HRD IN MERGER AND ACQUISITION

In an ideal merger, the newly created entity pools the best features of the two merging organizations. A
well planned process built on the foundations of an open, honest and consistent communication strategy
can pave the way.

Mergers and acquisitions have become a common phenomenon in recent times. A merger of the size like
HP-Compaq has implications for the workforce of these companies across the globe. Although the
merging entities give a great deal of importance to financial matters and the outcomes, HR issues are the
most neglected ones. Ironically studies show that most of the mergers fail to bring out the desired
outcomes due to people related issues. The uncertainty brought out by poorly managed HR issues in
mergers and acquisitions have been the major reason for these failures.

The human resource issues in the mergers and acquisitions (M&A) can be classified in two phases .

 pre-merger phase

 Post merger phase.

Literature provides ample evidence of difference in between the human resource activities in the two
stages: the pre-acquisition and post acquisition period. Due diligence is important in the first phase while
integration issues take the front seat in the later. The pre acquisition period involves an assessment of the
cultural and organizational differences, which will include the organizational cultures, role of leaders in
the organization, life cycle of the organization, and the management styles. The mergers often prove to be
traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual
impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The
other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor
syndromes, stress on the workers, information system issues etc. The human resource system issues that
become important in M&A activity are human resource planning, compensation selection and turnover,
performance appraisal system, employee development and employee relations.

M&A activity presents a different set of challenge for the human resource managers in both acquiring and
acquired organizations. The M&A activity is found to have serious impact on the performance of the
employees during the period of transition. The M&A leads to stress on the employee, which is caused by
the differences in human resource practices, uncertainty in the environment, cultural differences, and
differences in organizational structure and changes in the managerial styles.

The organizational culture plays an important role during mergers and acquisitions as the organizational
practices, managerial styles and structures to a large extent are determined by the organizational culture.
Each organization has a different set of beliefs and value systems, which may clash owing to the M&A
activity. The exposure to a new culture during the M&A leads to a psychological state called culture
shock. The employees not only need to abandon their own culture, values and belief but also have to
accept an entirely different culture. This exposure challenges the old organizational value system and
practices leading to stress among the employees. Research has found that dissimilar cultures can produce
feeling of hostility and significant discomfort which can lower the commitment and cooperation on the
part of the employees. In case of cultural clash, one of the cultures that is dominant culture may get
preference in the organization causing frustration and feelings of loss for the other set of employees. The
employees of non-dominating culture may also get feelings of loss of identity associated with the
acquired firm. In certain cases like acquisition of a lesser known or less profitable organization by a better
one can lead to feelings of superiority complex among the employees of the acquiring organization. In
case of hostility in the environment the employees of two organizations may develop “us” versus “them”
attitude which may be detrimental to the organizational growth.

The uncertainty during the M&A activity divert the focus of employees from productive work to issues
like job security, changes in designation, career path, working in new departments and fear of working
with new teams. The M&A activity leads to duplication of certain departments, hence the excess
manpower at times needs to be downsized hence the first set of thoughts that occur in the minds of
employees are related to security of their jobs. The M&A activity also causes changes in their well
defined career paths and future opportunities in the organization. Some employees also have to be
relocated or assigned new jobs; hence the employees find themselves in a completely different situation
with changes in job profiles and work teams. This may have an impact on the performance of the
employees. Research has found that at least two hours of productive work per employee per man day is
lost during the M&A activity in the organizations. The increased political processes that may be
underway in the organizations to sustain the importance of the various individuals and departments will
add to the confusion.

The human resource systems vary across organizations owing to the differences in the organizational
culture, sectoral differences and national cultural differences. For example if the compensation in the
acquired firm is lesser compared to the acquiring firm, the acquisition will raise employee expectations
(for the employees of acquired firm) of a possible hike in compensation which may not be realistic. On
the other hand if the compensation level of employees in acquiring firm is lower the employees may press
to have equal compensation across all the divisions of the firm. The pay differential can act as a de-
motivator for the employees of acquiring firm and may have long term consequences. The compensation
issues may also involve legal angle. Two cases in the Indian context are important which underline the
importance of legal issues related to compensation in M&A activity.

The first case involving Hindustan Lever Limited acquiring TOMCO, the employees in TOMCO enjoyed
better terms and services compared to the HLL employees. The HLL employees argued that if TOMCO
employees are allowed to work on their original terms and conditions, two classes of employees will
come in existence. Since both the set of employees now belong to same firm, a case of discrimination will
arise against the employees of HLL. However the court supported TOMCO employees in the process.
The second case involves merger of Glaxo and Wellcome-Burroughs who decided to merge in 1996. The
Indian arms however couldn’t merge in the last seven years because of high pay differential between
workers of Glaxo and Wellcome in India. The workers of Wellcome were offered a one time
compensation of Rs. 2 lakhs in 1998, which they refused. Further the VRS scheme launched by the firm
evoked very tepid response.

Since 1997 the firms have been working as independent subsidiaries in India. Compensation differences
need to be rectified by the acquiring firm so as to maintain the morale of acquired firm employees and to
retain them. The compensation structureamong the organizations may also differ creating troubles, for
example one of the firms may have performance based pay while other may have higher component of
fixed pay. Hence the differences in compensation structure and performance appraisal systems also need
to be rectified so as to bring equity in the human resource systems and to treat employees at the equal
level.

Another practical problem is differences in the grading or organizational structures in the systems. Since
the organizational structures are different designations for the employees are used, during the integration
of acquired organization the acquiring organizations need to develop a mechanism to remove the
differences in the grading systems bring them at equal level, as many a times the compensation is related
to the grade of employee in the organization.

The employee relations issues gain more importance in the acquisitions of manufacturing units in India.
The power equation between management and trade unions is bound to change with the acquisition. The
acquiring management also needs to keep track of number of unions in the workplace and equations
between them as many Indian manufacturing units have multiple unions. Hence comprehensive analysis
of trade unions operating in the plant should be done. This will require study of management-union
equation, employee contracts, political linkages of the unions, compensation related clauses, number of
trade union and dynamics between the unions.

The impact on the employees can be divided into categories of psychological trauma, increased workload,
survivor guilt and stress. The reaction of the employees can vary from anger to dejection and depression.
The process of merger can have inbuilt psychological and social threats which should be identified like
exodus of managers due to the perceived job insecurity. There is also fall in the morale, commitment and
loyalty. The merger can lead to depression and impaired performance. The dissimilarity in the cultures
can produce the feelings of hostility and significant discomfort, which impact on the commitment and
cooperation on the part of employees. The cultural difference also leads to counterculture feelings where
employees tend to completely reject the dominant culture of the organization. The impact of cultural
shock is significant and long lasting on the employees. The initial shock is followed by employees
making their own perceptions based on values and past experiences. The more dissimilar the culture is
higher will be the cultural shock. The likely reactions as noted by studies are anger fear, denial frustration
and depression which leads to altered behavior, reduced productivity, stress, illness, accidents , conflicts
and a total lack of commitment to make merger work. The feeling of political back stabbing adds to the
psychological trauma. Kids Corner and Kamala

Kamala who was in her early forties was quite puzzled with what is happening with her career. As she
was listening to a lecture on people issues in mergers and acquisitions, she could not just let herself free
from the experiences she was having for the past 6 months. Kamala is working as a Principal in a nursery
school which takes care of about 100 students. She had four teachers working under her and other three
office staffs. The events unfolded as follows. Vidhya group was interested in taking over “Kids Corner”
which was the nursery managed by Kamala. Although Kamala was not a partner in “Kids Corner”, she
was given a lot of freedom and authority in running the organization. As a principal she was vested with
the responsibility of taking any decision which affected the organization. The partners of “Kids Corner”
were running the organization as a service tothe society. The revenues which were collected as fees from
the kids were used to fund the salary and other running expenses of the nursery.

As the professor explained how some of the major mergers turned out to be acquisitions with the bigger
and stronger company trying to take full control, Kamala was worried about her destiny in the
organization. Kamala initiated the process of merging Kids Corner with Vidhya group. Vidhya group
managed many educational institutions from high schools to engineering colleges. However they didn’t
have professionally managed preschool in their portfolio. The inclusion of Kids Corner would help then
to get a good group of students in the entry level classes of their high school too. Kamala also thought this
as an opportunity to grow and increase the visibility of Kids Corner. Kamala represented Kids Corner in
all the major negotiations with the Vidhya Group. She was impressed with the way that Vidhya group
discussed various issues with her. They also guaranteed her the post of Principal once the group takes
over the Kids Corner. The parents of the kids were also involved in the take over negotiations. The
Vidhya Group and the parents were of the opinion that since she managed the institute till now, she
knows best to do it further.

The ownership of Kids Corner was taken over by the Vidhya Group. However things changed a lot since
then. Lots of ambiguity crept in regarding the fate of Kids Corner. Kamala was sidelined in some of the
major decisions which were taken regarding the running of Kids Corner. Some of the teachers left the
organization feeling uncomfortable with the new management and their style of functioning. The way the
new management dealt with Kamala also changed a lot. A new person was appointed as the manager of
Kids Corner. He took some of the major decisions regarding the running of the organization, which
Kamala was unaware of.

Kamala thought that there is a major dent in the freedom she had in running the organization. She was
further shocked when the new management informed her that the salary that she is drawing now is too
high for the organization to afford. They wanted the salary to be cut to almost half. With this Kamala
thought that she was cheated by the Vidhya group. She is on leave for almost a week and had discussed
this issue with her colleagues and family. She was in a complete dilemma and has now started thinking of
the options she had before her. After the session, she had a chat with the professor and narrated the
experience she is undergoing. She brought out the options before her – Whether to continue with “Kids
Corner”, join another organization which may give a comparable salary and job profile or fight it out with
the new management.

In the case of Kamala, we can see how the confusion after merger affects the professional life. If
organizations of large size merge, the differences that may exist in practices, the mystery about the future,
feeling of distrust and rumors will be creating havoc in the life of employees. The result as we have seen
in the case may be employees leaving the company or drop in productivity due to apathy towards work
and the management. It is important to understand a merger will be the case of managing a number of
employees like Kamala and this should be a well planned process.

Managing M & A

Clearly defined communication strategy during M&A plays an important role in removing the employee
fears and kill rumors floating around in the organization. The organizations need to reach their employees
before the press as the employees will have

Feelings of getting cheated. Studies show that communication strategy that involves senior managers of
the acquired organizations work well. Involving other employees who are trusted by the employees for
instance trade union leaders are also helpful. The employees meeting in small groups so as to discuss their
concerns, fears and positive feelings also helps to lessen the stress on employees of acquired firm. The
group meetings seem to help because many-a-times employees are reluctant to come out and speak their
concerns, whereas in groups where everyone shares same set of feelings to an extent, it becomes easier to
come out with the common set of concerns and fears. This also provides confidence to employees that the
new management is willing to listen to their concerns and feelings, building an atmosphere of mutual
trust.

The transition period also becomes crucial from communication point of view. In case of lengthy
transition period the employee stress increases, the best strategy in this period is to convince the
employees that they are part of new organization and their concerns will be taken care of. The transition
period can also be used to improve communication with the employees of acquired firm. Improved
communication will help to better understand each other’s cultures and practices. Firms can also use this
period to analyze the human capital of the acquired firm and define their possible roles in the new
organizations. The transition period provides ample opportunity to design the new organization, explain
the new roles to the employees, plan synergies and train the employees as the new role. This will make
the integration process easier for the acquiring organization.

HR takes control

• Train managers on the nature of change

• Technical retraining

• Family assistance programs

• Stress reduction program

• Meeting between the counter parts

• Orientation programs

• Explaining new roles

• Helping people who lost jobs

• Post merger team building

• Anonymous feedback helpline for employees

The communication aspect being very important should be handled carefully by the human resource
department. The communication should provide precise information to the employees, providing any
piece of information which is unreal can lead to rumors and counteract. The communication should be
sufficient enough to answer the queries and worries of the employees. The first set of information should
be related to their future jobs, this will help to lessen their worries related to job security. The
communication shouldn’t involve false promises which may counteract later. The communication can be
through trusted and credible employees of the acquired company and trade unions can be involved in the
process too.