Mergers & Acquisitions

An HR Perspective

M Sutapa Lakshmanan
Contents

 Trends in M&A activities

 Research by Corporate Leadership Council
 Motivation for embarking on M&A activities
 The role of HR in Mergers and Acquisitions
 Legal framework
 Due diligence
 Social plans
 Integration - HR Road Map
 Restructuring
 Lessons learned
 Surviving post-merger
Trends in M&A Activities

In a matter of one day 19 companies and investors around the world announced
US$75bn worth of deals, bringing the total value of M&A activity for 2006 to a record $3,5
trillion.

In 2007 , mergers and acquisitions accounted for almost double that amount !

According to M&A Intelligence, there are several merger and acquisition transactions
involving Russian companies and Latin American companies in 2007-08. Total worth of
over $ 100 bn. The number of deals increased 42.2 percent over 2006 in 2007. The average

value of each deal increased from $56.11 million to $176.82 million.

HPs take over of EDS, Microsoft’s bid on Yahoo are just not imaginary.

We all know India’s emergence in the M&A market. Aditya Birla – Minacs
deal; the Indian connection in Mittal - Arcelor are a few.

Interesting tread of Indian “Multination” like Ranbaxy sold…..so, it’s no more one
way traffic ! !
Motivation

What is motivating M&A activities? --

Many reasons!
 Growth – Internal growth to difficult or slow
 Brand acquisition
 Market penetration
 Synergies
 Acquiring new technology
 Industry restructuring/consolidation
 Up- or down stream integration
 Access to resources or markets
 Panic & Ego
Motivation

Mergers and acquisitions tend to come in waves. Some of this is related to

external conditions, including the perceived value of the operations in a
market segment or the loosening of antitrust rules. But a lot of it is based
on panic.

Once a sector starts consolidating, other players feel the need to follow
suit in order to maintain market power and to deny growth to others. After
a few acquisitions, panic often sets in, and a domino effect comes into
play. Most large companies are constantly exploring the chance to buy out
other firms in their industry, but the segment-wide panic moves the deal
making from back to front burner. M&As are contagious.
However………….

Surveys shows that the majority of companies fail to capture the full
value from M&A, mainly due to poor integration management.

Human capital related factors are frequently at the root of failed M&A.

 Right Management Consultants – 77% of M&A do not achieve their

original purpose
 Mercer – 50-80% of M&A never produce anticipated benefits
 McKinsey – 70% of mergers fail to achieve synergies

Sources of deal failure:

 Cultural integration issues

 Organizational structure issues
 Failure of leadership from Top Management
 Communication failures
The role of HR in Mergers and Acquisitions –
Corporate Leadership Council

Key conclusions
HR performance in integration is a key driver of M&A success
44% of senior executives report that integration is the greatest source of
error in M&A and that overcoming human capital challenges is more
important to integration success than any other aspect of integration

HR imperatives
1. Establish an HR M&A infrastructure
2. Gain early insight into deal objectives
3. Assess and identify human capital risks
4. Identify financial and compliance risks
5. Identify cultural and talent risks
6. Plan responses to identified risks
7. Build a communication plan
8. Monitor and respond to integration risks
9. Continuously monitor key talent metrics related to performance, retention
and engagement
10.Assess HR’s performance post-integration and capture lessons learned
HR’s Involvement in M & A Transactions
Target Screening Gather preliminary information about
potential companies for acquisition or
merger to have a broad assessment of ‘fit.’

Planning Pre-Acquisition Strategy • Understand the culture and key

policies/processes of the target company

• Advise management on structure, makeup

and processes for separation, integration
and transition planning teams
• Advise senior management on retention
and benefits packages
• Plan key processes (e.g., selection,
relocation, outplacement)
• Plan communication strategies and follow-
up activities in support of the transaction
announcement
• Identify potential barriers to integration
success and be prepared to resolve them.
HR’s Involvement in M & A Transactions
Due Diligence • Develop a due diligence checklist that
tailors to specific company issues and style
to examine aspects of the company
• Conduct the due diligence process (e.g.,
culture, employee competencies,
compensation/incentive programs,
employee benefits, policies and practices,
employee relations, and financial costs
associated with compensation and
employee benefits liabilities)
Integration Planning/Execution • Finalize and implement the integration plan
and employee communication strategy.
• Involve senior management and ensure
they are seen by employees frequently;
introduce the integration leader to the
organization.
• Provide information about expected
reorganization, reductions and selection
process.
• Coach and facilitate teams through
separation, integration and transition
planning processes.
Legal framework

Countries have different legal requirements/obligations depending on the type of purchase

transaction – acquisition

Assets purchase
Stock purchase

USA Assets purchase:

A buyer is not legally obligated to hire any of the employees of the target business and the
employees would not be automatically “transferred” to a buyer, they must apply for
employment. A buyer may establish new terms and conditions of employment

UK – TUPE:
TUPE is an acronym for the Transfer of Undertakings (Protection of Employment)
Regulations
The purpose of TUPE is to protect employees if the business in which they are employed
changes hands. Its effect is to move employees and any liabilities associated with them
from the old employer to the new employer by operation of law.
Due Diligence
Purpose

 Real cost of the acquisition

 Risk mitigation
 “Fit”

Information memorandum

 Detailed description of the business – marketing tool

Data room

 Information about all aspects of the business – Un-edited

Core HR Issues
 Direct staff costs
Payroll costs
Incentives
 Indirect staff costs
 Liabilities regarding retirement and social benefits
 Social plans
 Management talent and depth
 Business model and organization structure
 Culture compatibility
Due diligence

Main HR Topics

 Staff numbers
 Organisation structures and business models
 Organisation culture and change fitness
 Remuneration
 Benefits
 Incentives
 Conditions of employment
 Labour relations/law
 Employee statistics and skills retention issues
 Talent management
 Training & development
 Training structures
 Learners
 Performance management
 Succession – health of pipeline
 Admin systems
 Compliance
Social Plans

 Employee contracts
 Union agreements
 Works Council agreements
 Supervisory Board and co-determination
 Statutory requirements/restrictions
 National and regional contracts (European Union)
 Change of control provisions
 Severance benefits
 Relocation benefits
 Pension and post-retirement benefits
 Share option schemes/plans
 Long term incentive plans
 Executive contracts and parachute clauses
Restructuring

Objective: Extraction of value

In a Wall Street Journal article ("How to Assess 2007's M&A Activity," 16/01/07), analysts Dennis Berman
writes that 2007 will be an even bigger year for such deals. He warns, however, that investors should be
wary, as success leads to hubris (excessive pride or arrogance), and eventually catastrophe, especially for
smaller investors.

As Berman points out, "The purpose of most of today's mergers is to make money. Firing people is the
obvious way to achieve it." Bad news for workers. But also bad news for investors -- after the initial
personnel savings are delivered, most companies are unable to deliver any enhanced revenue after the
dust settles from a merger.

Objective
Is to support the achievement of the business needs of the acquiring company

But
Often requires carve-out and separation of business units
Staff reductions, relocations and or job content changes are often inevitable
“Social plans” restricts management options and impacts time lines
Restructuring highly regulated in many countries
Impacts relationship with communities and effects company reputation
Many hidden costs
Counter to integration objectives
Lessons learned
Why do most mergers and acquisitions fail to live up to expectations?

Is it the finances or the technology? Rarely

Is it the overly ambitious strategy of executives? Occasionally

Mostly, it is poor execution of the actual “merging” of the companies

involved.

Merger failures usually revolve around people issues:

 Loss of key staff,
 Culture clash,
 FUD: fear-uncertainty-doubt,
 Poor communication and interaction between employees of the
merging organizations
Some Key Rules

 Have a clear vision and get buy in from your people

 Find the holes in the ice
 There is no such thing as a merger of equals
 Integrate fast
 Get the right people in the right jobs
 Communicate. Communicate. Communicate
 It’s never over
Surviving people challenges post merger

 Leadership alignment
 Get leaders involved
 Make it personal
 Follow a structured approach

 Organizational design
 Take inventory
 Seek input
 Explain “ why” and “how”

 Talent Retention
 Act quickly
 Build commitment
 Work with HR

 Communications
 Don’t wait too long
 Provide frequent updates
 Establish a two-way dialogue
Surviving people challenges post merger

 Culture
 Pick your battles
 Work with culture, not against it
 Link cultural issues to business value
 Day One
 Celebrate
 Set the tone for the future
 Don’t let up
Thank You