This article is written by Shoumik Chowdary pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute resolution from Lawsikho. 

This article has been published by Sneha Mahawar.​​

Introduction

In today’s increasingly complicated and globalized economic climate, Mergers and Acquisitions (M&A) have replaced organic development as the primary means of expansion for many companies. The term “cross-border merger” refers to a partnership between an Indian and a foreign firm. Only mergers with Indian companies were permitted in India. After the Companies Act, 2013 was passed, outbound mergers were authorized with some limits. The Companies Amendment Act, 2017, was pivotal for the legal basis for international mergers. For international mergers, the Reserve Bank of India released proposed rules in 2017. In response, the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018, were drafted. New restrictions have eased business in India, helping companies diversify, reform, and consolidate their businesses. It opened new international markets for Indian businesses. While the reasons for most mergers and acquisition failures are primarily financial, a large number of deals also fail due to poor human resources management, including issues such as incompatible work cultures, different management styles, lack of motivation, attrition, want of communication, trust issues within teams and uncertainty of long-term goals. This article explores the human resources management aspect of Mergers and Acquisitions and delves into its importance and role, as well as talks about the various strategies a human resource manager can adopt during Mergers and Acquisitions. Finally, the article also looks at the main challenges faced by human resource managers with respect to Mergers and Acquisitions. 

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Importance of human resource management in mergers & acquisitions

The term human resource management (HRM) is used to describe an organization’s systematic efforts to shape the actions of its employees. Managing human resources is a crucial strategic challenge for all firms, but especially so for those engaged in cross-border Mergers and Acquisitions, since employee behaviour has a significant impact on profitability, customer satisfaction, and other essential metrics of organizational success. Human resource management encompasses a wide range of actions any company takes, no matter how big or small. Both strategic plans and routine procedures for supervising employees are part of human resource management. All organizations need to have policies in place that lay out the ground rules for managing employees. Mergers and acquisitions are recognized as significant factor that affects talent management strategies. Talent management is all about finding, keeping, inspiring, and rewarding a company’s most talented managers so that they can keep up their competitive edge. Human resource management may benefit Mergers and Acquisitions by using talent management initiatives. Retention is a crucial aspect of M&A human resource management. Once the company’s leadership has been established, HR professionals should begin working on a plan to keep its most valuable employees from leaving. Many top employees of an acquired organization leave during the acquisition transition because their status is diminished in comparison to the competitors of the acquiring company.

Developing and implementing comprehensive compensation strategies helps to retain talented managers. To ensure the success of the new synergy, it is essential that the leadership team first identifies the most valuable personnel and then designs a remuneration package that will not only keep them happy at work but also substantially motivate them. The acquiring firm’s human resources policies and reward system tend to have the most significant impact on winning over the target company’s workforce and facilitating a smooth transition. Understanding that pay packages are utilized to incentivize personnel towards the new integrated vision is fundamental to designing effective compensation methods. Appropriate compensation is a well-documented inducement for managers to stay with their organization. In most cases, the most contentious parts of negotiation are the terms of employment, including remuneration, benefits, and retention strategies. The structure of the transaction and the treatment of employees may be affected by the political and legal climate in which the Merger and Acquisition deal is reached. To come up with an effective retention and compensation strategy, HR managers need to be familiar with the functions of unions and the varying approaches to employment relations regulation across countries. For example, the stricter regulations on M&A deals imposed by European Union labour rules make doing business in Europe more difficult than in the United States. This is due to stricter laws and limits on employee dismissals for M&As that occur within European borders. Due to the lack of powerful trade unions like those seen in Europe, the United States has a far more transient approach to hiring and firing.

Effective communication is one of the most important ways for a combined firm to get the most out of its people. To successfully implement an M&A, it is necessary to convince employees that they would personally profit from the company’s continued growth. One of the safest and most productive strategies is using numerous communication channels simultaneously. To successfully integrate the two organizations and win over the affected workers’ confidence, it’s crucial that they have a clear understanding that the integration process is fair, impartial, and reflective of their shared interests. Communication reduces employees’ concerns and confusion regarding M&As, builds trust, and promotes integration. The ability to communicate more effectively was determined to be a critical factor in the combined company’s success. It was identified that the connection between communication and performance varied between acquirers from different countries. The purchasing business must successfully deal with these difficulties to achieve M&A performance.

Role of human resource management in cross-border M&A

The outcome of Mergers and Acquisitions can be affected by human resource management at any time during the procedure. Human resource management’s primary concern in the lead-up to a merger is usually to ensure that all applicable laws and regulations are being followed, particularly those pertaining to equal employment opportunity and collective bargaining agreements. Human resources managers can get to work on the merger preparations immediately after a deal is announced by doing things like handling retention agreements and evaluating pay scale disparities. Human resources managers have been shown to have the most significant impact on Mergers and Acquisitions during the integration phase, which is when M&A processes and policies are put into effect. Human resources managers are crucial after an acquisition, especially if there are cultural differences. In many cases, the type of integration varies from country to country,  which will impact business practices and policies.

Integration stage

Human resource management must consider the degree and pace of integration when undertaking Mergers and Acquisitions. Two identified critical aspects that matter in this context are strategic interdependence, or fit, and structural autonomy.  Four-category classification system for the level of integration is based on these two characteristics, with one category for each possible combination of the acquirer and acquired firm size. There are varying degrees of integration between countries regarding M&A deals that span international borders. Within the context of the resources, processes, and values paradigm, the function of human resource management can be analyzed throughout the integration phase of international Mergers and Acquisitions. Human resource management (HRM) is a broad field that incorporates many subfields and subcategories, such as human resource management planning, staffing, training and development, assessment and incentives, organizational design and control, and corporate responsibility. Special attention must be paid to staffing and retention when we talk about resources; training and development; evaluation and reward; and other human resource management systems and practices when we talk about processes; and national and corporate culture at work when we talk about values because the number of human resource management practices involved in an M&A can be unlimited. M&A tactics include overcapacity, product/market extension, and research and development. 

Product or market expansion through merger & acquisition 

Layoffs are a normal part of human resource management strategies in mergers and acquisitions that aim to expand into a new product or market area, even if employee retention is the primary goal. Since the strategic purpose of most mergers is to acquire new product lines or grow into new markets rather than reduce redundant staff, layoffs are not the primary objective of acquiring organizations. The number of people who lose their jobs after an overcapacity merger or acquisition might vary from country to country. The same is true for mergers and acquisitions that aim to expand into new markets. Regarding product or market extension M&As, there is more variety in procedures between organizations than with overcapacity M&As, indicating the need to modify business and human resource management systems and practices. That is, even if the products produced by the merged companies do not overlap, the processes involved in their production and delivery may call for adjustments to other infrastructure. Businesses pursuing the product or market extension M&As have a more significant variation in organisational values than those pursuing overcapacity M&As. When the company buying the other company is bigger than the company being bought, conflicts over resources and processes may be less likely to happen. 

Alternative to research and development

Human resource management is challenged when attempting to substitute research and development (R&D) through M&A. Companies use this kind of Merger and Acquisition to gain access to specialized staff knowledge. Human resource management’s primary focus will be on people and relationships. In several cases, acquired business employees received a substantial stock sale payout. Businesses in different market economies that utilize M&A as an R&D replacement prioritize keeping key employees, just as they do with domestic M&As. In order for M&A to be a viable R&D choice, human resource management must put in place processes to facilitate the transfer of acquired firms’ knowledge to the acquiring firm. Human resource management should promote learning and collaboration. There is little room for inefficient integration when M&A is used in place of R&D, especially when the target industry is IT. Human resource management may need new systems. Using Mergers and Acquisitions in place of research and development can be challenging because the acquiring company is often more bureaucratic than the acquired company, and the two companies shared values can negatively affect the merger. While larger companies may feel liberated by an acquisition, smaller, more entrepreneurial businesses may feel stifled. Using Mergers and Acquisitions (M&A) in place of research and development (R&D) may allow IT companies to maintain consistent values regardless of where they are headquartered. Common values show how necessary knowledge and ideas are in production, and industrial values help solve problems unique to each country. 

Overcapacity in merger & acquisition

A mass layoff is unavoidable due to mergers and acquisitions that result in excess capacity. The success of the merger depends heavily on the human resource management function’s ability to swiftly settle on a downsizing strategy, including the planning and staffing of duties such as outplacement programming. However, downsizing is not the only HR concern; retention concerns may also play a significant influence. Since management in a linked merger (such as an overcapacity M&A) already knows the business of the acquired firm, the turnover rate at the top of the organization will be higher than in an unrelated merger. When two nations with distinct market economies are involved in an M&A, the acquiring firm will be more limited in its options if the target company is in a country with solid worker protection laws and a more long-term perspective on labour relations.

Strategies of human resource management that fit mergers and acquisition

An organization’s human resource management strategy is crucial, but it can only be effective if it’s in sync with the company’s overall goals. Strategy, structure, and human resource management fit tightly, with the strategy being the primary factor. We can propose that for merging enterprises to integrate successfully, their human resource management strategy should be aligned with their M&A strategy. It’s crucial to understand M&A strategies to determine human resource management functions. Furthermore, we rely on three conceptual tools: resources, processes, and values, to assess the match between M&A and human resource management strategies and to help make sense of human resource management difficulties in the various types of M&As. Resources include money, people, brands, and relationships. Human resource management (HRM) in the context of Mergers and Acquisitions entails making choices concerning personnel and retention concerns, with termination choices being particularly weighty. Processes are how firms turn resources into goods and services. Finally, values are the beliefs that guide workers’ decisions and actions. Priorities and decisions are shaped by values.

Geographic roll up 

Mergers and Acquisitions (M&A) occur when businesses look to grow into new geographic markets while keeping their operations at the regional level. When larger corporations buy out smaller ones, they often leave the local management team in place so that business can continue as usual. These Mergers and Acquisitions (M&As) are like overcapacity M&As in that they both entail the consolidation of enterprises; however, they differ considerably in that they often take place early in an industry’s life cycle. Strategically, a roll-up relates to the creation of business gains and aims to generate economies of scale and scope, while an overcapacity merger or acquisition aims to minimize capacity and duplication. Even though people are less easily replaceable in geographic roll-up M&As, the processes and values of the merging entities are likely to be more different than in an overcapacity M&A. But because the company buying the other company is usually bigger than the company being bought, conflicts over status are less likely to happen than in an overcapacity M&A. 

Industry convergence 

Through Mergers and Acquisitions, new industries can be formed out of those which are already in existence but are seeing their borders erode. This form of a merger is uncommon and poorly understood at the present time, making it challenging to assess. When corporations join to save money on research and development (R&D), the acquired company is sometimes given more leeway than usual, and the focus is on creating value through integration rather than achieving perfect symmetry.

Market extension 

Cross-border Mergers and Acquisitions (M&A) allow companies to broaden their operations beyond their home country. Such Mergers and Acquisitions take place when the acquiring and acquired companies are functionally related in production and/or distribution but sell products that do not compete directly with one another or when a corporation desires to diversify geographically, like when two companies create the same product but sell it in different areas. Businesses engage in this form of M&A to fulfill their long-term strategic objectives, and one common motivation is to get the scale and efficiencies needed to compete on a global scale in less developed markets. Success in a merger or acquisition aimed at expanding a company’s product line or market presence is correlated with the size and M&A experience of the two companies involved.

Due diligence 

The due diligence stage begins once a target company has been selected, and company executives begin communicating with one another to share financial and legal data that will help them weigh the pros and cons of a proposed merger. The present moment is ideal for learning about the culture of the prospective company and comparing it with that of the current business. Since the two companies had similar views on corporate principles and ethics, merging them was a breeze. Therefore, cultural due diligence should play a pivotal role in the M&A process during the due diligence phase. It is critical to ensure that cultural assessment is not forgotten throughout an M&A process by including experts in human resources or organizational development on the M&A team. M&A teams should conduct interviews or use a cultural assessment tool to evaluate the culture of firms they are contemplating acquiring proactively. Critical insights into potential synergies and areas of conflict that can arise throughout the cultural integration endeavour can be gained by understanding how the firms’ executives and employees set plans and goals, engage with the marketplace, and reward behaviours. It is crucial currently to do proper homework on the cross-border management skills of both companies. Cross-border acquisitions often change from absorption to reverse acquisition in the acquired firm’s native country. Those in charge at corporate headquarters may misunderstand the significance of on-the-ground operations in establishing the company’s credibility and reputation in the new market because they are focused on abstract concepts like ownership or the implementation of standard operating procedures across all locations.

Substitute for research & development

When companies with cutting-edge R&D or technological know-how are purchased rather than developed in-house, typically, larger, more seasoned companies are the ones doing the acquiring in a reverse merger. In place of research and development (R&D), M&As must keep valuable human resources and accumulated knowledge. Because entrepreneurial people often feel limited by the bureaucratic structure of the acquiring organization, adjusting the newly formed entity’s processes and values is a complex undertaking. The success of this type of international merger or acquisition hinges on the degree of integration achieved by the acquired firm and the adaptability of the acquiring company. Integration issues arise only in certain fields.

Potential target

The standard practice for a company contemplating many M&A targets is to collect a wide variety of relevant data and information on each of them. The opportunity to rapidly expand product lines or move into new geographies, or even eliminate a competitive threat, are all examples of the kind of data that could be useful in determining whether or not an M&A target will be helpful in achieving a given growth goal. As data is gathered on the Merger or Acquisition’s prospective target, it’s also vital to think about how much effort will be required to integrate the two organizations’ operations. The firm’s international business experience is another element in cross-border M&As. M&A activity is more likely and more successful if the target company has prior experience operating in a foreign environment through partnerships, joint ventures, or acquisitions. Similarly, the acquired firm’s M&A and national cultural experience are important considerations. 

Challenges of human resource management in cross border mergers & acquisition

In the past, human resource management has often been given a seat at the table quite late in the M&A process. Many of the human resource management co-workers believe that human resource management should be involved in planning and strategy at an earlier stage. Human resource management engaged late in domestic M&A agreements might result in unrealized synergies and deal value degradation. The consequences of ignoring human resource management in a cross-border merger or acquisition are substantially more severe. The human resources management team is ideally suited to overcome the logistical, cultural, and legal hurdles that prohibit businesses from realizing their full potential and closing deals for maximum value.

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Legal and regulatory issues

Human resource management needs to collaborate closely with the interdisciplinary team of legal and accounting professionals to successfully handle the additional regulatory and legal difficulties that arise during cross-border M&A negotiations.

Tax issues

Foreign subsidiaries of merging corporations may receive substantial tax benefits from transactions structured as mergers. This benefit may be lost if HR and business teams engage in informal integration initiatives also known as deemed integration, such as merging reporting lines or moving operations to a single location.

Labour and employment regulations 

In some countries, when a merger or acquisition is about to be finalized, it is customary to first meet with labour unions, works councils, or other employee representatives. These entities may be able to obstruct a contract. To successfully address these labour relations issues, human resource management managers must devote sufficient time and resources. Terminating an employee in most countries requires substantial notice and severance, and simple function duplication due to acquisition is typically not sufficient cause. A company’s human resources department also must be aware of any restrictions on modifying employment terms.

Immigrations consideration 

Work permits and visas may be required for some personnel at the acquired company; it is essential to ensure a smooth transition of all relevant paperwork. Even in an asset sale, a change in work authorization may be necessary before a seller’s employee can begin working for a buyer. The purchaser is responsible for completing all paperwork for themselves and their personnel, who will be working on-site at the overseas subsidiary. While doing their due diligence, human resource management should discover these immigration concerns and see to it that they are resolved.

Availability of information 

The amount of information available to the public is substantially smaller, and the accuracy of financial reports is much less certain. As a result, human resource management managers will not only have significantly less data at their disposal during due diligence but will also have to exercise heightened caution when handling sensitive employee information.

Effect of national and corporate culture

Differences in national culture can influence anything from work hours to leadership expectations, which human resource management must take into account when negotiating international deals.

Human resource management functions and duties may shift in different cultural contexts. Human resource management staff members can be both order takers and strategic advisors. Cross-border counterparts may not have as much involvement as you. When performing due diligence and integrating new systems, you may face pushback from subordinates if you are the leader of human resource management. Foreign labour markets are also typically more strictly regulated, something that human resource management directors discover in addition to different reaction times and attitudes toward vacation and work hours. When conducting due diligence, these rules must be carefully considered. Even the questions you choose to ask during due diligence can be affected by factors like the company’s employment policies, plans, and programs. The human capital issue is further complicated by the fact that deal structures can vary widely from one nation to the next. Employees working away from the headquarters may feel powerless, which can have adverse effects on transaction value, productivity, and quality of work delivered on time, as well as cooperation and a willingness to work to resolve employee difficulties. Human resource management executives may face resistance to central supervision from a foreign country despite the urgent need for international cooperation. It is essential to separate genuinely controllable problems from the ones that can be dealt with on a national or even international scale.

Conclusion

Human resource management (HRM) has emerged as one of the most critical measures for guaranteeing the success of M&A transactions, although its contribution is difficult to quantify. Since acquired businesses are likely to introduce new liabilities and risks to the M&A market, HRM due diligence has taken on even greater importance in the contemporary global financial crisis. More difficulty in doing HRM due diligence may arise from the fact that an acquiring business may need to determine whether the acquired firm’s financial troubles are temporary because of the slow economy or permanent due to underlying problems that would persist even if the economy were to improve. Problems that arise from M&As, such as when a country’s preferred level and speed of merger integration do not fit with the target company’s M&A strategy, are also illuminated by the framework. It would be interesting to include other possible outcomes, such as differences in size and experience between the organizations doing the buying and selling.

In the above situation, we have discussed the role and importance of human resource management in cross-border Mergers and Acquisitions. In the role of human resource management, we have elaborated on the three integration stages 1) Product or market extension, 2) Alternative to research and development and 3) Overcapacity.

A critical analysis of strategies of human resource management has been discussed and the challenges faced by human resource management during the Merger and Acquisition have been portrayed too. Looking at the above situation, we can suggest that for human resource management to have a smooth process of merger and acquisition should focus more on the retention of key employees, the creation of new policies and employee benefit programs to guide the company and compensation strategies development.

Reference

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