CHAPTER 12 Mergers and Acquisitions Chapter Learning Outcomes After reading this chapter, you should be able to: • Understand the various types of mergers and acquisitions. • Explain why organizations merge and the methods used to achieve a merger. • Identify the financial and human impacts of mergers. • Describe the issues involved in blending cultures. • Discuss how a merger affects HR planning, selection, compensation, performance appraisal, training and development, and labour relations. Chapter Summary The focus of this chapter are the HRM implications of mergers and acquisitions (M&As). Mergers are undertaken to provide a strategic benefit or a financial benefit, or to fulfill the psychological needs of the managers. The financial and other results of mergers are not always as positive as expected, and the effects on staff can be devastating, whether or not employees stay. The culture of the previously separate companies and the new merged company are the factors that experts say are the most important predictor of merger success. The merger has an impact on each of the functional areas—HR planning, selection, compensation, performance appraisal, training and development, and labour relations. Class Outline Instructor’s Teaching Notes Students’ Learning Activities Mergers and Acquisitions Mergers and acquisitions peaked in 2007. Although buyers are typically focused on mergers and acquisitions to support growth strategies, sellers have become more reluctant to sell due to issues with valuations of organizations and the economic climate. • Horizontal merger • Vertical merger • Conglomerate merger Definitions Horizontal merger: the merging of two competitors. • The competitors combine to increase market power. These mergers are subject to review by regulators who fear monopoly in the marketplace. Vertical merger: the merger of a buyer and seller or supplier. • These two merge to achieve the synergy of controlling all factors affecting the company’s success, from the production of raw goods, to manufacturing, to distribution and sales. • The example provided is the merger of a real estate agency with a real estate developer. Conglomerate merger: the merger of two or more organizations competing in different markets. • The assets and liabilities of both companies are taken on by a third company, usually after the original companies are dissolved. Consolidation: the joining of two or more organizations to form one new organization. Takeover: one company acquiring another company. The Urge to Merge Companies merge for three reasons: • Strategic benefits • Financial benefits • Needs of the CEO or management team Strategic Benefits • M&As are a growth strategy for companies; they are a quick method of growth. • Competitive positions can be strengthened. • Complementarities can be obtained, e.g., HP and Compaq can renegotiate contracts with suppliers for memory chips and hard drives. • Merge to gain access to new markets, e.g., international. • Diversification may occur to reduce dependency on one market. • A company may redefine its business through acquisitions, e.g., Pfizer bought Warner Lambert to get the drug Lipitor. Operating synergy: the cost reductions achieved by economies of scale produced by a merger or acquisition. Vertical integration: the merger or acquisition of two organizations that have a buyer‒seller relationship. Horizontal integration: the merger or acquisition of rivals. Financial Benefits • Organizations expect to reduce the variability of the cash flow of their own business. • Organizations expect to use funds generated by their own mature (or cash cow) businesses to fund growing businesses. However, some experts argue that the advantages of using one division to fund another division might be risky in the long run. Labelling one business in the portfolio a “cash cow” and another a “star” has negative effects. • There may be tax advantages to the takeover, which vary by country. Considerable tax losses in the acquired firm may offset the income of a parent company. • It is expensive to enter new markets and to develop new products. Acquisitions result in more rapid market entries than innovation and product. • Astute corporations may analyze the financial statements of a company and decide that the company is undervalued. By acquiring the company, and sometimes by merging it with the administration already in place, a company can achieve financial gains. Management Needs • Managers may pursue their personal interests at the expense of stockholders. • Often the motives of executives are unconscious. Some managers make decisions only to prove their capabilities. • Other studies link personality factors to management decisions, such as the need for power. Merger Methods During the first tentative talk about a merger, the board of directors is kept informed of the procedures. Hostile takeovers become dramatic, with management pushing for poison pills and seeking white knights to protect themselves. Poison pill refers to the right of key players to purchase shares in the company at a discount—around 50%—that makes the takeover extremely expensive. White Knights are buyers who will be more acceptable to the targeted company. The Success Rate of Mergers • In publicly owned companies, the goal is to increase shareholder value. In private companies, the goal is to increase ROI (return on invested capital). • A merger occupies so much management time, attention, and other resources that the original businesses are sometimes neglected. Executives of HP and Compaq spent more than one million person-hours planning for the integration. • The best success rates occur with similar businesses rather than dissimilar ones. • Mergers are more successful when a large firm absorbs a small firm. • Mergers are less successful in service industries (compared to manufacturing) due to greater risk. Financial Impact • Many mergers fail because the buyer overextends itself financially with high debt loads and then must apply cost-cutting measures to service the debt. • A firm that has to use cash to pay for the debt incurred in acquiring another business has less to spend on certain projects such as research and development. • Some forecasted economies of scale are never achieved. Impact on HR Within 18 months of a merger and acquisition, results show: • Employees go underground, to avoid being visible. • Overt sabotage when employees resent the turmoil. • Self-interested survival tactics emerge, including hiding information to gain power. Cultural Issues in Mergers • The principal reason that mergers fail is because the two cultures did not “mesh.” • The blending of cultures can take years. Culture: the set of important beliefs that members of an organization share. • These beliefs are often unspoken. • They are an accumulation of the group’s shared history and experience. • Culture is known as the “social glue” that binds individuals together and creates organizational cohesiveness. HR Issues in M&As 1. The Contingency Plan • Should identify the contact person and the merger coordinator. • Contact person should develop a plan. • Should outline the chain of command, communication methods, procedures, and negotiation skills training. 2. HR Due Diligence Conduct a due diligence review to assess how the M&A will affect employees. The items to be considered: • Collective agreements. • Employment contracts. • Executive compensation contracts. • Benefit plans and policies. • Incentive, commission, and bonus plans. • Pension plans and retirement policies. • WSIB statements, claims, assessments, experience rating data. • Employment policies. • Complaints—employment equity, health and safety, wrongful dismissal, unfair labour practices, certification, and grievances. 3. Transition Team • An important element of a merger or acquisition is the need to appoint a transition team to manage: – Urgency – Information – Stress – HR policy review to recognize complementary, duplicated, or contradictory HR policies for the merging companies. Four options are open to those involved in M&As: • Cultural pluralism—Partner organizations co-exist. • Cultural integration—Partner organizations blend cultures. • Cultural assimilation—One company (usually the acquirer) absorbs the other. • Cultural transformation—The partner companies abandon key elements of their current cultures and adopt new norms. Consultants specializing in post-merger integration practices believe that two cultures cannot be merged by just waving the vision banner. They suggest these specific steps be undertaken: • Deploy role models: Those in highly visible positions of authority should exemplify the new and desired behaviours. • Provide meaningful incentives: Shower the role models and employees who replicate the desired behaviours with quick and visible rewards. Some questions to be asked by each partner group in the merger: • How do we view our organization’s culture? • How do we view the other side’s culture? • How do we think the other side views our culture? The goals of the transition team are to: • Retain talent. • Maintain productivity (both quality and quantity). • Select individuals for the new organization. • Integrate HR programs. • Begin the process of integrating cultures. Selection The two most critical issues for HR are related to: • Retention • Reduction Classification of Workers Integration keys: employees who possess critical skills for the transition, but not for the future of the company Transition: employees not needed in the new enterprise need a plan to assist them. Keepers: high performers in necessary roles Long-term stars: key talent needed for the business Demotion: under the new organizational structure, some employees are given less responsibility, less territory, or fewer lines due to amalgamation. Competition for the same job: some companies force employees to compete for their old jobs by having to apply as new candidates for a position. Termination: if not successful in the competition, employees are then let go. Sometimes, the acquiring firm waits until it can obtain its own appraisal of employee capabilities and has a chance to determine fit. • HR managers must terminate duplicate positions and redundant employees once the merger or acquisition is completed. • Ask “How many employees does the merged company need?” • Lean and mean cuts to the workforce result in greater work load, stress, and “survivor syndrome.” Some important areas are: • Urgency: Staffing decisions, such as terminating, hiring, evaluating, and • training, become urgent. • Information gaps: While both companies might have excellent plans for employees and reams of documentation, these plans have to be adjusted to merged needs. • Stress: The moment that the companies go “into play,” employees are stressed because they are aware of the traditional fate of employees in mergers. Compensation Important compensation decisions for the post merger company are whether to: • Merge compensation systems. • Adopt a totally new compensation system. • Create a new compensation system (all employee benefits will be subjected to the same scrutiny). It is extremely important to consider the possibility of lawsuits from employees who judge changes to be constructive dismissal. Performance Appraisal • Employee behaviour and performance is not typical after a merger so its effect should be considered. • Employee behaviour post-merger can be sorted into three categories: – Not knowing—Remedied by more communication. – Not able—The solution is training. – Not willing—A strong case for performance management through feedback and incentives. Training and Development • Managers and peers may need additional training in the role of coach and counsellor to deal with post-merger behaviours. • All staff will benefit from training for stress reduction and relaxation techniques. Labour Relations • It is important to interpret the collective agreement for clauses that may affect employees and/or managers and job security, seniority, buy outs, etc. • Collective agreements need to be renegotiated to protect the rights of employees. Managers or other staff with access to confidential information, i.e., HR, are not generally part of the union. • Early union participation helps the merger process goes more smoothly because unions make valuable contributions. Evaluation of Success Success can be measured through financial measures, customer service metrics, human capital metrics, and operational measures including employee retention and engagement. Review “Big Is Beautiful” in the chapter-opening vignette. What were some of the reasons that Rogers successfully merged with its retail stores, making it one of the 10 largest retail in chains? Ans. • Expert transition team included IT and HR experts. • Expanded communication system. • New operating system and intranet. • Hired 9 new managers and 500 employees. Review HR Planning Today 12.1—Issues: Foreign Ownership of Canadian Companies. Ask Students: What are some of the issues that Canadian companies need to consider when pondering foreign acquisitions and mergers? Ans. • 1 in 5 Canadian businesses has foreign ownership. • When foreign firms take over Canadian companies, they often create new jobs while eliminating others. • There is a strong opinion that foreign ownership should be restricted in certain sectors such as banking, culture, and telecommunications. • These industries have an influential role in the Canadian economy, households and national pride. Review HR Planning Today 12.2—A Rough Ride. Ask Students: What were some of the problems associated with the merger between Chrysler and Daimler Benz? Ans. • Main issues were related to culture. • German culture of Daimler-Benz was formal (which the Americans viewed as brutal and harsh). • U.S. culture of Chrysler was informal (which the Germans viewed as unprofessional). • Merger companies were fierce rivals from two different countries. • The merger was unsuccessful after 10 years, and Chrysler was sold at a fraction of the price. • Erosion to the Mercedes-Benz status also occurred because management was too preoccupied with merger issues. Learning Activity Ask students to look in the business section of major newspapers or go online to the website of a major business. Identify one where a merger or acquisition has taken place. Name the type of merger. Ask Students: How is a company merger similar to a blended family being created that includes one parent and a child, and another parent and a child. What commonsense steps might be helpful during both? Ans. • Recognize that each has its own culture and traditions. • Do not try to change too much too soon. • Get input from the people involved in the changes. Ask Students: Discuss that synergy means that two forces working together will have better results than one. How might this apply to a merger of two companies? Ans. Synergy implies that the value and performance of two firms combined will be greater than the sum of the separate individual firms. Operating synergies allow the firms to increase their operating income and achieve higher growth. Learning Activity Divide the students into groups of three. Have each group look at a different aspect of HR planning—contingency planning, due diligence, and the formation of a transition team. Ask Students: Why does HR planning require these additional tasks with mergers and acquisitions? Ans. • Make two plans in case the merger goes through or does not. • Know current salary for employees and needs for new labour. • Help employee morale through any merge decision. • Transition team communicates with staff to influence them toward the change. Ask Students: As a class, discuss the following factors considered by the Competition Bureau of Canada. These are used to assess if a merger is likely to prevent or lessen competition in order to decide whether to approve it. Ans. The overview of the trade-off analysis includes: 1. The efficiency gains should be greater than anti-competitive effects, considered using a cost benefit analysis. 2. The Bureau will seek information to perform the trade-off analysis before the Commissioner decides whether to challenge the merger, accept a remedy, or take no action. 3. It is up to the merging parties to decide whether to assert efficiency gains from the merger, and how and when to engage with the Bureau on efficiencies. From the Canadian Bar Association, Competition Bureau of Canada, Resources http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04350.html#section1_1 Learning Activity In groups of five, ask students to list what they think are the pros and cons of mergers between two companies. Ans. Pros • Revenue could increase. • Share prices may rise. • Costs may be reduced. • Name recognition may increase. Cons • Businesses do not always achieve success due to a merger. • The two companies may not agree on important decisions. • Legal procedures can be complicated. Quotes about Mergers The heart of our national economy long has been faith in the value of competition. ―Standard Oil v. FTC Screw the competition―focus on good customer service. ―Virgin founder Richard Branson Every successful competitive practice has victims. The more successful a new method of making and distributing a product, the more victims, the deeper the victims’ injury. ―Judge Frank Easterbrook, The Limits of Antitrust From Competition & Regulatory Law, Competition/antitrust law, advertising & regulatory law, compliance, and education services: www.ipvancouverblog.com/quotes. Review HR Planning Notebook 12.1—Reasons for Failures of M&As. Which of these reasons for M&A failure has the greatest impact? Ans. Managers often focus on the acquisition, assuming the integration of human resources, processes, and structural arrangements will take care of themselves. Review HR Planning Notebook 12.2—Goals of Mergers and Achievement Rates. Ask Students: How do you interpret the difference between the planned goals and actual results achieved for mergers, e.g., access to new markets, growth in market share, and enhanced reputation? Suggested Ans. 3. Even when there are extensive benefits due to a merger, there can also be unanticipated costs. 4. Loss of excellent workers such as high performing sales staff. 5. Lower productivity because employees have less commitment and job satisfaction, and decreased trust in the employer. Review HR Planning Notebook 12.3—Making an Acquisition Successful. What type of issues should a transition consider during an acquisition? Ans. 1. Develop the systems that mattered most to employees: rewards, performance management, and individual development. 2. Sequence the implementation of these systems at a pace that employees can absorb. 3. Use the climate survey to monitor employee feedback and concerns. Review HR Planning Today 12.4—The Blending of Cultures: Integration of Pet Valu and Bosley’s. Ask Students: Was the cultural integration successful? Ans. • The cultural integration was successful. Initially processes were standardized. • Pet Valu’s materials were used for effective recruitment and employee appraisals. • Ms. Martin Bevilacqua explains the process as building bridges on things that Bosley’s did not have the time or resources to address. Review HR Planning Notebook 12.4—The Cultural Due Diligence Checklist. Ask Students: 1. How can companies that are experiencing a merger actively manage their culture? 2. How can companies experiencing a merger manage their culture using relevant items on a due diligence checklist? Ans. 1. Conduct a cultural audit of each organization, through qualitative research (through interviews, focus groups, or through quantitative surveys). 2. Identify similarities and differences and discuss these. 3. Create a new employee value proposition from the strengths of each culture. 4. Use acculturation strategies such as cross-functional seminars and provide cultural mentors to strengthen integration. 5. To overcome cultural challenges, celebrate small wins, and acknowledge the value in past practices. Review HR Planning Notebook 12.5—Share or Asset Purchase. Note two ways to logistically purchase a company. Review HR Planning Notebook 12.6—The Transition Team. Ask Students: What are some of the mechanisms the transition team can set up to aid in an effective merger? Ans. • Formal announcement, press release • Merger hotline • Managerial tool kit • Newsletter • Focus groups/roundtable discussions • Employee surveys Review HR Planning Today 12.5—HR Making a Difference in Mergers. Ask Students: How are the two integration strategies of Encana and TD Canada Trust the same or different? Ans. • Encana processed layoffs quickly so as not to draw out the uncertainly and instability for employees and the business. • TD Bank acquired Canada Trust in 1999, and had to integrate 1,500 branches, 44,000 employees, 10 million customers, and $265 billion in assets. This was done in waves. Ask Students: HR has a role in the stages before a merger, during a merger, and as described post-merger in the chapter. Prior to a merger, when it is being considered, what factors should HR consider? Ans. HR due diligence is a systematic process performed for determining the viability of the integration of staff in terms of the merger, processes and future. To be considered are: • People cost • Structure • Talent • Culture • Regulations • Engagement Ask Students: What problems related to merging might be associated with the areas above. Ans. Some are listed under HR Planning Today 12.5—HR Making a Difference in Mergers. Ask Students: What employees might experience after a merger between companies. Ans. • Concern about their jobs and working with different teams and supervisors. • Wonder how compensation, benefits, bonuses, telecommuting and performance appraisals will change. • Stress of increasing workloads. If your company is considering a merger, here are questions to ask: • Why is the merger taking place? • What are the business benefits of the merger? • What new products or services will be offered as a result of the merger? • What are the financial impacts of the merger? • Will my job be lost? • If my job is affected, will I have an opportunity to compete for other jobs within the merged company? • What is the nature of the firm that is merging with ours? What is its culture like? Are there opportunities for growth within the firm? • How many layoffs will there be in the company? • Will there be workforce adjustment support for those getting laid off? • What can be expected in terms of severance? • If my job remains, can I expect it to expand? Will there be fewer people doing more work? • Will the compensation and benefits I’m currently receiving change? • What training and development support will be available if the nature of my job is changing? • What impact will the merger have on the union in our company? See HR Planning Notebook 12.5—Share or Asset Purchase. Review HR Planning Today 12.5—HR Making a Difference in Mergers. Ask Students: What they think employee reactions are when their employer is bought by another company. Ans. • Nervous to know if their job, and their manager’s job is secure. • Uncertain and suspicious. Fear. Concern. • Will the new company already have someone in their role? • Anxiety about unknown since new management will make changes. • Worry that the values of the organization will change. • Skepticism due to not viewing it as a benefit, even for the employer. • Anger/frustration, knowing some jobs may go to cheaper labour offshore or be re-adjusted to be part-time roles. • Compassion knowing some colleagues will lose positions. • Sadness after pouring everything into the organization but seeing it was not enough. • Appreciation that rumours will stop since there is concrete news finally. • Concern over how this will affect company stock price, which affects their own shares. • How will this affect pay/bonus structure and benefits? • Relief if company was struggling, as purchase will help it stay in business. • If the new company is well known, there may be some excitement about the change. • Maybe there will be more room for advancement? • This could be good in the long-term. • Excitement. • Glad for new leadership. Ask Students: What are some reasons being that one company would acquire another? Ans. • An existing business generally has its own markets with a customer base, production facilities, skilled workers, and product or service lines to integrate with. • Access to new markets, i.e., international ones • To have access to a manager’s toolkit to handle challenges. One site with a list of steps to aid in successful mergers is: https://iveybusinessjournal.com/publication /seven-steps-to-merger-excellence/ Instructor Manual for Strategic Human Resources Planning Monica Belcourt 9780176798086, 9780176570309
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