February 2008

M&A - The Human Touch....

In last year’s M&A supplement I wrote about what a potentially turbulent process an MBO could be. I had used the analogy of a Hollywood Movie epic. The drama and intrigue, tough and tense negotiations and a nerve racking race to reach a seemingly impossible deadline. All you needed was a little love interest and a good scriptwriter!! Little did I suspect that a few months later our company would be living the rollercoaster ride that an acquisition can provide. If our ambition to open in the Capital was to become a reality, we needed to step back and consider the impact the deal would have on the stakeholders from both companies.

Many merger and acquisition deals focus primarily on strategic, financial and legal issues. But "people issues" often make the difference between hoped-for expectations and results achieved. A recent study conducted by Management Consultants McKinsey, confirms what many know; that people are the key to making mergers work, and people related problems such as culture clashes, management disputes, loss of talent and the inability to manage change, can often be the reason why mergers fail. Most mergers and acquisitions set off rapid change, therefore a company that addresses cultural, organisational and HR issues up front and throughout integration (along with strategic, financial and legal issues) will have a better chance of succeeding and gaining the competitive advantage and enhanced shareholder value it seeks.

There are many reasons for companies to pursue a merger or an acquisition. Among these are:

• to gain needed leadership/management talent or technical expertise.
• to increase market share, to absorb competition.
• to enhance its product/services offerings, to quickly enter new markets.
• rapid geographic expansion or just to increase critical mass.

On final analysis, it is anticipated that the merger or acquisition will result in increased profitability and sustainable growth. For this anticipation to become reality, the soft side, or people issues, must be given significant emphasis throughout the process. The Harvard Management Update states, "Most mergers fail to add shareholder value...indeed, post-merger, two-thirds of the new companies perform well below the industry average." Why? Research and experience indicate that most executives manage the business integration but do not manage the human integration. The M&A process normally consists of four stages that should be managed as one coordinated effort. These stages are: Pre-deal Planning, Due Diligence, Integration Planning, and Implementation. Talented Human Resources personnel should be involved early on in the Pre-deal Planning stage and throughout all stages of the process to identify people-related issues, organisational issues and cultural fit. If people-related issues and cultural issues are effectively addressed in the early planning stage, business leaders can begin to assess the feasibility of success sooner rather than later. Often the soft side issues are among the hardest issues that must be addressed. There are essentially three critical areas that should receive focused attention.

ORGANISATIONAL CULTURE

Two organisations merging on the basis of financial data alone is like two people marrying based solely on height and weight. There is now a growing recognition that ignoring potential culture clashes can lead to financial failure or to a significant reduction in desired results. Many failed mergers/acquisitions point to a clash of corporate cultures as the common cause. Culture is not generally recognised within an organisation because it is an inherent part of our business life. It’s just "the way we do things here." It shapes management style, values, operating philosophies and practices, behaviours that are rewarded, decision-making responsibility, power and control mechanisms. But we become acutely aware of our company’s culture when it collides with and is contrasted with a different culture. Even organisations that appear to be highly compatible and should be able to achieve desired results can have underlying cultures that will threaten successful integration. Both the acquiring and the acquired organisations should conduct a cultural assessment as early as possible to reveal the differences in styles, values, beliefs, norms, practices, procedures, etc. This assessment shows where differences exist and helps highlight what elements in both cultures should be retained. Rather than imposing one organisation’s culture on the other, the best of both organisations can be integrated into a common corporate culture that people can identify with. Culture change in mergers and acquisitions is normally a time-consuming process. It is suggested by various authors, and confirmed by experience, that true cultural integration can take three-seven years; but patience will reap rewards.

LEADERSHIP/MANAGEMENT TEAM

Management style, in many cases, is not very flexible. Yet, it is important to determine the style of leadership that would be most appropriate in a merged situation. Leadership must be honest, straightforward, decisive, and prioritise actions throughout the process. Management of each organisation will look for fairness and objectivity in the selection of leaders and managers. Competencies should be established for the new organisation’s leadership and management roles. These competencies for the new, expanded organisation may be different than those required for the pre-merger companies. At the executive level, technical skills (e.g. finance, marketing, engineering, etc.) are usually less important and relationship management skills become more important. Effective choices should be made, free from internal politics and the "we versus them" mentality that may only result in festering organisational and cultural problems.

STAFFING

Fairness, timeliness and honesty are required for success in employee selection and deselection. To ignore these elements, necessary for success, will result in larger retention and morale problems. A recent survey of HR professionals found that managing people issues, such as retaining key employees and identifying suitable roles, was deemed to be the most challenging aspect by 35% of the respondents.

Many mergers and acquisitions have been plagued by unclear reporting relationships. The need to redefine and communicate reporting relationships, authority and accountability, immediately following organisational combinations, is a critical component of the integration process. Downsizing is unfortunately an inherent component of mergers and acquisitions. The goal of many mergers is to achieve economies of scale and operating efficiencies. Therefore, mergers normally result in consolidation of departments, integration of functions and elimination of workgroups or roles, which results in redundant personnel. It is important to assess such individuals quickly, to determine their strengths and ascertain whether they may succeed in different roles with new challenges. Any downsizing should be handled quickly with respect and dignity and departing employees should be provided appropriate support.

One of the real challenges posed by a merger and acquisition is communicating with employees. It is impossible to over-communicate. Communicate continuously. Share as much information as is possible and practical through open and honest communication throughout all stages of the process. What is meant to be achieved by the merger/acquisition? Why is the company doing this? What will the organisation look like? How will people be affected? Effective two-way communication can help build trust, quell the rumour mill, relieve anxiety, focus people on the business and its possibilities and lessen productivity loss.

The above is a brief of just some critical human issues in a merger or acquisition. Talented people make decisions, conceive strategies, produce the goods and services, wow customers and deliver results. Their commitment to delivering success is what makes any M&A work.