Mirror. Signal. Merger. How to deal with a pharma takeover
pharmafile | December 14, 2015 | Feature | Manufacturing and Production, Medical Communications, Sales and Marketing | Deals, acquisition, buyouts, mergers, takeovers
So 2015 has been a record year for M&A in the pharma industry.
The Financial Times has called this “the most vigorous period of M&A among drug makers since the turn of the century”. And, as if to emphasise the point, Pfizer have just completed the staggeringly large $160 billion takeover of Allergan, the maker of Botox.
However, it appears that this record may not last for long, as research from Reed Smith and Mergermarket shows that 2016 will see even more pharmas merge. The global law firm and financial analysts recently surveyed pharma organisations, and found an incredible 94% are planning to make an acquisition in the coming year.
Often when big mergers such as Pfizer and Allergan’s are completed, the headlines are grabbed by the astronomical amounts of money involved. In fact, deal values in 2015 have been three times higher than the previous year with some market commentators – notably GlaxoSmithKline’s chief executive Sir Andrew Witty – stating that these companies are paying over the odds for targets resulting in ‘poor choices’ that will not generate a return on investment.
So, with even more money changing hands it is vitally important to get the post-merger integration right. And, whether a takeover is hostile or ‘friendly’, it brings with it a number of issues for the boards on both sides to manage.
But in my view, there needs to be a paradigm shift under which deals are pursued. The mind-set of boards needs to move from the traditional approach of control-order-predict to a more open one of collaborate-empower-create.
Steer clear of the denial trap
Although mergers can fail for a number of reasons, the mindset differences between the merging parties plays a significant role. For instance, one of the products of the control-order-predict mindset is what is often referred to as the denial trap. The acquirer calls the deal an acquisition while the acquired calls it a merger. They therefore come at it from different perspectives – having not yet worked out a shared vision. The acquiring organisation has a built-in compulsion to install its people, systems and policies in the acquired organisation. But in order to preserve the relationship it may promise polite autonomy instead.
The merging organisation colludes with the acquiring organisation and buys into the promise of autonomy. Deep down, however, it knows it will be taken over, its systems replaced, people laid off and its identity diluted. In the end of course, the acquiring organisation does indeed follow its compulsion. But by maintaining this mutual denial, both the acquiring and merging organisations put the success of the deal in danger. Through a lack of honest communication, the businesses lose momentum in months of internal wrangling and realignments – thus jeopardising the value of the deal itself.
During a takeover situation, these issues are even more acute – as the two organisations are sometimes openly resisting each other. Particularly amongst the organisation being taken over, a ‘fight or flight’ mentality springs up amongst staff that are naturally loyal to their brand. Their natural instinct is to fight against the other side and, if that fails, get out.
What can the board do about this? In my experience, the first thing they need to do is be very clear about their commitment to their outcomes. They need to communicate clearly what the vision is for the outcome of the deal, and take brand identities out of it. This can then engender the sense that both sides are in fact one group of people trying to achieve something together.
Put people at the centre
While avoiding the denial trap boards need to also focus intensely on people issues. As pharmas are now largely entering into deals to acquire specific drugs or a pipeline and related R&D, they often overlook that they are acquiring a whole set of people too.
With a merger, for instance, not only are you asking two companies to integrate under one corporate mission, but you are bringing together large groups of people with their own personalities, ambitions, behavioural traits and ways of working. The complexity increases massively when multiple branch offices, cross-border IT infrastructure and financial regulation are included. In short, while people issues are not a pharma’s core competence – they absolutely have to make the people dynamic work for a deal to be successful.
A pitfall that merging organisations often fall foul of is relying too heavily on setting workstreams in order to drive synergies and take costs out. These aim to create processes and systems that act as the glue between the two organisations, but in fact, it is actually an aligned mindset and commitment to embrace the change that leads to success.
In order to move a deal into a paradigm of collaborate-empower-create, one fundamental requirement is to realise that the deal affects people on both sides. It is not just the organisation being acquired that is undergoing a change. Both sides are being transformed, everything has to be reinvented. It is therefore critical that either individuals on the board, or the board itself, puts any personal advantages of the deal (such as greater empowerment and control of a larger organisation) to one side, to focus on the people on both sides that are going to make the deal happen.
Once the board infuses management with the sense that both sides need to change, there is a much stronger common position and the managers who are operationally implementing the deal can create a real environment of collaboration. The old brand identities can be more lightly held and the decisions that need to be made can be taken to create a new, reinvented organisation. This sense of genuinely being in it together also addresses the trust gap that so often springs up around any deal. The antidote to a lack of trust is greater collaboration and communication.
Meanwhile on the acquired side, particularly in a hostile deal, emotions can be running high. So the board needs to show a cool head and be a voice of reason. Once it is clear that the deal is going to happen, they need of course to focus all their efforts on negotiating the best possible outcome for the business and the people in it.
But beyond the strategic negotiations, they also need to focus on moving people through the natural reaction cycle (shock, negativity, fear, resentment, suspicion) as quickly as possible – to a new frame of mind that is practical and realistic about it. This means asking: “The deal is going to happen – how can we make the most of it? What opportunities might it throw up?”
A different way of acquiring smaller innovators
Now that most mid-market players have been acquired, big pharma has begun switching its attention to smaller companies and start-ups – often in the biotech space – which hold more potential for breakthrough innovations and transformative technologies.
For instance AbbVie’s $21billion takeover of Pharmacyclics earlier this year will see AbbVie benefit from the acquisition of a fast-growing blood cancer drug. While this approach may lead to big pharma buying in products rather than performing as much R&D in-house, this may not be a bad thing as smaller companies now tend to focus on innovation as the solution to big pharma’s problems rather than being just an alternative intellectual property platform.
When it comes to acquiring these smaller players, an interesting approach has been observable by European pharma. Rather than consuming the smaller entity, there is the deliberate strategic decision to hold the newly acquired innovator separate so it keeps its brand name, and its own systems and way of working. It can be many years before the organisation is actually integrated in.
This may be a sensible short-term decision – but is it in fact just avoiding the pain of integration for as long as possible? The fear of mismanaging integration and perhaps destroying the entrepreneurial culture of the smaller organisation holds the larger corporate back. But, given the right approach, I would argue there is a strong case for integrating much sooner, so as to fully realise the benefits of the deal.
In conclusion, whilst it is true that deals are hard to manage in any sector, a report last year highlighted the benefits of a strong acquisition strategy – finding that of the 11 pharma companies that have remained in the global Top 20 since 1995, seven had made acquisitions worth more than $10 billion each. So, these trailblazing pharmas have demonstrated that, despite the inevitable disruption caused by the mergers, they can end up better off.
Despite this, many deals still fail to deliver the benefits promised to shareholders. For example a recent survey by Korn Ferry found that the one skill leaders feel that they are the least equipped with is the ability to deliver on M&A and drive strategic change. But if boards focus on creating a more open and collaborative mindset on both sides, the road to success will start to become a lot clearer.
Mike Straw is chief executive of Achieve Breakthrough, and has worked with four of the top twelve global pharmaceutical companies.
Related Content
Brenntag acquires mcePharma to expand GMP capabilities in biopharma services
Brenntag Specialties has acquired Czech-based mcePharma, strengthening its position in the pharma and biopharma industries …
Curium Pharma announces acquisition of Monrol
Curium Pharma, a nuclear medicine company, has acquired Eczacıbaşı-Monrol Nuclear Products (Monrol), a nuclear medicine …
Enosium Life Science acquires RWEality
Enosium Life Science, which specialises in life sciences, has acquired RWEality, a consultancy focused on …
