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MIT SCHOOL OF BUSINESS Case No. :-8 Batch : - 28th Faculty Name : - Prof. (Col). N.

Ram Gopal Sub Semester Date : - Performance Management : - III :-

HR PAVES THE WAY

Questra Technologies has just acquired two telecom companies to enable the company to leapfrog into the top three global broadband service providers position. Determined to avoid the mistakes made during a previous merger, Questra planned and executed a comprehensive, HR led post merger integration program. Would Questra achieve the primary objective of the merger? Monday, 04 April 2005, 9:30am, Sanjay Gupta, Head Group Human Resources, Questra Technologies, mentally ran Human Resources, Questra Technologies, mentally ran through the agenda for the final review meeting of the year-long merger and integration initiative that his company had undertaken. In 2004, when he was given charge of the project, many skeptics had warned him about the pitfalls awaiting him.

The pitfalls, it seemed, were many. For one, it was common knowledge that many a M&A (merger and acquisition) failed to deliver the promised value because management teams did not spend enough time to analyze what would work and what wouldn't in the new integrated entity. Second, according to a study by an international consulting firm, two thirds of those involved in leading change felt that they had been insufficiently prepared for the task by senior management. Third, as suggested by one research, more than nine out of ten corporate M&As fell short of their objectives because managers often got bogged down with finance and technology issues and failed to concentrate on integrating corporate cultures and management styles. As Gupta looked back on his year long journey to this point, he did so with a satisfied smile. For, he was now confident that Questra Technologies would prove the skeptics wrong. A marriage made in heaven? Headquartered at New Delhi, India, Questra Technologies was a $3 bn globally admired next generation broadband technology company. Its vision was to be a leading provider of cutting edge communication products and services, specializing in application and content distribution across communication platforms and global markets. Page 1 of 10

In 2004, Questra decided to acquire two next generation telecom companies simultaneously with the objective of leapfrogging into the top three global broadband service providers position. The two companies were the Singapore based Sequence Technology, a $70mn next generation company operating in the internet protocol domain, and Emarin Inc, a $55 mn US based company operating in the mobile technology domain. Sequence Technology had an international footprint in broadband services with network operation centers

It was critical that Questra integrated the cultures of all three companies into a cohesive one

(NOC) in London, Hong Kong and Tokyo. Emarin Inc, on the other hand, was the leading direct communications provider to the New York Stock Exchange, Chicago Mercantile Exchange and NASDAQ, and interconnected with multiple market participants and intermediaries. Together, Sequence Technology and Emarin Inc had 9500 enterprise customers, concentrated in four industry verticals, which accounted for 50% of the broadband market worldwide. The verticals were financial, legal, government and healthcare.

The acquisition of Sequence Technology and Emarin, it was thus felt, would enable Questra to reap benefits from the convergence of technologies; multiple platform networks and applications; increased economies of scale and scope; a larger geographical footprint; and accelerated penetration into the lucrative $800bn global enterprise data market.

If, however, the M&A was to result in increasing shareholder value, it was imperative for the merged entity to operate using the knowledge capital, capability, and best practices of all three companies. To do so, it was critical that Questra integrated the cultures of all three companies into a cohesive one and ensure that it retained all key knowledge workers from a collective work force of 24,000 plus as on date. The three companies together had hired some 7500 employees in 2006, and were projecting to hire another 10,000 plus in 2007 and an estimated 18,000 in 2008. Much of the recruitment was focused on the fast shrinking pool of experienced and talented telecom engineers. Compatibility issues About five and a half years ago, Questa had acquired its first company. At that time, the company had made many mistakes in integrating the two companies, and the merger initiative had been rather painful for many managers. The M&A activity had succeeded in the end, but not before the company had faced several bottlenecks. Not surprisingly, the traumatic memories of the previous merger led to skepticism in the minds of several Questra managers who had lived through the experience.

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According to Naveen Tandon, Senior Manager, who had been with Questra for the past eight years, the issues were many: "Several employees resisted change at that point of time because they feared negative personal consequences. Unless employees are informed about how the merger will affect their career, they will resist it. Moreover, downsizing and consolidation of employees is normal after a merger, as management tries to eliminate redundancy. Employees know this and worry about their future. The period of worry is also prolonged as communication from top management usually comes to a standstill with priority being given to planning future direction and restructuring. Middle management cannot take on the role of reassuring employees since they too are kept in the dark. Then, there are questions about whether the acquiring company will impose policies and procedures on the acquired company or vice versa. Inevitably, employees see the other company's policies as less effective than the policies currently being followed. All these grey areas finally lead to many employees concluding that they must choose between taking care of themselves and supporting the company. Some senior managers may also try to protect the employees in their team. Consequently, many employees view mergers as a battle to be fought and won." Sharad Goklani, another senior manager who had also spent nine years with the company had a different story to tell. He felt that roles and responsibilities change when companies merge. It may not be clear who is in charge, who makes decisions and what authority employees have. Many aggressive employees seize a perceived advancement opportunity and assume they are better off asking for forgiveness than permission. Passive personality types will wait until someone in authority clears the confusion. Without clear roles and responsibilities,productivity suffers as employees postpone work until clarity is achieved. In the previous merger Goklani also found that, many employees chose the certainty of a new job over the uncertainty of staying with the merged company. Some left because they felt betrayed. The irony was that, in a merger situation, the more talented employees leave because they easily find other opportunities. The deadwood often stays because they do not have other options. Prenuptial decisions Human resource management was, in fact, given the highest priority with Questra beginning the employee restructuring initiative even before the announcement of the merger with Sequence and Emarin. The timing of the initiative played a critical role since it helped the new management to lay their cards on the table immediately post the announcement. To ease the transition, Questra also announced the nomination of Sanjay Gupta as Integration Officer. In his new role, one of the first reports that Gupta had to give Philip Mathew, CEO Questra Technologies, was a detailed organogram, recommending managers for various executive positions in each department, group, division and location of the merged entity. Put simply, the most crucial decisions concerning the structure of management were taken early in the process. For each top executive position, Gupta came across at least two or three strong contenders. Page 3 of 10

He was aware that any negligence over the choice of management ran the risk of sinking the M&A. Employees from the acquired companies still harboured doubts

Mathew immediately chose the best fit between contenders and available positions based on the report. Once the new organogram was finalized, a meeting of all the senior managers from all the three companies was arranged to draw up a list of employees who were deemed as indispensable to the newly reorganized Questra Technologies. Commenting on the process, Mathew, said, "The top management team went through the organizational structure line by line to identify the key employees who must be retained." It wasn't an easy task. The big challenge for the team was to develop a set of merit based criteria that would be acceptable to all stakeholders and implement the same across the company at the earliest. Within the next three days, the team came out with a shortlist and on that basis one top manager for each division was made accountable for retaining key employees. Thus, when the merger was announced, the Questra management team already had a detailed list of key employees. This enabled the management to immediately touch base with the identified employees, meet with them on the shop floor, explain the fundamentals of the merger, and outline the future process. The managers also conducted candid and open discussions with the employees, staying with them for as long as it took.

Even employees located in several remote international locations were contacted through phone or the Internet within two hours of the deal being announced. To such employees, Questra managers said, "We want you to know that we are really excited about this acquisition and that you will be playing a key role. We are planning to hold a meeting in your location within the next couple of weeks, at which time we would like to talk to you about the objectives of this merger and your value to us".

As Mathew points out, "You have to get in touch with employees quickly, communicate extensively, and tell the employees what you know before they fall prey to rumors. Though much critical information cannot be disclosed, it is important to share what you can while assuring employees that you will communicate the rest as soon as you are in a position to do so.

Of course, the management still had to face the challenge of dealing with hostile and average performers, and respond to questions such as, "We are the acquirer, not the acquired; so, why are we losing our jobs? " Further, the management found that employees from the acquired companies still harbored doubts, leading to questions such as 'are they going to value us in the long term? '; 'are they going to be professionally Page 4 of 10

managed. To address such questions, Gupta believed that Questra Technologies had to roll out an assessment and selection process that would demonstrate the company's professionalism in organizational management and career planning. This, he felt, would result in employees feeling valued. Setting the right note The first phase of the merger process had been successfully accomplished. But, the Questra management believed that the situation was still fragile and an extensive communication program was required to clarify various issues and concern areas. With this objective, the company launched a comprehensive employee communication program, which included a statement of guiding principles and policies on employee relations, besides other critical HR policies.

The statement was drafted to project consistent employee management standards across the company and its operations, and to powerfully communicate the company's new goals and values. Management also decided to tailor the statement on the merger deal to reflect the guiding principles. Some of the statements included were:

We seek to capitalize on the strengths of all three both companies in the employee selection process. employee selection will be done on the basis of meritocracy, and by matching competencies and Experience to positions. A committee comprising the CEO, the head of HR and other top managers will review all conflicting cases.

In addition to the above, the company also organized several workshops, presentations and interactive sessions to develop a understanding of the merger process that would unfold over the next few months.

Meeting ground The Questra management also realized that the integration would succeed more if it was modeled on an inclusive process rather than a top-down, autocratic one. A decision was, therefore, taken to launch a new culture formation initiative across the company. The thinking was that the culture formation process would determine the manner in which the company would tackle issues and challenges, employee interaction with each other, and company interaction with stakeholders and employees. By following such an inclusive culture formation process, it was felt, that employee commitment to the newly merged entity would be guaranteed .

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Questra did realize that integrating of cultures was always a difficult and hugely challenging task. And, in this case, the task was doubly, or rather triply, difficult since three companies were being merged into one. Mathew, therefore, believed that it was necessary to harmonize, regularize and communicate about all elements that influence culture, including learning and development, recruitment, performance management, employee engagement and empowerment.

He further believed that to avoid the backward looking "we versus them" thinking, it was advisable to form new teams with employees from all three companies. Such an organizational structure would then result in the new culture including the best elements from all three companies.

On the basis of the above rationale, the Questra management carried out a detailed analysis of the culture of all three companies. This included a diagnosis of the existing culture, value systems, norms, differences between and the common elements of all three cultures, cultural barriers, and the basic ingredients of the desired new culture. The diagnosis also established "linkages" among all three companies to achieve a better understanding.

The analysis helped Questra to evolve a road map for immediate implementation, which included identification of the best value system emerging from all three cultures; critical diversity issues; development of a code of conduct including positive and negative behavior for all stakeholders; and an action plan for incorporation of the code of conduct in all HR systems and procedures within a specified duration. A new family formation: The next priority was to incorporate all remaining employees into the activity of the reorganized Questra. This was definitely not the same as communicating with or motivating employees. It was reintegration. It meant engaging employees as meaningful contributors in the strategic challenges facing the company. Concrete, emerging business issues would need to be used to generate a sense of urgency. The urgency generated would also have to be a cascading influence, starting at the top and continuing down through organizational levels. With the above priority in mind, Mathew and Gupta scheduled a four day off site engagement program for 125 of Questra's reorganized senior and mid level managers.

A senior technocrat from a middle management strategic initiative team kicked off the meeting with a brief presentation of the three key focus areas, which would result in repositioning Questra and leveraging its competitive advantages.

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The first key area focused on strengthening partnerships with the large customer base of Sequence Technology and Emarin Inc. The second focus area was to integrate the business processes of all three companies and the third was to offer an integrated product and service offering to customers. Small groups were formed and members were then asked to identify the critical dimensions in these strategic focus areas. There were several requests for modifications and improvements from the members when the group reconvened, but at the end there was a general agreement on the various ideas.

The next step was an internal assessment and evaluation. Components of the strategic structure and processes were divided among teams with the task of analyzing how the said components might affect the three focus areas. When this analysis was shared with the larger audience, it was clear to most employees that Questra's business strategy would be seriously influenced by the new initiative.

The process, like all other merger processes, was however not without its stress and flash points. For it also succeeded in exposing managers who were still resistant, and even hostile to the merger. One such senior manager, for instance, chose the last twelve minutes of the meeting to air his differences with the merger and Mathew publicly. The manager was asked to resign a week later. Mathew explained the decision by saying that the manager was asked to resign not for disagreeing but for never disagreeing in the past or at any time during the meeting except in the penultimate minutes. Most Questra employees seemed to accept this explanation, leading Mathew and Gupta to believe that the incident would not affect the integration process.

Questra followed the above meeting with a two day, offsite event for select operational level frontline employees. In this program, over 75 employees were split into smaller peer groups from each of the major functional groups in the reorganized company. The new concept proposed in the last strategic meeting was discussed. Mathew's objective was, first, to give customers a single point contact with Questra and, second, to develop the customer service team to break bureaucratic hurdles and increase customer satisfaction. He was of the opinion that it was difficult to shift and develop capabilities of the customer service team unless deadlocks were broken and resources redeployed.

Exhibit 01: all three companies at a glance

Questra technology Total valuation of the company $ 3bn

Sequence technology $ 70 mn

Emarin inc $ 55 mn

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Nature of the company

privately held company

privately held company turnover $ 23 mn

privately held company $ 20 mn

Current sales

$ 80 mn

Pat

$ 21 mn

$ 4.2 mn internet protocol domain 4000 plus 1900 plus telecomm/ soft. engg 25 years 31 years

$ 6.7 mn mobile technology domain 3495 plus 1700 plus telecomm/ soft. engg 29 years 35 years

Areas of business. expertise Current number of employees Number of employee hired during 2005-6 Background of the employees Average age of employees Average age of the managerial staff Average number of years of experience

broadband technology 16,500 plus 3500 plus telecomm/ soft. engg 27 years 33 years 4 years 5.1 years 5.7 years

5.1 years

5.7 years

* looking into the vast emerging opportunities, all the above three companies together plan to hire 10,000+ employees in 2007, and 18,000+ employees in 2008.

Growing the family tree Integration does not begin and end with few offsite meetings, however effective they might be. Mathew's next move was to make more structural changes. To overcome this, Mathew decided to make the organizational structure flexible enough to accommodate all high performing individuals. He believed that growth should not just be up the ladder or depend purely on acquiring managerial competencies. Another productive growth path could be horizontal. Many globally admired companies had also instituted technical expertise programs to allow individual contributors and specialists to develop their expertise and competencies. According to Mathew, the lateral method also worked because it was consensual in style; an important factor in managing highly talented individuals.

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Nurturing the family In the subsequent stages Questra launched a few other unique employee engagement initiatives. The company decided to identify competencies needed for a gamut of roles, each of which carried a rating from one for a beginner to five for an expert. The idea was that in the communication industry, junior employees had limited influence over their assignments but were nevertheless crucial links in the chain. Hence Gupta believed that they must be given a clear picture of how their career could shape up and have greater control over it. Using the competencies matrix, Questra employees would be in a position to view not only a profile of their current competencies but also what competencies they needed to acquire in order to grow into more challenging positions. To help them acquire desired skills, the company instituted learning programs, many of which were delivered and administered through the Internet. Moving forward, Questra Technologies also launched a program called "Fast-Track", which identified fifteen career milestones on the path to becoming a senior manager, each of which triggered development activities. Further, a unique two month residential course for a handpicked group of probable senior managers from across the company was also instituted and received good acceptance from employees. The programs ensured that employees kept learning and networking even after they reached senior management positions. To keep employees happy and energized, the company also launched another program to help prepare employees for life outside the company, besides helping them enhance their competencies. In addition, recently launched programs aimed at keeping the company in touch with former employees, more flexible career paths and an employee incentive system linked with development for senior executives were also well received. By giving employees more control over their career development, top management felt that the overly aggressive "stay or move" approach, which was a risky strategy when talented employees were in short supply, had been replaced with a more persuasive approach. As Gupta remarked, "Not everyone can be a senior employee, but they can still be extremely valuable to the company." Family unity What was the outcome of Questra's year long post merger? "One hundred percent retention of key talent", according to Mathew, as Gupta was preparing for the closing review meeting of the post merger integration program, he reflected that a systematic and well planned HR led, post merger integration program had led to a smooth and successful transition. The program had succeeded in making managers focus on strategic as well as people related issues. After all, integration was about changing not just organizational structures, processes and strategies but also people without whom no M&A activity could achieve its objectives. This was the mistake made by organizations world over: the assumption that the merger by itself would generate sufficient interest to get employees and stakeholders on board and that one speech from the CEO Page 9 of 10

would get everyone going The organization structure, systems and processes had also aligned employees with organizational goals by rewarding certain behavior and discouraging others.

Gupta further reflected that the energy generated from the integration initiatives would result in the rejuvenated energy of Questra's work force capitalizing on the strengths of all three pre-merger companies. Truly, leaders must channel employee energy behind strategic intent. Unless, people receive clear guidelines and an understanding of how they can contribute to the overall goal, their energy will deplete rapidly. For their energy to be fully utilized, top management must actively drive the pace of integration, embrace it in specific ways, make it personal, and ensure that the company improves individual and organizational competencies in order to capitalize on emerging market opportunities.

Question 1. What is the effect of Synergy in M&A? And what common synergies actually inspired this merger? 2. Discuss in detail various actions taken to smoothen the pre merger, integration and post merger stages of M&A/ 3. The Questra management seems to have pulled out all the stops to prevent the typical post merger issues of employee attrition, morale, confusion and cultural conflicts. The question, however, remains as to whether the post merger integration process will succeed in catapulting Questra into the envisioned top three global broadband company position and deliver significantly increased shareholder value? To ensure that the primary objective underlying the merger is met what should HR do next?

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