A303 Q05

Q5.

What are the key pitfalls in the management of cross-border M&As? Why do M&As typically fail to yield synergies? What can HR department do to boost the chances of a successful integration? Give Examples.

Introduction • M&As one of the greatest challenge for HR function • >50% not successful • Cross-border M&As is especially difficult due to embeddedness of firms undergoing acquisitions in their respective national context. • Many problems of M&A stem from failure to consider the issues early on. • Many companies have neither the measures nor the know-how to give this HR area the priority its merits (KPMG,1999,p15).

What are the key pitfalls in the management of cross-border M&As? •

Definition of Pitfalls: Potential problems; mistakes that might easily be made.

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5 types of integration i. ii. iii. iv. v.

Stand-alone Absorption Reverse merger Best of both Cultural transformation

Stand-alone • No Change; acquired company preserve its independence & cultural autonomy. Pitfall: • Do not last (temporary phenomenon) • Overtime the 2 companies may begin to work against each other competing with each other in the same market Absorption • Acquired company conforms to the acquirer’s way of working Pitfall: • Pejorative meaning in the minds of many at times maybe an ugly process • Likely to have a high degree if resistance

Reverse merger • Opposite from absorption; acquirer blend into that of acquired. • Not often • Sometimes unintended Pitfall: • Can lead to reverse resentment Best of both • Takes the best practices form both sides and integrate them • Very few succeeded since very difficult to do Pitfall: • Likely to be disagreement: who decides what is ‘best’? • The strength of culture comes from the internal consistency of the internal consistency if the practices which may not be there when the ‘best’ parts are put together. • May become to political and time consuming

Cultural transformation • Both companies find new way of operating • Most complex and most difficult to implement Pitfall: • If do not have the full commitment, focus and strong leadership at the top, will get trapped in endless debates while ongoing business suffers. • A complicating factor in international acquisitions is that there will often be parts of the organization where a particular approach to the merger make sense and others where it does not.

Pitfalls: When accessing culture in due diligence •

Common mistake made is culture due diligence process is that measures used to delineate the culture are superficial in nature. (such as the number of levels in the organization structure, type of employee benefit programs, level of detail in policy manuals).

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Metaphoric: Culture understanding is like an ice-berg. Tip of iceberg visible to the observer, do not reflect a much larger mass beneath the ocean’s surface. External manifestation of cultural dynamics do not reflect behind the scene dynamics that create them and sustain them.

Pitfalls: When undertaking a human capital audit & selecting the management team. • • •

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Do not take time to define the type of skills embedded un people who are critical to the success of the deal, relying on instead on financial performance data as a proxy. Without early assessment: companies acquire targets with weaker then expected skills than expected or talent that has a high likelihood of departure. Delays after merger announcement in deciding on the structure and management team in the acquired team. Fuels post merger anxiety and confusion, leading the most valuable contributors to leave. Audit may uncover significant weakness that may call for replacement candidates to be ready to step in immediately after closing the deal. Without advance planning, this may not be possible.

More pitfalls • Some M&As are public knowledge during the pre-M&A phase, many are not, and the public announcement, triggers shock and anxiety in the workforce of the companies involved. Rumors of possible layoffs, reassignments drain energy and productivity. • Many acquired businesses lose key employees soon after the acquisition, this is a major contributing factor to the failure of acquisitions. When insufficient attention is paid to retaining talent, especially if staff cuts are expected, headhunters inevitably move in and the best will leave first since they have other choices.

Some more pitfalls • Acquired companies typically do not know how things work in the corporation that now owns them. • Time and resources are being spent on giving people time to adjust and not upsetting the old culture. Competitors will come along and take away the business. • Slow pace due to lack of a credible plan. Negative impact, reinforces in the minds of many subordinates that no one amongst the executives knows what they are doing, that no progress is being made.

Main causes of failure • •

Failure to integrate the different cultures and workforces of the combining firms(Marks & Mirvis 2001) Especially true for cross borders M&A as the different political and legal system, culture and language barriers and other national differences can be a major obstacles to yield synergies(Very & Schweiger, 2001)

Cont’d

•Focus on strategic /financial of the benefits while overlooking the people/cultural issue.

The role of culture

•Culture distance hypothesisdifficulties, cost or risk associated with cross cultural contact increase with growing cultural difference

advocate

•Org and/or national cultures of merging firm have to be similar, or at least complimentary( Cartwright&Cooper ‘93) •“Double layered acculturation”(Barkema ‘96)

adversary •Derivation of cultural distance hypothesis essentially flawed(McSweeney) •Presence of more obvious national cultural difference increased the awareness in the integration process(Larsson and Risberg) •National cultural distance enhance performance by providing access to diverse sets of routine and repertoires embedded in national culture(Morosini et al)

•Cultural distance is too simplified view on the M&A impact •Success of M&A depend on strategic logic, integration approach and the management of the integration process.

Synergies? What synergies? Stand-alone acquisition Synergies? Get hold of talented management and soft skills Why fail? •Fail to protect the boundary of the acquired firm from intrusion from parents •Fail to prevent “creeping assimilation” from taking place, overtime it defeat the purpose of the acquisition as the different practices which was seen as competitive edge was eradicated.

Absorption acquisition Synergies? •Cost cutting(Usually on the side of acquired firm) •Improvements in system and processes Why fail? •Fail to choose target well(mostly in cultural sense) •Fail to move fast as to remove uncertainty •Fail to capture the available synergies

Reverse merger Synergy? •Capabilities from the acquired firm Why fail? Failure to attribute the status of “parallel business unit”, instead a subsidiary role without a place in the reporting hierachy was given

Best of both Synergies Adoption of best practices from firms with similar size and status(merger of equals Why fail? Failure to identify best practice due to its “embeddedness” and arbitrary nature Failure to retain talent who fails to land the top job(which perceived to be unfair) Target ill- chosen(differences more than similarities, lack of mutual respect)

Transformation Synergies? The opportunity given by the M&A to break away from the past Why fail? Lack of commitment and strong leadership

What can HR department do to boost the chances of a successful integration? • There is no shortage of evidence that attention to people and cultural issues is one of the most critical elements in making the cross-border acquisition strategy work. • In a recent McKinsey study of international M&A, the four top ranked factors identified by responding firms as contributing to acquisitions success are all people related.

McKinsey study of international M&A Top Ranked Factors • Retention of Key Talent • Effective Communication • Executive retention • Cultural integration

Conference Board Study (1997) Top ranked factors • Retention of Critical Talent • Blending Culture • Retention of Key Executives • Differences in Approachs to Compensation/Benefits Bottom of list • Impact on workforce size • Downsizing • Redeployment of employees

Survey sponsored by KPMG (1999) 3 Keys to success • Selecting the management team • Resolving Cultural issues • Communication

Effective Communication • Communication is always a vital part of any process of change and is particularly critical in cross-boarder acquisitions where cultural differences may intensify tensions due to misunderstanding and distance. • The aim of communication is alleviate the anxiety and stress that accompany every acquisition. • It also provide valuable feedback to management about progress of the integration process and any potential roadblocks.

Mirvis and Marks (1994) The following must occur in order to counter the ‘merger syndrome’ in employees • They should be trained in developing coping skills to deal with stress. • Information must be transparent and freely communicated to employees. • Senior Management must communicate a vision throughout the company, one that is positive and guides the employee from both previous companies towards a new and better future. • To involve people at all levels from the previously separated companies with each other in some kind of role quickly. Develop systems that allow for interaction amongst people from the two companies.

Retaining talent • Many acquired business lose key employees soon after acquisition and is a major contributing factors to the failure of acquisitions. • Retention of talent is particularly important for firms where the value of deal lies in the acquisition of intangible assets, which is the knowledge and skills of the people inside the acquired company. • Effective and open communication is key to successful identification of key talents and financial incentives, recognition, higher prospect is key to retaining talents for future.

Creating the new culture • A manual of ‘soft’ principles such as speed in decision making and for conflict management • A ‘hard’ practices such as the Abacus measurement system that would apply across all units of the newly merged enterprise. • In the process of culture building or cultural assimilation after an acquisition, values and norms have to be translated into actions.

Managing the transition • The post-merger integration is always delicate and complicated process. • Appoint integration manager to guide integration process, making sure that timelines are followed and that key decisions are taken according to the agreed schedule • To spell out the logic of the new business model and translate into operational targets. • Help the acquired company to understand how the new owner operates and what it can offer in terms of capabilities

Moving with speed • Making effective decision and acting fast will creep changes, uncertainty and anxiety that last for months that comes with most acquisition. • While time and resources are being spent on giving people time to adjust and not upsetting the old culture, competitors come along and take away the business • Need for management to demonstrate to the employees that the merger/acquisition is showing signs of success quickly, and to communicate the accomplishments to the whole organization.

Conclusion HR function play a significant role in all phases of the acquisition. As identified by Various studies that the people and cultural Issues if managed properly will boost the chance of success for international M&A. Good preparation during the premerger/acquisition phase is vital if the postmerger phase is to be successful.