaders early and link tightly into planning. Ensure that structure follows strategy Make decisions quick and make them stick Cultural Integrational Tool- Adopt and go Clarify roles and ensure shared accountability Create dedicated integration teams Address cultural similarities and differences Rigorously measure, manage and communicate integration progress, wins, issues and opportunities 2.5 SHARPLY FOCUS ON VALUE CREATION PRE MERGER INTEGRATION TEAM STRUCTURE Central Program Management Office (cPMO)

Imaging & Printing Systems Group Supply Chain Customer To Cash Team Information Technology Finance

Personal Systems Group

Enterprise Systems Group

Services

Human Resources (Including Organizational Design & Structure) Brand Architecture Communications-Organization HP Labs CTO e-inclusion & Community Engagement .com/e-commerce Government Affairs Culture 26

Closing/Anti-trust Global Functions Infrastructure Communications- Merger Communication & Messaging Shared go to Market Value Capture TABLE 3- INTEGRATION PLANNING FRAMEWORK

Strategy Strategy Strategy Priorities Strategy Priorities Go To Market Strategy Go To Market Strategy Portfolio Portfolio Channel strategy Channel strategy

Measures Measures Customer Customer Satisfaction Satisfaction Financial Financial Employee Employee Satisfaction Satisfaction Operational Operational Excellence Excellence Recognitions & Recognitions & Reward Reward Systems Systems

Structure & Structure & Process Process Organization Organization Structure Structure Systems & Systems & Processes Processes Information Information Flows & Flows & Decision Decision Making Making Process Process Financial & Financial & People & Culture People & Culture Information Information One Common Culture One Common Culture Systems Systems Retention of Top Talent Retention of Top Talent Architecture Architecture New Competencies For our New Competencies For our People People Roles Responsibilities Roles& & Responsibilities

27

2.6 CULTURAL INTEGRATION GOALS To build a strong, new culture that: Is clearly defined and broadly understood Reflects the business strategy and brand Supports best-in-class performance with customers, partners, shareowners and employees Produces alignment, commitment and excitement Establishes a competitive advantage Is reflected in the communications and actions of core leaders Activities Formal work-stream status Culture due diligence (CDD) investigation planned and communicated CDD process included interviews, focus groups and survey Culture integration team met with combined Executive Council Reviewed approach to culture integration Identified culture cornerstones Explored archival material Engaged broader employee coalition Connected with brand and communication work Fast Start workshops initiated

Anatomy of Cultural Due Diligence Coverage: 22 countries Timeframe: October December 2001 127 in-depth executive interviews 138 focus groups with managers and individual contributors, spanning 1,500 employees Focus of inquiry HP on HP Compaq on Compaq Views of other company Computer-assisted content analysis of interview data Report to executive team: Christmas week 28

SAMPLE SAMPLE INPUT: INPUT:

New New Co-Executive Co-Executive Culture Culture Session Session HP HP Historical Historical CPQ CPQ Historical Historical New New HP HP Brand Brand Competitive Competitive Environment Environment

STRATEGY

STRUCTURE & PROCESSES

CORPORATE OBJECTIVES

VALUES
METRIC & REWARDS

BEHAVIOR

POLICIES & PRACTICES

SAMPLE SAMPLE OUTPUT OUTPUT

Vision Vision & & Governance Governance of of the the Company Company Balance Balance Scorecard Scorecard & & Pay Pay Metrics Metrics Leadership Leadership Selection Selection Formation Formation & & Start Start Up Up of of New New Teams Teams Customer(Quality Customer(Quality Initiatives) Initiatives) Fast Fast Track Track Program Program

29

Day 1 Preparation Focus solely on launch day Gain agreement on day 1 requirements across functions/activities Make adopt-and-go decisions Develop conceptual/ physical models Prepare Test Review readiness Establish command centers Measuring Success at Launch-We Were Ready 170 client business managers, 25 partner business managers and 30 retail account managers trained and announced. 800 senior managers named, including region and country leads Product roadmaps and transition plans available Customer and partner outreach and training programs initiated 1100 customers contacted to date 23 top US/EMEA retail accounts contacted on day 1 All partners given access to on-line sales training Sales readiness training website received 40,000 hits in the first hour of launch and 100,000 hits by end of day. 20,000 presales and sales call center agents and 8000 consumer support users trained and ready day 1. Channel strategy in place and communicated Work force restructuring initiated. Launch Report-Infrastructure Delivers hp.com (online store) open for business @hp employee portal accessible to all employees Company networks connected at key strategic locations Active directory and enterprise directory synchronized E-mail systems interconnected All external call centers with HP greeting on day 1 30

 Employee names with hp.com suffix for external email (both in-bound and out-bound) Day 1 infrastructure management environment Monitoring and reporting process Escalation and incident management process Command center for 30 days Remain Sharply Focused on Value Creation-Post Close Merger Integration Structure

STEERING COMMITEE

CENTRAL MERGER INTEGRATION OFFICE

GROUPS (PMI)

REGIONS /COUNTRIES (PMI)

WORLDWIDE OPERATIONS (PMI)

CORPORATE FUNCTIONS (PMI)

2.7 Integration Plan of Record Managing integration progress through a rigorous process. Tracking all projects and their milestones to ensure we meet synergy goals on schedule Ensuring tie off with value capture, restructuring and financial planning targets Determining accountability owner for each project Driving results through merger integration office focus on cross-organizational dependencies, pan-HP view. Meeting with the Steering Committee 31

While the Clean Team operated in metaphorically clean rooms apart from the day-to-day distractions of operating a company, they were closely linked to the Steering Committee. Fiorina had limited the Steering Committee to a small group of senior executives who could rapidly make decisions and have those decisions be completely unquestioned during execution. The committee consisted of Carly Fiorina, Webb McKinney, Jeff Clarke, Susan Bowick, Bob Wayman, and Bob Napier, the chief information officer. Clarke described how each Monday the teams would go through a very rigorous process with the merger integration program office, (reporting to McKinney and Clark). They would track the status of each project by using the color codes red, green, yellow, just like a stoplight. Items on track were marked with yellow, items that were finished or well ahead of plan were marked green, and items that were falling behind or otherwise failing were marked red. Since they had to track over 10,000 Adopt-and- Go decisions, the simplicity and rigor of that red, green, yellow tracking process was critical. On Tuesdays, teams prepared for an all-day Wednesday integration meeting (chaired by Clark and McKinney). During these meetings, teams made recommendations about integration decisions. Clark and McKinney would consider the recommendations and often sent them back to the teams for more work. Members of the teams would sometimes debate and come to a consensus recommendation, or a consensus position of agreeing to disagree. McKinney and Clark then made the Adopt-and-Go decision. On Thursdays, Carly held her half-day Steering Committee meeting. Clark and McKinney were on the agendas for these meetings. They would present or bring others in to present and make recommendations about important status items of the merger and different decisions, such as the merger product roadmaps, management decisions, restructuring plans, consolidation plans, etc. TABLE 6 - Value Capturing Planning Framework Integration Planning
Value Value capture capture team team Drive Drive overall overall top-down top-down corporate corporate planning planning process process to to achieve achieve full full value value of of the the merger merger by by 2004 2004 Provides Provides top-down top-down baseline, baseline, forecasts, forecasts, synergy synergy targets targets Consolidates Consolidates integration integration team team submissions submissions Integration Integration teams teams Verify Verify and and refine refine top-down top-down baseline, baseline, forecasts forecasts and and synergy synergy targets targets with with bottom-up bottom-up data. data.

Implementation-Post Closing
Corporate Corporate planning planning Monitors Monitors and and tracks tracks revenue, revenue, cost cost and and synergy synergy capture capture over over time time Groups Groups Responsible Responsible for for revenue, revenue, owned owned cost cost and and synergy synergy targets targets Execute Execute on on synergy synergy capture capture for for day-to-day operations day-to-day operations Functions Functions Execute Execute on on synergy synergy capture capture on on owned owned costs costs for for day-to-day day-to-day operations operations Management Management compensation compensation tied tied to to achieving value capture goals achieving value capture goals

INTEGRATION STARTS

32

KICK OF GROUP & FUNCTIONAL TEAMS

TIME HPs PEOPLE STRATEGY AFTER THE MERGER-MANAGING CULTURAL CHANGE

DEAL CLOSE

1. Need for Change Management Strategy Change is an opportunity that you can influence, and when managed correctly it will energize an organization. a) Why manage Change Significant workplace change can defocus an organization Consistently practiced change management techniques will: anticipate the phases of emotions address the issues maintain strong communication efforts provide the catalyst to move people through change without losing focus and productivity b) Challenge for HR Develop a strategy to maintain and surpass the pre-merger standards of both companies while managing massive cultural change.

5 STAGES OF CHANGE MANAGEMENT Stage 1-Awareness REINFORCE & ARRIVE The HP People Strategy is aligned to their corporate objectives and values and designed to keep employee commitment, especially in this time of change. HPs People Strategy enabled HR to: Speed and smooth the process of change. Move through the initial change period Set a culture of high performance right from the start.

33

Stage 2-Encourage face-to-face interaction Fast Start sessions Fast Start and Fast Value To help speed the cultural integration of the two companies, HP included a Cultural Integration Team (CIT) within the overall Clean Team. The CIT launched Fast Start, a program of merger integration workshops led by facilitators and held at the level of individual employee teams, designed to help employees get to know each other, understand and align themselves with the companys strategy and identify and deal with hot spotslikely sources of contention that employees would face as HP got down to the job of integrating Compaq and HP together. Every HP employee was required to attend a Fast Start workshop. One product of the Fast Start effort was the Fast Value program, one-to two-day focused sessions designed to help employees learn to work horizontally across the post-merger HP. Stage 3-Be pragmatic Adopt and go methodology Adopt-and-Go The Clean Team would do the research necessary to make recommendations about which products to keep and which to eliminate. These were determined in a Product Roadmap, a master plan of which overlapping product lines from HP or Compaq would be kept and which would be dropped. It was a huge task, but one they were expected to perform expeditiously. According to Jeff Clark, instead of trying to develop best practices by combining the best aspects offered by the respective assets of both companies, the Clean Team chose the better of what was currently used by HP and Compaq, made that the winner as fast as possible, and moved on to the next decision. The people whose jobs were eliminated when their products were dropped knew that they could look for other jobs in the company. Adopt-and-Go improved the focus of 99 percent of the combined HP-Compaq employees who worked outside of the Clean Teams. They knew that there would be no debate over the clean room decisions. Their job was to execute the clean room decisions. And that allowed the new company to get enormous speed in the first six months, which obviously led to good financial performance. The Adopt-and-Go process stopped the politicking, it allowed for speed of execution and that was the pivotal part of the new companys ability to accelerate the savings.

34

Stage 4- Mobilize: What Is High Performance

The high performance culture accelerates future growth by: Maximizing organizational/individual productivity and capability Aligning individual performance with company and business objectives Using rewards as the motivator Developing people through effective coaching, performance feedback and development planning.

35

BALANCE SCORECARD, HP VALUES ANDSUPPORTING BEHAVIORS

36

Stage 5: Reinforce and Arrive

Ensuring the Best Environment 1. Re-evaluated personal conduct policies and practices 2. Objectively examined behaviors and actions within HP 3. Created a new set of standards that define what we stand for today, owned by all HP employees. 4. Not an HR programa broad-based, company-wide initiative 5. Long-term solution 6. Personal accountability and ownership How we get things done is as important as what we get done. - Carly Fiorina 37

Reinforcing Desired Behavior Clearly set expectations for personal conduct Charge each employee with accountability and responsibility for creating the best work environment Provide resources, training and tools Reward those who contribute to and ensure best work environment

38

CASE ANALYSIS- TATA TETLEY ACQUISITION

1.1 INTRODUCTION Tata Tea, after the acquisition of Tetley, has become the worlds second largest branded tea company. Tata Tea Globalization at a glance World's second largest global branded tea operation with product and brand presence in 40 countries. Significant presence in plantation activity in India and Sri Lanka. Subsidiary in the US overseeing operations in the country, joint ventures in Pakistan and Bangladesh to sell tea Acquisition of Tetley, a company that had a turnover three times the turnover of Tata Tea in India This was the biggest ever cross-border acquisition by an Indian company at that time and was also the first leveraged buyout by an Indian firm. BACKGROUND Tata Group Tata Tea, set up in 1964 as a joint venture named Tata Finlay, with UK-based James Finlay & Co to develop value-added tea, was among India's first multinational companies. In 1983 the Tatas acquired the entire shareholding of James Finlay to rechristen the company as Tata Tea Limited. In the mid 1980s, to offset the erratic fluctuations in commodity prices Tata Tea felt it necessary to enter the branded market and launched its first brand Kanan Devan in polypack, thus heralding the polypack revolution in the country. Today Tata Tea and UK-based Tetley Group represent the world's second largest global branded tea operation with product and brand presence in 40 countries and a significant, albeit consciously declining presence, in plantation activity in India and Sri Lanka . The worldwide branded tea business of the Tata Tea Group contributes around 88 per cent of its consolidated turnover with the remaining 12 per cent coming from bulk tea, coffee, and investment income. Tata Tea is headquartered in Kolkata (West Bengal) and owns 26 tea estates in India as an entity. With an area of 15,000 hectares under tea cultivation, the company produces around 40 million kilograms of black tea annually. Its tea estates are located in the states of Assam and West Bengal in eastern India and Kerala and Tamil Nadu in the south. The 39

company has a strong distribution network in India reaching out to over 1.7 million retail outlets in India. Full-fledged research and development centers of the company focusing on the branded tea business include a facility at Teok (Assam) and a product development center at Bangalore, Karnataka focused on the entire range of tea operations. The Tata Group companies are the largest shareholders of Tata Tea with a stake of 29 percent, followed by the public with around 23 percent stake. Foreign institutional investors, foreign companies and non-residents hold around 18 per cent stake, with the remaining stake held by Indian financial institutions, mutual funds, banks and other companies. Products and Brands While Tata Tea is the second largest tea company in India after Hindustan Lever, it owns the single largest tea brand in the country, Tata Tea Premium. The company has five major brands in the Indian market catering to all major consumer segments for tea. Under the Tata Tea portolio, three brands cater to the premium, popular and economy segment Tata Tea Gold, Tata Tea Premium and Tata Tea Agni respectively. In addition Tata Tea in India has three very strong regional brands in the four Southern states, which are either number one or number two in their respective geographies. These are Tetley, Kanan Devan, Chakra Gold and Gemini. Tetley in India, though a niche brand, is presented as the new face of tea innovation brand. The Tata Tea brand leads market share in terms of value and volume in India. Tetley acquired in 2000 is the market leader in the UK and Canada with 26 per cent and 40 per cent market share respectively by value. Tetley has also launched iced tea under Tea of Life brand in UK, which is making good progress. Tetley is establishing a presence in the ready-to-drink segment, for which Tetley Ice Tea has been launched in UK and Australia. Chayya, a recently launched Chai Latte brand in UK, is the first of its kind and is showing great promise. Besides Tetley also boasts of a wide range of fruit and herbals and specialty tea. In order to build its business in these high value segments, packaging innovations such as the stay fresh flip top carton are being introduced. 1.2 INTEGRATION PROBLEMS A variety of problems existed in integrating the two companies: 1. How to Integrate: The Tatas decided that the best way to integrate was not to integrate initially but to maintain a joint-venture type of arrangement. Furthermore, the integration process was not rushed in order to protect Tata Tea from the risk of Tetleys debt. Tata Tea did not want to change that structure until the debt level was manageable. The arms-length relationship required that Tata Tea retain existing management at Tetley. Ken Pringle remained as the Tetley Group CEO, and Tata management took new positions on the Tetley board of directors. 40

2. Size Difference: Tata Tea was half the size of Tetley in terms of revenues and number of upper management. Tata Tea feared a domination of Tetleys corporate culture. 3. Financial Constraints: There were three financial constraints restricting integration. The first constraint was that legal and capital controls in India made the listing of Tetley shares in India unattractive. The second constraint was that Tata Tea did not want to carry the heavy debt burden held by the SPV, particularly as Tata Tea was an A-rated Indian company. The third constraint was the restrictive covenants at Tetley as a consequence of the LBO, which meant that changes in Tetleys structure needed to be pre-approved by bankers. 4. Regional Players: Soon after the merger, the highly fractionated regional tea makers in India grew faster, putting pressure on Tata Teas market share and profitability at home. Regional players gained 6 percent market share in 2001. 5. Operational challenges: The merger posed a variety of operational questions, such as: Growth issues: How could the combined corporate vision of Challenging for leadership in tea around the world be achieved? The merger required vertical integration between a tea production company and a global marketing company, and the question was what growth targets needed to be defined for the individual companies? Supply chain: How should they set up processes to harness the synergies on tea sourcing and blending, purchasing, packing, logistics, and supply to allied functions to the mutual advantage of both companies? Support processes: How should they integrate various support processes covering Finance & Legal, IT, R&D, HR, and Communications so that the objectives of both companies were in sync? The back-office integration was complicated by the fact that Tetley reported in UK GAAP, while Tata Tea adhered to Indian GAAP. Commercial processes: How should they put in place benchmarked processes, which would be adopted uniformly by the two organizations?

6. Cultural/Racial: There was a great deal of concern that British employees would resent having Indian managers. These concerns were largely the result of the fact that India was a former British colony. Anecdotally, Tetley employees were given substantial retention packages to avoid exodus, which may have created negative feelings among Tata Tea employees. Mr Kumar also noted that, Culture was a huge issue and had to be handled carefully. . . . 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.

41

7. Corporate Philosophy: The two companies had different opinions on how the business should be run. Tata Tea was a collection of estates that just happened to sell package tea and focused on Asia (excluding China), Middle East, and Eastern Europe. Tetley was a marketing and packaging company that had relationships with tea estates and focused on North America, Australia, and Western Europe. Due to the significant differences in customer base, the two companies had dissimilar products. In Tata Teas markets, tea was usually brewed in pots, so Tata Tea was an expert in bulk and loose teas, while Tetley was an expert in tea bags and instant tea. This gave rise to three types of differences: Objectives of the company: Tata Tea was an integrated tea company, with its dual emphasis on plantation as well as domestic marketing, whereas Tetley was primarily a global marketing company. Whose approach was correct? Geographical spread: Tata Teas international presence was limited to bulk tea sales, whereas Tetley was into brand marketing with sizable international presence. Which customers should the organization focus on? Differences in skill-sets: Tata Tea was a plantation company whose major strengths were managing the estates, dealing with a huge work force, and making teas. There was a drive since the mid-80s to create domestic brands and export bulk teas. In contrast, Tetleys strength lay in its ability to buy quality teas worldwide; perfect its blending skills, bring about innovation in packaging, and combine good logistics with management skills. How were people to be cross-trained?

8. Kenya vs. India: It was initially believed that huge synergies would be achieved because Tetley could source teas substantially from Tata Teas estates. Unfortunately, the majority of Tetleys teas were of a different flavor, quality, and cost from teas found in Tatas estates. Therefore, the integration process had to focus more on new products than on substitution. 9. Branding: Both companies had very strong brand names in their respective regions. There was debate as to the surviving name of the new entity. The Tata name was not strong in Western markets, while Tetley was relatively unknown in Tata Teas markets. There were also talks about pensioning off the lovablebut old fashionedTeafolks in favor of promoting tea as a modern lifestyle choice. 10. Conglomerate: Tata Tea was ultimately part of a huge conglomerate. The impact of the conglomerate on the operations of a related foreign entity and the strength of Tata Tea within the conglomerate was unknown to Tetley employees. The Tata organization required group companies to pay fees for the use of the Tata name and adhere to standards of financial and social responsibility. The ramification of these standards on Tetley was still a mystery.

42

11. Auctions/Commodity Price: The acquisition of Tetley by Tata Tea came at a time when the prices of raw materials for making Tea were increasing. There were also rumors in the market about Hindustan Lever Limited and Tata Tea controlling the price of Tea. 12. Demand for Tea: The general demand for tea in many of Tetleys core markets was slowing or decreasing. This was partly because tea was viewed as a boring or sophisticated drink. Sodas, coffee, and juices were gaining significant ground. There were a number of questions about how to revitalize tea as a drink of choice. 13. Exchange Rate: The rupee was strengthening relative to the pound, which caused the acquisition of teas from India to be more expensive for Tetley and made the transfer of money back to the Tata organization less remunerative. Changes Required There were substantial challenges to realizing the synergies, which Khusrokhan effectively summarized: The first challenge is that the acquirer company in this case is smaller than the company it acquired. The second challenge is that since this was a cross-border acquisition, it is bound to have its fair share of cultural problems. Getting people in two companies in the same country to come together can be a problem; cross border integrations are even tougher. The third difficulty is that, because this is a heavily ring-fenced, leveraged acquisition, banks can have a say in what is being done. We will have to carry the banks with us for anything that could be construed to be a structural change to Tetleys operations [Attitudinal and mindset change among employees] is very much a part of any integration process. I call it the learning-to-think-for-two phase, where each organization has to begin to appreciate that there are two ways of looking at every issue and to appreciate each others point of view. It is something like the adjustment phase in a marriage, which starts immediately after the honeymoon. 1.3 FORMULATING INTEGRATION LOGIC AND PERFORMANCE GOALS Tata Tea, as part of its stated strategy to globalize, has charted out its vision to be the market leader in the country and increase reach in the global market. For this the company has followed a strategy of forming subsidiaries or entering into alliances in countries that have a significant presence in the tea market, both from the producer as well as consumer side.

43

The first move towards globalization was the formation of its 100 per cent subsidiary in the USA in 1987. This was followed by its presence in the plantation industry in Sri Lanka. Over time the company realized that in order to go global; acquiring an international brand would be preferable to building one afresh the world over. Hence in 1995, the company bid for Tetley, a well-known innovator in tea packaging, buying, blending and logistics management and the second largest seller of tea in the world after Unilever, but failed. The reasons being that company as big as Tetley wasnt affordable. Tetley was bigger that TATA TEA. This however did not deter the company from reaching out again when the opportunity arose in the year 2000. It was a major landmark in the history of the company in that year when it acquired Tetley.

The company decided to acquire through a leveraged buyout. However it had some implications. The integration team was often hampered by the due interference by the Banks. The acquisition took place through a special purpose vehicle (SPV) Tata Tea (GB) Limited at a cost of GBP 272 million, funded through a mix of debt and equity. This acquisition made Tata Tea the world's second biggest tea company after Unilever. It was the biggest ever cross-border acquisition by an Indian company at that time and was also the first leveraged buyout by an Indian firm. 1.3.1 Deriving the Integration Logic Tata offered following reason to acquire Tetley: In the branded tea segment Tetley is second only to Unilever, while in UK it is number one.

Its UK operation was a mixed bag, wherein volumes were good while margins were difficult to maintain. Primary reasons for under-pressure margins were substantial increase in African tea prices (Tetley buys majority of its tea from this market) and retail price remaining low throughout the year. In UK price control is largely in the hands of retailers, as 70% of FMCG goods are sold through them. However, Q1 FY 2001 results were mirror image of last year results, as tea prices from Kenya dropped and retail prices showed some improvement, thereby requiring less promotional costs. Tetley has embarked its continued efforts of cost reduction and has even closed down its unviable London factory, one of the two factories it operates in UK. Canada is the second most important market for Tetley. Volumes were good in Black Tea and company increased its market share to 40%. In Specialty Sector Company increased its market share and emerged as brand leader. 44

Company sees US as a difficult market. In France also company was successful in increasing market share to 10%. Company overall sees better prospects in current year.

Benefits from Tetley:

Tata Tea and Tetley now work on common agenda, with representations in each company from other. The major advantage will be increased outsourcing of tea from South India upon quality improvement program undertaken by Tata Tea.

Others:

Management of supply chain cost, benefiting both companies. R&D initiatives helping Tata Tea producing more for Tetley. Training given to Tata Tea personnel in buying and blending tea, which would make it suitable for exporting to Tetley. To take Tetley name across the world and even introduce Tetley brand in India leveraging Tata Teas distribution and financial strength. Tetley was a company that had a turnover of GBP 280 million, three times the turnover of Tata Tea Ltd. The acquisition was the perfect blend - Tata Tea the leader in India in the packaged tea segment with a presence in developing countries through exports and Tetley the second largest tea brand in the world, with a presence in developed economies of US, Canada, Europe and Australia. The integrated vista offered access to new markets and products to both companies, as well as synergies in tea buying and blending. Tetley manufacturing facility based at Eaglescliffe, in the north east of England, is believed to be the largest tea bag factory in the world. The combined portfolios of branded offerings cater specifically to the US, Canada, Western Europe, Australia, Middle East, West Asia, Africa, Poland, Russia and Kazakhstan markets in addition to the manufacturing and supply operations of Tetleys subsidiary companies. More than 70 per cent of the consolidated sales of the company now come from outside India.

45

Tetley has a customized portfolio of offerings for each country, ranging from black, green, fruit and herbal teas, iced ready-to-drink teas and an extensive range of exotic specialty tea.

1.3.2 Selling the Integration Logic Over time the Tata had realized that in order to go global; acquiring an international brand would be preferable to building one afresh the world over. Hence in 1995, the company bid for Tetley, a well-known innovator in tea packaging, buying, blending and logistics management and the second largest seller of tea in the world after Unilever, but failed. The reasons being that company as big as Tetley wasnt affordable. Tetley was bigger than TATA TEA. Tata Tea knew of Tetley via their joint venture in Southern India as well. Tata Tea had actively competed with Sara Lee to acquire Tetley and the potential of Tetley completing its own initial public offer and the largest cross border acquisition in India (in terms of UK). Comparison of two firms is shown in table 1 (3/31/00)- (3/31/01) TATA TEA TETLEY

Turnover Operating Profit Employees Tea Estates Key Markets

$ 207 Million $36 Million 59,740 54 India

$ 417 Million $42.6 Million 1,100 0 Britain, Canada, Australia, United States

Thus for buying Tetley again, there wasnt enough troubles to convince the board. Tetley was acquired in 2000, considered a landmark deal in India. However what followed next was complicated.

1.4 CREATING THE INTEGRATION PLAN

46

When the Board finally sat down to plan the integration the following synergies between Tata Tea and Tetley had been identified. Purchasing: Tetley bought about 8000000 kgs of Indian teas annually fragmented from sources. It envisaged that Tata Tea could help in sourcing or supplying Tetley requirements of Indian teas. Brands: Markets where only one or the other company had worked singly could be developed jointly leveraging the internationally known as Tetley brand name. Tata Tea could help launch Tetley in India, the Middle East, and Russia, traditional bastions of Tata Tea. Technology: Tetley would give Tata Tea access to specialty products such as: flavored teas, herbal teas, and organic teas and decaffeinated teas. These additions were thought as useful introduction to Indian market. Cost Synergies: Both companies could jointly relocate manufacturing of teas both packets and bags and utilize a supply chain approach and common platforms for the InfoTech, MIS, and finance conditions. While the geographic spread of operations were a constraint in moving people around, it was anticipated that virtual teams using information technology could work together without physically moving across the country boundaries Infotech: The acquisition was seen as an opportunity to improve the infotech infrastructure of Tata Tea, improving the connectivity to remote plantations adopting an Enterprise Resource Planning System to create a global supply chain based on Tetleys SAP based ERP solution.

1.4.1 Initial Ring Fenced Structure Tetley initially continued to operate, after the acquisition as a separate company with its own goals and objectives predominantly as a consequence of a ring fenced structure chosen for the acquisition. Tata tea is in fact smaller than Tetley. It acquired Tetley by the means of a leveraged buy put. Tata tea put up only one third of Tetley acquisitions cost with banks and lenders putting in the balance funding. A leveraged buy-out has perforce certain limitations attached to it, in terms of what you can and cant do as long as the high leverage continues. Therefore, in the early days following the acquisition, Tata Tea restricted its role to an advisory one: Monitoring, guiding and Watching over Tetleys operations.

47

A few months ago, after having seen an encouraging performance by Tetley, Tata Tea decided to put in some more money from Tata Tea and Tata Sons into the acquisition by way of quasiequity, which brought down some of the very high-cost debt, incurred on the acquisition and simultaneously enhanced our ownership stake. However such attitude didnt work. From the results, it was clearly seen that a formal integration had to be done in order to drive out the synergies between the two entities. Winners Curse and a Financial Shortfall It was clear that Tata Tea had paid too much for Tetley, almost pound 100 million more than the next highest bid. Tata Tea had hoped to achieve cash flows of at least pound 48 million in order to repay the principal and interest created by the leveraged buyout. Tetleys financial performance had been deteriorating with cash flows of pound 10 million in 1999. The pressure to generate increase in cash flow created intense pressure and conflict internally at Tata Tea and between the two organizations. Meeting the cash flow targets established during the merger was not going to be easy as tea was loosing grounds to sodas, juices and coffee. At the same time the raw material was increasing. Tata Tea realized that they would have to increase the amount of equity in the SPV to reduce expensive debt. The only areas where Tata Tea and Tetley worked closely together were in the areas of tea buying and blending. In order for Tata Tea to be useful to Tetley in sourcing or supplying their requirements of Indian teas needed to have its people trained to know exactly what Tetley was looking for in terms of quality and process of the Teas required for their two blends. The entire Tata Tea buying and blending team was trained in Tetley methods and the two companies began operating seamlessly in their area. The Tata Tea hence established a new post merger strategy in order to derive the synergies. 1.5 OPERATIONAL INTEGRATION By February 2002, it was apparent that by all the metrics, the acquisition of Tetley was not going well. The failure of Tetley to make the required cash flow targets, coupled with the high debt burden, required Tata Tea to make some changes, the first major blow was that Tata Tea would have to increase the amount of equity in the SPV to reduce the expensive debt. In September 2001, Tata Tea invested an additional pound 60 million of equity. The company also sold Tetleys private label tea business in US to Harris Tea for 15 million pounds. The seamless integration was not working, because they were still to separate companies. With the investment of quasi-equity by Tata Tea and Tata Sons which brought down some of the very high-cost debt incurred on the acquisition and simultaneously enhanced the Tata Teas ownership stake, Tata Tea could finally begin contemplating greater integration. 48

Tata Tea decided to hire the Boston Consulting Group to develop an Operational Agenda. BCG took its first steps by asking the top management at both entities to identify their strength and weaknesses. Rather than having two separate companies running their own business, it was finally the decision that there should be one entity with one central command. Senior officials from both the sides from Tetley and Tata Tea met in Goa to kick start the process of integration and develop a structure. During this meeting they created a task force of neutral members (non executive board members), whose tow main objectives were to launch a premium Tetley brand in India and to introduce Tetley branded iced tea in United States. Accomplishing these goals could bring two organizations closer together. The senior officials also had to decide on how to begin restructuring global facilities and how to enter new markets. One good sign was that from March to December 2001, Tetley group had a 3% increase in sales and a 34% increase in EBIT. The problem was that Tata Tea was loosing market share itself to regional players and to HLL. An apex Executive Committee of six people led the integration effort from the two companies. The executive committee was in charge of the broad strategies and policies associated with the integration process. R.K. Krishan Kumar, Tata Tea, headed the supervisory board. The other members included: (1) (2) (3) (4) (5) Homi Khusrokhani M.D. Tata Tea Percy SiganPoria, Deputy MD, Tata Tea Ken Pringle , CEO, Tetley Group John Nicholas, Tetley Group Peter Unsworth, Tetley Group

A parallel project team structure was also formed to look into specific areas of the integration process. The task force created was split up into teams to complete all aspects of the integration. Teams were assigned tasks as: (1) (2) (3) (4) Assimilation of systems of financial, information technology and data management. Review of procurement, packaging, and related cost savings. Issues related to tea buying and blending. Harmonization of personnel and human resources policies and an attempt to solve cultural issues created by geographic divide and British Colonization of India (5) Innovation and new product development. The steering group also included two nominees from BCG. Also , the project coordinator team would see one member from BCG assisting Tata Tea- Tetley team. 49

1.5.1 The Integration Process Following the meeting, Tata Tea and Tetley group agreed to merge the entities into a single entity and the first step began to integrate operations. The entire exercise was to complete in 18-24 months. The two companies would have a single CEO to look over the operations. Phased Integration Process Integration was to be completed in 3 phases (1) In the first phase, the end points were development of a common vision, goals and synergies for both the companies and also a creation of a road map for capturing synergies and taking process further. (2) The second phase was devoted to actual working together and captures these synergies. (3) Ultimate phase would have been legal mergers which could be done once the debt in Tetley was reduced. Four cross functional teams with representatives from both Tata Tea and Tetley were set up. Each team had defined objectives for the processes under their charge, which spelled out the way forward with measurable goals and estimated timelines. They were closely monitored both internally and by the teams and also by the executive committee for meetings through at regular intervals. Integration of SAP environment between Tata Tea and Tetley was commenced to help in sharing the data under common platform and to facilitate decision making.

Though the Tetley acquisition was perceived negatively by the market for the next three years, the company carefully chose an approach to integrate the processes and explore synergies between the two companies with absence of any time pressures, while maintaining operational independence. The emphasis throughout was on revenue and growth and not on cost reduction. A common Mission-Vision-Values statement and strategy for both the companies was formulated after a debate in a joint managerial group of the two companies. A structure that facilitated joint working in several areas was implemented. A well-thought through process was adopted for the integration of the two companies with some of the highlights being: Identification of common beliefs: An international consulting firm was commissioned to identify the common beliefs between the two companies and suggest ways to bring the two closer together. Creation of a structure: A structure was put into place to create a steering committee with several task forces reporting to it and comprising managers of both companies. 50

Some teams were given time-bound tasks while others worked on unification of some processes. This structure was then folded into the operations of both companies. Refinement of structure: The Steering Committee became a Supervisory Board reporting to the Board of Tata Tea, which started taking decisions on matters concerning both companies. Four integration teams supported this Board, one, a growth team having an agenda to drive geographical and product category growth and improve operational performance and the other three to drive common business processes. These include the Commercial and Business Processes Team top streamline and standardize marketing, the Global Supply Chain Team to handle raw materials, finished products, delivery and distribution, and the Support Team to look at finance, research, communications, Information Technology and Human Resources. An intense benchmarking process was conducted in Tata Tea Tetley as well as other companies, the end result of which was to have world-class processes that are endemic to the branded business. 1.6 STRATEGIC INTEGRATION After the acquisition, Tetley initially continued to operate as a separate company with its own goals and objectives, predominantly as a consequence of the ring-fenced structure chosen for the acquisition. In the early days following the acquisition, Tata Tea restricted its role to an advisory one: monitoring, guiding, and watching over Tetleys operations. The only areas where Tata Tea and Tetley worked closely together were in the areas of tea buying and blending. In order for Tata Tea to be useful to Tetley in sourcing or supplying their requirements of Indian teas, Tata Tea needed to have its people trained to know exactly what Tetley was looking for, in terms of the quality and prices of the teas required for their blends. The entire Tata Tea buying and blending team was trained in Tetley methods and the two companies began operating seamlessly in this area. Commenting on the synergies soon after the acquisition, R. K. Krishnakumar, chairman of Tata Tetley and vice chairman and CEO of Tata Tea, told the Economic Times, I see us fusing all these entities into one super global company, seamlessly operating as one entity, deriving all the efficiencies of integration and imparting the necessary aggression in the marketplace to gain market share. The synergies between the two companies are very strong and bringing them together does make sense. But this is only at a conceptualization stage. We arent working on anything. It may take a while to happen. Ratan Tata, Chairman of Tata Tea, best summarized the integration process when he said, It will take three to four years for the benefits of the acquisition to be felt. 51

By February 2002, it was apparent that by all metrics, the acquisition of Tetley was not going well. The failure of Tetley to make the required cash flow targets, coupled with the high debt burden, required Tata Tea to make some changes. The first major blow was that Tata Tea would have to increase the amount of equity in the SPV to reduce expensive debt. In September 2001, Tata Tea invested an additional 60 million of equity. The company also sold Tetleys private label tea business in the United States to Harris Tea for $15 million. The seamless integration was not working, because they were still two separate companies. With the investment of quasiequity by Tata Tea and Tata Sons (the Tata groups primary holding company), which brought down some of the very high-cost debt incurred on the acquisition and simultaneously enhanced Tata Teas ownership stake, Tata Tea could finally begin contemplating greater integration. Tata Tea decided to hire Boston Consulting Group (BCG) to develop an operational integration agenda. BCG took its first steps by asking top management at both entities to identify their strengths and weaknesses. Rather than have two separate companies running their own business, it was finally the decision that there should be one entity with one central command. BCGs suggestion of having one entity stood in contrast to the Tetley Chairman and Tata Tea Vice Chairman, R. K. Krishnakumars position. Commenting on the decision to hire a consulting firm, Krishnakumar said, We recognize that with the acquisition of Tetley, there is a need to synchronize operations. The consultants will map out a blueprint that will help us with logistics and marketing plans that keep both identities intact. Meeting in Goa Senior officials from both sides from Tetley and Tata Tea met in Goa to kick-start the process of integration and develop a structure.4 During this meeting they created a task force of neutral members (nonexecutive board members), whose two main objectives were to launch a premium Tetley brand in India and introduce Tetley-branded iced tea in the United States. Accomplishing these goals could potentially bring the two organizations closer together. The senior officials also had to decide on how to begin restructuring global facilities and how to enter new markets. One good sign was that from March to December 2001, the Tetley group had a 3 percent increase in sales and a 34 percent increase in EBIT. The problem was that Tata Tea was losing market share itself to regional players and to Hindustan Lever Limited. The integration effort was led by an apex Executive Committee of six people from the two companies. The Executive Committee was in charge of the broad strategies and policies associated with the integration process. The supervisory board was headed by R. K. Krishnakumar, vice chairman, Tata Tea. The other members included Homi Khusrokhan, 52

managing director, Tata Tea; Percy Siganporia, deputy managing director, Tata Tea; Ken Pringle, CEO, Tetley Group; and John Nicholas and Peter Unsworth of Tetley group. A parallel project team structure was also formed to look into specific areas of the integration process. The task force created was split up into teams to complete all aspects of integration. Teams would be assigned tasks such as Assimilation of systems for financial, information technology, and data management; Review of procurement, packaging, and related cost savings; Issues related to tea buying and blending; Harmonization of personnel and human resources policies and attempt to solve the Cultural issues created by the geographic divide and British colonization of India; and Innovation and new product development.

The steering group also included two nominees from BCG. Also, the project coordinator team would see one member from BCG assisting the Tata Tea-Tetley team. The Integration Process Following the meeting, Tata Tea and the Tetley group agreed to merge the two entities into a single entity, and, as a first step, began to integrate operations. This [the merger] is move rather quickly on functional integration, said Ken Pringle, Tetley CEO. The entire exercise was expected to be completed within the next 18-24 months. The two companies would have a single CEO overseeing the operations of both companies. The phased integration process The integration process was to be completed in three phases. In the first phase, the end points were the development of a common vision, goals, and strategies for both companies, and also the creation of a road map for capturing synergies and taking the process further. The second phase was to be devoted to actually working together to capture these synergies. The third and ultimate phase could be a legal merger, which could be done once the debt in Tetley was reduced. Four cross-functional teams with representatives from both Tata Tea and Tetley were set up. Each team had defined objectives for the processes under their charge, which spelled out the way forward with measurable goals and estimated time lines. These were closely monitored both internally and by the teams and also by the executive committee for adherence through meetings at regular intervals. Integration of the SAP environment between Tata Tea and Tetley was commenced to help in sharing of data under a common platform and to facilitate decision making. 53

The Commercial and Business Processes Team will streamline and standardize marketing. The Global Supply Chain Team will concern itself with raw materials, finished products, delivery and distribution and The Support Team will look at finance, research, communications, IT and HR. We have cut across individual operation areas and gone though an intense benchmarking process in Tata Tea, Tetley as well as other companies. The end result of this exercise will be that we will have world-class processes that are endemic to the branded business, says Percy Siganporia, Tata Tea. A fourth team, known as the Growth Team, is looking at geographical and product category growth.

The cultural integration, which is often an issue in many a merger or acquisition, has been smooth for Tata Tea and Tetley. Mr. Nicholas says, We are different but we are learning from each other. For instance, Tetley is very process oriented while Tata Tea is quicker to respond and more action-oriented. Mr. Pringle emphasizes, We have focused on bringing together skill sets of both teams. We can add to each others knowledge and skills and create business with better value prospects. For instance, Tetley is well known for its packaging innovations. Its round bags in the 1990s were received with greedy gulps by consumers, who saw it as a faster and better brew. Laminated packaging replaced cardboard and changed the consumers' perception on the freshness of tea. In India, however, taste preference is stronger than brand loyalty. Says Mr. Khusrokhan, Most consumers have a personal recipe for making tea and stick to the one brand that gives them that satisfaction. The name of the game is raising the consumers curiosity, arousing interest and encouraging them to try something different. While Tetley is standardized, Tata Tea has strong regional brands and different blends for different areas as each region has its own taste preference. Specialty and herbal teas are high growth segments but in India they are a very small, niche segment. In the USs cold tea is the biggest segment but again in India, it is tiny.

CHANGE MANAGEMENT AT TATA-TETLEY

NEW MISSION, VALUE STATEMENT

54

Their Vision, Mission and Corporate Purpose Statement were framed by the Company's senior management in February 1999. This formed the basis of the Company's direction and strategy over the past few years. It marked the realization within the Company that " Customer is paramount". Much of this statement remains valid and is of considerable relevance even today. With the acquisition of Tetley in 2000, and commencement of a formal process of integration, the process of evolving corporate thinking onto a global canvas was initiated. In 2002, the "Supervisory Board" of Tata and Tetley put forth a new Vision Statement, "Challenging the World for Leadership in Tea", embodying a modified set of Values, in line with the Tata Group Purpose. "Challenging for leadership in tea around the world" 1. Challenging A state of mind throughout the organization, never being satisfied with the status quo, constantly striving to be better and to do new things, in new ways and a principle by which we manage our brands in the marketplace, creating relevant differentiation and confidently projecting clear brand identities. 2. Leadership.Not just in size, but more importantly in the eyes of our customers and consumers, through our thoughts, ideas, behavior and achievements 3. Through innovation, which will enable us to build stronger relationships with our existing consumers, reach out to new consumers and keep the category vibrant. 4. TeaThe product scope of our vision, encompassing the widest definition of the category; the production and marketing of black and green teas, specialty fruit and herbal teas, ready-to drink teas, tea serving systems and retailing of tea. 5. The World- The geographic scope of our vision; building a global business by leveraging and building our brands and forging partnerships to mutual advantage. Tata-Tetley- Our Values We believe that our customers and consumers define the success of our organization and that they should be top-of-mind in everything that we do. We believe that our people are at the heart of our organization; and that we should give them the freedom to achieve, through clarity of direction and the creation of an informal, barrier free culture We believe in tea and in our products, and their role in adding to the well-being of people the world over We believe in earning the respect of all those who know us We believe in making a positive contribution to the people and communities our business touches We believe that by striving to deliver our vision and by living our values we shall create more valuable business and hence over the long term increase returns to our shareholders. 55

The Vision and values which have evolved over time gives the desired impetus for sustainability thinking and is sharpened further through stakeholder engagements to arrive at key issues.

NEW CORPORATE GOVERNANCE SYSTEM Tata Tetley devised a new corporate governance structure and was managed by the Managing Director under the supervision, control and direction of the Board of Directors. The Board was set up the following Committees: a. Executive Committee b. Audit Committee c. Investors Grievance Committee d. Remuneration Committee and e. Ethics and Compliance Committee In addition the Business Review Committee (BRC) for the Company reviews the medium and long-term strategies of the Company and recommends/suggests changes that the Committee may consider necessary. The day-to-day operations are run by the Managing and Deputy Managing Director with the assistance of two Executive Directors. Important issues relating to strategy are referred to and discussed at Executive Committee meetings which are chaired by the Vice Chairman. The Company also has a Management Committee and each of the Strategic Business Units (SBUs) have their own Board where all issues relevant to the SBU are discussed TTL is guided by the internal code of conduct as framed by Tata Sons Ltd. (TSL) covering all its employees at various levels. It clearly specifies the norms under which- Business transactions, Behavioral standards with external agencies and Social responsibilities as corporate citizen to be conducted. In addition the corporate governance code as enunciated in the Listing Agreement entered into with the various Stock Exchanges is adhered to. The basic objective is to ensure transparency in all dealings and the functioning of the management and the Board. The policies pursued focus on long-term shareholder value creation through integrity, social obligations and regulatory compliance.

TATA TETLEY EMPLOYEES Tea companies depend heavily on their employees especially the plantation workers. Thus at Tata Tetley they took special care of our workforce. As on March 31, 2003, Tata Tea Ltd in 56

India had a total permanent full-time workforce of 56,031 supplemented by 64 employees working on contract and 20,784 temporary blue-collar employees. There was been a significant reduction in the work force due to decrease in employment of temporary workers, and reduction of the permanent workforce by about 2% as part of cost control measures. The Company however does not keep a record of workers employed by contractors for carrying out various activities. Employee benefits TTL had set up the Tata Tea Employee Welfare Trust with a corpus of over Rs 1 million to promote employee (including casuals) welfare through measures such as providing medical assistance to non-executive employees and their dependants, providing scholarships varying between Rs 500 and Rs 1000 per month to employees' children studying in intermediate classes, rehabilitating victims of cyclones and other natural disasters, etc. TTL paid out Rs. 1,02,500/during 2002-03 towards these issues. Retired executives and their spouse enjoy medical insurance benefits comprising both hospitalization and domiciliary components, in addition to drawing pension. Employees also have access to well stocked libraries, recreation clubs, etc. Labor/Management Relations Unionised employees constitute 98% of the total permanent workforce. All permanent employees other than executives, junior management staff, and employees on contract are represented by independent trade union organizations (labour, subordinates and clerical staff are included). TTL consults and negotiates either directly with recognised trade unions or through associations like Indian Tea Association (ITA) or United Planters' Association of South India (UPASI). The Company promotes organizational communication through the publication of in-house magazines: Tatean (published for the whole company), Samachar (published primarily for the eastern plantations) and Seithigal (published primarily for the southern estates). The Company invites employees to share their ideas through a formal suggestions scheme, WinIdea, which has provisions for recognizing ideas of use to the Company. The Company discusses various work related issues with the trade unions and involves them in making decisions on issues like welfare measures, tasks, recreation, holidays, etc. Health and Safety The disease profile of different workplaces are maintained regularly and monitored routinely. Occupational diseases are treated in estate hospitals. Any accident that may take place during the 57

course of employment are reported to the authorities concerned as per requirement of the Factories Act, 1948 / Plantation Labour Act, 1951 / Workmen's Compensation Act, 1923. Link Workers (and Mahila Mandal in NIPO) discuss various health and safety issues in the presence of doctors and welfare officers in their monthly meetings. These associations have representations from staff and workers on the estates. All factory workers are medically checked once every year and records maintained. There has been one case each of work related fatality during the year under review in both NIPO and SIPO. A proposed HIV / AIDS policy for Tata Tea has been drafted pending top management approval. Training and Education TTL provided 2.29 mandays of classroom training per executive during 2002-03. Other indices pertaining to executive training were also given. Training to non-executives is mostly on the job training and hence difficult to quantify. Illustrative examples of classroom training for nonexecutives are shown below: TRAINING FOR NON-EXECUTIVES Professional Selling, Sales Effectiveness, Strengthening Selling Skills Workshops, Seminars on Finance, Taxation and Audition Computer Refresher Course, MS Projects Training Programme on Effective Purchase Procedures Safety, Health & Hygiene Work Shop, Cleanliness of the Work Area, Handling of Chemicals, and Quality Control Operating Procedure for Equipment, Calibration and Maintenance Procedure of Lab Instruments, Training Programme on Energy Efficiency Training on Quality

While Tata Tea did not currently have any formal career ending training programmes, it is committed to helping employees in managing career endings through generous employee separation schemes. It invests in updating employee skills by nominating them to various internal and external programmes as listed in below:

MANAGEMENT DEVELOPMENT PROGRAMMES Organizational Renewal for Competitiveness 58

Managing and Measuring Business Performance Continual Improvement through Cost of Quality Effective Marketing Sales Management Labour Reforms and Social Safety Net Sexual Harassment at Workplace Building a Truly Value-Driven Organization Creative Excellence in Management Competency Mapping and Assessment Accounting Standards and Its Practices Training on TBEM Corporate Public Relations Corporate Governance Issues for Managers Core Managerial Skills for Health Professional Manufacturing Management Plant level Energy Audit Practice for Energy Conservation Supply Chain & Logistics Management for Global Trade IT for Agri-Business

The Company nominates its employees to training programmes conducted by reputed institutions such as the IIMs, XLRI, ASCI, NITIE, etc., in addition to organizing various in-house programmes of general interest.

POST MERGER
59

EXPLORE

LEARN

REALIZE

THINK

RECOGNIZE

DESIG N

PRE MERGER
LESSONS LEARNT 60

In an ideal merger, the newly created entity pools the best features of the two merging organizations. A well planned process built on the foundations of an open, honest and consistent communication strategy can pave the way. Mergers and acquisitions have become a common phenomenon in recent times. A merger of the size like HP-Compaq has implications for the workforce of these companies across the globe. Although the merging entities give a great deal of importance to financial matters and the outcomes, HR issues are the most neglected ones. Ironically studies show that most of the mergers fail to bring out the desired outcomes due to people related issues. The uncertainty brought out by poorly managed HR issues in mergers and acquisitions have been the major reason for these failures. The human resource issues in the mergers and acquisitions (M&A) can be classified in two phases the pre-merger phase and the post merger phase. Literature provides ample evidence of difference in between the human resource activities in the two stages: the pre-acquisition and post acquisition period. Due diligence is important in the first phase while integration issues take the front seat in the later. The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc. The human resource system issues that become important in M&A activity are human resource planning, compensation selection and turnover, performance appraisal system, employee development and employee relations. M&A activity presents a different set of challenge for the human resource managers in both acquiring and acquired organizations. The M&A activity is found to have serious impact on the performance of the employees during the period of transition. The M&A leads to stress on the employee, which is caused by the differences in human resource practices, uncertainty in the environment, cultural differences, and differences in organizational structure and changes in the managerial styles. The organizational culture plays an important role during mergers and acquisitions as the organizational practices, managerial styles and structures to a large extent are determined by the organizational culture. Each organization has a different set of beliefs and value systems, which may clash owing to the M&A activity. The exposure to a new culture during the M&A leads to a psychological state called culture shock. The employees not only need to abandon their own 61

culture, values and belief but also have to accept an entirely different culture. This exposure challenges the old organizational value system and practices leading to stress among the employees. Research has found that dissimilar cultures can produce feeling of hostility and significant discomfort which can lower the commitment and cooperation on the part of the employees. In case of cultural clash, one of the cultures that is dominant culture may get preference in the organization causing frustration and feelings of loss for the other set of employees. The employees of non-dominating culture may also get feelings of loss of identity associated with the acquired firm. In certain cases like acquisition of a lesser known or less profitable organization by a better one can lead to feelings of superiority complex among the employees of the acquiring organization. In case of hostility in the environment the employees of two organizations may develop us versus them attitude which may be detrimental to the organizational growth. The uncertainty during the M&A activity divert the focus of employees from productive work to issues like job security, changes in designation, career path, working in new departments and fear of working with new teams. The M&A activity leads to duplication of certain departments, hence the excess manpower at times needs to be downsized hence the first set of thoughts that occur in the minds of employees are related to security of their jobs. The M&A activity also causes changes in their well defined career paths and future opportunities in the organization. Some employees also have to be relocated or assigned new jobs; hence the employees find themselves in a completely different situation with changes in job profiles and work teams. This may have an impact on the performance of the employees. Research has found that at least two hours of productive work per employee per man day is lost during the M&A activity in the organizations. The increased political processes that may be underway in the organizations to sustain the importance of the various individuals and departments will add to the confusion. The human resource systems vary across organizations owing to the differences in the organizational culture, sectoral differences and national cultural differences. For example if the compensation in the acquired firm is lesser compared to the acquiring firm, the acquisition will raise employee expectations (for the employees of acquired firm) of a possible hike in compensation which may not be realistic. On the other hand if the compensation level of employees in acquiring firm is lower the employees may press to have equal compensation across all the divisions of the firm. The pay differential can act as a de-motivator for the employees of acquiring firm and may have long term consequences. The compensation issues may also involve legal angle.

IMPLICATIONS AND CONCLUSION - HP COMPAQ

62

Analysis of the strategic dynamics of the HP-Compaq acquisition integration in terms of four key processes and feedback loops between them presents a mixed story of significant progress but also of key unresolved issues. It was found that the process of formulating the integration logic and performance goals was generally well carried out. The pre-clearance process of establishing the integration planning approach and the integration tools developed for that purpose were first rate and recognized as such by many observers. The operational integration process similarly was executed quite well and beat the short-term goals set for the merger. With the benefit of hindsight, however, it was found that the feedback loop between the operational integration process and the process of formulating the performance goals could have been stronger. While understandable in light of the heavy demands on everybody involved during the operational integration process, a weak feedback loop prevented top management from timely revisiting the initial assumptions on which the perhaps too explicitly stated longer-term performance goals were based, and from testing the new corporate strategy with key customers. Because the strategic integration process was not clearly recognized as a distinct one by top management, we found an even weaker feedback loop back to the longer-term performance goals, as well as a failure to pay sustained attention to executing the multi-year strategic activities necessary to meet the longer-term goals. Victory was claimed too soon, and the opportunity costs of the acquisition integration not fully appreciated. Viewing the execution of the acquisition integration process primarily in terms of the operational integration process prevented top management from clearly seeing the need to augment its own bandwidth. Yet, while the exact nature of the integration team changes as the integration process progresses and the heavy team structures of the integration planning and operational integration were perhaps not necessary for the strategic integration process, the opportunity to increase top managements bandwidth resided in the capabilities for large-scale change developed by the integration planning team. These should have been kept in place for the time necessary to execute the strategic integration process. By splitting part of the integration team and focusing it on starting to execute the key multi-year initiatives the feedback loop necessary to keep the acquisition integration ahead of environmental change would have been much stronger, raising top managements continued alertness to the rapidly evolving competitive challenges. This, in turn, might also have prevented top management from underestimating the time and effort required during the strategic integration process to execute on the strategic initiatives necessary to compete effectively and simultaneously on multiple fronts against world-class competitors with fundamentally different strategies and capabilities. 63

Highlighting the importance of the four processes involved in acquisition integration, the role of feed-back loops in managing the strategic dynamics of acquisition integration and the role of the integration planning team, as well as providing insight in why intelligent and hard driving top managers may fail to pay enough attention long enough to the strategic integration process offers potentially useful guidance for the top managements and boards of directors of other companies contemplating major acquisitions and the management of their strategic dynamics. EVALUATION OF THE CHANGE MANAGEMENT AT HP COMPAQ Merging two workforces, cultures and product lines, spanning printers and storage devices to notebook, handheld and desktop PCs, is never easy, but the global scale of the HP/Compaq merger made it a mammoth task. HP had 88,000 employees and Compaq 65,000, all spread across the globe. According to Mike Taylor, HR director for HP UK & Ireland states, All organisations know that the success of a merger is down to the people-you have to get your people focused in the right way. HRs role remains pivotal for the success of the merger, not much could have happened without the intervention of HR. A huge amount of core HR work was planned and executed. For this, Clean Room was developed. Here, a virtual team was assembled from both companies to plan for the merger. The team adopted an HR strategy and an HR plan that tackled these issues one by one. This included harmonizing terms and conditions and implementing new job architecture and a new performance-management system right across the organization. The need to focus employees meant it was vital to have the necessary communication and information channels in place. Traditional media such as posters and leaflets and regular briefings from senior executives did their part. But the most effective delivery mechanism was its intranet employee portal, @HP. The self-service HR portal, which was originally rolled out in 2000 and has around 141,000 users, received two million hits on day one of the merger. It enabled HP to disseminate a mass of information during the run-up to the merger which included the rationale behind the move and the role employees could play within the new organization. It included training materials which enabled sales people to go out and represent the company to customers in an appropriate way. The portal was a 24/7 tool which helped prepare for the merger, but the company put a raft of other initiatives in place; the most significant of these from a people perspective was its Fast Start seminars. At the planning phase, the Clean Room team constructed training modules that managers could use to get their newly appointed team up to speed on the company. The Fast Start sessions were further followed up with a Fast Forward programme to have a smooth transition into the final phases. It also strengthened the culture. These programmes were developed within HR to help organization meet its business objectives. It was ensured that HP can take advantage of the technology to move up the value chain and HR was developed as 64

genuine business partners. After the merger, HP employees also wanted to know about the decision making process and the components of product lines and how they would be supported. The seminars worked at a strategic level but were also tactical to get people thinking about how they were going to operate. One of the major challenges was to ensure the best of both sides processes and practices were adopted, with speed and agility among the new companys core values, HP used an Adopt and Go approach when it came to deciding on processes which meant that instead of saying those processes could be improved lets design a new one, it would have been time consuming so they took the best from whichever world and went with it. Now HP is a complete mix of pre-merger HP and pre-merger Compaq built in and integrated across the organization. IMPLICATIONS AND CONCLUSION-TATA TETLEY The international marriage success lies in complementing each other .The year 2000 saw the Tata group acquire the Tetley group based in UK where the deal; was closed for 271 million pounds. The merger was undertaken on two counts. For one, Tata Tea had their global ambitions well in place, as they wanted to take Tata Tea to the global markets. The second reason, from Tatas side was the fact that they wanted to understand the global distribution system.

The deal was a rare example of an Indian company taking over a larger British group. 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. The cultural integration, which is often an issue in a merger or acquisition, has been smooth for Tata Tea and Tetley. 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. Both the groups were aware of the culture difference that existed and rather than trying to dominate each other, they adopted a focused approach to blend the two cultures. They 65

appreciated and worked towards adding to each others knowledge and skills and create business with better value prospects. The best part was that both the companies decided to leave behind the separate cultures of Tata and Tetley and move towards defining a single company. It was the first step towards a merger. The Merger was being seen as something beneficial for both the parties given the synergies that were expected. The key learnings from this merger were pre-estimating the importance of cultural differences, adopting a non-threatening approach and absence of time pressure. This actually helped Tata Tetley improve results. Conclusion Different cultures make different assumptions about others based on own values. Thus, while going for a merger activity, it is important to see them with our eyes not theirs. It isnt enough to say, We are two big companies coming together to form a giant, so this is a time to be happy. From due diligence to integration, being able to qualify and quantify cultural differences and synergies is the key to protecting shareholder value and reducing the risk of failure and a happy and everlasting merger.

BIBLIOGRAPHY
66

BOOKS 1. Change Management (by Jeff Hiatt) 2. Managing Change and Transition (by Richard A. Luecke) 3. Strategic Organizational Change (by Michael A. Beitler) 4. Managing Transitions: Making the Most of Change (by William Bridges) 5. Leading Change (by John P. Kotter) WEBSITES 1. http://www.hp.com/ 2. http://www.compaq.com/country/index.html 3. https://www.google.co.in/ 4. http://www.tata.in/ 5.http://www.tataglobalbeverages.com/our-brands/brands-overview/brandbrandid=fde0caaa-acb6-4094-ad53-0481902a6d19 detail?

67