HUMAN RESOURCE MANAGEMENT’s PIVOTAL ROLE in MERGERS & ACQUISITIONS
Ajit Kumar
Mumbai, India

Abstract

Human Resource Management in Mergers & Acquisitions Organizations of all sizes and across all industry sectors are increasingly looking to M&A to support their global growth strategies. The primary objectives for M&A’s are to cut costs, broaden market shares or take advantage of each other’s synergies and most typically to accelerate growth. Yet several studies indicate that more than half of all M&A deals fail to meet management’s strategic, operational and financial objectives.

The crux of the matter lies in the excessive focus on financial due diligence, risk assessments. Quite often, the people factor, i.e. issues that relate directly to people as workforce management and cultural integration, are left out of the due diligence process creating major challenges later during integration. In the past, HRM was expected to provide support in postintegration efforts, as well as increased business focus and knowledge to ensure that the full value of M&A deals is realized. For organizations, it important to believe in the fact that People are its key assets.

However, today we realize that, mastering the softer issues is the hardest part of integration and has the strongest influence on an M&A’s long-term success. HRM professionals are expected to be ready to manage the people, opportunities and the risks associated in these transactions. Managing organizational change and business / culture integration requires more attention by Leadership and HRM to M&A deals.

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Background

Mergers and Acquisitions (M&A) is an aspect of corporate strategy and management dealing with the buying, selling, and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector, or a new field or new location. The integration of two organizations is often the real-world test of a successful merger or acquisition. For the newly combined company, it can mean the difference between ongoing financial success and eventual failure. Evidence suggests that the shareholders of acquired firms realize significant positive returns while shareholders of the acquiring company are most likely to experience a negative wealth effect. The overall net effect of M&A transactions appears to be positive returns for the investors in the combined buyer and target firms. This implies that M&A creates economic value, presumably by transferring assets to management teams that operate them more efficiently.

Human Resource Management (HRM) is the management of an organization's workforce, or human resources. It is responsible for the attraction, selection, training, assessment, and rewarding of employees, while also overseeing organizational leadership and culture, and ensuring compliance with employment and labor laws.

HRM is a product of the human relations movement, when researchers began documenting ways of creating business value through the strategic management of the workforce. The function was initially dominated by transactional work such as payroll and benefits administration, but due to globalization, company consolidation, technological advancement, and further research, HRM now focuses on strategic initiatives like mergers and acquisitions, talent management, succession planning, industrial and labor relations, and diversity and inclusion.

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Our Quest Our endeavor is to understand the dynamics of HRM during an M&A.      Why do we need to have HRM team involved during an M&A? What should be the aspects that the HRM should look into? When should the HRM get involved? What weightage should the analysis have on the proposed acquisition target? Can HRM make or break an M&A?

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Our study area

Why do we need to have HRM team involved during an M&A? Typically the HR team of the acquiring company work towards a smooth and effective integration. This entails channeling the skills and enthusiasm of employees, merging the intellectual capital of both organizations and streamlining the way in which the new business operates so that it can rapidly overcome hurdles and take advantage of synergies. HRM teams can play a critical role during an M&A by highlighting broad areas of concern, before they wipe out the benefits of the potential M&A.

However, for any HRM team to be effective in an M&A deal, the HRM personnel must understand how the business functions, its goals, financial operations, marketing and product / service development, as well as how the business fits into the competitive landscape. Only when HRM is as business savvy as the rest of senior leadership and approaches its functions from a strategic perspective will it earn a seat at the management table for the M&A deals.

The crucial question for companies is whether HRM is up to the task of playing a strategic role in a merger or an acquisition. If HRM has traditionally served as a technical expert in an organization, its leaders are not likely to be inclined or prepared to play a strategic role. In which case the HRM would be likely to play a role early in M&A planning, and the organization should consider how to transform HRM into a strategic player. This may entail divesting HRM of its more routine chores, which would allow HRM to focus on providing high-level counsel to senior management on such topics as strategic staffing, long-term incentive plans and methods for developing a world-class workforce.

What should be the areas that the HRM should look into? HR’s own responsibilities, in M&A include effectively and openly communicating with employees, creating and implementing strategies to retain key employees, and aligning cultures between the merging organizations assessing a cultural fit to ensuring the success of the new culture. ______________________________________________________________________________ HRM in M&A By Ajit Kumar on May 18, 2013 5

The senior HRM executive should provide advice on such essentials as retaining key talent, communicating to employees, taking steps to combine cultures and developing processes for managing different benefit programs.

Companies, which want their M&A deals to be successful, need to spend more time on key change management and communication activities. Ensure that they excel at communicating with employees throughout the integration, and creating and implementing strategies to retain key employees.

However obvious it may seem, that the workforce aspect of integration needs to rank high on the agenda, particularly where gaining capabilities in a new field is one of the goals of an acquisition. But in the absence of a clear cut strategy for employee retention, the whole M&A initiative can be derailed. Losing employees you would like to retain is only the most immediate and obvious effect of getting the workforce aspects of integration wrong. One common concern for acquirer is the ability to standardize the terms and conditions of employment.

Employee communications is an area which is much forgotten during M&A. Communication to internal stakeholders should be clear and precise and address the concerns of the employees’, right after the initial post-deal announcements and should be followed to support all phases of the integration process.

Culture integration is generally viewed as a small issue or abstract concept. However, the fact is, culture goes far beyond aspects like collaboration and collegiality, which a merged organization may embrace as core tenets of work style and relationships. Culture is nothing less than the basic DNA of an organization. It forms the foundation for the structures, processes and actions that support business strategy, and define interactions among employees, customers and stakeholders.

Once a deal is sealed, nothing is more important to a successful outcome than effectively managing these “soft” issues. Companies need to identify future resources to help with an accelerated dive into an M&A transaction. Organizations can rope in expert business partners to ______________________________________________________________________________ HRM in M&A By Ajit Kumar on May 18, 2013 6

help in the facilitation of the process. Despite the ground realities, once a deal is finalized, things quickly get very frenzied, and resources trained beforehand can be of big help.

Companies, which want their M&A deals to be successful, need to spend more time on key change management and communication activities. Ensure that they excel at communicating with employees throughout the integration, and creating and implementing strategies to retain key employees.

Integration leaders, who can typically be picked from various parts of the organization, should be part trained on why culture and people issues matter so much. This means emphasizing in quantitative terms the inherent risks that arise in the areas of business continuity and retaining key talent, and presenting risk mitigation strategies.

To sum up, understanding the issues and developing and implementing a realistic HRM strategy and timetable are crucial in international M&A deals

When should the HRM get involved? M&A team can improve the probability of success is by getting HRM involved early i.e. as soon as the organization begins thinking about its acquisition criteria and possible targets.

Moreover HRM’s role in the M&A should be defined clearly and the head of HRM should have a seat at the management table for all discussions and negotiations. To help improve the odds of orchestrating a successful transaction, HR must be broadly involved in all phases of M&A – pre-deal planning, target company evaluations, due diligence, and post-merger integration.

In the early stages of M&A, i.e. when the target is being considered as a potential good merger candidate, HRM can help define the cultural aspects. Thereafter as the deal progresses into due diligence stages, HRM can help assess its culture and uncover potential HR related financial issues. ______________________________________________________________________________ HRM in M&A By Ajit Kumar on May 18, 2013 7

Post acquisition, HRM is likely to be the most qualified party to understand and execute such Integration-planning activities as developing employee communication strategies, programs to retain key talent and organizational and staffing plans. During this stage HRM’s role would also consist of helping employees cope with change which has far-reaching consequences, including maintaining productivity, stemming the loss of key talent and smoothing the integration of the two cultures.

Unanswered questions about job security, relocation and new reporting relationships, even changes in benefit programs can spawn rumors, anxiety, resentment and the loss of top talent, who can most easily find jobs elsewhere. All this can lead to lower productivity and diminution of a company’s intangible assets. In the growing world of global mergers, these issues take on heightened importance.

When organizations address people and culture issues early, strategically and with discipline, they can achieve significantly more successful deals.

What weightage should the analysis have on the proposed acquisition target? Employment due diligence is often conducted superficially during an M&A due diligence. This can turn into a nightmare if, for example, the acquirer determines after prices already have been negotiated that it has not only inherited various international employees but also several lawsuits.

Accordingly, the first step in any international M&A should be a full and thorough due diligence, including an examination of employment and employee benefits matters. In a crossborder transaction, employment/HR issues can wreak havoc. In the due diligence process, the acquirer may learn that the benefits programs are excessive or that the pension is underfunded to the extent that it can kill a deal.

If such issues are noticed early in the due diligence stages, the acquirer can safe guard their interest by re-negotiating the deal value, or take other suitable measures to ensure the deal ______________________________________________________________________________ HRM in M&A By Ajit Kumar on May 18, 2013 8

doesn’t cripple the parent organization. However, if in the unfortunate circumstance that the acquirer feels the issues of the target company outweighs the potential benefits, the management of the acquirer may even consider to drop the M&A deal.

Hence to sum up, there could be a lot at stake for the acquirer, given the enormity of the issues the acquirer can decide on its future course of action.

Can HRM make or break an M&A? M&A’s provide enormous potential for growth that simply can’t be achieved as quickly through organic, incremental development. However, success rates are not very high, rendering them an expensive and very risky way to grow a business. When companies pay close attention to the people aspects of a merger or an acquisition, they greatly increase the chances that the deal will fulfill its promise. That’s why, in the final analysis, we conclude that HRM can make or break an M&A.

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Conclusion The differences in organizational pace between the acquiring and the acquired organizations can undermine post-merger integration efforts, creating challenges that result from categorizing activities as either hard or easy as part of the M&A activities. Notwithstanding, the hard stuff is the domain of Finance, IT, and Operations, while the easy stuff is for HR and Training to figure out.

Despite best intentions, integration is viewed with narrow objectives and the greater connection to enabling a brighter future is lost. Alignment, speed, value, and, ultimately, results all suffer from the lack of cohesiveness and engagement. The key to an M&A success is the leveraging/creating the unique competence by the M&A deal.

There is no single success mantra for M&A. It’s a combination of many key factors. It’s important to understand that Organizational performance is driven by its people, their skills and contributions. Success of any merger or acquisition is ultimately just as much about people and culture as it is about the financials of the deal. Organizations should keep employee-centric thinking top of mind and effectively execute and measure key people practices throughout the transition.

To that effect, they HR’s role is that of a strategic partner. The HR team is expected to drive strategic thinking and help leaders focus adequately on all phases of a transaction. HR can help effectively manage the people side of a transaction, aligning leadership behavior and actions, communication, retaining key talent and building the right culture and supporting strategic organizational goals and primary M&A objectives

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References
1. Why HR Can Make or Break Your M&A (2002) - By Andrew F. Giffin and Jeffrey A. Schmidt 2. The role of HR in successful M&A integration (November 2010) – By Danny A Davis and Sven Ringling 3. Employment Law and HR issues in M&A – Published in the Acquisition International, September 2012 edition 4. How to Avoid HR Nightmares in International M&A Deals (January 2007) – By Susan Eandi (Partner) and Ute Krudewagen (Associate) of Baker & Mckenzie. 5. HR & M&A - 10 Critical Success Factors for Planning & Implementation - By David S. Greenspan, Sphr, Author & Principal, Clemente, Greenspan & Co., Inc 6. Talking about the people side of M&A – Published by PWC 7. Wikipedia.com

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