Role of hr in mergers and acquisitions

ROLE OF HR IN MERGERS AND ACQUISITIONS

Syed Qarib Raza Kazmi

Mergers and Acquisitions

Mergers and acquisitions represent the ultimate in change for a business.

No other event is more difficult, challenging, or chaotic as a merger and acquisition.

Hence it is imperative that everyone involved in the process has a clear understanding of how the process works.

Some interesting M&A figures

Virtually every major company in the United States today has experienced a major acquisition at some point in history. And at any given time, thousands of these companies are adjusting to post-merger reality. For example, so far in the decade of the 1990's (through June 1997), 96,020 companies have come under new ownership worldwide in deals worth a total of $ 3.9 trillion - and that's just counting acquisitions valued at $ 5 million and over. Add to this the many smaller companies and nonprofit and governmental entities that experience mergers every year, and the M & A universe becomes large indeed.

The Art of Merger and Acquisition Integration,Alexandra Reed Lajoux

Why you need to know this ? You might be asking yourself, why do I need to

learn the merger and acquisition (M & A)process? Well for starters, mergers and acquisitions are

now a normal way of life within the business world.

In today's global, competitive environment, mergers are sometimes the only means for long-term survival.

In other cases, such as Cisco Systems, mergers are a strategic component for generating long-term growth.

M&A defined

When we use the term "merger", we are referring to the merging of two companies where one new company will continue to exist.

The term "acquisition" refers to the acquisition of assets by one company from another company.

Mergers can be categorized as follows:

Horizontal: Two firms are merged across similar products or services. Horizontal mergers are often used as a way for a company to increase its market share by merging with a competing company. For example, the merger between Exxon and Mobil will allow both companies a larger share of the oil and gas market.

Mergers can be categorized as follows:

Vertical: Two firms are merged along the value-chain, such as a manufacturer merging with a supplier. Vertical mergers are often used as a way to gain a competitive advantage within the marketplace. For example, Merck, a large manufacturer of pharmaceuticals, merged with Medco, a large distributor of pharmaceuticals, in order to gain an advantage in distributing its Products.

Mergers can be categorized as follows:

Conglomerate: Two firms in completely different industries merge, such as a gas pipeline company merging with a high technology company. Conglomerates are usually used as a way to smooth out wide fluctuations in earnings and provide more consistency in long-term growth. Typically, companies in mature industries with poor prospects for growth will seek to diversify their businesses through mergers and acquisitions. For example, General Electric (GE) has diversified its businesses through mergers and acquisitions, allowing GE to get into new areas like financial services and television broadcasting.

Reasons for M & A

Every merger has its own unique reasons why the combining of

two companies is a good business decision. The underlyingPrinciple behind mergers and acquisitions ( M & A ) is

simple: 2 + 2 = 5

Synergy value can take three forms:1. Revenues: By combining the two companies, we will realize higher

revenues then if the two companies operate separately.2. Expenses: By combining the two companies, we will realize lower

expenses then if the two companies operate separately.3. Cost of Capital: By combining the two companies, we will experience

a lower overall cost of capital.

Strategic Reasons

However, the best mergers seem to have strategic reasons for the business combination. These strategic reasons include: Positioning - Taking advantage of future opportunities that

can be exploited when the two companies are combined. Gap Filling - One company may have a major weakness

(such as poor distribution)whereas the other company has some significant strength.

Organizational Competencies - Acquiring human resources and intellectual capital can help improve innovative thinking and development within the company.

Broader Market Access - Acquiring a foreign company can give a company quick access to emerging global markets.

Basic business reasons

Bargain Purchase - It may be cheaper to acquire another company then to invest internally.

Diversification - It may be necessary to smooth-out earnings and achieve more consistent long-term growth and profitability.

Short Term Growth - Management may be under pressure to turnaround sluggish growth and profitability.

Undervalued Target - The Target Company may be undervalued and thus, it represents a good investment.

The M&A Process

Phase 1 - Pre Acquisition Review Phase 2 - Search & Screen Targets Phase 3 - Investigate & Value the Target Phase 4 - Acquire through Negotiation Phase 5 - Post Merger Integration

Phase 3-Investigate & Value the Target

The third phase of M & A is to perform a more detail analysis of the target company. You want to confirm that the Target Company is truly a good fit with the acquiring company. This will require a more thorough review of operations, strategies, financials, and other aspects of the Target Company. This detail review is called "due diligence.“

The main objective is to identify various synergy values that can be realized through an M & A of the Target Company. Investment Bankers now enter into the M & A process to assist with this evaluation.

Phase 3-Investigate & Value the Target

A key part of due diligence is the valuation of the target company. In the preliminary phases of M & A, we will calculate a total value for the combined company. We have already calculated a value for our company (acquiring company). We now want to calculate a value for the target as well as all other costs associated with the M & A. The calculation can be summarized as follows:

Due Diligence Check list (HR) Plan Due diligence for

organization To develop acquisition

guidelines Understanding the employment

law issues, critical people issues such as leadership, employee communications, talent retention and cultural alignment

Assessment of critical people and deployment of appropriate resources in the new company

Development of organizational chart and reporting line

Integration planning Recommend HR policies

and programs Development of a C&B

strategy for the combined companies

Retention of key people and separation of redundant staff

communications strategy development and implementation

Integration of payroll, benefits and HR-IS ( SAP)

Phase 5-Post Merger Integration If all goes well, the two companies will

announce a agreement to merge the two companies. The deal is finalized in a formal merger and acquisition agreement.

Every company is different - differences in culture, differences in information systems, differences in strategies, etc. As a result, the Post Merger Integration Phase is the most difficult phase within the M & A Process.

Typical M&A Process

Timeline of M&A Events

CandidateScouting

FormalDue Diligence

Initial HR StrategyIdentify Implementation Leaders and Team

Program DesignDecisionsDetailed HR Strategy

StrategicPlanning

ConfidentialCourting

Price and TermsNegotiations

PreliminaryProgram Design

Implementation of Integration Plansand ProgramsAnnouncement

Closing“DAY 1”

CandidateScouting

FormalDue Diligence

Initial HR Strategy

Identify Implementation Leaders and Team

Program DesignDecisions

Detailed HR Strategy

HR Process

Strategic HR—Due Diligence

Integration Preparation

Integration

Strategy Assessment

HR-Liability& SynergyGap Assess.

DealInput

ProgramOfficeSetup

Create “100 Day” Plans

Create OptimizationPlans

...

Execute 100 Day Plan

Execute Optimization Plans

Monitor Synergy Realization

Why the role of HR is important in M&A

HR Role

Participation: Operations Location

China (PRC), 36%

South Korea, 15%Malaysia, 10%

Hong Kong (SAR), 7%

Singapore, 7%

U.S, 7%

Australia, 6%

Thailand, 6%

New Zealand, 3%

India, 1%

Indonesia, 1%

Taiwan, 1%

Participation: Global Headquarter Location

U.S., 26%

Europe, 22%Malaysia, 10%

Singapore, 10%

China (PRC), 7%

Australia, 5%

South Korea, 5%

United Kingdom, 5%

Canada, 3%

India, 1%

Japan, 1%

Thailand, 1%

Other, 3%

Background of Study

Web-based survey conducted in 2006

Conducted in 11 markets: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, and Thailand.

Conducted in four languages: Chinese, Japanese, Korean, and English

73 companies participated

0% 20% 40% 60% 80%

Percentage of Respondents

Other

Shared tangible resources

Vertical integration

Shared know-how

Consolidation of functions

Coordinated strategies

Combined business creation

Improved market access

Rank 1 Rank 2 Rank 3

Why are Companies Acquiring?Improved market access by far the number one driver of M&A

activity:

Synergy Objectives

Growth Return

Improved Market Access(bigger is better)

CombinedBusiness Creation(new is better)

CoordinatedStrategies(together we conquer)

SharedKnow How(know more)

Vertical Integration(process we own)

Consolidation of Functions(serve more with less)

Negotiating Power

TaxBenefits

FinancialEngineering

Synergies with significant “People integration” Issues

Shared Tangible Resources (use same for more)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Percentage of Respondents

Other objectives of the due diligence process:

To examine the impact of a potential deal on competitorsand industry

To identify w hat needs to be done during integration

To evaluate the identif ied synergies

To def ine the right price

To determine that the deal can be successful in theimmediate/near-term

Rank 1 Rank 2 Rank 3

Due Diligence Top Objectives

Immediate and short-term objectives dominate. Long-term issues are of lesser concern:

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Percentage of Responses

Employee communications

Cultural fit

Alignment of comp. & ben. plans

Compliance with applicable laws

Retention of key employees

HR

Is

su

es

Rank 1 Rank 2 Rank 3

Most Important HR Issues During Due Diligence

Retention of key staff and compliance with applicable laws are most important. Much fewer companies focus on long-term issues such as cultural fit:

HR Issues in Due Diligence

Percent of Companies (Ranking 1, 2, or 3)

According to Importance According to Complexity

Retention of key employees 41% 27%

Compliance with applicable laws 36 31

Quantification of severance/benefit obligations 32 35

Alignment of compensation and benefit plans 26 35

Leadership assessment 26 34

Cultural fit 25 49

Employee communications 24 23

Leadership retention 18 13

Corporate governance 16 13

Labor relations 14 25

Sales force effectiveness 10 17

Organizational structure 9 15

Orange shade: over 30% of companies rank this high

HR issues rank slightly different when comparing importance vs. complexity:

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Percentage of Responses

Employee communications

Decision-making

Leadership assessment and selection

Harmonization of compensation and benefitplans

Cultural fit

Are

as

Rank 1 Rank 2 Rank 3

Top HR Integration Issues According to Importance and Complexity

Culture fit clearly dominates top HR concerns for importance and complexity during integration:

A Reality Check Why M&A fail

Poor strategic fit - The two companies have strategies and objectives that are too different and they conflict with one another.

Cultural and Social Differences - It has been said that most problems can be traced to "people problems." If the two companies have wide differences in cultures, then synergy values can be very elusive.

Incomplete and Inadequate Due Diligence - Due diligence is the "watchdog" within the M & A Process. If you fail to let the watchdog do his job, you are in for some serious problems within the M & A Process.

A Reality Check Why M&A fail

Poorly Managed Integration - The integration of two companies requires a very high level of quality management. Integration is often poorly managed with little planning and design. As a result, implementation fails.

Paying too Much - In today's merger frenzy world, it is not unusual for the acquiring company to pay a premium for the Target Company. Premiums are paid based on expectations of synergies. However, if synergies are not realized, then the premium paid to acquire the target is never recouped.

Overly Optimistic - If the acquiring company is too optimistic in its projections about the target Company, then bad decisions will be made within the M & A Process. An overly optimistic forecast or conclusion about a critical issue can lead to a failed merger.

A success Story

Trivor Systems Pakistan was acquired by Bentley Systems Incorporated in may 2007.

Bentley is the global leader dedicated to providing architects, engineers, constructors, and owner-operators with comprehensive architecture and engineering software solutions for sustaining infrastructure. Founded in 1984, Bentley has nearly 3,000 colleagues in more than 45 countries, $500 million in annual revenues, and, since 2001, has invested more than $1 billion in research, development, and acquisitions.

Key Aspects of the Acquisition Retention of employees with the domain and product expertise.

1st year plan, 2nd year plan Alignment of Job titles. Management structure remained largely intact. Improved Hardware policies. Proper Translation of Trivor compensation with Bentley

compensation structure. All hands Meeting Before formal acquisition process Formal signing of new contracts. Introduction of new benefits

Enhancement of health cover Quarterly Team building events

Continuation of old polices