Role of HR during Mergers and Acquisitions


By

Miss Vandana Mohanty
Lecturer (HR)
Rajdhani College of Engg and Management
Bhubaneswar
 


Mergers and acquisitions are part and parcel of big business. In an ideal merger, the newly created entity pools the best features of the two merging organizations. Mergers and acquisitions (M&A) are increasingly being used by firms to strengthen and maintain their position in the marketplace. While most early M&A research focuses on the financial and strategic issues, the recent literature focuses on the human resources (HR) aspect of M&A. Today, it is widely accepted that the way in which HR issues are handled is critical to the success of any M&A.It is seen that, most M&A failures can be traced to poor support of HR-related issues and activities.. An unsuccessful M&A integration process may have huge detrimental effects on a company, including loss of key personnel, a decline in employee productivity, reduced job satisfaction, communication breakdowns, and resistance to change (Cartwright and Cooper, 1993). This paper will discuss how companies use M&A as a growth strategy, common reasons for M&A failures and successes, HR practices critical to successful integration, and the role of HR in M&A.

Keywords Merger, Acqusition, Strategic, Integration, Detrimental

Mergers and Acquisitions (M&A) An Introduction.

Mergers and Acquisitions (M&A) have become the preferred route for expansion and Consolidation. The unshakeable and rock solid companies aspiring to emerge as significant players on the global stage, are scouting to acquire prospective and attractive companies, gasping for survival due to the mounting competitive pressures. Mergers and acquisitions represent the ultimate in change for a business. No other event is more difficult, challenging, or chaotic as a merger and acquisition.

A merger can be defined as a situation when either two or more independent companies merge, or when one or more persons already controlling at least one company acquire direct or indirect control of the whole or parts of at least one undertaking. Whereby in a merger, the two or more companies create a new entity and in an acquisition, the acquired company loses its economic and legal autonomy [Gerpott 1993]. The term "acquisition" refers to the acquisition of assets by one company from another company. In an acquisition, both companies may continue to exist. The acquiring company will remain in business and the acquired company (which we will sometimes call the Target Company) will be integrated into the acquiring company and thus, the acquird company ceases to exist after the merger.

The literature sources [e.g. Jansen 2000; Haspeslagh/Jemison 1991] most frequently identify three phases of a merger or an acquisition.


The idea or preparation phase explains the need for a merger or an acquisition, which is given by the company's objectives and desires. The second phase includes the search for an appropriate target company, the valuation, legal and financial negotiation. The last phase, integration, consists of fusing the two companies into one. Since the speed of competition in many industries has made organic growth seem excessively time-consuming, many managers consider acquisition to be an attractive mean to expand a firm's knowledge base quickly. Wysocki [1997] means: "In today's economy, building work teams from scratch can be yesterday's luxury. So, when you can't build fast enough, you buy." Mergers and acquisitions have become a common phenomenon in recent times

From a global perspective, the rest of the world is also beginning to see increased merger and acquisition activities. We can see from the chart below that in the Pacific Rim alone there is a substantial amount of activity -


Mergers and acquisitions are a growing trend, and analysts don't see any downturn over the next 10 years. Therefore, we need to look at how human resources professionals can assist in the success of an acquisition. In the long run successful mergers and acqusitions occur when both sides are open to new possibilities..

Merger & Acquisition Success Rate

It might be more accurate to use the term failure rate rather than success rate. Industry analysts agree that the failure rate of mergers and acquisitions is somewhere between 40% and 80%. A lot of sources average it out at 50%. Even more shocking is that if we think of failure as not increasing shareholder value, then the numbers look worse, with the higher end of the scale being 83%. This means that 83% of the companies do not ultimately see the returns that were projected for the merger or acquisition after a 3- to 4-year period.

Research also suggests that up to 65% of failed mergers and acquisitions are due to 'people issues' that result in poor productivity.

WHY THE MARRIAGE FAILS..

The mergers and acquisitions are done to grow faster but it is not sure that the result emerges the same as it was thought. Some failures can be

* Expectations are unrealistic
* Hastily constructed strategy, poor planning,
* unskilled execution
* Failure/inability to unify behind a single macro
* message
* Talent is lost or mismanaged
* Power and politics are the driving forces, rather
* than productive objectives
* Requires an impossible degree of synergy
* Culture clashes between the two entities go unchecked
* Transition management fails
* The underestimation of transition costs
* Financial drain
* Defensive motivation

Perhaps of these, culture clashes, gaps, or incompatibility and losses of key talent are cited the most frequently, although even these become intertwined with other reasons. (Bianco, 2000; Fairlamb, 2000)

HR in Three Stage Model of Mergers and Acquisitions

Merger and acquisitions are strategic alliances. Merging two companies with their different policies, procedures, and culture will create stress for all the people involved. The 'survivors' from both companies will have to deal with new people, new procedures, possibly more work, and the loss of previous co-workers and friends. In case of M&As the role of hr starts from stage 1 to the end till a new identity is created.

The first phase is the Pre-Merger which includes the planning of the merger and acquisition. There are many Human Resource issues along with other issues in the first phase. One of the issues that can be arisen in the pre-merger is to identify the reasons behind the Merger and Acquisitions. The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The second stage of integration in an M&A activity is extensive and complex. Whereas Stage 1 activities set the scene for M&A activity, those in Stage 2 are the ones that make the activity come to life. Clearly there are differences between a merger and an acquisition, differences between a merger of equals and non-equals, and differences between an acquisition with inclusion and an acquisition with separation. Then comes the last phase that is the solidification of the new entity. As the new combination takes shape, it faces issues of readjusting, solidifying and fine-tuning .On the third stage, HR issues like solidifying leadership and staffing, assessing the new strategies and structure, assessing the new culture are the main issues  which an HR Manager is likely to face.

OTHER HR ISSUES

People management plays a critical role in M&A. People issues like staffing decission, Organizational design,etc are most sensitive issues in case of M&A negotiations, but it has been found that these issues are often being overlooked. The range of key issues that HR needs to address if the chances of success are to be optimized includes:

  • understanding, prior to embarking on acquisition, the strategic rationale underpinning the deal, together with the external constraints and opportunities
  • ensuring that cultural due diligence is carried out prior to a deal, so that effective integration programmes can be implemented immediately post-deal
  • moving quickly but fairly in the appointment of new management teams at all levels in the business, and dealing humanely with the casualties
  • identifying realistic synergy targets, and exercising caution in estimating both the timeframe and the potential cost of redundancies
  • ensuring that due diligence provides comprehensive data on all aspects of reward, and that the costs of harmonization or 'pragmatism' are factored into the deal
  • establishing early a flexible project management process, and ensuring that it has the necessary time, resources and processes to manage the transition
  • communicating consistently, truthfully and when necessary
  • HR being integral to the M&A process from the outset as a credible business-partner offering practical, financially astute and timely solutions.

M&A's carry quite a burden for HR. As well as getting its own house in order integrating HR programs, reconciling redundant HR functions and working through two service and technology strategies it must also support and help other departments through their own individual transitions. As such, while the integration of the HR function, its systems and people programs is integral to a successful merger.

Conclusion

When going through M&As organizations usually focus primarily on the financial, economic and commercial aspects of the deal, and often only as an afterthought on people. Contradictory really, as most senior executives recognize that people are their greatest asset, but they just seem to overlook this mantra in the heat of a deal .The HR issues need to be treated as a key component of any merger, not on an ad hoc basis as they arise. The key to successfully managing many integration issues is effective communication. This entails devising a comprehensive communications strategy and implementing it with care and diligence. From the outset of negotiations, HR managers need to work with senior management to identify and troubleshoot these potential problems.

Reference

  • Mergers and Acqusition Jeffery A Krug.
  • Knotted Foreever..- Amit Pande & Sandeep  K Krishnan(IIM-A)
  • Leonard, Bill. "Will This Marriage Work?" HR Magazine, vol. 44 (April 1999): 34.
  • Marks, Mitchell Lee. "Let's Make a Deal." HR Magazine, vol. 42 (April 1997): 125
  • Bower, J. (2001). Not all M&As are alike And that matters. Harvard Business Review 79(3):92-101.
  • Schweiger, M.D. and Goulet, P.K. (2000). Integrating mergers and acquisitions: An international research review. In :Cooper, C. and Gregory, A. (Eds.) Advances in Mergers and Acquisitions Volume I, JAI, (New York, NY).
     


Miss Vandana Mohanty
Lecturer (HR)
Rajdhani College of Engg and Management
Bhubaneswar
 

Source: E-mail March 10, 2010

          

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