"It takes only 60 days for a company to match its competition in pricing, 90 days in marketing and three years in distribution. But it takes seven long years to create a competitive corporate culture and build a top team". (Harvard Business School Study)
Mergers and acquisitions are commonplace today as businesses restructure to compete in a global marketplace. Despite the economic logic behind them, research indicates that most mergers fail to achieve the synergistic results expected. Furthermore, studies repeatedly demonstrate that at best, only half of all mergers and acquisitions meet initial financial expectations. Employee management is necessary because most people are averse to change that wasn't their idea, especially when they think their livelihoods are at stake. Fear of job loss and changes in corporate culture are just two reasons why employees may feel compelled to make rash decisions, like turning in their letters of resignation. You can expect to lose a few employees, but it's not acceptable to lose top performers as a result of M&A activity.
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Human resource (HR) activities are increasingly being held responsible for merger and acquisition failure. The HR weaknesses commonly found in a typical merger process can be grouped as follows:
1. Neglect of psychological issues. The psychological effects of change on people are not given adequate consideration when companies are integrated.
2. Inadequate communication throughout the merger process. Employees are not kept informed during the integration process. Although people fear that their jobs are at stake, they typically have very little reliable information on which to base decisions.
3. Culture clashes between the two organizations. Employees with different values and work styles are frequently required to work together with no structure for resolving differences.
4. Ambiguous company direction and unclear roles and responsibilities. Senior management is typically slow in articulating the vision and mission of the new merged organization. After downsizing, staff is left to deal with more work and have little sense of direction from which to determine priorities.
The Merger Syndrome
“Mergers and acquisitions … represent a significant and potentially emotional and stressful life event” (Cartwright and Cooper 1992), because they can change an individual's working life significantly but fail to provide the individual with any control over the event. Some common merger stressors include uncertainty, insecurity, and fears concerning job loss, job changes, compensation changes, and changes in power, status, and prestige. Employees may experience job/career/life dissatisfaction, lower self-esteem, depression, and anxiety. The result may be higher turnover and absenteeism and substandard performance levels.
Both individuals and organizations have relatively consistent patterns of reaction to a merger. Individuals typically become preoccupied with their own survival, and organizations tend to withdraw into crisis management, which often involves secrecy and centralized decision making: in most cases this organizational response exacerbates the negative impact of the merger on employees. Executives may be optimistic about the merger, because they have more control over the situation and better access to information. The majority of staff, on the other hand, is typically pessimistic or angry about the change.
Hunsaker and Coombs (1988) have provided a nine-stage sequential model of employees' emotional reactions during a merger or acquisition, which describes what has come to be known as the ‘merger syndrome':
1. Denial. At first employees feel that the merger will not really happen or that it will not change their work or their organization.
2. Fear. As plans for the merger begin to unfold, employees begin to fear the unknown and to imagine the worst. Workers become preoccupied with job loss as rumors of mass layoffs and terminations circulate throughout the company. This typically leads to substandard performance and a decline in productivity.
3. Anger. Once employees feel that they have no control over the situation and that the merger is inevitable, they begin to express anger towards those responsible for the deal. They may feel that they have been sold out after providing the company with many years of quality service.
4. Sadness. Employees begin to grieve the loss of their corporate identity; they focus on the differences in the way the two companies operate and are managed and adopt a ‘we' versus ‘they' mindset.
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5. Acceptance. After a sufficient mourning period has elapsed, employees begin to realize that resisting the situation would be futile, and they start to accept reality. This may imply behavioral compliance but not necessarily renewed organizational commitment.
6. Relief. After much of the integration is completed, employees begin to feel more settled in the new organization and become more accustomed to working with employees from the other company. At this stage, they feel that things are actually better than they had expected.
7. Interest. As people become more secure in their new positions, they begin to consider the benefits of the new organization. They perceive their situation as a challenge and try to prove their abilities and worth in the new company.
8. Liking. Employees recognize new opportunities and begin to like their work.
9. Enjoyment. Employees become committed to their new organization.
Human Resources Best Practices during a Merger
When senior HR personnel are included in the strategic decision making, organizations gain a better understanding of the human implication of a merger. Human resource staff should conduct cultural audits to determine whether the cultures of the organizations are compatible and provide recommendations for overcoming their differences. Firms that conduct quick assessments of their human resources are in a better position to determine what actions will be necessary to retain talented individuals. Unfortunately very few companies make any attempt to audit personnel resources during an acquisition, and as a result, there is typically a shortage of required talent in the new organization.
While each merger is unique and may thus require different approaches, the points discussed below offer some general guidelines on how HR professionals can facilitate the process and help ensure its long-term success:
Include HR Specialists in Pre-merger Discussions. In the strategic planning phase, HR personnel should assess the corporate cultures of the two organizations to identify areas of divergence which could hinder the integration process. Communication methods, compensation policies, skill sets, and company goals need to be assessed. Before reaching a deal, the companies can agree on what elements of their respective cultures should be retained and how they will rectify significant differences.
Identify and Address Employee Concerns. Conducting an employee attitude survey can help companies elicit common employee perceptions and concerns and allow the new management to create a more appropriate integration plan, develop tools to minimize employee stress (e.g., counseling services and stress management training), and send a message that the organization truly cares about its human resources.
Provide a Realistic Merger Preview, Communicate Continuously. Early communication is critical in any merger or acquisition situation. If employees receive initial word of the change without immediate follow-up information, the rumor mill will undoubtedly start turning. People may suspect that management is trying to hide bad news such as layoffs by not revealing further details. Frequent and regular communication should be provided during and after the merger acquisition event. Because employees experience more stress and anxiety when they are uncertain about their future, organizations should inform all employees of merger plans at the same time as, or in advance of any press release. Employees who are kept informed about the progress of the merger and who understand why certain decisions are being made take a much more favorable view of the event than those who feel uninformed and are less likely to suffer from stress and resist the change. Companies that are not honest with employees regarding layoff and downsizing plans tend to experience a decrease in employee morale and productivity and an increase in turnover and absenteeism.
All employees must be made aware of what the merger is meant to achieve, why it is important, what the organization will look like in the near future, and how they will likely be affected. The value of open and honest communication methods at all stages cannot be overestimated; employee communications must continually keep people up-to-date on the progress of the merger. Employee participation should be sought whenever possible.
Develop an Integration Plan. HR personnel should initiate a detailed integration plan for merging people, by identifying individuals crucial to the long-term success of the new company and creating incentives to help retain them; developing and communicating the new organizational structure; implementing downsizing initiatives that will minimize the adverse impact on the organization and individuals; addressing employee stress through counseling and support services; and merging the two organizations' policies and processes to complement the new structure and reinforce the new values of the company.
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Conduct a Talent Audit. HR personnel should identify employees who will be critical to the success of the new organization. Sorting out who will go and who will stay when merging two divisions is difficult, but it must be done quickly and fairly. Development needs must also be identified so that new talents necessary for success in the merged environment can be nurtured through training programs.
Manage Downsizing with Care. Because some duplication of function is almost inevitable when two organizations merge, layoffs and downsizing are common. There may be several significant organizational benefits from offering assistance to terminated workers, including improved morale among the remaining work force. Perhaps more than any other event, downsizing provides an opportunity for the company to demonstrate that it cares for its employees and considers its human resources its most valuable asset.
A related consequence of mergers is unanticipated turnover. Many employees leave the company voluntarily after the merger announcement or during the difficult transition period. Typically, it is the best performers that leave, because they are the most marketable and can easily find work elsewhere. A U.S. study found that almost 50 percent of the executives in acquired companies leave within one year, 75 percent within three years, and 58 percent of managers within five years (Walsh 1998).
If downsizing is carried out properly, displaced employees will feel that they have been treated fairly, employees that remain with the organization can feel proud to work for the company, and the public image of the organization will be enhanced. Ideally, early retirement incentives, and enhanced severance packages will minimize involuntary terminations. However, if employees must be laid off or terminated, they should be identified as soon as possible, communicated with honestly, and treated fairly. Outplacement support services such as job-search workshops, career counseling, retraining programs, stress-management workshops, retirement preparation, and financial counseling should be available to help employees adjust to the traumatic change.
Motivate Employees. Specific short-term organizational goals should be defined and communicated throughout the organization to provide employees with a clear direction. Individual performance standards should be established that are somewhat higher than the standards employees were striving for before the merger. Ideally, the development of short-term performance goals will (1) force employees to become familiar with the new firm's goals, (2) motivate employees to attain their performance targets, (3) make employees and supervisors define and communicate their expectations, and (4) clarify how performance will be measured in the new company.
Monitor the Integration Progress Continually. Human resource personnel should distribute employee questionnaires or conduct informal interviews to establish the current culture of the organization and the present level of job satisfaction, motivation, and commitment. Staying in touch with employees and demonstrating the importance of their opinions by soliciting feedback will help re-establish organizational trust and renew their commitment.
People Determine the Fate of Mergers. The key element linking the strategies just discussed is a recognition that people, not numbers, determine the fate of most mergers or acquisitions. Although many of the human problems associated with mergers and acquisitions—fear and uncertainty, stress and tension—cannot be eliminated, HR managers can help to alleviate them by leading the change, setting examples, and providing the tools necessary to ensure a smooth transition.
The human aspects of mergers and acquisitions should be accorded the same emphasis and attention that is usually given to financial, legal, and strategic concerns. The HR strategy must stress honesty, clarity, and a feeling of involvement by employees. Carefully designed integration programs need to deal with communication, transition management, organizational structure and staffing processes, and the development of common policies and practices.