Mergers acquisitions the_role_of_hrm

Mergers & Acquisitions:
Understanding the Role of HRM

July 2007

Craig W. Fontaine, Ph.D.
Northeastern University
College of Business Administration

Based 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

Executive Summary
HR professionals play a Human resource management professionals must be capable of
critical 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

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 and
acquisitions are a result
of M&A evolution from
the 19th century to the
21st century.

The Five Waves of Merger Activity in the US


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. The
While 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 same
M&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


Economies of Scale
The largest single driving force behind mergers and acquisitions is
probably economies of scale. Economies of scale means that if you
have a large company, you can leverage your suppliers. This is a very
powerful capability, and exercising it can be a strategic move for a
company’s operations. You can save a tremendous amount of money
on services such as health insurance — we all know that health insurance
is extraordinarily expensive and getting more so every day.
I know about the strategic benefits of economies of scale from my
personal experience of working as a consultant in a small merger and
acquisition in 2006 in which two failing private schools joined together to
become one successful entity. One of the major contributing factors for
the success of this merger was that the combined organization had
more people who were buying health insurance; as a result, the health
insurance company substantially dropped their premiums because the
risk 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 larger
quantities. They simply get a lower price because they give the suppliers
more business.

Saturated Market Consolidation
Another driving force for mergers and acquisitions is the consolidation of
saturated markets. If you have a market that is saturated – one in which
there are many players in the space with a lot of competition – you can
take over one of your competitors and then automatically increase your
market share.
This, in turn, allows you leverage economies of scale on a more critical
level than on office supplies and services such as insurance. For
example, if two companies manufacture similar products, their
combined organization has the potential to significantly decrease the
cost of goods sold by purchasing raw materials in bulk. And when the
cost of goods sold goes down, profit, of course, goes up.


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.


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-interrupted
will 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.


A conglomeration merger is where two companies who don’t have a lot
to do with one another decide to merge. The reason for this would be
economies of scale, and getting a larger identity and more assets to be
able to leverage for loans and other financial purposes.
And finally, as mentioned earlier, a strategic merger is the newest type of
merger that may involve some or all of the features of the other merger
types mentioned above.
No matter what type of merger, HR professionals are likely to
encounter merger and acquisition challenges due to…

Rapid Rise of Merger & Acquisition Activity in the US
Merger and acquisition activity is increasing in the United States. Activity
rose 38% from 2004 to 2005; in fact, 2005 was the first year in which we
passed the $1 Trillion mark. 6 What’s more, the upward trend continued
through 2006. The numbers make it painfully clear that most human
resource professionals are going to encounter at least one merger or
acquisition in their careers.

Source: UNCTAD Foreign Direct Investment Interactive Database 7


A Growing Global Merger & Acquisition Profile
From a global perspective, the rest of the world is also beginning to see
increased merger and acquisition activities. You can see from the chart
below that in the Pacific Rim alone there is a substantial amount of
activity:

Source: Learnings on M&A Integrations, the Cerebrus Group 8

Mergers and acquisitions are a growing trend, and analysts don’t see
any downturn over the next 10 years. Therefore, we need to look at how
human resources professionals can assist in the success of an acquisition.

There’s no question that their assistance is needed because the
success rate numbers are bad. Shockingly bad….


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 forth.
new 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…


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 acquisitions
ignore 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.


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 being
purely 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 Resistance
The 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.”


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 that
emotional aspect which is
often 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 out
provides 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.”


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 involvement
beginning to recognize the across the various stages of a merger and acquisition are surprisingly
dynamics that lead to low. 17
failure and are coming to
understand the role of HRM
in resolving "people issues."

Human Resources Involvement in the Merger Process 18


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 Best
leadership, 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.


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 a
multi-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.


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 & Processes
HR 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.


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 Rationalization
The 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.


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. 24
need 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.


Suffice it to say that, if you are going to do this, it must be
communicated. You must have the criteria available on the intranet
someplace that allows people to understand. But please, don’t forget
that this is a very important personal issue for people. You’re talking
about peoples’ wellbeing, so please know that there’s going to be much
apprehension around this issue.

Compensation
Determining the compensation comparisons between the companies is
obviously something that must be done. There are people who will be
unhappy about the comparisons. Sometimes, there are companies that
overpay people because they needed to because it was a driver for
them. Their skills, knowledge, and abilities might not be as critical to the
new, merged organization. Therefore, their compensation might drop,
and you need to make this clear to them. You need to develop and
deliver clear compensation guidelines and try not to lose your
employees around these types of circumstances. 26
This is an area in which there needs to be a tremendous amount of one-
on-one activity between HR and the functional managers.

Retention
We’ve touched on retention throughout this paper. You need to put a
retention plan in place early. A retention plan first identifies the critical
people. That is not necessarily the critical people at the top, but the
people who have critical skills, knowledge, and abilities that are going to
be primary drivers for the organization. 27
For example, if you are a pharmaceutical company and you make your
money by being the most innovative and having the most creative
people in R&D who are always coming up with new patents, you need
to understand that those are the kind of people that you are going to
need to draw to your organization – you must retain them.

You don’t want mass exodus. But if you do the things that we’ve
discussed herein, you should be in pretty good shape.

The following Best Practices Check List summarizes the points
made in this section…


Best Practices Check List
Area Best Practice
Leadership 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 manner
Rationalization 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.


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: c.fontaine@neu.edu management.

Web Site: The entire process and all of the steps involved must ABSOLUTELY be
www.professorfontaine.com 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.


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, United
Nations Conference on Trade and Development,
http://www.unctad.org
8 “The Global Perspective: M&A Deals in 2006” , Learnings on M&A
Integrations, the Cerebrus Group, http://www.cerebrus-
consultants.com/pdfs/cerebrus_m&a_presentation.pdf
9“Cultural Synergy in Mergers & Acquisitions” Kwintessential Ltd.,
http://www.kwintessential.co.uk/cultural-services/articles/intercultural-
mergers.html
10 Ibid.
12 Cartwright, S., Cooper, C. (1994), "The human effects of mergers and

acquisitions", in Cooper, C. (Eds),Trends in Organisational Behaviour, John
Wiley & Sons, Chichester, Vol. 1.

13 Ibid.

14 Cartwright, S., Cooper, C. (1993), "The role of culture compatibility in

successful organizational marriage", Academy of Management
Executive, Vol. 7, pp. 57–70.

15 Ibid.

Cartwright, S., Cooper, C. (1994), "The human effects of mergers and
15
acquisitions", in Cooper, C. (Eds),Trends in Organisational Behaviour, John
Wiley & Sons, Chichester, Vol. 1.

18 “Why Do Mergers Fail? What Can Be Done to Improve their Chances
of Success?” Key Strategy Limited, http://www.key-
strategy.com/documents/MergersFailImproveChances.pdf

19 Appelbaum, S., Gandell, J., Shapiro, B., Belisle, P., Hoeven, E. (2000b),

"Anatomy of a merger: behaviour of organizational factors and


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 international

mergers and acquisitions", Human Resource Planning, Vol. 16 No.1,
pp. 53–70.

22 De Pamphilis, D. (2001), Mergers, Acquisitions, and Other Restructuring


23 Brockner, J., Greenberg, J. (1990), "The impact of layoffs on survivors:

an organizational justice perspective", in Carroll, J. (Eds),Applied Social
Psychology and Organisational Settings, Erlbaum Associates, Hillsdale, NJ.

24 Ibid.

25 Leana, C., Feldman, D. (1989), "When mergers force layoffs: some

lessons about managing the human resource problem", Human
Resource Planning, Vol. 12, No.2, pp. 123–40.

26 Cartwright, S., Cooper, C. (1996), Managing Mergers, Acquisitions and

Strategic Alliances: Integrating People and Cultures, 2nd ed.,
Butterworth-Heinemann, Oxford.

27Schweiger, D., Ivancevich, F., Power, F. (1987), "Executive actions for
managing human resources before and after an acquisition", Academy
of Management Executive, Vol. 1, No.2, pp. 127–38.


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