why public-sector mergers fail

7/31/2019 Why Public-sector Mergers Fail

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Why does public-sector merger fail

Group-7

Ranadip Madhu PGP/15/168

Kumar Abhinav PGP/15/228

Divesh Ranjan PGP/15/275

Mudaliar Ravi Mohan PGP/15/292Nikhil Motiwala PGP/15/310


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Agenda

Major Public Sector Mergers1

Issues with the Public Sector Mergers2

Examples of AI, IOC and Insurance Companies3

Reasons for failure : AI Example4

Other reasons for Public Sector Mergers Failure5

11/3/2012 2IIM Kozhikode|MACR


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Major Public Sector Mergers

AI and Indian Airlines (IA)

Indian Refineries Ltd (IRL) and Indian Oil Co. Ltd.(IOCL)

Insurance companies nationalized in 1970s &clubbed into four large public-sector organizations



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Issues with the Public Sector Mergers (1/3)

Prolonged strike by Air India (AI) pilots

AI and Indian Airlines (IA), the pilots of both from the

dissolved organizations continue to view themselves

as employees of the original enterprise

in their opinion the promises made then, whether

explicit or implied, have to be honored

the contentious issue in the current tussle that only

former AI pilots have the right to receive training and

fly the new Boeings, as they were ordered by the

former international carrier

AI-IA merger



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IOC still looks like two companies

Two distinct cultures Different HR practices

Diverse career progressions

Inter-division relations are characterized by rivalry

and mutual distrust. Every senior-level position that is open to all

divisions is bitterly contested and divided amongthe two merged groups by unwritten but informally

understood practices and formulae

IOC : Merger of Indian Refineries Ltd (IRL) and Indian Oil Co. Ltd.(IOCL) (1964)




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HR problems took decades to unravel Numerous managing directors and general

managers slotted into new positions

Resulted in writ petitions and court cases took decades

to resolve

Insurance Companies nationalized in 1970s & clubbed

into four large public-sector companies




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Motivation for mergers

Create market power

Save costs by sacking workers and increasingthe workload on remaining employees

Acquirers get banks and the government towaive part of the liabilities

These so-called synergies are at the cost of

either consumers, employees or bondholders



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Autopsy of the failure of Public Sector Mergers

Merger of AI was not driven by the boards or seniormanagement of the two airlines

Initiative was entirely the design of the ministry ofcivil aviation

The two managements were bullied to assemble ajoint team to work out the merger

Not much synergy or cost-savings two former entities had placed large orders from two rival

manufacturers (Boeing and Airbus),

unlikely that any synergy from common maintenance can berealized.

Case of AI merger



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Time-line for AI merger

Minister of aviation promised Parliament that networkintegration would be achieved in 16 weeks

In reality, the contract for network integration of theairlines was awarded in April 2010 and realized in 2011

The new AI could not even merge its call centers orairport lounges.

In 2010, a committee under Justice Dharmadhikari to sort out the wage fixation and

related HR issues In 2011, another committee to study how

Dharmadhikaris recommendations can beimplemented



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Cost-Benefit Analysis for AI merger

Consultants had predicted an increase in HR and branding cost of Rs 385crores over the first three years

Downsides

Eroded all the cost savings from integration of hangars, maintenance facilities

Gains were to come from growth in revenue and reduction in borrowingcosts

Revenue growth would result from network integration and subsequently byjoining the Star Alliance, which would divert international traffic towards themerged entity

The savings and synergy can be expected from fewer ladders and desks at theterminals or buses to ferry passengers

In an industry where fuel and lease rent accounts for 80 per cent of costs,these savings are very less

Upsides



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FACTS equally valid for other PSUs

Possibility of gains through exercising market power is remote

most PSUs (power, petroleum marketing, railways) cannoteven charge enough to recover their legitimate costs, leavealone extract monopoly rent

Nor can they realize savings from the merger, which comemainly from increasing workload and reduction in overlappingmanpower

The human costs of mergers in PSUs far outweigh any minorgain. Layoffs are impossible; most employees would seekprotection under the mandate of writs in courts.

The senior management will spend the bulk of its time andenergy sorting out human issues, rather than evolve newstrategy or fight competition.



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The bulk of mergers fail to create value for anyone except consultants, lawyers, advisers and

investment bankers


why public-sector mergers fail

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