Global Transactions Forecast: The Impact Of Macro Trends On Future M&A And IPO Activity

Cross-Border Deal Making In The High-Tech Industry: Lessons Learned From An M&A Transaction


By Willis Towers Watson

With merger and acquisition (M&A) activity heating up worldwide, two Towers Watson M&A experts met with Karen Gaydon, a successful U.S.-based deal maker whose team at Synaptics recently closed the acquisition of a joint venture in Japan. This article, which summarizes their discussion, includes insights from all three on M&A trends in the high-tech industry, as well as valuable information about M&A success factors.

Alex Young-Wootton (Director, International Consulting, Towers Watson (Facilitator)): Karen, thank you for joining us today. We’re looking forward to hearing your thoughts about recent M&A activity in the high-tech industry worldwide and, specifically, your recent experiences doing a deal in Japan.

First, what’s your general impression of the M&A dynamics in the high-tech space? Also, what types of deals are being done in the industry; where are they happening, and what’s motivating the deal makers?

Karen Gaydon (Senior Vice President, Global Human Resources, Synaptics): There are several factors. Many companies have a good deal of cash right now, which increases their odds for doing an accretive deal, even if their stock price is low. There are also some very low interest rates out there.

In high tech, there’s a lot of talk about synergy — that is, leveraging strategies to leapfrog the competition. That’s what happened in our 2014 acquisition of Renesas SP Drivers (known as RSP). RSP is a display-driver company, which is a great complement to our Synaptics touch business. Together, we have a powerful, market-leading strategy for display integration. That’s the sort of strategic synergy I mean.

It’s also worth pointing out that the stock market has generally reacted very positively to recent acquisitions, which is another driver of the considerable M&A activity happening now.

“Technology companies that had traditionally been isolated to Silicon Valley are continuing to expand around the world, creating attractive acquisition targets for U.S. multinational companies.”

Young-Wootton: You mentioned the available cash in the high-tech industry; we’ve certainly noticed that, too. With the buildup of cash, the valuation of high-tech companies has seemingly increased accordingly.

In the U.S., we’re also seeing more and more inbound M&A transactions in the high-tech space. By that I mean that companies outside the U.S. — particularly in China, Brazil and Japan — are looking to acquire U.S. companies or partner with them on joint ventures. Also, technology companies that had traditionally been isolated to Silicon Valley are continuing to expand around the world, creating attractive acquisition targets for U.S. multinational companies.

So more and more, M&A deals involve employees outside the U.S. In particular, we’re seeing a trend of deals involving employees in Japan and China. Of course, those deals bring a host of cultural and regulatory challenges, many of which you’ve no doubt faced, Karen.

David Tingey (Senior International Consultant, Towers Watson): Today’s huge demand for technology also comes into play. In light of the surging growth in demand, some deals enable high-tech companies to expand into new markets and serve a larger customer base. Other deal makers are looking to add volume to the markets they’re already in. In yet other deals, the acquirer wants to enter an adjacent business area.

Karen, you mentioned the synergies that arise from bringing two complementary technologies together. That can enable the acquirer to capture a larger share of the market or define a new market with a different customer base.

And to expand your point, Alex, about an acquirer expanding its global reach: A deal can enable a company to establish an efficient product delivery system in new countries, as opposed to shipping products from a regional hub, for instance, or even across the globe.

Other companies perceive a deal as a way to enhance the workforce. At times, a deal in high tech isn’t even a technology-related play, but rather a means of getting some critical talent without having to recruit aggressively in an increasingly competitive environment.

Young-Wootton: What specific challenges do deal makers in the high-tech industry face when they do M&A transactions?

Gaydon: Two big challenges arise from the pervasive “eat or be eaten” mindset. There’s enormous pressure on high-tech companies to keep up the momentum of profitable growth. They can grow either organically or inorganically, as long as they keep growing. So there’s pressure for M&A transactions to be quickly accretive, for one thing, and also to give the company a strategic advantage — or, as I’ve mentioned, the ability to leapfrog the competition. Those pressures are on everybody’s mind.

Another challenge is having core competencies in M&A. That expertise is absolutely key to growing companies. Whenever you acquire a company, you must be able to quickly and effectively integrate the people, processes and technology. You must understand the complexities of the culture and be able to quickly move the acquired value onto the bottom line.

“In particular, we’re seeing a trend of deals involving employees in Japan and China.”

Young-Wootton: Thanks, Karen. That experience can be critical. When acquirers look more and more outside their borders, there are a host of additional challenges. Cross-border deals have unique regulatory, tax and labor-related issues. If the acquirer lacks experience doing deals in high tech in that country, it faces a steep learning curve.

Those challenges can make cross-border deals complicated and time-consuming, and can make it difficult for the acquirer to do the integration quickly and effectively. They also make it hard — sometimes impossible — for the acquirer to achieve optimization and rationalization, and to make the deal quickly accretive.

Integration poses perhaps the biggest challenges. With all deals, domestic and cross border, it can be difficult to integrate cultures and business models. But with cross-border deals, there may also be unfamiliar regulatory requirements that make the integration of acquired employees more complicated.

Tingey: There’s something else from an HR perspective. When companies acquire new types of businesses, products or solutions, the corporate philosophy of the acquired company is sometimes quite different from that of the buyer. The acquirer might be very successful in transitioning employees from a similar type of business, but when the target is a different type of company, the transition can be complicated by the target’s very different corporate style.

Add to that the factors involved in working in new geographies, which could include things the acquirer never had to deal with, like work councils and unions. In such deals, the cultural alignment can be very tricky. And that’s true even within the industry if the acquired company’s headquarters is in a different part of the world. For example, Asian and European companies usually have very different ways of doing business. That difference in itself can cascade into a multitude of challenges for integration.

Young-Wootton: Thank you both. These points serve as good background for what I’d like to discuss next: Synaptics’ latest acquisition, on which the two of you worked closely together.

The company Synaptics acquired was a joint venture (JV) composed of multiple groups and with a fairly complex structure. Karen, can you tell us a bit about that transaction and its challenges?

Gaydon: We acquired a JV in Japan that included three companies: RSP, PowerChip and Sharp. The acquisition was a US$465 million deal that involved approximately 350 employees, the majority of whom were in Japan, with a few in Taiwan and China. There was also a very large contingent workforce supporting the JV.

The number one challenge of the deal was the geographic distance involved. Japan is a long way from the U.S., so every time we had a meeting or just talked to somebody, it involved either getting on a plane or on the phone.

That was further complicated by the language and cultural differences. The JV was a very traditional Japanese company in which very few people spoke English. It had a very loyal workforce with a low attrition rate. Nearly half of the employees had been with the JV for over 20 years. Also, the compensation and benefit structure and philosophy were considerably different from what we’re accustomed to in the U.S., particularly in high-tech companies in Silicon Valley.

Another major challenge was the union environment. The unions were highly regulated, and the labor agreements had strict terms and conditions. And the fact that the organization was a JV made the labor relations part even more complicated, because we weren’t dealing with just one union in Japan, but with multiple unions.

“We knew up front that we’d have to successfully navigate the union environment in order to bring all of the JV’s employees into Synaptics.”

Tingey: Yes, some of the challenges we faced in Japan were tied to the language barrier, the way lines were drawn in the sand within the JV, and the strict rules of engagement with management and especially with the unions.

It was difficult for us to get some necessary information about the organization. Also, some of the deal’s decision makers sat within the parent companies rather than the JV, so there wasn’t a lot of shared experience among them. For example, in HR, there wasn’t a local, senior HR manager, and that situation led to complications. We had to develop a very carefully thought-out process for discussing plans with the unions and enlisting their support.

Other difficulties arose from the number of benefit programs involved. There were not only the core programs of the three parent companies, but also benefit programs for legacy groups within the JV. There were upward of six different types of benefit programs we had to consider when we planned the integration, in addition to the benefits already in place with Synaptics.

Young-Wootton: From my own experience, much of what both of you have mentioned is very typical for acquisitions in Japan. And the additional complexity, owing to the JV, of having many different employee groups to address simultaneously makes the deal process a precarious balancing act.

Karen, you mentioned union negotiations, which I know can be particularly complex in Japan. Can you speak to a specific union-related challenge and how you overcame it?

Gaydon: Certainly, but first I’d like to take a step back.

We knew up front that we’d have to successfully navigate the union environment in order to bring all of the JV’s employees into Synaptics. We also needed to think about the design of the go-forward organization — a design that would support the deal strategy — so it was imperative for us to quickly get our arms around the union issues.

I think our first union-related challenge was simply understanding what was legally mandated, where we had some flexibility and what deadlines we needed to meet. Several unions were involved with the JV, but fortunately, we were able to negotiate with them as one entity, which was good. We started with the end in mind, knowing what our scheduled close date was and what needed to be in place to achieve business success. We then worked backward from that date to understand the exact requirements along the timeline. And remember, we were sorting through all of this with primarily non-English-speaking union officers and managers.

How did we navigate through all of that and overcome the challenge? By partnering with experts such as yourselves who were extremely credible and knowledgeable. Experts who could work in the local language with the JV’s management and the unions to identify those milestone dates, determine which meetings we needed to attend, and serve as the bridge between us and the unions regarding what needed to be done.

We had a timeline, as well as goals for looking at the compensation and benefit programs. Having an experienced partner to help us navigate through all of that was enormously helpful. I really can’t imagine that we would have been able to do that without local experts working in the local language.

There was another challenge related to what I’ve been talking about: successfully migrating the acquired workforce from the JV’s very complex compensation and benefit structure to the pay-for-performance philosophy typical of the high-tech industry in the U.S. That might sound simple, but actually, the degree of complexity was huge. For example, the JV had many different types of allowances, as well as benefit programs. It was all based on a philosophy that placed the highest value on hierarchy and employees’ length of service, rather than performance and results. Japanese companies are very different from U.S. companies in this regard. Very, very different.

So how did we overcome that challenge? Again, by partnering with your team — in-country experts who really understand the competitive labor market in Japan, and the compensation and benefit structures of Japanese companies. Experts who were very analytical about what those programs could do for us via a side- by-side analysis. That enabled us to compare the JV’s programs with ours and make decisions about the go-forward plan.

And I want to stress that those go-forward decisions weren’t always motivated by just financial considerations. There were emotional elements, too. For example, RSP’s leaders were very attached to a particular benefit that was very important to the company. So as we started to think about a new compensation and benefit structure, we did our best to include it. It was a compromise that helped drive the broader changes, and also reinforced our credibility and flexibility. It was very important for us to understand issues like that.

Also, we considered the working population in Japan, where two-thirds were union members and one-third were managers. Knowing that ratio, we really tried to work with the managers to help us manage the change. We felt that if the managers could understand and be comfortable with the go-forward plan, they in turn could go out to their teams and talk it through with their employees. That worked pretty well and was important to our successful negotiations with the unions, and I think it’s still working.

“We felt that if the managers could understand and be comfortable with the go-forward plan, they in turn could go out to their teams and talk it through with their employees.”

Tingey: Something else that was integral to the successful union interaction was the level of trust established. Without that bedrock of trust, the conversations would have been much more difficult.

Karen, you and other members of the Synaptics team made significant efforts to be in the room, face to face, with the JV’s executives and union officials in Japan, and to form personal relationships. That helped to build trust. The success that came after that was really a consequence of you explaining, in person, what your philosophy was and why you were doing the deal. I think your presence made them feel comfortable about what you were saying. They believed your intentions were good and that you weren’t just putting things down on paper for the unions to react to, hoping they’d react positively.

I’d like to point out what I see as another major success factor, Karen: your influence in ensuring Synaptics controlled all messages to the unions. You worked with us to make sure each message was your own rather than RSP’s version of it, and that maintained consistency. You were there in front of the unions, and we helped you make sure all translated messages were clear and conveyed what you wanted them to convey. Given the strong relationships among the JV’s management and the unions, your control of the messages could have been undermined. But you had a strong intent to maintain control and build trust from the very beginning, and that really helped you be successful in those negotiations.

Gaydon: Yes, I agree, trust was crucial. At the same time, it was really important that we were clear about our agenda and business objectives. We made sure to always translate slide presentations back to English to be certain the messages were clear and correct. And you’re absolutely right about the role of face-to-face meetings in building trust. I can’t emphasize enough the significance of that.

Young-Wootton: Karen, with this acquisition, what were the three most important lessons you learned from the experience?

Gaydon: The number one lesson is about understanding the cultural differences and successfully navigating through the challenges they pose. We could have spent this entire conversation talking about only the cultural element of a deal — it’s that huge.

As for what enabled us to handle that well, I think it was that, at the outset, we crafted several guiding principles relating to culture and working with RSP. One was our belief in the importance of investing the time to build relationships — face-to-face time, as we’ve discussed.

It’s not easy to do, so when we built our integration plan, we very intentionally planned to hold face-to-face meetings every two weeks. That meant we’d be going to Tokyo once a month, and the JV’s integration team in Japan would be coming to San Jose once a month. It was tough, but it worked really, really well. For those meetings, we invested in professional translators. There was a bit of a learning curve involved in working with translators in a business setting, but it really made a difference. It helped us demonstrate very quickly that we wanted to listen, and to understand the JV’s culture and point of view.

We did a couple of other things, too. To help both sides understand the differences, we partnered with an outside company to implement a program called Working With the U.S. and another called Working With Japan. All of the Japanese employees participated in a one-day session, and we attended a parallel session in the U.S. Both were very informational and extremely well received. This demonstrated that we were listening and respectful of the differences.

We’ve also provided English language lessons for the JV’s employees and Japanese language lessons for our U.S. employees who interact with colleagues in Japan. To determine the language proficiency of our employees, we conducted a survey. Then we set up instructional programs ranging from a group for beginners to one-on-one coaching for some of the senior executives.

Though these things sound simple, they were all important demonstrations of our determination to integrate the JV with our company as smoothly as possible and to help everyone be successful. I’ve also hired an experienced HR director for our Japanese operation who’s working out really well as a bridge between our U.S. Synaptics people and our acquired employees in Japan.

Our second big learning relates to aligning two very different organizations to a joint business strategy. We spent a lot of time together building a joint-product road map and strategy for realizing the acquisition’s desired value. We learned that putting people together in a room who are passionate about their products and about building a unified strategy together can really help you transcend the cultural differences.

And I think the third major learning is the importance of having a very effective project management office (PMO). We had a strong leader pulling that together, with a highly disciplined approach to creating the PMO framework. The team included people from Synaptics and RSP who were assigned to various work streams. There was considerable accountability and very clear goals. There were scheduled reviews with the Synaptics CEO and executive team, and with RSP’s leadership team. I’m convinced that the strong PMO made a big difference in the entire transaction because it kept us all on track, raised issues that needed to be raised and provided mechanisms for addressing them.

“We learned that putting people together in a room who are passionate about their products and about building a unified strategy together can really help you transcend the cultural differences.”

Tingey: Karen, those are very helpful explanations. And I can add another learning from the HR perspective: the importance of being realistic about the deal’s complexity. With the cultural differences and the union involvement, it was really important for us to understand what could be integrated on the day of closing and what would take more time. Even now, several months after closing, we’re considering additional activities to align the two organizations.

With any type of M&A transaction, there can be an overwhelming push from the business to have everything lined up on day one, and that can create a number of unnecessary obstacles. Often that’s neither realistic nor possible given the conversations and actions that are legally required, particularly with unions. So being realistic about what can be done by day one — and what the longer-term, post-closure road map looks like — is extremely helpful. In this particular transaction, it helped ensure that people were on board with what would happen at close, and it took some of the emphasis away from the day-one alignment.

One other learning of note, or maybe a reinforcement of something we already knew pretty well: The amount of effort needed on both sides of the deal to ensure the target organization understands your approach is important.

The Synaptics team members spent a lot of time and effort helping the JV team understand why they were doing things certain ways, as well as trying to understand the JV’s motivations. The Japanese organization had its own deep history and way of doing things, and we were sensitive to all of that. I feel strongly that the actions Karen’s team took to avoid any friction and develop the cultural understanding really helped everyone on both sides pull together. I think that was a significant factor in the deal’s success.

Young-Wootton: I think another takeaway, or maybe a reminder, is that very often the workforce size doesn’t correlate with how much HR attention the transaction needs. In the deal we’ve been discussing, there were only several hundred acquired employees, yet the deal was more complex than many others involving several thousand employees.

This has been a very interesting discussion that we hope will be helpful to deal makers everywhere, particularly those considering cross-border deals. Thanks to both of you — and to Karen, in particular, for sharing the details of Synaptics’ recent acquisition.

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