HR's real role in mergers & acquisitions (an inside view)

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Information about HR's real role in mergers & acquisitions (an inside view)

Published on April 25, 2014

Author: ashutoshlabroo



This 6 page write up was published by an international forum as well as I had shared it long back in Trainer's Forum too.

I see most of these issues, opportunities & even critical items still relevant & more so in the emerging INDIA where Global Businesses will be quite keen to buy & acquire to increase their ASIAN/ INDIAN Footprints.

I think there will be some wisdom visibly in this write up for all the HR Professionals in any firms looking at Acquiring Companies & or Consulting Companies already advising companies on acquiring.

The write up is totally based upon my personal views of having ably steered & lead multiple acquisitions & merger scenarios in past companies & even in my present company.

All the best.....

M&A (Role of HR) - 1. Touch points Fortunately or Un-Fortunately M&A time for HR is always a tough challenge & brings on table lot of tough learning & inputs. I was fortunate to work on this during few of my past tenures. As per requests made by few friends & others I am sharing my learnings in a series of posts. 1. Touch points that companies need to maintain during M&As. Specifically the touch points during any M&A can be the most ignored pieces of the whole pie. While the Companies involved generally would focus mainly on the ROI factors along with the BUSINESS GROWTH story for the MERGED or ACQUIRED entities. However avoiding these touch points is really tricky & can be the most risky in long run if avoided being addressed appropriately. a) BUSINESS VISION of the MERGED/ ACQUIRED Co. – This can be the most commonly available piece of document on the web-sites or the Corporate Office walls. However, it is seldom seen that two Companies can have a similarity in this aspect of business. Funny as it may sound but alignment of the VISION can be like ARRANGED MARRIAGES. It might work from day one or might not work ever. b) Alignment of ETHICS, VALUE SYSTEMS & PHILOSPHIES of STAKE HOLDERS or MANAGEMENT at both ends. c) Clarity of CULTURAL Synergies or differences at both ends. d) Clarity in Business Performance Planning or Measurement at both ends. The ability to succeed in a merger & acquisition depends entirely on the people who are driving the business - whether they have creativity, capacity to innovate and ability to execute, and more importantly, whether they can do these things collaboratively. To ease the merger & acquisition transition and make sure the pieces fit together as seamlessly as possible, HR should take the initiatives in management, recruitment, structure, retention, and managing cultural change. In a merger & acquisition, the employees should be put in a position to see easily that there was value in their daily work lives. It is more important for the employees to be able to say that they understand why this is happening. M&As are strategic alliances. In a merger, two companies join together and create new entity. In an acquisition, one company acquires sufficient shares to gain control of the other organization. M&A (Role of HR) - 2. People issues Significance of people-related issues during any M&A Scenario:- Many M&As fail to achieve the desired results because the people issues are not given the importance they deserve. If I go back to what are available statistics (older numbers), within 2003 the value of M&A business in the USA was only worth 510,866.4 $. This is much less when compared to the value of merged and acquired businesses in 1998, amounting to $1.2 trillion. Though there are still a large number of companies worldwide that believe in the philosophy of “growing through acquiring”, the percentage of failures in M&As has been pulling back quite a few. The decade of 1990s saw a spate of mergers and acquisitions in all the important sectors of business. However, the success rate of these M&As is estimated to be a mere 30–40%. Companies do announce that their mergers have been successful, but they also accept that they have not been able to derive the kind of benefits that they expected to, from a merger or an acquisition. What can be the major reason for this failure (partial or complete) of mergers and acquisitions? Companies do go through a detailed analysis and due diligence review on all fronts – business, markets, financial, legal etc. Then what is it that is stopping these companies from achieving complete success? People issue is one of the most sensitive but often ignored issue in a mergers & acquisitions scenario. When a decision is taken to merge or acquire, a company analyses the feasibility on the

business, financial and legal fronts, but fails to recognize the importance attached to the human resources of the firms involved. Organizations fail to realize that people have the capability to make or break the alliance. Therefore, it is important for organizations on the verge of integration to analyze the feasibility of the integration on the human resources front. People related issues can be really tough to decipher during the deal but this is exactly what eventually determines the future success or failure of the new relationship. In historical perspective there are organizations which paid the least importance to these issues & had to pay hugely in terms of future failures & failed relationship which either led to a split in terms of a merger or else in terms of an acquisitions re-selling of stake at much lesser than earlier price at which the stake was bought. People issues stem not only from the CULTURE, VALUES & VISION of the organizations in the new relationship. BUSINESS VISION of the MERGED/ ACQUIRED Co. – This can be the most commonly available piece of document on the web-sites or the Corporate Office walls. However, it is seldom seen that two Companies can have all of similarity in this aspect of business. Funny as it may sound but alignment of the VISION can be like ARRANGED MARRIAGES. It might work from day one or might not work ever. M&A (Role of HR) - 3. Cultural Challenges & Needful Adjustments The major cultural adjustments or pitfalls that WORKFORCE at both ends needs to understand are :- Ø Everyone likes to Assume in such times but we can’t afford to - To avoid inaccurate rumours, which are highly detrimental to organizational morale, employees at both the ends need to stay informed as soon as possible about what to expect once the acquisition takes place. Ø The employer needs to establish the importance of asking for details but enforce people don’t believe in abstract - A realistic merger preview depicting job expectations for the future. Ø Envisage & establish & review the Change in Organization, Role, Reporting Relationships etc. Ø Employees will need to cope more realistically with new or modified job demands. Ø Employees might see layoffs or downsizing to take place soon but that might be the much required respite to resurrect the entity. Ø Employer needs to put maximum priority on communication to avoid suspicion, & ensure no demoralization, loss of key personnel and business even before the contract has been signed. Ø It is tough to gain emotional and intellectual buy-in from the staff, and so the employees will know why merger is happening & sometimes the reasons can be pleasant or else atleast un- pleasant. Ø Very tough to Enjoy Un-Predictable "CHANGE" Ø Accommodate & adjust with a New Culture Mix, New Teams & People Ø In the short term, unclear roles and responsibilities, and confusing procedures Short Term Missing HR integration on the following perspectives which employees will definitely experience in the new entity or setup:- Remuneration Benefits Terms & Conditions of Employment Culture & Management Style of the new entity Career & other Development Issues Communication Employee Relations

M&A (Role of HR) - 4. Acquirer & the Acquired - Cultural Integration I don’t think any companies can maintain their distinct cultures in an M&A Setup. The distinct beliefs would invariably create chinks of differences in everything without fail every time. If they do that, the arrangement will not last longer. The very fact that we use the word distinct means “to be different”. The differences in CULTURE can be a big issue in future as the necessary alignment would call for a perfect blend. Yes, we need to realize the GOOD & BEST of both the setups. The Best Practices of both setups which have proved to be useful need to be debated (un-biased) & discussed at length. We would need to compare what is unique & similar in the structures and systems, and policies and procedures of the two organizations. Standardized systems and structures and policies and procedures have to be developed to suit the changed needs of the merged or the acquired organization. Still, the management has to take an unbiased view of what will work & not work in the new culture. If 1, 2, 3 are good culture practices or beliefs in Co. A (Acquirer), it has to stay, & if 4, 5, 6 are good practices in Co. B (Acquired), that has to stay as well. Essentially the commonalities can stay & they infact can make the joint so powerful that it just connects like YIN & YANG. M&A (Role of HR) - 5. Reaching Out to People Every company needs to reach out to its people & the role of HR when it comes to sensitizing and familiarizing people is of paramount importance here wr.t. clear 3 steps to work this out – A.) REACH OUT TO PEOPLE - COMMUNICATE, COMMUNICATE, COMMUNICATE. A clear, transparent, logical, precise & simple but illustrative “PERSONAL” communication is the only key in such cases. HR shouldn’t make the mistake of shooting mails on the subject. The magic of one to one or one to many dialogue can never be reduced by technology. Creating Listening Posts, Conduct Employee Forums where everything & anything under the sun can be asked by the people (especially the ones getting impacted or likely to be impacted or presumed to be impacted). Town Halls, Social Gatherings to share with people the future plans. B.) STATE THE FACTS (In Person) – Face it. You need to acknowledge things might just change now. Rather than letting people over-assume & fantasize, mostly resulting in a loss of productivity & efficiency, we must be open. Don’t hide what is in store w.r.t. these factors that are concerning any employee in general at any level. If you don’t share it the steam from RUMOURS & GOSSIP might make the environment in transit too filled with un-necessary smog. It is critical to clearly state what is going to happen sooner or later. Hiding these things wouldn’t help. Infact we must prepare people to embrace & acknowledge the new dimensions. Whose job level will grow (promote), whose job will increase (enlarge), whose job might not be needed (separations) must be shared in person with those concerned with the same. C.) Share the Future Goals & Vision of the Merged/ Acquired Setup as quickly as possible so that the rumour mills don’t work overtime. Changes or Restructuring in LEADERSHIP, REPORTING RELATIONSHIPS should be prepared parallely before the formal setup changes are ready to be announced. The employees worth retaining must be taken in confidence & made abreast on all developments & how positive it will prove to be for them in future.

M&A (Role of HR) - 6. Cross Border M&A situations Cases of cross-border deals or M&As of different geographical areas are really tricky affairs as organizational culture and the national culture become two important factors in determining the feasibility of integration. For example, the organizational culture of company A might be very open and transparent with free flow of communication in all directions. People enjoy their freedom of working in an informal and friendly atmosphere. On the other hand, company B might be known for its stringent policies, systems and strict regulations with marked hierarchies. People in this company are used to work in a bound and regulated environment. A blind eye to these differences would render any M&A deal between these two companies, disastrous. Similarly, when it comes to cross-border mergers and acquisitions, care should be taken to see that the national cultures of the two companies are not drastically different. A past M&A study identified a set of cultural attributes that define and differentiate cultures. They can be studied under Uncertainty Avoidance, Power Distance, Individualism Vs Collectivism, Future Orientation and Gender Differentiation. For example, a country like Sweden, which is ranked high on uncertainty avoidance, would prefer a structured and orderly work environment. On the other hand, a country like Russia, which is ranked low on the same attribute would thrive under uncertainty. If a company from Sweden, characterized by orderliness merges with a company from Russia characterized by uncertainty, it can lead to chaos and confusion. Therefore, a complete feasibility study on the human resources front is important while going for a merger or acquisition. However, inspite of all best precautions there can be major disparities in culture that need to be bridged. We need to understand that culture is the pattern of norms, values, beliefs and attitudes that influence individuals’ and groups’ behaviour within the organization. In short, culture is “the way we do things.” Culture, therefore, is not an independent variable and it equates with business and supports the strategies. It aligns with the organization’s goals and influences the work groups in such a way as to align their personal and professional values and beliefs to enhance themselves and the organization, too. Cross-cultural differences or issues are one of the most important challenges which globalization has brought to the world of business. Understanding how cultural factors can make or break a deal across borders is the most significant question, which arises before making any deal. Knowing the ‘do’s and don’ts’ and a proper understanding of cultural values of other countries and organizations are the keys to the success of these deals. Creating a cohesive culture from two distinct entities is a challenge. Apart from that, how competent these organizations are to deal with cultural differences is the key challenge in this global, competitive world. Today’s business environment M&As have to look into cultural issues seriously, as they do the financial ones. In view of the importance of the above aspect, we need to focus on the impact of culture and the existing cultural issues faced by the organizations entering the deals.

M&A (Role of HR) - 7. Challenges of Indian Business Environment There are some rather strong cultural aspects that Indians need to be adept with. Though I do believe, Indians are conceptually a sharper race & technically our acumen can outlast anyone. I have reasons to say this. We are culturally adept with managing lack of resources (Financial, People, Methods, Machines) etc. better than others. However, we are bogged down by many traditions (good as well as bad ones), many value systems (rights & wrongs), likes & dis-likes (Strong & Not So Strong) and above all our Conditioning (Ability to Learn or Un-Learn) towards the un- known. The cultural aspects that INDIANS need to be adept with specifically in domain of M&A would be divided into various areas both ways whether we MERGE or ACQUIRE or get MERGED or get ACQUIRED:- A) BUILDING ON STRENGTHS & NOT APPEARANCES (A look good, feel good deal might not really be a “SOUND” deal) B) FLEXIBILITY (Be ready to accept that some things will appear & be the way you have never wanted or allowed to be, in the past) C) OPENNESS TO CHANGE (Any M&A Deal calls for this & you can’t avoid it) D) OVERCOMING FEAR OF UN-KNOWN (Backward or Forward Integration for LONG TERM Sustenance & Growth) E) Look for LONG TERM & do not focus on SHORT TERM gains (First decide whether the deal is a solution to overcome our existing challenges or an opportunity to create WEALTH in all aspects – PEOPLE, FINANCIAL, STRATEGIC & BUSINESS) F) We are culturally not very good WIN-WIN Managers. We like to compete in everything but in such deals we can’t be the WINNERS if someone is losing. The actual issues will show up sooner or later. We need to look beyond the routine style of thinking & look for a Mutually Beneficial deal. M&A (Role of HR) - 8. Successful Deals With so many impending challenges & nuances, can there be successful M&A deals. Well, the answer is YES & NO. We need to acknowledge the fact that most of the human resource strategies in mergers and acquisitions are reactive and descriptive, and only recently have tools been devised to proactively investigate and alleviate potential obstacles. Moreover, most of the research examines cultural and human resource matters for a relatively short period, but they need to be studied on a long term basis. However there is a way out & that is treating a M&A Activity like a project with no emotional baggage. Thus, the first thing you need to do is to develop the ‘HR’ Project Plan A project plan would be this critical document that directs and supports the whole process of integration and should be continuously updated to include the latest developments. The project plan should define the tasks to be performed in order of their priority. The owner for each task has to be identified and the responsibilities assigned. It is also important to note that the owner enjoys the authority to carry out the task successfully. Each task has to be given a due date of completion and the owner should keep track of the developments and record them. There should be common forum for exchange of information among the different task owners. In all probability, these tasks would be interrelated and the success of the project depends on effective coordination among all the task owners.

The project plan should also take into consideration some unavoidable hurdles that may arise and provide for contingencies. Stage 1:- Ø Conducting thorough due diligence of all areas - I suggest it should always be done by an outsider. Ø Cultural assessment - Again to be done by an outsider. Ø Planning for combination which minimizes problems at a later stage - Specifically this is the stage of an open dialogue & hearing the un-heard so far & anything that you miss for discussions may create issues later on. Ø Creating practices for learning and knowledge transfer - Again critical from the point of view of the importance to the organization. Stage 2:- Ø Communicating the benefits of merger/ acquisition Ø Designing / implementing teams Ø Creating the new structure strategies and leadership Ø Retaining key employees Ø Communicating to and involving the stake-holders Ø Deciding on HR policies and practices Ø Deciding on who stays and who goes Ø Establishing a new culture, structure, and HR policies & practices Stage 3: - Ø Solidifying the leadership and staffing Ø Assessing the new strategies and structure Ø Assessing the new culture Ø Assessing the new HR policies & practices Ø Assessing the concerns of stakeholders Ø Revising as needed Ø Learning from the process Ø The new entity must learn Well even if you do all of the above, there is no guarantee for a 100% successful M&A. Reason is - people. They will make it or break it. HR can only try & ensure they educate, inform & train & execute the M&A project with a strong bent of openness & honesty.

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