mergers acquisitions the role of hrm

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2007 Northeastern University

Mergers & Acquisitions:

Und ersta nd ing the Role of HRM

July 2007

Craig W. Fontaine, Ph.D.Northeastern UniversityCo lleg e of Business Ad ministrat ion

Based on :

C.W. Font a ine, Human Resourc e M ana gem ent : The key to Suc cessful Merge rs and Ac quisitions.,The 9th Annua l Co nferenc e on Business Integra tion, Lond on, 2005


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Exec utive Summary

HR professionals play ac ritica l role in the suc c ess

or failure o f merge rs andacquisitions.

Huma n resource m anag em ent p rofessionals must be c apa ble ofhand ling m any unique c hallenge s. One o f the most prevalentc hallenges that HR professionals fac e and the one tha t requires theutm ost a tte ntion is in a me rger or ac quisition.

HRM p lays a c ritica l role in the suc c ess or fa ilure o f me rgers andac quisitions. Invo lving HR from the very ea rliest of p lanning sta ge s canma ke all the difference in both the financ ial and the huma n outc om es.

What Are Mergers & Ac quisitions?

The first thing we need to exam ine is the d ifferenc e b etw een a m erger

and an ac quisition.1

A merger is whe n two c om pa nies, more or less on e qua l foo ting, dec ideto join force s. There are many rea sons why c om panies me rge. We lladdress those reasons late r. The b asic a ttribute o f a m erge r, how eve r, istha t it is c onsidered to be a n equal transac tion, with bo th pa rtiesac c ep ting risk and sharing in the p ote ntial rew ards.

Ac quisitions a re different in the sense tha t one c om pany is, in fac t, takingover ano ther c om pa ny. Of co urse, som e c om pa nies wantto be takenover and som e do not.

One of the m ost c ha lleng ing a cquisition situat ions an HR professiona l (orany othe r professiona l in the organiza tion) can fac e is the hostile

takeover. A hostile ta keover is simp ly when a large r, mo re powe rful, andricher orga nizat ion takes ove r anothe r orga nizat ion. They a c c om p lishthis by t ypica lly offering a premium of 20% to 25% ove r and ab ove thecurrent stock pric e. This is, of co urse, a p ow erful influenc ing tool,espec ially for those individua ls who ho ld a lot of sha res. And those tha thold a lot of sha res a re often on t he b oa rd of d irec to rs or sit in positions ofpo we r in the orga nizat ion being taken over.

The c onc ep t of hostile go es be yond the wa y in which a n organizationis acquired . When you ente r into a n ac quisition situation, there c an b e alot of rea l hostility internally be c ause p eop le do not w ant to see theirc om panies taken over. The situation ca n easily bec om e even morehostile a s you g o throug h the a c quisition p rocess.

Mergers & Ac quisitions: Und ersta nd ing the Role of HRM 2


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The 5 Waves of Me rger & Acquisition Ac tivity in the US

Me rgers and ac quisitions a re no t a new thing in the United Sta tes. Thehow -and -why of mod ern mergers and a cquisitions has evo lved o ver thede c ad es, sta rting in the late 19th c entury and mo ving into the 21stcentury.

In the late 19th and ea rly 20th c enturies, ec ono mic c ond itions,tec hnologic al innovation, and co mp etitive forc es c am e tog ether todrive the First Wave o f mergers and ac quisitions in the US from 1894 to1905. Ma ny ca ll it The Grea t Merger Movem ent. During this First Waveof a c tivity in the US, there w as an unprec ed ente d numb er of horizonta lmergers. Rep orts Lamorea ux in The Grea t Merge r Move ment inAm eric an Business 1895-1904: More tha n 1,800 firms d isappea red intohorizonta l c omb ina tions, at least a third of whic h c ontrolled mo re tha n

70 percent of the markets in which they operated. 2

Mod ern mergers andac quisitions a re a result

of M& A evo lution fromthe 19th c entury to the

21stcentury.


The Five Waves of Merger Ac tivity in the US


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In the m idst of The G rea t Me rge r Moveme nt c am e the Sherman Ant itrustAc twhich prohibited m onopo lies. After the Sherman Antitrust Act c am ethe Sec ond Wave of merge rs and a c quisitions. Betwe en 1915 and 1930,c om panies c a lled oliga rc hies b eg an to form a nd d id b usiness in ama rket space in whic h the re w ere a rela tively sma ll number of sellers.

Great e xamp les of oliga rc hic orga niza tions in toda ys mo de rn ma rketmight b e c om pa nies such as Co ca -Cola, Pep si, and Sc hwe pp s. Thebeverag e ind ustry is a huge ind ustry with b illions of d ollars in po tentialp rofit. These c om panies a ll a re in the same business and in the samema rket spa ce , and they co op erate to some extent.

While we know our c ountrysbusiness histo ry is filled with

M&A ac tivity, the reasons fome rge rs and ac quisitions are

less obvious. Then, businesses ac ross the US were d isrupt ed on Oc tober 29, 1929, whenthe US stock ma rket c rashed . The sub seq uent Grea t Depression lasteduntil the t ime of The New Dea l and the ad vent o f World War II.

The Third Wave of m erge rs and ac quisitions in the US c ame in the 1960sduring a bo om ing ec ono my. This wa s whe n we first be ga n to see hug ec ong lom erates being forme d. Conglom erates a re the result of thec omb ination of c omp anies which ac tually had nothing to do w ith oneanother p rior to the merge r or ac quisition. They were simp ly trying toincrease the ir size to leve rage the a dvant ag es of having a largecompany.

The Fourth Wave, in the 1980s, was the age o f the so-c a lled hostiletakeover. You may reca ll the w ell-pub lic ized 1988 leve rag ed buyo ut ofR.J. Reynolds Tob ac co, which c am e to ba sica lly define the hostiletakeove r for most Am eric ans. These a re insta nc es in which treme ndousam ounts of m oney a re a pp lied to e ntic e shareholde rs to a gree to such

takeovers.

From the 1990s to the p resent, we have seen the e me rge nc e o f adifferent kind of ta keove r the Fifth Wave of strateg ic merge rs in whichorganiza tions intentiona lly try to a bsorb o ther c om pa nies to increa setheir ma rket share and g ain com pe titive a dva ntag e.

Why Do Compa nies Merge?

While we know our countrys business history is filled with mergers andac quisitions ove r the d ec ad es, the reasons behind t his M&A ac tivity a reless obvious. We should now add ress the rea l issue o f whycompaniesmerge.3



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Economies of Scale

The largest single d riving force behind me rgers and ac quisitions isprobably ec ono mies of sca le. Ec ono mies of sca le mea ns tha t if youhave a large c om pany, you c an leverag e your supp liers. This is a verypo we rful c ap ab ility, and exerc ising it ca n be a strat eg ic mo ve for ac omp any s op erations. You c an save a treme ndo us am ount of moneyon service s suc h as hea lth insuranc e we a ll know tha t hea lth insuranc eis extraordinarily expensive and getting more so every day.

I know a bo ut the strat eg ic bene fits of ec onomies of sc ale from mype rsona l experienc e o f wo rking as a c onsultant in a sma ll me rge r andac quisition in 2006 in w hich t wo failing p rivate schoo ls joined tog ethe r tobe c om e one suc c essful entity. One o f the ma jor contribut ing fac tors forthe suc cess of this me rge r wa s tha t the c om bined organizat ion had

mo re p eo ple w ho w ere buying he a lth insuranc e; as a result, the he althinsuranc e c om pa ny substantially dropp ed their p rem iums be c ause therisk wa s being sprea d a c ross mo re p eo p le.

Large com pa nies can a lso buy ba sic supp lies suc h a s pa pe r, penc ils,and paperc lips less expensively from sup p liers when they b uy in la rgerqua ntities. They simp ly ge t a lowe r p rice b ec ause the y give the supp liersmore business.

Saturated Market Consolidation

Another driving force for mergers and acquisitions is the consolidation ofsa turat ed ma rkets. If you have a ma rket tha t is sat urat ed one in which

there a re m any p layers in the spa c e w ith a lot o f c omp etition you ca ntake o ver one of your com pe titors and then a utoma tica lly increase yourmarket share.

This, in turn, allow s you leverage ec onomies of sc aleon a mo re c ritic alleve l than o n office sup p lies and services suc h as insuranc e. Forexam ple, if two c om pa nies ma nufac ture similar prod uc ts, theircom bined organiza tion has the p ote ntial to significantly dec rea se thec ost of goods sold b y purcha sing raw ma teria ls in bulk. And whe n thec ost o f go od s sold go es dow n, profit, of c ourse, go es up.


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Competitive Position Improvement

The third d riving force has to do with simp ly imp roving yo ur com pe titivepo sition b ec ause you e nd up with a larger asset b ase a nd inc rea sednot oriety. For exam ple, consumers a re more likely to p urcha se servicesor prod uc ts from large , rec og nized com pa nies.

As we ve seen, there a re ve ry go od rea sons why o rga niza tions dec ide toeng ag e in me rge rs and ac quisitions. But, if you wa nt to d rop do wn tothe next level of deta il, we need to ta ke a look at exac tly whatorga nizat ions a re trying to ac hieve w hen they d o, in fac t, elec t to me rgeor ac quire a nothe r orga nizat ion.

More prec isely, they are a ttempting to c reate synergy

Synergysynergy(n)

Cooperative interaction

am ong groups, espe c iallyam ong the ac quired

subsidiaries or m erge dpa rts of a c orporation,

that c reates an enhanc edcom bined effect.

Ame rica n Heritage Dictiona ry

Synergy, is wha t organiza tions a re a ttem pt ing to a chieve whe n theyeng ag e in me rge rs and acquisitions.4

The first thing tha t we know, and p rob ably one of the mo st c ritic al thingswhe n it c om es to me rge rs and ac quisitions, is tha t c om pa nies almo sta lwa ys immed iate ly p resume tha t they a re going to red uc e sta ff. This is,in fac t, true. Sta ff red uc tions rep resent a trem end ous savings toorga niza tions post-merger or po st-ac quisition .

When o rga nizat ions me rge or ac quire o ne a nothe r, there a re som ehorizonta l dep artme nts or functions in b oth organiza tions tha t c an b e

very easily co nsolida ted . This includ es suc h func tions as acc ounting,huma n resources, ma rketing, and e ven the sa les de partment. And ,given t hat sta ffing usua lly is one of the large r bud ge t items for anorganization, Staffing Syne rgy ca n be a n imme diate benefit .

Anothe r contributor to synergy is the ac quisition o f new tec hnology.Given tha t tec hno logy is suc h a key d river in todays business wo rld,Tec hnical Syne rgy is som ething tha t we need t o exam ine more c losely.

Perhap s the b est exam ple tha t I c an provide is from my p ersona lexpe rience w hen I wo rked a t EMC Corporation. EMC Corporation wa s ac omp any that ma de huge, sec ure storage de vic es for som e o f thewo rld s largest orga niza tions. All of the a irlines, banks, and ca r renta lagencies were using EMC systems.



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What they did not ha ve w as a produc t that wa s usea ble b y sma ll- andme d ium-sized e nte rp rises. So, EMC a c quired Da ta Gene ra l Co rporat ion.Dat a G ene ra l wa s in exac tly the same b usiness as EMC . They ha d a veryfine p roduc t in the $15,000 - $30,000 range, w here the EMC systems were$1 Million plus. By EMC s acquisition o f Data Ge nera l, they we re a b le toab sorb a new tec hnology and introd uce an e ntirely new p rod uct line fortheir c ustom ers and o pe n a new ma rket of a ll those c ustom ers who we renot c oming to EMC b ec ause of the c ost.

The last one, we ve a lrea dy touched on b riefly, is the c onc ep t ofFinanc ial Syne rgy. It is the no tion tha t when you have m ore visibilitybe c ause you are larger, it easier to raise c ap ita l and mo re c ustom ersnat urally flow to you. And it a lso encom pa sses ec ono mies of sc ale.

Now that weve looked a t the why of mergers and ac quisitions,lets look at the how

Merger Types

When c om pa nies de c ide to eng age in a me rge r their rea sons typicallyfall into one of six c a tegories. 5 The first type of merger is a horizontalmerger. This is when tw o c om panies who a re c urrent ly in d irec tc om petition join toge ther and sha re their prod uc t lines, their ma rkets,and their c ustom er ba se.

Cha nce s are, if you a re

an HR professiona l, youwill eventually find yourself

in the midd le of a mergeor ac quisition.

A vertical merger is when a c omp any, and p erhap s one o f theirsuppliers, join tog ethe r to b e a ble to offer a contiguo us, non-interrupt edsupply of me rc hand ise to their c om panies. An examp le might b e an icec rea m c one m anufac turer merging w ith an ice c rea m m aker so thatbo th p rod ucts c an be ac quired from a single entity, thereb y presuma blyma king it ea sier for the c ustom er.

A ma rket extension merger is with two c om panies tha t sell the sam eprod uc t in different m a rkets. This is an interesting typ e o f mergerbe c ause co mp anies ca n be reg iona l. Com pa nies c an have d ifferentseg me nts of the ma rketplac e in whic h they have g ained a rep utation.By ac quiring a nother com pa ny that ha s a foothold in another ma rket,you c an a utom at ica lly inc rea se the m arkets tha t you ad d ress.

A produc t extension merger is whe n tw o c om panies selling d ifferentprod uc ts in the sam e market me rge . An exam ple o f this is the EMC/ DataGene ral exam ple whe re EMC sold at the high e nd a nd Data Generalsold a t the low to mid range.



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A co nglomeration merger is where two c omp anies who d on t have a lotto d o with one a nothe r dec ide to m erge. The rea son for this wo uld beec onomies of sca le, and ge tting a large r identity and mo re a ssets to b eab le to leverage for loa ns and othe r financ ial purpo ses.

And finally, as me ntione d ea rlier, a strateg ic m erger is the ne we st type o fme rge r tha t ma y involve som e o r all of the fea tures of the o ther mergertypes me ntioned a bo ve.

No m atter wha t type o f me rger, HR professionals are likely to

enc ounter me rger and ac quisition cha llenges due to

Rapid Rise of Me rger & Acquisition Ac tivity in the US

Me rge r and a cquisition a c tivity is increa sing in the United Sta tes. Ac tivity

rose 38% from 2004 to 2005; in fa c t, 2005 wa s the first ye ar in w hich w epassed the $1 Trillion mark.6 What s mo re, the upw ard trend c ontinuedthroug h 2006. The num bers ma ke it pa infully c lear that mo st humanresource p rofessiona ls are g oing to enc ounte r at least one me rge r orac quisition in their ca ree rs.

Source : UNCTAD Foreign Direc t Investment Inte rac tive Da ta ba se7



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A Growing Glob al Merger & Ac quisition Profile

From a g loba l perspec tive, the rest of the wo rld is a lso b eg inning to see

inc rea sed me rge r and acquisition a c tivities. You c an see from the c hartbe low tha t in the Pac ific Rim a lone the re is a substantial am ount o factivity:

Source: Lea rnings on M& A Integ rations, the Cerebrus Group 8

Me rge rs and ac quisitions are a growing trend , and ana lysts don t seeany d ow nturn ove r the next 10 yea rs. Therefore, we ne ed to look a t howhuman resources professiona ls can a ssist in the suc c ess of an a c quisition.

Theres no question that their assistance is nee de d bec ause the

suc c ess rate numbers are bad. Shoc kingly ba d.



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Merger & Acquisition Success Rate

It might b e m ore ac c urate to use the te rm fa ilure rate ra ther thansuc c ess rate. Why? Ind ustry ana lysts agree tha t the failure ra te ofme rgers and a c quisitions is som ew here betwe en 40% and 80%. A lot ofsourc es average it o ut a t 50%. This is a fa ir number to use for the sake o fd iscussion.

Even mo re shoc king is tha t if you t hink of fa ilure as not increa singsha reho lder value, then the numb ers look wo rse, with the highe r end ofthe sca le be ing 83%. This me ans tha t 83% of the c om panies do no tultima tely see the returns tha t we re p rojec ted for the m erger orac quisition afte r a 3- to 4-yea r period .9

Resea rc h a lso suggests tha t up to 65% of fa iled me rge rs and ac quisitions

are d ue t o pe op le issues tha t result in p oo r prod uc tivity.10

Major HRM Issues in Mergers & Ac quisitions

Comb ining mergedc ultures req uires a fo cus

on one new vision and one

new orga nizat ional mission.

Prob lems typica lly o cc uwhen the large r or stronge

of two orga niza tions tries

to significan tly influencethe integration.

Resea rc h show s tha t c onsistently 65% of me rgers and ac quisitions that fa ildo so bec ause of peo p le issues c ultura l issues, com munica tion issues,and so fo rth.

Histo ric a lly, HR ha s no t ha d a sea t at the tab lein the me rgers andac quisition p roc ess. You c ould a rgue t ha t this is true in all HR ac tivities.How eve r, we are tha nkfully beginning to see a num be r of orga niza tionswho are b eg inning to truly rea lize tha t a stra teg ic HR ap proa c h involvingHR in mo st a ll business dec isions and p roc esses is a smart thing to do.

But we c an t deny tha t tod ay ma ny businesses do no t c onsider HR to b ea business partner -- they c onsider HR to b e no thing m ore tha n a sta ffpo sition tha t c a rries out a c ritica l, but not strat eg ic , role.

If you look at the fa ilures and suc cesses of m erge rs and ac quisitions ove rtime, it is my o pinion tha t c om panies tha t ha ve a strong HR lea de rship c om panies who se senior ma nag em ent trust HR have a d istinctad vanta ge w hic h we c an p inpoint in this pa pe r.

But first, lets look at the HR issues that inevita bly arise in merge rs

and ac quisitions



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Lac k of Communica tion

Lac k of comm unica tion during m ergers and a c quisitions has long b eenidentified as the m ost c ritic a l need . As we exam ine the HR issuesinvolved , you will see a lot of referenc es to the fac t tha t p eop le resistme rgers, ac quisitions, and espec ially takeovers a t a p ersona l leve l. Therea son w hy they resist a t a persona l leve l is bec ause the y have no t b eentold why things must c hange or howthey are go ing to c hange.11

Lack of Training

As c om pa nies merge a nd a c quire one ano ther, they tend to me rgetechno log ies. They a lso merge p olicies, p roc esses, and p roced ures. In ame rge r situation, you end up w ith 50% of the p eo ple d o no t know thenew softw are, policies, p roc esses, and p roced ures. If you don t tra in

those p eo ple, and expend som e o f your resources on t raining, that w illend up be ing neg ative influenc e on your outc om e.12

Loss of Key Peop le

Ofte n, exec utives are so

foc used o n the financ ialand proc ed ural aspe c ts of

the takeover that they

ignore so-c alled "inta ngib leassets," suc h as busine ss

c ulture, huma n ca pital,co mp any structure and

co rporate governanc e.

In essenc e, they a re soob sessed with num be rs tha t

they forget about p eople.

Goo d pe op le key p eop le tend to lea ve o rga nizations at thispa rticular point in time .13 Ma ny peop le are afraid o f losing their jobs. It isa we ll-know n fac t in the business wo rld tha t m ergers and ac quisitionsusua lly c ause sta ff reduc tions. Weve already add ressed tha t. It s true.Tha t is one o f the rea sons why they do it.

Peop le who are talented the exac t kind of p eop le who m you wa nt toreta in in the o rga nizat ion a re exac tly the kind o f peop le who a re g oingto p ut their resume s out a nd p rob ably go to your co mp etitor. That is a

treme ndous loss for an orga niza tion.Corpo rate Culture Clash & Power Politics

Corporate c ulture, as we know, is a funda me nta l asset (or even liab ility)for orga nizat ions. Weve all worked for different c om panies with d ifferingc ultures. I ve worked in co mp anies tha t had a ve ry loosey go osey,ge ntle c ulture. I ve wo rked for c om pa nies tha t have a ve ry hard-d riving,ag gressive, c om petitive c ulture with e qually ag gressive internal po liticsand pow er strugg les.

If one c om pany w ith one style ta kes ove r a c om pa ny with anothe r style,tha t is indee d a d ifferenc e and it is a hug e d ifferenc e.14 Som e p eop lefeel comfo rtab le in the one setting and som e do not. The c lash of two

c ultures c an b e so d etrime nta l that you lose key pe op le.



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Lastly, there is the issue of na tiona l cultures.15 If me rge rs and ac quisitionsoc cur on a globa l sc ale in whic h a co mp any from Ma laysia is be ingtaken ove r by a c om pany in the United Sta tes, cha lleng es arise.

Betwe en 40% and 80% ofM&A de als fail, due to

purely huma n resista nc e tocha nge a problem

known a s "peo p le issues. Peo ple from o ther cu ltures suc h a s Ma laysia c an be d ifferent they m ayhave a different set of va lues, they ma y be lieve d ifferent t hings, theyma y or ma y not emb rac e tea mw ork, they ma y have a longe r vision ofshort-term and long -term p ayb ac ks, they may feel differently ab outaut hority and d elegat ion. All of these things ma ke a huge d ifferenc e.An America n co mp any c annot simp ly take over an Asian c om pa ny andpresume that the Asian p eop le a re g oing to a gree with the wa y yourorganiza tion is struc tured and how you run th ings. This fina l issue is solarge, in fac t, that we co uld literally de vote an entire w hite p ap er to thistopic a lone.

All of these issues either stem from or lead to one thing

Emp loyee resistanc e.

Employee Resistance

Emp loyee resista nc e is p roba b ly the single m ost d ifficult issue t o d ea l withduring mergers and a c quisitions. I ve a lrea dy mentioned tha t you reproba bly going to lose som e pe op le that you d o not wa nt to or c annotafford to lose. The root c auses of resistanc e c an all be c ounte red if youtake c a re t o do it, and the HR organizat ion is the organizat ion tha t shoulddrive this effort.16

The p roblem lies in the fa c t

tha t resista nc e is assumedto b e a logical cha llenge

with a logica l solution.

A lac k of informa tion ab out c hang e a nd the failure of pe op le tounderstand the need for c hang e c an b e viewed tog ether. If lea de rshipc annot stand up in front of the c omp any a nd say the following,resistance will worsen:

Were do ing this be c ause we must.

Were do ing this be c ause we are failing a ndif we do nt , we a ll sta nd to lose our job s.

Were d oing this bec ause it is go ing to he lpus. It is go ing to a llow us to g row . We re a llgo ing to be be tter off during a nd a fter thistransitiona l pe riod.



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You need to g ive comp lete d isc losure as to why you a re doing it. And ,frankly, if you ha ve to sca re som eb od y and say som ething like thefollow ing, then d o it:

We MUST ma ke this c hang e o r we ma y notbe in existenc e 2 yea rs from now.

But resista nc e a lso has anemo tional aspe c t which is

often m uch stronger than

human logic.

If you do not g ive tha t kind o f informa tion to pe op le a nd m ake it thatc lear to them , then they are more likely to resist.

Mo st pe op le also believe tha t their nee ds a re being igno red. This isbe c ause you have no t allowe d c om munication to flow up wa rd. This hasbe en show n in the literature to b e p erhap s one of the m ost c ritic aleleme nts. Even if you do not ta ke pe op les sugg estions and imp lemen tthem, the notion that at lea st you a llow the p erson to voice the ir

pe rsona l op inions is extrem ely critica l to the outc om e.People are conc erned abo ut their persona l we ll being. Everybod ywhom Ive ever known who has go ne through a merger or acq uisition(and I ve been through seve ral m yself), the first thing they think whenthey first find ou t this is happening to them is tha t they are going to losetheir job, they are go ing to b e transferred , they a re g oing to ha ve tomo ve, or they a re no t go ing to b e w orking for the sam e b oss anymore.These a re the things that m ake p eop le w ant to b olt from anorganization.

There c an be a co nflic t b etwe en individua l goa ls and orga nizationalgo als. When I wo rked for a nuc lear eng ineering comp any c alledComb ustion Enginee ring, we we re a c quired by a glob al giant, ABB out

of Switzerland . They to ld us, You a re no long er going t o b e designingand building nuclear pow er plants. We a re go ing to c hang e you to ac om pany tha t servic es nuc lear po we r plants. For a ll those pe op le who

joined Comb ustion Enginee ring bec ause t hey w ere nuc lear eng ineers,the ir life s go a l was to d esign the late st and grea test con trol systems.They no longe r be lieved tha t their persona l go a l of be ing a nuc lea rde sign engineer was com pa tible with the new orga nizat ional goa ls ofservicing p ow er plan ts. It c learly d id no t req uire the same type o f skills,know led ge, and ab ilit ies as they had brought to the ta ble.

Clear and co nstantco mmunica tion from

senior ma nag eme nt

provide s dec isive a nswersto "peo p le issues" and

dispel uncertaintyamo ng em ployees an

essential ingredient fo

a suc c essful deal.

Ma ny peo ple a re a lso g oing t o say som ething like t his:

It s not go ing to work. It will never wo rk. We retoo different. We do nt have enough money. We

do nt ha ve enoug h systems. We don t haveenough p eop le.



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Overcoming Resistanc e to Change

To o verco me this resistanc e, you nee d to try to foc us the p eop le on the

be nefits that a re g oing to oc c ur. You need to involve the pe op le in thec hang e p roc ess. If you c an g et them to be lieve tha t they are go ing tohave som e input in ma king the system s and the proc esses be tter, theyare more likely going to w ant to stay on a nd b e eng ag ed and ba sic allybec ome co mmitted to the new organization.

This is la rge ly done by two -way c om munica tion. You m ust d o it ea rly.You m ust do it quic kly. You d o no t want rumors to sta rt. If rumors sta rt tofly, you need to keep your ea r to the g round . You nee d to d ispe l therumo rs bec ause the people w ho a re hea ring these rumors alwa ys havea c onno ta tion of som ething neg at ive no ma tter wha t is being said. Theymust, in fac t, be co rrec ted so tha t you d o not lose p eop le or have thatkind o f ba c klash go ing on.

And, you must increase trust and ac c ep tanc e b y keep ing the p eop lec onstantly informed and c onstantly asking them for their input.

And HR is just the team to spearhea d this effort

The Imp ortanc e o f HR in the M&A Proc ess

The following c hart shows the numb er of co mp anies that e nga ge huma nresource p rofessionals and hold them a t a high level of involveme ntac ross the va rious sta ges of a me rger and acquisition a re surprisingly

low.17

The g oo d news is tha t thebusiness wo rld is fina lly

be ginning to rec og nize thedynamics that lead to

failure and are co ming to

understa nd the role o f HRMin resolving "people issues.

Human Resourc es Invo lveme nt in the Merger Proc ess18



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Let s look a t the US as an example in Figure 2. In the initial planningpha se, only 15% of the c om pa nies a re e nga ging HR. HR is eng ag ed alittle b it more in the investiga tion p hase. It s ea sy to und ersta nd why HR isnot more involved in the nego tiation pha se. But loo k at the numb ers forinteg ra tion. Less tha n 30% are enga ging HR in the a c tua l integ ra tion,and it is in the integra tion p hase w here a ll the issues tha t we re d isc ussinghere oc cur.

As HR lead s the c om pa nies through the p rocess, there a re p roven

best prac tices that they c an follow to he lp ensure succ ess

HRM Best Prac tices for Mergers & Ac qusitions

Suc c essful M&A de alsare m ostly attribute d to

lead ership, we ll-planned

communication and

early manag ement of"people issues.

After c areful review o f the litera ture, and ta king into ac c ount my ow npe rsona l resea rc h a nd expe rienc e, I have put tog ethe r a set of HRM BestPrac tices for HR pe op le when they a re fac ing the d aunting task ofma naging the c om plex issues involved in merge rs and ac quisitions.

These Best Prac tice s a re high-level, bu t they shou ld g ive yo u a solidove rall view of the kinds of things you nee d to pa y atte ntion to as you gothroug h the m erger and ac quisition p roc ess:

Leadership Transition Team Struc ture Policies & Proc esses ionWorkforce Rationa liza t ndingJob Grad ing/ Ba

CompensationRetention

Leadership

Ide ntify you

lead ers qu ickly.One of the first things tha t you nee d to ad dress is who is go ing to havethe lea dership po sitions in the new c om bined orga niza tion? 19

The o ne thing you a bsolutely do not w ant to do now is c rea te alead ership va c uum. You must ide ntify who tho se lead ers a re going to b eand yo u must iden tify them q uickly. This he lps ma intain the foc us on the

business and it also b eg ins to make the transition smoo the r.



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Lea de rs do not alwa ys need to b e from the ac quirer co mp any in anac quisition. As a m at ter of fac t, this is p rob ably not a ve ry goo d ide a . Ifyou have pe op le in the a cq uired organization who see that a ll of theirsenior pe op le a re b eing let g o a nd tha t it ap pe ars to them thateve rybo dy from the b ig e ntity is ta king a ll of the big jobs, they a re no tgo ing to feel pa rticularly good ab out it. They a re g oing to feel as if, infac t, they are playing a m inor role, and t hey tend to lea ve for those kindsof reasons.

You ne ed to rec og nize tha t ta lent exists in both orga niza tions. If you sta rtlaying o ff the senior peo ple from one o rga niza tion, the rest of the pe op leare going to doub t that they have a c ontribution to make.

Transition TeamQuickly ident ify

and assemble a

multi-functionaltransition team.

The transition tea m m ust be ide ntified quickly and it also m ust be m ulti-functional. 20 The transition te am w orks d irec tly benea th leadership.Obviously, the leaders of the organization will ultimately be overseeingthe transition. Your transition te am shou ld include individua ls from ea c hde partment, division, or function of the c om pa ny whe ther it b e sales,ma rketing, engineering, quality cont rol, ma nufac turing, and so o n. Thiswa y, there is a t least one pe rson in all of the se g roup s who will be ab le tolook at the de ta ils of how the transition would hap pe n in their group .

I am mo st fa milia r with eng ineering o rga niza tions, having wo rked ineng ineering organiza tions all of my life. After having g one throug h a t leasttwo ma jor ac quisitions, I c an t ell you tha t what typically happ ens is tha tsom e d irec tor-leve l pe rson rep orting to a senior lea de r like a vice president

must sta rt looking a t the d ifferent typ es of p rod uc ts tha t the o therc om pany offe rs. They shou ld ta ke a loo k at the skill sets inside tha t otherc omp any and be gin to try to figure out how are they going to mergepe op le, prod uc ts, and p roc esses. Are they going to keep the prod uc tssep arate o r integrate the produc ts? Are they g oing to ma ke it a sep aratedivision? Are they going to kee p the lead ership?

Tha t is the role o f a transition te am. They ne ed to m ake dec isions,change initiatives, and p rovide ove rsight througho ut the proc ess.



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Struc ture

There a re enormo usorganizational

de c isions to b e ma de ,and they have

enormous implicationsfor the suc c ess o

failure of t he merge r o

acquisition.

One o f the other ma jor things tha t mo st pe op le overloo k whe n they thinkabout me rgers and ac quisitions is wha t is this new ent ity going to loo klike? How will the co mb ined orga niza tional c hart look? Are you go ingto take the new c om pa ny and m ake it a new division? We see tha t alot. Othe r organiza tions might say, No, no, no. Were go ing to take theexisting eng inee rs from Comp any B and w e re simply go ing to integ ra tethem into our large r organiza tion. This doesn t change theorganiza tional c hart from a struc tura l perspec tive; it only cha nge s thec hart from the fac t that there s proba bly going to simp ly be mo repe op le inside tha t orga nizat ion. What if you do a n ac quisition fromove rsea s? Does tha t mea n that you want to struc ture things c om p letelyd ifferently so tha t you have a n internat iona l division and a US d ivision?

We a lso b eg in to see tha t huge de c isions have to b e m ad e from astructural perspective.21 If two sma ll com pa nies are m erging, lots oftimes sma ll com pa nies can tend to b e ve ry ce ntralized in the d ec isionma king. Large r orga niza tions tend to b e mo re d e-ce ntralized in thede c ision ma king. When you d e-centralize d ec ision making, you tend t opush the dec ision ma king as low d ow n on the o rga nizat ion a s is logica l.

You w ill eventua lly have to rec onfigure the organization w ith all thesubdivisions within func tions, and ge t d ow n to deta iling who is go ing tobe the senior engineer, who is go ing to be the m ana ge r, and who isgo ing to be the lead eng ineer. But as you ll see a s we t a lk about som eof the othe r best p rac tices, tha t is p rob ab ly best left for the d eta il leve llater on.

Polic ies & Proc esses

Every orga niza tion ha s d ifferent policies, whe the r it is an e thics policy, avaca tion polic y, or a b onus po licy. The com pa nies must co mb ine theirpo lic ies, which me ans tha t you might ta ke the b est out o f one o r the b estout of the o ther.22

HR c an a nd d oes play a

c ritic a l ro le in assessingjobs, job requirements,

and peo ple.

Onc e a ga in, you should no t take one o rga niza tions polic ies and try tosuperimp ose them o ver the entire new e ntity. You c an lose a lot ofpe op le b y do ing this.

For examp le, one c om pany s po licy wa s to a llow you to w ork fromhom e. And no w, you might say that the new entity is not going to a llow

pe op le to wo rk at hom e. You re go ing to lose a lot of pe op le, and tha t issom ething tha t you ca nt a fford to do . So you have to be ve ry ca refulwhe n you merge these p olic ies and p roc ed ures. But, of course, costsalso m ust b e c onsidered.



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But, in rea lity, this is a g rea t time t o introduc e ne w p olicies and newproce sses which ca n be p erc eived by the pe op le to be g ood for them.For examp le, ma ny co mp anies these d ays are c onsidering w hethe r 2we eks vac a tion is eno ugh. If you had be en considering c hanging thevaca tion from 2 weeks to 3 we eks, this wo uld be a wo nde rful time to dosom ething like tha t.

If you w ere c onside ring things like doing p rofit sha ring o r p rofit ga ining , orintrod uc ing any of those t ypes of m one ta ry induc em ents, this wo uld a lsobe a go od time to p rovide those incentives.

The b otto m line is tha t if you a re g oing to ma ke the transition ha pp ensmo othly, you a re p rob ab ly going to have to g ive somethingba ck to thepeople.

Workforce RationalizationThe b ott om line is tha t ifyou are going to ma ke

the t ransition hap pe nsmoo thly, you ha ve to

give something ba ck

to the peop le.

Workforc e rationalizat ion is the p art of M&A tha t no one w ant s to fac e,bec ause it nec essarily enta ils sta ff red uc tions. Sta ff reduc tions must behand led very sensitively. Most often, it will have to be ha nd led in apha sed ma nner.23 But I must caution you a bout t his.

When a me rge r or ac quisition is anno unc ed , a lot of c om pa nies tend tosta rt laying p eo ple o ff in p hases. Everybod y end s up sort of hanging onand saying, Well, let s see wha t happens. But as soo n as tha t first setof layo ffs hap pens, espec ially if it is follow ed a c oup le of m onths later bya sec ond set of layoffs, then you a re going to ha ve a rea l prob lem withkeeping the goo d p eop le be ca use they ca n see the hand writing on thewa ll. This is an exce llent e xamp le of why you ne ed to kee p

co mmunica tion g oing.If, in fac t, you a re g oing to have a layoff, it is impe ra tive that you ha vean imm ed ia te m ee ting with the p eop le I like to c a ll survivors. Survivorsare the ones who w erent laid o ff. You need to c all them into a room(typica lly do ne a t a loc al level with a ma nag er and his or her pe op le).The m ana ger shou ld say som ething like: You know I laid off Fred andSally this mo rning. But Im here to te ll you tha t it is not go ing to keepgo ing. If you re in this room , you re safe. This imm ed iateco mm unic ation is c ritic al to keeping the p eop le on b oa rd.



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Job Assignm ent

Onc e you ha ve your workforc e rationa lized and you ha ve yo ur survivors,you ne ed to m ake sure tha t the survivors fit into the overall structure,which m ea ns that w e nee d to g ive them som e job assignm ents. 24

HR c an provide thefunctional hea ds with a ll

the informa tion theyneed to know ab out the

performanc e and the

c harac teristics of ea c hindividual.

One of the mo st com prehe nsive wa ys of d oing t his is by using aCo mpetenc y Assessment . Every job in the o rganiza tion shou ld have a

job desc ription o f the key know ledge , skills, and ab ilities nec essary fortha t job . They key func tiona l hea ds nee d to b e involved in assessingea c h ind ividua l. HR p rovid es a c ritic a l role in this. HR can provide thefunctiona l head s with all the information they need to know ab out thepe rforma nce and the c harac teristic s of ea c h individua l.

This person is very strong in this elem ent, bu t a little we ak in this elem ent .But he s a lways me t his go als, hes alwa ys be en a provide r, and he salwa ys been the kind of p erson w ho c om es in and wo rks 95 hours a we ekif nec essary. To d rill down to tha t leve l of assessme nt, HR will have to beenga ge d to a significa nt level.

Job Grading/ Band ing

Ano ther important issue is how you g roup peo p le in pa y brac kets. This isca lled grad ing and ba nding.

As an e xam ple, let s go ba c k to the examp le o f an eng ineeringc om pany. Every c om pany has junior engineers, senior eng ineers,c onsulting eng ineers, princ ipa l eng ineers, and so fo rth. Lots ofcom pa nies have 14 or 15 (believe it or not) g rade levels within aparticular function or division.

HRMUSTbe involved with how the new, merged , or ac quired entity isgo ing to handle this.25

What we see ha pp ening is wha t we c all broad ba nding. Broa dba nding is whe re a n orga niza tion eliminate s ma ny of the ir a lmosta rbitrary job d istinc tions suc h a s: Eng inee r 1, Eng inee r 2, Sen ior Eng inee r,etc ., and b and s them in the single entity of Engineer. And within tha tba nd , of co urse, there is go ing to be a huge differenc e in sa laries.Instea d of o ne range go ing from $42,000 to $50,000 and the next rangegoing from $50,000 to $58,000, there is going to b e one range w ith agrea t de al of variat ion. This will allow you to g ive peop le co mp ensa tion

ba sed mo re o n the ir performa nce tha n their seniority.



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Suffice it to say tha t, if you a re g oing to d o this, it must b ec omm unic ate d. You must have the c riteria a vailab le on the intranetsom ep lac e that a llow s pe op le to understand . But please, don t forge ttha t this is a very imp ortant persona l issue fo r peo p le. You re ta lkingab out p eop les we llbe ing, so p lea se know tha t there s go ing to be muc happrehe nsion a round this issue.

Compensation

Determining the c om pe nsation c om pa risons be twee n the c omp anies isob viously som ething tha t must be do ne. There are pe op le who w ill beunhap py ab out the co mp arisons. Som etimes, there are co mp anies tha toverpay p eop le b ec ause they need ed to b ec ause it wa s a d river forthem. Their skills, know ledge , and ab ilities might no t be a s c ritica l to the

new , me rge d o rga nizat ion. Therefore, their c om pensa tion might drop,and you need to m ake this c lea r to them. You need to de velop a ndde liver clea r c om pensat ion g uidelines and try not to lose yourem p loyee s a round these typ es of c irc umstanc es. 26

This is an a rea in whic h there nee ds to b e a trem end ous am ount o f one-on-one a ctivity be twee n HR and the functional ma nag ers.

Retention

We ve touc hed o n retention througho ut this pa pe r. You need to p ut arete ntion plan in plac e e arly. A retention p lan first ident ifies the c ritica lpe op le. Tha t is not nec essa rily the c ritica l pe op le at the top , but t he

pe op le who have c ritica l skills, know ledg e, and ab ilities tha t a re g oing tobe p rima ry drivers for the orga niza tion.27

For examp le, if you are a p harmac eutical co mp any and you ma ke yourmone y by b eing the mo st innovative a nd ha ving the most c rea tivepe op le in R&D who are alwa ys c oming up with new p ate nts, you nee dto und erstand that those a re the kind o f peo ple tha t you are go ing toneed to d raw to you r organiza tion you must retainthem.

You d on t wa nt ma ss exodus. But if you do the things tha t we vedisc ussed herein, you should be in pretty goo d shape .

The following Best Prac tices Chec k List summarizes the p oints

ma de in this sec tion


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Best Prac tices Check List

Area Best Prac tice

Leadership Ide ntify the lead ers in both co mp anies. Identify who w ill have lea de rship roles in the com bined

organization.

Transition Team Identify who from various departments within the combinedorga nization is go ing to be a p a rt of the transition tea m.

Struc ture Finalize the orga nizat ion structure for the merged entity inc onte xt of ope ra tion size, produc ts, etc .

Incorporate different structures and approaches. Foc us first on the b road top line structure, with de ta iledstructures evo lving subsequently followed by d eta iling of

roles and responsibilities.

Polic ies & Processes Co mp are a nd study HR po lic ies of bo th entities and ident ifyareas of com mona lity and differenc es.

To the extent p ossible e nsure no or minimum loss toount o f cha nge s in policies.emp loyees on ac c

Co nside r all costs.Workforce

Rationalization

itivity in a p hased ma nner Balanc e timing with maintaining e mp loyee morale.

Handle redundanc ies with sensunless the issue is a large one.

Job Assignment head in assessing the role of c hallenging

and fac ilitation in a ne utral wa y.

Perform a c om pe tenc y assessment.Involve top tea m and key functionalsuitab ility of ind ividua ls for roles.

HR or an Externa l Consultant p lays

Job Grading/ Band ing ess.

Pay atte ntion to orga nizationa l culture, willingne ss oflead ership to imp lement, and HR ab ility to drive the proc

Ensure proper co mm unica tion all throug h the exerc ise. Alleviate a nxiety and a pp rehension amo ng e mp loyees.

Compensation

y.

ion

Com pe nsation c omp arisons by emp loyees in b oth entitiesare inevitable.

Com pa ny should be clea r in its ap proac h and philosop h It is usual to align compensation structures. Ensure no loss to e mp loyees be c ause of c om pensa t

changes.

Com pe nsation a nnounce ment timing is important.Retention Create a retention plan that e nco mp asses all of the a bo ve

best practices.


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Where to start?

Pick Your Strong Leaders Pick Them Quic kly Keep Comm unica tion Going at All Leve ls.

Professor Craig W. Fontaine

Northeastern Unive rsity

Colleg e of Business

Administration

Phone: 617-610-6079

Ema il: c .fonta [email protected] u

Web Site:

www.professorfontaine.com

Your announc eme nt should p rob ab ly be m ad e b y senior ma nag eme ntto b e fo llow ed quic kly by a series of sma ller mee tings a t the functiona l ordivisional leve l, and right d ow n to the ind ividua l mana ge r ta lking to theirindividua l peop le. Those m ana ge rs need ed to identify the p eop le w homthey do not w ant to lose a nd ma ke that ve ry c lea r to HR and seniormanagement.

The en tire p roc ess and a ll of the steps involved must A BSOLUTELY be

c onsidered fa ir. There is a notion tha t we c a lled Perce ived Justice.Perceived justice is when a person takes a look a t the system a nd says:

OK, I might no t a gree w ith it, but its be en laid outon pa pe r. I understand wha t theyre up to. It isbe ing co nduc ted fairly. Im not be ing trea ted a nyd ifferently than anybo dy else.

If peop le do n t pe rc eive the p roc ess to b e fa ir, it s do om ed for failure.

And , as a lways, rem em be r that business absolutely must g o on be c ausetha t is why this who le thing ha ppe ned in the first plac e. You c anno ta llow business to b e d isrup ted , and it ca n be d isrupte d very, very ea sily ifyou d o no t do a ll tha t you c an as an HR pe rson to ensure a smo oth

transaction.


* * * * *

References

1 Sc hw eiger, D., Csiszar, E., Nap ier, N. (1993), "Imp lementing inte rnat iona lme rgers and ac quisitions", Human Resource Planning, Vol. 16 No.1,pp.5370.

2 The Grea t Me rger Mo vement in America n Business 1895-1904,Lamorea ux, Nao mi R., Ca mbridge University Press, 1985-1988.

3 Mirvis, P., Marks, M. (1992), Ma nag ing the Merger: Ma king it Work,Prentic e-Hall, Eng lew oo d Cliffs, NJ.

4 De Pamphilis, D. (2001), Mergers, Acquisitions, and Other RestructuringAc tivities: An Integ rated Ap proac h to Proc ess, Too ls, Ca ses, andSolutions, Academ ic Press, San Diego, CA .


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5 Mirvis, P., Marks, M. (1992), Ma nag ing the Merger: Ma king it Work,Prentic e-Hall, Eng lew oo d Cliffs, NJ.

6Telec om munica tions Merge rs and Ac quisitions Newslette r, Janua ry,2006.

7 UNCTAD Foreign Direc t Investment Inte rac tive Da ta base, UnitedNations Conference on Trad e and Developme nt,http://www.unctad.org

8 The Glob a l Perspec tive: M&A Dea ls in 2006 , Lea rnings on M&AInteg rat ions, the C erebrus Group, http :// ww w.cerebrus-consultants.com/pdfs/cerebrus_m&a_presentation.pdf

9 Cultural Synergy in Mergers & Ac quisitions Kwintessentia l Ltd .,http://www.kwintessential.co.uk/cultural-services/articles/intercultural-

mergers.html10 Ibid.


12 Ca rtwright, S., Co op er, C. (1994), "The hum an e ffec ts of me rgers andac quisitions", in Co op er, C. (Eds),Trend s in Orga nisa tiona l Behaviour, JohnWiley & Sons, Chic heste r, Vol. 1.

13 Ibid.

14 Ca rtwright, S., Co op er, C. (1993), "The role of c ulture com patibility insuc c essful orga niza tiona l ma rriag e", Acad emy of ManagementExecutive, Vol. 7, pp. 5770.

15 Ibid.

15 Ca rtwright, S., Co op er, C. (1994), "The hum an e ffec ts of me rgers andac quisitions", in Co op er, C. (Eds),Trend s in Orga nisa tiona l Behaviour, JohnWiley & Sons, Chichester, Vol. 1.


18 Why Do Me rge rs Fa il? What Ca n Be Done t o Improve the ir Cha nc esof Suc c ess?Key Strat eg y Limited , http:/ / ww w.key-strategy.com/documents/MergersFailImproveChances.pdf

19 Ap pelba um , S., Ga nd ell, J., Sha p iro, B., Belisle, P., Hoeven , E. (2000b),"Ana tom y of a m erger: beha viour of orga niza tional fac tors and
http://www.unctad.org/http://www.unctad.org/


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p roc esses throug hout the p re- during - post-sta ge s (pa rt 2)",Mana gem ent Dec ision, Vol. 38 No.10, pp. 67484.

20 Ibid.

21 Sc hweig er, D., Csisza r, E., Nap ier, N. (1993), "Imp lem enting inte rnat iona lme rgers and ac quisitions", Human Resource Planning, Vol. 16 No.1,pp . 5370.

22 De Pamphilis, D. (2001), Mergers, Ac quisitions, and Othe r Restruc turingAc tivities: An Integ ra ted Ap proa c h to Proc ess, Too ls, Cases, andSolutions, Ac adem ic Press, San Dieg o, CA .

23 Broc kner, J., Greenberg , J. (1990), "The imp ac t o f layo ffs on survivors:an orga niza tiona l justice perspec tive", in C arroll, J. (Eds),App lied Soc ia l

Psyc holog y and Orga nisa tiona l Set tings, Erlbaum Assoc iates, Hillsda le, NJ.

24 Ibid.

25 Leana, C., Feldman, D. (1989), "When mergers force layoffs: somelessons ab out m anag ing the human resource prob lem ", HumanResource Plann ing, Vol. 12, No.2, pp . 12340.

26 Cartwright, S., Cooper, C. (1996), Managing Mergers, Acquisitions andStrat eg ic Allianc es: Integ rat ing Peop le and Cultures, 2nd ed .,Butterworth-Heinemann, Oxford.

27 Sc hweig er, D., Iva nc ev ich , F., Power, F. (1987), "Exec utive ac tions forma naging hum an resource s be fore and afte r an a cquisition", Academyof Ma nag eme nt Exec utive, Vol. 1, No.2, pp. 12738.

mergers acquisitions the role of hrm

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