HR’s Role in Merger and Acquisition

Prepared by:

Aakash Goswami Chirag Kanani

Gurpreet Bhardwaj Pratik Negi

Shalini Kaunshal

PGP/SS/IIPM/ISBE/09-11/HR

HR’s Role in Merger and Acquisition:

Issues and Concerns:

Mergers and acquisitions fail if they are not in conformance with the strategic objectives. A study carried out by McKinsey & Co. concluded that some companies focus too much on cost cutting while neglecting day-to-day business, and thereby profits suffer. A merger may also have been done for just glory than confirming the strategic objectives. An executive’s ego gets satisfied when he buys the competition, especially when he gets a big bonus for the deal. Bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers are biggest motivators for these deals. Economies of scale thought of at the time of deciding the merger can become elusive. The organization may become too fuzzy and unmanageable. Mergers may also be driven by the fear of Globalization. The step may be defensive when the management thinks that it is better to acquire before getting acquired. Some mergers and acquisitions have also failed because of differences in the top management. It is a result of lack of clarity, at the time of decision of merger or acquisition, of the future strategic steps to be taken. It is most important that mergers and acquisitions are backed with strategic objectives and not driven by the hype or selfish motives of the management. It needs proper corporate governance on the part of management. Talent retention becomes very important in the wake of merger or acquisition. The company needs to ensure that the best talent remains in the company. For that it needs to have proper plan at the time making decision of merger or acquisition. It also needs to ensure that the culture does not change drastically or if it needs to be changed there is proper change management in place. Also, the top management needs to form a clear common vision at the time of making the decision for merger or acquisition. Introduction:

Mergers and acquisitions have gained importance in recent times. Business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition amongst domestic companies and competition against imports have all combined to spur mergers and acquisitions activities in India.

Mergers and acquisitions take the form of

� Open offers

� Substantial sale of equity

� Sale of distressed assets by financial intermediaries

� Schemes of arrangement by companies, etc.

The last 2 years have seen a spur in the number of merger deals and also the average size of the deal has been increasing year after year. To give a perspective, the month of August saw 41 deals worth $ 2.17 billion.

The historical data shows that roughly two-third of the big mergers and acquisitions fail as the value of stock declines in the stock market. The value may increase immediately after the announcement of merger; it starts declining soon after the market comes to realize that the assumptions behind the merger were flawed. We will have a look at few of the live examples from the industry and look at the reasons as to why do the mergers fail.

Importance of Valuation

A valuation of a target company or business in needed to decide the maximum price that a purchaser should be willing to pay for control. The seller responds to the offer that a bidder makes, based on the bidder’s valuation. However, a seller also could make his own valuation of a shareholding or business unit, as the minimum cash price that would be acceptable or as the target price to achieve.

There are many mergers that have failed due to difference in the Valuation techniques used by different companies. A recent case in the Indian context is the HLL-TOMCO merger that took place in the 1992.

A reason why there was large hue and cry was raised:

a) The swap ratio that was derived and finally agreed upon was that for 2 shares of HLL, the HLL shareholders will get 15 shares of TOMCO. This was deduced on the basis of three valuation methods. Weightings were given and then a value was derived at. The valuation methods that were used were the yield method, the asset value method, the market value method.

b) And, an independent committee arrived at a value of 5:15 swap ratio as against 2:15 as was agreed upon by the parties in merger. This was the reason behind the deal falling out.

The Matrix-Stride merger plan was also called off due to non agreement on the valuation front of the company.

The Jet-Sahara Fallout (absence of strategic planning)

The major reasons due to which the much talked about aviation industry felt flat on its face were:

a) The policy related to mergers and acquisition in the aircraft industry did not clearly specify the terms of transfer for airport infrastructure. The guidelines though clear on parking bays and landing slots, did not specify the status of aircraft hangars, check-in counters, cargo warehouses, passenger lounges and other such airport facilities.

b) Also, Jet Airways enthusiastically overvalued Air Sahara, and later wanted a discount on the original price (20 to 25 percent). This is typically a case of overvaluing a company whose business model was not robust.

Glaxo-Wellcome-Burroughs (HR issues)

Glaxo and Wellcome-Burroughs decided to merge in 1996. The Indian arms however couldn’t merge in the last seven years because of high pay differential between workers of Glaxo and Wellcome in India. The workers of Wellcome were offered a one time compensation of Rs. 2 lakhs in 1998, which they refused. Further the VRS scheme launched by the firm evoked very tepid response. Since 1997 the firms have been working as independent subsidiaries in India.

ABB-Flakt Merger in India

This is a case of a domestic acquisition of Flakt by ABB in India pursuant to the cross-border (Swiss-Swedish) merger that happened at their parent level. Analyses reveal that valuations of both the companies were not done meticulously and corresponding swap ratio was biased. Synergy perceived was hardly achieved. The gain on merger was less than the capital market (BSE SENSEX) growth. Shareholders of erstwhile Flakt India lost heavily. Some of the reasons why Mergers & Acquisitions have failed in recent times are as follows :-

1. No Guiding principle

As rudimentary as this sounds, we often see merging companies fail to develop a set of guiding principles linked to the merger's strategic intent. These principles should get at the very logic of the transaction—is the merger absorption of one company into another or a combination designed to take the best of both? Perfection may not be possible, but these principles will ensure that all decisions drive the combined entity in the same direction. In a best-of-both-companies transaction, for example, one principle might be: "Combine IT organizations by selecting the most up-to-date systems and deploying them across the combined entity."

2. No ground rules

While this sounds similar to point number one, ground rules for planning provide nuts-and-bolts guidance for how the planning teams should act as they begin to put the face of the merged entity on paper. These rules should include processes for how decisions are to be made and how conflicts should be resolved.

3. Not sweating the details It's hard to believe, but detailed post-close transition plans can be lacking even when two companies are working hard and have top-level leadership closely engaged. Why? To some extent, this reflects the daunting complexity of any integration. It can also, however, reflect the culture of the companies and a resistance to detail and top-down accountability. The acquirer may be suffering from acquisition fatigue, management distraction, and reluctance to share information, or a simple unwillingness to follow a methodical decision timeline.

4. Poor stakeholder outreach All relevant stakeholder groups—both internal and external—must receive communication about the transaction, early and often. While employees (see sin number eight), customers, and regulators get the bulk of the attention, there is a long list of additional stakeholders such as communities, suppliers, and the like who also need care and feeding. Management must strive to understand how these groups view the deal and how they might react to changes such as new pricing, the elimination of vendors, and adjustments in service and personnel.

5. Overly conservative targets Management must set aggressive targets from the start. This helps reinforce and clarify the transaction's guiding principles and strategic intent, specifically, how hard the integration teams need to push for cost savings and revenue growth. Most companies tend to focus on one or the other—but neglect to place adequate emphasis on both. Experience demonstrates that management never gets more in synergies than it requests. So, build your targets with some stretch and expect that your people will find a way to get there.

6. Integration plan not explicitly in the financials We have seen merging companies build detailed integration plans only to stop short of driving them into the combined entity's operating financials in a clearly identifiable manner. Institutional memory is short and the plans are often redone on the fly (see sin number nine). While the integration plan will evolve, you need to create financial benchmarks that can be tracked.

7. Cultural disconnect Bringing disparate groups of people together as one company takes real work and represents an effort that is often largely overlooked. Culture change management is not indulgent; it is a critical aspect of any transaction. However, simply acknowledging the issue or handing it off to specialists is not enough. Management must set a vision, align leadership around it, and hold substantive events to give employees a chance to participate. Detailed actions and well articulated expectations of behavior connect the culture plan to the business goals.

8. Keeping information too close There is a natural hesitancy to share information, and current regulations put pressure on what management can tell the organization without going to public disclosure. However, absent real facts, the rumor mill will fill the void. Tell employees what you can. Also, tell them what you can't tell them at the moment, why, and when you will be able to do so.

9. Allowing the wrong changes to the plan

All the hard work and despite meticulously avoiding sins one through eight, some companies

still miss the mark. The popular trend toward empowered line managers and decentralization

carries the risk of handing off carefully designed plans to new decision makers who are not

steeped in the balances and considerations that made the plan viable in the first place.

Following handoff, every company needs clear decision rights about who can change the

agreed-upon plans, under what circumstances, and with what approvals.

The Formation of M&A &Hr Challenge:

HR Issues in M&A:

Retention of Key employees

Compliance with applicable laws

Alignment of compensation & benefit plans

Cultural fit

Employee communication

Different Phases of M & A in HR:

Pre- M & A phase : assessment of differences, role clarity, management styles

Post-M&A phase: designation for employees, compensation & PMS, relation between

management & trade unions

HR Activities in the Phases of M & A:

Successful Examples of M&A:

In an ideal merger, the newly created entity pools the best features of the two merging organizations. A well planned process built on the foundations of an open, honest and consistent communication strategy can pave the way. Mergers and acquisitions have become a common phenomenon in recent times. A merger of the size like HP-Compaq has implications for the workforce of these companies across the globe. Although the merging entities give a great deal of importance to financial matters and the outcomes, HR issues are the most neglected ones. Ironically studies show that most of the mergers fail to bring out the desired outcomes due to people related issues. The uncertainty brought out by poorly managed HR issues in mergers and acquisitions have been the major reason for these failures. The human resource issues in the mergers and acquisitions (M&A) can be classified in two phases the pre-merger phase and the post merger phase. Literature provides ample evidence of difference in between the human resource activities in the two stages: the pre-acquisition and post acquisition period. Due diligence is important in the first phase while integration issues

take the front seat in the later. The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc. The human resource system issues that become important in M&A activity are human resource planning, compensation selection and turnover, performance appraisal system, employee development and employee relations. M&A activity presents a different set of challenge for the human resource managers in both acquiring and acquired organizations. The M&A activity is found to have serious impact on the performance of the employees during the period of transition. The M&A leads to stress on the employee, which is caused by the differences in human resource practices, uncertainty in the environment, cultural differences, and differences in organizational structure and changes in the managerial styles. The organizational culture plays an important role during mergers and acquisitions as the organizational practices, managerial styles and structures to a large extent are determined by the organizational culture. Each organization has a different set of beliefs and value systems, which may clash owing to the M&A activity. The exposure to a new culture during the M&A leads to a psychological state called culture shock. The employees not only need to abandon their own culture, values and belief but also have to accept an entirely different culture. This exposure challenges the old organizational value system and practices leading to stress among the employees. Research has found that dissimilar cultures can produce feeling of hostility and significant discomfort which can lower the commitment and cooperation on the part of the employees. In case of cultural clash, one of the cultures that is dominant culture may get preference in the organization causing frustration and feelings of loss for the other set of employees. The employees of non-dominating culture may also get feelings of loss of identity associated with the acquired firm. In certain cases like acquisition of a lesser known or less profitable organization by a better one can lead to feelings of superiority complex among the employees of the acquiring organization. In case of hostility in the environment the employees of two organizations may develop “us” versus “them” attitude which may be detrimental to the organizational growth. The uncertainty during the M&A activity divert the focus of employees from productive work to issues like job security, changes in designation, career path, working in new departments and fear of working with new teams. The M&A activity leads to duplication of certain departments, hence the excess manpower at times needs to be downsized hence the first set of thoughts that occur in the minds of employees are related to security of their jobs. The M&A activity also causes changes in their well defined career paths and future opportunities in the organization. Some employees also have to be relocated or assigned new jobs; hence the employees find themselves in a completely different situation with changes in job profiles and work teams. This

may have an impact on the performance of the employees. Research has found that at least two hours of productive work per employee per man day is lost during the M&A activity in the organizations. The increased political processes that may be underway in the organizations to sustain the importance of the various individuals and departments will add to the confusion. The human resource systems vary across organizations owing to the differences in the organizational culture, sectoral differences and national cultural differences. For example if the compensation in the acquired firm is lesser compared to the acquiring firm, the acquisition will raise employee expectations (for the employees of acquired firm) of a possible hike in compensation which may not be realistic. On the other hand if the compensation level of employees in acquiring firm is lower the employees may press to have equal compensation across all the divisions of the firm. The pay differential can act as a de-motivator for the employees of acquiring firm and may have long term consequences. The compensation issues may also involve legal angle. Two cases in the Indian context are important which underline the importance of legal issues related to compensation in M&A activity. The first case involving Hindustan Lever Limited acquiring TOMCO, the employees in TOMCO enjoyed better terms and services compared to the HLL employees. The HLL employees argued that if TOMCO employees are allowed to work on their original terms and conditions, two classes of employees will come in existence. Since both the set of employees now belong to same firm, a case of discrimination will arise against the employees of HLL. However the court supported TOMCO employees in the process. The second case involves merger of Glaxo and Wellcome-Burroughs who decided to merge in 1996. The Indian arms however couldn’t merge in the last seven years because of high pay differential between workers of Glaxo and Wellcome in India. The workers of Wellcome were offered a one time compensation of Rs. 2 lakhs in 1998, which they refused. Further the VRS scheme launched by the firm evoked very tepid response. Since 1997 the firms have been working as independent subsidiaries in India. Compensation differences need to be rectified by the acquiring firm so as to maintain the morale of acquired firm employees and to retain them. The compensation structure among the organizations may also differ creating troubles, for example one of the firms may have performance based pay while other may have higher component of fixed pay. Hence the differences in compensation structure and performance appraisal systems also need to be rectified so as to bring equity in the human resource systems and to treat employees at the equal level. Another practical problem is differences in the grading or organizational structures in the systems. Since the organizational structures are different designations for the employees are used, during the integration of acquired organization the acquiring organizations need to develop a mechanism to remove the differences in the grading systems bring them at equal level, as many a times the compensation is related to the grade of employee in the organization. The employee relations issues gain more importance in the acquisitions of manufacturing units in India. The power equation between management and trade unions is bound to change with

the acquisition. The acquiring management also needs to keep track of number of unions in the workplace and equations between them as many Indian manufacturing units have multiple unions. Hence comprehensive analysis of trade unions operating in the plant should be done. This will require study of management-union equation, employee contracts, political linkages of the unions, compensation related clauses, number of trade union and dynamics between the unions. The impact on the employees can be divided into categories of psychological trauma, increased

workload, survivor guilt and stress. The reaction of the employees can vary from anger to

dejection and depression. The process of merger can have inbuilt psychological and social

threats which should be identified like exodus of managers due to the perceived job insecurity.

There is also fall in the morale, commitment and loyalty. The merger can lead to depression and

impaired performance. The dissimilarity in the cultures can produce the feelings of hostility and

significant discomfort, which impact on the commitment and cooperation on the part of

employees. The cultural difference also leads to counterculture feelings where employees tend

to completely reject the dominant culture of the organization. The impact of cultural shock is

significant and long lasting on the employees. The initial shock is followed by employees making

their own perceptions based on values and past experiences. The more dissimilar the culture is

higher will be the cultural shock. The likely reactions as noted by studies are anger fear, denial

frustration and depression which leads to altered behavior, reduced productivity, stress, illness,

accidents , conflicts and a total lack of commitment to make merger work. The feeling of

political back stabbing adds to the psychological trauma.

Managing M & A

Clearly defined communication strategy during M&A plays an important role in removing the

employee fears and kill rumors floating around in the organization. The organizations need to

reach their employees before the press as the employees will have feelings of getting cheated.

Studies show that communication strategy that involves senior managers of the acquired

organizations work well. Involving other employees who are trusted by the employees for

instance trade union leaders are also helpful. The employees meeting in small groups so as to

discuss their concerns, fears and positive feelings also helps to lessen the stress on employees

of acquired firm. The group meetings seem to help because many-a-times employees are

reluctant to come out and speak their concerns, whereas in groups where everyone shares

same set of feelings to an extent, it becomes easier to come out with the common set of

concerns and fears. This also provides confidence to employees that the new management is

willing to listen to their concerns and feelings, building an atmosphere of mutual trust.

The transition period also becomes crucial from communication point of view. In case of

lengthy transition period the employee stress increases, the best strategy in this period is to

convince the employees that they are part of new organization and their concerns will be taken

care of. The transition period can also be used to improve communication with the employees

of acquired firm. Improved communication will help to better understand each other’s cultures

and practices. Firms can also use this period to analyze the human capital of the acquired firm

and define their possible roles in the new organizations. The transition period provides ample

opportunity to design the new organization, explain the new roles to the employees, plan

synergies and train the employees as the new role. This will make the integration process easier

for the acquiring organization.

The communication aspect being very important should be handled carefully by the human

resource department. The communication should provide precise information to the

employees, providing any piece of information which is unreal can lead to rumors and

counteract. The communication should be sufficient enough to answer the queries and worries

of the employees. The first set of information should be related to their future jobs, this will

help to lessen their worries related to job security. The communication shouldn’t involve false

promises which may counteract later. The communication can be through trusted and credible

employees of the acquired company and trade unions can be involved in the process too.

Acquisition strategy of GE Capital

The GE Capital uses a successful model called “Pathfinder” for acquiring firms. The model

disintegrates the process of M&A into four categories which are further divided into

subcategories. The four stages incorporate some of the best practices for optimum results. The

pre-aquisition phase of the model involves due diligence, negotiations and closing of deals. This

involves the cultural assessments, devising communication strategies and evaluation of

strengths and weaknesses of the business leaders. An integration manager is also chosen at this

stage. The second phase is the foundation building. At this phase the integration plan is

prepared. A team of executives from the GE Capital and the acquiring company is formed. Also

a 100 day communication strategy is evolved and the senior management involvement and

support is made clear. The needed resources are pooled and accountability is ensured. The

third is the integration phase. Here the actual implementation and correction measures are

taken. The processes like assessing the work flow, assignment of roles etc are done at this

stage. This stage also involves continuous feedbacks and making necessary corrections in the

implementation. The last phase involves assimilation process where integration efforts are

reassessed. This stage involves long term adjustment and looking for avenues for improving the

integration. This is also the period when the organization actual starts reaping the benefits of

the acquisition. The model is dynamic in the sense that company constantly improves it through

internal discussions between the teams that share their experiences, effective tools and refine

best practices.

Acquisition strategy of Cisco

The acquisition strategy of Cisco is an excellent example of how thorough planning can help in

successful acquisitions. After experiencing some failures in acquiring companies, Cisco devised a

three step process of acquisition. This involved, analyzing the benefits of acquiring,

understanding how the two organizations will fit together – how the employees from the

organization can match with Cisco culture and then the integration process. In the evaluation

process, Cisco looked whether there is compatibility in terms of long term goals of the

organization, work culture, geographical proximity etc. For example Cisco believes in an

organizational culture which is risk taking and adventurous. If this is lacking in the working style

of the target company, Cisco is not convinced about the acquisition. No forced acquisitions are

done and the critical element is in convincing the various stakeholders of the target company

about the future benefits. The company insists on no layoffs and job security is guaranteed to

all the employees of the acquired company. The acquisition team of Cisco evaluates the

working style of the management of the target company, the caliber of the employees, the

technology systems and the relationship style with the employees. Once the acquisition team is

convinced, an integration strategy is rolled out. A top level integration team visits the target

company and gives clear cut information regarding Cisco and the future roles of the employees

of the acquired firm. After the acquisition, employees of the acquired firm are given 30 days

orientation training to fit into the new organizational environment. The planned process of

communication and integration has resulted in high rate of success in acquisitions for Cisco.

HR’s control:

• Train managers on the nature of change

• Technical retraining

• Family assistance programs

• Stress reduction program

• Meeting between the counter parts

• Orientation programs

• Explaining new roles

• Helping people who lost jobs

• Post merger team building

• Anonymous feedback helpline for employees

Conclusion:

HR role both tactical & strategic in M&A

Open mindset what works well

Maintain synergy with merged or acquired firms

Remove “us vs them”

Managing grapevine by effective communication strategy

Ensuring confidentiality & Knowledge

Proper counseling and career assistance