HR Challenges in Mergers and Acquisitions

The rapid changing business scenario in the market place, due to the globalization phenomenon, growth in the outsourcing mode of working, the need to speed up growth, and the shortening of product cycles, has forced companies to think about using "mergers and acquisitions" as a part of their business strategy, to meet their business goals. Depending on how the two companies see their position in the merger, they would broadly fit into one of the four situations - rescue, partnership, adversarial, hostile. Regardless of the reasons for the merger the objective is to produce advantages for both the buying and selling companies, that is, the resultant entity should be greater than the sum total of the individual entities.Value (A+B) > Value (A) + Value (B) While there are many reasons cited for failures of mergers, the key area that has become very important, is to understand the process of managing the human resources in a way where they are not only retained, but also collaborate effectively to contribute higher levels of performance. Defining merger? A merger occurs when one company is combined with and totally absorbs another. Operations, facilities, and functions are rationalized and combined for maximum efficiency. The cultural beliefs, norms, and infrastructure of the acquired organization generally change to the acquiring culture for the integration purposes. The acquired organization effectively loses its identity. Acquisition is a process used to transfer stocks or assets from one company to another (from seller to buyer). The process of acquisition can take place as a purchase of stock, purchase of assets, or a merger. Acquisition is a generic term used to communicate the transfer of ownership. A merger may or may not be a part of an acquisition. One can do an acquisition followed by a merger or by means of a merger, or one can also do an acquisition where no merger takes place. The main objectives for mergers could be summed up as below:

Horizontal mergers for market dominance or economies of scale Vertical mergers for efficient channel control

Hybrid mergers for spreading risk, cutting costs, creating synergies, or could also be a defense mechanism to survive against competition

Growth for global reach Survival by developing a critical mass Acquiring cash, deferred taxes, or even excess debt capacity Acquire a bigger asset base to leverage borrowing Top line growth objective, financial gains and personal power Adding a core competency to provide more combinations of products and services

To acquire talent, knowledge, and technology (lately, this is becoming a very important reason)

The challenges faced in the process of integrating the workforce are many. While one would expect that a merger would bring about a growth quite easily, a majority fall short of their goals and objectives. While some failures can be explained by financial and market factors; a substantial number can be traced to neglected human resource issues and activities. The problem

Mergers are failing to meet their objectives. In the last decade, mergers and acquisitions have become a worldwide growth story, despite the high risks attached, and the information that over 85% of them have failed during the process of integration. It has been determined that most cases of failures have been because of employees not being able to adjust to the new environment, and/or many good employees leaving the organizations during the process of the integration. Despite a well planned strategy acquisitions have found to be a failure, and the main reason attributed for the failure is the challenges faced in managing people related issues.

Some reported findings People are the key to making a merger work, and it is the people-related problems like, culture clashes, management disputes, loss of talent and the inability to manage change, which are the basic reasons why mergers fail. The top seven obstacles to achieving success with a merger or acquisition are:
1.

1. 2. 3. 4. 5. 6. 7.

An inability to sustain financial performance Loss of productivity Incompatible cultures Loss of key talent A clash of management styles An inability to manage / implement change Objectives / synergies not being well understood

All these obstacles are either directly or indirectly related to the strategic management of people and that cultural differences between companies may be the single highest barrier to success. HR professionals usually have little involvement at the pre-deal stage, which goes a long way to explaining why people, organization and culture issues tend to get overlooked, the usual members of the deal team not being trained to identify or assess such issues. Stages of a Merger A merger has a profound effect on the people of both companies, and managing this impact is an important part of managing a successful transition to a unified leadership, business model, and organization. By recognizing and responding appropriately to the impact of the deal on each employee, HR managers can set the tone for long-term success or failure of the new company. In the pre-deal stage, it is the Organizational Design that needs focus, particularly assessing and selecting the right leadership talent - Right people in the Right Positions. Remuneration also plays a key role and needs to be considered from the multiple perspective of strategy impacting employer, employee, and cost. Maintaining and building morale and loyalty, and treating people fairly are the other areas in this stage that plays a significant role. In the post-deal stage, it is the responsibility of the HR to

plan and manage the integration process. Given below are some reasons that resulted in successful integration.

Detailed HR due diligence Employee communication Talent retention and selection Integrating the HR function Integrating pay and performance management programs HR planning and project management Leadership development Change management and culture

Cultural integration The major sub-area of the HR challenges faced in a merger is the issue about culture. It is also the most difficult area to understand and get right in combining two or more organizations. Cultural integration is a major barrier to success in a merger. Every organization has its own unique business culture. Companies may be dominated by a sales mentality, or an engineer's rule. Some companies have a culture of paternalism while others are more democratic and participative. Bringing two different business cultures together in any transaction can create frictions. This situation is further compounded when differences in national customs and language are added to the mix. Fortunately, cultural differences are not insurmountable. The steps a company can take to help reduce the potentially negative impact of culture differences. Anticipate cultural challenges. Ask for guidance on cultural issues. Understand that cultural differences can exist within the same country. Have a strategy for overcoming cultural conflicts. Remain alert to the symptoms of the post-deal cultural clash. Recognize

that business culture in emerging markets does not stand still. The challenges faced on the cultural integration, is suggested to be handled using these 8 steps.1.Build transaction context and rationale 2. Determine degree of organizational integration 3. Assess organizational behavior 4. Develop change hypothesis 5. Determine drivers of

behavioral change 6.

Design appropriate drivers 7.

Implement change 8.

Measure

and reinforce change outcomes Change Management Universally, change is an inevitable consequence of mergers. Achieving the optimum value of any merger transaction usually requires some changes in the organizational structure, operations, reward systems, and people. Change, has its problems, it is very upsetting and dislocating, and hence a proactive management is needed for the change to produce the anticipated benefits. Entrants to emerging markets should approach change with full knowledge of the forces involved in the market dynamics and a clear understanding of the local rules and the local culture in how the local workforce expects to be treated. Some change management challenges can be avoided by solving them as early as the stage before the deal is actually finalized. For example, reduction of the workforce, changes in local leadership, etc.; the acquirer could insist that the target company handles these issues as a pre-requisite to close the deal.The epicenter of change is also important. In cultures where participative management is common, as in the United States, success is more likely when top management and mid-level managers jointly identify problems and create change solutions. In other cultures, including many in emerging markets, a top-down approach to change is more appropriate. Nevertheless, an acquirer should involve local management in the change process. Bringing in expatriates to manage or lead is likely to create resentment and thereby resistance. Thus, it is recommended that one should observe the principles of successful change management:

Communicate with employees on the necessity of change Explain how change will benefit them Provide visible incentives for change Manage the stresses that go hand-in-hand with workplace change Get it done quickly, even as the market environment is changing Establish a clear and visible link between change and business improvement.

The book "Successful Mergers - Getting the People Issues Right" Marion Devine has suggested the lists of M&A synergies which include both tangible and intangible assets, such as:

Corporate brands and well defined reputation Capital and new streams of revenue Core competencies in management or business processes People who possess unique skills or customer relationships Needed elements of a culture or operating environment Management resources

It adds, that many of these assets are people based. Employees at every level of the organization help to forge a corporate brand identity and reputation. Conclusion The business strategy / need of a merger can be successful only when the merger contributes a performance level that is greater than the sum of the individual performances. This also means that the existing workforces would need to come together and derive synergic collaboration benefits to generate higher levels of performance. This leads to the conclusion that in any M&A, HR issues need to be addressed very effectively, and the teams not just retained but also motivated to work together collaboratively. The success level is thus directly proportional to the effective handling of the integration of human resources. The needs that clearly emerge are:1. Strong need to manage the human assets to realize the full benefit of the merger. 2. Need to communicate the vision and business plans as early as possible to the employees of both the companies. 3. Need to involve HR in due diligence stage - to understand the cultural factors that could impact the work force integration, and also to estimate the costs of integration. 4. Need to develop the new business goals and the organization structure to meet them. Further, it is essential to map the competencies of the people and integrating the findings to the organization structure.

5. A dedicated team to handle mergers would be beneficial in the process of integration, as they can be seen as neutral bias, and working with clear objectives of integration for the new objectives. 6. A process of communicating a clear message quickly, and then continuously stay in contact, is essential. 7. A point of contact must be established for employees to contact for clarifications, and this person should have access to senior management to be able to respond to the queries quickly. 8. A high priority must be given on managing employees with unique skills, and the ones who influence customers. 9. Engage employees in productive work to manage their commitment levels. The study brings out that for mergers to be successful, it is important to address issues revolving around 1. Clarity - provided at the earliest and constantly addressed to satisfy queries from employees is a must manage situation. Companies must look at establishing suitable processes that could be set up to manage this as suited to their work environment. 2. Competence - must be the focus area to assess quickly and establish its link to the new business plans and strategies. It is important to be able to utilize the existing competencies to further the objectives of the company. 3. Commitment - from all employees needs to be obtained, and this is possible by bringing into alignment current and future needs of employees with the objectives of the company. Recommendations The following recommendations are being put forth for companies to consider in making the process of mergers useful in retaining the people, and thereby protecting perhaps the most valuable assets that the company has acquired. 1. Evolve a clear vision and business strategy of the merger during the process of negotiation, and have it ready for communication across the two companies.

2. Involve the HR early in the cycle of negotiations, to map the culture of both the companies, and where necessary evolve a culture that suits the merged entity. 3. Create a new Organization Chart, and take up a detailed audit of the competencies of the employees to map their roles and responsibilities as aligned with the new chart. 4. Establish a strong communication system, to proactively stall the arising fears and insecurity amongst the people. Establish a single point of contact for the employees of the company to talk to and seek clarifications / answers to their queries. This person should have easy access to the Senior Management team to get their views to help clarify matters that arise. 5. Communicate to provide clarity of the plans, and communicate continuously. If needed, using an external agency that can be seen as a neutral agency, for this purpose could also be considered. 6. Engage employees in productive work and keep their motivation / commitment levels at the highest possible levels. Source of references used HR Issues and Activities in Mergers and Acquisitions: Randall Schuler and Susan Jackson, 2001 Society for Human Resource Management Foundation Survey of over 400 HR Executives worldwide, 2001 Successful Mergers Getting the People Issues Right, Marion Devine, The Economist, 2007

The Impact of Culture on Mergers & Acquisitions

Gene Gitelson, John W. Bing, Ed.D., and Lionel Laroche, Ph.D., P.E.
According to a KPMG study, "83% of all mergers and acquisitions (M&As) failed to produce any benefit for the shareholders and over half actually destroyed value". Interviews of over 100 senior executives involved in these 700 deals over a two-year period revealed that the overwhelming cause for failure "is the people and the cultural differences". Difficulties encountered in M&As are amplified in cross-cultural situations, when the companies involved are from two or more different countries.

Seven Pitfalls on the Path to Merger Success

Merger success is possible; however, being part of the 17% that succeeds, rather than the 83% that does not deliver, requires more than insight. Merger success is based on acceleration, concentration and creating a critical mass for operational change (adaptation). Up to the point in the transaction where the papers are signed, the merger and acquisition business is predominantly financial - valuing the assets, determining the price and due diligence. Before the ink is dry, however, this financially-driven deal becomes a human transaction filled with emotion, trauma, and survival behavior - the non-linear, often irrational world of human beings in the midst of change. The seven pitfalls represent the critical and vulnerable areas of the M&A transaction. These areas must not only be valued for their negative impact on the critical success factors that drove the "deal", they are the very agenda for the organization's action in the critical first 90 days of the new entity. In the case of international mergers and acquisitions, the complexity of these processes is often compounded by the difference in national cultures. People living and working in different countries react to the same situations or events in very different manners. Therefore, a company involved in an international merger or acquisition needs to consider these differences right from the design stage if it is to succeed.

Pitfall #1: Preoccupation

In Canada, individual preoccupation with "How is this all going to impact me?" weakens commitment to the job at hand. This, in turn, translates into people looking for work in other companies. Often a firm in the midst of transition loses some of its own talent - strengthening the competition. In countries where people identify largely with groups, people tend to look for support within their group. In France and Italy, people caught in the midst of a merger or acquisition often turn to unions. If unions cannot provide answers because they have been excluded from the negotiation process, they are likely to go on strike. These strikes may do much more damage to the organization than comparable Canadian strikes; for example, the strike by French railroad and subway workers in December 1995 resulted in the demise of the Jupp government. What is less apparent is the pervasive loss of productivity of those who remain. Studies indicate that line employees and managers at all levels lose a minimum of 15% of personal effectiveness as a result of rumors, misinformation, and worry. They also indicate that teams tend to break down and become less effective during mergers and acquisitions. To quantify these losses, determine the number of individuals involved, multiply by their fully-loaded hourly wage, consider just one hour lost to confusion, waiting for clarity, figuring out who should do what to whom (assuming you know who "whom" is) and a likely job search. This is how much productivity is lost per day to the company (and the new owners). Multiply this by 65 (there are 65 working days per quarter) and compare this number with the amount in gross sales revenue that the firm will have to generate to the bottom line to offset this loss in productivity. The strategy: Acceleration. Speed the integration to reduce the uncertainty and anxiety. Delayed decisions to "ease the pain" only magnify and sustain the pain and prevent the company, the individuals and /or the groups from getting on with the work and their lives. In the case of international M&A's, ensure that both individual and collective concerns are addressed.

Pitfall #2: List-making

You may also call it compulsive-obsessive list-making; whatever the name, it's real. In the face of overpowering uncertainty and rising fears of insecurity, it will happen. Making comprehensive lists is a very logical response to one's world thrown upside down. Lists of things to do fill the space and suppress the anxieties; they even make sense, except to the bottom-line and the economic drivers that were the very basis of the merger. As soon as the merger is announced and the first calls to action proclaimed, the reality sinks in. The "list" is overwhelming. Personal and departmental needs drive the allocation of resources. Quickly, as the days build, there is a widening disconnect between the financial and market-based goals of the merger and real-time allocation of effort. Tolerance for uncertainty varies widely around the world and this variation can play havoc in international M&As. For example, Mexicans tend to require more structure and definition of their role and responsibilities than do Canadians. When a Canadian corporation acquires a Mexican company, its Mexican employees are often looking for information and structure that is not forthcoming, because their new Canadian managers deem it unnecessary. The Mexican organization often grinds to a halt, since Mexican employees are unlikely to go and ask for the information they need, since this may be viewed in Mexico as questioning management's authority.

The strategy: Concentration. During the first 90 days, focus and get everyone to focus on the 20% of the goals that yield 80% of the economic value. Dealing with uncertainty explicitly is critical to the success of M&As. In the case of international M&As, the economic value of a foreign organization may not be where its Canadian partners expect it. For example, a Canadian company acquiring a company operating in a country where the government controls much of the economy may find that the value of its new acquisition lies more in the personal ties between its managers and high level government officials than in its quality of service.

Pitfall #3: Organizational Proliferation

In Canadian organizations, many task forces, committees and integration teams are created to handle all the lists and to plan new lists. Integration structures and transition teams designed to be all-inclusive and to represent a sign of "new partnership" will weigh heavily on an organization seeking to keep its eye on its customers and the market. More effort will be placed on temporary rules and reporting relationships than the work itself. In the case of international M&As, this issue is compounded by the fact that organizational change is brought into companies in different ways in different countries. For example, in countries where the sense of hierarchy is much stronger than in Canada (like France and Mexico), change is brought about from the top and employees at all levels expect new directions from their managers. This may paralyze cross-cultural M&As, since top Canadian managers expect input from these teams and committees, while French members of these committees and teams expect direction from their managers. The strategy: Accelerate, concentrate and adapt. Form small, agile, quick-acting teams, including people from both sides of the M&A, with a clear mission and empowered integration team managers with direct access to senior management and to their support. Transitions do not need to be demonstrations of democracy in action. Clear leadership and strong support is essential to these teams; without it, they often break down into sub-teams (one sub-team for each side of the M&A). This is particularly common in the international case, since language and cultural differences create significant communication issues.

Pitfall #4: Infrequent and irrelevant communication

Fear and a lack of all the answers deters top management from providing the information that customers, shareholders and employees need to redirect their action to the value-added of the deal. Rumor fills mystery and vacuums. When there is communication, it often lacks information and substance that explains and supports stakeholders' interests. In many international M&As, the working languages of the two organizations involved are not the same. Communication can break down even when the employees of the foreign M&A target speak English. Consider the case of a Norwegian - American joint venture. Because Norwegians tend to be more relationship-oriented while Americans tend to focus on tasks, the parties almost came to blows over when and how to bring the discussions to a conclusion. The Norwegians complained that they had not built up enough trust to negotiate final details and needed more time. The Americans responded that they could not waste valuable time on further meetings and that the matter should be settled by the legal team. Tension decreased when the teams realized that their goals were the same but their ways of achieving them were quite different; a deal was eventually struck.

The strategy: Accelerate, concentrate and adapt. Frequent communication, repeated at least 7 times through multiple avenues - print, voice mail, e-mail, meetings, and video. In times of stress, the "noise" of survival and uncertainty drowns out the message. Over-communicate and remember that responsibility for a message being received lies with the sender as well as with the receiver. A recent PricewaterhouseCoopers survey of 124 mergers indicates that those firms that implemented effective communications strategies showed better results in customer focus, employee commitment and productivity than those firms that had a delayed communication strategy. In the international case, communication often requires translation as well as adaptation. Indeed, the best way to make a presentation and to reach an audience differs from country to country 1. The communication strategy needs to take communication style preferences into account, as in the Norwegian - American example mentioned above.

Pitfall #5: Triangulation

Without clear lines of authority and clear understanding of where they fit in, employees and managers are caught in a web of conflicting objectives and old loyalties. This type of organizational and personal strangulation robs the new entity of the very energy it needs to overcome the losses in productivity. The tolerance for "fuzzy", temporary organizational charts and decision-making processes depends on the countries involved in the merger or acquisition. In hierarchical countries, like the Philippines, both organizational chart and chain of command need to be clearly defined, more clearly than in Canada. If employees do not understand them, paralysis often results. A Filipino employee reporting to two managers, as in a matrix organization, will likely be quickly overwhelmed. He / she interprets the situation as having to meet two complete sets of expectations and perform two separate jobs. For Filipinos, asking managers to discuss their conflicting requests would be viewed as insubordination. The strategy: Concentrate and adapt. Concentrate on substance rather than form, and focus on helping people adapt. Management needs to provide the information that people need to be comfortable with the new organization; this information depends on people's cultural backgrounds. In Canada, people need to know how they fit with the value drivers rather than short-lived organizational charts; such may not be the case in other countries.

Pitfall #6: The relatives

Not the "in-laws", but the relative forces of time and space. Time in a merger is accelerated, compressed and merciless. In Canada, publicly held companies need to show clear results at the end of the first quarter after the announcement. Individuals going through a merger have to work at an accelerated pace at the very same time that the inner adaptation of change - personal and psychological transition - weighs them down and operates on personal, rather than linear time. Change is easy; inner adaptation is not. And time is relative - the leaders started their adaptation to the new reality far before those who learned of the merger on announcement day. The leaders have ridden the wave and are way in front of this shock wave now crashing down on the others. They wonder about why people don't seem to "get it" and often mistake shock and confusion for resistance to the new realities. The concept of time is also related to culture. While long-term in North America tends to mean three years, it means up to 30 years in Japan. Consequently, Japanese strategy discussions are likely to take into consideration events that Canadians consider irrelevant, since they are expected to take place beyond the Canadian planning horizon.

Space is also relative. In an increasingly virtual world, those not "connected" in the same space and time feel disconnected from the decisions and the center of the action. Irregular and incomplete communications at headquarters becomes a daunting challenge for those who live in different time zones, regions, countries and organizational units. The strategy: Adapt. Adapt to the realities of change and transition - they are different experiences and each individual will have their own way of going through them. Help guide and support employees through the endings that they need to come to terms with before you expect them to embrace the new world. Provide temporary structures to enable people and departments to navigate between the old ways and the new. Actively manage the merger across time, space and organizations, keeping in mind the different concepts of time and space that may be at play. Create the appropriate communications tools and the accountabilities and standards that will enable the organization to better operate across time and space.

Pitfall #7: The guiding light

At a time when leadership and active management is most called for, the stress and uncertainties associated with the merger causes an inward focus and a retreat to safe and high ground. More leadership is needed, at this time, than less. One of the primary roles of a leader is to articulate a vision and inspire others to join in that vision. Proclaiming a new vision and handing out laminated cards, however, does not create a new vision for the new entity. A clear new vision captures the critical success factors and economic drivers that brought the entities together. In the case of international M&As, the need for leadership remains, but the nature of leadership changes. Being a good leader requires different skills and attributes in different countries. For example, charisma and a positive personal image are important attributes of leadership in the U.S., more so than in Canada. The strategy: Adapt. Only a new culture can create the context for true change to happen and hold. Changing culture means changing behavior. One of the quickest way to effect change and create the new company is to place in all key positions those individuals who are true representatives of the new culture and who can lead effectively people on both side of the company's cultural divide. These people are the role models who demonstrate, with the visible active support of senior management, what the new culture is.

Conclusion
These pitfalls of mergers and acquisitions challenge today's leaders to a new standard of managing change. The strategy is clear - accelerate, concentrate, adapt, and in the case of international M&As, consider cultural differences. The human and cultural issues that separate the 17% from the 83% are not about some abstract values or the "soft stuff", but the concrete reality of productivity, economic value and sustained growth. References
1

"On with the Show", L. Laroche, CMA Management, December 1999 / January 2000.

This article originally appeared in CMA Management, March 2001.

Indian Mergers and Acquisitions: The changing face of Indian Business

Until upto a couple of years back, the news that Indian companies having acquired AmericanEuropean entities was very rare. However, this scenario has taken a sudden U turn. Nowadays, news of Indian Companies acquiring a foreign businesses are more common than other way round. Buoyant Indian Economy, extra cash with Indian corporates, Government policies and newly found dynamism in Indian businessmen have all contributed to this new acquisition trend. Indian companies are now aggressively looking at North American and European markets to spread their wings and become the global players. The Indian IT and ITES companies already have a strong presence in foreign markets, however, other sectors are also now growing rapidly. The increasing engagement of the Indian companies in the world markets, and particularly in the US, is not only an indication of the maturity reached by Indian Industry but also the extent of their participation in the overall globalization process. Here are the top 10 acquisitions made by Indian companies worldwide: Target Company Country targeted Deal value ($ ml) 12,000 5,982 729 597 565 500 324 293 290 239

Acquirer Tata Steel Hindalco Videocon

Industry Steel Steel Electronics Pharmaceutical Energy Oil and Gas Pharmaceutical Steel Electronics Telecom

Corus Group plc UK Novelis Canada Daewoo Korea Electronics Corp. Germany Belgium Kenya Romania Singapore France Canada

Dr. Reddys Betapharm Labs Suzlon Hansen Group Energy Kenya Petroleum HPCL Refinery Ltd. Ranbaxy Terapia SA Labs Tata Steel Natsteel Videocon Thomson SA VSNL Teleglobe

If you calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than double the amount involved in US companies acquisition of Indian counterparts.Graphical representation of Indian outbound deals since 2000.

Have a look at some of the highlights of Indian Mergers and Acquisitions scenario as it stands (Source: http://ibef.org) Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in Indias corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments. Mergers and Acquisitions The total M&A deals for the year during January-May 2007 have been 287 with a value of US$ 47.37 billion. Of these, the total outbound cross border deals have been 102 with a value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India. The total M&A deals for the period January-February 2007 have been 102 with a value of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value of US$ 21 billion. There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April 2007. Of these, the number of outbound cross border deals was 32 with a value of US$ 3.41 billion. There were 74 M&A deals with a total value of about US$ 4.37 billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value of US$ 3.79 billion.

The sectors attracting investments by Corporate India include metals, pharmaceuticals, industrial goods, automotive components, beverages, cosmetics and energy in manufacturing; and mobile communications, software and financial services in services, with pharmaceuticals, IT and energy being the prominent ones among these.