Mergers and Acquisitions: The Human Factor

The companies worldwide have experienced a tremendous increase in M & A activity. In the year 1999, 29,361 deals were consummated in USA at a value of nearly three trillion dollars. Recent studies have revealed that millions of employees have been adversely affected by such M & A activity. In addition to the impact on human resources, mergers result in many common corporate and societal impacts. Top-level management must carefully examine the negative implications of mergers and acquisitions in order to respond effectively to them. In a research study published by the US based Change Management Group CMG, an HR research company sought (1) to out-line the most common impacts that mergers have on employees and (2) to recommend actions that would help managers guide their companies through the merger process in the healthiest and most effective manner.

M & A Impact

After being closely involved in the integration of a number of Fortune 500 firms, as well as interviewing merger participants and experts, the CMG found a common pattern in almost all of the mergers. The Merger Impact Model in Figure 1 illustrates the most common types of implications discovered in their study. As the model displays, M & A activity leads to merger stressors, which may result in several impacts. On the individual level, these are manifested as physiological and psychological symptoms. At this level, it does not matter if the merger is successful; the effects can be just as real. On the corporate and societal level, the impacts are much more long term. According to CMG a clear comprehension of the model will assist executives in forecasting many of the most serious problems that may be faced in a M & A scenario.

M & A and the individual?

Many of the stressors that accompany merger activity are apparent. Most people in the workforce can easily visualize job uncertainty, loss of security and transfers. However, stressors such as new performance evaluation criteria, changes in reporting relationships, and loss of control over one's career have not been widely debated and appreciated. A variety of the physiological effects experienced by employees of merging firms are well documented: headaches, insomnia and stomach upsets are often symptomatic of the pressures that occur in the general business environment. This research also revealed other physiological impacts, which are not well documented, such as greater alcohol and drug consumption, higher levels of sick leave and medical insurance expense and increased accident rates. We can assume that, in general, any physical disorders affecting employees pre-merger will only be made worse by the stress of the merger. The M & A activity also contributes to the creation of a large number of psychological challenges for the employees involved. Depression and anxiety are disorders that occur in certain employees during and after the merger. Other less familiar psychological symptoms, including lifestyle instability, loss of self-confidence and marital/family strife, appear to occur regularly in certain segments of the merged workforce. If managements were sensitive to these common problems and adequately prepared for them prior to the merger, the resulting loss of talent, energy and productivity will be reduced.

The Impact on Corporates and Society

An extension of the individual effects are the impacts on corporations and society. The sheer magnitude of the M & A movement in the last decade has led to the neglect of the careful analysis of the long-term implications on the corporate sector and the society at large. The CMG study of the human element in mergers and acquisitions resulted in five major findings:

1. America's corporations have been largely blind to the long-term consequences of mergers and acquisitions for their human resources.
2. Clashes of culture between the merging companies can greatly undermine the original value of the merger.
3. Inadequate handling of formal and informal communication systems can significantly undermine the integration of resources within the merged companies.
4. Most human resources professionals are inadequately prepared and trained to play an important policy role in mergers and acquisitions and, consequently are greatly underutilized.
5. Corporations are beginning to awaken to their professional and social responsibilities to employees of the merging firms.

Failure to consider long-term consequences

Corporations have displayed a great deal of wishful thinking about their ability to merge large, complex organizations into one effective streamlined entity without suffering a variety of personnel problems. Generally the firms' top management's attempt to blend the energies and egos of tens of thousands of employees within unrealistic time limits. The amount of time and energy needed to successfully merge two sophisticated, large organizations, however, is more likely to resemble the planning and execution of the Olympics, accompanied by the resultant clash of cultures from many elements attempting to work together toward one goal. This corporate failure to consider and plan for the long-term consequences can result in financial problems, loss of employee loyalty, lowered employee morale and reduced productivity.

Financial problems

One long-term consequence that is rarely seriously considered prior to a merger is that between 60 and 80 percent of all mergers are financial disappointments, based on their stock price five years later. This generally leads to an increased competition over limited resources within the merged corporation. The stresses of a merger can cause even a previously profitable firm to crack under the pressure of organizational changes. It is not unusual for the parent company to find itself forced to sell part or all of a recent acquisition on account of inadequate financial performance. The worst possible scenario occurs when the parent company takes on too much debt for its balance sheet and is forced to sell the most profitable portion of a recent acquisition. This action can leave both the merged firm and the divested subsidiary in a financially weak state.

Loss of employee loyalty

One more common consequence of many mergers is a loss of loyalty from employees who view themselves as the "losers" in the merger process. Such employees can range from a secretary, who resents a physical transfer, to a senior vice president, who has been demoted or laterally transferred to a less important job. Each of these people bears their own personal grudge that colors their actions for years to come. They may even "retire on the job" if they believe that they have been with the company for too many years to easily change corporations. The "golden handcuffs" of accrued benefits might result in the retention of employees who are no longer making a positive contribution. One of the key dilemmas in any merger is how to retain the most talented employees, while reducing the "dead wood" found in any major corporation. Merged companies generally observe that the very employees they most value and wish to retain are the first to quit. An increase in the turnover rate of productive employees is one of the greatest costs of corporate mergers. This is particularly true of the acquired firm.

A Wall Street Journal article estimated that between 50 and 75 percent of executives in merged firms plan to leave the new organization within three years. Another problem arises when the parent company feels compelled to bring about a reduction in the team size in order to streamline its operations. This forced reduction can lead to a series of wrongful termination lawsuits. Executives not only become distracted by the merger of new operations, methods, standards and employees, but also by the legal preparations to defend the company. Many executives described themselves as "extremely stretched" during this part of the M & A process.

Reduced Productivity and Lowered Morale

M & A's can also cause a significant drop in employee morale. The resulting loss of creative power can cripple a corporation that is competing within a rapidly changing industry. Moreover, employees often start talking to their friends and colleagues about how terrible it is to work at the "XYZ" company. They discourage others from joining the firm. Unfortunately, senior executives are often too involved with the merger to notice this pervasive morale problem. Probably the most common long-term consequence is the productivity problems that develop from the blending of new systems and standards. Almost every control system in the acquired corporation will need to be revised to meet the standards of the parent company. The mere introduction of new financial and purchasing requirements can severely affect a factory, add to this the effects of laying off a significant percentage of its workforce.

Corporate Cultural Clash

Clashes of culture between the merging companies can present major problems as well. The Wall Street Journal profiled the differences in culture between the "button-down" executives of Pillsbury and its Miami-based Burger King subsidiary. The Burger King executives were described as favoring "brighter clothes, darker tans, and flashier cars." Internally, corporate personnel have gone so far as to nickname Burger King "Miami Vice" and Pillsbury "Minneapolis Ice."

The cultural differences are very obvious when one visits Pillsbury's high-rise headquarters where "dark suits are the corporate uniform, and the conservative earth tones dominate the decor. Pink, on the other hand, is the exterior color for Burger King's $40 million tropical headquarters at the edge of Biscayne Bay." This clash of cultures is so common that the public accepted with nonchalance the announcement that General Motors bought out Ross Perot's stake in GM and Electronic Data Systems for $700 million because the differences of personalities and cultures had become intolerable. When there are such broad cultural differences between corporations, it affects decision-making and communication between the two companies. This aspect of the merger process is extremely difficult to define, but it pervades all aspects of the new relationship.

Communication Problems

Our analysts found faults in communication systems at almost every instance in badly merged companies. The Securities and Exchange Commission (SEC) in US severely restricts the types of information that can be shared internally or externally prior to a completed merger. Employees will know that something is happening, but accurate information will not be available to them. In many cases, senior managers were accused of lying to their employees about the pending merger. In one case, a senior officer of the firm denied that a merger was even under consideration as little as two days prior to formally announcing it to the same employees. Circumstances such as these create the most destructive types of rumors and can compel normally well-balanced employees into taking poorly considered actions. Many managers find themselves learning more about their corporation from reading the daily business section of the newspaper than from their own superiors. The pre-phase to a merger is a particularly troublesome time for any corporation. Accurate information is most often held by a small group of senior officers and their external consultants, who are unwilling to have any "leaks" that might jeopardize the proposed merger or lead to "insider trading." Consequently, senior executives without a "need to know" are often excluded from having the very information they require to properly plan for a major change in ownership. These excluded executives find themselves feeling alienated, frustrated, and defensive when employees begin flooding them with questions about the future.

Underutilization of HR Professionals

David Merrell concluded, "Human resource problems are at the heart of many M&A failures - so why, when it comes time to negotiate, are these executives often left sitting on the bench?" He concluded that human resources managers are seen as softball players in the hardball game of mergers and acquisitions: "The feeling is that personnel can stand by to clean up the mess after the starting lineup has nailed down the victory." As long as human resources professionals are viewed by many in the top management as not being able to play in the corporate big leagues, this situation is unlikely to change. Nevertheless, it is the rare executive who has had any training or experience in handling the HR issues that result from the merger process. Often, senior managers are forced to make major human resource decisions without corporate guidelines, standards, or training. These decisions may involve terminations, pre-mature retirement, transfers, demotions, promotions, layoffs, relocation of work, or major conflicts between employees. Infact, we are of the opinion that the mergers and acquisitions raise the ultimate human resources issue for any executive. Even though mergers and acquisitions may represent the ultimate human resource challenge, most personnel professionals are ill equipped to participate in the process of coordinating the two companies. It is the rare human resources specialist who has had significant B-school training or actual experience in large-scale organizational change, organizational development in diverse corporations, or M & A strategy.

Increase corporate responsibility

Our final revelation is that merging companies are beginning to become more aware of their responsibilities to their employees. This change in emphasis has occurred on account of number of major corporations finding themselves faced with the prior described problems after their first attempt at merging with another company. Companies are beginning to appreciate that mergers cannot be solely dominated by law firms and investment bankers. Lawyers and financiers make the deal, but it is line managers who make the merged firm work. Companies are increasingly involving managers in the planning processes of any major organizational change. Mergers by their very nature are the most profound organizational change undertaken by corporations.

Recommendations: Contingency Planning

Contingency planning is at the core of any sensible merger or anti-merger strategy. The days when very large corporations could assume that it would be impossible for another company, perhaps even a smaller one, to attempt a takeover are over. Historically, corporate contingency planning has focused on potential takeover targets rather than on defensive strategies. In order to adequately protect its capital and human assets, no well managed firm can still afford that type of thinking. Companies must plan for the possibility of a hostile takeover. Regardless of the outcome of a takeover attempt, it has become a law of mergers that human resources will bear the ultimate cost. If the takeover attempt fails, then overhead and human resources will have to be cut to pay for the successful defense of the company. Thousands of employees have been laid off from corporations that have been described in the business press as "winning the battle." If the takeover is successful, then a large percentage of employees from the "losing team become redundant" and subject to dismissal. Thus, the employees of any firm that is a merger takeover target face a "lose-lose" situation. We recommend that major corporations form a merger planning team to be coordinated by the executive staff. This team would meet on a regular basis to prepare and revise contingency plans. Along with legal and financial representatives, employees should be represented by senior HR professionals, specially trained in M & A work. In addition to the legal and financial issues, these committees should address problems such as:

(1) The cultural issues;
(2) The designation of cross-functional merger integration teams;
(3) Employee retention;
(4) Organizational development and change strategies.

Specific scenarios could be developed based on the most likely companies to be acquired and/or the appropriate defenses to be mounted against unwanted suitors and raiders.

Training and Development

The output of the contingency planning teams should include pre-merger and post-merger training and development packages. The pre-merger training and development plans should address the needs of senior managers by fully acquainting them with the nuances of the merger process. This training should be undertaken even if a merger is not contemplated, for, once the merger process starts, it will be impossible to capture the attention of senior executives. The pre-merger training program could be as simple as having external experts visit the corporation for seminars and workshops. This would increase the overall appreciation of the issues at stake and provide senior executives an opportunity to preview the capabilities of outside experts who might be called back during an actual merger.

The post-merger training package should be prepared so that it can be used when required. The target segment for this program will be the top-level management. This program will address issues viz; managerial communications, key employee retention, management of change, evaluation criteria for selecting new management and operation teams, resolution of corporate culture conflicts, team building and organizational design issues.

Of course, majority of companies do not have the types of resources to fully staff such a training program internally. The HR staff should identify and assess the expertise available from consulting cos, B-schools and individual practitioners prior to the merger. Thus, the management team staff would have a fully detailed contingency plan of the steps necessary to manage the merger or anti-merger process, as well as adequate external resources on call. We found it interesting that few companies conduct this type of contingency planning unless they had fought off a previous hostile takeover attempt or had badly managed a takeover attempt of their own. There is a lesson to be learned from those firms.

Post-merger integration teams

After a merger has begun, we recommend the setting up of the post-merger integration teams. The membership of these teams should be outlined in the merger contingency plan. The actual staff members from the acquiring firm can be named and made public prior to any attempted merger. Their counterparts from the targeted firm could be identified by position in the plan. Those executives and managers can then be singled out for special merger training as outlined above. They would enter the merger process better informed and more confident about their abilities to handle this complex problem and opportunity. These integration teams would be entrusted with the responsibility of making the merger work. We recommend establishment of teams in the following domains: policy, legal, financial, human resources, security, facilities and equipment, operations and manufacturing, marketing and communications. These teams provide an excellent opportunity for human resources personnel to act as facilitators and guide the decision-making process. This puts them in a unique position to speak on behalf of the employees at every policy making level. The labour pains associated with the new corporation can be kept within reasonable levels with excellent planning, insightful training and properly functioning integration teams. With companies that have taken this approach, we found that communications were more straightforward, rumor control better managed, and misunderstanding kept to a minimum.

Human resources action teams

Despite the best planning, HR conflicts will break out in the most unexpected places and times during the merger process. To deal with such problems, we recommend that the HR department put together "action teams" of four or five professionals with special skills to assist managers. For example, if in fighting breaks out between sections of the acquired and acquiring firms, an industrial / organizational psychologist might be called upon to guide the groups in acquiring conflict resolution skills and in participating in a team building process. If the issue revolves around selection of employees to stay with the new enterprise, then staff skilled in evaluation and compensation could be assigned to the line manager as an internal consulting team. The earlier work done by the contingency planning teams would provide the senior HR executive with a pool of internal and external resources to call upon in such situations.

Merit selection

We strongly recommend that employees be selected on the basis of merit to fill key positions in the merged firm. If the selection process is conducted with fairness and integrity, then both firms will gain better staffs, higher morale and greater productivity. An alternative strategy, and one that is practiced too frequently, could be termed "to the victor go the spoils." In a banking merger, employees indicated "they began looking for another position as soon as their boss/mentor was terminated." Their reasoning was "if they would treat him that way, what will they do to me?" Whenever large numbers of an acquired firm's employees are fired as a result of a merger, the "survivors" can be expected to spend more time job-hunting in the first year after the merger than contributing to their new parent company. For these reasons, we recommend that acquiring firms seriously explore the adoption of a "meritocracy" when selecting the future leaders of an expanded corporation.

M & A HR Issues in the Indian context

The impact of the M & A process on the employees is found to be similar irrespective of the geography and location of the merger activity. In India too, we have experienced the effects and defects of the merger process. In the case of Thermax System Software TSS nearly 2/3's of the employees left TSS after it was acquired by Global Tele Systems. A few years ago the joint venture JV between Proctor & Gamble and Godrej collapsed due to the lack of HR synergies in the two organizations. When Sify's e-business division was merged with Satyam , the merger created a whole lot of technical confusion, which was caused on account of differing views of the employees on issues related to technology integration and development practices. The HR department was found to be clueless and solution less in this situation. The Grasim and L & T Merger has also thrown up interesting HR issues while it is widely perceived to be a value proposition i.e. L & T's cement business is been acquired by Grasim implying there by that the cement business will go into stronger hands. Moreover L & T will focus on its core engineering business. It will be interesting to see how the L & T employees cope with the complicities of setting up employees shareholders trust. We are sure that the future is full of challenges in the M & A space.

Conclusion

Progressive corporations have realized that a merger is in name only without the positive support of the newly acquired staff. Buildings, equipment and patents can be claimed and controlled, but the creative energy and productive forces of people have to be earned by the new parent corporation. Companies willing to properly prepare them by following the steps outlined in this article will create strong, profitable organizations as a result of their merger.

Author: Mr. Sundeep Bedi,
CEO
Knowaysys Technologies Pvt Ltd, Pune
reachus@knowaysys.com

 

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Sundeep Bedi’s personal Profile

Sundeep Bedi is a 36 year old CEO of Knowaysys Technologies Pvt Ltd, a Pune based IT solutions, product development and management consulting company. Mr. Bedi has over fifteen years of professional performance experience. He started his career with Parallel Track Inc. a logistics solution provider. He later moved to Microware Consulting and Training Center and IT Education services company where he worked as a center manager. From 1994 to 1999 he was working with Wavelet Technologies Pvt Ltd in the capacity of Manager Business Development. He has been working with team Knowaysys eversince its inception in March 2001. In addition to his official roles SB has also worked as a consultant rendering his advisory services in the area of Financial services, Technology Management. TechnoMarketing fiscal policy development and economic management several fortune five hundred companies, Indian corporates, Multilateral financial institutions and governments figurein his consulting client list. He is also a freelanced journalist with published titles in Financial Times, London, Wall Street Journal, International Herald Tribune, Times of India and Maharashtra Herald.

He is also the editor of www.premiumpolicies.com a web based insurance and risk management information service. Moreover he is also the editor of www.knoweconomics.com an internet based economics research engine which is shedule to be launched on May 4, 2003. Moreover he has the recipient of the prestigious FIE Foundation award for his pioneering contribution in the field of accessibility computing i.e. for the development of a Indian language speech synthesizer a Braille data entry system and obstacle detector prototype for the benefit of the visually challenged. SB believes that disability can be noticed but ability must be recognized.