A PROJECT REPORT
______________________________
for
MBA
IN
December 2009
INDEX
Sr. Topic
No.
1 Introduction
2 Objective of M&A
3 Research Methodology
4 The Mergere And Acquisition Life Cycle
5 The Key Roles Of The Human Resource
Professional In The New Economy
6 The Role Of HR In Mergers And
Acquisition
6.1 The Role Of HR In The Pre Deal Phase
6.2 The Role Of HR In The Due Diligence Phase
6.3 The Role Of HR During The Integration Planning
6.4 The Role Of HR During The Implementation
Phase
6.5 Role Of HR In Evaluating The Merger
7 Managing cultural diversity in cross-
border alliances
7.1 National cultures
7.2 Industry culture
7.3 Organizational cultures
7.4 Domestic cultural diversity
7 Understanding how cultural diversity influences
1.Introduction
To put it simply, the term “Merger” refers to the combination of two or more
organizations to form a new company, which often has a new corporate identity.
Acquisition, on the other hand, is the purchase of a company by another company.
Besides assessing the risk and potential of the merged entity, it is just as important
to derive synergy from the merger or acquisition so that the company can quickly
transit into the new entity and operate at its maximum efficiency. This is crucial in
meeting the various bigger organisational objectives including growth in market
share. To achieve this, it is essential for HR to play a pivotal role in ensuring the
smooth integration of HR policies and managing employees of differing work
cultures all through the merger and acquisition life cycle.
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. It is
imperative that everyone involved in the process has a clear understanding of how
the process works..
Mergers and acquisitions are now a normal way of life within the business world.
In today's global, competitive environment, mergers are sometimes the only means
for long-term survival. In other cases, such as Cisco Systems, mergers are a
strategic component for generating long-term growth. Additionally, many
entrepreneurs no longer build companies for the long-term; they build companies
for the short-term, hoping to sell the company for huge profits. In her book The Art
of Merger and Acquisition Integration, Alexandra Reed Lajoux puts it best:
Virtually every major company in the United States today has experienced a major
acquisition at some point in history. And at any given time, thousands of these
companies are adjusting to post-merger reality. For example, so far in the decade
of the 1990's (through June 1997), 96,020 companies have come under new
ownership worldwide in deals worth a total of $ 3.9 trillion - and that's just
counting acquisitions valued at $ 5 million and over. Add to this the many smaller
companies and nonprofit and governmental entities that experience mergers every
year, and the M & A universe becomes large indeed.
2.Objective Of M & A
Every merger has its own unique reasons why the combining of two companies is a
good business decision. The underlying principle behind mergers and acquisitions
( M & A ) is simple: 2 + 2 = 5. The value of Company A is $ 2 billion and the
value of Company B is $ 2 billion, but when we merge the two companies
together, we have a total value of $ 5 billion. The joining or merging of the two
companies creates additional value which we call "synergy" value.
Gap Filling - One company may have a major weakness (such as poor
distribution) whereas the other company has some significant strength. By
combining the two companies, each company fills-in strategic gaps that are
essential for long-term survival.
Chapter 1
3.Research Methodology
When we use the term "merger", we are referring to the merging of two companies
where one new company will continue to exist.The term "acquisition" refers to the
acquisition of assets by one company from another company. In an acquisition,
both companies may continue to exist. However, throughout this course we will
loosely refer to mergers and acquisitions ( M & A ) as a business transaction where
one company acquires another company. 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 acquired company ceases to exist after
the merger.
Horizontal: Two firms are merged across similar products or services. Horizontal
mergers are often used as a way for a company to increase its market share by
merging with a competing company. For example, the merger between Exxon and
Mobil will allow both companies a larger share of the oil and gas market.
Vertical: Two firms are merged along the value-chain, such as a manufacturer
merging with a supplier. Vertical mergers are often used as a way to gain a
competitive advantage within the marketplace. For example, Merck, a large
manufacturer of pharmaceuticals, merged with Medco, a large distributor of
pharmaceuticals, in order to gain an advantage in distributing its products.
There are five key phases to the life cycle of mergers and acquisitions. These can
be identified as follows:
Pre Deal
The first phase involves searching for suitable entities for mergers or acquisitions.
During this phase it is usual to develop a set of criteria for the selection of a
suitable entity. In this early phase the organization defines its objectives and
desired outcomes of the merger or acquisition and searches for suitable entities.
This often involves extensive research and gathering of market intelligence to
assess the potential of suitable candidates.
Due Diligence
Once a suitable entity has been identified, usually the next step is to make an offer
to acquire or merge with the new entity. This offer is usually made conditional on
the completion of a due diligence. During this second phase, a review of the new
entity is undertaken to ensure the soundness of the deal and to assess any risks
involved with the completion of the deal. During this phase the organization will
typically review the financial statements, strategies, business plans, resources and
operations of the entity to confirm their assessment of the commercial suitability of
the deal.
Often many transactions do not go beyond this phase because the due diligence
highlights the inappropriate risks associated with the deal.
Integration Planning
In this third phase detailed plans, milestones and activities are developed to ensure
the successful implementation of the deal. This phase is often conducted under
very tight time frames and requires extensive and detailed involvement from
experienced personnel. Detailed project management plans are established to
ensure the smooth implementation of the deal.
Implement Merger
Phase four requires the execution of the detailed planning conducted in phase
three. Again, this phase is usually conducted under tight time frames and requires
the execution of many complex plans simultaneously. Strong project management
skills are required during this phase. The implementation phase is very visible to
shareholders, staff, clients and competitors and is conducted under tremendous
scrutiny of these parties.
Evaluate Merger
The final phase requires reviewing the performance of the new entity to ensure that
a successful integration has been completed and that the objectives of the merger
or acquisition have been achieved. Performance of the new entity is assessed
against the original objectives determined in the Pre Deal phase.
Jac Fitz-enz in his book The ROI of Human Capital describes “human capital” as a
combination of factors such as:
• The traits one brings to the job – intelligence, energy, a generally positive
attitude, reliability and commitment.
• One’s ability to learn – aptitude, imagination, creativity, and what is often called
“street smarts” and savvy (or how to get things done).
• One’s motivation to share information and knowledge – team spirit and goal
orientation.
Fitz-enz goes on to describe people as the “profit lever” of the new economy and
that the organisation’s passive resources “require human application to generate
value”.
The roles are multi-dimensional and involve a combination of both short and
longterm horizons, administrative and strategic duties as well as a focus on both
people and processes. They can be represented as such:
During the 1990s we have seen the HR profession strive to move from being an
“administrative service” to become a business partner dealing with strategic human
resource issues.
• meet targets and needs – both of the organisation, the customers and the
employees;
Whilst many HR professionals have identified the need to shift their focus from
satisfying administrative requirements to becoming a strategic partner of the
organisation, the question remains as to how successful they have been in
achieving this shift.
Since Dave Ulrich’s book, Human Resource Champions, there has been a growing
recognition that HR professionals of forward-looking organisations will be
required to act as business leaders. As business partners and facilitators, HR
professionals are expected to share, plan, promote and manage; as business leaders,
they are expected to lead, direct, thrive on chaos and respond to real-time issues.
This is a critical role to play through all
the phases of a merger or acquisition.
When To Involve HR
The success rate of mergers and acquisitions is dismal. Research (Gaplin and
Hendron) has shown that during mergers and acquisitions:
There are many reasons that can be attributed to these results. Several of them
revolve around the people and cultural issues.
A survey conducted by the SHRM and Towers Perrin of over 440 HR executives
worldwide showed that there was a considerable gap between the expected and
achieved synergies of mergers and acquisitions:
From this survey it is clear that “growth in market share” and “becoming a leader
in industry consolidation” are the key objectives that organizations are striving for
in mergers and acquisitions.
The research shows that less than half the participants were able to achieve those
objectives.
For a successful merger and acquisition it is essential that HR play a pivotal role
through all the five phases of the process. The survey conducted by SHRM and
Towers Perrin also looked at the most significant obstacles to successful mergers
and acquisitions. The results can be summarized as follows:
A review of these key obstacles highlights the importance of the role of the HR
professional in mergers and acquisitions. It also surfaces the range of areas where
HR professionals can play a key role. These include:
• maximizing productivity
• developing the organizational culture
• retention of key talent
• cultivating the style of the management team
• acting as a change agent
• communicating the business objectives
Typically, experience has shown that HR has been involved too little or too late
resulting as a contributing factor to the 70% failure rate in realising projected
synergies.
The results of the research conducted by SHRM and Towers Perrin demonstrates
in particular the lack of involvement by HR professionals in the first two phases of
the merger and acquisition life cycle.
If HR is to operate in the role of strategic business partner as described by Ulrich,
it is essential that they are actively involved in all stages of the merger and
acquisition cycle including the pre deal and due diligence stage and not just in the
performance of the traditional role as the “functional expert” in later stages of the
merger and acquisition cycle.
The obvious conclusion from the results represented in the above graph is that
successful companies have benefited from a greater degree of HR involvement
than unsuccessful companies.
With specific reference to the Asia Pacific context, Watson Wyatt in their survey
across 190 companies, compared the timing and level of HR involvement between
companies in the Asia Pacific and those in the United States.
The results showed that in the Asia Pacific, there was little involvement of HR in
the early stages of the Merger and Acquisition life cycle. This “little involvement”
in the early stages may account for the need for extensive involvement in the later
stages. The differing results between Asia Pacific and the United States in the
earlier stages may also be partially accounted for the greater need for due diligence
requirements on accrued benefit liabilities (including retirement, redundancy,
health, annual leave, long service leave) and termination provisions in the more
developed United States environment.
One of the first critical areas that HR can be involved is in assessing the potential
compatibility of cultures. This involvement could also extend into phase two of the
process as part of the due diligence. This could involve reviewing an array of
things such as leadership style, mission, vision and values of the organisation, team
strength, performance and reward management systems, customer focus and
organisational
capabilities.
Many of the HR activities identified in the pre deal phase are continued with
greater detail in the due diligence phase to ascertain the correctness of the
perceptions obtained in phase one.
It is during the due diligence phase that potential problems and risks are often
identified.
Acquiring an organization that has not allowed sufficient provision for accrued
benefits can result in a major expense for the acquirer.
Some countries require that payroll taxes are processed on a “pay-as-you-earn”
basis (PAYE). It is important to identify that any such taxes have been paid and
that there are no outstanding liabilities.
It is during the due diligence phase that HR professionals are expected to review
the contracts of employment. This can include a wide range of activities such as:
• identifying any triggers in the contract that may result in a termination or release
from employment (such as an acquisition or merger)
Performance management and reward systems are also items for due diligence
including the identification of any future obligations for guaranteed or variable
bonuses.
HR practitioners should also value the people-related transaction and ongoing costs
as well as identify any potential people-related savings that may result from the
merger.
In summary, one of the most critical roles for HR during the due diligence process
is to identify any contractual obligations, benefit entitlements and resource savings
that may impact on the value of the deal.
6.3 The Role Of HR During The Integration Planning
• Talent management;
• Designing the communication strategy for staff and other relevant bodies such
as Unions and the Ministry of Manpower;
• Appointment criteria for new positions;
• Development of the contract terms of employment for the new entity;
The details and planning that are put into this phase is a critical factor in the
success of the implementation of the acquisition. For a successful implementation,
quick, decisive and focused action is needed. This can be better achieved if
detailed planning was conducted prior to implementation.
One of the key roles for HR professionals during the implementation phase is the
co-ordination of communications to staff. It is critical that the new organisation
maximize productivity and focus on client and shareholder satisfaction as soon as
possible. HR can play a pivotal role in maximising employee engagement through
effective and timely communications to staff.
In every case study cited in this research, every respondent highlighted the critical
impact of effective communication. Essentially through any change process,
employees want to know “what is in it for me?” (WIFM). This could include such
issues as, Will I have a job? Who will I report to? What are my rights and benefits
if terminated? What have my clients been told? What is the media saying? What
will be my future
role and responsibilities? What are my new benefits and terms of employment?
Who can I talk to for help and information? The questions raised are extensive!
• Acting quickly to restructure the organization and select the right people for
each role including people management, assessment and development;
• Establishing the new Culture including the Mission, Vision and Organisational
Values;
1. Decide how critical employee retention really is – this will vary considerably
depending on the nature of the business.
2. Look for talent in unexpected places – some of your key resources may not be
top management.
4. Don’t be too desperate to retain any one person – for key management, short
term contracts with severance bonuses may be all that is needed for the integration
phase.
5. Retention bonuses often backfire – sometimes good people leave because they
are not part of such a scheme.
6. Be open to creative approaches that earn trust – its not just all about cash
bonuses. Consider options such as career management and new skills development.
The critical role for HR professionals during the implementation phase is to help
ensure the organisation maximises employee engagement to assist in achieving the
initial objectives of the merger or acquisition through a successful integration.
The failure rate for successful mergers is high at around 70%. (Source: Gaplin and
Hendron) It is important for the management team to review the progress and
success of the implementation phase.
Our research in preparing the attached case studies highlighted that even after
some years there are several organisations in Singapore who have not really
achieved successful implementation from the HR perspective. Benefit programmes
have not been harmonised, different performance management systems are still
operating, economies of scale have not been achieved through re-engineering and
repositioning of the operations and a unified sense of purpose, mission, vision and
direction have not been obtained.
8.1 Staffing
Guideline: When making staffing decisions, gather reliable information about how
employees respond to cultural differences. Competencies related to managing
diversity should be given at least as much weight as technical competencies.
Throughout the lives of IJVs and IM&As, numerous staffing decisions must be
made, including decisions regarding whom to hire, whom to promote, and perhaps
whom to let go. In addition to ensuring that an alliance is staffed with people who
have the technical proficiencies required, staffing practices can improve the
organization’s effectiveness by identifying individuals who are more likely to be
effective working amid cultural diversity. Staffing practices also should be
sensitive to the composition of teams (i.e., the content and structure of cultural
diversity).
Staffing for cross-cultural competency
On the basis of their experiences and a review of the literature, Schneider and
Barsoux (1997) proposed a set of behavioral competencies needed for effective
intercultural performance. These included linguistic ability, interpersonal
(relationship) skills, cultural curiosity, ability to tolerate uncertainty and ambiguity,
flexibility, patience, cultural empathy, ego strength (a strong sense of self), and a
sense of humor. When evaluating employees for staffing decisions, competency
models such as this one provide useful guidance that can increase an organization’s
ability to staff its alliances with employees who easily adjust to and enjoy cultural
diversity. However, it should be noted that competency models for cross-cultural
adjustment often are developed on the basis of expatriates’ experience (e.g.,
Mendenhall and Oddou, 1985; Tung, 1981). While expatriate assignments may
share some similarities with IJV or IM&A assignments, there also are many
differences. Much more research is needed to identify the personal characteristics
most likely to contribute to success in these settings. When an organization’s
strategy requires that it participate in a large number of IJVs and IM&As, it has the
opportunity to conduct such research. Doing so can help it further refine its
understanding of how various personal characteristics relate to the performance of
employees in culturally diverse organizations.
The human resource issues in the mergers and acquisitions (M&A) can be
classified in two phases the pre-merger phase and the post merger phase. Literature
provides ample evidence of difference in between the human resource activities in
the two stages: the pre-acquisition and post acquisition period. Due diligence is
important in the first phase while integration issues take the front seat in the later.
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 usual impact is high
turnover, decrease in the morale, motivation, productivity leading to merger
failure. The other issues in the M&A activity are the changes in the HR policies,
downsizing, layoffs, survivor syndromes, stress on the workers, information
system issues etc. The human resource system issues that become important in
M&A activity are human resource planning, compensation selection and turnover,
performance appraisal system, employee development and employee relations.
M&A activity presents a different set of challenge for the human resource
managers in both acquiring and acquired organizations. The M&A activity is found
to have serious impact on the performance of the employees during the period of
transition. The M&A leads to stress on the employee, which is caused by the
differences in human resource practices, uncertainty in the environment, cultural
differences, and differences in organizational structure and changes in the
managerial styles.
The organizational culture plays an important role during mergers and acquisitions
as the organizational practices, managerial styles and structures to a large extent
are determined by the organizational culture. Each organization has a different set
of beliefs and value systems, which may clash owing to the M&A activity. The
exposure to a new culture during the M&A leads to a psychological state called
culture shock. The employees not only need to abandon their own culture, values
and belief but also have to accept an entirely different culture. This exposure
challenges the old organizational value system and practices leading to stress
among the employees. Research has found that dissimilar cultures can produce
feeling of hostility and significant discomfort which can lower the commitment
and cooperation on the part of the employees. In case of cultural clash, one
of the cultures that is dominant culture may get preference in the organization
causing frustration and feelings of loss for the other set of employees. The
employees of non-dominating culture may also get feelings of loss of identity
associated with the acquired firm. In certain cases like acquisition of a lesser
known or less profitable organization by a better one can lead to feelings of
superiority complex among the employees of the acquiring organization. In case of
hostility in the environment the employees of two organizations may develop “us”
versus “them” attitude which may be detrimental to the organizational growth.
The uncertainty during the M&A activity divert the focus of employees from
productive work to issues like job security, changes in designation, career path,
working in new departments and fear of working with new teams. The M&A
activity leads to duplication of certain departments, hence the excess manpower at
times needs to be downsized hence the first set of thoughts that occur in the minds
of employees are related to security of their jobs. The M&A activity also causes
changes in their well defined career paths and future opportunities in the
organization. Some employees also have to be relocated or assigned new jobs;
hence the employees find themselves in a completely different situation with
changes in job profiles and work teams. This may have an impact on the
performance of the employees. Research has found that at least two hours of
productive work per employee per man day is lost during the M&A activity in the
organizations. The increased political processes that may be underway in the
organizations to sustain the importance of the various individuals and departments
will add to the confusion.
The human resource systems vary across organizations owing to the differences in
the organizational culture, sectoral differences and national cultural differences.
For example if the compensation in the acquired firm is lesser compared to the
acquiring firm, the acquisition will raise employee expectations (for the employees
of acquired firm) of a possible hike in compensation which may not be realistic.
On the other hand if the compensation level of employees in acquiring firm is
lower the employees may press to have equal compensation across all the divisions
of the firm. The pay differential can act as a de-motivator for the employees of
acquiring firm and may have long term consequences. The compensation issues
may also involve legal angle. Two cases in the Indian context are important which
underline the importance of legal issues related to compensation in M&A activity.
The first case involving Hindustan Lever Limited acquiring TOMCO, the
employees in TOMCO enjoyed better terms and services compared to the HLL
employees. The HLL employees argued that if TOMCO employees are allowed to
work on their original terms and conditions, two classes of employees will come in
existence. Since both the set of employees now belong to same firm, a case of
discrimination will arise against the employees of HLL. However the court
supported TOMCO employees in the process. The second case involves merger of
Glaxo and Wellcome-Burroughs who decided to merge in 1996. The Indian arms
however couldn’t merge in the last seven years because of high pay differential
between workers of Glaxo and Wellcome in India. The workers of Wellcome were
offered a one time compensation of Rs. 2 lakhs in 1998, which they refused.
Further the VRS scheme launched by the firm evoked very tepid response.
Since 1997 the firms have been working as independent subsidiaries in India.
Compensation differences need to be rectified by the acquiring firm so as to
maintain the morale of acquired firm employees and to retain them. The
compensation structure among the organizations may also differ creating troubles,
for example one of the firms may have performance based pay while other may
have higher component of fixed pay. Hence the differences in compensation
structure and performance appraisal systems also need to be rectified so as to bring
equity in the human resource systems and to treat employees at the equal level.
Another practical problem is differences in the grading or organizational structures
in the systems. Since the organizational structures are different designations for the
employees are used, during the integration of acquired organization the acquiring
organizations need to develop a mechanism to remove the differences in the
grading systems bring them at equal level, as many a times the compensation is
related to the grade of employee in the organization.
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