Pharma is being taken over by takeovers but what can Boards do to keep their heads above water?
The surge of deals in the pharma industry shows no sign of slowing down and, with deal values three times higher in 2015 than the previous year, it is even more important to get the post-merger integration right. Regardless of whether the takeover is hostile or friendly, such deals bring a whole glut of issues for the Boards on both sides.
The paradigm under which deals are pursued needs to change; the mindset of Boards needs to move from the traditional approach of control–order–predict to a more productive collaborate–empower–create.
One of the products of the control–order–predict mindset is the denial trap. Here, the acquirer calls the deal an acquisition while the acquired calls it a merger. Coming from different perspectives, they fail to work out a shared vision. While the acquirer has a built-in compulsion to install its own people, systems and policies, in order to preserve the relationship it may promise a degree of polite autonomy. However, while the acquired buys into the promise of autonomy, deep down it fears a take-over – that its systems will be replaced, its people laid off and its identity diluted.
In the end, the acquiring organisation does indeed follow its compulsion. Without honest communication, the businesses lose momentum as they wrestle with internal wrangling and realignments, jeopardising the value of the deal itself.
These issues can be even more acute in a takeover situation; where two conjoining organisations openly resist one another. Within the acquired, a ‘fight or flight’ mentality springs up among staff who are naturally loyal to their brand; their instinct is to defend themselves against the other side and, if that fails, to get out.
What can the Board do about this? The first step is to be crystal clear about its commitment to outcomes. Communicate clearly the vision for the outcome of the deal. Also, take brand identities out of it; by taking off the labels, as it were, a sense of unity can be engendered on both sides so that everyone believes they are a single group of people trying to achieve and create something new together.
At the same time, a focus on the intangible, human dynamics is critical. Most often, companies enter into deals to acquire specific drugs or a pipeline, and they almost overlook that they are acquiring people too. While people issues may not be a core competency, it is essential to make the people dynamic work if a deal is to be successful.
To move a deal into the new paradigm of collaborate–empower–create, acquirers must be willing to surrender their own egos and to embrace something new. It is not just the organisation being acquired that is undergoing a change; both sides are being transformed and everything must be reinvented. By infusing management with the sense that both sides need to change, a common position can emerge and the managers ‘on the ground’ can create a truly collaborative environment.
Meanwhile on the acquired side, particularly in a hostile deal, emotions can be running high, so the Board must show a cool head and be the voice of reason. Of course, once it is clear that the deal is going to happen, all efforts must be focused on negotiating the best possible outcome for the business and its people. However, beyond strategic negotiations, Boards also need to focus on moving people through the natural reaction cycle (shock, negativity, fear, resentment, suspicion) as quickly as possible. They must reach a new frame of mind that is practical and realistic – the deal is going to happen, so how can we make the most of it and what opportunities might it throw up? What will the new organisation look like?
An interesting approach taken in many recent deals by European pharmas is the deliberate strategic decision to acquire a smaller company and to keep it separate. Here, the acquired organisation keeps its brand name, systems and ways of working, and it can be many years before the organisation is actually integrated. However, there is a strong case for integrating sooner rather than later in order to fully realise the benefits of the deal.
Deals are hard to manage and many fail to deliver the benefits promised to shareholders. A recent survey by Korn Ferry, for example, identified that delivering on M&A and driving strategic change were skills leaders felt they were least equipped with.
However, if Boards focus on creating an open and collaborative mindset on both sides, and embrace a willingness to create a whole new organisation with an established name, the benefits will start to come through.
Mike Straw is CEO of organisational change consultancy Achieve Breakthrough
Five tips for boardrooms
1 – Avoid the denial trap – be open and honest about what you want
2 – Focus on your commitment to outcomes
3 – Reinvent the whole organisation by loosening the grip of brand identity internally
4 – Help everyone see that change must happen on both sides
5 – Encourage opportunities to drive collaboration and innovation