Demergers may create problems for employees in the short term, but studies show that they are beneficial to shareholders
The Ambani brothers have split the Reliance empire and gone their separate ways. Its been headline news. Ignore the acrimony and mudslinging and the key issues that have been the modalities of the break-up: who gets what, and the effect on shareholders. Lost in the process are the employees.
Reliance insiders say that the senior people were given the choice of joining one faction or the other. You can do it for the top brass, but obviously not for the rank and file.
It is also a question of management styles, says Mumbai-based HR consultant D. Singh. They are different. You might not be comfortable with one or with the new corporate culture that may unfold.
There is a lot of management literature on mergers and their effects on employees. Surprisingly, there is very little research on demergers. One reason is that a merger has integration problems as newcomers try to fit into an established corporate culture. In a demerger, there is no outside influence. The employees who are part of the splinter are busy shedding the shackles of their parent organisation.
Besides, there are many more mergers than demergers. The latter are not as popular, says management consultant and author Robert Heller, because even a modest acquisition or merger adds visibly to the managements power. By the same token, a demerger, removing a substantial business from the corporation, subtracts from the managerial might. Secondly, in a demerger the board implicitly concedes that its management cannot win the best possible results from the subsidiary. If the demerger succeeds as when Vodafone was carved out from Racal odious comparisons are bound to be made... Vodafone soared to a market worth many times that of its erstwhile parent... its only human to feel at least a twinge of envy when former subordinates soar into the corporate stratosphere.
Demergers are more common when the market is down and managements are desperate to add to their companys market capitalisation.
A demerger creates problems for employees for several reasons. First, there are the location issues. Second, a demerger creates a smaller company. The employees have to be reassured that they dont lose out on earlier benefits. When CemCo was demerged from Larsen & Toubro, chairman A.M. Naik had to issue several missives to the employees on this score.
When Godrej Soaps went in for a demerger in the middle of 2000, some 1,000 of its 2,650 people were dispatched to Godrej Consumer Products. Chairman Adi Godrej sent a personal letter to all the employees which said: The change will lead to significant opportunities for employees at all levels... Says D. Singh: It made a huge difference.
What is needed at the end of the day is constant reassurance. HR managers need to concentrate on this area because demergers are only going to increase. At GE, Jack Welch conducted some shotgun demergers because of his philosophy that the company should not be in areas where it was not No. 1 or No. 2. Appliances, the core business of GE in another era, went out of the window amid much heartburn.
I
f you want a successful demerger, look at Nokia. The company exited from paper, tyres, metals, electronics, cables and TVs to concentrate on mobile phones. In this case, the parent went places.
In a study of 38 cases, the London School of Economics found that demergers are beneficial to shareholders both at the time of the announcement and in the two years following. The writing is on the wall.
THE SPLIT FIT
The ideal demerger creates a company that is:
In a single product or services market.
Staffed by experienced and committed managers in that area.
Better placed through controlling its own investment decisions and acquisition strategies.
In a fast-growing sector, very different from its parent company.
Free to compete with its parent which, as a larger organisation, is unable adapt to new technology (traditional banking vs net banking, for instance).
The Ambani brothers have split the Reliance empire and gone their separate ways. Its been headline news. Ignore the acrimony and mudslinging and the key issues that have been the modalities of the break-up: who gets what, and the effect on shareholders. Lost in the process are the employees.
Reliance insiders say that the senior people were given the choice of joining one faction or the other. You can do it for the top brass, but obviously not for the rank and file.
It is also a question of management styles, says Mumbai-based HR consultant D. Singh. They are different. You might not be comfortable with one or with the new corporate culture that may unfold.
There is a lot of management literature on mergers and their effects on employees. Surprisingly, there is very little research on demergers. One reason is that a merger has integration problems as newcomers try to fit into an established corporate culture. In a demerger, there is no outside influence. The employees who are part of the splinter are busy shedding the shackles of their parent organisation.
Besides, there are many more mergers than demergers. The latter are not as popular, says management consultant and author Robert Heller, because even a modest acquisition or merger adds visibly to the managements power. By the same token, a demerger, removing a substantial business from the corporation, subtracts from the managerial might. Secondly, in a demerger the board implicitly concedes that its management cannot win the best possible results from the subsidiary. If the demerger succeeds as when Vodafone was carved out from Racal odious comparisons are bound to be made... Vodafone soared to a market worth many times that of its erstwhile parent... its only human to feel at least a twinge of envy when former subordinates soar into the corporate stratosphere.
Demergers are more common when the market is down and managements are desperate to add to their companys market capitalisation.
A demerger creates problems for employees for several reasons. First, there are the location issues. Second, a demerger creates a smaller company. The employees have to be reassured that they dont lose out on earlier benefits. When CemCo was demerged from Larsen & Toubro, chairman A.M. Naik had to issue several missives to the employees on this score.
When Godrej Soaps went in for a demerger in the middle of 2000, some 1,000 of its 2,650 people were dispatched to Godrej Consumer Products. Chairman Adi Godrej sent a personal letter to all the employees which said: The change will lead to significant opportunities for employees at all levels... Says D. Singh: It made a huge difference.
What is needed at the end of the day is constant reassurance. HR managers need to concentrate on this area because demergers are only going to increase. At GE, Jack Welch conducted some shotgun demergers because of his philosophy that the company should not be in areas where it was not No. 1 or No. 2. Appliances, the core business of GE in another era, went out of the window amid much heartburn.
I
f you want a successful demerger, look at Nokia. The company exited from paper, tyres, metals, electronics, cables and TVs to concentrate on mobile phones. In this case, the parent went places.
In a study of 38 cases, the London School of Economics found that demergers are beneficial to shareholders both at the time of the announcement and in the two years following. The writing is on the wall.
THE SPLIT FIT
The ideal demerger creates a company that is:
In a single product or services market.
Staffed by experienced and committed managers in that area.
Better placed through controlling its own investment decisions and acquisition strategies.
In a fast-growing sector, very different from its parent company.
Free to compete with its parent which, as a larger organisation, is unable adapt to new technology (traditional banking vs net banking, for instance).
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