HR
chiefs have a major role to play in any successful merger. As Tom Lester finds
out, it is up to them to mould the prospects of the amalgamated organisation by
cherry picking the best talent from both companies Â
Harassed
HR directors may see some welcome relief in the current decline in the volume
of mergers and acquisitions. Nothing is more disruptive and stressful than a
messy takeover, with the HR staff left to pick up the pieces. But the long-term
trend in M&A activity remains relentlessly upward, and the ability to make
the contribution that a sizable merger demands has to be part of the HR
toolkit.
In
the past, M&A was regarded as a peculiarity of the Anglo-Saxon way of
business, with its emphasis on short-term performance and the rights of
shareholders over those of employees. These issues remain open, but in recent
years, many industries, from pharmaceuticals to the automotive industry, have
consolidated and are then faced with the challenge of radical restructuring and
technological change. GlaxoSmithKline and DaimlerChrysler are two cases in
point. But an increasing number of industries now favour achieving global scale
in a few products as their strategic goal, rather than national scale in many.
Each
big M&A move has a kind of ripple effect, as the logic, once worked
through, points to further disposals and amalgamations. When the UK’s Vodafone
took over Mannesman, it wanted only the fast-growing mobile phone network that
the company had built up in Germany. It had no interest in Mannesman’s
traditional steel and engineering interests, so these were sold on.
Even
without these secondary deals, the number of large cross-border M&As in
Europe alone (as the table on page 12 shows) has climbed almost exponentially
in the past decade from just two to 109. The first quarter of this year showed
a 30% decline compared to quarter one last year, but no one doubts that there
are more deals in the offing. The banking industry for one, in spite of the
string of amalgamations over the past few years, is still regarded as ripe for
further rationalisation. HR directors cannot therefore afford to be caught
unprepared.
It
is widely seen as a paradox that in spite of the growth, according to KPMG,
anything up to 70% of acquisitions fail to create value, and around half
actually destroy it. As in the disastrous BMW-Rover merger, mismanagement of
the human side and the underlying cultural differences are usual reasons for
the poor record. However, the fallacy in the figures comes from assuming that
"creating value", however measured, is the board’s principal
objective. Building a dominant position in a chosen world market, such as Cisco
and its 70 acquisitions has done in electronic network equipment, is often
nearer the mark. Creating value from the acquisitions can come later. Perhaps
quite a bit later in Cisco’s case.
Whether
HR directors can help improve the M&A success rate, or bring forward the
point at which additional value is created, therefore depends on how close they
are to the strategic direction of the company. The starting point has to be
"What is the purpose and logic of the bid, and how best can it be
achieved?" The situation is different, of course, if those directors are
on the receiving end of a bid, but they may still be called upon to help bring
the two parties together – and are more likely to keep their job if their
expertise is seen to be crucial to success.
Not
all HR chiefs, whatever their title, are close enough to the group strategy,
nor expert enough on the capacity of senior managers, to fulfil it. Even if
they are, the secrecy and speed that often surrounds the bid negotiations
condemn them to a secondary role from the outset. So HR should be on both ends of
the bid and should therefore make preparations. The quality and culture of the
existing managers is probably the critical factor. The time taken to assimilate
a purchase, and their prospects if it is their company that is being bought,
will depend on their competences.
One
group HR director who saw the future in these terms is Scottish Power’s Paul
Pagliari. In 1999, he was able to convince the executive committee that its
strategic plans depended heavily on the quality of the senior managers of this
formerly state-owned utility. An acquisition in particular would require a new
range of skills. So a Management Asset Valuation was carried out with the help
of consultants Whitehead Mann GKR, assessing its top 20 managers and
benchmarking them against the consultants’ database.
Pagliari
was very satisfied with the result, "We liked the process, which we
couldn’t have done ourselves. We used it not as a selection tool, but as an
incentive. It showed that we have strong management assets, but there were some
areas we needed to address." Within a matter of months, Scottish Power had
purchased Pacificorp, an Oregon-based power company, effectively doubling the
size of the group. Pacificorp’s top echelon retired or moved on as part of the
deal, so Scottish Power had to be able to manage it from day one, and urgently
needed to know which of its managers were capable of doing that, as well as
co-ordinating the two units.
The
moment such a deal is done – or, as is often the case, agreed in principle but
awaiting the regulators’ approval – the senior management and HR team have to
go into overdrive, well-prepared or not. The usual course of action is to set
up an integration team to decide on the structure, key appointments and so on,
and oversee the integration of each function. The overriding aim is to keep
both companies operating efficiently while building a new organisation capable
of delivering on the CEO’s promise to the shareholders.
The
loss of critical staff, key managers etc at this stage or later can destroy
hopes of synergies overnight. In some cases, of course, losing the old guard
may be rated an advantage, but the success of the Daimler-Chrysler merger, for
one, has been threatened by the resignation of key US managers and mutual
incomprehension of management styles. Deutsche Bank, for another, had to
abandon its attempt to take over Dresdner Bank and its Kleinwort Benson
offshoot due to the strife between rival investment bankers.
Identifying
the key people early on is therefore vital – some firms manage to do this
surreptitiously before the bid – and communicating with them in particular and
the rest of the organisation in general is a vital and urgent part of the HR
role. When the pharmaceutical companies Astra in Sweden and Zeneca in the UK
merged two years ago, recalls HR vice-president Tony Bloxham, "We
identified a long list of critical people round the world – several hundred –
to whom we said ‘You’re highly regarded – hang in there, you’ll have a role.’"
Bloxham
claims it was the first pharmaceutical merger not to lose market share, and a
number of rivals have taken its success as their benchmark. Two further
features of the operation stand out. One was to apply, with Egon Zehnder’s
help, consistent management standards across the organisation, irrespective of
cultural and educational differences. The other was to communicate these
standards via the intranet along with 60 questions to be used in the interviews
to ensure the selection was made in an open and transparent way.
Many
of the so-called authorities on M&A, particularly from the US,
underestimate the cross-border complications in a merger, and indeed often
ignore the obvious problem that one party cannot know how the other party’s
managers rate against its own, especially if they live in another country. So
senior managers rely on the people they know, increasing the sense of
unfairness and uncertainty among the others, and probably losing many able
people in the process.
Management
audits are a valuable tool in this context (see box opposite). Using external
consultants may be expensive, but they can provide a valuable insight
relatively quickly into how well the competences of managers on both sides
compare with each other and with global standards, and how well they are likely
to match the strategic challenge ahead.
Check
list for M&As
–
Keep as close to the strategic thinking of the chief executive as possible. Aim
to ensure the competences of the senior managers match his ambitions.
–
Be prepared for a merger or acquisition. Be ready with nominations for an
integration team.
–
Plan the new structure through the integration team with top appointments being
made early on.
–
Aim for a realistic timescale.
–
Expose the tough decisions and obtain agreement.
–
Where conflicts arise, be ready to have senior managers independently assessed.
–
Be realistic about salary and bonus expectations, but aim for a unified
structure.
–
Assess cultural differences and implications.
–
Communicate with all staff as much and as early as possible. Recognise and meet
worries over jobs, location, culture, pensions, bonuses, etc.
Management
audits
These
are a European invention which are slowly gaining popularity in the US. The
pioneer is the Swiss search consultancy Egon Zehnder, closely followed by
Whitehead Mann GKR.
They
claim to offer unbiased assessment (insofar as that is possible) of individual
managers, EZ does it by interview alone, WM by a combination of interview and
psychometric tests. The assessments, set against a common set of criteria, can
be applied globally. They have the resources to process a large number of
managers very quickly – around 200 is the practical maximum – and can compare
the results with their databases to give an international benchmark to each person
and to the group. Even if the merger falls through, the results can be very
useful. Companies that use them claim a success rate of 90 to 95%.
Some
firms find the conclusions helpful – they believe they know the capabilities of
their own staff better than outsiders ever could and anyway, it is the company
that is left to deal with the implications of the ratings. Also, they are
expensive – around £5,000 to £6,000 ($7,500-$9,000) per head – so even a giant
like GlaxoSmithKline (see page 18) used them in its recent merger only where
there were several candidates for one job.
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Further
information…
–
Egon Zehnder International: www.egonzehnder.com
– Watson Wyatt Worldwide: www.watsonwyatt.com
– KPMG: www.kpmg.com
– McKinsey: www.mckinsey.com
– William MMercer: www.wmmercer.com
