Strategic Human Resources Management: Merger and Acquisition Strategy

LAW CHONG SENG

University Technology of Malaysia (UTM) cslaw5@live.utm.my, mylawcs@gmail.com

ABSTRACT The strategic issue that the HR director needs to focus on before merger includes employee compensation, notice to employee, number of employee needed after the merger, employee rights if the merger take place, communication and talents retention. Employee compensation is an important issue because the merger involves the reduction of workforce and the amount of compensation can be substantial. The pre-determination of number of employee needed will help to decide the cost saving from the merger. Understand the employee rights and to get employees to accept the new employment and the need to focus on the standardization of financial and non financial aspects of both companies. Establishment of good communication with employees is essential with intention to link between the two companies employees. With the proper process of talents retention strategy, it allows the key employees to involve in merger from beginning and to take up certain authority throughout merger process. It creates commitment and raise confident level in key talents. The strategic issue that the HR director needs to focus on after merger includes employees motivation from both companies to work as a team, cultures merging, HR practices standardization, improves the morale of the 1

employees and create the synergy between the two different merging entities. To effectively motivate employees, HRM needs to deal with each employee and working together one-onone. This is helping talented people to find satisfaction in their work, and satisfaction is key to an employees decision to stay or leave an organization. Cultures merging will help to overcome the problems in way of doing things, beliefs and the assumptions. The standardization of HR practices is allows HRs to work in partnering with senior management team to manage the merger and on integrating HR practices with the business goals. With the right activities to improve employees morale, everything about the deal will go more smoothly from the employees point of view, and therefore company will have greater productivity and better relationships between employees and customers. By having synergy between the two different merging entities, it creates shareholder values, reduce operating expenses and capital expenditure, improve working capital and gain substantial revenue for the company. INTRODUCTION Human resource management professionals must be capable of handling many unique challenges. One of the most prevalent challenges that HR professional face and the one that requires the 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 (Jan Ulijn, Geert Duysters, Elise Meijer, 2010). We argue that, for merging to be integrated successfully, they need to align their HRM strategy to their M&A strategy. Thus, it is important to have a clear understanding of M&A strategies to be able to specify the role that HRM should play. In the context of HRM in M&A, decisions about resources involve staffing and retention issues, with termination decisions being particularly important. Processes refer to activities that use to convert the resources into valuable goods and services. These would be training and development programs as well as appraisal and rewards systems. Finally, values are the way in which employees think about what they do and why they do it. Values shape employees priorities and decision making (Andrew J. Sherman, 2006). Human resource management is a management function that helps managers plan, recruit, select, train develop, remunerate and maintain members for an organization. There are factors that determine the important of HR functions: The orientation of top management to people management The expectations of line managers have of HR Skills, competences and ability of HR personnel HR functions and its characteristics Internal factors External factors The purpose of the report is to critically discuss the strategic issues that the HR 2

director needs to address before and after the merger. FACTORS IN HR FUNCTIONS The importance of top management in defining the roles of HR and the top management team as a whole and the role of the CEO/MD as a single actor. The attitude of top management towards people management defines the role of the HR manager in the organization. If top management sees people management issues as important for the company and if they think that HR can add value to the company, they are more likely to invite the HR manager to the management team and through that demonstrate the importance of HR in their organization (Edwin L. Miller Jr., 2008). The line managers' expectations for HR function affect the role assumed by the function. Their expectations are important because they are the ones who perform the strategic role together with the HR function. There are differences in the perceptions of line managers and HR managers in the meaning of the strategic role of HR. Even though it may seem that the role of the HR manager is in the hands of top management, this is not wholly the case. HR managers' own activity, skills and competencies have also been found to play an important part in framing their roles. To be able to affect their own roles, HR managers need to possess certain skills and competencies through which they can demonstrate the importance of HRM. The competencies and skills needed are professional and technical HR competencies, business orientation and ability to make business focused decisions, and interpersonal, political skills (Michael Armstrong, 2006).

Skills and competencies in successfully managing HR issues form the basis for the work of HR. By getting things done effectively in one's own field, it is easier to gain credibility in other fields. The importance of business and strategic competencies links to the discussion of HR managers as strategic partners. There are many studies stressing business competencies and their role in enabling HR managers to gain a higher status in organizations. There is a need for HR managers to understand the business in order to be able to contribute to the success of the company (Daniela Peterhoff, 2005). Interpersonal skills are important for HR managers in many ways. First, they help them to create networks and increase their credibility, power and influence in organizations. Second, they can facilitate the effective creation and implementation of HR programs through which HR managers can demonstrate the importance of HRM for organizations. HR managers' personal relationship with CEO is an important channel to bring attention to HR issues. The importance of HR managers' own activity can be seen in the studies where top management's positive attitude to people management has led to different outcomes based on the behavior of HR managers. It seems that although the top management may value the management of people it does not automatically mean that they value the HR function or HR managers. Instead, they may see HRM as a part of a general manager's job and not see how separate HR function can add value to the company. The characteristics of the HR function have been stated to affect the roles of HR. The expectations of other members of the organization have for the function, the nature of HR leadership, resources possessed by the 3

HR function and the way they are used, the level of HR professionalism, business knowledge, power, willingness to act in a strategic role, communication and visibility, the structure of the HR function and effective administrative support systems affect the roles of the HR function and its abilities to change the roles (Randall S. Schuler, Susan E. Jackson, 2007). There are also factors in the external environment of organizations which can affect the strategic role of HR. These factors include economic situation, changes in technology and culture, line of business, level of internationalization and competition. These factors affect the ways organizations operate and the roles HR plays. Also some factors inside organizations have been argued to have an influence on the roles of HR. Factors such as size, structure, history, power and politics within the organization can at least partly explain the roles (Gerald R. Ferris, Sherman D. Rosen, Darold T. Barnum, 1995). Internal factors, just like the external factors mentioned above, have not received more attention. The differences in the roles of HR among organizations are due to contextual and internal factors. The focus on the roles and involvement of HR not just on the strategic role. This approach is to justify that early involvement of HR in an IM&A process, even if administrative, is a contributing factor. STRATEGIC ISSUES BEFORE MERGER The HR leadership has an opportunity before the merger to ensure that both organizations have a strategy mapped out in advance. Once the merger starts taking place, people will often be too busy to keep a strategic perspective.

Before the merger takes place, the leaders of both organizations, at least, of the dominant firm should have a strategy mapped out, including communications to employees and customers, where layoffs will take place, if any, and how the cultures should be merged. A SWOT (strengths, weaknesses, opportunities, and threats) analysis should be done for the combined company. If possible, a brief culture survey should be undertaken in both companies to discover what the cultural differences are (Paul Sparrow, 2009). Sometimes this will be obvious in some aspects. One culture values teams and bottomup innovation, the other favors commandand-control tactics - but not in others, such as how and whether individuals and teams are rewarded for innovations, how failure is dealt with, whether conflict is addressed openly. This will prevent disconcerting delays between the announcement and the implementation of the merger (Daniela Peterhoff, 2005). If the real purpose of the merger is to acquire another companys assets that should be acknowledged and dealt with up front. If employees are fooled at first by pleasant words, they will react more strongly when those words become taunts. Finally, before the merger or acquisition takes place, the leadership teams should consider the non-financial issues. Will people in the two companies be able to work together? Will acquiring a company, or merging with it, destroy the properties or drive away the talent that made it worth having? Can a simple partnership, alliance, or even stock ownership without integration provide more benefits than combining the two companies? These issues may be overlooked by the leadership teams. Just as they are often

ignored or downplayed by who want to do the deal. Some questions to ask the leaders, in person or via open-ended survey are: Are there viable alternatives to the merger? Is there a communication strategy to keep employees and customers informed? Are the cultures for the two organizations compatible? Is there a plan for merging the cultures? Will one be dominant, and, if so, how will people operating under the other culture be brought on board? What are each organizations key strengths, weaknesses, opportunities, and threats? What is each organizations strategy? How will they be merged? 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, 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 company need to make this clear to them. HR director needs to develop and deliver clear compensation guidelines and try not to lose employees around these types of circumstances. This is an area in which there needs to be a tremendous amount of one-onone activity between HR and the functional managers (Michael Armstrong, 2006). Employee resistance is probably the single most difficult issue to deal with during mergers and acquisitions. Companies are probably going to lose some people that do not want to or cannot afford to lose. The root causes of resistance can all be countered if 4

you take care to do it, and the HR organization is the organization that should drive this effort. The problem lies in the fact that resistance is assumed to be a logical challenge with a logical solution. This is because of employees have the rights if the M&A is taken place (Andrew J. Sherman, 2006). Most employees believe that their needs are being ignored. This is because HR is not allowed communication to flow upward. This has been shown in the literature to be perhaps one of the most critical elements (Terrence E. Deal, Allen A. Kennedy, 1999). Even if HR do not take peoples suggestions and implement them, the notion that at least HR allow the person to voice their personal opinions is extremely critical to the outcome. Employees are concerned about their personal well being. The first thing employees 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. To overcome this resistance, HR needs to focus the employees on the benefits that are going to occur. HR needs to involve the people in the change process and 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. HR must do it early and quickly. And, HR must increase trust and acceptance by keeping the people constantly informed and constantly asking them for their input (Martine Cardel Gertse, Anne-Marie Soderberg, Jens Erik Torp, 1998).

HR director needs 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. If there are key personnel that work well with customer and they make money by being the most innovative and having the most creative people in Marketing who are always coming up with new market, the company need to understand that those are the kind of people that are going to need to draw to the organization and must retain them. The HR leadership may, because of its skill and background, be placed in the uncomfortable but important position of persuading corporate leaders to admit the truth to themselves, and to employees (Ingo Walter, 2004). STRATEGIC ISSUES AFTER MERGER Motivation is important because the employee from different companies might have different work practices. Motivation from the HR director will be essential for them to be able to work as a team. Culture affects the ways of doing things. Without merging the culture, the organization will face problem in term of ways of doing things, beliefs and the assumptions. The HR director may need to raise the issue of culture - how people work, how they think, what they value, and, of some importance, how they view the other organization. If the acquired organization is viewed with disdain, these issues must be addressed up front. Likewise, severe cultural differences must be addressed. They can be overcome with attention and work (Martine Cardel Gertse, Anne-Marie Soderberg, Jens Erik Torp, 1998). Cultural differences are obvious like one culture values teams and bottom-up 5

innovation, the other favors command-andcontrol tactics but others may be subtle (Johannes Gerds, 2004). Will acquiring a company, or merging with it, destroy the properties or drive away the talent that made it worth having? If the real purpose of the merger is to acquire another companys assets that should be acknowledged and dealt with up front. If employees are fooled at first by pleasant words, they will react more strongly when those words become taunts (Martine Cardel Gertse, Anne-Marie Soderberg, Jens Erik Torp, 1998). One of the major thing that HR director must seriously put in place after M&A is how the new entity going to look like? How will the combined organizational chart look? Are you going to take the new company and make it a new division? HR director 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 manager, who is going to be the manager, and who is going to be the lead department. HR director must standardize the HR practices within the two organizations for some of the best practices, that is probably best left for the detail level later on (Johannes Gerds, 2004). Workforce rationalization is the part of M&A that no one wants to face, because it necessarily entails staff reductions. Staff reductions must be handled very sensitively. Most often, it will have to be handled in a phased manner and to improve the morale of the employee. When come to a merger or acquisition, company tends to start laying people off in phases. Everybody ends up sort of hanging on and saying, Well, lets 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, 6

then HR 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 HR needs to keep communication going (Edwin L. Miller Jr., 2008). If, in fact, HR is going to have a layoff, it is imperative that HR has an immediate meeting with the people that called survivors. Survivors are the ones who werent laid off. HR needs to call them for meeting and to give them details explanation of M&A activities in the company. The HR director shall give motivation talk. This immediate communication is critical to keeping the people on board. Synergy is what organizations are attempting to achieve when they engage in mergers and acquisitions. The first thing that we know, and probably one of the most critical things when it comes to mergers and acquisitions, is that companies almost always immediately presume that they are going to reduce staff. This is, in fact, true. Staff reductions represent a tremendous savings to organizations postmerger or post-acquisition (Michael Armstrong, 2006). 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 and create additional value-add to the company. Other long term benefit is it creates shareholder values, reduce operating expenses and capital expenditure, improve working capital, gain substantial revenue and ultimately improve companys cash flow (Andrew J. Sherman, 2006).

CONCLUSION Before the merger, the strategic issues that the HR director need to focus on includes the compensation, number of employee needed, communication and the employee rights. After the merger, the focus on the motivation for the employees from both companies, the merger of two different cultures, standardization of HR practices within the two organizations, improves the morale of the employees and to create the synergy between the two different merging entities. It can be concluded that the roles of HR director in the case of an M&A is affected by top and line management's support, skills, competences and ability of HR personnel, external and internal factors, by the HR function itself and most of all by the factors relating to HR managers themselves. There is a need to compare what impact the strategic intent of the deal and integration has on the roles of HR managers. It would also be very important to be able to observe M&A processes from beginning to end and analyze in depth how HR director and other managers interact and behave in these processes. With these strategies in place, it would produce important information on the role of HRM and the role of other managers in the M&A process. From a practical point of view, it seems that HR director and other managers need more knowledge about issues related to M&A processes. REFERENCES Andrew J. Sherman. (2006). Mergers and Acquisitions from A to Z, Library of Congress Cataloging-in-Publication Data, USA. Daniela Peterhoff. (2005). Human Resource Due Diligence: A Concept for Evaluating Employee Competences in Mergers &

Acquisitions, Deutscher Universitats-Verlag, Germany. Edwin L. Miller Jr. (2008). Mergers & Acquisitions: A Step-By-Step Legal & Practical Guide, John Wiley & Sons, Ltd, UK. Gerald R. Ferris, Sherman D. Rosen, Darold T. Barnum. (1995). Handbook of Human Resource Management, Blackwell Publishers, USA. Jan Ulijn, Geert Duysters, Elise Meijer. (2010). Strategic Alliances, Mergers and Acquisitions: The Influence of Culture on Successful Cooperation, Edward Elgar Publishing Limited, UK. Ingo Walter. (2004). Mergers & Acquisitions in Banking & Finance: What Works, What Fails, and Why, Oxford University Press, New York. Johannes Gerds. (2004). Post Merger Integration, Springer-Verlag, Berlin. Martine Cardel Gertse, Anne-Marie Soderberg, Jens Erik Torp. (1998). Cultural Dimensions of International Mergers and Acquisitions, Walter de Gruyter GmbH & Co., Berlin. Michael Armstrong. (2006). Strategic Human Resource Management: A Guide to Action, British Library Cataloguing, UK. Paul Sparrow. (2009). Handbook of International Human Resource Management: Integrating People, Process and Context, John Wiley & Sons, Ltd, UK. Randall S. Schuler, Susan E. Jackson. (2007). Strategic Human Resource Management, Blackwell Publishing Ltd, USA.

Terrence E. Deal, Allen A. Kennedy. (1999). The New Corporate Cultures: Revitalizing the Workplace After Downsizing, Mergers and

Reengineering, Perseus York.

Publishing, New