This article is written by Kanishk Gambhir, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here he discusses “Human Resource Factors in Mergers and Acquisition”.
Human Resource factor is one of the most important factors in any organisation. So during a merger or acquisition transaction, it becomes very vital that a proper strategy is implemented. Further, it becomes more important during an international merger and acquisition as it depends on the people for success or failure of such a transaction due to cultural integration, problems of communication, new geographic presence etc.
In fact, virtually there would be no acquisition where the people issue would not matter. Further, during mergers and acquisitions, employees are fired, promoted or retained depending on their talents and skills. So it becomes very vital to deal with human resource issue as early as possible to make sure everything goes smoothly and properly.
Issues related to Human Resource Factors in a Merger or Acquisition
During a merger or acquisition, Human resource manager has a very essential role to play with due diligence in regards to human resource management considerations which involves cross-culture assessment and a human capital audit.
Majorly the human resource factor has to be considered in two different perspectives, that is, pre-acquisition which would involve human capital audit and other is post-acquisition which involves communication, retaining talent and management of merger syndrome.
Human Capital Audit
Human Resource Audit refers to a comprehensive method of objective and systematic verification of current practices, documentation, policies and procedures prevalent in the HR system of the organization.
In relation to merger and acquisition, it has to be looked with two ways. One of it would be preventive and other would be focused on talent.
The preventive human capital audit would be properly focused on liabilities such as litigation related to employees, employees’ pension as well as other employees benefit programmes. These employees related constraints help in acquisition in developing the cost per employee and if any internal restructuring is required. Sometimes it would also involve a comparison between the polices and contracts of both the companies.
Talent human capital audit is finding out whether the newly formed company has enough talent required to execute the acquisition and ensuring that the acquisition is successful. Further, it is also vital in identifying which of the talent already available in the companies is necessary for the success of the merger in the short term and overall business growth and development in the long run.
It is also very vital that both the companies understand each other’s incentive structure and they note the key differences between them as it might impact employee retention.
The companies tend to ignore the human audit data in the initial stages and use financial performance as an alternative in the initial stages but unfortunately, this can cause a lot of problems in later stages. A proper strategy in the initial stages itself is very important to deal with all employees related problems. Some of the problems which might arise later are Employee benefit stock option, golden parachutes etc.
Therefore, it is very vital to retain key employees and make it a priority in the acquisition agreement.
Communication is a very important aspect for the success of any business aspect and mergers and acquisitions are not any different. This increases in the case of cross border merger where a lack or problem in communication might lead to a major misunderstanding which will lead to bigger problems. A proper communication process should be developed to help in this area. Two important aspects should be taken into consideration while developing the communication process.
The aim of communication, on one hand, is to alleviate the anxiety and stress that accompany every acquisition and on the other hand provide feedback to the top management about the progress of the integration and any potential roadblocks that might be created.
The top management has to clearly express the rationale for the acquisition, the synergies sought and the degree of integration required so that employees can understand the merger and this would lead to a reduction in problems and tensions among employees. Further, there should also be proper communication from employees to the top management for a smooth and proper merger.
Hence, communication in merger and acquisition transaction is a two-way process and should be handled with proper care for the success of the transaction.
The cultural element in both domestic and international merger or acquisition is very vital.
In the domestic transaction, culture is more related to the office culture and how the office works and functions. Some offices have more formal setting others especially the new offices prefer a more informal setting. So if a merger takes places the employees would find it very difficult to adjust to the new culture and atmosphere which might lead to a reduction in productivity and effectiveness due to a very new working atmosphere. So such a problem should be talked about -pre-acquisition or a proper strategy should be implemented regarding the same.
The problem of culture becomes much more complex and tough when we talk about international merger and acquisition as now the term culture is related to the difference in beliefs, work ethic and diversity as well. So, it becomes very difficult for companies to handle such complex problems due to geographical distance as well as no proper knowledge. Hence, to deal with such problems a team of experienced professionals and a well thought out plan is required otherwise it might lead to failure of the transaction.
Managing the Merger Syndrome
Whenever a merger or acquisition is announced the top management more or less have the knowledge of the same from months and they get used to the idea of it. But for the employees at a middle or lower-level, it does not help at all and create a bundle of uncertainties relating to their future. As usually mergers are done with an aim to increase revenue which means reducing cost, it usually leads to the firing of employees. So such an announcement creates panics and uncertainty among employees leading to problems for the company and making the already complex transaction of merger more difficult with this obstacle as employees would usually require a clear picture regarding the same.
The best way to deal with it is a clear representation of what is going to happen and giving them an opportunity to save themselves if the merger is going to lay off jobs so that they have enough time to handle such a transaction.
Another problem arises is when such an announcement is taken too lightly by the employees. If that is the case, they would have a very difficult time adjusting to the new atmosphere post-acquisition. So, in this, a proper regarding what is going to change and how the new entity would function should be given to employees in advance so that they start adjusting to the new atmosphere.
For the success of a merger transaction, it is key to note that talent retention is very vital. Generally, employees are not satisfied with the terms of the merger or with the new management, they tend to leave the organisation which will definitely lead to failure of the acquisition.
Further, more than 75% of the firm’s top management leave within 5 years of a merger and majority of the leaves within the first year itself, thus clearly showcasing that retention of talent is a very difficult task.
Lack of attention in such cases, especially in the cases where the staff cut is expected, the better employees generally leave due to availability of other better opportunities to them as after announcement of a merger and lack of certainty of a job after few months, a job offer whether higher paying or not look more attractive and certain. Retention of key and talented employees is therefore very essential for achieving both short term integration tasks and long term business performance goals. This means that companies should very carefully make a proper Human Resource scorecard and a talent map to differentiate between the good and bad employees and making sure the retention of the good employees through proper contracts and discussion removing all or any of their doubts.
Also, it is to be noted that for proper due diligence it is necessary that the acquirer is not only depended on the world of the manager but a 360-degree performance review is done so that all bias and unfairness so removed.
Thus, retaining key talent is prerequisite for a merger or acquisition to be successful and a proper strategy for the same should be made well in advance.
A transaction of merger and acquisition is a formidable challenge for almost all companies. Complexity of border deals due to legal, physical or cultural aspects further makes the implementation of such transactions even more difficult. But at the end to gain the international market, increment in global market share and long term growth companies overcome such factors with the help of a very sound and thought-out policy. It is to be kept in mind that financial dimensions along with human resource had to be given roughly the same footing to improve the odds of success of the transaction.
- https://www.managementstudyguide.com/human-resource-audit.htm (Last accessed on 27 January 2020.)
- Vladimir Pucik and Paul Evans , the human factors in mergers and acquisitions. https://www.researchgate.net/publication/313477928_The_Human_Factor_in_Mergers_and_Acquisitions
- Krug and Hegerty (2001), Predicting who stays and leaves after an acquisition, Strategic Management Journal, 22,185-196.
- Krug and Hegerty 1997, Post acquisition turnover among US top management teams, Strategic Management Journal, 18(8), 667-675.
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