HR Challenges in Mergers and Acquisitions

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Posted 5 June 2009 - 8:15pm by dugars
Sanjay Dugar
The rapid changing business scenario in the market place, due to the globalization phenomenon, growth in the outsourcing mode of working, the need to speed up growth, and the shortening of product cycles, has forced companies to think about using "mergers and acquisitions" as a part of their business strategy, to meet their business goals. Depending on how the two companies see their position in the merger, they would broadly fit into one of the four situations - rescue, partnership, adversarial, hostile. Regardless of the reasons for the merger the objective is to produce advantages for both the buying and selling companies, that is, the resultant entity should be greater than the sum total of the individual entities.Value (A+B) > Value (A) + Value (B) While there are many reasons cited for failures of mergers, the key area that has become very important, is to understand the process of managing the human resources in a way where they are not only retained, but also collaborate effectively to contribute higher levels of performance.

Defining merger?

A merger occurs when one company is combined with and totally absorbs another. Operations, facilities, and functions are rationalized and combined for maximum efficiency. The cultural beliefs, norms, and infrastructure of the acquired organization generally change to the acquiring culture for the integration purposes. The acquired organization effectively loses its identity. Acquisition is a process used to transfer stocks or assets from one company to another (from seller to buyer). The process of acquisition can take place as a purchase of stock, purchase of assets, or a merger. Acquisition is a generic term used to communicate the transfer of ownership. A merger may or may not be a part of an acquisition. One can do an acquisition followed by a merger or by means of a merger, or one can also do an acquisition where no merger takes place. The main objectives for mergers could be summed up as below:-
  • Horizontal mergers for market dominance or economies of scale
  • Vertical mergers for efficient channel control
  • Hybrid mergers for spreading risk, cutting costs, creating synergies, or could also be a defense mechanism to survive against competition
  • Growth for global reach
  • Survival by developing a critical mass
  • Acquiring cash, deferred taxes, or even excess debt capacity
  • Acquire a bigger asset base to leverage borrowing
  • Top line growth objective, financial gains and personal power
  • Adding a core competency to provide more combinations of products and services
  • To acquire talent, knowledge, and technology (lately, this is becoming a very important reason)
 The challenges faced in the process of integrating the workforce are many. While one would expect that a merger would bring about a growth quite easily, a majority fall short of their goals and objectives. While some failures can be explained by financial and market factors; a substantial number can be traced to neglected human resource issues and activities. 

The problem

Mergers are failing to meet their objectives. In the last decade, mergers and acquisitions have become a worldwide growth story, despite the high risks attached, and the information that over 85% of them have failed during the process of integration. It has been determined that most cases of failures have been because of employees not being able to adjust to the new environment, and/or many good employees leaving the organizations during the process of the integration. Despite a well planned strategy acquisitions have found to be a failure, and the main reason attributed for the failure is the challenges faced in managing people related issues. 

Some reported findings People are the key to making a merger work, and it is the people-related problems like, culture clashes, management disputes, loss of talent and the inability to manage change, which are the basic reasons why mergers fail.  The top seven obstacles to achieving success with a merger or acquisition are:
    1. An inability to sustain financial performance
    2. Loss of productivity
    3. Incompatible cultures
    4. Loss of key talent
    5. A clash of management styles
    6. An inability to manage / implement change
    7. Objectives / synergies not being well understood
All these obstacles are either directly or indirectly related to the strategic management of people and that cultural differences between companies may be the single highest barrier to success. HR professionals usually have little involvement at the pre-deal stage, which goes a long way to explaining why people, organization and culture issues tend to get overlooked, the usual members of the deal team not being trained to identify or assess such issues.   Stages of a Merger  A merger has a profound effect on the people of both companies, and managing this impact is an important part of managing a successful transition to a unified leadership, business model, and organization. By recognizing and responding appropriately to the impact of the deal on each employee, HR managers can set the tone for long-term success or failure of the new company. In the pre-deal stage, it is the Organizational Design that needs focus, particularly assessing and selecting the right leadership talent - Right people in the Right Positions. Remuneration also plays a key role and needs to be considered from the multiple perspective of strategy impacting employer, employee, and cost. Maintaining and building morale and loyalty, and treating people fairly are the other areas in this stage that plays a significant role. In the post-deal stage, it is the responsibility of the HR to plan and manage the integration process.  Given below are some reasons that resulted in successful integration.
  • Detailed HR due diligence
  • Employee communication
  • Talent retention and selection
  • Integrating the HR function
  • Integrating pay and performance management programs
  • HR planning and project management
  • Leadership development
  • Change management and culture 
Cultural integration The major sub-area of the HR challenges faced in a merger is the issue about culture. It is also the most difficult area to understand and get right in combining two or more organizations. Cultural integration is a major barrier to success in a merger. Every organization has its own unique business culture. Companies may be dominated by a sales mentality, or an engineer's rule. Some companies have a culture of paternalism while others are more democratic and participative. Bringing two different business cultures together in any transaction can create frictions. This situation is further compounded when differences in national customs and language are added to the mix. Fortunately, cultural differences are not insurmountable. The steps a company can take to help reduce the potentially negative impact of culture differences. Anticipate cultural challenges. Ask for guidance on cultural issues. Understand that cultural differences can exist within the same country. Have a strategy for overcoming cultural conflicts.· Remain alert to the symptoms of the post-deal cultural clash.·         Recognize that business culture in emerging markets does not stand still. The challenges faced on the cultural integration, is suggested to be handled using these 8 steps.1.Build transaction context and rationale 2. Determine degree of organizational integration 3. Assess organizational behavior 4. Develop change hypothesis 5. Determine drivers of behavioral change 6.    Design appropriate drivers 7.    Implement change 8.    Measure and reinforce change outcomes 

Change Management

Universally, change is an inevitable consequence of mergers. Achieving the optimum value of any merger transaction usually requires some changes in the organizational structure, operations, reward systems, and people. Change, has its problems, it is very upsetting and dislocating, and hence a proactive management is needed for the change to produce the anticipated benefits. Entrants to emerging markets should approach change with full knowledge of the forces involved in the market dynamics and a clear understanding of the local rules and the local culture in how the local workforce expects to be treated.  Some change management challenges can be avoided by solving them as early as the stage before the deal is actually finalized. For example, reduction of the workforce, changes in local leadership, etc.; the acquirer could insist that the target company handles these issues as a pre-requisite to close the deal.The epicenter of change is also important. In cultures where participative management is common, as in the United States, success is more likely when top management and mid-level managers jointly identify problems and create change solutions. In other cultures, including many in emerging markets, a top-down approach to change is more appropriate. Nevertheless, an acquirer should involve local management in the change process. Bringing in expatriates to manage or lead is likely to create resentment and thereby resistance. Thus, it is recommended that one should observe the principles of successful change management:
  • Communicate with employees on the necessity of change
  • Explain how change will benefit them
  • Provide visible incentives for change
  • Manage the stresses that go hand-in-hand with workplace change
  • Get it done quickly, even as the market environment is changing
  • Establish a clear and visible link between change and business improvement.
 The book "Successful Mergers - Getting the People Issues Right" Marion Devine has suggested the lists of M&A synergies which include both tangible and intangible assets, such as:-
  • Corporate brands and well defined reputation
  • Capital and new streams of revenue
  • Core competencies in management or business processes
  • People who possess unique skills or customer relationships
  • Needed elements of a culture or operating environment
  • Management resources
It adds, that many of these assets are people based. Employees at every level of the organization help to forge a corporate brand identity and reputation.   Conclusion The business strategy / need of a merger can be successful only when the merger contributes a performance level that is greater than the sum of the individual performances. This also means that the existing workforces would need to come together and derive synergic collaboration benefits to generate higher levels of performance. This leads to the conclusion that in any M&A, HR issues need to be addressed very effectively, and the teams not just retained but also motivated to work together collaboratively. The success level is thus directly proportional to the effective handling of the integration of human resources.  The needs that clearly emerge are:- 
  1. Strong need to manage the human assets to realize the full benefit of the merger.
  2. Need to communicate the vision and business plans as early as possible to the employees of both the companies.
  3. Need to involve HR in due diligence stage - to understand the cultural factors that could impact the work force integration, and also to estimate the costs of integration.
  4. Need to develop the new business goals and the organization structure to meet them. Further, it is essential to map the competencies of the people and integrating the findings to the organization structure.
  5. A dedicated team to handle mergers would be beneficial in the process of integration, as they can be seen as neutral bias, and working with clear objectives of integration for the new objectives.
  6. A process of communicating a clear message quickly, and then continuously stay in contact, is essential.
  7. A point of contact must be established for employees to contact for clarifications, and this person should have access to senior management to be able to respond to the queries quickly.
  8. A high priority must be given on managing employees with unique skills, and the ones who influence customers.
  9.  Engage employees in productive work to manage their commitment levels.
The study brings out that for mergers to be successful, it is important to address issues revolving around 
  1. Clarity - provided at the earliest and constantly addressed to satisfy queries from employees is a must manage situation. Companies must look at establishing suitable processes that could be set up to manage this as suited to their work environment.
  2. Competence - must be the focus area to assess quickly and establish its link to the new business plans and strategies. It is important to be able to utilize the existing competencies to further the objectives of the company.
  3. Commitment - from all employees needs to be obtained, and this is possible by bringing into alignment current and future needs of employees with the objectives of the company.
Recommendations The following recommendations are being put forth for companies to consider in making the process of mergers useful in retaining the people, and thereby protecting perhaps the most valuable assets that the company has acquired. 
  1. Evolve a clear vision and business strategy of the merger during the process of negotiation, and have it ready for communication across the two companies.
  2. Involve the HR early in the cycle of negotiations, to map the culture of both the companies, and where necessary evolve a culture that suits the merged entity. 
  3. Create a new Organization Chart, and take up a detailed audit of the competencies of the employees to map their roles and responsibilities as aligned with the new chart. 
  4. Establish a strong communication system, to proactively stall the arising fears and insecurity amongst the people. Establish a single point of contact for the employees of the company to talk to and seek clarifications / answers to their queries. This person should have easy access to the Senior Management team to get their views to help clarify matters that arise. 
  5. Communicate to provide clarity of the plans, and communicate continuously. If needed, using an external agency that can be seen as a neutral agency, for this purpose could also be considered. 
  6. Engage employees in productive work and keep their motivation / commitment levels at the highest possible levels.
Source of references used HR Issues and Activities in Mergers and Acquisitions: Randall Schuler and Susan Jackson, 2001 Society for Human Resource Management Foundation Survey of over 400 HR Executives worldwide, 2001 Successful Mergers - Getting the People Issues Right, Marion Devine, The Economist, 2007
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