Pharma Boards in the Era of Hostile Takeovers

October 19, 2015

With hostile takeovers on the rise, Mike Straw argues that pharma boards have a huge role to play in managing the people issues.

With hostile takeovers on the rise, Mike Straw argues that pharma boards have a huge role to play in managing the people issues.

With 2015 already a ‘record year for mega-deals’ according to the Financial Times (September 18, 2015) and on track to be one of the biggest years ever for M&A, another trend is also developing: a growth in hostile takeover bids. In the US for example, hostile takeovers in the healthcare sector hit a post-financial crisis high.

This has been exemplified recently by Dutch drugmaker Mylan’s $27bn hostile bid for Perrigo – which if successful would be the largest ever hostile takeover.

Some analysts are starting to believe that the pharma M&A boom may slow down, especially in the wake of around $130bn being wiped off the value of the Nasdaq biotech index since Hillary Clinton announced a crackdown on high drug prices recently.

At the same time though, this has made many target companies cheaper – meaning that M&A is likely to remain a prominent feature of the pharma landscape for some time to come.

And with hostile bids on the rise, what are the dynamics that come into play on both sides and what should Boards do about it?

Any merger or acquisition is hard enough to pull off successfully. There is the danger of the denial trap – where the acquirer calls the deal an acquisition while the acquired calls it a merger. They come at it from different perspectives and don’t have any kind of shared vision. The acquiring organization has a built-in compulsion to install its people, systems and policies in the acquired organization. But it often denies its nature, fights against its compulsions and promises autonomy.

The merging organization colludes with the acquiring organization 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 organization does indeed follow its compulsion. But both the acquiring and merging organizations are deeply psychologically invested in maintaining their mutual denial. The danger is that through a lack of honest communication, the businesses lose momentum in months of internal wrangling and realignments – thus jeopardizing the value of the deal itself.

In a hostile bid, the challenges are even more extreme. The two sides are openly ‘at war’ with each other. The organisation being taken over resents what is happening and there is a very clear sense of us and them. If and when the deal happens, no matter how compelling the ‘vision’ that is waved before management and staff of the acquired organisation, it can take a long time to bring them on board (if ever). Individuals have long ‘corporate memories’; they will always feel like an employee of company X. When they become an employee of company Y, the adjustment period can be long and difficult – especially if they see colleagues around them losing their jobs or if they or their colleagues lose responsibilities and seniority.

What can the board do to help?

On the acquiring side, the board needs to do more than just advise on the T&C’s of the deal. They need to ensure that the denial trap doesn’t happen. They need to show leadership and be a coach to the organization – helping frame people’s mindsets and frames of reference around the deal. They also need to facilitate those important background conversations that help win people’s hearts and minds.

Crucially, they need to gear up their leadership team and middle management to be ready to work with the acquired company – to be sensitive to the situation and involve them in projects that they can work on together. They need to look for opportunities for collaboration and joint working, where they can generate some quick wins together and build a sense of common purpose.

On the acquired side, particularly in a hostile deal emotions can be running high. So the board, and in particular the HR Director, 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. “The deal is going to happen – how can we make the most of it? What opportunities might it throw up?”

Any deal, hostile or otherwise, can generate significant opportunities for individuals at both organizations. The new entity will have a need for people who buy into the vision, understand where the organization is trying to get to, and are prepared to take on new responsibilities to make that happen. Careers can be made – in a very short period of time - in such situations.

So management needs to help employees (and themselves!) move from a position of negativity and resistance to one of practical positivity. Instead of putting up barriers, they need to look at what’s in front of them, build an understanding of the other side and key individuals, and work out where they can best add value.

As so often in life, attitude is 90% of success. Even hostile takeovers can work out well corporately and for individuals, on both sides.

Leadership’s job is to help everyone see that and make it a reality.

Mike Straw is CEO of Achieve Breakthrough, a consultancy that provides organizations with new ways of thinking and acting to deliver better business and people performance.