News & Articles

Human Resource Management
Published in the Rochester Business Journal
May 27, 2005
© 2005 HR Works, Inc.

Expert HR planning eases acquisition process

By Candace Walters

Pick up a business newspaper any day, and you’ll read of yet another merger or acquisition. As companies of all sizes jockey to grow and create shareholder value, they face several options: Grow organically or pursue an acquisition to achieve critical mass more quickly.

An increasing number of firms seem to be opting for the latter. In upstate New York, acquisition activity has been robust for two to three years, says Kyle Monroe, managing partner of Peregrine Capital Partners LLC.

For companies of all sizes, the promise of rapid growth can be very alluring – so alluring that they fail to thoroughly investigate their target. During the courtship phase, unrealistic expectations may be created that later backfire. In fact, only 15 percent of corporate mergers achieve their financial objectives, according to Workforce Management magazine, and about half result in culture clashes.

One highly visible cultural mismatch created waves when General Motors Corp. purchased Electronic Data Systems Corp., and Ross Perot joined the GM board to infuse an entrepreneurial spirit. After a few years, however, the clash of styles had become so impossible to manage that GM bought back Perot’s stock just to get him off the board.

Small companies are just as vulnerable to cultural mismatches. If formerly productive employees can’t adjust to a new way of life at the merged entity, they may leave en masse, depriving the operation of what was to be its best assets.

Managing human capital strategies to achieve a successful deal

Deals can run aground for a series of reasons, but “people problems” are cited frequently, according to a recent study of Fortune 500 firms involved in a merger or acquisition. Recognizing that compensation and benefits may constitute more than half of an organization’s operating budget, and understanding that the continued productivity of key employees is so crucial to the combined company’s value, embarking on any major change without a thorough analysis of HR concerns is irresponsible.

When human issues derail a deal, it’s usually because they weren’t planned for or addressed early, Monroe says. For example, one of the parties to a merger may have a labor union while the other does not – a fact that’s best clarified and managed as early as possible.

While it seems apparent that understanding all the terms of a deal up front increases the odds that the transaction will succeed, inexperience and inflated expectations lead many companies to rush through a deal while overlooking crucial HR issues. Company leaders might think they’ll plug the acquired firm into their existing structure with minimal difficulty. Often, they underestimate the importance of having a plan in place for retaining key talent and managing communications; without those key elements, productivity is likely to slip, and possibly doom the union to failure.

Companies in the best position to bring successful deals to fruition, Monroe says, are those that engage experienced, objective advisors; educate themselves about the process; and set realistic goals.

The importance of specialized HR expertise

Developing the experience that leads to successful acquisitions is not easy. A study published in 2002 by the Society for Human Resource Management found that, even among billion-dollar companies that had experienced several mergers, many senior HR managers still lacked the skills to fully leverage the human resources aspect of a deal. If even large companies with ample resources have trouble making mergers pay off, consider how much more difficult it is for small firms to properly assess opportunities.

Using their limited resources, small firms tend to look closely at the financial picture but typically don’t bring in the seasoned, objective expertise they need to effectively manage the people aspects. They often fail to keep employees productive during the transition, and valuable time is lost as workers speculate on rumors, worry about their jobs and start jumping to the competition. Without expert help, company leaders often fail to understand how employees think and how they’ll likely react to new circumstances.

The good news is that companies that engage outside HR professionals with a track record in M&A management will benefit from the consultants’ experience with mergers in several industries; familiarity with the due-diligence process; and the ability, as outsiders, to provide objective guidance.

HR professionals with M&A experience use a process involving four steps: planning, pre-deal due diligence, integration and implementation.

1. Planning. Once the decision has been made to proceed with an acquisition, a team of financial and legal experts, along with senior managers, map out a process that will ensure a successful transition.



2. Pre-acquisition due diligence. One of the greatest risks that an acquiring company faces is that the acquisition target may carry undue liabilities. No one wants to buy someone else’s legal headaches, or to be surprised when dozens of employees suddenly claim accrued vacation time.
   
   To get all the facts on the table, HR best practices involve working methodically through the following steps:
   
   
   • Assemble all documentation for both companies, including employee information and FLSA classifications; EEO/AAP issues; wage and hour issues, compensation plans; benefits programs; health and safety documentation; immigration paperwork; union issues; pending or past litigation; and policies and training, including COBRA, HIPAA and FMLA procedures.
   
   
   
   • Compare costs of existing benefits and compensation for each company and analyze differences in value.
   
   
   
   • Address duplicate functions. Determine staffing needs and identify individuals to be let go. Review for adverse impact and WARN Act application. Determine levels of severance and outplacement, and plan communication documents.
   
   
   
   • Prepare estimates of employee-related cost savings.
   
   
   
   • Review and assess cultural issues and differences.
   
   
   
   • Identify hidden and potential liabilities.
   
   
   
3. Integration. A thorough integration strategy must involve a careful examination of how every employee will be affected. HR professionals create a workforce integration project plan that spells out accountabilities, deadlines and disclosure approvals. The plan answers questions such as: Who will work in which location? How will titles change? Who will report to whom?
   
   It’s easy when worrying about negative reactions to layoffs and reassignments to overlook the critical need to ensure the support of key employees. Every organization has a core of individuals or groups who have a disproportionate influence on business performance. During the stress of a transition, worry may take its toll on their productivity. Or worse, they become easy pickings for competitors who sense instability.
   
   Monroe suggests sharing the acquisition plans early with a few highly valued individuals and contracting with them to remain fully productive with the merged company for a determined period of time.
   
   Also central to the integration phase is developing an employee communications strategy that keeps everyone informed and maintains high performance and productivity. An effective communication plan will be sensitive to the acquisition’s impact on each person. Allowing bad news to spread via the grapevine is the quickest way to demoralize a workforce and possibly derail a deal.



4. Implementation. Once the deal is signed, a general announcement will be made and a series of meetings will take place quickly to inform employees of all the details – job descriptions, reporting responsibilities, new locations, and changes to compensation and benefits. It’s important as well to address the reasons behind the deal – whether it’s to grow, expand market share, or eliminate competition – so that employees understand what’s in it for them, and why their continued productivity is important.
   
   As the merged entity moves into its new identity, HR will be relied on heavily to manage ongoing change and employee communication; advise management on people issues; align total rewards and other HR policies; monitor the process of organizational and people-related integration activities; and design incentive programs that capture synergies of the merged organizations.

Conclusion In most businesses, a company’s assets walk into the building each morning and leave at night. Any employees, when faced with changes they fear or don’t understand, can easily stage a slowdown or leave to work for a competitor – possibly sabotaging the goals of the merger.

With acquisition activity expected to remain robust in the foreseeable future, it’s incumbent upon company leaders to involve HR professionals early in the process to fully address the range of complex challenges, particularly in leveraging the people aspects, to increase the likelihood that the merged entity will achieve the expectations envisioned at the outset.

Candace Walters is president and CEO of HR Works, Inc., an HR management outsourcing and consulting firm serving more than 600 clients in the Rochester, Buffalo, Syracuse and Baltimore/Washington areas. HR Works provides HR Department outsourcing, part-time and interim HR managers, affirmative action plans, HR*Stars recruitment services, legally reviewed employee handbooks and supervisor manuals, compensation programs, training and more. To offer comments, write walters@hrworks-inc.com

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