Mergers and Acquisitions: Is HR being locked out on done deals?
David Woods, August 01, 2011
Mergers and acquisitions (M&A) are big business, but most fail or do not work out as well as planned – perhaps because HR is not involved till the last moment, if at all. It’s time HR was at the M&A top table
Whispered conversations by the water cooler, confidential meetings behind closed doors, rumours and speculation circulating around the office, secret handshakes and the almost inaudible clink of champagne flutes from the sealed-off boardroom. Mergers and acquisitions (M&A) are big business - but until the dotted line is signed, careless talk can scupper a deal.
But secrecy comes at a price. Here's a scenario: Employee X loves his job. He works tirelessly every day, longing for that hard-earned promotion that finally seems within his grasp. He leaves work on Wednesday night, feeling engaged, motivated and ready to take on the world. He has dinner with his wife, where they discuss the option of moving house and make plans for the future.
But at 9.15 the following morning, after his usual easy commute to work, employee X is called into an internal meeting. "The company has merged," he is told. "You will be moving to a new office. We can't give you much more information at this stage, but we have to notify staff of a 30-day consultation period."
Things will never be the same. And there is one more piece of information about employee X that is worth noting. Employee X is the HR director.
Hard to believe as it might be, this is not unusual in real business life. Steve Allan, European head of mergers and acquisitions at HR consultancy Towers Watson (which itself went through a large-scale merger between Watson Wyatt and Towers Perrin in 2009), explains: "HR directors are not involved enough in M&A. They are brought in late - and in a lot of cases wouldn't be remotely aware of the target identification process around M&A."
He adds: "They could be brought in relatively close to a deal being signed and asked, 'does this make sense?'." But he admits that it does happen that HR is not involved at all.
So what is the argument for the door being closed to HR? Mergers and acquisitions are 'commercial deals', of course. But for this argument to stand, the implication is that HR is not seen as a commercial function.
Simon Barrow, chairman of consultancy People in Business, says: "If HR is kept out, it confirms it is not seen as strategic - but M&A is where the most human damage can be done.
"It is bankers that often create the appetite for an M&A deal, but have no feeling of responsibility for ensuring lasting value. They get paid, like any estate agent, for getting the deal done - 86% of deal expenses go to traditional advisers: bankers, accountants, lawyers and financial PR agencies. But who is paid to look ahead and address the issues which can turn a deal into dust?"
Fundamentally speaking, an acquisition will involve the transfer of assets from one organisation to another. This naturally involves accounts, clients, premises and data. But what is the one thing CEOs - often in the pages of HR magazine - claim to be their 'greatest asset'? That's right: people.
Strict TUPE - Transfer of Undertakings (Protection of Employment) - regulations after an acquisition (see box opposite) protect staff terms and conditions if they have to change organisation; and HR departments will be responsible for the induction of these staff and for clarifying their contracts. It will be the HR department that will have to go through the 30-day consultation process with employees. And, on the face of it, when staff are confused and disorientated during the changes to business, the HR department can appear like an admin department - churning them into the new business and dealing with redundancies - rather than a strategic function.
But HR directors are also supposedly responsible for recruitment, retention, talent management, and succession planning, as well as change management. The people strategies they had in place prior to the deal will often need drastic amends - and fast.
And it is often not till in the longer term that mergers and acquisitions turn out not to work out as well as the consultants and PR people envisaged. Executive search firm Heidrich and Struggles' 2010 research into the merger market finds as many as 74% of deals do not work out as well as planned and, the company's managing partner Jonathan Day tells HR magazine, the failure rate of M&A is always north of 60%.
So returning to Barrow's argument about the longer term issues that can turn a deal to dust, it seems HR is left in the cold, when its input is vital for planning how the business would operate post-merger. And, when HR is eventually told, its role is essentially picking up the pieces after the deal.
"The decision not to involve HR is not one of malice," Day adds. "But if the company is unfamiliar with the merger market, investment bankers will dominate the deal. They just don't care [about HR issues] and the CEO will want to keep it secret. They might think HR will communicate the message and torpedo the deal. Then its involvement will be too late to add value.
But he adds: "In organisations familiar with M&A, a more disciplined approach is taken and in these companies HR is much more involved in deals."
But, as the experts suggest, HR directors can't expect a seat on the board and this is not the time for navel-gazing. The message is clear: 'Prove your worth now - or face being left out of the proverbial loop.'
Take the Cadbury/Kraft deal in 2010, for instance. Rarely was there a mention of the Cadbury HR department's involvement in the clash of culture between a US super-corporate and a British paternalistic institution. In fact, it was Kraft Foods' CEO Irene Rosenfeld, no less, who bore the brunt of the attacks (on the very pages of HR magazine) from industry experts in June last year, when she was accused of being "the world's most unpopular CEO". And when rumours circulated following Kraft's hostile take-over that new-starters at the combined business would see lower rates of pay and fewer holidays, the company remained silent and the HR view was noticeably missing from the press - despite HR magazine's attempts to hear Cadbury's HRD Richard Doyle's side of the story.
So, a year on, is Kraft Foods any more agreeable to commenting on acquisitions? Diane Tomlinson, HR director, Kraft Foods UK & Ireland, stepped forward. She says: "In our experience, HR has played a vital role following acquisition.
"HR has been instrumental in the successful integration of two businesses into one effective and harmonious company. It has been involved from the start in every aspect, including organisation design and change, location changes, recruitment, communications, ways of working, systems and process change and critically ensuring employees remained engaged and motivated through the change process.
"Line managers and employees at every level have relied on their HR business leads to guide them through the change process.
"Playing a key role in integrations can be a defining moment for the HR function, as it puts the HR team and its capability at the centre of the business change agenda."
So, in this case, HR was 'not involved' in the discussion stages (read: 'kept out') and was brought in after the deal to pick up the pieces, then? Tomlinson replies: "In most cases, HR is involved as a strategic advisor prior to an acquisition, to provide insights about key talent and the implications of differences/similarities in corporate cultures, policies and practices of the two companies. In an unsolicited bid, this is not possible, as there is limited access to people or non-public information until after the deal is approved. In either case, the role of HR from acquisition onwards is paramount."
During Kraft's merger with Cadbury's, it backtracked on what it promised staff about their pensions. As a result of this and other cases, the people issues in M&A have reached the Government's agenda, with a consultation just completed on a 'Kraft law': employees having more rights to information - and rights to respond - prior to and during M&A (see box above). This will push HR professionals into M&A conversations, whether the consultation recommendations are made into law or not.
In spite of an apparent trend otherwise, experts agree it is desirable to have an HR involvement as early as the due diligence stage - and the proposals above may well help the process.
Elaine Ball, a partner at Altaia Partners, a consultancy that helps HR professionals manage corporate change, said: "This presents a real opportunity for HR directors to be at the top table and decide the way deals are shaped and presented, taking into account the interests of employees. Since the timescales of M&A could be accelerated, it means HR can get involved much earlier."
But she adds: "HRDs will need to be able to translate financials into what it means for employment and job numbers and they will have to be able to answer the penetrating questions from employee representatives and trade unions. I can't predict what will happen with the Takeover Code proposals, but the direction is clear: employees will be seen as interested parties and will be heard."
And the evidence suggests HR directors might find themselves in M&A mode sooner than they think. The M&A market is big business in Europe - and is set to grow, according to findings published in June in the Quarterly Deal Performance Monitor (QDPM) from Towers Watson and Cass Business School.
In the first quarter of 2011, European acquirers saw the best market outperformance since the credit crunch - average share price returns of 12.2 percentage points above the MSCI Regional Index, while their US-based counterparts saw an outperformance of 5.1 percentage points (compared to the North American regional index), with Asia-Pacific acquirers outperforming by 1.9 percentage points ahead of their comparable regional index.
The QDPM's research also found that globally, as M&A activity has increased, the time taken to complete the deals has tightened. M&A activity in the first quarter of this year (measured by number of deals) is nearly 23% higher than the same time last year (30% higher by volume), with the average time from announcement to completion of deals decreasing from 78 days in 2010 to 67 days in 2011.
Some commentators suggest HR directors might be precluded from being selected for boardroom merger strategy meetings because they simply might not be experienced in M&A activity. Towers Watson's Allan suggests a way out of the Catch 22 situation: "Deals are about getting people to work together and HR has knowledge of people. M&A is commercial - and HR runs employee benefits and knows about pensions."
Day adds: "Companies planning M&A often underestimate the amount of information they can get about the other business prior to the deal and HR professionals have a role in the due diligence phase early on. They can look at the management structure, carry out an external talent review of the other business's employees and predict what the merged business would look like if top talent were to leave.
"HR directors need to understand that if the people strategy is wrong in M&A, it probably won't cause the deal to fail, but will lead to an erosion of it over time."
Barrow takes the argument one step further. "The soft stuff is the hard bit." he explains. "If merging businesses are going to be able to handle the people challenges, the HRD needs to bang the table - because if you screw up on these issues, you screw up the deal."
Top ten TUPE pitfalls
1. There is an obligation to provide information about the transfer in writing to appropriate representatives of the employees who will be affected by the transfer.
2. In the event that any measures are envisaged in relation to the affected employees of either the transferor or the transferee, there is also an obligation to consult with appropriate representatives of those employees. 'Measures' include things such as redundancies and also much less significant issues, such as a change in the date on which wages are paid.
3. 'Appropriate representatives' are either representatives of a recognised trade union or, if there is no recognised union, representatives elected by the employees. The onus is on the employer to arrange the election of employee representatives.
4. The penalty for failing to inform and (if appropriate) to consult is an Employment Tribunal award of up to 13 weeks' actual gross pay in relation to each affected employee.
5. It is important that a transferee establishes, before the TUPE transfer, as much information as possible about the employees it will be taking over, so it knows what kind of liabilities to expect. There is an obligation for the transferor to provide some limited information at least 14 days before the transfer.
6. Claims against the transferor which arose pre-transfer can themselves often be the subject of the TUPE transfer so that, post-transfer, they would then lie against the transferee.
7. Occupational pensions don't transfer (subject to a few exceptions). However, the transferee still has various obligations under the Pensions Act to protect pension rights.
8. Any TUPE-related dismissal will be automatically unfair if the employee has 12 months' service or longer, unless the dismissal is for "an economic, technical or organisational reason entailing changes in the workforce".
9. The employer can take steps to try and harmonise terms and conditions, but any detrimental changes to terms and conditions will be void if the main reason for them is the TUPE transfer, or a reason connected with it.
10. There is no fixed time limit following a TUPE transfer when an employer might be able to change terms and conditions, but if the change to terms and conditions is not connected to the TUPE transfer, then an employer can make such changes without them being void.
James Wilders is employment partner at law firm Dickinson Dees
Case Study: Molson Coors UK
Tracey Ashworth-Davies, HR director at brewing firm Molson Coors (UK), is no stranger to mergers and acquisitions in the organisations she has worked in - but, she says, "some I have been involved in, some I haven't".
She is definitely on the interventionist side of the argument. She believes HR directors have a role as a "critical advisor" during the M&A process. She explains: "Employee behaviour is absolutely critical. So an HR director should look at an organisation - prior to a merger or acquisition - to see how the people there would fit into their business. It's not just about TUPE, but the whole process.
"It can take months to work out whether the team will be good enough. They need to be careful not to get too carried away with the proposition, but to think it through. They also need to be careful not to get carried away with TUPE, or the staff will feel like chattels."
Ashworth-Davies' advice for her peers facing M&A is to ask: 'Why are we buying this business?'
In 2009, Molson Coors acquired a 50.1% stake in Cobra Beer, while in January this year it acquired Sharps, a small Cornish brewery (flagship ale, 'Doom Bar'), employing 100 staff.
"HR was absolutely at the [decision] table," Ashworth-Davies says. "With Sharps, we knew it looked like an acquisition from the start and it turned out to be a fantastic one. I met with the sellers and took part in the early discussions, wondering how we would approach it.
"I was careful to align what we did on the first day with what our strategy was, going forward. I was involved in conversations about how we would present the acquisition to staff. The lawyers can deal with the legal issues [eg TUPE], but HR should be involved in leading the rest of the adoption process, otherwise it could be rough."
Takeover code AKA Cadbury Law
This May, the consultation over proposals for a Takeover Code, known as the 'Cadbury law', finished. The Government had not released its response as HR magazine went to press, but should the recommendations be adopted, they will push HR into the limelight during mergers and acquisitions.
The proposals mean employers may be required to disclose M&A plans that will affect employees at the time of the offer - rather than when the deal is signed. It will mean stronger rights for employee representatives to be consulted and their views published. The guidelines will also clarify the situation on pre-deal secrecy. The offer would have to set out the acquirer's strategic intent and the likely effect on employment and office locations. If there are going to be no changes or effects on employment, the acquirer has to say so. During Kraft's merger with Cadbury, it backtracked on its statements and these guidelines seek to stop this from happening again.
In addition, any commitments made by an acquirer will be binding for a minimum of 12 months from the time an announcement is made that talks are underway; potential acquirers will have to be named.
Employee representatives will have the right to expert advice in assisting them to verify their opinion on the employment effects - at the target company's expense. They can also receive binding intent from acquirers about job losses or pensions, for example.
For HR directors of either the acquirer or the target company, the process will become faster and more public. Because the commitments made will be binding, HRDs will need to think strategically, as well as tactically - and so be part of the takeover team, with an understanding of legal and financial information. Since the merger will be public, there could also be an element of media attention given to the decisions they make.