Role Of HR In Mergers & Acquisitions

A PROJECT REPORT

______________________________

Submitted by Pathan Mohammedharkoon Noormohammed

Section-D Roll No-07

______________________________

in partial fulfillment o f the requirement

for

MBA

IN

Human Resource Management

December 2009

INDEX

Sr. No. Topic1 Introduction 2 Objective of M&A3 Research Methodology4 The Mergere And Acquisition Life Cycle5 The Key Roles Of The Human Resource Professional

In The New Economy6 The Role Of HR In Mergers And Acquisition

6.1 The Role Of HR In The Pre Deal Phase6.2 The Role Of HR In The Due Diligence Phase6.3 The Role Of HR During The Integration Planning6.4 The Role Of HR During The Implementation Phase6.5 Role Of HR In Evaluating The Merger

7 Managing cultural diversity in cross-border alliances7.1 National cultures7.2 Industry culture7.3 Organizational cultures7.4 Domestic cultural diversity

7.5 Understanding how cultural diversity influences behavior8 Key Factors Of HRM In M&A

8.1 Staffing 8.2 Training and development 8.3 Performance Appraisal

9 Examples 9.1 Acquisition strategy of GE Capital 9.2 Acquisition strategy of Cisco

10 Conclusion

11 Bibliography

1.Introduction

To put it simply, the term “Merger” refers to the combination of two or more

organizations to form a new company, which often has a new corporate identity.

Acquisition, on the other hand, is the purchase of a company by another company.

Besides assessing the risk and potential of the merged entity, it is just as important

to derive synergy from the merger or acquisition so that the company can quickly

transit into the new entity and operate at its maximum efficiency. This is crucial in

meeting the various bigger organisational objectives including growth in market

share. To achieve this, it is essential for HR to play a pivotal role in ensuring the

smooth integration of HR policies and managing employees of differing work

cultures all through the merger and acquisition life cycle.

Mergers and acquisitions represent the ultimate in change for a business. No other

event is more difficult, challenging, or chaotic as a merger and acquisition. It is

imperative that everyone involved in the process has a clear understanding of how

the process works..

Mergers and acquisitions are now a normal way of life within the business world.

In today's global, competitive environment, mergers are sometimes the only means

for long-term survival. In other cases, such as Cisco Systems, mergers are a

strategic component for generating long-term growth. Additionally, many

entrepreneurs no longer build companies for the long-term; they build companies

for the short-term, hoping to sell the company for huge profits. In her book The Art

of Merger and Acquisition Integration, Alexandra Reed Lajoux puts it best:

Virtually every major company in the United States today has experienced a major

acquisition at some point in history. And at any given time, thousands of these

companies are adjusting to post-merger reality. For example, so far in the decade

of the 1990's (through June 1997), 96,020 companies have come under new

ownership worldwide in deals worth a total of $ 3.9 trillion - and that's just

counting acquisitions valued at $ 5 million and over. Add to this the many smaller

companies and nonprofit and governmental entities that experience mergers every

year, and the M & A universe becomes large indeed.

2.Objective Of M & A

Every merger has its own unique reasons why the combining of two companies is a

good business decision. The underlying principle behind mergers and acquisitions (

M & A ) is simple: 2 + 2 = 5. The value of Company A is $ 2 billion and the value

of Company B is $ 2 billion, but when we merge the two companies together, we

have a total value of $ 5 billion. The joining or merging of the two companies

creates additional value which we call "synergy" value.

Synergy value can take three forms:

1. Revenues: By combining the two companies, we will realize higher revenues

then if the two companies operate separately.

2. Expenses: By combining the two companies, we will realize lower expenses

then if the two companies operate separately.

3. Cost of Capital: By combining the two companies, we will experience a lower

overall cost of capital.

For the most part, the biggest source of synergy value is lower expenses. Many

mergers are driven by the need to cut costs. Cost savings often come from the

elimination of redundant services, such as Human Resources, Accounting,

Information Technology,etc. However, the best mergers seem to have strategic

reasons for the business combination. These strategic reasons include:

Positioning - Taking advantage of future opportunities that can be exploited

when the two companies are combined. For example, a telecommunications

company might improve its position for the future if it were to own a broad band

service company. Companies need to position themselves to take advantage of

emerging trends in the marketplace.

Gap Filling - One company may have a major weakness (such as poor

distribution) whereas the other company has some significant strength. By

combining the two companies, each company fills-in strategic gaps that are

essential for long-term survival.

Organizational Competencies - Acquiring human resources and intellectual

capital can help improve innovative thinking and development within the

company.

Broader Market Access - Acquiring a foreign company can give a company

quick access to emerging global markets. Mergers can also be driven by basic

business reasons, such as:

Bargain Purchase - It may be cheaper to acquire another company then to

invest internally. For example, suppose a company is considering expansion of

fabrication facilities. Another company has very similar facilities that are idle. It

may be cheaper to just acquire the company with the unused facilities then to go

out and build new facilities on your own.

Diversification - It may be necessary to smooth-out earnings and achieve more

consistent long-term growth and profitability. This is particularly true for

companies in very mature industries where future growth is unlikely. It should be

noted that traditional financial management does not always support diversification

through mergers and acquisitions. It is widely held that investors are in the best

position to diversify, not the management of companies since managing a steel

company is not the same as running a software company.

Short Term Growth - Management may be under pressure to turnaround

sluggish growth and profitability. Consequently, a merger and acquisition is made

to boost poor performance.

Undervalued Target - The Target Company may be undervalued and thus, it

represents a good investment. Some mergers are executed for "financial" reasons

and not strategic reasons. For example, Kohlberg Kravis & Roberts acquires poor

performing companies and replaces the management team in hopes of increasing

depressed values.

Chapter 1

3.Research Methodology

When we use the term "merger", we are referring to the merging of two companies

where one new company will continue to exist.The term "acquisition" refers to the

acquisition of assets by one company from another company. In an acquisition,

both companies may continue to exist. However, throughout this course we will

loosely refer to mergers and acquisitions ( M & A ) as a business transaction where

one company acquires another company. The acquiring company will remain in

business and the acquired

company (which we will sometimes call the Target Company) will be integrated

into the acquiring company and thus, the acquired company ceases to exist after

the merger.

Mergers can be categorized as follows:

Horizontal: Two firms are merged across similar products or services. Horizontal

mergers are often used as a way for a company to increase its market share by

merging with a competing company. For example, the merger between Exxon and

Mobil will allow both companies a larger share of the oil and gas market.

Vertical: Two firms are merged along the value-chain, such as a manufacturer

merging with a supplier. Vertical mergers are often used as a way to gain a

competitive advantage within the marketplace. For example, Merck, a large

manufacturer of pharmaceuticals, merged with Medco, a large distributor of

pharmaceuticals, in order to gain an advantage in distributing its products.

Conglomerate: Two firms in completely different industries merge, such as a gas

pipeline company merging with a high technology company. Conglomerates are

usually used as a way to smooth out wide fluctuations in earnings and provide

more consistency in long-term growth. Typically, companies in mature industries

with poor prospects for growth will seek to diversify their businesses through

mergers and acquisitions. For example, General Electric (GE) has diversified its

businesses through mergers and

acquisitions, allowing GE to get into new areas like financial services and

television broadcasting.

4.THE MERGER AND ACQUISITION LIFE CYCLE

There are five key phases to the life cycle of mergers and acquisitions. These can be identified as follows:

Pre Deal

The first phase involves searching for suitable entities for mergers or acquisitions.

During this phase it is usual to develop a set of criteria for the selection of a

suitable entity. In this early phase the organization defines its objectives and

desired outcomes of the merger or acquisition and searches for suitable entities.

This often involves extensive research and gathering of market intelligence to

assess the potential of suitable candidates.

Due Diligence

Once a suitable entity has been identified, usually the next step is to make an offer

to acquire or merge with the new entity. This offer is usually made conditional on

the completion of a due diligence. During this second phase, a review of the new

entity is undertaken to ensure the soundness of the deal and to assess any risks

involved with the completion of the deal. During this phase the organization will

typically review the financial statements, strategies, business plans, resources and

operations of the entity to confirm their assessment of the commercial suitability of

the deal.

Often many transactions do not go beyond this phase because the due diligence

highlights the inappropriate risks associated with the deal.

Integration Planning

In this third phase detailed plans, milestones and activities are developed to ensure

the successful implementation of the deal. This phase is often conducted under

very tight time frames and requires extensive and detailed involvement from

experienced personnel. Detailed project management plans are established to

ensure the smooth implementation of the deal.

Implement Merger

Phase four requires the execution of the detailed planning conducted in phase

three. Again, this phase is usually conducted under tight time frames and requires

the execution of many complex plans simultaneously. Strong project management

skills are required during this phase. The implementation phase is very visible to

shareholders, staff, clients and competitors and is conducted under tremendous

scrutiny of these parties.

Evaluate Merger

The final phase requires reviewing the performance of the new entity to ensure that

a successful integration has been completed and that the objectives of the merger

or acquisition have been achieved. Performance of the new entity is assessed

against the original objectives determined in the Pre Deal phase.

5. THE KEY ROLES OF THE HUMAN RESOURCE

PROFESSIONAL IN THE NEW ECONOMY

The New Economy

We work in an economy that is poised for merger and acquisition activity.

Aggressive competition, rapid change, the impact of technology, globalisation,

legislative change, consumerism and increasing workforce mobility drive the new

economy.

To operate effectively in such a dynamic environment, it is essential for

organizations to harness their greatest asset – their people. Organisations need

people who can adapt, respond, anticipate and deliver, to meet client expectations.

Effective organizations seek to maximise the efficiency of their human resources

by ensuring that they are well managed and developed

Maximising Human Capital

The term “human capital” has gained increasing popularity in Singapore as a way

to describe the people working in organisations.

Jac Fitz-enz in his book The ROI of Human Capital describes “human capital” as a

combination of factors such as:

• The traits one brings to the job – intelligence, energy, a generally positive

attitude, reliability and commitment.

• One’s ability to learn – aptitude, imagination, creativity, and what is often called

“street smarts” and savvy (or how to get things done).

• One’s motivation to share information and knowledge – team spirit and goal

orientation.

Fitz-enz goes on to describe people as the “profit lever” of the new economy and

that the organisation’s passive resources “require human application to generate

value”.

The Roles Of HR Professionals

Dave Ulrich (1997) identified four key roles for the future HR manager. These

roles can be summarised as:

• responsibility for improving productivity through assisting in performance

management;

• responsibility for being a functional expert in the administrative function;

• responsibility for being a facilitator of cultural change; and

• responsibility for being a business partner through the development of a HRM

strategy.

The roles are multi-dimensional and involve a combination of both short and

longterm horizons, administrative and strategic duties as well as a focus on both

people and processes. They can be represented as such:

During the 1990s we have seen the HR profession strive to move from being an

“administrative service” to become a business partner dealing with strategic human

resource issues.

Dave Ulrich (1997) describes HR champions as those who:

• turn strategic statements into organisational actions;

• meet targets and needs – both of the organisation, the customers and the

employees;

• align HR plans to organisational actions; and

• identify and improve capabilities for future success.

Whilst many HR professionals have identified the need to shift their focus from

satisfying administrative requirements to becoming a strategic partner of the

organisation, the question remains as to how successful they have been in

achieving this shift.

Since Dave Ulrich’s book, Human Resource Champions, there has been a growing

recognition that HR professionals of forward-looking organisations will be

required to act as business leaders. As business partners and facilitators, HR

professionals are expected to share, plan, promote and manage; as business leaders,

they are expected to lead, direct, thrive on chaos and respond to real-time issues.

This is a critical role to play through all

the phases of a merger or acquisition.

6. THE ROLE OF HR IN MERGERS AND ACQUISITIONS

When To Involve HR

The success rate of mergers and acquisitions is dismal. Research (Gaplin and

Hendron) has shown that during mergers and acquisitions:

• Only 30% of companies acquired their return on the cost of capital

• Close to 50% of executives leave in the first year

• 70% do not realise their projected synergies

There are many reasons that can be attributed to these results. Several of them

revolve around the people and cultural issues.

The Bureau of Business Research at the American International College (1996)

reported that the ten pitfalls which had negative impact on successful mergers and

acquisitions were:

1. Incompatible cultures

2. Inability to manage targets

3. Inability to effectively implement change

4. Non-existent or overestimated synergies

5. Lack of anticipation of foreseeable events

6. A clash in management styles

7. Excessive premium for acquisition

8. Unhealthy acquisition target

9. Requirement to spin off or liquidate too much

10. Incompatible marketing systems

The Economist (1999) reported:

“Study after study of past merger waves has shown that two of every three deals

have not worked… Look behind any disastrous deal and the same word keeps

popping up – culture. Culture permeates a company and differences can poison any

collaboration.”

A survey conducted by Grant Thornton Business Owners Council across 750

business owners and senior executives in the USA found that some of the major

contributing factors for the failure of mergers and acquisitions included:

• A poor integration strategy

• A loss of key personnel

• The lack of a compelling strategic rationale

• Inadequate communications

Raymond Stone comments:

“The clash between corporate cultures is a major cause of merger failure. For

example, it is estimated more than half of all merged companies in the United

States fail to create value for shareholders because management underestimates

‘the complexity of corporate marriage’. Furthermore, these complexities are

intensified when organizations from different countries combine… By neglecting

the human dimension,

managers can destroy the value of the acquired or merged organization. HR

managers, therefore need to take a pro-active role in educating line managers about

the people problems involved in mergers and acquisitions.”

CEO Magazine reported:

“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 the first year, 75% in the first 3 years.”

A survey conducted by the SHRM and Towers Perrin of over 440 HR executives

worldwide showed that there was a considerable gap between the expected and

achieved synergies of mergers and acquisitions:

From this survey it is clear that “growth in market share” and “becoming a leader

in industry consolidation” are the key objectives that organizations are striving for

in mergers and acquisitions.

The research shows that less than half the participants were able to achieve those

objectives.

For a successful merger and acquisition it is essential that HR play a pivotal role

through all the five phases of the process. The survey conducted by SHRM and

Towers Perrin also looked at the most significant obstacles to successful mergers

and acquisitions. The results can be summarized as follows:

A review of these key obstacles highlights the importance of the role of the HR

professional in mergers and acquisitions. It also surfaces the range of areas where

HR professionals can play a key role. These include:

• maximizing productivity

• developing the organizational culture

• retention of key talent

• cultivating the style of the management team

• acting as a change agent

• communicating the business objectives

Typically, experience has shown that HR has been involved too little or too late

resulting as a contributing factor to the 70% failure rate in realising projected

synergies.

The results of the research conducted by SHRM and Towers Perrin demonstrates

in particular the lack of involvement by HR professionals in the first two phases of

the merger and acquisition life cycle.

If HR is to operate in the role of strategic business partner as described by Ulrich,

it is essential that they are actively involved in all stages of the merger and

acquisition cycle including the pre deal and due diligence stage and not just in the

performance of the traditional role as the “functional expert” in later stages of the

merger and acquisition cycle.

The obvious conclusion from the results represented in the above graph is that

successful companies have benefited from a greater degree of HR involvement

than unsuccessful companies.

With specific reference to the Asia Pacific context, Watson Wyatt in their survey

across 190 companies, compared the timing and level of HR involvement between

companies in the Asia Pacific and those in the United States.

The results showed that in the Asia Pacific, there was little involvement of HR in

the early stages of the Merger and Acquisition life cycle. This “little involvement”

in the early stages may account for the need for extensive involvement in the later

stages. The differing results between Asia Pacific and the United States in the

earlier stages may also be partially accounted for the greater need for due diligence

requirements on accrued benefit liabilities (including retirement, redundancy,

health, annual leave, long service leave) and termination provisions in the more

developed United States environment.

6.1 The Role Of HR In The Pre Deal Phase

Typically in Asia, there is little involvement of HR professionals in the first phase

of mergers and acquisitions. However, there is a critical need for HR to be

involved in this phase.

One of the first critical areas that HR can be involved is in assessing the potential

compatibility of cultures. This involvement could also extend into phase two of the

process as part of the due diligence. This could involve reviewing an array of

things such as leadership style, mission, vision and values of the organisation, team

strength, performance and reward management systems, customer focus and

organisational

capabilities.

One of the challenges that HR faces is obtaining this information in an

environment where the organisation may not want to alert other parties of their

intent to acquire or merge. As such, much of this information is usually obtained

on an informal level or through the use of third parties.

6.2 The Role Of HR In The Due Diligence Phase

During this phase, the organization determines the associated risks and the

soundness of the deal. It is at this stage that the organization determines whether it

will purchase the entity and its correct value.

Many of the HR activities identified in the pre deal phase are continued with

greater detail in the due diligence phase to ascertain the correctness of the

perceptions obtained in phase one.

It is during the due diligence phase that potential problems and risks are often

identified.

It is particularly important that the HR representatives access professional help

when dealing with acquisitions in countries outside of their own areas of expertise

and knowledge. During this phase it is important to determine any liabilities that

may be a result of partial or unfunded benefits such as retirement schemes, long

service leave and other accrued benefits.

Within the Singapore context, it is important to ensure, effective from 1 October

2000, that all short-term employee benefits have been recognized as expenses for

the accounting period in which they were incurred and that suitable provisions

have been made in the books to fund for the future payment of such benefits.

[Singapore Accounting Standard 17 (2000)].

Acquiring an organization that has not allowed sufficient provision for accrued

benefits can result in a major expense for the acquirer.

Some countries require that payroll taxes are processed on a “pay-as-you-earn”

basis (PAYE). It is important to identify that any such taxes have been paid and

that there are no outstanding liabilities.

For Singapore companies it is important to ensure that Central Provident Fund

(CPF) contributions and payments for deductions to other entities such as the

Chinese Development Assistance Council (CDAC), MENDAKI, Singapore Indian

Development Association (SINDA), etc. are current and that there are no

outstanding liabilities.

It is during the due diligence phase that HR professionals are expected to review

the contracts of employment. This can include a wide range of activities such as:

• assessing the viability and costs of integrating and rationalizing HR systems as

well as determining their compatibility

• ensuring contracts are in place

• reviewing termination terms

• identifying the impact of any local laws governing employee terminations

• identifying any special terms or conditions for management

• identifying any benefit entitlement issues such as long service leave

• identifying any issues around operating hours and working days

• identifying any triggers in the contract that may result in a termination or release

from employment (such as an acquisition or merger)

• identifying any terms that relate to contracts for a specific period

• identifying the risks associated with the loss of key talent

• identifying any ownership issues regarding intellectual property

Performance management and reward systems are also items for due diligence

including the identification of any future obligations for guaranteed or variable

bonuses.

HR practitioners should also value the people-related transaction and ongoing costs

as well as identify any potential people-related savings that may result from the

merger.

Implications of any Union relationships or obligations are usually also explored as

part of the due diligence.

In summary, one of the most critical roles for HR during the due diligence process

is to identify any contractual obligations, benefit entitlements and resource savings

that may impact on the value of the deal.

6.3 The Role Of HR During The Integration Planning

It is during this phase when the HR professionals’ skills in project management

and change management are a critical asset to the life cycle of the merger or

acquisition.

HR is usually involved in a wide range of planning issues such as:

• Talent management;

• Retention initiatives for key personnel;

• Determining transition strategies to move people to new roles, provide training

and reskilling;

• Outplacement processes and policies;

• Determining the new management team;

• Determining the direction for the new organisational culture;

• Determining the leadership style for the new organisation;

• Designing the communication strategy for staff and other relevant bodies such

as Unions and the Ministry of Manpower;

• Appointment criteria for new positions;

• Development of the contract terms of employment for the new entity;

• Determining the level and appropriateness of integration;

• Developing brand alignment strategies; and

• Determining work environment and work location issues.

The details and planning that are put into this phase is a critical factor in the

success of the implementation of the acquisition. For a successful implementation,

quick, decisive and focused action is needed. This can be better achieved if

detailed planning was conducted prior to implementation.

6.4 The Role Of HR During The Implementation Phase

Effectively, during the implementation phase, HR is required to deliver on the

plans developed during the integration planning phase as well as respond to

unexpected and new requirements – which are often many and unpredictable.

One of the key roles for HR professionals during the implementation phase is the

co-ordination of communications to staff. It is critical that the new organisation

maximize productivity and focus on client and shareholder satisfaction as soon as

possible. HR can play a pivotal role in maximising employee engagement through

effective and timely communications to staff.

In every case study cited in this research, every respondent highlighted the critical

impact of effective communication. Essentially through any change process,

employees want to know “what is in it for me?” (WIFM). This could include such

issues as, Will I have a job? Who will I report to? What are my rights and benefits

if terminated? What have my clients been told? What is the media saying? What

will be my future

role and responsibilities? What are my new benefits and terms of employment?

Who can I talk to for help and information? The questions raised are extensive!

Until staff receive satisfactory communication and clarification on the answers to

these questions, performance and productivity can be severely impaired. During

the integration planning phase, it is advisable to develop a comprehensive Q and A

sheet that identifies and responds to likely staff issues. One benefit of providing

this information in a written format is that it helps ensure reliability and

consistency of the message across the group in times of change and uncertainty.

An important element of the communication programme during the

implementation phase is the issue of timing and messages. Items that need

addressing include such things as what do you tell the media verses what do you

tell your staff? Who do you tell first? Experience has shown that timely releases of

consistent, transparent information is an important factor to the success of staff

trusting the organization through the change process. It is often tempting to “hide”

or “soften” bad news such as downsizings and restructures but, in reality staff

expect change during mergers and acquisitions and look towards management to

conduct their communications with integrity.

In addition to the content and the timing of communications, the medium of

communications is also important. The use of tools such as email helps ensure that

consistent messages can be distributed in a timely fashion to many employees

across different locations and time zones. However, there may be the need for

other forums where two-way question and answer sessions can be held.

Documenting communications is important for ensuring staff receive a consistent

message during such times of change.

As well as the important role of implementing the employee communication

programme, there are several other activities typically conducted by HR

professionals during the implementation phase. These include:

• Acting quickly to restructure the organization and select the right people for

each role including people management, assessment and development;

• Aligning business strategies with people practices;

• Establishing financial and legal liabilities and compliance management;

• Managing cultural and organisational change;

• Issuing new employment contracts with revised terms and conditions;

• Developing and harmonising HR policies and programmes across the group;

• Responding to staff queries and providing management support;

• Liaising with Unions and other bodies that may be involved in disputes;

• Establishing the new Culture including the Mission, Vision and Organisational

Values;

• Providing training and development and reskilling;

• Implementing strategies for the development, sharing and retention of knowledge

capital;

• Assisting with restructures, job descriptions, job values and organisational

structure;

• Assisting in organisation and process redesign;

• Implementing retention strategies;

• Implementing brand alignment strategies;

• Implementing work environment and work location plans; and

• Implementing the other HR components of the integration programme such as the

merger of HRIS architectures, the development of new induction courses and so

forth.

Employee retention through the integration phase is often cited as a key role for

HR professionals. A study conducted by Right Management Consultants that

included interviewing a number of executives involved with the people side of

mergers and acquisitions produced six important principles for making the

transaction more successful:

1. Decide how critical employee retention really is – this will vary considerably

depending on the nature of the business.

2. Look for talent in unexpected places – some of your key resources may not be

top management.

3. Recognise that nothing is forever – some retention strategies are only

appropriate for the short-term transition phase.

4. Don’t be too desperate to retain any one person – for key management, short

term contracts with severance bonuses may be all that is needed for the integration

phase.

5. Retention bonuses often backfire – sometimes good people leave because they

are not part of such a scheme.

6. Be open to creative approaches that earn trust – its not just all about cash

bonuses. Consider options such as career management and new skills development.

The critical role for HR professionals during the implementation phase is to help

ensure the organisation maximises employee engagement to assist in achieving the

initial objectives of the merger or acquisition through a successful integration.

6.5 The Role Of HR In Evaluating The Merger

It is often tempting for management to get caught up in the excitement of searching

for and acquiring new business opportunities. An important phase in the merger

and acquisition cycle is the post merger phase when a review of the achievements

of the merger can be assessed against the original or revised objectives.

The failure rate for successful mergers is high at around 70%. (Source: Gaplin and

Hendron) It is important for the management team to review the progress and

success of the implementation phase.

Our research in preparing the attached case studies highlighted that even after

some years there are several organisations in Singapore who have not really

achieved successful implementation from the HR perspective. Benefit programmes

have not been harmonised, different performance management systems are still

operating, economies of scale have not been achieved through re-engineering and

repositioning of the operations and a unified sense of purpose, mission, vision and

direction have not been obtained.

In addition to comparing the achievements of the new organisation against the

original objectives, often HR professionals will use a range of tools such as

cultural surveys to benchmark and monitor the success of establishing the new

organisational culture.

In maximising the engagement of the human capital in the new organisation, it is

important that this review process is conducted and appropriate remedial action is

identified and taken to ensure the successful outcome of the integration.

7. Managing cultural diversity in cross-border alliances

The term culture to refer to the unique pattern of shared assumptions, values,and

norms that shape the socialization, symbols, language, narratives, and practices of

a group of people. Thus culture provides a context (a mindset) for interpreting

events and assigning meaning (Denison, 1996; Rafaeli and Worline, 2000; Trice &

Beyer, 1993). Cultures develop in both large and small groups of people, so

cultural differences occur at many levels. Some cultural differences become most

evident when one is comparing large geographic regions, while others can be

found at the level of countries, regions within countries, industries, organizations,

occupational groups, demographic groups within a country, and so on (Jackson and

Schuler, 2003). For any particular international joint venture, merger, or

acquisition, cultural differences at many or all of these different levels are likely to

be relevant. The distances between the cultures of organizations can have a

significant impact on their relationships. In fact it may preclude their relationship

(Ghemawat, 2001). It is, however, the specific nature and location of a CBA that

determines which elements of culture become most salient and require the most

attention.

7.1 National culturesDepending on the cultural distance between the national cultures involved in a

CBA, managing differences in country cultures or regional cultures may be of

relatively great or of only minor significance. In some CBAs, such as those

between U.S. and Canadian business, differences in country cultures are relatively

small. In others, however, cultural differences in such key areas as leadership

styles and decision-making procedures can be substantial (Brodbeck et al., 2000).

Even when an alliance occurs between companies within a single country, cultural

differences may be significant, owing to regional differences. A study of more than

700 managers in large cities in each of China’s six major regions suggests that

there are at least three distinct subcultures in China: one in the southeast, another in

the northeast, and a third covering much of the central and western parts of the

country. The subculture of the southeast region is the most individualistic, whereas

the subculture of the central and western areas is the most collectivistic. The

culture of the northeast region falls between these two extremes. Thus, cultural

diversity may create just as great a challenge for an alliance between companies

from different regions in China as it would for other CBAs (Ralston et al., 1996).

Variations (or similarities) in the institutional environments of the alliance partners

may further complicate (or help to alleviate) the challenge of managing differences

due to national cultures. For example, the European Union, the Asia-Pacific

Economic Cooperation, and the North American Free Trade Agreement all

represent institutional arrangements that seek to provide a common framework

or perspective that can be used to guide some relationships between companies in

the member countries (see Luo, 1999; Moran and Abbott, 1994). As these

institutional arrangements become better established, it is likely that CBAs within

an economic trade region will become easier even in the face of significant

differences in national cultures. Nevertheless, even within economic trade zones,

differences in institutional arrangements among countries result in differences in

the functioning of corporate boards and top management teams as well as

approaches to managing an organization’s human resources (Brewster, 1995;

Glunk et al., 2001; Mayer and Whittington, 1999).

7.2 Industry culture

Similarly, differences in industry cultures may be important in some CBAs and

nearly irrelevant in others. Industry cultures are likely to be relatively unimportant

when an alliance is created between companies within an industry, but when

organizations from distinct industries attempt to form an alliance, such differences

may be as significant as differences in country culture. Industries boundaries are

both fuzzy and unstable, so the question “What industry are we in?” is not always

easy to answer. Furthermore, some companies compete by constantly pushing at

the boundaries of the industry and, eventually, redefining the industries in which

they compete (Hamel, 2001; Hamel and Prahalad, 1994). Nevertheless, at any

point in time, the relevant industry for mostorganizations is made up of a group of

companies that offer similar products and services. Companies within an industry

experience similar patterns of growth, and eventually a common industry culture

may develop. Generally, companies within the same industry are a firm’s most

significant competitors, as well as their most likely partners in strategic alliances,

including international mergers, acquisitions, and joint ventures.Unfortunately,

there is very little empirical research evidence available to use in understanding

industry-based cultural differences. An exception is the work of Hofstede (1997),

who suggested that industry cultures can be described using four dimensions.

These dimensions build on Hofstede’s earlier work on organizational cultures,

described below.Although Hofstede’s dimensions for describing industry

differences have not been widely used in empirical research, his work supports the

assumption that cultural clashes are more likely to be disruptive in alliances that

are formed by firms from different industries.

7.3 Organizational cultures

As is true for industry cultures, describing differences in organizational cultures

can be difficult because there has been little empirical work directed at

understanding the nature of these differences and how they are manifested across

different countries (Adler and Jelinek, 1986; Aguinis and Henle,2002). One

popular typology for describing organizational cultures uses two dimensions to

create a typology of four cultures, with each culture characterized by different

underlying values. In this typology, one dimension reflects the formal control

orientation, ranging from stable to flexible. The other dimension reflects the focus

of attention, ranging from internal functioning to external functioning. When these

four dimensions are combined, they form a typology of four pure types of

organizational cultures: bureaucratic, clan, entrepreneurial, and market

(Hooijberg and Petrock, 1993; Quinn and Rohrbaugh, 1983).

On the basis of research in ten companies located in three European countries,

Hofstede proposed using six dimensions to conceptualize organizational cultures

(Hofstede, 1991; Hofstede et al., 1990): process versus results orientation;

employee versus job orientation; parochial versus professional; open versus closed

system; loose versus tight control; and normative versus pragmatic. Rather than

reflecting different values, these dimensions reflect differences in management

practices (see also Peterson and Hofstede, 2000). Using yet a third approach to

conceptualizing organizational culture, the GLOBE project (Dickson et

al., 2000; House et al., 1999) has made the assumption that differences in

organizational cultures can be understood using the same dimensions that

differentiate among national cultures.

7.4 Domestic cultural diversity

In any organization, differences in individual personality and behavioral styles

contribute to domestic workforce diversity. Other forms of domestic diversity are

associated with membership in various demographic groups. Regardless of which

other forms of cultural diversity exist in CBAs, domestic cultural diversity is

always an issue. In the Davidson-Marley IJV, the Dutch workforce hired to staff

the manufacturing plant shared a societal culture, but other forms of domestic

diversity proved challenging nevertheless. Recruitment and selection practices

intentionally sought to represent the demographic diversity (gender, age, and

so on) of the Dutch labor market within the plant. Additional diversity was

introduced unintentionally, however, because employees were hired in two distinct

waves.

All employees who were hired had to meet the same technical skill requirements,

but different personalities were sought during these two hiring waves. In selecting

the first 100 employees, the IJV sought people who were willing to contribute to

building up the firm in its pioneering phase. Good problem-identification and

problem-solving abilities were needed. In addition, the IJV looked for employees

with an international orientation because these employees would be traveling to the

United States or the United Kingdom to receive training. Within the United States,

research on domestic cultural diversity is based on the assumption that membership

in some demographic groups results in socialization experiences that effectively

create identifiable subcultures within a national population. Gender, ethnicity, and

age are the characteristics most often associated with demographic cultural

influences (Bloom, 2002). Certainly there is evidence of group-based differences

in values and behavioral styles among members of different demographic groups.

Within the context of North America, gender differences in verbal and nonverbal

communication, influenceability, interpersonal styles, and leadership styles are

well documented (Best and Williams, 2001; Carli, 1989; Eagly and Carli, 1981;

Eagly and Johnson, 1990; Tannen, 1990, 1995). Also well documented are age and

cohort differences in work attitudes and values (Elder, 1974; Rhodes, 1983;

Thernstrom, 1973; “Work attitudes,” 1986). Presumably, differences among ethnic

groups and language groups within countries tend to mirror cultural differences

between the host country and the original home country of an ethnic group.

(However, with time, assimilation and adaptation may diminish the differences,

and/or a new ethnic culture or language difference may develop.) Of course,

differences found among demographic groups within a country are shaped by and

also contribute to the country’s national culture. For example, gender differences

appear to be more pronounced in some countries than others, as do the

relationships between men and women (Best and Williams, 2001; Williams and

Best, 1990). Furthermore, in other countries, it is likely that meaningful cultural

variations are associated with other demographic subgroups; for example, cultural

differences due to religion may be more salient while those due to race or ethnicity

may be less salient.

7.5 Understanding how cultural diversity influences behavior

Scholars who study culture at different levels of analysis disagree about how to

describe cultures, the social levels of analysis at which it is appropriate to apply the

concept of culture, and many other issues that are beyond the scope of this chapter.

(Interested readers can find an overview of these issues in Ashkanasy and Jackson

(2001). For more detailed discussions, see Ashkanasy et al. (2000a).) Without

attempting either to summarize or to resolve these debates, in this chapter we make

some simplifying assumptions about the nature of “culture.” One assumption is

that our understanding of the consequences of cultural diversity in CBAs can move

ahead without our resolving the question about how best to assess the “content’’ of

culture. We do not intend to suggest that empirical work of a comparative nature is

unimportant. However, a complete understanding of the ways that the cultures of

various subgroups are similar to or different from each other is not needed in order

to begin to understand how the presence of cultural differences shapes behavior in

organizations. That is, we assume that the structure of cultural diversity has some

predictable consequences, and that these arise regardless of the content of the

cultural diversity present in a specific CBA.We also assume that the behavior of an

individual is influenced by multiple cultures, which are associated with the

person’s multiple memberships in and identification with a variety of overlapping

and intersecting social entities (societies, organizations, professions, ethnic

populations, and so on). These multiple cultures provide the individual with a

variety of value systems (which need not be consistent with each other) for

interpreting and responding to events in the environment. Depending on the social

setting, some of the value systems available to an individual become more salient

and important in guiding behavior. This perspective of how cultures impact

behavior is consistent with social identity theory, which views social

identification processes as situationally determined (Salk and Shenkar, 2001).

A model for understanding cultural diversity and its consequences

Jackson et al. (1995) developed a model to illustrate how domestic diversity

influences behavior in organizations. Here we have adapted their model to

illustrate how many aspects of cultural diversity can combine to influence the

behavior of employees in cross-border alliances

The many forms of cultural diversity

As the model recognizes that the cultural context includes several layers or

levels. To some extent, these layers of culture are nested, with the more inclusive

levels of culture operating as constraints around the “lower” levels of culture. For

example, the organizational cultures of single-business domestic firms tend to be

constrained by and reflect their country and industry cultures. We do not intend to

imply that the more inclusive levels of culture determine the cultures of more

delimited social systems, however. Nor do we intend to suggest that a lower-level

social system is fully nested within only one higher-level social system. Indeed, for

CBAs, this is definitely not the case – instead, at least some individuals (e.g., the

top management team) within any organization formed by a CBA are embedded in

multiple organizational and country cultures, and perhaps also multiple industry

cultures.

Organizes constructs into four general categories that are linked as follows:

cultural diversity →mediating states and processes → short-term behavioral

manifestations → longer-term consequences.

The model can be used to analyze the behavior of individuals, dyads, and larger

social units, such as work teams or departments. Beginning on the left, the content

and structure of cultural diversity are viewed as (partial) determinants of the way

people feel and think about themselves and each other. The content of cultural

diversity simply refers to the specific values, norms, language, and other elements

of a culture. As has already been noted multiple levels of cultural content will be

relevant in most situations. For CBAs, societal, organizational, and industry

cultures are likely to be particularly salient. However, demographic cultures also

are likely to play a role in shaping the interactions between individuals and groups

within the organization.

The structure of cultural diversity refers to how cultural differences are distributed

within the team or organization. The specific circumstances of a particular CBA

mean that both the structure and the content of cultural diversity may be unique to

each alliance. For example, in the combination phase of IM&As, the structure of

organizational-level diversity within the integration teams is likely to be balanced

(or, some might describe it as polarized), especially if the partners try to merge the

cultures of the two companies. If each of the partners is a domestic firm with little

societal-level diversity represented, then the integration team also will be balanced

in terms of societal cultural diversity. In this situation, the alignment of societal

and organizational membership reinforces the cultural divide between the

subgroups within the team, creating a cultural fault line (Lau and Murnighan,

1998). Next, consider the example of an IJV that is located outside the countries of

the two parents and staffed completely with local talent. In that case, there may be

little societal diversity within the IJV.Nevertheless, if employees were hired from

the local external labor market, a great deal of organizational and industry-based

diversity may be present. If the local labor market for jobs is demographically

diverse, and if employment practices encourage hiring across the full range of the

labor force, then demographic diversity will also be present in the workforce.

Under this scenario, the expectation might be that the structure of diversity should

not create a strong fault line or polarization between any two groups. Nevertheless,

cultural fault lines and polarization may arise even under this type of scenario.

In the Davidson-Marley IJV, a cultural fault line was inadvertently created among

employees in the Dutch manufacturing plant. It developed because employees were

hired in two distinct waves. The first group of 100 employees who were hired

worked in a start-up operation and were deeply involved in working out the details

of how the operation was run. After the new plant was established and growing,

the IJV hired 200 more employees. For this wave of hiring, they sought people

who were willing to accept and adjust to the management practices of the now

thriving operation, and who could work well in teams. Thus differences in the job

tenure of employees were aligned with differences in personality. Furthermore, as

a result of the timing of the hires, these two waves of employees found themselves

working under different employment contracts. And, owing to the seniority

differences in the two groups, those who were hired first were always assigned to

more advanced job categories and received higher pay. This divide within the

workforce created unexpected conflicts, and in retrospect, the HR manager realized

that it would have been better to hire on a continuous basis rather than in two

distinct waves (van Sluijs and Schuler, 1994). The content of cultural differences

has received the most attention in past research. However, research on group

dynamics clearly shows that the structure of cultural diversity has important

consequences. For example, intergroup conflict is almost inevitable when

cultural fault lines are present, regardless of the cultural values or norms that

separate the groups. In contrast, when differences are more broadly distributed and

diffuse, problems of coordination may be more problematic than overt conflict,

especially in the early stages of a group’s development. However, given enough

time, very diverse multinational teams in which there is no opportunity for

nationality-based cliques to form can overcome these problems and outperform

more homogeneous teams in the long run (Earley and Mosakowski, 2000).

How cultural diversity influences employees thoughts and feelings

The forms of diversity present in an organization can influence how people think

and feel. Eventually, their thoughts and feelings are translated into observable

behaviors. Attraction, discomfort, admiration, stereotyping, perceptions of status

and power – all of these thoughts and feelings are influenced by cultural diversity.

Emotional reactions

Regardless of the basis for identifying people as similar or dissimilar (e.g.,

commonality of national, industry, organizational and/or demographic culture),

people tend to feel more comfortable with and positive about others whom they

perceive to be similar. Loyalty and favoritism characterize interactions with similar

others while distrust and rivalry characterize interactions with those who are

dissimilar. The tendency to be attracted to and biased in favor of similar others is

so pervasive that it operates even when people judge their similarity on the basis of

meaningless information (such as randomly determined group membership). At the

level of teams and larger organizational units, feelings of attraction or liking

among members translate into group cohesiveness. Although there has been little

research on the effects of shared societal, industry, or organizational cultures on

group cohesiveness, there is a great deal of evidence showing this effect of

similarity for other background characteristics, including age, gender, race,

education, prestige, social class, attitudes, and beliefs (Jackson et al., 1995). As

will soon become apparent, this similarity–attraction–cohesiveness dynamic can

have important consequences for the emotional landscape within which members

of CBAs conduct their work.

8. Key Factors Of HRM In M&A

8.1 Staffing

Guideline: When making staffing decisions, gather reliable information about how

employees respond to cultural differences. Competencies related to managing

diversity should be given at least as much weight as technical competencies.

Throughout the lives of IJVs and IM&As, numerous staffing decisions must be

made, including decisions regarding whom to hire, whom to promote, and perhaps

whom to let go. In addition to ensuring that an alliance is staffed with people who

have the technical proficiencies required, staffing practices can improve the

organization’s effectiveness by identifying individuals who are more likely to be

effective working amid cultural diversity. Staffing practices also should be

sensitive to the composition of teams (i.e., the content and structure of cultural

diversity).

Staffing for cross-cultural competency

On the basis of their experiences and a review of the literature, Schneider and

Barsoux (1997) proposed a set of behavioral competencies needed for effective

intercultural performance. These included linguistic ability, interpersonal

(relationship) skills, cultural curiosity, ability to tolerate uncertainty and ambiguity,

flexibility, patience, cultural empathy, ego strength (a strong sense of self), and a

sense of humor. When evaluating employees for staffing decisions, competency

models such as this one provide useful guidance that can increase an organization’s

ability to staff its alliances with employees who easily adjust to and enjoy cultural

diversity. However, it should be noted that competency models for cross-cultural

adjustment often are developed on the basis of expatriates’ experience (e.g.,

Mendenhall and Oddou, 1985; Tung, 1981). While expatriate assignments may

share some similarities with IJV or IM&A assignments, there also are many

differences. Much more research is needed to identify the personal characteristics

most likely to contribute to success in these settings. When an organization’s

strategy requires that it participate in a large number of IJVs and IM&As, it has the

opportunity to conduct such research. Doing so can help it further refine its

understanding of how various personal characteristics relate to the performance of

employees in culturally diverse organizations.

Staffing for composition

As we have noted, cross-cultural alliance partners often establish teams to ensure

the airing of multiple perspectives prior to decision making (Apfelthaler et al.,

2002). Especially during the early stages of the alliance’s evolution, these teams

often are staffed with equal numbers of representatives from each partner involved

in the alliance. For example, following a merger, this tactic might be used ensure

that the two companies have equal representation in the new top management team

(Schweiger et al., 1992). This tactic also is likely to be used when forming the

board that oversees an IJV, when staffing IM&A integration and transition teams,

and so on. While representational staffing has many benefits, it may inadvertently

lead to unnecessary conflict, divisiveness, and turnover if it creates teams

characterized by strong fault lines. Fault lines can be avoided if staffing decisions

take into consideration the structure and content of diversity created by a

combination of people selected to staff a team. In other words, selecting the “best”

people for a team assignment involves more than evaluating the performance

potential of individuals: it requires evaluating the performance potential of the

team as a whole. In addition to avoiding the creation of teams or departments with

clear fault lines, staffing decisions also need to consider the status dynamics that

are likely to arise within a team or organizational unit. When members of a group

perceive a clear status hierarchy, lower participation and involvement can be

expected from those on the lower rungs of the hierarchy, regardless of their actual

expertise and knowledge.

8.2 Training and development

Training and development activities can address a number of challenges created by

the cultural diversity present in IJVs and IM&As. Training to improve cultural

awareness and competencies may seem the most relevant form of training for

improving intercultural relations, but appropriate business training should also be

helpful.

Cultural awareness and competency training

Perhaps most obviously, cultural awareness and competency training can quickly

teach employees about cultural similarities and differences, and perhaps diminish

their reliance on inaccurate stereotypes. Although stereotypes can be resistant to

change, they can be modified if sufficient disconfirming evidence becomes

available (Triandis et al., 1994).

As was implied by our earlier discussion of the many types of cultural diversity

present in some IJVs and IM&As, awareness training should not be limited to

learning about national cultures; employees may also benefit from information

about differences (and similarities) due to regional locations, industries,

organizations, and membership in various demographic groups. Besides imparting

knowledge, effective training provides employees with opportunities to practice

and hone their interpersonal skills. Nor should awareness training be viewed as a

one-time event. Educational briefings may be helpful initially, but as the alliance

evolves, more intensive team-building workshops and joint problem-solving

sessions will likely be needed as employees experience the many implications that

cultural diversity has for their daily interactions.

Business training

The potential benefits of cultural awareness training seem obvious, but business

training also can improve the alliance’s ability to manage its cultural diversity.

Business training can help to establish two of the conditions that enable diverse

groups to reap the benefits of their diversity: an understanding of shared goals, and

mutual respect. Unless participants in an alliance believe they share the same

interests, they may assume that a competitive relationship exists between the

alliance partners. Furthermore, unless they understand why the capabilities and

resources of each partner are needed to succeed in achieving their shared goal, they

may perceive that the contributions of one partner are more important, more

valuable, and thus more deserving of respect. Through business training,

employees in an alliance can develop an appreciation for how the capabilities and

resources of each partner can contribute to success. For example, if IJV partners

enter a relationship that is not based on a fifty-fifty equity relationship, employees

in the venture may assume that the higher-equity partner will ultimately have more

influence and control, placing the lower-equity partner in a position of lower

status. Yet in such a venture, it is likely that the intangible resources of the lower-

equity partner are essential to the venture’s success (Yan and Gray, 1994). Thus,

teaching employees about the complementary value of capital and intangible

resources provides employees with a solid foundation for developing mutual

respect.

8.3 Performance management

For any organization, performance management is an important and very complex

aspect of human resource management. For IM&As, creating a unified

performance management system is perhaps the greatest challenge faced by

organizations that seek to blend two disparate cultures (Fealy et al., 2001). For

IJVs, a major challenge is creating a performance management system that aligns

the interests of managers in the venture with those of the parents (Evans et al.,

2002). In addition to contributing to employees’ performance in the technical

aspects of their jobs, performance management systems can improve cross-cultural

relations by ensuring that employees’ efforts are directed toward

shared goals, providing them with feedback that provides insights about how

people from other cultures interpret their behaviors, and rewarding them for

developing the competencies required to be effective in a culturally diverse

organization. Training programs can inform employees about the shared goals of

alliance partners, but performance management systems must convince employees

that the rhetoric is also the reality. Ideally, at each evolutionary stage, all

employees involved will understand how their performance is assessed and

how performance assessments relate to the goals for the alliance. Rewards and

recognition for performance that contributes to achieving the alliance’s goals serve

to reinforce the message. The norms that govern giving and receiving feedback in

various cultures differ greatly, yet in any culture, giving and attending to feedback

is necessary for maintaining effective relationships. Cultural differences mean that

feedback communications are particularly prone to misunderstandings and

misinterpretations. One response to such problems is to avoid giving feedback to

people from other cultures. Well-designed performance management practices can

ensure that employees receive the feedback they need in a culturally appropriate

way. Often organizations provide training but do not mandate full participation,

nor do they reward employees who apply the training lessons in their work.

According to a study involving several hundred U.S. organizations, the success of

domestic diversity interventions was enhanced when supporting sanctions were in

place. Requiring everyone to attend cultural awareness and competency training

communicates their importance, as does providing rewards to employees who

provide evidence of improvement (Rynes and Rosen, 1995).

9.Examples

9.1 Acquisition strategy of GE Capital

The GE Capital uses a successful model called “Pathfinder” for acquiring firms. The model disintegrates the process of M&A into four categories which are further divided into subcategories. The four stages incorporate some of the best practices for optimum results. The pre-aquisition phase of the model involves due diligence, negotiations and closing of deals. This involves the cultural assessments, devising communication strategies and evaluation of strengths and weaknesses of the business leaders. An integration manager is also chosen at this stage. The second phase is the foundation building. At this phase the integration plan is prepared. A team of executives from the GE Capital and the acquiring company is formed. Also a 100 day communication strategy is evolved and the senior management involvement and support is made clear. The needed resources are pooled and accountability is ensured. The third is the integration phase. Here the actual implementation and correction measures are taken. The processes like assessing the work flow, assignment of roles etc are done at this stage. This stage also involves continuous feedbacks and making necessary corrections in the implementation. The last phase involves assimilation process where integration efforts are reassessed. This stage involves long term adjustment and looking for avenues for improving the integration. This is also the period when the organization actual starts reaping the benefits of the acquisition. The model is dynamic in the sense that company constantly improves it through internal discussions between the teams that share their experiences, effective tools and refine best practices.

Source: Ashkensas, R.N., DeMonaco, L.J. and Francis, S.C. (1998).Making the Deal Real: How GE Capital Integrates Acquisitions. Harvard Business Review, Jan/Feb98, Vol. 76 Issue 1, p165, 1

9.2 Acquisition strategy of Cisco

The acquisition strategy of Cisco is an excellent example of how thorough

planning can help in successful acquisitions. After experiencing some failures in

acquiring companies, Cisco devised a three step process of acquisition. This

involved, analyzing the benefits of acquiring, understanding how the two

organizations will fit together – how the employees from the organization can

match with Cisco culture and then the integration process. In the evaluation

process, Cisco looked whether there is compatibility in terms of long term goals of

the organization, work culture, geographical proximity etc. For example Cisco

believes in an organizational culture which is risk taking and adventurous. If this is

lacking in the working style of the target company, Cisco is not convinced about

the acquisition. No forced acquisitions are done and the critical element is in

convincing the various stakeholders of the target company about the future

benefits. The company insists on no layoffs and job security is guaranteed to all the

employees of the acquired company. The acquisition team of Cisco evaluates the

working style of the management of the target company, the caliber of the

employees, the technology systems and the relationship style with the employees.

Once the acquisition team is convinced, an integration strategy is rolled out. A top

level integration team visits the target company and gives clear cut information

regarding Cisco and the future roles of the employees of the acquired firm. After

the acquisition, employees of the acquired firm are given 30 days orientation

training to fit into the new organizational environment. The planned process of

communication and integration has resulted in high rate of success in acquisitions

for Cisco.

(The case is adapted from “Cisco’s acquisition strategy”, ICFAI Center for

management research)

10. Conclusion

Mergers and acquisitions have become a common phenomenon in recent times. A

merger of the size like HP-Compaq has implications for the workforce of these

companies across the globe. Although the merging entities give a great deal of

importance to financial matters and the outcomes, HR issues are the most

neglected ones. Ironically studies show that most of the mergers fail to bring out

the desired outcomes due to people related issues. The uncertainty brought out by

poorly managed HR issues in mergers and acquisitions have been the major reason

for these failures.

The human resource issues in the mergers and acquisitions (M&A) can be

classified in two phases the pre-merger phase and the post merger phase. Literature

provides ample evidence of difference in between the human resource activities in

the two stages: the pre-acquisition and post acquisition period. Due diligence is

important in the first phase while integration issues take the front seat in the later.

The pre acquisition period involves an assessment of the cultural and

organizational differences, which will include the organizational cultures, role of

leaders in the organization, life cycle of the organization, and the management

styles. The mergers often prove to be traumatic for the employees of acquired

firms; the impact can range from anger to depression. The usual impact is high

turnover, decrease in the morale, motivation, productivity leading to merger

failure. The other issues in the M&A activity are the changes in the HR policies,

downsizing, layoffs, survivor syndromes, stress on the workers, information

system issues etc. The human resource system issues that become important in

M&A activity are human resource planning, compensation selection and turnover,

performance appraisal system, employee development and employee relations.

M&A activity presents a different set of challenge for the human resource

managers in both acquiring and acquired organizations. The M&A activity is found

to have serious impact on the performance of the employees during the period of

transition. The M&A leads to stress on the employee, which is caused by the

differences in human resource practices, uncertainty in the environment, cultural

differences, and differences in organizational structure and changes in the

managerial styles.

The organizational culture plays an important role during mergers and acquisitions

as the organizational practices, managerial styles and structures to a large extent

are determined by the organizational culture. Each organization has a different set

of beliefs and value systems, which may clash owing to the M&A activity. The

exposure to a new culture during the M&A leads to a psychological state called

culture shock. The employees not only need to abandon their own culture, values

and belief but also have to accept an entirely different culture. This exposure

challenges the old organizational value system and practices leading to stress

among the employees. Research has found that dissimilar cultures can produce

feeling of hostility and significant discomfort which can lower the commitment

and cooperation on the part of the employees. In case of cultural clash, one

of the cultures that is dominant culture may get preference in the organization

causing frustration and feelings of loss for the other set of employees. The

employees of non-dominating culture may also get feelings of loss of identity

associated with the acquired firm. In certain cases like acquisition of a lesser

known or less profitable organization by a better one can lead to feelings of

superiority complex among the employees of the acquiring organization. In case of

hostility in the environment the employees of two organizations may develop “us”

versus “them” attitude which may be detrimental to the organizational growth.

The uncertainty during the M&A activity divert the focus of employees from

productive work to issues like job security, changes in designation, career path,

working in new departments and fear of working with new teams. The M&A

activity leads to duplication of certain departments, hence the excess manpower at

times needs to be downsized hence the first set of thoughts that occur in the minds

of employees are related to security of their jobs. The M&A activity also causes

changes in their well defined career paths and future opportunities in the

organization. Some employees also have to be relocated or assigned new jobs;

hence the employees find themselves in a completely different situation with

changes in job profiles and work teams. This may have an impact on the

performance of the employees. Research has found that at least two hours of

productive work per employee per man day is lost during the M&A activity in the

organizations. The increased political processes that may be underway in the

organizations to sustain the importance of the various individuals and departments

will add to the confusion.

The human resource systems vary across organizations owing to the differences in

the organizational culture, sectoral differences and national cultural differences.

For example if the compensation in the acquired firm is lesser compared to the

acquiring firm, the acquisition will raise employee expectations (for the employees

of acquired firm) of a possible hike in compensation which may not be realistic.

On the other hand if the compensation level of employees in acquiring firm is

lower the employees may press to have equal compensation across all the divisions

of the firm. The pay differential can act as a de-motivator for the employees of

acquiring firm and may have long term consequences. The compensation issues

may also involve legal angle. Two cases in the Indian context are important which

underline the importance of legal issues related to compensation in M&A activity.

The first case involving Hindustan Lever Limited acquiring TOMCO, the

employees in TOMCO enjoyed better terms and services compared to the HLL

employees. The HLL employees argued that if TOMCO employees are allowed to

work on their original terms and conditions, two classes of employees will come in

existence. Since both the set of employees now belong to same firm, a case of

discrimination will arise against the employees of HLL. However the court

supported TOMCO employees in the process. The second case involves merger of

Glaxo and Wellcome-Burroughs who decided to merge in 1996. The Indian arms

however couldn’t merge in the last seven years because of high pay differential

between workers of Glaxo and Wellcome in India. The workers of Wellcome were

offered a one time compensation of Rs. 2 lakhs in 1998, which they refused.

Further the VRS scheme launched by the firm evoked very tepid response.

Since 1997 the firms have been working as independent subsidiaries in India.

Compensation differences need to be rectified by the acquiring firm so as to

maintain the morale of acquired firm employees and to retain them. The

compensation structure among the organizations may also differ creating troubles,

for example one of the firms may have performance based pay while other may

have higher component of fixed pay. Hence the differences in compensation

structure and performance appraisal systems also need to be rectified so as to bring

equity in the human resource systems and to treat employees at the equal level.

Another practical problem is differences in the grading or organizational structures

in the systems. Since the organizational structures are different designations for the

employees are used, during the integration of acquired organization the acquiring

organizations need to develop a mechanism to remove the differences in the

grading systems bring them at equal level, as many a times the compensation is

related to the grade of employee in the organization.

The employee relations issues gain more importance in the acquisitions of

manufacturing units in India. The power equation between management and trade

unions is bound to change with the acquisition. The acquiring management also

needs to keep track of number of unions in the workplace and equations between

them as many Indian manufacturing units have multiple unions. Hence

comprehensive analysis of trade unions operating in the plant should be done. This

will require study of management-union equation, employee contracts, political

linkages of the unions, compensation related clauses, number of trade union and

dynamics between the unions.

The impact on the employees can be divided into categories of psychological

trauma, increased workload, survivor guilt and stress. The reaction of the

employees can vary from anger to dejection and depression. The process of merger

can have inbuilt psychological and social threats which should be identified like

exodus of managers due to the perceived job insecurity. There is also fall in the

morale, commitment and loyalty. The merger can lead to depression and impaired

performance. The dissimilarity in the cultures can produce the feelings of hostility

and significant discomfort, which impact on the commitment and cooperation on

the part of employees. The cultural difference also leads to counterculture feelings

where employees tend to completely reject the dominant culture of the

organization. The impact of cultural shock is significant and long lasting on the

employees. The initial shock is followed by employees making their own

perceptions based on values and past experiences. The more dissimilar the culture

is higher will be the cultural shock. The likely reactions as noted by studies are

anger fear, denial frustration and depression which leads to altered behavior,

reduced productivity, stress, illness, accidents , conflicts and a total lack of

commitment to make merger work. The feeling of political back stabbing adds to

the psychological trauma.

11. Bibliography

1.The Role of HR in Mergers and AcquisitionsA case study commissioned by the Ministry of Manpower (Singapore)Written by: Buck Consultants

2. Managing Human Resources in Cross-Border Alliances

Randall S. Schuler, Susan E. Jackson and Yadong Luo

3.Knotted forever… By Amit Pande & Sandeep K Krishnan(IIM-A)

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