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Why does public-sector merger fail

Group-7 Ranadip Madhu Kumar Abhinav Divesh Ranjan Mudaliar Ravi Mohan Nikhil Motiwala

PGP/15/168 PGP/15/228 PGP/15/275 PGP/15/292 PGP/15/310

IOC and Insurance Companies Reasons for failure : AI Example Other reasons for Public Sector Mergers’ Failure 4 5 11/3/2012 IIM Kozhikode|MACR 2 .Agenda 1 2 3 Major Public Sector Mergers Issues with the Public Sector Mergers Examples of AI.

Ltd.Major Public Sector Mergers AI and Indian Airlines (IA) Indian Refineries Ltd (IRL) and Indian Oil Co. (IOCL) Insurance companies nationalized in 1970s & clubbed into four large public-sector organizations 11/3/2012 IIM Kozhikode|MACR 3 .

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. as they were ordered by the former international carrier IIM Kozhikode|MACR 4 11/3/2012 .Issues with the Public Sector Mergers (1/3) AI-IA merger • Prolonged strike by Air India (AI) pilots – AI and Indian Airlines (IA). 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. whether explicit or implied.

Issues with the Public Sector Mergers (2/3) IOC : Merger of Indian Refineries Ltd (IRL) and Indian Oil Co. (IOCL) (1964) 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. Ltd. – Every senior-level position that is open to all divisions is bitterly contested and divided among the two merged groups by unwritten but informally 11/3/2012 IIM and formulae 5 understood practicesKozhikode|MACR .

Issues with the Public Sector Mergers (3/3) Insurance Companies nationalized in 1970s & clubbed into four large public-sector companies – 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 11/3/2012 IIM Kozhikode|MACR 6 .

Motivation for mergers Create market power Save costs by sacking workers and increasing the workload on remaining employees Acquirers get banks and the government to waive part of the liabilities These so-called synergies are at the cost of either consumers. employees or bondholders 11/3/2012 IIM Kozhikode|MACR 7 .

Autopsy of the failure of Public Sector Mergers Case of AI merger Merger of AI was not driven by the boards or senior management of the two airlines Initiative was entirely the design of the ministry of civil aviation The two managements were bullied to assemble a joint 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 be realized. 11/3/2012 IIM Kozhikode|MACR 8 .

Time-line for AI merger • Minister of aviation promised Parliament that network integration would be achieved in 16 weeks • In reality. another committee to Dharmadhikari’s recommendations implemented 11/3/2012 IIM Kozhikode|MACR study can how be 9 . the contract for network integration of the airlines was awarded in April 2010 and realized in 2011 • The new AI could not even merge its call centers or airport lounges. a committee under Justice Dharmadhikari – to sort out the wage fixation and – related HR issues • In 2011. • In 2010.

these savings are very less 11/3/2012 IIM Kozhikode|MACR 10 . maintenance facilities • Gains were to come from growth in revenue and reduction in borrowing costs • Revenue growth would result from network integration and subsequently by joining the Star Alliance. which would divert international traffic towards the merged entity • The savings and synergy can be expected from fewer ladders and desks at the terminals or buses to ferry passengers • In an industry where fuel and lease rent accounts for 80 per cent of costs.Cost-Benefit Analysis for AI merger Downsides • Consultants had predicted an increase in HR and branding cost of Rs 385 crores over the first three years Upsides • Eroded all the cost savings from integration of hangars.

FACTS equally valid for other PSUs • Possibility of gains through exercising market power is remote – most PSUs (power. railways) cannot even charge enough to recover their legitimate costs. leave alone extract monopoly rent • Nor can they realize savings from the merger. 11/3/2012 IIM Kozhikode|MACR 11 . • The senior management will spend the bulk of its time and energy sorting out human issues. which come mainly from increasing workload and reduction in overlapping manpower • The human costs of mergers in PSUs far outweigh any minor gain. most employees would seek protection under the mandate of writs in courts. rather than evolve new strategy or fight competition. Layoffs are impossible. petroleum marketing.

lawyers. advisers and investment bankers 11/3/2012 IIM Kozhikode|MACR 12 .The bulk of mergers fail to create value for anyone except consultants.