Introduction:

 

Mergers and acquisitions are common phenomena at present. Terms and conditions are set out, plans are put into action, and there are high hopes for a bright and successful future. However, researchers like Lubatkin, Pritchett and Cooper point out that between 50% to 66% of all M&As fail to reach their objectives, frequently with disastrous results. This may be to a number of key factors, but most of the evidence suggests that the human factor (in terms of personnel) is at the heart of the problem, and the failure to recognize this may be damaging to otherwise potentially successful ventures.

The problem derives from the fact that top managers are primarily concerned with the financial aspects of the merger, and are too preoccupied to take best care of the employees affected by the changes. Jemison and Sitkin suggest that “top executives, investment bankers and lawyers are paid to make a deal happen not to make it work“. Moreover, there is a belief that the signing of contracts is the end of the story, whereas the merger is only the start of a complex challenge to integrate the “cultures, histories, traditions, policies and practices” of the two organizations. With the increasing size and number of M&As transacted and the number of employees affected, it is essential that executives and human resource professionals pay greater attention to understanding the sequence of actions and reactions associated with the process.

 

 

 

 

 

Historical Perspective and Literature Review:

People as individuals are a less measurable organizational asset, and less easy to appreciate by a study of the balance sheet, material assets or profit and loss accounts. Poor communication, poor management and cultural gaps between the two organizations are the main reasons why mergers often fail in human terms.

There is a vast, behaviorally based literature applying to managerial aspects especially in the US and the UK. This literature takes various forms. MacDougal and Malek advise the managers on how to proceed mostly from a rational base – “clear objectives, documented plan, careful data collection” etc. Levinson attempts to explain what happens to people in the acquisition process based on practitioner experience. As he observes, “Caught up in the hoopla and glamour which have characterized the great merger sprees in recent years, business executives have been preoccupied with the strategies, tactics and techniques of acquiring, merging and selling … yet frequently the really crucial factor, people, has been superficially dealt with”. Levinson asked senior executives to examine their motives, to examine their feelings about the acquired personnel, and to open up honest discussion so a problem solving atmosphere could be created to encourage success.

In addition, taking into consideration the strategy based literature of advice; there is no shortage of behavioral, tactical advice for managers involved in acquisitions. Both the behavioral and the strategic advice are pragmatic and, most often, experience based. Much of it concentrates on what happens after the merger rather than on the whole process. Important issues are: getting people involved, spreading corporate culture, having a sense of purpose, having goals and so on. Though organizational issues (structure, interfaces), are to be given attention but commensurate attention is to be given to ’empathy’, ‘involvement’ and ‘good communication’’. This is where the HR managers come into play.

Towers Perrin, global management and HR consultants, say that HR professionals need to take a greater leadership role in the mergers and acquisitions, procedures involving their organizations, and that the earlier they get involved, the more successful the M&A will be. In a research study of 447 senior HR executives conducted by Towers Perrin and the Society for Human Resource Management (SHRM) foundation, five factors determined the failure of an M&A, three of which relate to HR:

  • Inability to sustain financial performance
  • Loss of productivity (HR-related)
  • Incompatible cultures (HR-related)
  • Loss of key talent (HR-related)
  • Clash of management styles

Another significant finding in the study was that 81 percent of the respondents said top management had confidence in their ability to help prepare a successful integration. “These findings show that HR professionals can play an important role during M&A, and they can make a difference,” says Jeffrey Schmidt, managing director for innovation and research at Towers Perrin. Schmidt says HR professionals need to recognize the importance of improving their M&A competencies to successfully take on the role of strategic partner. The competencies of HR managers include:

  • Understanding overall business strategy as well as people and organization issues associated with that strategy
  • Gaining knowledge about business in general and M&As in particular
  • Being able to contribute to another company’s value
  • Planning and leading complex M&A strategies
  • Understanding and spending more time with operating managers to help support them in M&As

The Human Factor as a Reason for Failure

In most mergers and acquisitions the real gray area is that both employees and managers are unprepared to cope with the new situation. Typically a huge portion of employees of the acquired firm find difficulty in coping psychologically with the trauma of mergers involving their companies. More specifically: A bulk of them does not anticipate the effects on their positions or careers. On the other hand, a few just panic. These managers feel that their careers under the new structure are threatened. They begin to look for new jobs. A miniscule percentage of people actually review their situation calmly, and make thoughtful decisions about their future.

All these relates to the absence of personal care. To the employees of the acquired companies the new management is in some way aliens. Furthermore they do not enjoy the advantages of previous good relationships with clients. Management motivation and employee output are things which need to be addressed by HR personnel. Another reason is that a change in status can lead to personal feelings being hurt. Executives and managers who previously held responsibilities and enjoyed a degree of control now face the prospect of finding themselves in a minority in important matters of policy; and when outvoted, bad feelings may occur. All these point to the tremendous role that HR professionals have to play in order to get the transition smooth.

 

Seven issues during M&As which can be handled by HR managers are:

1. Underestimation of the difficulties of merging two cultures.

2. Underestimation of the problems of skill transfer.

3. De-motivation of employees of acquired company.

4. Departure of key people in acquired company.

5. Too much energy devoted to ‘doing the deal’, not enough to post-acquisition planning and   integration.

6. Decision-making delayed by unclear responsibilities and post-acquisition conflicts.

7. Neglecting employee welfares of existing business due to the amount of attention going into the acquired company.

 

The Impact of M & As on Employees

The Nine stage sequential model of emotional responses among employees clearly point out the turbulence that goes inside employees of acquired firm during mergers.

Stage Characteristic Response
Denial Not accepting that the merger will take place
Fear Afraid with regard to future prospects
Anger Resentment towards those considered responsible
Sadness Mourning and grieving for what’s past
Acceptance Recognition of futility – a positive approach starts to develop
Relief Recognition that the situation is actually better

than expected
Interest Increasing feeling of security
Liking Recognition of new opportunities
Enjoyment Satisfaction that the merger is working out well

The strength of response is considered likely to be related to the length of service of the employees and the degree of their attachment and commitment to their former organization. Although the merger or acquisition event itself is often most shocking to those who have been with the organization for some time, feelings run so high in the early stages, that initial reactions are not helpful in predicting attitudes and longer term responses, but HR managers can help in alleviating employees problems through the following ways:

 

Actions from HR Psychological and Cultural Impact on employees
Communication : Management cascades/road shows/discussion forums Raises questions amongst employees
(What is happening?)

 
Business strategy: Loose coupling or tight integration Employees question the rational
(Why is it happening?)
Organizational structure: Integrating/rationalizing operations Managerial de-layering Employees question their short-term futures
(Where will I be in six months?)
Appointments and exits: Redundancy/relocations/new roles/ new appointments Employees question their long-term prospects
(Will I have a job?)
Terms and conditions: Pensions/salaries/benefits Doubts raised about financial benefits
(Will I lose out?)
Managing performance: Immediate targets and deliverables longer term objectives Questions about management expectations of personnel
(What is expected of me?)
Training and development Further questioning the future
(Do I have a future?)

 

 

More specific HR functions during Mergers and Acquisitions

 

The involvement of the HRM function is a matter of a humanitarian concern for absorbing grief among those people who were acquired. There are compelling financial reasons for assisting in the integration process and transferring the acquired peoples’ commitment to the firms new owners but as it turns out that without their (HRs) commitment it is difficult to achieve the operational and strategic objectives. Once the acquisition team has focused on the seller firm, the HRM function may become involved in data search for detail. Possible activities are: Human audit (numbers, level, locations, pay levels, union affiliations); human costs (obstacles to rationalization such as merger and employment law); people quality (key players, corporate culture, age profile, skills inventory); personnel policies (pensions, employment contracts, medical provision etc); employee relations and the organizational structure. The importance of HRM involvement in this stage is not only to provide data but also to prevent the acquiring firm’s management from surprises (e.g. complex financial arrangements in pension funds; over-generous employment contracts etc.). Hunt and Dowing in their study of forty acquisitions in the UK found that every case of failure was characterized by subsequent surprises about at least one major HRM issue.

Negotiating

The existing practice applied by most acquisition teams to exclude the personnel professional from the negotiating team creates advantages and disadvantages. First, it excludes the professional who should have skills in negotiating. Conversely, it keeps the team small. However, the advice of an HRM specialist should not be ignored since he/she can participate effectively into the process. Merger documents involve question about the staff and advice on post acquisition, areas in which HRs can be really instrumental.

Implementation

The first three months are ‘the crucial period’ of success or failure of a merge. The HR manager has to be come to conclusions about personnel matters and to implement them effectively. He or she has to communicate rapidly to show the acquired company where it stands on personnel policy and general terms and conditions of employment.

Some of the more important tasks that must be carried out by HRM in most post-merger situations are:

Effecting the merger by completing legal arrangements, negotiating with employees’ union, preparing necessary public relation releases.

Maintaining momentum immediately after the merger by clarifying reporting relationships and by ensuring the continuity of credit facilities and insurance.

Bringing the new organization into the corporate structure by reviewing compensation, by analyzing personnel policies of the acquired company and by developing a new audit program and eliminating activities not appropriate to the new company.

Realizing short-term profit improvement potential by eliminating redundant executive positions and unproductive personnel, and by closing down unnecessary facilities and consolidating the headquarters’ staff.

Realizing long-term improvement potential by integrating operations and transferring technologies and methods.

Finally……

Undoubtedly, the concept of acquiring “human capital” is paramount. Although top executives may not make their objectives explicit, many deals are driven by a desire to obtain certain intellectual and emotional assets such as know-how, creativity and innovation. The majority of the senior managers admit that they hoped to achieve some sort of cultural synergy through their merger. Mergers and acquisitions are highly individualistic, not to say idiosyncratic, events, yet many are characterized by a shared cluster of human issues and responses. Although complex and intangible, the human dimension of M & As can be managed. To do so it requires senior managers to approach these deals as human based transactions, not solely financial or strategic entities. Managers must anticipate and manage employees’ reactions and feelings from the very moment they begin to prepare for a deal, not just when they announce their plans.

 

“A One of the best things you can do as a manager is stand in front of staff and have a discussion. Our technology really helped, but these ‘coffee talks’ led to open discourse because the employees want to look at the company leaders in the eye.”

Vice-president, HR  Hewlett-Packard, Hugo Bague on successful merger with Compaq


References:

  1. McCann J. – R. Gilkey 1988, “Creating and Managing Successful Mergers and Acquisitions”, Prentice Hall, 1988.
  2. McCarthy G., “Mergers and the Performance of the Acquiring Firm”, Academy of Management Review, Vol. 8, part 2, (1961): 218-225
  3. MacDougal G. and F. Malek “Masterplan for Merger Negotiations”, Harvard Business Review, Jan-Feb, (1970): 72-82

 

Saikat Mondal

PGDM (2nd Year)

IIM-Lucknow