It’s not only consumers who tightened their belts during the recession. Just as customers deserted the high street, corporations battened down the hatches, folding their shopping lists away. In 2009, global merger and acquisition (M&A) activity was down 36% compared to the previous year. And in most industries, it stayed down.
However, recent evidence suggests that could be about to change. As the global economic recovery continues to gather pace, organisations that have built up large cash reserves during the downturn are looking for new sources of growth – and many are considering an M&A. In a 2013 KPMG survey of M&A professionals based in the US, 63% expected activity to increase during 2014, with North America, Western Europe, China and Asia the most fertile areas. Towers Watson also recently predicted the “mega-merger” will return this year.
However, the extent to which – and when – HR is involved in these transactions varies widely. Adam Rosenberg, partner and head of M&A for the UK at HR consultancy Mercer, says a few years ago the tendency was for HR to “wheel in very late on, probably to sort the pension problems out”, but this is starting to change: “Most companies now have someone from HR on a deal-steering committee, and certainly aware of what’s going on and feeding into the transaction.”
There is good reason for this. Around four in five M&As fail to deliver on their expected goals, suggests Gerry Miles, owner of Gerry Miles Consulting and leader of the Strategic HR Management programme at Ashridge Business School. He says this is often due to a cultural mismatch, or failure to ensure the new entity is able to effectively integrate two teams of people.
It is something Miles has seen close at hand, in the then Price Waterhouse’s merger with Coopers & Lybrand in the late 1990s, where a disparity around the maturity of the two firms – one was a global business and the other a national one – caused difficulties on the people side. “If you were ex-Price Waterhouse, it felt like you were going backwards,” he explains. “It was one of those things that we ought to have seen but we didn’t. The cultural fit is a deal-breaker.”
Rosenberg points to the Daimler-Chrysler tie-up as one where the different American and German company cultures had not been anticipated, and ultimately proved insurmountable. “The critical thing is to understand where there are issues and to have a framework for understanding those differences and a plan for mitigating any challenges that come as a result of those,” he says. “Most organisations don’t
Involve HR as soon as possible
Arjen Vermazen, senior vice-president HR EMEA at Astellas Pharma Europe, has been involved in several M&As throughout his career, including the merger of pharmaceutical companies Yamanouchi and Fujisawa, leading to Astellas’ formation back in 2004. He believes HR needs to be involved as soon as possible once the decision to proceed with a deal has been agreed, and stresses the need to focus on people, particularly where the skills-base is an important reason for the transaction.
“For us, all the knowledge and expertise are embedded in the minds of the people,” he says. “As two equal parties, we were really merging the two and trying to align the benefits, but that’s only possible if you foresee right from the start that there is an overlap of cultures.”
Peta Fry, HRD at accountacy firm Monahans, has been involved in a number of acquisitions in recent years, both internally and with external clients. She also stresses the need for HR to be involved early on. “If you know what’s going on, it allows you to think about some of the issues and you can plan your communication in a slightly different way,” she says. This could involve talking to people in the other organisation ahead of any new arrangements coming into force, and gaining the trust of senior people in that business.
Beyond ensuring a good cultural fit and developing a communications strategy, there are a host of practical issues that demand HR’s attention, many of which can be looked at before the transaction is complete, if the function is brought in early enough. “We’d be looking at retaining key people and skills, innovation and technology,” says Julie Downing, executive vice-president EMEA, HR, at IT company NTT Data. “We’d also look to engage the target’s leadership team and try to establish where any challenges may be as we move forward.” This would extend to understanding any employment contracts and pension arrangements that may be in place, as well as potential risks such as employment tribunals, she adds.
HR should also be aware at an early stage of the potential legal issues. Nick Thomas, a partner in the labour and employment team at law firm Morgan Lewis, identifies employee data as a potential minefield. “There’s always a tension between what the purchaser wants to see and what the existing employer is able to give out under the Data Protection Act, and that’s one of the areas where HR needs to assist in coming up with a practical solution,” he explains. “Often that can be as simple as anonymising certain data, although that doesn’t necessarily work if you are talking about a small workforce.”
Another task is to establish whether the transaction will be subject to TUPE regulations, in which case HR will need to consult unions and employee representatives for those who are not covered by recognition agreements. “Even if there are no major changes taking place, we would advise that HR leaves a minimum of four weeks for that information and consultation process,” Thomas says.
Communication is key
Once a deal has gone through, effective communication is vital, and HR is likely to be the conduit through which the new business engages with its expanded workforce. Naoki Okamura, senior vice-president and chief strategy officer at Astellas Pharma Europe, recalls how HR – under Vermazen – played an important role in reassuring individuals brought in as a result of its takeover of OSI Pharmaceuticals in 2010 over their new positions, some of which may have appeared to be a demotion.
“Someone with the title of senior vice-president or chief financial officer would not get that title in the Astellas organisation, so HR had to convince those people that their position had actually significantly increased because their role had gone from being in just one company focused mainly on the US to having a global remit,” he says.
Over time, the emphasis will fall on developing common policies and strategies, initially around sign-off processes and, further into the future, on other areas. “With things such as learning and development, you will typically find that each side has its own set-up and there will be resources in each that benefit the other party as well,” says NTT Data’s Downing. Performance management and recruitment processes also need to be agreed and, in time, efforts undertaken to harmonise terms and conditions of employment, she adds.
There is also the thorny issue of redundancies, which can affect people at all levels of the businesses involved in a merger, including those in HR. The key here is planning, says Mercer’s Rosenberg. “Often employees are got rid of too quickly or not in the best way, and that sends a very significant message to the rest of the workforce,” he says. “We’d want to make sure it was done in the right way, paying an appropriate sum of money. You would think about things very differently for a 62-year-old than for a 28-year-old.” Redeployment should also be considered where appropriate, he adds.
There can be particular challenges when dealing with international M&As, both practically and culturally. “Communication is more of a challenge and what works in one language might not work in another,” says Downing. “Pension schemes can be quite different across countries, so whereas you’re typically dealing with two sets of practices, rules and cultures, you could end up with five when you’re talking about big multinationals.”
Another issue arises when the company being acquired is actually larger than the purchasing company in a particular country, Downing adds. “You’ll start to experience some insecurity within your own organisation because people will feel that they will naturally be merged in with the larger, target company’s business,” she warns.
There are legal issues to consider here too, says Morgan Lewis’s Thomas, and engaging with European Works Councils requires a different approach from such activity in other parts of the world. “It becomes even more complex where there’s going to be some headcount reductions, because you have different triggers regarding when you have to consult and how long you have to consult for,” he says.
With M&A activity likely to increase in the coming years, there are measures HR can take now to ensure the function is involved in discussions as early as possible. “There’s nothing wrong in asking for a copy of the business plan and, if you spot that growth and acquisitions are part of it, in approaching the managing director or finance director and asking them to talk to HR earlier,” says Fry. “If you can position it as being interested and proactive, most directors and business owners will be very pleased to hear from you.”