Managing Organizational Change: IPIC and Mubadala Merger Report

Introduction

Mubadala Investment Company is the UAE’s largest investment holding company operating as a sovereign wealth fund. It comprises of several state-owned enterprises, such as the Advanced Technology Investment Company (ATIC), Advanced Microdevices (AMD), and the International Petroleum Investment Company (IPIC) (US-UAE Business Council, 2017). The merger between the former and the latter occurred in January 2017, when the company became a public joint-stock company (PJSC), adopting the new name of Mubadala (US-UAE Business Council, 2017). The company is wholly owned by the government of Abu Dhabi and responds to the UAE’s overarching authority.

Although both ATIC and IPIC were created and operated under the Abu Dhabi government, they were fully independent organizations dedicated to different aspects of investments. The merger meant to unite their financial and operational capacity in order to compete in international markets. However, such a move presented a myriad of issues related to change management. The entire structure of the company had to be reinvented to encompass new employees, transform the decision-making apparatus, and enhance the capacity of the organization to handle larger amounts of finances necessary to operate in the investment markets outside of Abu Dhabi and the UAE.

Change management is a complex process that involves theoretical and practical expertise. An HR manager has to understand the routines and the underlying issues in the context of a large merger such as the one between APIC and Mubadala. A successful resolution to change can make the company stronger and more resilient in the long-term perspective. The purpose of this report is to identify the major changes for Mubadala Investment Company, highlight the purposes of these changes in relation to the significance of the problem, and propose a model for organizational change along with recommendations.

Identification of Change

Existing Situation

Before the merger occurred, the companies operated independently, while a joint committee was established with the purpose of creating a plan for merging and the corresponding changes that were to take place. Presently, both APIC and Mubadala have their separate command and control structures (US-UAE Business Council, 2017). This means there are two directorial boards, two middle manager cores, and two sets of employees, each focused on their respective duties.

The organizations, despite being owned by the same entity, do not maintain a connection and information exchange. A customer seeking investments in technology is not directed from APIC to Mubadala, just as one seeking to operate in oil exchanges is not referred by Mubadala to APIC in return. Likewise, a client wishing to deal in petroleum and technology at the same time will have to separately address both companies. This creates a discrepancy, which leads to a loss of money and business opportunities since many international players would rather deal with entities that provide the whole package.

Another issue that arises from separation is a different set of practices, standards, and documents, which may not always correlate well with one another (US-UAE Business Council, 2017). As a result, it is more difficult to cooperate between the companies even if they have the interests of a shared client in mind. Lastly, each individual company is having issues entering the international market and pursuing opportunities outside of their area of expertise. Mubadala does not have specialists, contacts, and the infrastructure to enter the petroleum investment market, whereas IPIC cannot venture towards the technological market without significant expenditures. The proposed change is meant to answer all of these issues and is further elaborated on in the section below.

Reasons for Change

There are numerous financial, organizational, and political reasons underlying the merger between APIC and Mubadala. The main shareholder for both companies is the Abu Dhabi government, meaning that both organizations, while separate, operate under the same owner (Emirates NBD, 2016). From this perspective, the integration of two entities has the potential to create greater economic value for the government.

This merger will help the companies realize their synergies while diversifying their products to encompass a great array of potential ventures, including energy, utilities, technology, aerospace, manufacturing, healthcare, real estate, and financial investment sectors (Emirates NBD, 2016). It will also encourage foreign companies to come to Abu Dhabi in order to establish offices and production facilities, which is in line with the country’s long-term economic development plan. An additional rationale for the merger is as follows (Emirates NBD, 2016):

• Bondholder perspective. Since the commanding package of bonds is owned by the Abu Dhabi government, the decision will have little to no unintended and unperceived consequences for the majority of bondholders. The decision was planned a few years ahead, and the venture has explicit support from the UAE.
• Credit rating. The merger will not have any negative consequences for the company’s credit rating, since both ATIC and Mubadala have approximately the same rating, being AA/Stable by Standards & Poor’s and Aa2/Negative from Moody’s. The credit quality of Mubadala is slightly better than that of IPIC (BB+ versus BB-), however, from a cash flow perspective, IPIC has been historically more successful in attracting larger investments and providing a more positive cashflow. Because of the merger, the final credit rating is likely to grow both by S&P’s and Moody’s standards.
• Operating cash flow matters. Due to the high attractiveness of the oil sector in the Middle East, IPIC is known for generating large amounts of operating cash flow, that being of circa 3-5 billion USD per year, which exceeds its average capital expenditures by 1-2 billion. Mubadala, on the other hand, has been operating under a deficit budget for the past several years, generating a 1-2 billion cashflow with 3-5 billion in capital expenditures. The government had to deal with Mubadala by injecting additional capital in order to bail it out of debt. By merging two companies together, IPIC’s positive cashflow will counteract Mubadala’s funding needs.
• Stock trading. As it stands, IPIC’s bonds and stocks trade slightly better than those of Mubadala’s. It is expected that the merger will spread the convergence to all bonds in equal measure.

Finally, there is a political reason for performing the merger, associated with Khadem Al-Qubaisi, the ex-managing director of IPIC. His name is connected to a major scandal over IPIC’s 1MDB offshore money laundering affair (Hope & Wright, 2019). Currently, he is arrested and pending trial, but the relation of IPIC funds to the Malaysian laundering scheme threatened to hurt IPIC’s good name and standing, which is critical for a company trying to compete in international markets. The merger, thus, is seen as a way for IPIC to avoid this risk and improve its overall reputation.

As it is possible to see, all of the reasons for merging companies are valid and have the potential to improve the standing of the company and its bondholders in medium to long-term perspectives. It will have a marginally positive effect on the merged organization’s credit rating, provide compensation for deficit cashflow in one of the branches, and offer a greater pool of resources and products to offer to the market.

Identification, Proposition and the Significance of the Change

The major change to occur between IPIC and Mubadala is identified as the merger of two large companies with multibillion assets and operating cash flows into a singular entity. It is a massive endeavor that will involve thousands of employees and large sums of money in order to succeed and create a united company capable of competing in international markets. A mere alliance between these companies while keeping their respective entities and existing command structures is impossible due to various financial and organizational difficulties.

The significance of the proposed changes cannot be overstated, as it would create the largest financial and investment company to exist in all of the UAE, with the potential to compete in the Middle Eastern and international markets. Mubadala Investment Company’s global footprint expanded twice since the merger by combining assets, thus reaching the petroleum and technological markets in North America, South America, Africa, Europe, Asia, and Australia, effectively making it a global entity (US-UAE Business Council, 2017). In addition, the amount of operating cash flow for Mubadala increased from 1-2 billion to nearly 5 billion, greatly expanding its capabilities to conduct profitable large-scale investments (Emirates NBD, 2016).

Applying Theoretical Concepts of Change

Dynamics and Barriers to Change

The merger analyzed in this paper is a significant organizational and financial event, during which two companies engaged in a negotiation that resulted in the process of merging both “companies with different values, cultures, and forces into one cohesive unit” (Kansal & Chandani, 2014, p. 209). The process of change during mergers is not easy due to the sheer scope of it. Kansal and Chandani (2014) identify numerous factors that affect the dynamics of a newly-formed organization, which are as follows:

• System dynamics. The organizations in question have to face the prospect of merging not only their assets but also their technological, legal, and accounting systems, in order to facilitate the uniformity of transferred information.
• Structure dynamics. Large organizations that are created as a result of mergers are notoriously more difficult to control. A standard hierarchical structure carried on from the previous individual hosts may not be applicable here. Some of the solutions to this problem include decentralization and downsizing.
• HR dynamics. One of the purposes of change is to enhance employee performance and competencies. At the same time, changes often induce negative short-term dynamics due to the issues of redefining organization goals, vision, mission, and strategy, as well as recruitment and selection processes, employee training, benefits, and development.
• Profitability dynamics. Changes invariantly result either in the increase or decrease of revenues, market share, productivity, and engagement processes as an effect of restructuring and reengineering the organizational setup.
• Government policy dynamics. Depending on the country where the merger is registered, different policies may either enhance or hinder the performance of the organization.

These dynamics are closely related to various barriers to change, which are in one way or another related to human resource management. The performance of an organization is defined by the capability of the personnel to adjust, cope, and accept change. Resistance to modifications is the primary HR-related problem, as many employees may not understand the purposes and practicality of change in broad and particular perspectives (Appelbaum, Karelis, Le Henaff, & McLaughlin, 2017). Since mergers are often associated with significant changes in the command structure as well as layoffs, employees have every reason to be concerned about their future employment, which could result in resistance and sabotage (Appelbaum et al., 2017).

Force of habit and fear of the unknown also present a significant barrier to change, since individuals are more likely to fall back on their well-developed professional habits rather than operate using new systems, even if these systems are potentially more effective in the long run. Finally, there is an issue of a lack of competencies and proper support. Mergers and acquisitions typically involve some of employee functionality being either reduced or eliminated, while adding new duties and requirements at the same time (Appelbaum et al., 2017). The standards of quality of labor might be increased as well. Without proper training and support, individual productivity may fall dramatically, as employees will struggle to meet new demands to their labor.

In order to minimize the negative effect of these barriers and pay attention to various dynamics of change, an appropriate change framework is required. A lack of a systemic approach to a major event in the company’s history has the potential to significantly offset the goals and reasons for the change. The following section will propose a model for organizational change and provide recommendations in the scope of IPIC and Mubadala merger.

Kurt Levin’s Theory

Kurt Levin’s model of change acceptance involves three distinctive stages: unfreezing, transition, and refreezing. The unfreezing stage involves the gradual dismantling of the existing organizational practices, command structures, behaviors, and attitudes (Klev & Levin, 2016). Before any change is to occur, a place must be made for it, both figuratively and literally, in the minds of the employees that are to undergo such changes.

The transition stage, also referred to as the learning stage, involves the introduction of new practices, behaviors, and systems to take the place of the old ones. Desirable habits are formed at this stage, as it defines the future functionality of the organization (Klev & Levin, 2016). At this stage, alterations and changes from the initially planned model are possible, based on feedback and usability of systems in practice. Finally, there is the refreezing stage, which solidifies the practices developed and learned during the transition stage as new organizational standards (Klev & Levin, 2016).

There are several theories that operate within this framework, with different goals, effects, and results. Theory E, for example, is a change theory focused on maximizing shareholder value (Risberg, King, & Meglio, 2015).

It promotes the implementation of change through the top-down approach, with the construction of new systems and fitting employees into it. Such a system is transaction-based and seeks to minimize the potential costs of implementation by structuring and speeding up the process (Risberg et al., 2015). Due to its hierarchical nature, Theory E was popular in the late 20th century, with some of the examples of success including General Electric under J. Welch and IBM under L. Gerstner, who used this theory extensively during mergers and acquisitions.

The alternative to a centralized, top-down approach is Theory O, which focuses on developing organizational capabilities and places more inherent value in the human capital (Coccia, 2018). It is a bottom-up model that encourages employee participation, the creation of a new corporate culture, and the support of bottom-driven initiatives and solutions to problems (Coccia, 2018). Although this type of change requires more time to succeed, the result is more organic and committed. The examples of a bottom-up change process include Microsoft, Intel, and other creativity-based mergers.

Discussion and Recommendations

The purpose of the change is to enable two government-owned companies to form a new collective identity as a result of the merger. The reasons for the merger, as outlined in the sections above, include improving the financial standing of the new company and empower it to claim a greater market share while diversifying its portfolio of services and products. These goals must be kept in mind when devising a change program for the organization.

The government is the primary shareholder and beneficiary of the companies, meaning that its interests are prevalent when determining the model of change. Since both IPIC and Mubadala are hierarchical government-funded organizations, Theory E is an appropriate solution for merging. The recommended merger and acquisition change strategy is comprised of the following steps:

• Forming an integration plan. The first step of any change venture should involve creating a special project team of senior executives from both organizations, who would be in charge of creating implementation and strategic plans (Van Dick, Ciampa, & Liang, 2018). At this stage, it is also recommended to inform the employees about the planned merger. This measure will help them prepare and internalize the upcoming process while eliminating the potential for disinformation and gossip. The inclusion of members from both organizations will help facilitate communication between IPIC and Mubadala since the executives would be the experts in the affairs of their respective companies.
• Having a clear vision. Without understanding how the company is planning to position itself in the future, it is impossible to create a strategy to accommodate this goal. The vision step includes the company’s new goals, values, and policies that are to be communicated to employees.
• Cultural differences. The executives must analyze the core cultural values and differences of IPIC and Mubadala in order to create a new corporate culture based on similarities of both systems, in lieu of the companies’ visions and goals (Hickman & Silva, 2018). Since changes in corporate culture will affect employees the most, it is paramount that some key components should be retained in order to ease the transition. In order to understand differences in culture, the executives must keep in constant touch with their employees. Specific studies and surveys might be necessary to understand the differences in cultures as well as ways that might be appropriate to create a new one.
• Employee involvement. IPIC and Mubadala should encourage their employees to visit and learn the other organization prior to merging. This will create bonds between the organizations on an interpersonal level, will allow them to explore shared values, and facilitate an easier transition into a merged company. This part of change should focus on building trust and sharing the knowledge of systems, tools, finances, and budgeting (Hickman & Silva, 2018).
• Customer focus. In IPIC and Mubadala’s cases, the companies must make certain that the quality and availability of their services and products go up as a result of the merger (Kansal & Chandani, 2014). It is expected that the increased variety of investment opportunities is going to improve customer experience, while the new corporate structure will address and eliminate the potential existing problems, such as Mubadala’s debts and IPIC’s proneness to corruption.
• HR restructuring. The merger between Mubadala and IPIC is likely to eliminate certain positions while creating new ones. It will also bring about changes to the existing compensational packages and skill level requirements. Layoffs may be necessary to trim the organization and optimize its personnel, whereas certain employees will have to be retrained to include additional functional knowledge of either the technological or the petroleum spheres of influence (Kansal & Chandani, 2014).
• Finalizing changes. The key goals in the HR change strategy include the retention of good employees, maintaining key functionality, and removing any elements that are refusing to accept the future of the company (Dirva & Radulescu, 2018). Once that is done, and the changes are complete, it is important to refreeze the system and allow new practices to become standardized and widely used throughout the organization.

Based on the information available about Mubadala Investment Company, the first step of the proposed framework is already underway, as the company formed a special commission in order to investigate the parameters and opportunities for change. This paper sustains that Theory E and Kurt Levin’s Theory are appropriate to be used in large mergers such as this one. The proposed solutions are subject to alterations in order to accommodate the company’s needs better and to address pertinent HR-related challenges, should they arise. Alternative change theories addressing the same issues as Kurt Levin’s theory might also be substituted to achieve the organizational goals outlined at the beginning. Overall, it could be concluded that the merger in question has considerable potential, and its realization depends mostly on the organization’s ability to handle change.

References

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