Mergers and acquisitions: finding synergy and avoiding the reefs, and an HR manager’s guide

These articles are closely related:

Mergers and acquisitions: finding synergy and avoiding the reefs
An HR manager’s guide to mergers and acquisitions.

Let’s begin:

Mergers and acquisitions: finding synergy and avoiding the reefs

mergers Companies are joined nearly every day, but often two companies end up weaker together than they were separately. Indeed, a KPMG study showed that 83% of mergers and acquisitions failed to produce any benefits – and over half actually ended up reducing the value of the companies involved.

One of the main problems is that mergers and acquisitions are often planned and executed based on perceived cost savings or market synergies; rarely are the “people” and cultural issues considered. Yet, it is the people who decide whether an acquisition or merger works. Customer and employee reactions determine whether the newly combined organization will sink or swim.

Before the merger

Before the merger takes place, the leaders of both organizations – at least, of the dominant one – should have a strategy mapped out, including communications to employees and customers, where layoffs will take place (if any do), and how the cultures should be merged.

A SWOT (strengths, weaknesses, opportunities, and threats) analysis should be done for the combined company. If possible, a brief culture survey (preferably done via interviews as well as paper or Web/e-mail) should be undertaken in both companies to discover what the cultural differences are. Sometimes this will be obvious in some aspects -e.g. one culture values teams and bottom-up innovation, the other favors command-and-control tactics – but not in others, such as how and whether individuals and teams are rewarded for innovations, how failure is dealt with, whether conflict is addressed openly, etc. This will prevent disconcerting delays between the announcement and the implementation of the merger/takeover.

If the real purpose of the merger is to acquire another company’s assets, in terms of a particular product or brand, its factories or patents, etc., that should be acknowledged and dealt with up front. If employees are fooled at first by pleasant words, they willreact more strongly when those words become taunts.

Finally, before the merger or acquisition takes place, the leadership teams should consider the non-financial issues. Will people in the two companies be able to work together? Will acquiring a company, or merging with it, destroy the properties or drive away the talent that made it worth having? Can a simple partnership, alliance, or even stock ownership without integration provide more benefits than combining the two companies? These issues may be overlooked by the leadership teams — just as they are often ignored or downplayed by investment bankers who want to do the deal.

Power relationships

In many ways, it makes sense to consider mergers in the same light as acquisitions. It has become a truism that there is no such thing as a merger — one side will come out dominant in each function, even in the friendliest of “mergers.”

There can, in the end, only be one CEO, one head of each function, one head of each department. Therefore, we will generally consider mergers and acquisitions to be interchangeable.

Power issues should be confronted directly to avoid drawn-out conflicts and confusion for employees. Conflicts must be controlled but addressed, to avoid protracted turf wars, lasting bitterness, and employee withdrawal and retention. (Withdrawal can be psychological as well as physical – employees can simply not go that extra mile, and do the absolute minimum required of them. They can also sabotage change efforts and new initiatives. This can last for many years, long after outsiders have forgotten about the merger.)

Personal issues

In most takeovers, both companies’ staff lose some productivity (and people) as employees divert their attention to their own place in the future, merged company. Will they still have a job? Will they have advancement prospects? What will be their role? Will the company gain or lose? This is the time when the best employees may jump ship, because they will find it easiest to get jobs elsewhere — which strengthens the competition even as it weakens the integrated company.

Mergers can be a profoundly demoralizing time, especially if communications from the leaders are sparse or misleading. Many agree that the best way to handle this is to constantly communicate to everyone in the company, using a variety of methods – face to face included – so that people understand the reasons for the acquisition, the combined companies’ strategy, and how the two companies will combine. If layoffs need to be made, they should be announced quickly and directly, again with the reasons and rationale clearly expressed.

As people devote more time to exchanging rumors, trying to find out their status, and dwelling on the change, productivity tends to drop. In the absence of credible, continued information, the grapevine will spread inaccurate rumors with amazing ease. For that reason, the transition should be as short as possible. If there are layoffs, the role and situation of the survivors should be addressed. There is a separate line of research on this, which we will not delve into.

As the integration of the companies proceeds, many may feel that their past ways of working and their contributions are not valued.

In addition to celebrating success, the company must show in word and in deed that it value the best of the old ways, the tradition and heritage of the company being taken over. If the new organization shows total disregard for the heritage of groups being taken over, people will take longer to get over the shock of transition, and may sabotage change or simply “vote with their feet.”

Cultural issues

Culture – the shared values, beliefs, and preferred ways to behave – is hard to control, and in most mergers, it seems that nobody tries very hard to do it. The end result is that the culture usually is not as productive as it should be in the combined organization, moulded primarily by the leaders actions and politically adept or powerful people in each organization. The goal in a merger is for the best of two companies to be preserved, resulting in synergy and continued profit. This applies to culture as well as to operational processes and technologies. The cultures of each company should be carefully examined, and care taken to guide the combined organization’s culture so it incorporates the best of each.

One interesting note on cultural change is that it often seems to come about only when an organization feels that its very survival is threatened. A merger or acquisition provides a fine opportunity for change!

The role of organizational development

When an OD consultant is brought into the merger/acquisition process, there are a number of roles they can play:

Helping the leaders to agree on a clear and specific set of goals for the merger. Setting up measures helps the leadership team to focus on tangible, measurable results, which brings misunderstandings and con- fiict into the open. Measurement is also an excellent communication tool, since it is an action — which gives the words more credibility.

Measuring the results at a number of milestones can also point to potential problems before they become crises, helping to make the merger/acquisition smoother and increasing the likelihood of success. It also helps to keep leaders focused on a balanced set of issues.

Scenario planning – will the merger work if there is a market decline? What are the likely responses of customers and regulators? We wonder if, in the Daimler-Benz takeover of Chrysler, anyone considered reactions to Chrysler no longer being an American company, including a loss of sales (since most of its customers are in the United States) and the de-listing from many indexed mutual funds. The 2001 power crises in California was also seen as a result of lack of scenario planning – in this case, testing the assumption that natural gas prices would stay fiat.

The OD consultant should not usually lead the scenario planning, but they should be there as a process consultant to ensure that every team member’s contribution is heard, and that people are honest with each other and with themselves. (If that sounds too “touchy-feely,” just think about the plight of the California utilities).

Exploring options – are there other ways to accomplish the same goals without a merger? Again, going back to Chrysler, the company was seeking international expansion and financial security. A partnership with Daimler-Benz, or acquiring an Asian or European automaker, would probably have served the company more than becoming a division of a culturally very different conglomerate. Once more, the OD consultant may be most effective as a process consultant rather than as a leader.

Investigating assumptions – while usually not a separate exercise, the OD consultant, as an outsider, is in a unique position to bring out hidden assumptions. This should be done continuously throughout the process, though scenario planning and exploring options are expressly designed to explore and test assumptions. Sometimes, brief tactical surveys can be taken to test assumptions; sometimes, questions are enough.

Communication – ensuring that a steady stream of information is released by the organization’s leaders; keeping that information balanced, direct, clear, and accurate; and preventing undesirable subtexts from being communicated. The OD consultant should also probe leaders when their words and actions contradict each other, to clarify one or change the other.

Rewards – compensation systems are one thing; intangible rewards are another. Research shows that most people are generally not motivated by money, though they may take a job (or keep a job) for financial reasons. Even where bonuses or profitsharing help to increase motivation, the money itself is often symbolic, a measuring stick for achievement. The OD professional should help the organization to set up milestones and celebrate small and large successes along the route to integration, so that people not only feel progress, but also feel that their achievements are being rewarded. Otherwise, integration may seem like a long, long road.

Cultural assessment – clarifying each organization’s culture to make the task of integration easier, and to ensure that communications and actions do not accidentally cause more harm than good.

Cultural change – working with both organizations to clarify their shared vision of what the culture should be, and then working to make it that way. Johnson & Johnson maintains a shared culture among a large number of companies, some acquired, some home-grown; they do it by having a clear, shared vision and values, and by working with newly acquired firms to ensure that their culture is brought to the J&J way.

Leader coaching to integrate the leadership team, address confiicts, and assure mutual involvement and dedication to the merging process. OD professionals should work at every level of the organization where the merger is taking effect. The goal is to build the ability of the leaders to communicate their intentions accurately, build trust, and manage confiict and tension. Strong leader credibility is key to successful integration.

Working with process teams to identify the best practices in each organization and assure that they are not overtaken by lesseffective standard procedures from the dominant company, but become the standard procedures for both. This includes operational and service processes, but can also be applied to aspects of the culture.

Integrating initiatives – one problem that is not unique to mergers and acquisitions is initiative overload, where managers are overwhelmed with not just the merging of two organizations, but also quality initiatives, customer projects, SAP implementation, etc. One of the more challenging projects for an OD professional is integrating initiatives and helping leaders to make tough judgement calls on which ones should be suspended, eliminated, or combined.

Watch key processes – often forgotten in the integration are key processes such as new hire orientation, training, and even compensation systems. These processes all support or sabotage both the present and desired culture. OD professionals understand the role of each organizational system plays in the culture; they must keep an eye on all important systems and processes. By remembering what makes mergers succeed and fail, keeping an eye on the human issues as well as the financials, and using the most appropriate organizational development tools, companies can avoid “bad” mergers — and make the good ones work.

An HR manager’s guide to mergers and acquisitions

Astute leadership can bring out synergies while avoiding collisions and steamrollers.

merge Many studies have now shown that most mergers and acquisitions are unsuccessful. Still, they can be positive — and HR has a large role to play and making them work.

HR and Operations can both help companies to think systems and cultures through before the actual merger. That can help your company to be one of those which emerges stronger (such as Fiat and Chrysler) rather than weaker (such as Daimler and Chrysler). Handled well, HR and Operations can help people in each organization to actively work together, bringing out the best values and traditions of each — rather than creating a dominant group and a resentful group, or, worst of all, creating two resentful groups.

The role of Human Resources (HR)

HR may be in a unique position to question assumptions about the nature of assets and synergies. Investment bankers have a narrower training, and are rewarded for making deals, so human issues tend to get lost or overlooked.

The HR manager can influence events so that each company comes out ahead — but, to do that, the HR manager must preserve their own position! Before, during, and after the merger (or acquisition), HR may be responsible for increasing innovation, keeping communication going in all directions (upwards, downwards, across departments, across organizations), lessening the impact on those who are “reduced” and on the survivors, and assuring that cultural issues do not derail integration.

The new leadership team needs to work together, despite cultural and personality differences, power issues, and other barriers. HR can act as a facilitator and provide coaching; personal and team assessments can be helpful in enabling team members to work together constructively.

Opportunities for HR

Mergers and acquisitions are often planned and executed based on perceived cost savings or market synergies; rarely are the “people” and cultural issues considered. Yet, it is the people who decide whether an acquisition or merger works.

Customer and employee reactions determine whether the newly combined company will sink or swim.. If a convincing argument is made to senior leaders, HR may gain more power to increase the effectiveness of the organization, and may be able to mold the cultural changes instead of being pushed along by them.

Hazards for HR

Most mergers bring consolidation of staff departments; eliminating one of the HR departments is sometimes stated right up front as a justification for the merger.

For the “losing” department, layoffs tend to be a fact of life, while the “winners” face a higher workload. If both departments are kept, there may be issues of interdependence and autonomy, and hard decisions about which policies and services should be shared and which should stay separate.

In many cases, the parent company has taken on debt to finance the acquisition. The next logical step is to cut costs — and HR is often the first department on the block. Thanks to outsourcing agencies, even HR people in formerly indispensable functions can be replaced for short-term gains (and, sometimes, long-term losses). Internal consultants may be the first to be cut, since they are not clearly required to keep products or services rolling out. This makes it particularly important for HR managers to make a strong value case to the senior leadership.

Fortunately, there are also opportunities for HR to bring out synergies, so that the combined company is stronger than the originals.

HR’s role before the merger

The HR leadership has an opportunity before the merger to ensure that both organizations have a strategy mapped out in advance. Once the merger starts taking place, people will often be too busy to keep a strategic perspective.

Before the merger takes place, the leaders of both organizations – at least, of the dominant firm – should have a strategy mapped out, including communications to employees and customers, where layoffs will take place (if any do), and how the cultures should be merged. A SWOT (strengths, weaknesses, opportunities,

and threats) analysis should be done for the combined company. If possible, a brief culture survey (preferably done via interviews as well as paper or Web/e-mail) should be undertaken in both companies to discover what the cultural differences are.

Sometimes this will be obvious in some aspects -e.g. one culture values teams and bottom-up innovation, the other favors command-and-control tactics – but not in others, such as how and whether individuals and teams are rewarded for innovations, how failure is dealt with, whether confiict is addressed openly, etc. This will prevent disconcerting delays between the announcement and the implementation of the merger/takeover.

If the real purpose of the merger is to acquire another company’s assets, in terms of a particular product or brand, its factories or patents, etc., that should be acknowledged and dealt with up front. If employees are fooled at first by pleasant words, they will react more strongly when those words become taunts.

These issues may be overlooked by the leadership teams — just as they are often ignored or downplayed by investment bankers who want to do the deal.

Some questions to ask the leaders, in person or via open-ended survey, are:

Are there viable alternatives to the merger (for example, greater integration with suppliers, partnership deals, keiretsu)?
Is there a communication strategy to keep employees and customers informed?
Are the cultures for the two organizations compatible? Is there a plan for merging the cultures? Will one be dominant, and, if so, how will people operating under the other culture be brought on board?
What are each organization’s key strengths, weaknesses, opportunities, and threats?
What is each organization’s strategy? How will they be merged?

One way to get the answers to these questions is to have an outside agency speak with senior leaders, one at a time — or, if that is not possible, to have them circulate a brief confidential survey and present the results at a facilitated meeting. Difficult questions, for example whether there are alternatives to a merger, should be raised as early as possible.

The HR manager may need to raise the issue of culture – how people work, how they think, what they value, and, of some importance, how they view the other organization. If the acquired (or acquiring) organization is viewed with disdain, these issues must be addressed up front. Likewise, severe cultural differences must be addressed. They can be overcome with attention and work.

Some cultural differences are obvious (e.g. one culture values teams and bottom-up innovation, the other favors command-and-control tactics) but others may be subtle (e.g. how and whether individuals and teams are rewarded for innovations). Will acquiring a company, or merging with it, destroy the properties or drive away the talent that made it worth having? If the real purpose of the merger is to acquire another company’s assets, in terms of a particular product or brand, its factories or patents, etc., that should be acknowledged and dealt with up front. If employees are fooled at first by pleasant words, they will react more strongly when those words become taunts.

The HR leadership may, because of its skill and background, be placed in the uncomfortable but important position of persuading corporate leaders to admit the truth to themselves, and to employees.

HR as an internal consulting group

HR is often one of a few units which can work as an internal consulting group during a merger or takeover, along with quality or process engineering teams.

In this light, HR managers may be able to use management coaching skills to help managers and executives to communicate effectively and completely, to address power issues, and to deal with cultural issues. In some cases, HR may take a more active role; in others, HR should act as a coach.

Individual HR staffers need to understand their current skills and may need to update their knowledge or practice with role playing to ensure that they are working as constructively as possible. Process consulting skills are essential.

Some key issues in mergers follow.

Communication.

As people look inwards to try to find their place in the merged company and attempt to see their future in it – or outside it – productivity drops. The grapevine can become a major source of headaches. Constant, consistent, and honest communication from leaders and HR is essential.

Power and conflict.

It is essential to bring confiict out to the surface and deal with power issues honestly. If one group is obviously in charge, that should be admitted early on so people don’t waste time with second-guessing. Often, people get wrapped up in turf wars which are destructive to both sides, rather than trying to figure out roles for both sides and have a win-win situation.

Culture

Organizational culture is an organization’s shared values, beliefs, and preferred ways to behave – is a key to success, and though many talk about it, few seem to have the skills to grapple with culture and work with both organizations to assure a good fit. Many organizations use a brief cultural fit survey to assist them during mergers.

Operations

Ideally, processes can be examined to see where true synergies lie. In many mergers and takeovers, power relationships determine operational changes, rather than actual efficiencies or quality concerns. By making changes with facilitated cross-platform teams, HR can help to ensure that the best of the two organizations are preserved.

New HR Staff Roles

In a role as executive coach / internal consultant, HR staff can also be effective through:

• Helping the leaders to agree on a clear and specific set of goals for the merger, with a focus on tangible, measurable results, which brings misunderstandings and con- fiict into the open.

• Scenario planning – will the merger work if there is a market decline? What will be the responses of customers and regulators?

• Exploring options – are there other ways to accomplish the same goals without a merger?

• Investigating assumptions – the OD consultant, as an outsider, is in a unique position to bring out hidden assumptions. This should be done continuously throughout the process, though scenario planning and exploring options are expressly designed to explore and test assumptions.

• Rewards – even where bonuses or profitsharing help to increase motivation, the money itself is often symbolic, a measuring stick for achievement. The HR staff should help the organization to set up milestones and celebrate small and large successes along the route to integration, so that people not only feel progress, but also feel that their achievements are being rewarded.

• Integrating initiatives – ensuring that managers are not overwhelmed by initiatives and changes that all seem to come at once.

• Watching key processes – often forgotten are key processes such as new hire orientation, training, and even compensation systems. These processes all support or sabotage both the present and desired culture. As an HR professional, you know the impact of these processes, and can work to make them support change efforts.

You can’t help if you’ve been laid off

Most of us have heard the flight attendant say, “If you are travelling with a child, put your own oxygen mask on first.” If you’ve passed out, you’re not going to help anyone. Likewise, if you’re laid off in the first stages of a merger or takeover, you’re not going to be able to help guide the organization to a safe landing. There are a number of steps you can take to avoid the loss of your job, and the loss of your department, in a merger or takeover. None are infallible; it is unfortunate, but often choices are made based on personalities or power relationships.

Milestone: a deadline by which some important, measurable outcome will have been reached (a system implemented, customer turnover reduced by 10%, $1 million savings from employee ideas)

SWOT analysis: analysis of strengths, weaknesses, opportunities, and threats

Stretch targets: a high target, above what one would normally expect to be able to achieve, to motivate people by raising expectations

Synergy: where the whole is more than the sum of its parts

As the acquisition of Chrysler by Daimler-Benz shows, profitability and practical matters can take a back seat to personalities and power relationships.

Aside from the political and personal influence moves which are outside the scope of this article, there are some steps you can take. First, you should have a good, clear picture of how your department adds value to the organization, described in terms the CEO and other powers would resonate with. What is your contribution to the bottom line? Can you provide a brief presentation of problems you have seen in the organization, and steps you have taken to resolve them? Do you have cost savings of interventions your department has undertaken, e.g. quality initiatives, cultural change, employee survey-based change, facilitated process reengineering, etc.?

One way to justify not only your department’s existence, but also its leading role in the merger integration, is to link key results to human issues. Having a consulting firm statistically link employee survey results (possibly from existing data) with operational, customer, or financial data can pack a powerful punch. “Not only do we know internal communication is important, but we know raising it by ten points increases customer retention by 5%. That leads to a $600,000 increase in revenue!” Similar analyses can be used to predict employee retention.

An outside source of affirmation is The Loyalty Effect, a book which links customer retention to revenue and profit. This is not a major breakthrough — it can cost ten times as much to gain a new customer as to keep an existing one — but the research support is enormous.

More significantly, the writers show how employee retention has a strong impact on customer retention, which in turn has a strong impact on both profit and revenue. This “bottom- line” argument can both position you as having a strategic mindset, and give more weight to the “people issues” which are key to a smooth, productive integration.

Collecting key department success stories – money saved through best practices, innovation, or simple good sense, services provided, etc., is usually helpful.

The key here, and you probably have guessed this by now, is to show how much value your department adds, using as many quantifi- able metrics as you can.

Find all cost savings, efficiency increases, and other positive outcomes that you can, and show how your department is a profit center, not a cost center.

It’s not a guarantee, and it may not even work as well as forging strong personal relationships, but it can be very convincing, and a show of good faith (and a demonstration that you, personally, understand “real business issues.”

Wrapping it up

By knowing what makes mergers succeed, keeping an eye on the human issues as well as the financials, and using appropriate tools, companies can make mergers work.

Your job as an HR manager is to quickly develop a strategy for helping the company to achieve the synergies it needs — and develop HR’s game plan for leading the process. It helps to have achievable goals, with stretch targets, and concrete milestones (supported by good, valid measures) for implementation.

The most important step may be to sell the process – because the best change plans are useless unless they are implemented.