Blog

The past decade has seen a spurt in M&A activity buzzing across boardrooms. Acquisitions were evaluated in terms of synergies, cost savings, increase in market share etc with investment bankers rolling out figures justifying valuations. In spite of all this homework, nearly 75-80% of the mergers fail. Potential synergies and figures do a vanishing job. If companies go through a detailed analysis and due diligence review in all areas- business, markets, financial, legal etc., then what is it that is pulling down companies in achieving the expected level of success?

HR integration forms the greatest challenge in any M&A transaction. They have to play a critical and strategic role to achieve post merger Integration

• Statistics have proved that one of the major reasons for M&A failures is the human resource management. Companies that failed to realize the importance of HR integration in an acquisition have definitely not been able to achieve their merger objectives. Moreover, poorly managed HR integration can kill the company!
  Piramal Healthcare sold its healthcare division to Abbot Labs in 2009. Piramal Healthcare believed that its workers helped in creating value for the company. The company declared a bonus payment to its employees including the employees of the outgoing division. This signifies the importance that Piramal gave to HR issues in the sale transaction in order to prevent any dissent or dissatisfaction from the employees of the outgoing division.

• One aspect of the HR integration process is the optimal deployment which is normally procrastinated.

Around 50% to 80% of the mergers fail because of:

• Inability to integrate people in the new entity
• Inability to integrate cultures
• Attitude problems
• Lack of commitment
• Lack of problems
• Lack of trust
• Poor morale

Issues that arise in HR Integration

1. Top Management Combination:

   Integrating top management to lead and achieve the future organizational goals is a sensitive issue since realistically all cannot be accommodated. The challenge is to retain the desired talent for the merged entity and deal with departing people quickly and effectively but with dignity. The practical issue here is that political reasons often dictate that individuals are required to fill certain roles, which means an objective, competency-based selection process may be difficult to achieve. However, the long-term benefits of a thorough and objective leadership selection process far outweigh the advantages of a politically-correct leadership appointment which may be inevitable in the short run.

   Top management is critical for organizational success. It is necessary to retain key people as they also have a group of people who are committed and attached to them. If these key people are not retained then it would also involve losing the people who worked in their team. A very good example is PWC where after the Satyam scam many key employees including partners moved on to other Big Four firms and also took their team along with them.

   Another important need is how soon and how well the leadership ensures ‘vision Sharing’ and the ‘Mission Accomplishment’ in the reorganized Top Management as discussed hereinafter.

   Some issues to be considered:

   • What criteria will be used to choose the new management team and when will the names be announced?
   • Which of the executive positions are expendable?
   • Will the existing team be augmented by external managers (in order to foster restructuring efforts)?
   • How can star performers at the target company be identified early on and their commitment to the new company secured?
   • Which areas are likely to face particularly strong resistance from management?

2. Development of vision and mission:

   The development of a corporate vision is not as easy as one might think. A merger without a clear and realistic vision may lead to similar negative results in terms of shareholder value as merger based solely on fit-approaches may do. Visions are borne from good ideas, often developed by visionary people in endless meetings and projects. The problem is that many ideas look promising at the first sight, but prove to be useless later on.

   Stakeholder Group Experiences problems and resistances because of lack of vision and mission sharing

   Members of Board of Directors of Target Company	Fear of a dominating Acquirer Fear to loose the own position as CEO Conflicts in allocation of responsibilities and tasks Conflicts in location of new headquarter Personal hostility among CEOs of both partners Conflicts because of higher claims for redundancy payments
   Members of Supervisory Board	Fear of a dominating merger partner Fear to loose seat in the Supervisory Board Conflicts in name of the merged unit and location of the new headquarter Problems with regional / local politics Interest in regional independence
   Staff	Conflicts due to fear of changes in all cadres of management and staff.

3. Redefining and not summation of organizational goals:

   Summation of individual goals of the merging entities would certainly result in a disaster since the merging entities post-merger would pursue its redefined goals. Defining common organizational goals of the merged entity is the first step in HR integration to provide a clear-cut direction to the merged entity the course of action to be adopted post-merger which in turn is based on the objectives for which the deal was executed.

4. Dovetailing employees:

   The uncertainties of M&A shift the focus of employees from productive work to issues related to interpersonal conflicts, layoffs, career growth with the Acquirer Company, compensation, etc. Moreover, employees are concerned with how well they will go with new colleagues. The mergers involve downsizing, hence the first thing that comes to the minds of employees is related to their job security. Mergers also lead to changes in the well-defined career paths of employees, as defined by the acquired company. Due to these reasons, employees find themselves in a completely different situation with changes in job profiles and work teams. This may have a negative impact on the performance of the employees.

5. Cultural Integration:

   Culture consists of the long-standing, largely implicit shared values, beliefs, and assumptions that influence behavior, attitudes, and meaning in a company (or society).

   Culture has emerged as one of the dominant barriers to effective integrations. An organization’s culture defines its management style, structure, and organizational practices. Each company has its own set of values which may conflict with those of the acquired company. Imagine play-at-work culture Google tying the knot with IBM buying Google? The ‘suit’ culture of IBM will not at all jell with the casual approach that Google has, and a merger of this sort would fail miserably. At the time of short listing of a target, it is very necessary to understand the culture and HR structure of the acquiree company. The organization has to assess as to whether the successful integration of people and culture would be possible. For example, before ICICI bank, HDFC Bank had considered a merger with Bank of Rajasthan. However before it could assess the commercial and financial viability, HDFC bank management could not see a successful integration of people and culture of the traditionally run Bank of Rajasthan. Moreover even now after ICICI has decided to merge BOR with it there still seems to be a lot of friction from BOR employees who fear they would not be able to adapt themselves to the professional ICICI bank culture.

   The following table indicates how cultural mismatch can affect organizations.

   AREAS IMPACTED BY CULTURE	OUTCOMES
   Work culture	Sudden change in work culture may face resistance & discomfort
   Different decision-making styles	Can result in slow decision-making process
   Leadership style	A sudden change in leadership style may affect employee turnover especially the top level people
   Resistance to change	No initiative to introduce new strategies
   Personal success v/s Team success	Differences and dislike among employees and lack of support from others for getting the work done

   The employees may not be able to accommodate themselves in a new culture and thus may lead to cultural shock. Inability to adapt to a new culture increases stress levels among employees and results in low job performance. When it comes to cross-border M&A care should be taken to see that the national cultures of the two companies are not drastically different. The need, therefore, is to follow a structured approach in dealing with cultural differences.

6. Organizational Structure:

   Another problem is the difference between the organizational structures of the companies. Since the organizational structures are different, differences in compensation packages and designations can take place. The company has to maintain employees at equal levels. Unable to do so, employees can feel dissatisfied.

   The following issues need to be addressed:

   • How will the selected organizational changes affect staffing requirements?
   • What should be the timing of the organization and staffing changes? Who should be responsible for them?
   • What functions are duplicated and might be areas for replacement/ reassignment of talent?
   • What areas of corporate knowledge/expertise need to be protected?
   • What type of the organizational structure to choose- will it be flat with empowerment or will it be hierarchical with defined relationship and reporting prescriptions and so on

7. Other Issues:

   The following questions need to be addressed

   • Do employees feel integration is proceeding smoothly? If not, why?
   • Can they recommend ways to expedite or facilitate the process? Are efforts being made to mitigate the “us vs. them” mentality?
   • If there have been layoffs, for example, do the employees who have been maintained feel confident in their current standing and future prospects? How do they feel about the fact that there were layoffs (e.g., do they harbor resentment toward management)?
   • Are remaining employees more likely to follow their key influencers outside the door, or have they been given compelling reasons to stay?
   • Do they feel there has been an equal distribution of responsibility granted to managers from both of the merging companies?
   • Do they feel there has been inequality in which one firm’s employees got the “plum” assignments or territories?
   • Do acquired employees feel like second-class citizens? In general, do they feel both sets of employees are being treated fairly?
   • Do employees understand what will be expected of them in terms of specific new job responsibilities, as well as how they will be evaluated?
   • Do they understand what criteria will be used in the appraisal process, and when promotions and salary increases will be granted?
   • Do employees know how the merged firm is structured, who the key executives are, and how the lines of reporting are set up?
   • Do they understand how the merged company runs on a day-to-day basis (e.g., in terms of purchasing procedures, time and expense reporting)?
   • Do employees fully understand their new benefits and the provisions of the company’s health and welfare programs? Do they know how to file health insurance claims? Do they fully understand the particulars of the company’s retirement plans?
   • Do employees understand the reason for the transaction and the strategic direction of the merged company – including how it is positioned in the marketplace vis-à-vis competitors?
   • Do they understand what customer service or -relations roles employees play at different levels of the organization?

Resolving HR Integration Issues

• HR Due Diligence

  A due diligence review helps the merging companies identify the presence of any hidden liabilities for the integrated business. This review would help the companies have a re-look at their decision and recheck its feasibility. It would also help the companies identify those critical areas which need immediate attention if the deal is to be carried out successfully. The common wrong belief is that HR does not have any role to play during the due diligence review.

  It happened in some of the mergers that the companies failed to take note of the resentment brewing in the employees and by the time they realized it after the merger came through, more than half the workforce had left the integrated organization. HR due diligence review is, therefore, a sine qua non for any successful integration. Some organizations are even looking at specific issues like “culture due diligence review”.

  Some of the components for the HR due diligence review are:

  1. Organizational culture and structure
  2. Employee compensation & benefits
  3. Industrial relations
  4. Pending employee litigations
  5. HR policies and procedures
  6. Key talent analysis

• Resolving Cultural Issues

  1. As early in the process as possible, announce the alliance explaining why, why now, and anticipated steps. Keep communications regular, frequent and clear throughout.
  2. Do a bicultural audit to find common ground and difference.
  3. Agree on and communicate an exciting new vision to focus people on the future and help them let go of the past.
  4. Set up bicultural task forces on pertinent topics such as R&D, Quality, Communication, and Marketing.
  5. Provide language training, promote cross-cultural dialogue and train multicultural teams in Culture bridging skills.
  6. Get commitment from Top Management to participate actively in communications and training programs from the beginning.
  7. Increase social contact and ensure nationality mix.
  8. Set and communicate acceptable performance criteria for evaluation of management performance.
  9. Promote internal transfers and short-term staff exchanges internationally
  10. Ensure you have an international organizational structure to support your international strategy.

• Employee Communication

  Whenever there is news of any merger in an organization, anxiety prevails among the employees. This atmosphere of apprehensions leads to wide rumors. The employees lose faith in their organization and tend to become demotivated. To free employees from such fears, proper communication has to take place between the management and the employees. The management should instill a sense of security among them. Attrition: Most mergers bring with them downsizing, reallocation of work, change in work profiles, changes in career paths. If they fail to adapt to the new culture they face high levels of stress and thus end up leaving the organization.

  The following areas need to be addressed:Watch Cyberbully (2015) Full Movie Online Streaming Online and Download

  1. What communications strategies have been implemented to ensure the integrity and accessibility of information across all levels of the organization?
  2. What are the main concerns of the employees?
  3. How can messages be formulated to address employee concerns?
  4. What media are most appropriate for various messages and target audiences?
  5. How can negative impacts of events such as transfers, staff reductions or demotions be reduced?
  6. How should internal communication programs be orchestrated and coordinated with other activities?

• ROLE OF HR IN MAKING M&A SUCCESSFUL SUMMING UP

  The success of a merger and acquisition depends on how well an organization deals with issues related to its people and cultural integration. The HR department of an organization acts as a strategic partner. So formulating strategies while ignoring the employees can be a crucial error for the organization. The role of HR becomes strategic when it takes decisions about what kind of people, capability, and commitment the company would want the deal. To efficiently handle this phase many companies undertake feasibility studies based on which it decides what part of the workforce is to be retained.

  The HR can help the employee in the following ways:

  1. HR helps in managing interpersonal conflicts and makes employees better team players. It also helps them in dealing with cultural differences. Clear communication content and channels are customized to address cultural differences.
  2. HR also deals effectively with the integration issue. Effective employee communication acts as a key here. Questions about job security, relocation, changes in benefit programs and new reporting relationships are answered by the HR only. Keeping a check on rumors, anxiety, resentment and the loss of top talent, has also to be dealt with.
  3. The M&A phase is very sensitive to employees as they feel insecure about their future in the transitional times. HR in such a situation makes people retain their faith in the organization. The HR has to retain the confidence of employees and assure them job security.

External integration

In many cases of integration, companies become so focused on attaining synergies that they stop paying attention to integrating customers and retaining them.

Therefore, it is decisive to fully engage customers and get their feedback about the integration. Companies should create an intelligence mechanism to learn what is going on in the marketplace. It is extremely important to actively listen to the voice of the customer. Tales of post-merger woes, ranging from workforce issues to integration hiccups, make for recurring headlines. But the loss of customers in the wake of a deal can be the most difficult blow to stomach – especially when customer synergies have been touted as a driving force behind the transaction, as is often the case. When a customer leaves, revenue leaves with it. When millions of customers leave, management often follows. Projections of a post-merger customer base are often overly rosy. Customer reactions can be difficult to gauge, and business relationships are often based on a combination of tangible and intangible factors. With this level of uncertainty, customer preservation strategies must be a top priority throughout the merger process. If executed properly, such strategies can not only mitigate risk but can also pave the way for future revenue enhancement opportunities.

How to deal with customer related issues

• Know your customers

  The first step in the process is to make realistic assumptions about the potential for customer loss by conducting a detailed analysis of both companies’ customer bases. Who are the key customers? Is there an overlap? Who are stable? What are the customers’ sales histories? Which are profitable and unprofitable? Which are at-risk?

  Brand Equity and Customer Loyalty are factors which play a crucial role in retaining and enhancing the market share

• Communication

  The importance of communications in mergers and acquisitions cannot be overstated. From a customer perspective, the way in which a company manages its business relationships during a period of transition can be the difference between preserving and losing relationships. Like employees, every customer will want to know what the merger means for him or her. An employee will wonder, “Will my primary contact change? Will the company continue to offer the same types of products and services? Will I continue to receive what I need on time?” In addition, competitors may use the opportunity to take advantage of the situation, attempting to recruit top talent or take away business.

  Any corporate employee who interfaces with customers must be equipped to explain the impact and benefits of the merger and how a business will continue to operate. This will help to establish a clear and consistent message, and that accurate information is being disseminated. A specific plan must be put in place for communicating proactively and directly with customers. In some cases, it may make sense for management and/or key sales people to make personal visits to key customers. In others, it may be more appropriate to conduct personal or conference calls and/or disseminate a written communication in the form of an email or formal letter. The timing and messaging must be carefully coordinated with all external announcements while the initial communication with customers is clearly the most critical, the process of providing frequent information and updates must continue over time – in some cases for years after the merger has taken place. Integration is not a process that takes place overnight.

  Akin to managing a harmonious customer ship is maintaining the Vendor relationship with vendors of both the acquirer and the acquired for sustained success in the long term.

Click on the links below for related articles

Our Service Offerings

[su_tabs]
[su_tab title=”Mergers and Acquisitions”]

Mergers and acquisitions have become an essential and integral part of corporate strategy and will gain more significance as competition intensifies and companies move up the growth curve. In fact, M&A should grow in magnitude across the scale regardless of type and size of corporate from the blue chips to S&M companies…… Know More.

To discuss how our team can help your business achieve true results, please Contact us

[/su_tab]
[su_tab title=”Divestment Advisory Services”]

Family-owned companies often divest for various reasons including next generation not interested in carrying on the said business or to fund retirement etc. Carving out a business is often more complex than acquiring one and selling a carve-out business requires a greater level of planning, effort, and resources. HU Consultancy has extensive experience…… Know More.

To discuss how our team can help your business achieve true results, please Contact us

[/su_tab]
[su_tab title=”Joint Ventures”]

Joint Venture is the right option for inorganic growth when both the parties to the transaction have unique strength and want to come together to leverage the strength of each other without affecting their present structure or ownership. With the advent of globalization and increasing business opportunities,…… Know More.

To discuss how our team can help your business achieve true results, please Contact us

[/su_tab]
[su_tab title=”Financial Re-engineering”]

Financial re-engineering involves the radical redesign of core business processes to achieve dramatic improvements in return on investments. The company, may, in the long run, have some assets which are surplus or not being utilized by the core business. The effective utilization of those assets / funds can increase value for stakeholders substantially. HU Consultancy offers financial re-engineering and debt restructuring …… Know More.

To discuss how our team can help your business achieve true results, please Contact us

[/su_tab]
[/su_tabs]