An HR prescence at an early stage in negotiations may be the key to more successful mergers
Samuel Beckett’s famous axiom about his life’s purpose being to "fail, fail again, fail better" is one that is apparently dear to many chief executives’ hearts. They merge, acquire and deal like never before.
Boardroom confidence in mergers and acquisitions has taken the value of such transactions to an estimated global value of $2,200bn. In the UK alone, the DTI informs us, UK companies were involved in acquisitions and mergers worth some £53.8bn worldwide in 1998. That’s up on the £19bn of 1997 and the £13.4bn of 1996.
And yet in over 80 per cent of the deals sealed, firms fail to produce any increase in value for shareholders.
But despite all the talk of commercial logic and synergies, they are normally a disaster.
According to a new study from KPMG, 80 per cent of senior executives believe the deals they have done furnished benefits for shareholders.
Yet, in fact, in 83 per cent of cases, the merger failed to yield any benefits at all.
Worse, in more than half of the 700 deals looked at by KPMG between 1996 and 1998, the deal actually destroyed value. In many instances, those executives are in no position to know either way, as almost half of the organisations never even bothered to find out if the merger had benefited anyone.
Forgotten people factor
And the reason a deal is usually doomed for M&A failure, personnel professionals will by now have guessed, is the forgotten people factor.
As Sue Cartwright and Cary Cooper argue in a new IPD book, HR Know-how in Mergers and Acquisitions, most M&A decisions are based solely on projected earnings and economies of scale.
The people involved are a matter for operational management after the glorious deal is done.
In one of the classic instances, Royal and SunAlliance had duplicate boards for over a year – a fine example of leading from the front.
“Too often the human resource management aspects are forgotten when firms engage in M&A activity,” the authors say. “In many ways the process of merger is much like a marriage. Whether two organisational cultures are compatible is not a question often asked by boards and chief executives intent on finalising a deal.”
And yet many in the personnel field have been arguing this for a very long time. Is anyone listening?
John Nicholson, chairman of business psychologists Nicholson McBride, says that counter-rational attitudes towards mergers are analogous to the universal conviction that interviews are the best way to recruit people.
In the face of all the evidence, everyone likes to believe they are splendidly intuitive selectors of people.
“Just look at the people around the top table when mergers are done – chief executives, aided and abetted by bankers, stockbrokers and lawyers. They are focused on getting the deal, and that alone – not the things that will ensure success.
“There is so much going on in a merger, everyone is so busy and so much is happening that actually making things work is inevitably put back. It is not rational, but it makes good psychological sense.”
Merger situations are drenched in adrenaline, back-slapping and bonhomie and, all too often, HR specialists are likely to be the killjoys, calmly pointing out culture differences and technicalities.
But yet the gradual accumulation of data does suggest their presence early in negotiations might genuinely be the key to more successful mergers.
In one major study from 1989, AF Buono and JL Bowditch concluded that even when, on paper, acquisitions made good business, strategic, financial, economic and operational sense, they still had a 50:50 chance of failure. So few companies are good at the dull and gritty business of meshing organisations.
Andy Booth, research director of business performance consultancy Managing the Service Business (MSB), says, “It is very easy to get carried away by the synergies. Mergers do affect people. They can find themselves working with their sworn enemy, so inevitably, culturally, it is a very difficult step to take.”
As a result, M&As are the proteinaceous hunting grounds for the gannets in the executive search business. Many valuable staff are likely to leave in the process of a merger.
According to Chris Long, a director at Norman Broadbent, the exodus tends to work in two phases. The first is driven by the merger itself with posts duplicated and a redundancy plan often clumsily instituted.
But there is a second phase, 18-20 months down the line, when raised expectations are dashed and people are disappointed with the results.
“For us,” he says, “mergers are vital to our business and, yes, the basic reason is that senior HR people are not involved early enough in the due diligence process. Cultural differences and process realignment are simply not taken seriously enough, and as a result they often go wrong.”
However, Dr Michael Greenspan, M&A veteran and partner at organisational development consultancy Kiddy and Partners, argues there is a tendency to reach for the ubiquitous “culture clash” when carrying out inquests into the failure of mergers. Instead, he says a more likely explanation for failure is poor planning and bad management.
“Culture clash tends to be dragged up and blamed as an excuse for things going wrong, when really so many companies pay unrealistic prices for their acquisitions with some premiums as high as 44 per cent.
“They should look more at the robustness of some of the strategic thinking. Success is not directly linked to the similarity of the companies. If it was, companies with similar HR systems would do better, but that is not the case.”
Greenspan agrees that early involvement of HR people and operational managers – both of whom should be prepared to point out pitfalls to dollar-eyed CEOs – is paramount.
But he also counsels the importance of planning the post-acquisition strategy in advance of the deal being concluded. Strategy should be ready to be unveiled the day the deal is signed.
“All too often,” he says, ” the change is not managed. Uncertainty is inevitable, but the negative effects can be controlled. Tough decisions should be made quickly and then support should be available to help people adapt.”
For those not wishing to plunge head-first into the turbulence of a full-blown merger, fashion is on your side.
Andy Booth, research director of MSB, believes strategic alliances are starting to catch on – especially in the airline, automotive and IT sectors.
Alliances offer many of the advantages, but hardly any of the risks, he says.
“Companies would do well to be thinking about an alliance before a merger. They can get the benefits of size and the pooling of experience and assets, but without the risk of long-term damage.
“If two organisations have swapped equity, it is a relatively permanent form of arrangement. If an alliance founders, it is less important.”
Key motivators for alliances include cost savings and improved operational efficiency through joint purchasing, shared distribution networks, joint training programmes, shared marketing campaigns, and combined research and development initiatives.
But Booth says there are cultural problems with alliances too – of culture clash and employee suspicion of acquisition by stealth.
“Just like a merger, a poorly considered alliance structure can alienate employees. If one side is suspected of gaining too much power, a whole raft of people will feel overlooked and undervalued.”