Significance of HR in Mergers & Acquisitions
"Mergers and acquisitions are increasingly being used by firms
to strengthen and maintain their position in the market place. Yet
their success is by no means assured. A recent survey of 1000 organizations
by HR consultants, Watson Wyatt revealed that less than 33% of companies
attain their profit goals after the tie-up. Other surveys indicated
while some failures can be explained by financial and market factors,
a substantial number can be traced to neglected human resource issues
and activities. Could HR be the key to maximizing the M&A deal
value? This article will appear in two parts, with the first part
sharing research indications and the second on the roles of HR in
mergers and acquisitions.
… P.Raj Kumar (Head, Strategies and Operations, CnetG Asia
Sdn Bhd)
The statistics are mesmerizing: the total value of mergers and acquisitions worldwide reached USD3.44 trillion in the year 2000 -that's up 36% from 1998. In Europe alone, the value came to USD1.23 trillion, or more than double the previous year's total. The total value of mergers and acquisitions in Asia surpassed USD187 billion in the year 2000, arising from the telecommunications and financial sectors. Investment bankers in Asia are now eyeing unlikely sectors like power, transport and hospitality as well.
Yet mergers and acquisitions have not proven to be the panacea for business supremacy so far.
Less than 33% of companies attained their profit goals after a tie-up, a survey of 1,000 organizations by human resources consultants Watson Wyatt found. Only 46% ever met their expense-reduction goals and the mergers failed to produce the expected benefits 64% of the time.
"75% of Mergers and Acquisitions are disappointing or outright failures. 50% experience a decline in productivity in the first four to eight months. 47% of senior executives in acquired firms leave in their first year, 75% in the first 3 years." CEO Magazine, Business Week, Fortune.
Mergers & Acquisitions (M&A)
Companies today need to be fast growing, efficient, profitable, flexible,
adaptable, future-ready and have a dominant market position. Without
these qualities, firms believe that is virtually impossible to be
competitive in today's global economy. In some industries such as
insurance or banking, firms may move into new markets. In others such
as pharmaceuticals or software technology, firms may work with smaller
firms that have developed or are developing new products that they
can manufacture and/or distribute more efficiently, while other firms
focus on their own internal growth, leadership and development.
Regardless of industry, however, it appears that it has become all but impossible in our global environment for firms to compete with others without growing and expanding through deals that result in mergers or acquisitions. And the future appears to be ripe for a continuation of the trend for annual increases in merger and acquisition (M & A) activity.
The terms "merger" and "acquisition" are often used in tandem and sometimes synonymously, although they really are two distinct types of a corporate transaction.
A "merger" is a combination of two or more companies either through the pooling of interests, where the accounts are combined; a purchase, where the amount paid over and above the acquired company's book value is carried on the books of the purchaser as goodwill; or a consolidation where a new company is formed to acquire the net assets of the combining companies. Strictly speaking, only combinations in which one of the companies survives as the legal entity are called mergers. Thus, consolidations are technically not mergers though the term merger is commonly applied to them.
An "acquisition" is one company taking over controlling interest in another company. The assets or the stock of the seller are purchased for cash and/or stock of the buyer. The buyer is definitely the dominant party in acquisition transactions. A stock purchase would allow the seller to continue to operate as an independent entity. In an asset purchase, the seller's identity as a separate entity is eventually changed, usually being transitioned over time. Most of the transactions PSI participates in are acquisitions where PSI acquires the assets and ongoing business of the seller.
The experiences of companies in merger and acquisition activity suggest a model of mergers and acquisitions that has three stages: 1) pre-combination; 2) combination - integration of the partners; and 3) solidification and advancement - the new entity.
Top Priority Areas During Integration
Strategic business development is the most prominent area given top
priority during the mergers and acquisition process. Research shows
that 26% of 190 companies focused on potential businesses arising
from the newly merged entity. 22% of these companies vouched for operations,
as the most important area of interest. Marketing & sales, finance
and customer services followed through with average of 18%. Human
Resource Management?
Ironically, only 8% of these 190 companies responded that human resource management was a top priority during integration.
Why Mergers and Acquisitions Fail?
Mergers and acquisitions fail for a variety of reasons, often several
simultaneously. Surveys conducted by A.T. Kearney, Watson Wyatt and
Clemente, Greenspan & Co., Inc. share the typical reasons for
failure, as following:
- Unrealistic expectations
- Unrealistic assessment of business turnaround
- Poor planning, hastily constructed strategy, unskilled execution
- Failure/inability to unify behind a single macro message
- Inexperience in managing talent
- Ambiguity of power/authority in target company
- Culture clashes between the two or more entities go unchecked
- Financial drain
- Focus of executives is distracted from the core business
- Resistance to change
On the other end of the mergers and acquisitions equilibrium, the reasons cited for success in the tie-ups confirms the fear. Perhaps not surprisingly some of the major reasons for success in mergers and acquisitions include:
- Leadership
- Well-thought out goals and objectives
- Due diligence on hard and soft issues
- Well-managed M & A team
- Successful learning from previous experience
- Planning for combination and solidification steps completed early
- Key talent retained
- Extensive and timely communications to all stakeholders in, on the first day of work
- A surface analysis of the above would indicate that if the organization does not articulate its knowledge of the dynamics and emotions felt throughout the organization, and provide a clear vision of the future and the path to get there, then the likelihood that any strategic restructuring effort will be successful will be seriously diminished.
Perhaps mergers and acquisition roadmap should revisit Maslow's theory?
The next article will focus on the roles of HR in mergers and acquisitions
