With mergers and acquisitions (M&A) in the biopharmaceutical sector showing no signs of slowing down, there has been some criticism of these deals in recent years. These acts of consolidation don’t always reap the fruits they set out to bear and, if not managed well, may even result in a stifling of innovation, reduction in R&D productivity and decreased value of the company.
In a recent study as part of an MBA project, an anonymous survey and interviews were conducted among a sample of biotech and pharmaceutical company employees and people close to M&A deals, to find out their experiences of M&A and to assess the value of staff communications during the M&A process.
The urge to merge
Despite the urge to merge, studies show that failure rates for M&As in general are high. Reasons cited for failures include poor corporate governance, poor valuation of the acquired firm and poor post-acquisition management, including poor communication with employees and mis-managed integration of staff.
M&A activity in the biopharmaceutical sector is seen as a means of growth and competitive advantage through, for example, access to new markets or geographies; growth in R&D pipelines; access to scientific expertise in a given therapy or technology area; access to sales and marketing expertise; complementary skills and company synergies.
M&A activity has swept the industry and has led to some high profile M&As, as seen with AstraZeneca, GlaxoSmithKline, Sanofi, Roche, Merck and Pfizer to name a few. According to industry database Evaluate Pharma, in 2011 there were nearly 200 M&As in the pharmaceutical sector. The last few years have seen big pharma facing thinning pipelines and patent expiries and for some this activity is a great means of gaining additional assets and technologies. In turn, many biotechnology companies have looked at the trade sale as a better exit and return for shareholders than the more traditional initial public offerings (IPO).
Despite the drivers for M&A, in general the failure rates are high. A 1984 study by McKinsey (Magnet) found more than two thirds of corporate M&As never earned as much as the acquirer would have made had he invested the money in the bank, while Kitching (1967) and Baker et al, (1981) both found that about 80 per cent of M&As studied did not meet either their financial or organisational expectations.
However, it has been shown that communicating with staff during M&A can reduce uncertainty, quell rumours and mitigate dysfunctional outcomes and can support employees through periods of change. Post-acquisition management – that is, what happens after the deal is signed – is often key to the success. Too often top management concentrates on getting the deal done and does not put enough effort into planning the post-acquisition phase.
Reasons for the deal
As part of the aforementioned MBA study, 92 per cent of respondents said their company had previous experience of M&A within the organisation. This would imply that lessons had been learned through the experience and could suggest that the M&A process would run more smoothly as a result of past experiences. On the downside, this experience could also mean that most employees within the organisation had been through one or more M&As in the past and may not be happy about another one.
Many of the respondents had undergone their most recent deal within the past 12 months (25 per cent) or within the past 12-18 months (46 per cent). Fewer respondents had undergone their last M&A 19 months-5 years ago (17 per cent) or more than five years ago (12 per cent). Most respondents said their organisation was planning for M&A activity in the next year (56.5 per cent).
Too often top management does not put enough effort into planning the post-acquisition phases …
Most survey respondents (84 per cent) said there was a detailed or rough implementation plan prior to the final deal, while 16.5 per cent said they were not aware or an implementation plan.
When responding about the most recent deal, 42.5 per cent of respondents’ organisations had acquired another company. The main reasons given for the deal were: access to R&D or pipeline (43 per cent), company growth or defence (38 per cent), entry to new areas or markets (32 per cent), entry to new product areas (25 per cent).
Talking to staff is not the priority when doing a deal. As one interviewee said: “Often the main focus is the deal itself and the financial benefits, synergies and scale. Companies don’t always think about the broader implications beyond this, so insufficient attention is paid to the communications imperatives of creating a new entity.
“Communicating with external stakeholders – especially shareholders – is prioritised in M&A. I have heard cases where employees first knew of a merger of their company by reading it in the business press”.
Reducing uncertainty
All of the interviewees agreed that internal communication is vital in order to reduce the high levels of uncertainty and rumours that tend to develop among employees during M&A. They also agreed that communication with employees can support the M&A integration, improve staff productivity and help to achieve better M&A outcomes.
“Without employee communications, the ‘water cooler conversations’ take over. Employees become disengaged, motivation falls and no work is done, driving business performance through the floor,” said an interviewee.
“If you don’t communicate, it is mayhem,” said a former communications head of a large pharmaceutical company. “All other things being equal, without a planned internal communications programme, the desired M&A outcomes will be much more difficult to achieve.”
All of the interviewees agreed that realistic communications were important during M&A so, even if the news is bad news (for example site closures, job cuts), this should be communicated and a timeline of events made clear, and all internal communications should match what is being said externally.
“Concerns about job cuts, cost saving initiatives and so on will follow the M&A announcement,” acknowledged one interviewee. “It is impossible to say ‘don’t worry, all jobs are safe’, so you have to find ways to communicate what you do know and what will happen next, and give timelines on how long things will take.”
Discussing company culture
Where the deal is done in order to access new markets or areas it could be that the parent company is acquiring an organisation in a different geography, with a different culture and different ways of working. This may make the integration process difficult. There is evidence that employee communications can support this process and in some cases a ‘third culture’ of the new organisation may be created.
The majority of respondents to the survey (88 per cent) agreed that it was important to create a company with common values and behaviours for a M&A to succeed. And 80 per cent said that the values and culture of their organisation were communicated and discussed after the M&A.
The reason why some respondents felt the communication of the culture and vision of the company was poor is unclear. It is perhaps a reflection of communication cascade that nearly 20 per cent did not think the culture and values of the organisation were communicated. Of course, it could be that in these companies it was not felt important to communicate the culture and vision of the company. Or perhaps the issues were communicated but not sufficiently well.
In describing the cultures of the two organisations in the M&A, 59 per cent of respondents said the cultures were different or totally different, with 41 per cent saying the two companies had similar or somewhat similar cultures. However, when questioned about the extent of cultural integration in their part of the business, 24 per cent believed no cultural change was needed; 48 per cent said there had been little cultural change and the minority of respondents, 28 per cent, said there had been significant cultural change within their part of the business.
This implies that even where cultures were different, in some cases no changes were made to culture within particular parts of the business. Integration of culture was believed to have been handled effectively (33 per cent) or to an extent (58 per cent) in the majority of responses, while 8 per cent believed this has not been handled effectively in the M&A.
As one interviewee said: “Companies are bad at understanding their own culture, let alone that of others. And many organisations are bad at seeing and understanding the differences.
“Some pharma mergers have seen lots of clashes at different levels, especially where the companies coming together have very different cultures.”
Vision and rationale
Communicating the reasons for the deal can help to gain staff buy-in and support during the M&A process, despite the accompanying uncertainties of change. It can help employees to establish an identity with and a commitment to the new organisation.
Most respondents in the survey felt that the rationale and vision for the M&A was communicated well. Some responses are positive about the communication of the rationale and vision for the M&A, while other comments suggest this could have been done better or was done badly in the M&A.
When asked do you believe the rationale and vision for the M&A were communicated well within your organisation after the M&A took place, 81 per cent of respondents said yes, while 19 per cent said no.