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Mergers acquisitions the_role_of_hrm

  1. 1. Mergers & Acquisitions: Understanding the Role of HRM July 2007 Craig W. Fontaine, Ph.D. Northeastern University College of Business AdministrationBased on:C.W. Fontaine, Human Resource Management: The key to Successful Mergers and Acquisitions.,The 9th Annual Conference on Business Integration, London, 2005 © 2007 Northeastern University
  2. 2. Executive Summary HR professionals play a Human resource management professionals must be capable ofcritical role in the success handling many unique challenges. One of the most prevalent or failure of mergers and challenges that HR professionals face and the one that requires the acquisitions. utmost attention is in a merger or acquisition. HRM plays a critical role in the success or failure of mergers and acquisitions. Involving HR from the very earliest of planning stages can make all the difference in both the financial and the human outcomes. What Are Mergers & Acquisitions? The first thing we need to examine is the difference between a merger and an acquisition. 1 A merger is when two companies, more or less on equal footing, decide to join forces. There are many reasons why companies merge. We’ll address those reasons later. The basic attribute of a merger, however, is that it is considered to be an equal transaction, with both parties accepting risk and sharing in the potential rewards. Acquisitions are different in the sense that one company is, in fact, taking over another company. Of course, some companies want to be taken over and some do not. One of the most challenging acquisition situations an HR professional (or any other professional in the organization) can face is the hostile takeover. A hostile takeover is simply when a larger, more powerful, and richer organization takes over another organization. They accomplish this by typically offering a premium of 20% to 25% over and above the current stock price. This is, of course, a powerful influencing tool, especially for those individuals who hold a lot of shares. And those that hold a lot of shares are often on the board of directors or sit in positions of power in the organization being taken over. The concept of “hostile” goes beyond the way in which an organization is acquired. When you enter into an acquisition situation, there can be a lot of real hostility internally because people do not want to see their companies taken over. The situation can easily become even more hostile as you go through the acquisition process. Mergers & Acquisitions: Understanding the Role of HRM 2
  3. 3. The 5 Waves of Merger & Acquisition Activity in the US Mergers and acquisitions are not a new thing in the United States. The how-and-why of modern mergers and acquisitions has evolved over the decades, starting in the late 19th century and moving into the 21st century. In the late 19th and early 20th centuries, economic conditions, technological innovation, and competitive forces came together to drive the First Wave of mergers and acquisitions in the US from 1894 to 1905. Many call it “The Great Merger Movement.” During this First Wave of activity in the US, there was an unprecedented number of horizontal mergers. Reports Lamoreaux in The Great Merger Movement in American Business – 1895-1904: “More than 1,800 firms disappeared into horizontal combinations, at least a third of which controlled more than 70 percent of the markets in which they operated.” 2 Modern mergers andacquisitions are a resultof M&A evolution from the 19th century to the 21st century. The Five Waves of Merger Activity in the US Mergers & Acquisitions: Understanding the Role of HRM 3
  4. 4. In the midst of The Great Merger Movement came the Sherman Antitrust Act which prohibited monopolies. After the Sherman Antitrust Act came the Second Wave of mergers and acquisitions. Between 1915 and 1930, companies called “oligarchies” began to form and did business in a market space in which there were a relatively small number of sellers. Great examples of oligarchic organizations in today’s modern market might be companies such as Coca-Cola, Pepsi, and Schwepps. TheWhile we know our country’s beverage industry is a huge industry with billions of dollars in potential business history is filled with profit. These companies all are in the same business and in the sameM&A activity, the reasons for market space, and they cooperate to some extent.mergers and acquisitions are less obvious. Then, businesses across the US were disrupted on October 29, 1929, when the US stock market crashed. The subsequent Great Depression lasted until the time of The New Deal and the advent of World War II. The Third Wave of mergers and acquisitions in the US came in the 1960’s during a booming economy. This was when we first began to see huge conglomerates being formed. Conglomerates are the result of the combination of companies which actually had nothing to do with one another prior to the merger or acquisition. They were simply trying to increase their size to leverage the advantages of having a large company. The Fourth Wave, in the 1980’s, was the age of the so-called hostile takeover. You may recall the well-publicized 1988 leveraged buyout of R.J. Reynolds Tobacco, which came to basically define the “hostile takeover” for most Americans. These are instances in which tremendous amounts of money are applied to entice shareholders to agree to such takeovers. From the 1990’s to the present, we have seen the emergence of a different kind of takeover – the Fifth Wave of strategic mergers – in which organizations intentionally try to absorb other companies to increase their market share and gain competitive advantage. Why Do Companies Merge? While we know our country’s business history is filled with mergers and acquisitions over the decades, the reasons behind this M&A activity are less obvious. We should now address the real issue of why companies merge. 3 Mergers & Acquisitions: Understanding the Role of HRM 4
  5. 5. Economies of ScaleThe largest single driving force behind mergers and acquisitions isprobably economies of scale. Economies of scale means that if youhave a large company, you can leverage your suppliers. This is a verypowerful capability, and exercising it can be a strategic move for acompany’s operations. You can save a tremendous amount of moneyon services such as health insurance — we all know that health insuranceis extraordinarily expensive and getting more so every day.I know about the strategic benefits of economies of scale from mypersonal experience of working as a consultant in a small merger andacquisition in 2006 in which two failing private schools joined together tobecome one successful entity. One of the major contributing factors forthe success of this merger was that the combined organization hadmore people who were buying health insurance; as a result, the healthinsurance company substantially dropped their premiums because therisk was being spread across more people.Large companies can also buy basic supplies such as paper, pencils,and paperclips less expensively from suppliers when they buy in largerquantities. They simply get a lower price because they give the suppliersmore business.Saturated Market ConsolidationAnother driving force for mergers and acquisitions is the consolidation ofsaturated markets. If you have a market that is saturated – one in whichthere are many players in the space with a lot of competition – you cantake over one of your competitors and then automatically increase yourmarket share.This, in turn, allows you leverage economies of scale on a more criticallevel than on office supplies and services such as insurance. Forexample, if two companies manufacture similar products, theircombined organization has the potential to significantly decrease thecost of goods sold by purchasing raw materials in bulk. And when thecost of goods sold goes down, profit, of course, goes up. Mergers & Acquisitions: Understanding the Role of HRM 5
  6. 6. Competitive Position Improvement The third driving force has to do with simply improving your competitive position because you end up with a larger asset base and increased notoriety. For example, consumers are more likely to purchase services or products from large, recognized companies. As we’ve seen, there are very good reasons why organizations decide to engage in mergers and acquisitions. But, if you want to drop down to the next level of detail, we need to take a look at exactly what organizations are trying to achieve when they do, in fact, elect to merge or acquire another organization. More precisely, they are attempting to create synergy… Synergy synergy (n) Synergy, is what organizations are attempting to achieve when they Cooperative interaction engage in mergers and acquisitions. 4 among groups, especially among the acquired The first thing that we know, and probably one of the most critical things subsidiaries or merged when it comes to mergers and acquisitions, is that companies almost parts of a corporation, always immediately presume that they are going to reduce staff. This is,that creates an enhanced in fact, true. Staff reductions represent a tremendous savings to combined effect. organizations post-merger or post-acquisition.American Heritage Dictionary When organizations merge or acquire one another, there are some horizontal departments or functions in both organizations that can be very easily consolidated. This includes such functions as accounting, human resources, marketing, and even the sales department. And, given that staffing usually is one of the larger budget items for an organization, Staffing Synergy can be an immediate benefit. Another contributor to synergy is the acquisition of new technology. Given that technology is such a key driver in today’s business world, Technical Synergy is something that we need to examine more closely. Perhaps the best example that I can provide is from my personal experience when I worked at EMC Corporation. EMC Corporation was a company that made huge, secure storage devices for some of the world’s largest organizations. All of the airlines, banks, and car rental agencies were using EMC systems. Mergers & Acquisitions: Understanding the Role of HRM 6
  7. 7. What they did not have was a product that was useable by small- and medium-sized enterprises. So, EMC acquired Data General Corporation. Data General was in exactly the same business as EMC. They had a very fine product in the $15,000 - $30,000 range, where the EMC systems were $1 Million plus. By EMC’s acquisition of Data General, they were able to absorb a new technology and introduce an entirely new product line for their customers and open a new market of all those customers who were not coming to EMC because of the cost. The last one, we’ve already touched on briefly, is the concept of Financial Synergy. It is the notion that when you have more visibility because you are larger, it easier to raise capital and more customers naturally flow to you. And it also encompasses economies of scale. Now that we’ve looked at the “why” of mergers and acquisitions, let’s look at the “how”… Merger Types When companies decide to engage in a merger their reasons typically fall into one of six categories. 5 The first type of merger is a horizontal merger. This is when two companies who are currently in direct competition join together and share their product lines, their markets, and their customer base. Chances are, if you are A vertical merger is when a company, and perhaps one of their an HR professional, you suppliers, join together to be able to offer a contiguous, non-interruptedwill eventually find yourself supply of merchandise to their companies. An example might be an ice in the middle of a merger cream cone manufacturer merging with an ice cream maker so that or acquisition. both products can be acquired from a single entity, thereby presumably making it easier for the customer. A market extension merger is with two companies that sell the same product in different markets. This is an interesting type of merger because companies can be regional. Companies can have different segments of the marketplace in which they have gained a reputation. By acquiring another company that has a foothold in another market, you can automatically increase the markets that you address. A product extension merger is when two companies selling different products in the same market merge. An example of this is the EMC/Data General example where EMC sold at the high end and Data General sold at the low to mid range. Mergers & Acquisitions: Understanding the Role of HRM 7
  8. 8. A conglomeration merger is where two companies who don’t have a lotto do with one another decide to merge. The reason for this would beeconomies of scale, and getting a larger identity and more assets to beable to leverage for loans and other financial purposes.And finally, as mentioned earlier, a strategic merger is the newest type ofmerger that may involve some or all of the features of the other mergertypes mentioned above.No matter what type of merger, HR professionals are likely toencounter merger and acquisition challenges due to…Rapid Rise of Merger & Acquisition Activity in the USMerger and acquisition activity is increasing in the United States. Activityrose 38% from 2004 to 2005; in fact, 2005 was the first year in which wepassed the $1 Trillion mark. 6 What’s more, the upward trend continuedthrough 2006. The numbers make it painfully clear that most humanresource professionals are going to encounter at least one merger oracquisition in their careers. Source: UNCTAD Foreign Direct Investment Interactive Database 7 Mergers & Acquisitions: Understanding the Role of HRM 8
  9. 9. A Growing Global Merger & Acquisition ProfileFrom a global perspective, the rest of the world is also beginning to seeincreased merger and acquisition activities. You can see from the chartbelow that in the Pacific Rim alone there is a substantial amount ofactivity: Source: Learnings on M&A Integrations, the Cerebrus Group 8Mergers and acquisitions are a growing trend, and analysts don’t seeany downturn over the next 10 years. Therefore, we need to look at howhuman resources professionals can assist in the success of an acquisition.There’s no question that their assistance is needed because thesuccess rate numbers are bad. Shockingly bad…. Mergers & Acquisitions: Understanding the Role of HRM 9
  10. 10. Merger & Acquisition Success Rate It might be more accurate to use the term failure rate rather than success rate. Why? Industry analysts agree that the failure rate of mergers and acquisitions is somewhere between 40% and 80%. A lot of sources average it out at 50%. This is a fair number to use for the sake of discussion. Even more shocking is that if you think of failure as not increasing shareholder value, then the numbers look worse, with the higher end of the scale being 83%. This means that 83% of the companies do not ultimately see the returns that were projected for the merger or acquisition after a 3- to 4-year period. 9 Research also suggests that up to 65% of failed mergers and acquisitions are due to ‘people issues’ that result in poor productivity. 10 Major HRM Issues in Mergers & Acquisitions Combining merged Research shows that consistently 65% of mergers and acquisitions that fail cultures requires a focus do so because of people issues – cultural issues, communication issues,on one new vision and one and so organizational mission. Historically, HR has not had a seat at the table in the mergers and Problems typically occur acquisition process. You could argue that this is true in all HR activities.when the larger or stronger However, we are thankfully beginning to see a number of organizations of two organizations tries who are beginning to truly realize that a strategic HR approach involving to significantly influence the integration. HR in most all business decisions and processes is a smart thing to do. But we can’t deny that today many businesses do not consider HR to be a business partner -- they consider HR to be nothing more than a staff position that carries out a critical, but not strategic, role. If you look at the failures and successes of mergers and acquisitions over time, it is my opinion that companies that have a strong HR leadership – companies whose senior management trust HR – have a distinct advantage which we can pinpoint in this paper. But first, let’s look at the HR issues that inevitably arise in mergers and acquisitions… Mergers & Acquisitions: Understanding the Role of HRM 10
  11. 11. Lack of Communication Lack of communication during mergers and acquisitions has long been identified as the most critical need. As we examine the HR issues involved, you will see a lot of references to the fact that people resist mergers, acquisitions, and especially takeovers at a personal level. The reason why they resist at a personal level is because they have not been told why things must change or how they are going to change. 11 Lack of Training As companies merge and acquire one another, they tend to merge technologies. They also merge policies, processes, and procedures. In a merger situation, you end up with 50% of the people do not know the new software, policies, processes, and procedures. If you don’t train those people, and expend some of your resources on training, that will end up being negative influence on your outcome. 12 Loss of Key People Often, executives are so Good people – key people – tend to leave organizations at this focused on the financial particular point in time. 13 Many people are afraid of losing their jobs. It is and procedural aspects of the takeover that they a well-known fact in the business world that mergers and acquisitionsignore so-called "intangible usually cause staff reductions. We’ve already addressed that. It’s true. assets," such as business That is one of the reasons why they do it. culture, human capital, People who are talented – the exact kind of people whom you want to company structure and corporate governance. retain in the organization – are exactly the kind of people who are going to put their resumes out and probably go to your competitor. That is a In essence, they are so tremendous loss for an organization.obsessed with numbers that they forget about people. Corporate Culture Clash & Power Politics Corporate culture, as we know, is a fundamental asset (or even liability) for organizations. We’ve all worked for different companies with differing cultures. I’ve worked in companies that had a very “loosey goosey,” gentle culture. I’ve worked for companies that have a very hard-driving, aggressive, competitive culture with equally aggressive internal politics and power struggles. If one company with one style takes over a company with another style, that is indeed a difference – and it is a huge difference. 14 Some people feel comfortable in the one setting and some do not. The clash of two cultures can be so detrimental that you lose key people. Mergers & Acquisitions: Understanding the Role of HRM 11
  12. 12. Between 40% and 80% of Lastly, there is the issue of national cultures. 15 If mergers and acquisitions M&A deals fail, due to occur on a global scale in which a company from Malaysia is beingpurely human resistance to taken over by a company in the United States, challenges arise. change — a problem known as "people issues.” People from other cultures such as Malaysia can be different – they may have a different set of values, they may believe different things, they may or may not embrace teamwork, they may have a longer vision of short-term and long-term paybacks, they may feel differently about authority and delegation. All of these things make a huge difference. An American company cannot simply take over an Asian company and presume that the Asian people are going to agree with the way your organization is structured and how you run things. This final issue is so large, in fact, that we could literally devote an entire white paper to this topic alone. All of these issues either stem from or lead to one thing… Employee resistance. Employee ResistanceThe problem lies in the fact Employee resistance is probably the single most difficult issue to deal with that resistance is assumed during mergers and acquisitions. I’ve already mentioned that you’re to be a logical challenge probably going to lose some people that you do not want to or cannot with a logical solution. afford to lose. The root causes of resistance can all be countered if you take care to do it, and the HR organization is the organization that should drive this effort. 16 A lack of information about change and the failure of people to understand the need for change can be viewed together. If leadership cannot stand up in front of the company and say the following, resistance will worsen: “We’re doing this because we must.” “We’re doing this because we are failing and if we don’t, we all stand to lose our jobs.” “We’re doing this because it is going to help us. It is going to allow us to grow. We’re all going to be better off during and after this transitional period.” Mergers & Acquisitions: Understanding the Role of HRM 12
  13. 13. You need to give complete disclosure as to why you are doing it. And, frankly, if you have to scare somebody and say something like the following, then do it: “We MUST make this change or we may not be in existence 2 years from now.”But resistance also has an If you do not give that kind of information to people and make it thatemotional aspect which isoften much stronger than clear to them, then they are more likely to resist. human logic. Most people also believe that their needs are being ignored. This is because you have not allowed communication to flow upward. This has been shown in the literature to be perhaps one of the most critical elements. Even if you do not take peoples’ suggestions and implement them, the notion that at least you allow the person to voice their personal opinions is extremely critical to the outcome. People are concerned about their personal well being. Everybody whom I’ve ever known who has gone through a merger or acquisition (and I’ve been through several myself), the first thing they think when they first find out this is happening to them is that they are going to lose their job, they are going to be transferred, they are going to have to move, or they are not going to be working for the same boss anymore. These are the things that make people want to bolt from an organization. Clear and constant There can be a conflict between individual goals and organizational communication from goals. When I worked for a nuclear engineering company called senior management Combustion Engineering, we were acquired by a global giant, ABB outprovides decisive answers of Switzerland. They told us, “You are no longer going to be designing to "people issues" and and building nuclear power plants. We are going to change you to a dispel uncertainty among employees — an company that services nuclear power plants.” For all those people who essential ingredient for joined Combustion Engineering because they were nuclear engineers, a successful deal. their life’s goal was to design the latest and greatest control systems. They no longer believed that their personal goal of being a nuclear design engineer was compatible with the new organizational goals of servicing power plants. It clearly did not require the same type of skills, knowledge, and abilities as they had brought to the table. Many people are also going to say something like this: “It’s not going to work. It will never work. We’re too different. We don’t have enough money. We don’t have enough systems. We don’t have enough people.” Mergers & Acquisitions: Understanding the Role of HRM 13
  14. 14. Overcoming Resistance to Change To overcome this resistance, you need to try to focus the people on the benefits that are going to occur. You need to involve the people in the change process. If you can get them to believe that they are going to have some input in making the systems and the processes better, they are more likely going to want to stay on and be engaged and basically become committed to the new organization. This is largely done by two-way communication. You must do it early. You must do it quickly. You do not want rumors to start. If rumors start to fly, you need to keep your ear to the ground. You need to dispel the rumors because the people who are hearing these rumors always have a connotation of something negative no matter what is being said. They must, in fact, be corrected so that you do not lose people or have that kind of backlash going on. And, you must increase trust and acceptance by keeping the people constantly informed and constantly asking them for their input. And HR is just the team to spearhead this effort… The Importance of HR in the M&A Process The good news is that the The following chart shows the number of companies that engage human business world is finally resource professionals and hold them at a high level of involvementbeginning to recognize the across the various stages of a merger and acquisition are surprisingly dynamics that lead to low. 17 failure and are coming tounderstand the role of HRM in resolving "people issues." Human Resources Involvement in the Merger Process 18 Mergers & Acquisitions: Understanding the Role of HRM 14
  15. 15. Let’s look at the US as an example in Figure 2. In the initial planning phase, only 15% of the companies are engaging HR. HR is engaged a little bit more in the investigation phase. It’s easy to understand why HR is not more involved in the negotiation phase. But look at the numbers for integration. Less than 30% are engaging HR in the actual integration, and it is in the integration phase where all the issues that we’re discussing here occur. As HR leads the companies through the process, there are proven best practices that they can follow to help ensure success… HRM Best Practices for Mergers & Acqusitions Successful M&A deals After careful review of the literature, and taking into account my own are mostly attributed to personal research and experience, I have put together a set of HRM Bestleadership, well-planned Practices for HR people when they are facing the daunting task of communication and managing the complex issues involved in mergers and acquisitions. early management of "people issues." These Best Practices are high-level, but they should give you a solid overall view of the kinds of things you need to pay attention to as you go through the merger and acquisition process: • Leadership • Transition Team • Structure • Policies & Processes • Workforce Rationalization • Job Grading/Banding • Compensation • Retention Leadership Identify your One of the first things that you need to address is who is going to have leaders quickly. the leadership positions in the new combined organization? 19 The one thing you absolutely do not want to do now is create a leadership vacuum. You must identify who those leaders are going to be and you must identify them quickly. This helps maintain the focus on the business and it also begins to make the transition smoother. Mergers & Acquisitions: Understanding the Role of HRM 15
  16. 16. Leaders do not always need to be from the “acquirer” company in an acquisition. As a matter of fact, this is probably not a very good idea. If you have people in the acquired organization who see that all of their senior people are being let go and that it appears to them that everybody from the big entity is taking all of the “big” jobs, they are not going to feel particularly good about it. They are going to feel as if, in fact, they are playing a minor role, and they tend to leave for those kinds of reasons. You need to recognize that talent exists in both organizations. If you start laying off the senior people from one organization, the rest of the people are going to doubt that they have a contribution to make. Transition Team Quickly identify The transition team must be identified quickly and it also must be multi-and assemble amulti-functional functional. 20 The transition team works directly beneath leadership.transition team. Obviously, the leaders of the organization will ultimately be overseeing the transition. Your transition team should include individuals from each department, division, or function of the company – whether it be sales, marketing, engineering, quality control, manufacturing, and so on. This way, there is at least one person in all of these groups who will be able to look at the details of how the transition would happen in their group. I am most familiar with engineering organizations, having worked in engineering organizations all of my life. After having gone through at least two major acquisitions, I can tell you that what typically happens is that some director-level person reporting to a senior leader like a vice president must start looking at the different types of products that the other company offers. They should take a look at the skill sets inside that other company and begin to try to figure out how are they going to merge people, products, and processes. Are they going to keep the products separate or integrate the products? Are they going to make it a separate division? Are they going to keep the leadership? That is the role of a transition team. They need to make decisions, change initiatives, and provide oversight throughout the process. Mergers & Acquisitions: Understanding the Role of HRM 16
  17. 17. Structure There are enormous One of the other major things that most people overlook when they think organizational about mergers and acquisitions is what is this new entity going to look decisions to be made, like? How will the combined organizational chart look? Are you going and they have enormous implications to take the new company and make it a new division? We see that a for the success or lot. Other organizations might say, “No, no, no. We’re going to take the failure of the merger or existing engineers from Company B and we’re simply going to integrate acquisition. them into our larger organization.” This doesn’t change the organizational chart from a structural perspective; it only changes the chart from the fact that there’s probably going to simply be more people inside that organization. What if you do an acquisition from overseas? Does that mean that you want to structure things completely differently so that you have an international division and a US division? We also begin to see that huge decisions have to be made from a structural perspective. 21 If two small companies are merging, lots of times small companies can tend to be very centralized in the decision making. Larger organizations tend to be more de-centralized in the decision making. When you de-centralize decision making, you tend to push the decision making as low down on the organization as is logical. You will eventually have to reconfigure the organization with all the subdivisions within functions, and get down to detailing who is going to be the senior engineer, who is going to be the manager, and who is going to be the lead engineer. But as you’ll see as we talk about some of the other best practices, that is probably best left for the detail level later on. Policies & ProcessesHR can and does play a Every organization has different policies, whether it is an ethics policy, a critical role in assessing vacation policy, or a bonus policy. The companies must combine their jobs, job requirements, policies, which means that you might take the best out of one or the best and people. out of the other. 22 Once again, you should not take one organization’s policies and try to superimpose them over the entire new entity. You can lose a lot of people by doing this. For example, one company’s policy was to allow you to work from home. And now, you might say that the new entity is not going to allow people to work at home. You’re going to lose a lot of people, and that is something that you can’t afford to do. So you have to be very careful when you merge these policies and procedures. But, of course, costs also must be considered. Mergers & Acquisitions: Understanding the Role of HRM 17
  18. 18. But, in reality, this is a great time to introduce new policies and new processes which can be perceived by the people to be good for them. For example, many companies these days are considering whether 2 weeks vacation is enough. If you had been considering changing the vacation from 2 weeks to 3 weeks, this would be a wonderful time to do something like that. If you were considering things like doing profit sharing or profit gaining, or introducing any of those types of monetary inducements, this would also be a good time to provide those incentives. The bottom line is that if you are going to make the transition happen smoothly, you are probably going to have to give something back to the people. Workforce RationalizationThe bottom line is that if Workforce rationalization is the part of M&A that no one wants to face, you are going to make because it necessarily entails staff reductions. Staff reductions must be the transition happen smoothly, you have to handled very sensitively. Most often, it will have to be handled in a “give something back” phased manner. 23 But I must caution you about this. to the people. When a merger or acquisition is announced, a lot of companies tend to start laying people off in phases. Everybody ends up sort of hanging on and saying, “Well, let’s see what happens.” But as soon as that first set of layoffs happens, especially if it is followed a couple of months later by a second set of layoffs, then you are going to have a real problem with keeping the good people because they can see the handwriting on the wall. This is an excellent example of why you need to keep communication going. If, in fact, you are going to have a layoff, it is imperative that you have an immediate meeting with the people I like to call “survivors.” Survivors are the ones who weren’t laid off. You need to call them into a room (typically done at a local level with a manager and his or her people). The manager should say something like: “You know I laid off Fred and Sally this morning. But I’m here to tell you that it is not going to keep going. If you’re in this room, you’re safe.” This immediate communication is critical to keeping the people on board. Mergers & Acquisitions: Understanding the Role of HRM 18
  19. 19. Job Assignment HR can provide the Once you have your workforce rationalized and you have your survivors,functional heads with all you need to make sure that the survivors fit into the overall structure, the information they which means that we need to give them some job assignments. 24need to know about the performance and the One of the most comprehensive ways of doing this is by using a characteristics of each Competency Assessment. Every job in the organization should have a individual. job description of the key knowledge, skills, and abilities necessary for that job. They key functional heads need to be involved in assessing each individual. HR provides a critical role in this. HR can provide the functional heads with all the information they need to know about the performance and the characteristics of each individual. This person is very strong in this element, but a little weak in this element. But he’s always met his goals, he’s always been a provider, and he’s always been the kind of person who comes in and works 95 hours a week if necessary. To drill down to that level of assessment, HR will have to be engaged to a significant level. Job Grading/Banding Another important issue is how you group people in pay brackets. This is called “grading and banding.” As an example, let’s go back to the example of an engineering company. Every company has junior engineers, senior engineers, consulting engineers, principal engineers, and so forth. Lots of companies have 14 or 15 (believe it or not) grade levels within a particular function or division. HR MUST be involved with how the new, merged, or acquired entity is going to handle this. 25 What we see happening is what we call “broad banding.” Broad banding is where an organization eliminates many of their almost arbitrary job distinctions such as: Engineer 1, Engineer 2, Senior Engineer, etc., and bands them in the single entity of Engineer. And within that band, of course, there is going to be a huge difference in salaries. Instead of one range going from $42,000 to $50,000 and the next range going from $50,000 to $58,000, there is going to be one range with a great deal of variation. This will allow you to give people compensation based more on their performance than their seniority. Mergers & Acquisitions: Understanding the Role of HRM 19
  20. 20. Suffice it to say that, if you are going to do this, it must becommunicated. You must have the criteria available on the intranetsomeplace that allows people to understand. But please, don’t forgetthat this is a very important personal issue for people. You’re talkingabout peoples’ wellbeing, so please know that there’s going to be muchapprehension around this issue.CompensationDetermining the compensation comparisons between the companies isobviously something that must be done. There are people who will beunhappy about the comparisons. Sometimes, there are companies thatoverpay people because they needed to because it was a driver forthem. Their skills, knowledge, and abilities might not be as critical to thenew, merged organization. Therefore, their compensation might drop,and you need to make this clear to them. You need to develop anddeliver clear compensation guidelines and try not to lose youremployees around these types of circumstances. 26This is an area in which there needs to be a tremendous amount of one-on-one activity between HR and the functional managers.RetentionWe’ve touched on retention throughout this paper. You need to put aretention plan in place early. A retention plan first identifies the criticalpeople. That is not necessarily the critical people at the top, but thepeople who have critical skills, knowledge, and abilities that are going tobe primary drivers for the organization. 27For example, if you are a pharmaceutical company and you make yourmoney by being the most innovative and having the most creativepeople in R&D who are always coming up with new patents, you needto understand that those are the kind of people that you are going toneed to draw to your organization – you must retain them.You don’t want mass exodus. But if you do the things that we’vediscussed herein, you should be in pretty good shape.The following Best Practices Check List summarizes the pointsmade in this section… Mergers & Acquisitions: Understanding the Role of HRM 20
  21. 21. Best Practices Check ListArea Best PracticeLeadership Identify the leaders in both companies. Identify who will have leadership roles in the combined organization.Transition Team Identify who from various departments within the combined organization is going to be a part of the transition team.Structure Finalize the organization structure for the merged entity in context of operation size, products, etc. Incorporate different structures and approaches. Focus first on the broad top line structure, with detailed structures evolving subsequently followed by detailing of roles and responsibilities.Policies & Processes Compare and study HR policies of both entities and identify areas of commonality and differences. To the extent possible ensure no or minimum loss to employees on account of changes in policies. Consider all costs.Workforce Handle redundancies with sensitivity in a phased mannerRationalization unless the issue is a large one. Balance timing with maintaining employee morale.Job Assignment Perform a competency assessment. Involve top team and key functional head in assessing suitability of individuals for roles. HR or an External Consultant plays the role of challenging and facilitation in a neutral way.Job Grading/Banding Pay attention to organizational culture, willingness of leadership to implement, and HR ability to drive the process. Ensure proper communication all through the exercise. Alleviate anxiety and apprehension among employees.Compensation Compensation comparisons by employees in both entities are inevitable. Company should be clear in its approach and philosophy. It is usual to align compensation structures. Ensure no loss to employees because of compensation changes. Compensation announcement timing is important.Retention Create a retention plan that encompasses all of the above best practices. Mergers & Acquisitions: Understanding the Role of HRM 21
  22. 22. Where to start? • Pick Your Strong Leaders • Pick Them Quickly • Keep Communication Going at All Levels.Professor Craig W. Fontaine Your announcement should probably be made by senior management Northeastern University to be followed quickly by a series of smaller meetings at the functional or College of Business divisional level, and right down to the individual manager talking to their Administration individual people. Those managers needed to identify the people whom Phone: 617-610-6079 they do not want to lose and make that very clear to HR and senior Email: management. Web Site: The entire process and all of the steps involved must ABSOLUTELY considered fair. There is a notion that we called “Perceived Justice.” Perceived justice is when a person takes a look at the system and says: “OK, I might not agree with it, but it’s been laid out on paper. I understand what they’re up to. It is being conducted fairly. I’m not being treated any differently than anybody else. “ If people don’t perceive the process to be fair, it’s doomed for failure. And, as always, remember that business absolutely must go on because that is why this whole thing happened in the first place. You cannot allow business to be disrupted, and it can be disrupted very, very easily if you do not do all that you can as an HR person to ensure a smooth transaction. ***** References 1Schweiger, D., Csiszar, E., Napier, N. (1993), "Implementing international mergers and acquisitions", Human Resource Planning, Vol. 16 No.1, pp.53–70. 2 “The Great Merger Movement in American Business – 1895-1904,” Lamoreaux, Naomi R., Cambridge University Press, 1985-1988. 3Mirvis, P., Marks, M. (1992), Managing the Merger: Making it Work, Prentice-Hall, Englewood Cliffs, NJ. 4De Pamphilis, D. (2001), Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, Academic Press, San Diego, CA. Mergers & Acquisitions: Understanding the Role of HRM 22
  23. 23. 5Mirvis, P., Marks, M. (1992), Managing the Merger: Making it Work,Prentice-Hall, Englewood Cliffs, NJ.6Telecommunications Mergers and Acquisitions Newsletter, January,2006.7UNCTAD Foreign Direct Investment Interactive Database, UnitedNations Conference on Trade and Development,http://www.unctad.org8 “The Global Perspective: M&A Deals in 2006” , Learnings on M&AIntegrations, the Cerebrus Group,“Cultural Synergy in Mergers & Acquisitions” Kwintessential Ltd., Ibid.11De Pamphilis, D. (2001), Mergers, Acquisitions, and Other RestructuringActivities: An Integrated Approach to Process, Tools, Cases, andSolutions, Academic Press, San Diego, CA.12 Cartwright, S., Cooper, C. (1994), "The human effects of mergers andacquisitions", in Cooper, C. (Eds),Trends in Organisational Behaviour, JohnWiley & Sons, Chichester, Vol. 1.13 Ibid.14 Cartwright, S., Cooper, C. (1993), "The role of culture compatibility insuccessful organizational marriage", Academy of ManagementExecutive, Vol. 7, pp. 57–70.15 Ibid. Cartwright, S., Cooper, C. (1994), "The human effects of mergers and15acquisitions", in Cooper, C. (Eds),Trends in Organisational Behaviour, JohnWiley & Sons, Chichester, Vol. 1.17De Pamphilis, D. (2001), Mergers, Acquisitions, and Other RestructuringActivities: An Integrated Approach to Process, Tools, Cases, andSolutions, Academic Press, San Diego, CA.18 “Why Do Mergers Fail? What Can Be Done to Improve their Chancesof Success?” Key Strategy Limited, Appelbaum, S., Gandell, J., Shapiro, B., Belisle, P., Hoeven, E. (2000b),"Anatomy of a merger: behaviour of organizational factors and Mergers & Acquisitions: Understanding the Role of HRM 23
  24. 24. processes throughout the pre- during- post-stages (part 2)",Management Decision, Vol. 38 No.10, pp. 674–84.20 Ibid.21 Schweiger, D., Csiszar, E., Napier, N. (1993), "Implementing internationalmergers and acquisitions", Human Resource Planning, Vol. 16 No.1,pp. 53–70.22 De Pamphilis, D. (2001), Mergers, Acquisitions, and Other RestructuringActivities: An Integrated Approach to Process, Tools, Cases, andSolutions, Academic Press, San Diego, CA.23 Brockner, J., Greenberg, J. (1990), "The impact of layoffs on survivors:an organizational justice perspective", in Carroll, J. (Eds),Applied SocialPsychology and Organisational Settings, Erlbaum Associates, Hillsdale, NJ.24 Ibid.25 Leana, C., Feldman, D. (1989), "When mergers force layoffs: somelessons about managing the human resource problem", HumanResource Planning, Vol. 12, No.2, pp. 123–40.26 Cartwright, S., Cooper, C. (1996), Managing Mergers, Acquisitions andStrategic Alliances: Integrating People and Cultures, 2nd ed.,Butterworth-Heinemann, Oxford.27Schweiger, D., Ivancevich, F., Power, F. (1987), "Executive actions formanaging human resources before and after an acquisition", Academyof Management Executive, Vol. 1, No.2, pp. 127–38. Mergers & Acquisitions: Understanding the Role of HRM 24