Why Do Mergers Go RIGHT?
Walker, James W., Price, Karl F., Human Resource Planning
A great many articles and studies on mergers dwell on why mergers fail to achieve their potential. A common theme is that people-related issues were not addressed early enough or effectively enough in the merger process. For example, a Forbes survey of 500 CFOs found that the top reasons why mergers failed were not financial issues, but people-related issues: incompatible cultures, inability to manage the acquired company, inability to implement change, synergy overestimated, failure to forecast foreseeable events, or clashing management styles or egos.
Mergers often go right in part because HR leaders applied expertise, opportunity, and responsibility by working with senior management to ensure mergers and acquisitions are well-conceived, planned, and executed with regard to the people involved or affected. As leaders, we can ensure communication of a clear business rationale, attention to people-related risks in the "deal," and effective integration planning. A merger can be effectively implemented if vital talent is integrated and retained, commitment and performance are maintained throughout the transition, and people-related systems, processes, and organization are aligned with the new entity's strategic direction. Seven questions should be addressed:
1. Does the merger make sense?
2. What are the people-related issues?
3. How will we integrate and retain talent?
4. How will we integrate cultures and transfer knowledge?
5. How will we maintain commitment and performance during the merger process?
6. How will we align people-related systems, processes, and organization?
7. How will we implement the merger quickly and effectively?
Does the Merger Make Sense?
As part of the leadership team, HR leaders need to articulate a clear, convincing business case for the merger. We can influence communications and perceptions regarding the merger rationale, and thereby affect implementation success.
Many companies believe mergers and acquisitions are a key means of growth. By combining, companies may gain market share, new markets, a wider range of product offerings, control over the supply chain, and cost efficiencies. What matters is not just being bigger; a greater capacity to compete effectively can create greater shareholder value. People may not always agree with the merger rationale, but their understanding of it guides decisions and actions, motivates them to devote energy and time to change, sustains performance and retention during the merger, and develops enthusiasm for a better future.
Merger announcements should not simply be cliche. Stating that the merger will enable us "to become more competitive globally" or to "become the technology leader in our industry" says little to employees. Beyond increased shareholder value, an acquiring company should define the specific benefits expected and how they will be realized. Managers need to evaluate assumptions regarding costs, risks, and benefits early in the process. Companies typically expect to gain:
1. Revenue enhancement: New customers, new markets, marketing muscle, new products or development capacity, customer services and capabilities, access to new distribution channels, sales force efficiency, and cross-selling
2. Operations and cost improvement: Personnel costs/headcount, reduction of overhead duplication, supply chain, procurement, manufacturing, warehousing and distribution, new product development costs, outsourcing
3. Strategic positioning: Market leadership and the benefits of being number one, protecting current position versus competitors, vertical integration (e.g., ensuring ready supply sources, distribution channels, or customer access)
Merger success is more likely when a company explicitly evaluates the synergy expected from a merger. KPMG recently found such evaluation raises the chance of success to 28 percent above the average among mergers. Only by determining what and where value can be obtained from a deal can companies avoid "bad" deals and be in a position to work out how, during integration planning, benefits will be gained
It is also important to clarify whether the action is a merger of "equals" or actually an acquisition. Cisco unabashedly integrates acquired companies into the existing Cisco culture and business model. Other companies approach a merger as equals. In some of these cases one company dominates as the merger progresses. Occasionally a company assumes it is acquiring a company, but the partner emerges as the stronger party and dominates the management of the merged business (effectively a reverse takeover).
What Are the People-Related Issues?
Early in the merger process, we can help identify people-related issues by raising questions through due diligence and beginning integration planning even before the deal is done. An HR leader should press for active HR participation on due diligence and merger planning teams.
Once a company is interested in merging or making an acquisition and makes initial overtures to the candidate, it usually studies the business intensively. Areas of study include factors affecting value, financial risks, and implementation opportunities and pitfalls. People-related factors include:
1. Retirement, pension, or other liabilities
2. Executive contracts or other constraining compensation arrangements
3. Employee relations risks, including union relationships, contracts, and issues
4. Legal actions or compliance issues
5. Availability of capable management talent for key roles
6. Employee commitment vital for the retention of talent and sustained high performance.
Leading companies (e.g., General Electric, AT&T, Lucent Technologies, and Cisco) apply protocols for the analysis of issues in pending deals. GE even provides an online guide for managers that includes anecdotes gleaned from past deals, names of contacts, and tips for forming integration teams.
How Will We Integrate and Retain Talent?
HR leaders can help senior management identify, involve, and assess key executives and other critical talent vital for the success of the new business. We may take the lead to:
1. Define the future roles of executives in both merger partners (particularly the executive team of an acquired company)
2. Define the management capabilities required for the future success of the business
3. Identify the individuals who will be critical and any capability gaps that will need to be filled
4. Determine the actions required to retain key individuals through the merger
5. Establish ways to share knowledge and learn from each other
Capable leadership is vital for the success of a merger. The selection process should be based on an objective assessment of skills and competencies, not on political compromise. The process for appointments should be seen as fair and rational. It should also be timely-moving quickly to get the team in place and accelerate integration.
Few issues stand out more than the choice of managers for the new, combined organization. A merger of equals (beyond the financial and tax implications) implies management representation from both parties. When the merger of Glaxo Wellcome and SmithKline Beecham was announced, the top five executives were named and within a month the executives to fill the remaining nine senior positions were named. Of the 14 top positions, executives from each company filled seven. At Chase Manhattan, the top 15 executives were named with the announcement, and the next two tiers of management were in place within four months.
A company needs to work to ensure its key talent stays through the transition-and ideally five or 10 years beyond. John Chambers, CEO of Cisco, said, "When we acquire a company, we aren't simply acquiring its current products; we're acquiring the next generation of products through its people." Employees in an acquired organization may not feel connected to the new organization. What will it be like in the future? Will I want to be a part of this culture? Can I do what I have been doing? Will it be better or worse than before? People like a positive picture of the future, and how they fit into it.
As HR leaders we can lead the way for special compensation arrangements, including retention bonuses and special grants of stock options. We can emphasize involvement of people and effective communications. We can help managers target the individuals most vulnerable (likely to leave), learn their individual concerns, and customize solutions for them.
How Will We Integrate Cultures and Transfer Knowledge?
We can examine culture differences and identify issues that will affect merger success. Even in the same industry, companies that seem compatible may have dramatic differences in values and the way they function. These need to be understood and dealt with astutely. Michael Bonsignore, the CEO of Honeywell after its merger with Allied-Signal, stated: "I'm not naive about the fact that at some point in time, one of those two cultures, or a derivative of them, will prevail, as long as it is a net positive for the company; I don't have any preconceived notions about the Honeywell culture being better." Culture may be a "soft factor" in a merger, but its influence is great.
Some companies make knowledge transfer a primary objective in merger integration, particularly when each organization has strengths that contribute to the value of the "deal." This knowledge exchange helps the acquired organization introduce new practices that enhance revenue generation and enable accelerated cost improvements. In many cases, the knowledge that the acquirer gains also spurs improvements.
How Will We Maintain Commitment and Performance During the Merger Process?
While communication is critical in any business change, mergers require extraordinarily effective communication and change management. Here again, HR leaders can play a proactive role. Managers and employees in both the acquiring and acquired organizations want to know how the merger will affect their jobs, their pay, and their careers. Because cost savings may be part of the merger rationale, some employees may be displaced. The quicker the organization can deal with employee concerns, the sooner the organization can focus employees on the future.
We can help shape plans for regular, candid, and consistent communication with employees regarding merger progress and specific merger issues. It is amazing how companies restrict information flow, assuming it must be held confidential-even though rumors run rampant. Information should be provided in multiple ways, in the right forums for the organization, including group meetings, one-on-one, and via memos.
We can also ensure communication is interactive. Listening to merger-related questions and concerns of employees allows management to tailor communication to specific needs. More broadly, employees provide genuine insights into potential barriers and opportunities that may enhance merger integration.
The most powerful signal to employees is the enthusiasm shown by their leaders. At every opportunity, supervisors, managers, and unit executives should invite questions and suggestions. They restate, from their perspective, the rationale of the merger, the benefits anticipated, the key milestones of merger integration. We can help them report on progress, recognize important achievements, and discuss obstacles that are being addressed. Open, candid communication is far more powerful as a motivational tool than most managers recognize.
How Will We Align People-Related Systems, Processes, and Organization?
Much of the value of a merger lies in achieving synergies, so it is vital to determine the extent to which the organizations will be integrated and how this integration will be achieved. As HR leaders, we can help examine the infrastructure of each organization, determine future requirements for the new organization, and address differences or gaps. To build a truly high-performing organization, it is necessary to align the organization structure, business processes, people, and culture with strategy. We can guide initiatives to address key alignment issues, which may go well beyond traditional HR processes (compensation, performance management, etc.).
In acquisitions, many companies plan to put all of their entities on the same common management systems, thereby avoiding redundancies and costs. In other situations, acquired organizations are encouraged to retain their identity and conduct business in the manner appropriate to their markets and functions. Their cultures are thus respected and preserved, within a framework of overall company policy and practice. This is especially important where the acquisitions are valued for their entrepreneurial capability and culture.
There have been many successful mergers in which the struggle for new identity sorts itself out one way or another. This approach simply requires more time and effort to engage staff and build one "new organization" from the best of two. Here it is commonly considered good practice to select the best processes and practices of both organizations. Project teams spend considerable time examining the quality of both sides' systems and processes. This approach implicitly focuses on differences between the organizations and encourages each side to argue the merits of their current practices. Because neither side is likely to be world class, the parties may work to identify a "new and better" approach.
How Will We Implement the Merger Quickly and Effectively?
The actions by management in the first 100 days greatly influence the success of the deal after thee years (when observers judge the merger a success or failure). This "honeymoon" period goes by quickly, and unless plans are in place or underway, this window of opportunity to establish a sound foundation and achieve early results will be lost. It is far better to mesh the businesses quickly and then pursue refinements later.
HR leaders can help ensure the first 100 days set the stage for successful implementation by helping senior management:
1. Pick the right people for a dedicated integration management team (and give them sufficient resources and authority to act)
2. Orient employees to the new organization and the vision of the future quickly and directly
3. Establish a clear sense of urgency to act; build an enthusiasm for a successful merger completion
4. Set clear objectives and hold individuals and teams accountable for achieving them
5. Communicate clearly, honestly, and frequently; clearly explain decisions once they are made
6. Keep senior management on both sides highly visible and involved
7. Change plans if conditions change or if obstacles are insurmountable (the merger is what counts, not the plan)
A period of six to nine months is ideal for implementing a merger. It is not just the organization's eagerness to move ahead swiftly. Shareholders look for "unlocked value" to result and if they see it, they will provide sustained support for the merger decision. If not, share price may fall and the success of the initiative may falter.
As HR leaders we can facilitate integration planning; however, in many situations executives tend to be forceful and directive in implementing changes, with minimal involvement of HR, lower-level managers, or employees. This may be appropriate in some situations (e.g., acquiring and converting acquired retail stores or hotels). In other situations the involvement of employees may be important (e.g., high technology, professional services). Involvement generates ideas for improved integration and builds support for rapid integration.
To develop effective merger implementation plans and ensure their execution, many companies use merger integration teams and assign integration responsibility to specific executives. HR leaders can help the teams work effectively and swiftly--by facilitating their work or by serving on them.
HR leaders want to contribute directly to business performance. What better opportunities could appear than a merger or acquisition? Here we can apply--and further develop--our capabilities for leading effective strategic change. As the frequency of mergers and acquisitions increases, and as senior executives recognize the critical impact of people-related issues, we should be at center stage to help insure mergers go right.
What has been your experience? What are your views?…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Why Do Mergers Go RIGHT?. Contributors: Walker, James W. - Author, Price, Karl F. - Author. Journal title: Human Resource Planning. Volume: 23. Issue: 2 Publication date: June 2000. Page number: 6. © 1999 Human Resource Planning Society. COPYRIGHT 2000 Gale Group.
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