Japan’s corporate leaders are quickly discovering that keeping pace with intensifying competition and game-changing technology in the current market demands a reconsideration of the traditional approach to business and management strategy. While this requires adopting an enhanced international mindset it does not mean abandoning best practices and values that these corporations have relied upon. After all, they would not have reached their current positions in the market without internally developed solutions and tactics for growth and expansion. Rather, it is about building upon what is already known and incorporating new ideas and fresh perspectives into existing corporate structures. It is the start of a conversation on change and a broader transformation to grow, improve, and succeed.
People are widely regarded as a company’s greatest asset. From managers and executives, to workers at the various tiers of the corporate hierarchy, high-value talent plays a vital function within the organization and thus can help catalyze a business transformation when brought under the umbrella of a new owner. If talent retention efforts during cross-border M&A lack the vigor necessary to retain key people, employees that leave will often take large portions of the deal value with them.
In some cases, this can lead to the failure of the entire transaction itself. In our analysis, Japanese business leaders noted that while their recent transactions were not motivated by the need to access human capital in foreign markets, they nonetheless had an appreciation for the people power within the targets they were acquiring. Respondents were most outspoken about the possible financial consequences that could ensue from high turnover immediately following deal close. Among Japanese corporations, the conventional approach taken during an acquisition is to respect the acquired company and its employees and implement as little change as possible, all the while exploring opportunities for integration. “Retaining employees was crucial during our deal since we didn’t want to lose any of the value the talent had or contributed to the target company. Also, having to recruit and train new employees would only increase our costs, and getting these new hires ready to take on responsibilities would have created uncertainty during post-deal integration,” said the head of corporate strategy at a Japanese manufacturing company.
The target market will also greatly influence the approach that Japanese acquirers take when addressing employment issues. In advanced markets, Japanese acquirers will take a more laissez-faire approach, making few management or employee changes and allowing the target to conduct business as usual. At a minimum, managers from headquarter offices in Japan will be given short-term assignments at the target companies. In emerging markets, a more aggressive approach is taken. Often, Japanese companies will make deeper changes in management to assert control over operations, once they have a good understanding of the value that management brings to the company. While this presents the danger of removing former decision-makers with influence over staff or connections in the local market, it provides greater authority to manage the integration process. “Decisions based around employment differ when you compare acquisitions in mature and emerging economies. Japanese corporations tend to focus on skill sets and talent that will add value to the target company in mature markets, while there is more of a focus on local connections that senior employees have in emerging markets,” states Tomohisa Muranushi, Head of Employment at Baker & McKenzie. When addressing employee issues and preparing for integration, one practice that is falling out of favor among business leaders from the US and Europe is short term secondment of managers to the target company .Sending managers from the home office can sometimes send the wrong message or cause existing management and employees to panic. Equally, short-term secondments do not afford the assigned parties enough time to truly understand the business and culture at the target company. As Baker & McKenzie Partner Tomohisa Muranushi elaborates, “Japanese companies will often send three or four managers to the target company for the purpose of helping to oversee the integration and develop loyalty among employees.
But the problem is that they’re only there for a few months, sometimes on two-month secondments. This isn’t really enough time to overcome the distance between the local people and new owners, and at the end of the day they just come back to Japan without making any visible progress.” Having said that, however, he notes that this is a result of the underlying Japanese tactic around making as few changes as possible in the target company.
This has sometimes worked in gaining more loyalty from employees of the target company as they feel less threatened or controlled by headquarters. One alternative that acquirers may consider is to invite managers from the target company to the home offices of the new owners. This will allow them to see firsthand how operations are handled in Japan and what expectations are in terms of their management and performance back at the subsidiary. In this way, the foundations of a stable relationship between the acquired and the acquirer can be set, and target managers come away with new knowledge of their place within the global strategy.
IMPACT ON INTEGRATION: LOST TALENT, LOST TIME, LOST VALUE
The loss of key talent during the early stages of a cross-border transaction can ripple throughout the deal process. Ultimately, the impact will most likely be felt during post-deal integration. As respondents note, deals and acquisitions will generally succeed when employees vital to the company, like management with deep local connections and experience running operations, continue to work in their current capacities and contribute to merger efforts. As the senior director of M&A at an American business services company notes, “staff dedication and retention has a greater impact on the deal than most acquirers realize and can increase profits and efficiency significantly.”
The head of corporate strategy at a Japanese industrial company also brought up the point that having to focus on recruitment and training took resources away from other parts of the deal that may have required more attention. “Having to train and hire new employees had a direct impact on our pre-deal timelines and our overall success,” the respondent said. To maximize time and talent retention efforts, cross-border acquirers should formulate a blueprint for identifying and approaching key employees as early in the deal cycle as possible. Enlisting cooperation from senior management in hand picking these individuals will help drive the process and ensure greater rates of retention. Tackling these issues early will also bring up another key area where companies need to focus: complying with local employment laws. Prior to implementing redundancies and conducting down-sizing procedures, dealmakers must make sure they are not in breach of employee contracts or national laws, investigations which can be bolstered by enlisting support from advisors in the target market familiar with local regulatory regimes.
BAKER & MCKENZIE
Baker & McKenzie, founded in 1949, is a multinational law firm. As of August 2016, it is ranked as the second-largest international law firm in the world with 12,100 employees including 6,100 fee earners and 4,600 lawyers on a full-time equivalent basis in 77 offices across 47 countries. It is also ranked as the second largest law firm in the world in terms of revenue with US$2.62 billion in annual revenue in FY2016. Baker & McKenzie is ranked as one of the top five international law firms in the majority of countries where it has an established practice. Clients prize Baker & McKenzie for its breadth of access to markets, as it can individually guide cross-border transactions without using external local counsel. In 2014, Baker & McKenzie opened offices in Jeddah, Saudi Arabia; Brisbane, Australia; and Yangon, Myanmar as well as a second global services center in Belfast, Northern Ireland. In April 2015, Baker & McKenzie announced it was the first international law firm to enter into a joint operation in the China (Shanghai) Free Trade Zone with the PRC law firm FenXun Partners
The Mergermarket Group (Mergermarket Ltd) is a media company specialising in corporate financial news and analysis. Through its web-based products Mergermarket, Dealreporter, Debtwire, BioPharm Insight, PaRR, Wealthmonitor, Remark and its acquisition of Infinata, Xtract Research and Inframation Group, the Mergermarket Group provides the advisory, corporate and financial communities with actionable financial intelligence, analysis and data. Mergermarket subscribers include more than 3,500 advisory firms, investment banks, law firms, hedge funds, private equity firms and corporates. The company now has over 800 staff including a 500-strong team of specialist journalists and analysts in 65 locations around the world with headquarters in London, New York and Hong Kong.