ROLE OF HR INMERGERS ANDACQUISITIONSSyed Qarib Raza Kazmi
Mergers and Acquisitions Mergers and acquisitions represent the ultimate in change for a business. No other event is more difficult, challenging, or chaotic as a merger and acquisition. Hence it is imperative that everyone involved in the process has a clear understanding of how the process works.
Some interesting M&A figures Virtually every major company in the United States today has experienced a major acquisition at some point in history. And at any given time, thousands of these companies are adjusting to post-merger reality. For example, so far in the decade of the 1990s (through June 1997), 96,020 companies have come under new ownership worldwide in deals worth a total of $ 3.9 trillion - and thats just counting acquisitions valued at $ 5 million and over. Add to this the many smaller companies and nonprofit and governmental entities that experience mergers every year, and the M & A universe becomes large indeed.The Art of Merger and Acquisition Integration,Alexandra Reed Lajoux
Why you need to know this ? You might be asking yourself, why do I need to learn the merger and acquisition (M & A)process? Well for starters, mergers and acquisitions are now a normal way of life within the business world. In todays global, competitive environment, mergers are sometimes the only means for long-term survival. In other cases, such as Cisco Systems, mergers are a strategic component for generating long-term growth.
M&A defined When we use the term "merger", we are referring to the merging of two companies where one new company will continue to exist. The term "acquisition" refers to the acquisition of assets by one company from another company.
Mergers can be categorized asfollows:Horizontal: Two firms are merged across similar products or services. Horizontal mergers are often used as a way for a company to increase its market share by merging with a competing company. For example, the merger between Exxon and Mobil will allow both companies a larger share of the oil and gas market.
Mergers can be categorized asfollows:Vertical: Two firms are merged along the value-chain, such as a manufacturer merging with a supplier. Vertical mergers are often used as a way to gain a competitive advantage within the marketplace. For example, Merck, a large manufacturer of pharmaceuticals, merged with Medco, a large distributor of pharmaceuticals, in order to gain an advantage in distributing its Products.
Mergers can be categorized asfollows:Conglomerate: Two firms in completely different industries merge, such as a gas pipeline company merging with a high technology company. Conglomerates are usually used as a way to smooth out wide fluctuations in earnings and provide more consistency in long-term growth. Typically, companies in mature industries with poor prospects for growth will seek to diversify their businesses through mergers and acquisitions. For example, General Electric (GE) has diversified its businesses through mergers and acquisitions, allowing GE to get into new areas like financial services and television broadcasting.
Reasons for M & AEvery merger has its own unique reasons why the combining oftwo companies is a good business decision. The underlyingPrinciple behind mergers and acquisitions ( M & A ) is simple: 2+2=5Synergy value can take three forms:1. Revenues: By combining the two companies, we will realize higher revenues then if the two companies operate separately.2. Expenses: By combining the two companies, we will realize lower expenses then if the two companies operate separately.3. Cost of Capital: By combining the two companies, we will experience a lower overall cost of capital.
Strategic Reasons However, the best mergers seem to have strategic reasons for the business combination. These strategic reasons include: Positioning - Taking advantage of future opportunities that can be exploited when the two companies are combined. Gap Filling - One company may have a major weakness (such as poor distribution)whereas the other company has some significant strength. Organizational Competencies - Acquiring human resources and intellectual capital can help improve innovative thinking and development within the company. Broader Market Access - Acquiring a foreign company can give a company quick access to emerging global markets.
Basic business reasons Bargain Purchase - It may be cheaper to acquire another company then to invest internally. Diversification - It may be necessary to smooth- out earnings and achieve more consistent long- term growth and profitability. Short Term Growth - Management may be under pressure to turnaround sluggish growth and profitability. Undervalued Target - The Target Company may be undervalued and thus, it represents a good investment.
The M&A Process Phase 1 - Pre Acquisition Review Phase 2 - Search & Screen Targets Phase 3 - Investigate & Value the Target Phase 4 - Acquire through Negotiation Phase 5 - Post Merger Integration
Phase 3-Investigate & Value the TargetThe third phase of M & A is to perform a more detail analysis ofthe target company. You want to confirm that the TargetCompany is truly a good fit with the acquiring company. Thiswill require a more thorough review ofoperations, strategies, financials, and other aspects of theTarget Company. This detail review is called "due diligence.“The main objective is to identify various synergy values thatcan be realized through an M & A of the Target Company.Investment Bankers now enter into the M & A process to assistwith this evaluation.
Phase 3-Investigate & Value theTarget A key part of due diligence is the valuation of the target company. In the preliminary phases of M & A, we will calculate a total value for the combined company. We have already calculated a value for our company (acquiring company). We now want to calculate a value for the target as well as all other costs associated with the M & A. The calculation can be summarized as follows:
Due Diligence Check list (HR) Plan Due diligence for Integration planning organization Recommend HR policies and To develop acquisition programs guidelines Development of a C&B Understanding the strategy for the combined employment law companies issues, critical people issues Retention of key people and such as leadership, employee separation of redundant staff communications, talent retention and cultural communications strategy alignment development and implementation Assessment of critical people and deployment of Integration of payroll, benefits appropriate resources in the and HR-IS ( SAP) new company Development of organizational chart and reporting line
Phase 5-Post MergerIntegration If all goes well, the two companies will announce a agreement to merge the two companies. The deal is finalized in a formal merger and acquisition agreement. Every company is different - differences in culture, differences in information systems, differences in strategies, etc. As a result, the Post Merger Integration Phase is the most difficult phase within the M & A Process.
Typical M&A ProcessTimeline of M&A Events Implementation ofStrategic Confidential Price and Terms Preliminary Integration PlansPlanning Courting Negotiations Announcement Program Design Closing and Programs “DAY 1” Candidate Formal Program Design Candidate Formal Initial HR Strategy Identify ImplementationDetailedHR Strategy Initial ImplementationDetailed Program Design Scouting Scouting Due Diligence HR Strategy Diligence Leaders and Team Leaders and Team HR Strategy Decisions DecisionsHR ProcessStrategic HR—Due Integration IntegrationDiligence Preparation HR-Liability Program Create Create Execute Execute Monitor Strategy Deal & Synergy Office “100 Day” Optimization Day 100 ... Optimization Synergy Assessment Input Gap Assess. Setup Plans Plans Plan Plans Realization
Background of Study Participation: Operations Location Web-based survey Taiwan, 1% Indonesia, 1% conducted in 2006 India, 1% New Zealand, 3% Thailand, 6% Conducted in 11 Australia, 6% U.S, 7% China (PRC), 36% markets: Australia, China, Hong Kong, India, Singapore, 7% Hong Kong (SAR), 7% South Korea, 15% Malaysia, 10% Indonesia, Japan, Malaysia, New Zealand, Participation: Global Headquarter Location Thailand, 1% Singapore, South Korea, Japan, 1% India, 1% and Thailand. Other, 3% Canada, 3% Conducted in four United Kingdom, 5% South Korea, 5% U.S., 26% languages: Chinese, Australia, 5% Japanese, Korean, and China (PRC), 7% English Singapore, 10% Malaysia, 10% Europe, 22% 73 companies participated
Why are Companies Acquiring?Improved market access by far the number one driver of M&A activity: Improved market access Combined business creation Coordinated strategies Consolidation of functions Shared know-how Vertical integration Shared tangible resources Other 0% 20% 40% 60% 80% Percentage of Respondents Rank 1 Rank 2 Rank 3
Synergy Objectives Growth ReturnImproved Coordinated Consolidation of TaxMarket Access Strategies Functions Benefits(bigger is better) (together we conquer) (serve more with less)Combined Shared Shared Tangible FinancialBusiness Creation Know How Resources Engineering(new is better) (know more) (use same for more) Vertical Negotiating Integration Power (process we own) Synergies with significant “People integration” Issues
Due Diligence Top ObjectivesImmediate and short-term objectives dominate. Long-term issues are oflesser concern: To determine that the deal can be successf ul in the immediate/near-term To def ine the right price To evaluate the identif ied synergies To identif y w hat needs to be done during integration To examine the impact of a potential deal on competitors and industry Other objectives of the due diligence process: 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of Respondents Rank 1 Rank 2 Rank 3
Most Important HR Issues During Due DiligenceRetention of key staff and compliance with applicable laws are mostimportant. Much fewer companies focus on long-term issues such ascultural fit: Retention of key employees Compliance with applicable laws HR Issues Alignment of comp. & ben. plans Cultural fit Employee communications 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Percentage of Responses Rank 1 Rank 2 Rank 3
HR Issues in Due Diligence HR issues rank slightly different when comparing importance vs. complexity: Percent of Companies (Ranking 1, 2, or 3) According to Importance According to Complexity Retention of key employees 41% 27% Compliance with applicable laws 36 31 Quantification of severance/benefit obligations 32 35 Alignment of compensation and benefit plans 26 35 Leadership assessment 26 34 Cultural fit 25 49 Employee communications 24 23 Leadership retention 18 13 Corporate governance 16 13 Labor relations 14 25 Sales force effectiveness 10 17 Organizational structure 9 15Orange shade: over 30% of companies rank this high
Top HR Integration Issues According to Importance and ComplexityCulture fit clearly dominates top HR concerns for importance and complexityduring integration: Cultural fit Harmonization of compensation and benefit plans Areas Leadership assessment and selection Decision-making Employee communications 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Percentage of Responses Rank 1 Rank 2 Rank 3
A Reality Check Why M&A fail Poor strategic fit - The two companies have strategies and objectives that are too different and they conflict with one another. Cultural and Social Differences - It has been said that most problems can be traced to "people problems." If the two companies have wide differences in cultures, then synergy values can be very elusive. Incomplete and Inadequate Due Diligence - Due diligence is the "watchdog" within the M & A Process. If you fail to let the watchdog do his job, you are in for some serious problems within the M & A Process.
A Reality Check Why M&A fail Poorly Managed Integration - The integration of two companies requires a very high level of quality management. Integration is often poorly managed with little planning and design. As a result, implementation fails. Paying too Much - In todays merger frenzy world, it is not unusual for the acquiring company to pay a premium for the Target Company. Premiums are paid based on expectations of synergies. However, if synergies are not realized, then the premium paid to acquire the target is never recouped. Overly Optimistic - If the acquiring company is too optimistic in its projections about the target Company, then bad decisions will be made within the M & A Process. An overly optimistic forecast or conclusion about a critical issue can lead to a failed merger.
A success Story Trivor Systems Pakistan was acquired by Bentley Systems Incorporated in may 2007. Bentley is the global leader dedicated to providing architects, engineers, constructors, and owner- operators with comprehensive architecture and engineering software solutions for sustaining infrastructure. Founded in 1984, Bentley has nearly 3,000 colleagues in more than 45 countries, $500 million in annual revenues, and, since 2001, has invested more than $1 billion in research, development, and acquisitions.
Key Aspects of the Acquisition Retention of employees with the domain and product expertise. 1st year plan, 2nd year plan Alignment of Job titles. Management structure remained largely intact. Improved Hardware policies. Proper Translation of Trivor compensation with Bentley compensation structure. All hands Meeting Before formal acquisition process Formal signing of new contracts. Introduction of new benefits Enhancement of health cover Quarterly Team building events Continuation of old polices