The downturn in the economy may have produced some unlikely
M&A bedfellows but one thing remains constant, the need for HR to become
involved in the process as early as possible, finds Jane Lewis
Ask any investment banker whether 2001 has been a good year for mergers and
acquisitions activity and brace yourself for a shower of expletives. If the
City has been feeling the pinch in recent months, much of its pain can be
ascribed to falling levels of activity in this area. "Nothing’s going on –
the deals have all dried up," says one Credit Suisse First Boston
employee. "People in M&A are going to be laid off left right and
centre."
Given that the acquisition cycle typically follows that of the Stock Market,
it is no surprise that the flow of deals has slowed to a trickle – particularly
given the unprecedented bonanza at the height of the high-tech boom. If you
wanted to hike your share price, as the sad example of Marconi demonstrates, it
was a simple enough affair. Start acquiring and keep on going until you have
replaced a £3bn cash mountain with a £4bn debt. It was this strategy that,
briefly, made Marconi worth £34.5bn. And it was this strategy of carefree,
almost indiscriminate buying that ultimately crippled it.
"Many mergers are driven by the egos of CEOs," says consultant and
chief executive of Create, Amin Rajan. Certainly at the top level of
international business it is impossible to ignore the whiff of personal
ambition and intense sense of competition between individual executives. If one
moves, the other has to challenge. It was Mannesmann CEO Klaus Esser’s
spectacular coup of acquiring Orange that ultimately provoked rival Chris Gent
of Vodafone to launch a counter hostile bid on the German phone giant in
December 1999.
Similarly, GE’s recently retired chairman Jack Welch may never have
attempted to acquire Honeywell as his final swansong had not a smaller rival
already expressed interest. At this level of corporate chess a lot of decisions
are made by gut feeling. The fact that the Honeywell deal – finally scuppered
by the European competition authorities – would have been the largest ever
struck must surely have impressed Welch, a man with an eye on posterity, as a
suitably impressive bang to exit on.
During the bouyant days, there seemed to be no limit to the imaginative
expansionist activities that companies were prepared to contemplate. Only a
year ago the technical giant Hewlett-Packard was eyeing up
PricewaterhouseCoopers’ consulting business – a major leap into the unknown by
any reckoning. Now that the downturn has hit, however, the mood has switched to
retrenchment and consolidation. HP’s defensive $87bn (£55bn) merger with fellow
technical giant Compaq last month was a prime example of a likely new wave of
mergers – those born of necessity. "It’s a union of two desperados in
tremendous difficulties," says Rajan.
Now that the chips really are down for many companies, this is likely to be
the pattern of things to come. We are going to be hearing a lot more about
finding "structural solutions" to problems (for this, read,
cost-cutting) via mergers. Old hands like Chris Matchan, currently HR director
at Korn-Ferry International (but with a track record that includes Pentland,
Diageo and Citigroup) are unashamedly cynical. "Ninety per cent of mergers
are purely because two management teams run out of strategic options," he
says.
The rationale for merging may change with the economic climate, but both
research studies and anecdotal evidence suggest that one depressing fact
remains as constant as ever: HR is still on the back foot when it comes to
M&As. Leading management figures have long argued for the importance of including
HR in the early stages of any deal. Recent research from US HR consulting firm
Towers Perrin (the latest in a steady stream of surveys on this subject)
demonstrates the value of the argument. It found a direct correlation between
the extent of HR input and the likely outcome of a merger. "The earlier HR
is involved in the process, the greater the likelihood of success," it
states. And Jeffrey Schmidt, Towers Perrin managing director for innovation and
research, reinforces the importance of HR’s role by saying, "The soft
stuff is the hard stuff".
In the short term, the future looks grim. "History suggests that very
few executives have the skills (and luck) to pull off successful cost-cutting
mergers in the teeth of a downturn," claims one commentator. Too often
timetables slip, tough decisions are ducked and important issues fall through
the planning cracks. No wonder the resident M&A expert of Roffey Park,
Valerie Garrow, chose to entitle her book on merging successfully In Search of
the Golden Fleece. "We called it that because you set out with high hopes,
but can get lost on the way," she says.
Here’s our own four-stage our-stage guide to successful M&A navigation
for HR directors.
Pre-deal: Selecting the target
"In an ideal world HR should be consulted when a company board is
deciding to merge," says Amin Rajan. But how realistic is this in a world
where price, market and legal issues are still deemed the decisive
considerations? "There’s an argument that HR will never be involved in the
genesis, because it starts in smoky rooms populated by chairmen and
bankers," claims HR director Chris Matchan "That’s how it happened at
Diageo: George Bull [Grand Met chairman] and Tony Greener [Guinness chairman]
just decided over dinner. The original thought is always about the two balance
sheets and the two P&Ls [profit and losses] – it’s always about
numbers."
"There are so many issues during an M&A that it’s easy to forget
about HR," adds legal M&A specialist David Beswick, a partner at
Eversheds. "Often other issues – how much the company plans to pay, how
acquired brands will be structured, whether shareholders will accept the deal
and so on – take precedence."
HR involvement is often seen in the City as an irritant, an unnecessarily
complicatting factor that could wreck an otherwise "perfect" deal.
Given the influence of the markets on the mindset the average public company
chief executive, it is hardly surprising "senior executives have a
reluctance to get HR teams involved", he says.
But Beswick is convinced that somehow or other "HR has got to force
itself onto the agenda" even in the most preliminary stage of a deal.
There is evidence this is beginning to happen in some companies –
particticularly those at the sharp end of the knowledge economy, whose main
value lies in the skills and capabilities of their people. In these sectors, at
least, claims Rajan, many HR directors are now making their views felt at the
outset.
He admits such involvement is still rare. HR directors are still regularly
having surprises sprung on them even in blue-chip companies. One reason is the
vast disparity of talent in the profession. "There are some outstanding HR
people, and there are some outstandingly mediocre HR people," says Rajan.
But in those companies where HR played a role in target selection, two common
factors were evident. First, the HR director enjoyed high personal credibility
in the company and was "someone the CEO had enormous respect for".
Secondly, they had previously been involved in a routine basis in discussions
about future strategy.
The difficulty lies in winning this trust in the first place. Rajan’s advice
is to play a long game. "HR directors should push forward, but the only
way to do this is to secure a series of small successes. You need a track-record
– simply being assertive isn’t enough," he says.
But how should you act if it’s clear to you, if not to the rest of the
board, that the proposed merger is wrong, that it will never work in HR terms.
"You need a very strong HR person to say ‘don’t do it’," says
Matchan. "Someone right at the top of the table prepared to say the
unsayable. I wonder how often that happens?" In most circumstances, he
believes, HR directors usually duck the issue for fear of being labelled a
"sales prevention person – the HR director just charges round doing what
he’s told".
Due diligence
Rajan reports a much higher incidence of HR involvement in this, the second
stage of any M&A deal. This is unsurprising, after all due diligence is an
HR responsibility says Beswick. There’s a whole list of chores to consider.
"You’ve got consultation, Tupe issues, working councils, revising terms
and conditions," says Beswick. Indeed, it is precisely this kind of
governance issue that is often HR’s passport into the process, says GlaxoSmithKline’s
global head of HR, Michael Moore. "Things like pension funds get into very
early discussions."
But it’s the kind of due diligence that’s done that’s really important to
the eventual outcome of a deal says Rajan. And he has identified a critical
gap. "Much of this gets left to lawyers or strategy departments that don’t
really understand cultures." The reason why HR contribution is so
necessary at this stage is many CEOs don’t recognise the possible cultural
clash between organisations and how to identify a mismatch. "They see
their companies in terms of engineering mechanisms. Two companies may be ideal
partners for a merger in product terms but they could have two entirely
different sets of behaviour. There is a behavioural side to organisations which
is very unpredictable and difficult to foresee."
A failure to tackle this could prove ruinous in the long run – and has
frequently done so. It is often cited as the greatest cause of merger failure.
Rajan quotes the example of one big banking sector merger where very little
thought was given to how behavioural aspects would be integrated. Two years on,
the new entity still has big problems with synergy and hasn’t properly
integrated.
His solution is to insist upon a cultural audit. But how do you translate
this rather nebulous concept into action? Create’s Audit Toolkit provides a
useful guide. Briefly summarised it advises: First, find out what your target’s
key business values are. Second, look at its physical systems and processes: to
what extent do they incorporate the values? Finally, study individual
behaviours of senior managers: identify a number of behaviour characteristics
and see how they perform against them.
Garrow at Roffey Park also stresses the importance of studying target employees’
psychological contracts. Are they "relational" – implying a strong
sense of reciprocal loyalty – or merely "transactional"? Your
findings will offer strong clues about how to handle staff should the deal go
through. People with relational contracts, for example, "are not going to
take kindly to being asked to reapply for a job they’ve held down for 20
years", she says.
An important role for HR at this stage of merger proceedings may be to
educate the "deal team" about people issues in M&A. But you should
also try to bring something to the party yourself. Could you, for example,
contribute to the valuation of another company by putting a price on its people
capital?
And don’t rule out more informal modes of due diligence, says Rajan
"whether you do these overtly or by slightly subterranean means". A
report examining the talents and outlook of a target’s board members would be a
welcome addition to your company’s armoury at this time.
But due diligence isn’t just about sussing out the other party. This is also
the time to get your own house in order, says Garrow. You can save valuable
time in the critical post-merger period by making a full inventory of your own
people and processes now. Check your data is reliable. "Lists are often
out of date, people have left or moved."
Finally assess your own HR function. "There is such a big difference
between the capabilities of different HR functions that this is critical,"
says Garrow. "Some are huge. some are still ‘Personnel’. Expecting the
latter kind of outfit to come up with something like a slick communications
service or counselling during the merger is asking too much." So assess
your own capabilities and consider calling in third parties if necessary.
"But never abdicate responsibility," she says.
Integration planning
Successful integration planning has always been the lynch-pin of successful
mergers – particularly given the importance of acting quickly during the final
implementation phase. The more work you can do now the better. "Those who
do better have planned," says Beswick. "Companies that have planned
slip easily into implementation. Companies that haven’t, wake up."
The main areas to consider are: developing an employee communication
strategy, designing programmes to retain key talent, planning and leading
integration effort, and developing a strategy for the new entity. Some of the
softer HR skills are also important to consider at this stage. What action
needs to be taken, for example, to help employees cope with change? It would
also be a good move to set up a mechanism of sorts to monitor employees’
attitudes to the merger.
Undoubtedly merger planning gets easier with experience. Michael Moore at
GlaxoSmithKline claims one reason why the recent link up between the two giant
pharmaceutical companies had been "pretty normal, if I can use that expression"
is that both had been round the track several times. The fact that they’d been
eyeballing each other for years also helped. "There was a feeling in both
organisations that one day it would happen," says Moore. He estimates that
since he joined what was then SmithKline & French in 1987 the company has
done a deal that would impact people once every 17 months. "We’ve had
mergers, acquisitions, we’ve sold companies and we’ve made strategic alliances.
As a result we’ve built up a capability," he says.
Those companies for whom merging is a way of life may very well have built
up an arsenal of useful templates. But, as Garrow points out, many first-timers
walk in with their eyes shut. "Companies who haven’t been through mergers
don’t realise the impact of wading through all the data – having to deal with
the implications of things like pensions and contracts. In a first merger the
HR team can be overwhelmed. It’s a mammoth task."
Good planning, as well as morale, in the midst of a merger, relies on frank
communication between both sides. But this is frequently hampered by the
involvement of third parties who may restrict how much information either side
may disclose. In the past, it was usually Stock Exchange rules on
confidentiality that got in the way. But a growing number of proposed mergers
find themselves under scrutiny from the competition authorities, whether US or
European, and this limbo period and waiting for regulatory approval, as Moore
reports, can prove very frustrating to the process of implementation planning.
But the more detailed a map you can sketch of the proposed new company – how
its organisation will be defined, which key managers will be retained, what
will be its main strategic goals, and so on – the better.
Finally there’s your own position to consider. "There can be quite a
lot of individual competition when HR departments vie for control and compete
for jobs," says Garrow. Her advice is to be as scientific as possible.
"Get a feel of the best practice in both organisations. One company may be
particularly strong on devising comp & bens, the other’s strength may lie
elsewhere."
If your own job is on the line, it may be difficult to act objectively. But
you must at least recognise that if you plan to stay you also have a vested
interest, says Matchan. "You’re crazy if you think that’s not going to get
in the way." It’s equally important, he believes, to ensure that a measure
of realism is brought to the way the deal is presented to the workforce –
particularly with regard to the attitudes of senior management on both sides to
the deal.
Honesty, within reason, is always the best policy. "You can’t just put
two hardwired individuals together and presume they’re going to love each
other. But that’s what boards pretend is going to happen," says Matchan.
Prior to the AOL and Time Warner merger, for example, there was a strong sense
of conflict between the two sides that belied the public handshakes and shows
of outward bonhomie. "It doesn’t pass the bullshit test does it? You’re
immediately telling a great corporate lie which doesn’t bode well for the
future."
Implementation
Research shows that one of the most decisive factors influencing the success
or other-wise of mergers is how quickly the new company can be integrated once
the deal is done and dusted. On this point, says Matchan, your approach needs
to be highly pragmatic. "If I’ve learnt one thing, it’s you have to
sacrifice quality for speed in mergers. I wouldn’t normally say that – but
you’ve got to put people out of their misery," says Matchan.
This is a critical time, adds Garrow at Roffey Park "because everything
happens so quickly. The post-merger period is a time when employees are
thinking about themselves – about their CVs, their houses, their future –
nobody’s doing much work".
Prolonged uncertainty is not only a recipe for greater internal upheaval, it
can also play havoc with the new operation’s performance. By focusing inward
for too long, companies run the risk of taking their eye off the main game. You
should see the emerging new company in its earliest phases as a malleable
entity that can be shaped.
"If you leave it six months, you’ve had it," says Beswick at
Eversheds. "At the start people are scared – which makes it easier to get
change implemented." Companies that dither at this stage, he adds, risk
losing a large chunk of their prize asset. "You could have thrown away all
your money because the talent walks out of the door."
Effective communication, both in terms of individual positions and the
company’s wider strategic aims, is clearly of paramount importance,
particularly if the pace of change is fast and the ethos of an organisation
continually changing. "Some building societies have gone from merging, to
becoming a plc, to becoming a bank in a very short timeframe," says Garrow.
"People have to feel they can cope with that."
Setting up forums in which staff can express their anxieties may be a useful
step forward, but HR also needs to take a proactive role when it comes to
giving reassurance, she adds. "You need to work hard to show people they
do have a future and are valued." A good way of achieving this is to begin
assessing training and development needs now.
The process of creating a new culture – or conveying your own to a newly
acquired organisation – is clearly critical. But here again, it’s important not
to mislead. "HR people can be guilty of a lot of hype about
‘culture’," says Matchan. "The brand new culture looks fantastic on
paper, but it’s completely impossible to implement. You don’t just form Culture
No. 3 from two different companies. It takes years."
That said, you can and must send out clear signals from the outset. One key
finding of Valerie Garrow’s research was that "you can’t paint on a
culture afterwards". The way you handle restructuring, make appointments
and decide reward strategies counts. "These are all issues that send out
messages on the new values," she says.
Handling third-party involvement
As the failure of several high-profile putative mergers demonstrates (BT and
MCI, GE and Honeywell, to name but two), the role played by the competition
authorities in determining the outcome of international M&A activity has
intensified in recent years. And this has only added to the uncertainty facing
many organisations mid-deal.
Although companies have always had to abide by Stock Exchange rules when it
comes to issues like pre-deal disclosure, these have largely been predefined
and have rarely interfered with the timeframe of mergers. The problem raised by
the anti-trust authorities is that it can be very difficult to predict outcomes
– particularly since the view taken by US authorities may contrast strongly
with what the Europeans have to say. You may get the go ahead from one set of
officials, only to find yourself stymied by another.
The worst thing about the process from the point of view of HR is the
lengthy time it can take before regulatory approval is given. The
GlaxoSmithKline deal, for example, was in limbo for a full year while officials
wrangled over details. This severely interfered with pre-deal planning
arrangements.
Sign up to our weekly round-up of HR news and guidance
Receive the Personnel Today Direct e-newsletter every Wednesday
From the point of view of individual employees worried about the future,
this state of "phoney war" is particularly wearing – and the
prolonged uncertainty it causes can put HR in an invidious position. Head of HR
Mike Moore describes how it was necessary to tell certain individuals,
"This is the job we want you to do in the new company. But we can’t go
into detailed aspects of the job, and we can’t talk about what we’re going to
pay you." The longer the process draws on, the greater the fear that key
staff will simply act on their own initiative and leave.
"It’s a weird scenario," adds Matchan. "You have to act on
the assumption that the merger will go ahead, that there will be a third
company emerging." And all the conventional wisdom suggests you need to
let staff know as quickly as possible whether they will be retained. You could,
for example, find yourself in the position of informing an individual that his
or her services are not required in the new company, only to find yourself
back-pedalling frantically if the merger is called off. "Pulling off
stunts like that needs an exceptional HR person with brilliant skills."
