mergers acquisitions the_role_of_hrm

© 2007 Northeastern University

Mergers & Acquisitions: Understanding the Role of HRM

July 2007

Craig W. Fontaine, Ph.D. Northeastern University

College of Business Administration

Based on: C.W. Fontaine, Human Resource Management: The key to Successful Mergers and Acquisitions., The 9th Annual Conference on Business Integration, London, 2005

Executive Summary

HR professionals play a critical role in the success or failure of mergers and

acquisitions.

Human resource management professionals must be capable of handling many unique challenges. One of the most prevalent challenges that HR professionals face and the one that requires the utmost attention is in a merger or acquisition.

HRM plays a critical role in the success or failure of mergers and acquisitions. Involving HR from the very earliest of planning stages can make all the difference in both the financial and the human outcomes.

What Are Mergers & Acquisitions? The first thing we need to examine is the difference between a merger and an acquisition.1

A merger is when two companies, more or less on equal footing, decide to join forces. There are many reasons why companies merge. We’ll address those reasons later. The basic attribute of a merger, however, is that it is considered to be an equal transaction, with both parties accepting risk and sharing in the potential rewards.

Acquisitions are different in the sense that one company is, in fact, taking over another company. Of course, some companies want to be taken over and some do not.

One of the most challenging acquisition situations an HR professional (or any other professional in the organization) can face is the hostile takeover. A hostile takeover is simply when a larger, more powerful, and richer organization takes over another organization. They accomplish this by typically offering a premium of 20% to 25% over and above the current stock price. This is, of course, a powerful influencing tool, especially for those individuals who hold a lot of shares. And those that hold a lot of shares are often on the board of directors or sit in positions of power in the organization being taken over.

The concept of “hostile” goes beyond the way in which an organization is acquired. When you enter into an acquisition situation, there can be a lot of real hostility internally because people do not want to see their companies taken over. The situation can easily become even more hostile as you go through the acquisition process.

Mergers & Acquisitions: Understanding the Role of HRM 2

The 5 Waves of Merger & Acquisition Activity in the US Mergers and acquisitions are not a new thing in the United States. The how-and-why of modern mergers and acquisitions has evolved over the decades, starting in the late 19th century and moving into the 21st century.

In the late 19th and early 20th centuries, economic conditions, technological innovation, and competitive forces came together to drive the First Wave of mergers and acquisitions in the US from 1894 to 1905. Many call it “The Great Merger Movement.” During this First Wave of activity in the US, there was an unprecedented number of horizontal mergers. Reports Lamoreaux in The Great Merger Movement in American Business – 1895-1904: “More than 1,800 firms disappeared into horizontal combinations, at least a third of which controlled more than 70 percent of the markets in which they operated.” 2

Modern mergers and acquisitions are a result of M&A evolution from the 19th century to the

21st century.


The Five Waves of Merger Activity in the US

In the midst of The Great Merger Movement came the Sherman Antitrust Act which prohibited monopolies. After the Sherman Antitrust Act came the Second Wave of mergers and acquisitions. Between 1915 and 1930, companies called “oligarchies” began to form and did business in a market space in which there were a relatively small number of sellers.

Great examples of oligarchic organizations in today’s modern market might be companies such as Coca-Cola, Pepsi, and Schwepps. The beverage industry is a huge industry with billions of dollars in potential profit. These companies all are in the same business and in the same market space, and they cooperate to some extent.

While we know our country’s business history is filled with

M&A activity, the reasons for mergers and acquisitions are

less obvious. Then, businesses across the US were disrupted on October 29, 1929, when the US stock market crashed. The subsequent Great Depression lasted until the time of The New Deal and the advent of World War II.

The Third Wave of mergers and acquisitions in the US came in the 1960’s during a booming economy. This was when we first began to see huge conglomerates being formed. Conglomerates are the result of the combination of companies which actually had nothing to do with one another prior to the merger or acquisition. They were simply trying to increase their size to leverage the advantages of having a large company.

The Fourth Wave, in the 1980’s, was the age of the so-called hostile takeover. You may recall the well-publicized 1988 leveraged buyout of R.J. Reynolds Tobacco, which came to basically define the “hostile takeover” for most Americans. These are instances in which tremendous amounts of money are applied to entice shareholders to agree to such takeovers.

From the 1990’s to the present, we have seen the emergence of a different kind of takeover – the Fifth Wave of strategic mergers – in which organizations intentionally try to absorb other companies to increase their market share and gain competitive advantage.

Why Do Companies Merge? While we know our country’s business history is filled with mergers and acquisitions over the decades, the reasons behind this M&A activity are less obvious. We should now address the real issue of why companies merge.3



Economies of Scale The largest single driving force behind mergers and acquisitions is probably economies of scale. Economies of scale means that if you have a large company, you can leverage your suppliers. This is a very powerful capability, and exercising it can be a strategic move for a company’s operations. You can save a tremendous amount of money on services such as health insurance — we all know that health insurance is extraordinarily expensive and getting more so every day.

I know about the strategic benefits of economies of scale from my personal experience of working as a consultant in a small merger and acquisition in 2006 in which two failing private schools joined together to become one successful entity. One of the major contributing factors for the success of this merger was that the combined organization had more people who were buying health insurance; as a result, the health insurance company substantially dropped their premiums because the risk was being spread across more people.

Large companies can also buy basic supplies such as paper, pencils, and paperclips less expensively from suppliers when they buy in larger quantities. They simply get a lower price because they give the suppliers more business.

Saturated Market Consolidation Another driving force for mergers and acquisitions is the consolidation of saturated markets. If you have a market that is saturated – one in which there are many players in the space with a lot of competition – you can take over one of your competitors and then automatically increase your market share.

This, in turn, allows you leverage economies of scale on a more critical level than on office supplies and services such as insurance. For example, if two companies manufacture similar products, their combined organization has the potential to significantly decrease the cost of goods sold by purchasing raw materials in bulk. And when the cost of goods sold goes down, profit, of course, goes up.

Competitive Position Improvement The third driving force has to do with simply improving your competitive position because you end up with a larger asset base and increased notoriety. For example, consumers are more likely to purchase services or products from large, recognized companies.

As we’ve seen, there are very good reasons why organizations decide to engage in mergers and acquisitions. But, if you want to drop down to the next level of detail, we need to take a look at exactly what organizations are trying to achieve when they do, in fact, elect to merge or acquire another organization.

More precisely, they are attempting to create synergy…

Synergy synergy (n)

Cooperative interaction among groups, especially

among the acquired subsidiaries or merged parts of a corporation,

that creates an enhanced combined effect.

American Heritage Dictionary

Synergy, is what organizations are attempting to achieve when they engage in mergers and acquisitions.4

The first thing that we know, and probably one of the most critical things when it comes to mergers and acquisitions, is that companies almost always immediately presume that they are going to reduce staff. This is, in fact, true. Staff reductions represent a tremendous savings to organizations post-merger or post-acquisition.

When organizations merge or acquire one another, there are some horizontal departments or functions in both organizations that can be very easily consolidated. This includes such functions as accounting, human resources, marketing, and even the sales department. And, given that staffing usually is one of the larger budget items for an organization, Staffing Synergy can be an immediate benefit.

Another contributor to synergy is the acquisition of new technology. Given that technology is such a key driver in today’s business world, Technical Synergy is something that we need to examine more closely.

Perhaps the best example that I can provide is from my personal experience when I worked at EMC Corporation. EMC Corporation was a company that made huge, secure storage devices for some of the world’s largest organizations. All of the airlines, banks, and car rental agencies were using EMC systems.


What they did not have was a product that was useable by small- and medium-sized enterprises. So, EMC acquired Data General Corporation. Data General was in exactly the same business as EMC. They had a very fine product in the $15,000 - $30,000 range, where the EMC systems were $1 Million plus. By EMC’s acquisition of Data General, they were able to absorb a new technology and introduce an entirely new product line for their customers and open a new market of all those customers who were not coming to EMC because of the cost.

The last one, we’ve already touched on briefly, is the concept of Financial Synergy. It is the notion that when you have more visibility because you are larger, it easier to raise capital and more customers naturally flow to you. And it also encompasses economies of scale.

Now that we’ve looked at the “why” of mergers and acquisitions, let’s look at the “how”… Merger Types When companies decide to engage in a merger their reasons typically fall into one of six categories. 5 The first type of merger is a horizontal merger. This is when two companies who are currently in direct competition join together and share their product lines, their markets, and their customer base.

Chances are, if you are an HR professional, you

will eventually find yourself in the middle of a merger

or acquisition.

A vertical merger is when a company, and perhaps one of their suppliers, join together to be able to offer a contiguous, non-interrupted supply of merchandise to their companies. An example might be an ice cream cone manufacturer merging with an ice cream maker so that both products can be acquired from a single entity, thereby presumably making it easier for the customer.

A market extension merger is with two companies that sell the same product in different markets. This is an interesting type of merger because companies can be regional. Companies can have different segments of the marketplace in which they have gained a reputation. By acquiring another company that has a foothold in another market, you can automatically increase the markets that you address.

A product extension merger is when two companies selling different products in the same market merge. An example of this is the EMC/Data General example where EMC sold at the high end and Data General sold at the low to mid range.


A conglomeration merger is where two companies who don’t have a lot to do with one another decide to merge. The reason for this would be economies of scale, and getting a larger identity and more assets to be able to leverage for loans and other financial purposes.

And finally, as mentioned earlier, a strategic merger is the newest type of merger that may involve some or all of the features of the other merger types mentioned above.

No matter what type of merger, HR professionals are likely to encounter merger and acquisition challenges due to… Rapid Rise of Merger & Acquisition Activity in the US Merger and acquisition activity is increasing in the United States. Activity rose 38% from 2004 to 2005; in fact, 2005 was the first year in which we passed the $1 Trillion mark.6 What’s more, the upward trend continued through 2006. The numbers make it painfully clear that most human resource professionals are going to encounter at least one merger or acquisition in their careers.

Source: UNCTAD Foreign Direct Investment Interactive Database7


A Growing Global Merger & Acquisition Profile From a global perspective, the rest of the world is also beginning to see increased merger and acquisition activities. You can see from the chart below that in the Pacific Rim alone there is a substantial amount of activity:

Source: Learnings on M&A Integrations, the Cerebrus Group8

Mergers and acquisitions are a growing trend, and analysts don’t see any downturn over the next 10 years. Therefore, we need to look at how human resources professionals can assist in the success of an acquisition.

There’s no question that their assistance is needed because the success rate numbers are bad. Shockingly bad….


Merger & Acquisition Success Rate It might be more accurate to use the term failure rate rather than success rate. Why? Industry analysts agree that the failure rate of mergers and acquisitions is somewhere between 40% and 80%. A lot of sources average it out at 50%. This is a fair number to use for the sake of discussion.

Even more shocking is that if you think of failure as not increasing shareholder value, then the numbers look worse, with the higher end of the scale being 83%. This means that 83% of the companies do not ultimately see the returns that were projected for the merger or acquisition after a 3- to 4-year period.9

Research also suggests that up to 65% of failed mergers and acquisitions are due to ‘people issues’ that result in poor productivity.10

Major HRM Issues in Mergers & Acquisitions Combining merged

cultures requires a focus on one new vision and one new organizational mission.

Problems typically occur

when the larger or stronger of two organizations tries to significantly influence

the integration.

Research shows that consistently 65% of mergers and acquisitions that fail do so because of people issues – cultural issues, communication issues, and so forth.

Historically, HR has not had a seat at the table in the mergers and acquisition process. You could argue that this is true in all HR activities. However, we are thankfully beginning to see a number of organizations who are beginning to truly realize that a strategic HR approach involving HR in most all business decisions and processes is a smart thing to do.

But we can’t deny that today many businesses do not consider HR to be a business partner -- they consider HR to be nothing more than a staff position that carries out a critical, but not strategic, role.

If you look at the failures and successes of mergers and acquisitions over time, it is my opinion that companies that have a strong HR leadership – companies whose senior management trust HR – have a distinct advantage which we can pinpoint in this paper.

But first, let’s look at the HR issues that inevitably arise in mergers and acquisitions…


Lack of Communication Lack of communication during mergers and acquisitions has long been identified as the most critical need. As we examine the HR issues involved, you will see a lot of references to the fact that people resist mergers, acquisitions, and especially takeovers at a personal level. The reason why they resist at a personal level is because they have not been told why things must change or how they are going to change.11

Lack of Training As companies merge and acquire one another, they tend to merge technologies. They also merge policies, processes, and procedures. In a merger situation, you end up with 50% of the people do not know the new software, policies, processes, and procedures. If you don’t train those people, and expend some of your resources on training, that will end up being negative influence on your outcome.12

Loss of Key People Often, executives are so focused on the financial

and procedural aspects of the takeover that they

ignore so-called "intangible assets," such as business culture, human capital, company structure and corporate governance.

In essence, they are so

obsessed with numbers that they forget about people.

Good people – key people – tend to leave organizations at this particular point in time.13 Many people are afraid of losing their jobs. It is a well-known fact in the business world that mergers and acquisitions usually cause staff reductions. We’ve already addressed that. It’s true. That is one of the reasons why they do it.

People who are talented – the exact kind of people whom you want to retain in the organization – are exactly the kind of people who are going to put their resumes out and probably go to your competitor. That is a tremendous loss for an organization.

Corporate Culture Clash & Power Politics Corporate culture, as we know, is a fundamental asset (or even liability) for organizations. We’ve all worked for different companies with differing cultures. I’ve worked in companies that had a very “loosey goosey,” gentle culture. I’ve worked for companies that have a very hard-driving, aggressive, competitive culture with equally aggressive internal politics and power struggles.

If one company with one style takes over a company with another style, that is indeed a difference – and it is a huge difference.14 Some people feel comfortable in the one setting and some do not. The clash of two cultures can be so detrimental that you lose key people.


Lastly, there is the issue of national cultures.15 If mergers and acquisitions occur on a global scale in which a company from Malaysia is being taken over by a company in the United States, challenges arise.

Between 40% and 80% of M&A deals fail, due to

purely human resistance to change — a problem

known as "people issues.”

People from other cultures such as Malaysia can be different – they may have a different set of values, they may believe different things, they may or may not embrace teamwork, they may have a longer vision of short-term and long-term paybacks, they may feel differently about authority and delegation. All of these things make a huge difference. An American company cannot simply take over an Asian company and presume that the Asian people are going to agree with the way your organization is structured and how you run things. This final issue is so large, in fact, that we could literally devote an entire white paper to this topic alone.

All of these issues either stem from or lead to one thing… Employee resistance. Employee Resistance Employee resistance is probably the single most difficult issue to deal with during mergers and acquisitions. I’ve already mentioned that you’re probably going to lose some people that you do not want to or cannot afford to lose. The root causes of resistance can all be countered if you take care to do it, and the HR organization is the organization that should drive this effort.16

The problem lies in the fact that resistance is assumed to be a logical challenge

with a logical solution.

A lack of information about change and the failure of people to understand the need for change can be viewed together. If leadership cannot stand up in front of the company and say the following, resistance will worsen:

“We’re doing this because we must.”

“We’re doing this because we are failing and if we don’t, we all stand to lose our jobs.”

“We’re doing this because it is going to help us. It is going to allow us to grow. We’re all going to be better off during and after this transitional period.”


You need to give complete disclosure as to why you are doing it. And, frankly, if you have to scare somebody and say something like the following, then do it:

“We MUST make this change or we may not be in existence 2 years from now.”

But resistance also has an emotional aspect which is often much stronger than

human logic.

If you do not give that kind of information to people and make it that clear to them, then they are more likely to resist.

Most people also believe that their needs are being ignored. This is because you have not allowed communication to flow upward. This has been shown in the literature to be perhaps one of the most critical elements. Even if you do not take peoples’ suggestions and implement them, the notion that at least you allow the person to voice their personal opinions is extremely critical to the outcome.

People are concerned about their personal well being. Everybody whom I’ve ever known who has gone through a merger or acquisition (and I’ve been through several myself), the first thing they think when they first find out this is happening to them is that they are going to lose their job, they are going to be transferred, they are going to have to move, or they are not going to be working for the same boss anymore. These are the things that make people want to bolt from an organization.

There can be a conflict between individual goals and organizational goals. When I worked for a nuclear engineering company called Combustion Engineering, we were acquired by a global giant, ABB out of Switzerland. They told us, “You are no longer going to be designing and building nuclear power plants. We are going to change you to a company that services nuclear power plants.” For all those people who joined Combustion Engineering because they were nuclear engineers, their life’s goal was to design the latest and greatest control systems. They no longer believed that their personal goal of being a nuclear design engineer was compatible with the new organizational goals of servicing power plants. It clearly did not require the same type of skills, knowledge, and abilities as they had brought to the table.

Clear and constant communication fromsenior management

provides decisive answersto "people issues" and

dispel uncertaintyamong employees — an

essential ingredient fora successful deal.

Many people are also going to say something like this:

“It’s not going to work. It will never work. We’re too different. We don’t have enough money. We don’t have enough systems. We don’t have enough people.”


Overcoming Resistance to Change To overcome this resistance, you need to try to focus the people on the benefits that are going to occur. You need to involve the people in the change process. If you can get them to believe that they are going to have some input in making the systems and the processes better, they are more likely going to want to stay on and be engaged and basically become committed to the new organization.

This is largely done by two-way communication. You must do it early. You must do it quickly. You do not want rumors to start. If rumors start to fly, you need to keep your ear to the ground. You need to dispel the rumors because the people who are hearing these rumors always have a connotation of something negative no matter what is being said. They must, in fact, be corrected so that you do not lose people or have that kind of backlash going on.

And, you must increase trust and acceptance by keeping the people constantly informed and constantly asking them for their input.

And HR is just the team to spearhead this effort…

The Importance of HR in the M&A Process The following chart shows the number of companies that engage human resource professionals and hold them at a high level of involvement across the various stages of a merger and acquisition are surprisingly low.17

The good news is that the business world is finally

beginning to recognize the dynamics that lead to

failure and are coming to understand the role of HRM in resolving "people issues."

Human Resources Involvement in the Merger Process18


Let’s look at the US as an example in Figure 2. In the initial planning phase, only 15% of the companies are engaging HR. HR is engaged a little bit more in the investigation phase. It’s easy to understand why HR is not more involved in the negotiation phase. But look at the numbers for integration. Less than 30% are engaging HR in the actual integration, and it is in the integration phase where all the issues that we’re discussing here occur.

As HR leads the companies through the process, there are proven best practices that they can follow to help ensure success…

HRM Best Practices for Mergers & Acqusitions Successful M&A deals

are mostly attributed to leadership, well-planned

communication andearly management of

"people issues."

After careful review of the literature, and taking into account my own personal research and experience, I have put together a set of HRM Best Practices for HR people when they are facing the daunting task of managing the complex issues involved in mergers and acquisitions.

These Best Practices are high-level, but they should give you a solid overall view of the kinds of things you need to pay attention to as you go through the merger and acquisition process:

• Leadership • Transition Team • Structure • Policies & Processes • ionWorkforce Rationalizat • nding Job Grading/Ba • Compensation Retention •

Leadership

Identify your leaders quickly.

One of the first things that you need to address is who is going to have the leadership positions in the new combined organization? 19

The one thing you absolutely do not want to do now is create a leadership vacuum. You must identify who those leaders are going to be and you must identify them quickly. This helps maintain the focus on the business and it also begins to make the transition smoother.


Leaders do not always need to be from the “acquirer” company in an acquisition. As a matter of fact, this is probably not a very good idea. If you have people in the acquired organization who see that all of their senior people are being let go and that it appears to them that everybody from the big entity is taking all of the “big” jobs, they are not going to feel particularly good about it. They are going to feel as if, in fact, they are playing a minor role, and they tend to leave for those kinds of reasons.

You need to recognize that talent exists in both organizations. If you start laying off the senior people from one organization, the rest of the people are going to doubt that they have a contribution to make.

Transition Team Quickly identify

and assemble a multi-functional transition team.

The transition team must be identified quickly and it also must be multi-functional. 20 The transition team works directly beneath leadership. Obviously, the leaders of the organization will ultimately be overseeing the transition. Your transition team should include individuals from each department, division, or function of the company – whether it be sales, marketing, engineering, quality control, manufacturing, and so on. This way, there is at least one person in all of these groups who will be able to look at the details of how the transition would happen in their group.

I am most familiar with engineering organizations, having worked in engineering organizations all of my life. After having gone through at least two major acquisitions, I can tell you that what typically happens is that some director-level person reporting to a senior leader like a vice president must start looking at the different types of products that the other company offers. They should take a look at the skill sets inside that other company and begin to try to figure out how are they going to merge people, products, and processes. Are they going to keep the products separate or integrate the products? Are they going to make it a separate division? Are they going to keep the leadership?

That is the role of a transition team. They need to make decisions, change initiatives, and provide oversight throughout the process.


Structure There are enormous

organizational decisions to be made,

and they have enormous implications

for the success or failure of the merger or

acquisition.

One of the other major things that most people overlook when they think about mergers and acquisitions is what is this new entity going to look like? How will the combined organizational chart look? Are you going to take the new company and make it a new division? We see that a lot. Other organizations might say, “No, no, no. We’re going to take the existing engineers from Company B and we’re simply going to integrate them into our larger organization.” This doesn’t change the organizational chart from a structural perspective; it only changes the chart from the fact that there’s probably going to simply be more people inside that organization. What if you do an acquisition from overseas? Does that mean that you want to structure things completely differently so that you have an international division and a US division?

We also begin to see that huge decisions have to be made from a structural perspective.21 If two small companies are merging, lots of times small companies can tend to be very centralized in the decision making. Larger organizations tend to be more de-centralized in the decision making. When you de-centralize decision making, you tend to push the decision making as low down on the organization as is logical.

You will eventually have to reconfigure the organization with all the subdivisions within functions, and get down to detailing who is going to be the senior engineer, who is going to be the manager, and who is going to be the lead engineer. But as you’ll see as we talk about some of the other best practices, that is probably best left for the detail level later on.

Policies & Processes Every organization has different policies, whether it is an ethics policy, a vacation policy, or a bonus policy. The companies must combine their policies, which means that you might take the best out of one or the best out of the other.22

HR can and does play a critical role in assessing jobs, job requirements,

and people.

Once again, you should not take one organization’s policies and try to superimpose them over the entire new entity. You can lose a lot of people by doing this.

For example, one company’s policy was to allow you to work from home. And now, you might say that the new entity is not going to allow people to work at home. You’re going to lose a lot of people, and that is something that you can’t afford to do. So you have to be very careful when you merge these policies and procedures. But, of course, costs also must be considered.


But, in reality, this is a great time to introduce new policies and new processes which can be perceived by the people to be good for them. For example, many companies these days are considering whether 2 weeks vacation is enough. If you had been considering changing the vacation from 2 weeks to 3 weeks, this would be a wonderful time to do something like that.

If you were considering things like doing profit sharing or profit gaining, or introducing any of those types of monetary inducements, this would also be a good time to provide those incentives.

The bottom line is that if you are going to make the transition happen smoothly, you are probably going to have to give something back to the people.

Workforce Rationalization The bottom line is that if you are going to make

the transition happen smoothly, you have to

“give something back” to the people.

Workforce rationalization is the part of M&A that no one wants to face, because it necessarily entails staff reductions. Staff reductions must be handled very sensitively. Most often, it will have to be handled in a phased manner.23 But I must caution you about this.

When a merger or acquisition is announced, a lot of companies tend to start laying people off in phases. Everybody ends up sort of hanging on and saying, “Well, let’s see what happens.” But as soon as that first set of layoffs happens, especially if it is followed a couple of months later by a second set of layoffs, then you are going to have a real problem with keeping the good people because they can see the handwriting on the wall. This is an excellent example of why you need to keep communication going.

If, in fact, you are going to have a layoff, it is imperative that you have an immediate meeting with the people I like to call “survivors.” Survivors are the ones who weren’t laid off. You need to call them into a room (typically done at a local level with a manager and his or her people). The manager should say something like: “You know I laid off Fred and Sally this morning. But I’m here to tell you that it is not going to keep going. If you’re in this room, you’re safe.” This immediate communication is critical to keeping the people on board.


Job Assignment Once you have your workforce rationalized and you have your survivors, you need to make sure that the survivors fit into the overall structure, which means that we need to give them some job assignments. 24

HR can provide the functional heads with all

the information they need to know about the

performance and the characteristics of each

individual.

One of the most comprehensive ways of doing this is by using a Competency Assessment. Every job in the organization should have a job description of the key knowledge, skills, and abilities necessary for that job. They key functional heads need to be involved in assessing each individual. HR provides a critical role in this. HR can provide the functional heads with all the information they need to know about the performance and the characteristics of each individual.

This person is very strong in this element, but a little weak in this element. But he’s always met his goals, he’s always been a provider, and he’s always been the kind of person who comes in and works 95 hours a week if necessary. To drill down to that level of assessment, HR will have to be engaged to a significant level.

Job Grading/Banding Another important issue is how you group people in pay brackets. This is called “grading and banding.”

As an example, let’s go back to the example of an engineering company. Every company has junior engineers, senior engineers, consulting engineers, principal engineers, and so forth. Lots of companies have 14 or 15 (believe it or not) grade levels within a particular function or division.

HR MUST be involved with how the new, merged, or acquired entity is going to handle this.25

What we see happening is what we call “broad banding.” Broad banding is where an organization eliminates many of their almost arbitrary job distinctions such as: Engineer 1, Engineer 2, Senior Engineer, etc., and bands them in the single entity of Engineer. And within that band, of course, there is going to be a huge difference in salaries. Instead of one range going from $42,000 to $50,000 and the next range going from $50,000 to $58,000, there is going to be one range with a great deal of variation. This will allow you to give people compensation based more on their performance than their seniority.



Suffice it to say that, if you are going to do this, it must be communicated. You must have the criteria available on the intranet someplace that allows people to understand. But please, don’t forget that this is a very important personal issue for people. You’re talking about peoples’ wellbeing, so please know that there’s going to be much apprehension around this issue.

Compensation Determining the compensation comparisons between the companies is obviously something that must be done. There are people who will be unhappy about the comparisons. Sometimes, there are companies that overpay people because they needed to because it was a driver for them. Their skills, knowledge, and abilities might not be as critical to the new, merged organization. Therefore, their compensation might drop, and you need to make this clear to them. You need to develop and deliver clear compensation guidelines and try not to lose your employees around these types of circumstances. 26

This is an area in which there needs to be a tremendous amount of one-on-one activity between HR and the functional managers.

Retention We’ve touched on retention throughout this paper. You need to put a retention plan in place early. A retention plan first identifies the critical people. That is not necessarily the critical people at the top, but the people who have critical skills, knowledge, and abilities that are going to be primary drivers for the organization.27

For example, if you are a pharmaceutical company and you make your money by being the most innovative and having the most creative people in R&D who are always coming up with new patents, you need to understand that those are the kind of people that you are going to need to draw to your organization – you must retain them.

You don’t want mass exodus. But if you do the things that we’ve discussed herein, you should be in pretty good shape.

The following Best Practices Check List summarizes the points made in this section…


Best Practices Check List Area Best Practice Leadership Identify the leaders in both companies.

Identify who will have leadership roles in the combined organization.

Transition Team Identify who from various departments within the combined organization is going to be a part of the transition team.

Structure Finalize the organization structure for the merged entity in context of operation size, products, etc.

Incorporate different structures and approaches. Focus first on the broad top line structure, with detailed

structures evolving subsequently followed by detailing of roles and responsibilities.

Policies & Processes Compare and study HR policies of both entities and identify areas of commonality and differences.

To the extent possible ensure no or minimum loss to ount of changes in policies. employees on acc

Consider all costs.

Workforce Rationalization

itivity in a phased manner

Balance timing with maintaining employee morale.

Handle redundancies with sensunless the issue is a large one.

Job Assignment head in assessing

the role of challenging and facilitation in a neutral way.

Perform a competency assessment. Involve top team and key functionalsuitability of individuals for roles. HR or an External Consultant plays

Job Grading/Banding ess.

Pay attention to organizational culture, willingness of leadership to implement, and HR ability to drive the proc

Ensure proper communication all through the exercise. Alleviate anxiety and apprehension among employees.

Compensation

y.

ion

Compensation comparisons by employees in both entities are inevitable.

Company should be clear in its approach and philosoph It is usual to align compensation structures. Ensure no loss to employees because of compensat

changes. Compensation announcement timing is important.

Retention Create a retention plan that encompasses all of the above best practices.

Where to start? • Pick Your Strong Leaders • Pick Them Quickly • Keep Communication Going at All Levels.

Professor Craig W. Fontaine Northeastern University

College of Business Administration

Phone: 617-610-6079 Email: [email protected]

Web Site: www.professorfontaine.com

Your announcement should probably be made by senior management to be followed quickly by a series of smaller meetings at the functional or divisional level, and right down to the individual manager talking to their individual people. Those managers needed to identify the people whom they do not want to lose and make that very clear to HR and senior management.

The entire process and all of the steps involved must ABSOLUTELY be considered fair. There is a notion that we called “Perceived Justice.” Perceived justice is when a person takes a look at the system and says:

“OK, I might not agree with it, but it’s been laid out on paper. I understand what they’re up to. It is being conducted fairly. I’m not being treated any differently than anybody else. “

If people don’t perceive the process to be fair, it’s doomed for failure.

And, as always, remember that business absolutely must go on because that is why this whole thing happened in the first place. You cannot allow business to be disrupted, and it can be disrupted very, very easily if you do not do all that you can as an HR person to ensure a smooth transaction.


* * * * *

References 1 Schweiger, D., Csiszar, E., Napier, N. (1993), "Implementing international mergers and acquisitions", Human Resource Planning, Vol. 16 No.1, pp.53–70. 2 “The Great Merger Movement in American Business – 1895-1904,” Lamoreaux, Naomi R., Cambridge University Press, 1985-1988. 3 Mirvis, P., Marks, M. (1992), Managing the Merger: Making it Work, Prentice-Hall, Englewood Cliffs, NJ. 4 De Pamphilis, D. (2001), Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, Academic Press, San Diego, CA.


5 Mirvis, P., Marks, M. (1992), Managing the Merger: Making it Work, Prentice-Hall, Englewood Cliffs, NJ. 6 Telecommunications Mergers and Acquisitions Newsletter, January, 2006. 7 UNCTAD Foreign Direct Investment Interactive Database, United Nations Conference on Trade and Development, http://www.unctad.org8 “The Global Perspective: M&A Deals in 2006” , Learnings on M&A Integrations, the Cerebrus Group, http://www.cerebrus-consultants.com/pdfs/cerebrus_m&a_presentation.pdf9 “Cultural Synergy in Mergers & Acquisitions” Kwintessential Ltd., http://www.kwintessential.co.uk/cultural-services/articles/intercultural-mergers.html 10 Ibid. 11 De Pamphilis, D. (2001), Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, Academic Press, San Diego, CA. 12 Cartwright, S., Cooper, C. (1994), "The human effects of mergers and acquisitions", in Cooper, C. (Eds),Trends in Organisational Behaviour, John Wiley & Sons, Chichester, Vol. 1. 13 Ibid. 14 Cartwright, S., Cooper, C. (1993), "The role of culture compatibility in successful organizational marriage", Academy of Management Executive, Vol. 7, pp. 57–70. 15 Ibid. 15 Cartwright, S., Cooper, C. (1994), "The human effects of mergers and acquisitions", in Cooper, C. (Eds),Trends in Organisational Behaviour, John Wiley & Sons, Chichester, Vol. 1. 17 De Pamphilis, D. (2001), Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, Academic Press, San Diego, CA. 18 “Why Do Mergers Fail? What Can Be Done to Improve their Chances of Success?” Key Strategy Limited, http://www.key-strategy.com/documents/MergersFailImproveChances.pdf

19 Appelbaum, S., Gandell, J., Shapiro, B., Belisle, P., Hoeven, E. (2000b), "Anatomy of a merger: behaviour of organizational factors and

http://www.unctad.org/


processes throughout the pre- during- post-stages (part 2)", Management Decision, Vol. 38 No.10, pp. 674–84. 20 Ibid. 21 Schweiger, D., Csiszar, E., Napier, N. (1993), "Implementing international mergers and acquisitions", Human Resource Planning, Vol. 16 No.1, pp. 53–70. 22 De Pamphilis, D. (2001), Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, Academic Press, San Diego, CA. 23 Brockner, J., Greenberg, J. (1990), "The impact of layoffs on survivors: an organizational justice perspective", in Carroll, J. (Eds),Applied Social Psychology and Organisational Settings, Erlbaum Associates, Hillsdale, NJ. 24 Ibid. 25 Leana, C., Feldman, D. (1989), "When mergers force layoffs: some lessons about managing the human resource problem", Human Resource Planning, Vol. 12, No.2, pp. 123–40. 26 Cartwright, S., Cooper, C. (1996), Managing Mergers, Acquisitions and Strategic Alliances: Integrating People and Cultures, 2nd ed., Butterworth-Heinemann, Oxford. 27 Schweiger, D., Ivancevich, F., Power, F. (1987), "Executive actions for managing human resources before and after an acquisition", Academy of Management Executive, Vol. 1, No.2, pp. 127–38.

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