When two become one

Amerger or acquisition will often be talked about in pure dollar and cent terms. The size of each party is measured by market capitalisation or shareholder value, while the value of each completed “deal” is determined by the premiums earned on what are essentially the same physical assets.

But outside the headlines, HR is very much a part of any integration strategy, some would say the centre. Whether it’s blending management teams, appraising staff in the new ownership context or creating that all-important new working culture, the critical factors in any merger or acquisition are all people-centric. The end result may be measured in financial terms, but it’s people that determine just how good those numbers become – and that’s when HR really has the opportunity to shine.

The upheaval associated with any merger or acquisition is a prime opportunity for HR to demonstrate its knowledge and skill in positive human capital management. HR can evaluate the compatibility of corporate cultures and different options for combining enterprises. It is also often the trusted source of information for employees at a time when rumours are bound to be in high supply.

One of the biggest costs to a newly-merged entity can be the departure of key personnel. Hewitt’s 2009 report on Asian mergers and acquisitions shows that the perceived value of many merger deals is often reduced by the unexpected or unplanned departure of key staff. Had these organisations known an important manager or team would not be staying on with the firm, a lower price may well have been negotiated, the consultancy found.

Hewitt estimates that 76% of companies responding to its report had lost between 5.6% (for a standard industrial company) and 12.8% (for a financial services company) of total deal value as a result of key employees separating during and immediately after the integration.

That’s a substantial amount of lost wealth for the financial backers of such operations – at least $4.2 billion, given the total US$75 billion value of Hewitt’s survey sample.

Staying on the right side of the law

HR’s task list in any merger activity is going to be vast and complicated. But one of the first and most important steps is to make sure all parties are complying with relevant employment laws throughout the transaction period and into the future.

George Cooper, Practice Leader at Freehills Workplace Law and Advisory, says this often comes down to a question of shares or assets. If the transaction involves the transfer of shares in the target company, the employment issues are usually straight forward, he says. As this is a change of ownership in its simplest terms, there is no break in the employment relationship, just a different majority shareholder at the end of the line. Only in certain jurisdictions, namely Indonesia, can a change in share ownership trigger severance requirements, and then only under certain conditions.

But when business assets are changing hands, such as when a company sells off only its retail operations, things are often more complicated. Cooper says HR will need quality legal advice to ensure questions of redundancy, severance, reengagement and integration are all handled with a view to the relevant regulation.

“This is all crucial in the change management exercise,” Cooper says. “Only once this legal framework is understood, can the companies involved implement effective strategies for dealing with the affected employees.”

The integration process will present its own set of people challenges and issues. Are there different terms and conditions or employment policies that will need to be synchronised? Will HR need to manage a potential clash of workplace cultures that will need to be managed? The answer to both questions is invariably “yes”.

Cooper says the old Boy Scouts motto is relevant here – HR needs to “be prepared”.

The acquiring organisation must of course get a good understanding of the employment landscape within the target business well in advance so that all issues, even the ones not forseen, can be properly managed. “This is what the employment due diligence exercise is all about,” Cooper says. “HR should be heavily involved from an early stage.”

Commercial considerations: minimising the costs and maximising the effectiveness of the merger will be the next issue. The costs associated with inheriting a workforce, or making retrenchments, must be identified and understood so they can be properly allocated during the deal negotiations. Again, a thorough employment due diligence exercise and understanding of the legal ground rules affecting employment transfer will hold both parties in good stead, Cooper says.

Finally, engagement with the affected employees is crucial. For staff within the target business, a merger or acquisition will naturally be an anxious time. This can affect staff morale and, ultimately, productivity. It’s never easy to subdue the fears of staff when not all facts are known or can be divulged but HR should work to keep staff as informed as possible.

Indeed, in some countries, there are legal requirements for advance consultation with staff and unions. But even if this is not legally required, staff enthusiasm will be a key factor in making a transition work; and that can be all but impossible to elicit without effective, constant and open communication.

HR’s key to change management

Consolidation, cost and communication are central to successful change management in a merger or acquisition. Fortunately, these are specific skill areas of HR.

The overarching consideration of the HR professional on the acquisition side should be about consolidation of the two workforces. It’s something the Renault-Nissan alliance (a group of companies now linked by cross-shareholding) has achieved with great success, wowing many in the automotive world who said such a blend of French and Japanese working cultures simply couldn’t be done.

Simon Sproule, Communications Director for the alliance, says the tie-up has been founded on principles of mutual benefit and constant communication. “If the Renault-Nissan alliance collectively benefits from a decision but one of the partners loses, then the answer is an automatic ‘no’,” he says. “Unless it is ‘win-win’ we don’t proceed.”

Such a policy demands plenty of talking both within each individual organisation and between them. “We encourage dialogue and cross-company team work,” Sproule tells HRM. “It is essential that people talk to each other, listen to each other and learn from each other.”