Maximizing Deal Value
Role of Human Resources in Mergers & Acquisitions


Prof. Harshada Mulay
M.A, Diploma in Personnel Management & Industrial Relations, Masters in Personnel Management
Faculty in HRM & OB
Vivekanand Education Society's Institute of Management Studies & Research
Chembur, Mumbai

Mergers in India have moved to centre stage today, with the recent action in the air. The Competition Commission of India has announced that it will introduce measures to critically scrutinise all mergers. The Union Aviation Minister has had to come out with a statement that the recent Jet-Sahara merger will not create a monopolistic monster in the sky. Both Ernst & Young and Kotak Mahindra Capital are tomtomming that they are topping the Bloomberg League Tables, the first in terms of the number of deals (50) and the latter in total deal value ($2.9 billion).

The Jet brass has indicated that the Sahara folks will have to shape up or ship out. The airline has about 5,000 employees across the country, against Jet's 7,000. Even the Sahara pilots, much in demand because of a talent crisis in the sector, are getting together to ensure that their seniority and pay scales are not affected in the new entity.

Why were the pilots worried? They could walk out any day and get another job. Very probably they will get a handsome raise to boot. The reason is that any merger or take-over creates uncertainty. Air Sahara has only around 200 pilots. True, the Sahara Group has promised to absorb the unwanted in some of their other companies. "But the very fact that you are unwanted can be traumatic," ssid Mumbai-based HR consultant Shashi Rao.

Why such a woeful track record? HR consultants say people in charge of acquiring another company often forget that mergers are not just about balance sheets, cash flows or marketing synergies; they are about people making the synergies real.

Completion of the acquisition and integration--operationally and culturally--of the two companies have required human resources to play a major role. The work is still going on: Although most of the integration plan has been implemented, the human side of the integration continues to evolve.


1. Development of preliminary organizational designs and identification of the top three levels of management
2. Assessment of critical players and deployment of appropriate resources in the new company
3. Retention of key people and separation of redundant staff
4. Development of a total rewards strategy for the combined companies
5. Communications strategy development and implementation
6. Integration of payroll benefits and HR-IS
7. An ability to do all of the above with speed.

The upheaval associated with any merger or acquisition is a prime opportunity for HR to demonstrate its knowledge and skill in the management of human capital. HR is an intrinsic part of the integration team in an m&a because of its ability to evaluate the compatibility of corporate cultures and different options for combining enterprises. HR must also be the trusted source of information for employees about what the m&a means for them.


* Take definitive action and make decisions quickly--the secret for holding onto good people.
* Be candid with employees, and treat them with respect. Let them know that the combined entity will be a more valuable organization.
* Whenever possible, use ownership of the company as represented by stock options and stock grants to get everyone pulling in the same direction.
* Be honest about the people decisions that must be made.
* Treat those leaving with the same respect and attention as those staying.

Rather than take a risk-averse, wait-and-see attitude that can lead quickly to irrelevance, HR executives should be integral to all phases of due diligence, to easing the transition, and to focusing employees on the creation of shareholder value as soon as possible. Taking a wait-and-see attitude will lead to an irrelevant role for HR. Instead, the role must be orchestrated so that its value becomes integral to the deal.

Many companies report that their mergers are successful but admit the end results aren't as successful as they could have been. Recent studies place the success rate of merged companies at 30 to 60 percent, depending on what criteria you measure. No matter how flawless a deal seems on paper, the results are often disappointing. Most merged organizations lose 1 to 10 percent of their market value in the first year after the merger.

There's a lot to learn about managing the transition period, optimizing short-term performance, keeping the highest percent of talent, and integrating processes and systems. Companies that don't address those issues may suffer a loss of profitability, top talent, and confidence in leadership decisions.

Although a multitude of factors can contribute to a disappointing merger or acquisition, success depends ultimately on the effective use of people.

From the due-diligence stage through the identification and appraisal of people to the management of culture issues and communication, people issues impact every step along the way. Such issues are essential and integral to the process and must not be treated as an afterthought. It's unrealistic to assume that one business can absorb another without being altered. When two companies merge, one may change more than the other, but both will change.

Individually and collectively, to ensure that the management talent required to define the future of the new company is there to steer the chosen course.


Beginning at the start of the process, HR must orchestrate its role in due diligence. Due diligence is more than a financial evaluation. It's essential to assess the valued human assets that never show up on a balance sheet, in order to determine the true value of the deal and its likelihood of success.

Job number 1 is identifying the key people and taking immediate steps to keep them from walking out of the door the moment the deal is announced. Each function has to be understood, including the field organization of stores or salespeople if applicable. Often, what exists in the field is overlooked, yet it's there that the true business of a company is conducted. Each key individual should be assessed against a set of clearly defined competencies that are aligned to the needs of the new group.

When the right questions are asked before a merger, HR isn't left to play catch-up for the first six months. The key areas of HR due diligence:

  • Culture
  • Employee demographics and competency analysis
  • Key talent analysis
  • Benefit and compensation structure and how it compares with that of the parent company
  • Any legal issues relating to outstanding employee litigation, workers' compensation, and, where applicable, union contracts and issues.

Staffing the new organization with the right people requires systematically determining the roles needed and identifying the people who are best able to fill them. Valuable people, central to the success of the integration, may be lost because staffing decisions are made without a plan, without any thought to an equitable process of assessment, and without taking the future needs of the business into account. It's often better to obtain a third-party assessment of key players in both merging organizations, using consistent criteria and thus getting more buy-in to the outcomes and avoiding appearance of favoritism.


By understanding the similarities and differences between the two companies early in the game, it is possible to avoid a divorce before the marriage vows are taken. Should incompatibility be too great, it may even be wise to call off the wedding.

To understand the cultures involved, you have to look at the history of each company, its reputation in the industry, and its products and services. Although those are fixed, other factors that influence how a company operates and how employees, customers, and other stakeholders interact are critical to the effective functioning of the newly formed organization. Even location can affect the fit.

Another issue to consider is where authority lies and how decisions are made. Are the companies bureaucratic or freewheeling? Formal or informal?

Finally, there's the emotional element. How do employees feel about the company, management, and the future? How open are they to the new strategy? What employee behaviors are the norm, and what values and beliefs drive those behaviors? How much job satisfaction do people feel?

It's important to identify cultural areas of dissonance so that people can dispel misconceptions and begin creating a culture that's right for the new organization. That's often left until after the final papers are signed, which is risky because culture mismatches can be the Achilles' heel of many deals.

How do we identify cultural differences and similarities and learn to leverage them? Often, the most seemingly inconsequential programs and policies have great symbolic impact. Practices regarding casual dress, attitudes about long hours, and how offices are apportioned are deeply ingrained and must be dealt with.

One can't consider culture compatibility without touching on the different views that the acquirer and the acquired have about the new company. The acquirer assumes that the new company will closely resemble the original but with greater mass and capabilities. The acquired company expects that many of its strengths will be crucial to the new company (after all, isn't that why it was acquired?).


Without a clear plan and timetable, a merger or acquisition can fail. The plan should be broken down by function: What needs to be done? Who's going to do it? When will it be complete?

The integration effort must be led by a full-time dedicated team. There should be an integration project manager free from any routine responsibilities, whose sole job is to manage the overall plan. The integration manager needs a special set of competencies (including project management), broad experience in the parent business, and specific functional expertise relevant to the new business. He or she should be willing to make tough decisions quickly, handle conflict, and work well across functions and management levels. Skill as a communicator is essential.

Fill your integration team with flexible, creative, and enthusiastic people. Take them completely away from their usual jobs so they can devote themselves to the team effort. Pick the best people, not just the available people. Integration leadership should be invested in the continued development of the new organization and be in for the long haul.


* Develop strategies for retaining key people
* Examine compensation and benefit programs
* Identify barriers to a merged culture
* Create and execute a comprehensive plan for communicating with the new organization.

All of the change-management expertise in the group should be called upon to address employees' anxieties about the merger.


The need to communicate, communicate, communicate extends well into the latter stages of the integration but must begin with the first announcements. Often, communication efforts are fragmented with different messages and information flowing to investors, employees, managers, and customers. Messages to all stakeholders must be well planned and consistent. There can never be enough repetition. The message must be heard again and again to be fully understood.

Two-way communication always helps comprehension. All avenues should be used: written, one-on-one meetings, and small- and large-group meetings. People need a chance to probe, discuss, ask questions, and arrive at a personal level of understanding that they can't get from a piece of paper.

The overriding question is, "How does this affect me?" Speed in communication goes along with speed in the total integration. Don't leave people waiting for the other shoe to drop. Talk to them even if you don't have all of the information, rather than let the grapevine fill the communication void. Reduce anxiety by being upfront and honest.

Accessibility to managers, officers, and directors is critical to satisfying employees' hunger for information. During our acquisition, we developed an excellent tool, Rumor Buster, which was produced and distributed weekly to counteract rumors. Sometimes, it's enough to clarify the message or give more details; other times, it requires a  360-degree turnaround explanation for people to finally get the right information. Senior managers must remember that while they may have been involved in the acquisition for months, employees have only begun to acclimate themselves to the new situation. The information they're receiving is new to them.

The goal of communications should be not only to inform, but also to engage employees' hearts and minds. By presenting a clear vision of the future and gaining commitment to it, the new company begins to build the loyalty that's crucial to survival.

In the seven-step process we used (see page 63), we were careful to avoid statements that could be dismissed immediately as propaganda--such as, "We're not going to change anything." "We respect your autonomy." And "We want to get to know everyone. Don't worry, there's plenty of opportunity for each of you."

Statements like those are remembered, and nothing hurts the solidarity of the new company more than communication that is later contradicted.


There are two kinds of synergies that companies seek through a merger or acquisition: growth and economies of scale.

Growth. The role of HR is to identify key human assets in the target company, set up retention arrangements to keep critical talent, and create development plans for people to prepare them to achieve the anticipated corporate growth. Other issues needing attention to maximize the growth synergy are reward and recognition programs, team development, and integration of benefit and compensation programs--ensuring they are competitive to attract and retain desirable employees.

When mergers are contemplated, synergy and value often depend on the effective transfer of knowledge. As knowledge becomes an increasingly important corporate asset, it's critical to capture the best practices of each company for maximum return. It starts with the relatively easy task of identifying the people and processes needed to keep the business operating as usual. It moves to training on systems, specific job skills, and procedures. Ultimately, it involves capturing the tacit knowledge and informal networks that enable an organization to get things done.

Economies of scale. That's often a euphemism for firing people. But to achieve synergies, there must be an analysis of what the end-game organization will look like and which positions are truly

needed. Once that's clear, assessments must be done to determine who stays and who goes. Redundancies must be eliminated. Not only do job skills need to be determined, but also personality and motivational factors must be considered. The fit of a person with the new team and new culture can greatly affect his or her likelihood of success.

Individual job and career objectives must be discussed, and employees must be informed of their options for the future. The cost of severance packages and outplacement services should be factored into the equation. Even issues such as where to house the newly acquired employees become sensitive and costly. It's essential to have a well-documented and impartial approach to such issues in order to avoid the appearance of favoritism.

Because people are anxious to know their futures as soon as possible at the start of the integration process, we created a definitive plan with specific dates and a promise that each person would be spoken to within week 1 and everyone would know their alternatives for the future within 30 days.


There is no one way to retain people during a merger or acquisition. You can make offers to certain people and if they accept and want to stay, that's fine, If they don't, that may also be fine. But when you're talking about key people, the story changes. By the way, "key people" doesn't always mean top executives. Executives may be key in some respects, but there may be other employees who are more important to the workings of the enterprise. If you lose them, you can end up spending a lot of money and still be unsuccessful. Whether they're technology specialists, marketing people, or top management, you must make certain they'll stay.

The next question: How long do you need them? Some talent may be needed only during the transition period, after which their responsibilities can be handed off. Others may be needed for much longer. Each person must be considered, and a plan must be put together for that person. The kind of agreement that's drawn up and how far it goes to keep key talent will differ from organization to organization. But it's best not to give away too much or keep someone who will never adapt to the new structure, simply because he or she is talented or highly thought of. You may have to let people go as a tradeoff against disruptive attitudes or constant conflict. The appropriate fit of any one person in the new culture can be as critical to success as talent.

frequently used retention tool is the bonus. Unless you plan to give one to everyone, you run the risk of having some disenchanted employees feel undervalued. But for the people who are eligible, a bonus can make them feel special and entice them to stay for the period covered by the payout. You need to be clear up front regarding how far the program extends and what levels of payout there will be. That shouldn't be kept secret and must be perceived as fair and equitable, or it will generate negativity.

The new structure of the merged companies may be different, and certain jobs may not exist or be available because incumbents are staying, but there is wisdom in keeping the talent in the top 10 percent of the population, even if their current jobs no longer exist.

Find a place for them, and retrain them if necessary. Talented people tend to welcome the challenges of a new role, and they enjoy career growth and added responsibility.


Once the thrill of the deal is over and the reality sinks in, the mood may change from exhilaration to remorse as the workload grows and problems arise. People can be confused and fatigued. The direction might be unclear, people will be working harder and longer, and new people may need more time than anticipated to get up to speed. Acknowledging that and prioritizing the problems make the situation more manageable. People need permission to voice their feelings. Once out in the open, their emotions can be dealt with more easily.

Mergers and acquisitions don't follow a carefully laid-out linear progression. As much as we might desire a logical, well-ordered approach, when two groups combine, the process takes on a life of its own. Initial plans and assumptions have to be adjusted, and focus can be lost as critical and immediate problems rear their ugly heads. Executives are often pulled away to deal with the next business issue, reducing their visibility and giving the impression they're no longer concerned about the merger.

The good news is that people can tolerate a degree of uncertainty in their responsibilities if they believe the business direction is clear and the chances of long-term success are good.


1 Integrate fast. Realize synergies and efficiencies sooner rather than later.
2 Dedicate the necessary resources.
3 Make tough decisions about organizations and people quickly.
4 Restructure and re-recruit top talent.
5 Set clear, short-term objectives; celebrate successes as you achieve them.
6 Communicate strategically; be open and forthright.
7 Allow the acquired company to conduct business. After all, that's why you acquired it.
8 Manage the culture integration carefully.
9 Focus on what each event means to individuals.
10 Keep your sense of humor.
11 Seven-Step Communication
12 Develop macro messages.
13 Conduct analysis of key audiences.
14 Produce micro or issue-specific messages.
15 Select media mix.
16 Produce strategy timeline.
17 Implement strategy.
18 Measure the effectiveness of communication strategy.


As the economy brightens, experts predict that the recent flurry of mergers -- including high-profile mega-mergers like SBC Communications/AT&T and Procter & Gamble/Gillette, Oleg Deripaska's Russian Aluminum and Viktor Vekselberg's SUAL -Aluminum Mega Merger -- will increase throughout 2007. And this time around, unlike the last merger-frenzy period in the late 1990s, businesses seem to have learned that they need to involve human resources early in the process.

Prof. Harshada Mulay
Faculty in HRM & OB
Vivekanand Education Society's Institute of Management Studies & Research
Chembur, Mumbai

Source: E-mail October 10, 2006


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